UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
For the transition period from ____________ to ____________
Commission
File Number:
(Exact name of registrant as specified in its charter)
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Securities registered pursuant to Section 12(b) of the Act: None.
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Indicate
by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| ☒ | Smaller reporting company | ||
| Emerging growth company |
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an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
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As of November 16, 2021, there were
TABLE OF CONTENTS
i
LMP AUTOMOTIVE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Net investment in sales-type leases | ||||||||
| Deposits held in escrow for acquisitions | - | |||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Land | ||||||||
| Property, equipment and leasehold improvements, net | ||||||||
| Intangible assets, net | ||||||||
| In place leases, net | ||||||||
| Right of use asset | ||||||||
| Franchise rights | ||||||||
| Tradenames | ||||||||
| Goodwill | ||||||||
| Deposits held in escrow for acquisitions | - | |||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Vehicle floorplan financing | ||||||||
| Premium finance contract | ||||||||
| Operating lease liability, current portion | ||||||||
| Vehicle financing and notes payable, current portion | ||||||||
| Bank term loan, current portion | ||||||||
| Income taxes payable | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Vehicle financing and notes payable, net of current portion | ||||||||
| Bank term loan, net of current portion | ||||||||
| Deferred compensation liability | ||||||||
| Warrant liability | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Other noncurrent liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| Redeemable noncontrolling interests | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock at cost, | ( | ) | ( | ) | ||||
| Non-controlling interest in consolidated subsidiaries | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
LMP AUTOMOTIVE HOLDINGS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| New vehicle retail | $ | $ | $ | $ | ||||||||||||
| Used vehicle retail | ||||||||||||||||
| Used vehicle wholesale | ||||||||||||||||
| Finance and insurance, net | ||||||||||||||||
| Service, body and parts | ||||||||||||||||
| Fleet and other | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales: | ||||||||||||||||
| New vehicle retail | ||||||||||||||||
| Used vehicle retail | ||||||||||||||||
| Used vehicle wholesale | ||||||||||||||||
| Service, body and parts | ||||||||||||||||
| Fleet and other | ||||||||||||||||
| Total cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ||||||||||||
| Floorplan interest expense | ( | ) | ( | ) | ||||||||||||
| Other interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax provision | ||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||
| Net income attributable to noncontrolling interest | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to LMP Automotive Holdings | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Calculation of income (loss) for earnings per share: | ||||||||||||||||
| Net income (loss) attributable to LMP Automotive Holdings | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Change in noncontrolling interest redemption value | ( | ) | ( | ) | ||||||||||||
| ( | ) | ( | ) | ( | ) | |||||||||||
| Less: net income allocated to preferred shareholders | - | - | - | |||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Basic net income (loss) per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted net income (loss) per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average shares of common stock outstanding, basic | ||||||||||||||||
| Weighted average shares of common stock outstanding, diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
LMP AUTOMOTIVE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
| For the Three and Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Treasury | Non-Controlling | Accumulated | |||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Stock | Interest | Deficit | Total | ||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Common stock issued for cashless warrant exercises | ||||||||||||||||||||||||||||||||||||
| Common stock issued for cashless option exercises | ||||||||||||||||||||||||||||||||||||
| Adjustment for redemption value of noncontrolling interests | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common stock issued for options exercised for cash | ||||||||||||||||||||||||||||||||||||
| Convertible preferred stock issued for cash | ||||||||||||||||||||||||||||||||||||
| Common stock issued for acquisitions | ||||||||||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated entities | - | - | ||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Adjustment for redemption value of noncontrolling interests | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Noncontrolling interest in consolidated entities | - | - | ||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for options exercised for cash | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Adjustment for redemption value of noncontrolling interests | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Distributions to noncontrolling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of preferred stock | ( | ) | ( | ) | - | - | ||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
LMP AUTOMOTIVE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
| For the Three and Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid in | Treasury | Non- Controlling | Accumulated | |||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Stock | Interest | Deficit | Total | ||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Issuance of shares for cash | ||||||||||||||||||||||||||||||||||||
| Issuance of shares for purchase of assets | ||||||||||||||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Share based compensation | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Common stock repurchased | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Share based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Issuance of shares for cash | - | |||||||||||||||||||||||||||||||||||
| Cashless exercise of warrants | - | |||||||||||||||||||||||||||||||||||
| Net income | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | - | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
LMP AUTOMOTIVE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine
Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Share based compensation | ||||||||
| Revaluation of redeemable warrants | ( | ) | ||||||
| Principal collections on investment in sales-type lease contracts | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of right of use asset | ( | ) | ||||||
| Interest accrued on vehicle financing and notes payable | ||||||||
| (Increase) Decrease in assets: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Vehicles purchased for investment in sales-type lease contracts | ( | ) | ||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Increase (Decrease) in liabilities: | ||||||||
| Accounts payable | ||||||||
| Deferred compensation | ||||||||
| Other current & noncurrent liabilities | ||||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Acquisitions, net of cash acquired | ( | ) | ||||||
| Additions to intangible assets & other assets | ( | ) | ||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net cash received from issuance of common stock | ||||||||
| Proceeds from issuance of preferred stock | ||||||||
| Payment of fees for the issuance of preferred stock | ( | ) | ||||||
| Proceeds from redeemable warrants | ||||||||
| Proceeds from the sale of noncontrolling interest | ||||||||
| Proceeds received from related party | ||||||||
| Payment to related party | ( | ) | ||||||
| Distributions to noncontrolling interests | ( | ) | ||||||
| Distributions to redeemable noncontrolling interests | ( | ) | ||||||
| Proceeds received from term loan, net of debt discount | ||||||||
| Payments on term loan | ( | ) | ||||||
| Payments on insurance premium financing | ( | ) | ||||||
| Proceeds received from vehicle financing | ||||||||
| Proceeds from vehicle financing and notes payable | ||||||||
| Repurchase of common stock | ( | ) | ||||||
| Repayments of vehicle financing and notes payable | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE (DECREASE) IN CASH & RESTRICTED CASH | ( | ) | ||||||
| CASH & RESTRICTED CASH, BEGINNING OF PERIOD | ||||||||
| CASH & RESTRICTED CASH, END OF PERIOD | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Issuance of common stock for acquisitions | $ | $ | ||||||
| Accrued share commitment liability | $ | $ | ||||||
| Acquisition holdback due to Seller | $ | $ | ||||||
| Right of use asset obtained in exchange for operating lease liability | $ | $ | ||||||
| Purchase of software license for debt and equity | $ | $ | ||||||
| Purchase of vehicles for debt and equity | $ | $ | ||||||
| Common stock issued for conversion of preferred stock | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Operations and Principles of Consolidation
Business Activity
In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “LMP”, “Automotive”, and “the Company” refer to LMP Automotive Holdings, Inc. and its consolidated subsidiaries, unless the context requires otherwise.
LMP Motors.com, LLC (“LMP Motors”) is engaged in the buying and selling of vehicles in the automotive industry and operates in the state of Florida. LMP Motors is a limited liability company and was organized in the state of Delaware.
601 NSR, LLC (“NSR”) was formed to enter into future potential strategic acquisitions and is currently inactive. NSR is a limited liability company and was organized in the state of Delaware.
LMP Finance, LLC (“LMP Finance”) is engaged in the purchasing and subscribing of vehicles. LMP Finance operates in the state of Florida. LMP Finance is a limited liability company and was organized in the state of Delaware.
LMP Automotive Holdings, LLC (“LMP Automotive”) was formed to acquire the assets from LMP Motors.com LLC, LMP Finance, LLC, and other subsidiary companies. LMP Automotive operates in the state of Florida. LMP Automotive is a limited liability company and was organized in the state of Delaware.
Automotive
is a holding company incorporated in the state of Delaware on December 15, 2017. On December 15, 2017, the common ownership contributed
During the first nine months of 2021, Automotive, through LMP Automotive, acquired majority interests in 11 new vehicle franchises, comprising 7 new dealership locations. Automotive, through LMP Finance, also acquired a majority interest in LTO Holdings, LLC, a Connecticut based automotive leasing company with an associated collision center. These acquisitions transformed the Company, enabling us to offer a wide array of products and services fulfilling the entire vehicle ownership lifecycle, including new and used vehicles, finance and insurance products and automotive repair and maintenance.
On March 3, 2021, the Company completed certain acquisitions which resulted in the acquisition of Beckley Buick GMC, King Coal Chevrolet, Hometown Kia, Princeton Pre-owned, Lewisburg Pre-owned and Summerville Pre-Owned in West Virginia.
On March 4, 2021, the Company completed certain acquisitions which resulted in the acquisition of Fuccillo Kia of Port Charlotte and Cape Coral located in Florida, both operating under sales and service agreements with KIA Motors America, Inc.
On
March 9, 2021, LMP Finance, acquired a
On March 23, 2021, the Company completed the acquisition of Bachman-Bernard Chevrolet-Buick-GMC-Cadillac, along with its associated real estate.
On May 5, 2021, the Company completed the acquisition of Hometown Subaru in West Virginia, which is a dealership related to the March 3, 2021 acquisitions of Beckley Buick GMC, King Coal Chevrolet, Hometown Kia, Princeton Pre-owned, Lewisburg Pre-owned and Summerville Pre-Owned.
The
aggregate purchase price of these acquisitions totaled approximately $
The allocations of the purchase price for these acquisitions are preliminary. The allocations will be revised during the one year allocation period as management obtains additional information about the estimated fair values of the acquired assets, identification and quantification of assumed liabilities and finalization of working capital amounts related to these acquisitions.
Principles of Consolidation
These condensed consolidated financial statements include the amounts of Automotive and its subsidiaries, collectively referred to as the “Company.” All significant intercompany balances and transactions are eliminated in consolidation.
6
Note 2 - Summary of Significant Accounting Policies
Liquidity
The
Company has sustained net losses and has an accumulated deficit of approximately $
Management plans to continue to obtain funding through 2021 for strategic dealership acquisitions.
Basis of Presentation
These accompanying condensed consolidated financial statements contain unaudited information as of September 30, 2021, and for the three and nine months ended September 30, 2021 and 2020. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2020 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2020, is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2021. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain immaterial reclassifications of amounts previously reported have been made to the accompanying condensed consolidated financial statements to maintain consistency and comparability between periods presented.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We periodically evaluate estimates and assumptions used in the preparation of the financial statements and make changes on a prospective basis when adjustments are necessary. Such estimates and assumptions affect, among other things, our goodwill, indefinite-lived intangible asset, and long-lived asset valuations; inventory valuation; assessment of the annual income tax expense; deferred income taxes and income tax contingencies; and measurement of compensation costs.
Fair Value of Assets Acquired and Liabilities Assumed
We estimate the fair value of the assets acquired and liabilities assumed in a business combination using various assumptions. The most significant assumptions used relate to determining the fair value of property and equipment, and intangible franchise rights.
We estimate the fair value of property and equipment based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in divestitures, acquisitions and real estate transactions. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value.
We estimate the fair value of our franchise rights primarily using the Multi-Period Excess Earnings (MPEE) model. The forecasted cash flows used in the MPEE model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, general operating expenses, and cost of capital. We use primarily internally-developed forecasts and business plans to estimate the future cash flows that each franchise will generate. We have determined that all cash flows of the store are directly attributable to the franchise rights. We estimate the appropriate interest rate to discount future cash flows to their present value equivalent taking into consideration factors such as a risk-free rate, a peer group average beta, an equity risk premium and a small stock risk premium. Additionally, we also may use a market approach to determine the fair value of our franchise rights. These market data points include our acquisition and divestiture experience and third-party broker estimates.
7
We use a relief-from-royalty method to determine the fair value of a trade name. Future cost savings associated with owning, rather than licensing, a trade name is estimated based on a royalty rate and management’s forecasted sales projections. The discount rate applied to the future cost savings factors an equity market risk premium, small stock risk premium, an average peer group beta, a risk-free interest rate and a premium for forecast risk.
Accounts Receivable
The Company carries its accounts receivable at cost. Accounts receivable consist of amounts due from customers, financial institutions, manufacturers and insurance providers. Management has determined that no allowance for uncollectible accounts for accounts receivable is necessary as of September 30, 2021 and December 31, 2020. Such estimates are based on management’s assessments of the creditworthiness of its customers, the aged basis of its receivables, as well as current economic conditions and historical information.
Inventories
Inventories are valued at the lower of net realizable value or cost, using the specific identification method for new vehicles, pooled approach for used vehicles, and the first-in, first out method for parts. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and transportation. Inventories as of September 30, 2021 and December 31, 2020 are recorded based on perpetual inventory records.
The
Company launched its subscription business in 2018, at which time it started to depreciate the corresponding fleet inventory using a
monthly rate of
Company
management periodically reviews its inventories to determine whether any inventories have declined in value. The Company has a reserve
recorded for impairment to reflect inventory at net realizable value of approximately $
Inventories consisted of the following as of September 30, 2021 and December 31, 2020:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| New vehicles | $ | $ | ||||||
| Used vehicles | ||||||||
| Parts & accessories | ||||||||
| Fleet vehicles | ||||||||
| Accumulated depreciation | ( | ( | ) | |||||
| Total inventories | $ | $ | ||||||
Property, Equipment and Leasehold Improvements
Property, equipment, and leasehold improvements are stated at cost. The costs of additions and betterments are capitalized and expenditures for repairs and maintenance are expensed in the period incurred. When items included in property and equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in selling, general and administrative expenses.
Vehicles and equipment are depreciated utilizing the straight-line method over the estimated useful lives of the respective assets as follows:
| Equipment | |||
| Vehicles | |||
| Furniture and fixtures | |||
| Buildings |
Leasehold improvements are amortized over the shorter of the remaining term of the lease or the useful life of the improvement utilizing the straight-line method.
Intangible Assets
Intangible assets are stated at their historical cost and amortized on a straight-line basis over their expected useful lives.
Through acquisition, we have agreements (Franchise Rights) with our manufacturers. Franchise Rights represents a right received under Franchise Agreements with manufacturers and is identified on an individual dealership basis.
8
The Company evaluates the useful lives of our Franchise Rights based on the following factors:
As evidenced by our acquisitions, there is an active market for most automotive dealership franchises within the United States. We attribute value to the Franchise Rights acquired with the dealerships we purchase based on the understanding and industry practice that the Franchise Rights will be renewed indefinitely by the manufacturer.
Accordingly, we have determined that our Franchise Agreements will continue to contribute to our cash flows indefinitely and, therefore, have indefinite lives.
As an indefinite-lived intangible asset, franchise value is tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying value may exceed fair value. The impairment test for indefinite-lived intangible assets requires the comparison of estimated fair value to carrying value. An impairment charge is recorded to the extent the fair value is less than the carrying value. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. We will evaluate our indefinite-lived intangible assets using a qualitative assessment process. We have determined the appropriate unit of accounting for testing Franchise Rights for impairment is each individual store.
The testing of our indefinite-lived intangible assets for impairment will be performed on or before December 31 of each year and more frequently if events or circumstances indicate the carrying amount of the reporting unit more likely than not exceeds fair value.
Long-lived Assets
The Company reviews long-lived assets and certain identifiable intangibles held and used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In evaluating the fair value and future benefits of its long lived and intangible assets, management performs an analysis of the anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes an impairment loss if the carrying value of the asset exceeds the expected future cash flows. There were no deemed impairments of long-lived assets as of September 30, 2021 and December 31, 2020.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
As of September 30, 2021, and December 31, 2020, the fair value of these financial instruments, including cash and restricted cash, accounts receivable, notes receivable, net investment in sales-type leases, and accounts payable, approximated book value due to the short maturity of these instruments. Vehicle financing and notes payable and related party notes payable approximate fair value due to market interest rates. Our fair value measurements related to goodwill, intangible assets and contingent consideration are recognized in connection with acquisitions. Goodwill and intangible assets are valued using level 3 inputs, and contingent consideration is valued using level 2 inputs.
The following table presents information about the Company’s liabilities that are measured at fair value on a recurring basis as of September 30, 2021 and indicates the fair value hierarchy of the valuation techniques that the Company utilized to determine such fair value. As of September 30, 2021 the fair value of warrant liabilities is as follows:
| Description | Quoted Priced
in Active Markets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Other Unobservable Inputs (Level 3) |
|||||||||
| Warrant liabilities | $ | $ | $ | |||||||||
Warrant Liability – The 2021 Warrants are accounted for as derivative liabilities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815-40 Derivatives and Hedging (“ASC 815”) and are presented as a liability on the Company’s consolidated balance sheets. The warrant liability is measured at fair value at inception and on a recurring basis, with any subsequent changes in fair value presented in the Company’s statement of operation.
9
Initial Measurement – The Company established the initial fair value for the 2021 Warrants on February 25, 2021, the date of the closing. The 2021 Warrants are measured at fair value on a recurring basis, using a Monte Carlo simulation, Option Pricing Model (“OPM”). The Company allocated the proceeds received from (i) the sale of the preferred units, first to the 2021 Warrants based on their fair values as determined at initial measurement, with the remaining proceeds allocated to Series A Convertible Preferred Stock. The 2021 Warrants were classified as Level 3 at the initial measurement date due to the use of unobservable inputs.
The Company utilizes the OPM to value the 2021 Warrants at each reporting period, with any subsequent changes in fair value recognized in the consolidated statement of operations. The estimated fair value of the warrant liability is determined using Level 3 inputs. Inherent in the OPM are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the volatility of its shares of common stock based on historical volatility that matches the expected remaining life of the 2021 Warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the issuance date for a maturity similar to the expected remaining life of the 2021 Warrants. The expected life of the 2021 Warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates to remain at zero. The aforementioned warrant derivative liability is not subject to qualified hedge accounting.
The following table provides quantitative information regarding Level 3 fair value measurements:
| September 30, 2021 | February
25, 2021 (initial measurement) | |||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (years) | ||||||||
| Expected volatility | % | % | ||||||
| Exercise Price | $ | $ | ||||||
| Stock Price | $ | $ | ||||||
| Dividend yield | % | % | ||||||
The following table presents the changes in the fair value of the warrant liability:
| Warrant Liability | ||||
| Fair value as of February 25, 2021 | $ | |||
| Change in valuation inputs or other assumptions (1) | ( | ) | ||
| Fair value as of March 31, 2021 | ||||
| Change in valuation inputs or other assumptions (1) | ||||
| Fair value as of June 30, 2021 | ||||
| Change in valuation inputs or other assumptions (1) | ||||
| Fair value as of September 30, 2021 | $ | |||
| (1) | Changes in valuation inputs or other assumptions are recognized in other income, net in the statement of operations for the three months ended March 31, 2021, June 30, 2021 and September 30, 2021. |
Share-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of stock options, based on the fair value of those awards at the date of grant over the requisite service period, which generally is the vesting period of the award. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards.
Revenue Recognition
The Company recognizes revenue in accordance with the FASB ASC 606, Revenue from Contracts with Customers (“ASC 606”). 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.
The Company leases vehicles to third parties that are accounted for in accordance with FASB ASC 842, Leases (“ASC 842”). These leases generally have lease terms less than one year in duration. The accounting for investments in leases and leased vehicles is different depending on the type of lease. Each lease is classified as either a sales-type lease, or operating lease, as appropriate. The Company classifies leases as sales-type leases, where the present value of the sum of the lease payments and guaranteed residual value exceeds the Company’s investment in the leased vehicle.
10
Revenue on sales-type leases is recognized at the inception of the lease and the related interest income is recognized over the term of the lease using the effective interest method. Revenues on the sales of vehicles at the end of a lease are recognized at the inception of the lease, and any net gain or loss on sales of such vehicles is presented within fleet and other revenues and fleet and other cost of revenues in the condensed consolidated statements of operations. Interest income is derived from the discounted cash flows of the lease payments. Investments in sales-type leases are comprised of the minimum lease payments receivable and guaranteed residual at their present value.
New Retail Vehicle and Used Retail Vehicle Revenues
Revenue from the retail sale of a vehicle is recognized at a point in time, as all performance obligations are satisfied when a contract is signed by the customer, financing has been arranged or collectability is probable, and the control of the vehicle is transferred to the customer. The transaction price for a retail vehicle sale is specified in the contract with the customer and includes all cash and non-cash consideration including dealer fees. In a retail vehicle sale, customers often trade in their current vehicle. The trade-in is measured at its stand-alone selling price in the contract, utilizing various third-party pricing sources. There are no other non-cash forms of consideration related to retail sales. All vehicle rebates are applied to the vehicle purchase price at the time of the sale and are therefore incorporated into the price of the contract at the time of the exchange. We do not allow the return of new or used vehicles, except where mandated by state law.
The Company collects sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale. These taxes are accounted for on a net basis and are not included in revenues or cost of sales.
Service, Body and Parts Revenue
Revenue from service, body and parts sales is recognized upon the transfer of control of the parts or service to the customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale and are not significant.
Finance and Insurance, net
Revenue
from finance and insurance sales is recognized, net of estimated chargebacks, at the time of the sale of the related vehicle. Chargeback
reserves totaled approximately $
As a part of the vehicle sale, we seek to arrange financing for customers and sell a variety of add-ons, such as extended warranty service contracts. These products are inherently attached to the governing vehicle and performance of the obligation cannot be performed without the underlying sale of the vehicle. We act as an agent in the sale of these contracts as the pricing is set by the third-party provider, and our commission is preset. Revenues for these contracts are presented net of associated costs within the consolidated statements of operations.
Fleet and Other Revenue
Fleet and other revenue consists of revenue from sales-type and operating leases, subscription and interest. Effective July 1, 2021, dealer fees are now reflected in new and used vehicle revenue.
Subscription Revenue
The Company offers a vehicle subscription plan where a customer will pay a monthly fee in exchange for access to a vehicle. The Company’s subscriptions include monthly swaps, scheduled maintenance and upkeep, license, and registration and in most cases roadside assistance. Customers have the flexibility to up-or-downgrade a vehicle monthly, with the vehicle payment adjusted accordingly. There is an activation payment at subscription inception that varies based upon the monthly payment of the selected vehicle. Monthly vehicle payments are dependent upon the vehicle selected by the customer. Due to the nature of the subscription contract, where the subscriber can swap out the vehicle in the contract, the performance obligation is completed and recognized each month. The revenues earned under these contracts are recognized in accordance with ASC 606.
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a vehicle to a customer under a subscription contract. The prices of the vehicles are stated in its contracts at stand-alone subscription prices, which are agreed upon with the customer prior to delivery. The Company satisfies its performance obligation for monthly subscription payments upon delivery to the customer and in each subsequent month the customer retains possession of the vehicle. The Company recognizes revenue at the agreed-upon price stated in the contract in the month earned.
11
The
Company also receives a one-time, non-refundable payment as an activation fee to its vehicle subscription program. This fee is deferred
and amortized to income monthly over the term of the subscription, as the performance obligation (providing a vehicle for the customer)
is completed over the term of the subscription. Subscription revenues are recognized over time based on the duration of the contract
term with the customer. The amount of revenue recognized is calculated using an input method, which most closely depicts performance
of the contracts. Our subscription liability balance was approximately $
Customer payment is received prior to initial vehicle delivery and on each monthly recurring anniversary date. The Company collects sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale. These taxes are accounted for on a net basis and are not included in sales or cost of sales.
Leasing Revenue
The Company accounts for revenue earned from vehicle rentals and rental related activities wherein an identified asset is transferred to the customer and the customer has the ability to control that asset under FASB ASC 842. Revenue from operating leases is recognized ratably on a straight-line basis over the term of the agreement.
Performance obligations associated with rental related activities, such as charges to the customer for the fueling of vehicles and value-added services such as loss damage waivers, navigation units, and other ancillary and optional products, are also satisfied over the rental period.
Payments are due from customers at the time of reservation. Additional charges incurred by the customers are collected at the time of vehicle return. The Company collects sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale. These taxes are accounted for on a net basis and are not included in sales or cost of sales.
Dealer Fees
Dealer fees are earned primarily in connection with retail sales of new or used vehicles and are recorded at the same time as the retail sale. These consist of the standard dealer fees charged with each transaction.
Segment Reporting
We have determined that each of our retail stores along with our fleet operations, which are considered individual operating segments, are one reportable segment because they have similar operating revenues, margins, customers, product distribution, and regulatory environment. Additionally, there is one management team that reviews and manages our retail stores and fleet operations. Therefore, we have determined that we have one reportable segment: Retail & Fleet.
Our Retail & Fleet segment is comprised of our retail automotive locations that sell new vehicles manufactured by General Motors, Subaru and KIA Motors and Fleet leasing and sales. The franchises in each segment also sell used vehicles, wholesale vehicles, parts and automotive services, and automotive finance and insurance products.
We define our chief operating decision maker (“CODM”) to be a committee comprising of the Company’s Chief Executive Officer and Chief Operating Officer. Historical and forecasted operational performance is evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results. Our CODM reviews capital expenditures on an aggregated one reporting unit basis. Performance measurement of the reportable segment by the CODM is based on several metrics, including earnings from operations. The CODM uses these results, in part, to evaluate the performance mainly associated with expected inventory and working capital requirements, of the reportable segment.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred tax assets are required to be reduced by a valuation allowance to the extent that, based on the weight of available evidence, it is more likely than not that the deferred tax assets will not be realized.
Advertising
The
Company expenses advertising and marketing costs in the period incurred. Advertising expense was approximately $
12
Leases
The Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”) using the modified retrospective adoption method with an effective date of January 1, 2019. This standard requires all lessees to recognize a right of use asset and a lease liability, initially measured at the present value of the lease payments.
Under Topic 842, the Company applied a dual approach to all leases whereby the Company is a lessee and classifies leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the Company. Lease classification is evaluated at the inception of the lease agreement. Regardless of classification, the Company records a right of use asset and a lease liability for all leases with a term greater than 12 months. Operating lease expense is recognized on a straight-line basis over the term of the lease.
The components of the right of use asset and lease liabilities as of September 30, 2021 and December 31, 2020 are as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Operating lease right of use asset | $ | $ | ||||||
| Operating lease liability, current portion | $ | $ | ||||||
| Operating lease liability, net of current portion | $ | $ | ||||||
Operating Leases
During 2018, the Company entered into a lease with an entity related through common ownership for its facilities in Plantation, Florida.
In
September 2020, the Company entered into a lease with an unrelated entity for office space in Fort Lauderdale, Florida. The 34 month
lease provides for monthly payments of $
In
March 2021, two of the Company’s dealerships entered into
In
May 2021, one of the Company’s dealerships entered into two leases with a related entity for the dealership premises with monthly
rents of $
Total
operating lease cost for the Company’s lease locations was approximately $
Discount Rate
When available, the Company uses the rate implicit in the lease or a borrowing rate based on similar debt to discount lease payments to present value. However, the lease generally does not provide a readily determinable implicit rate, therefore for the leases beginning in 2021, the Company used the Company’s incremental borrowing rate.
Lease Cost
Operating
lease cost related to right of use asset on the Plantation lease was approximately $
Operating
lease cost related to right of use asset on the Fort Lauderdale lease was approximately $
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This guidance was to be effective for reporting periods beginning after December 15, 2019, with early adoption permitted. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective dates for the Company, as a smaller reporting company, until fiscal year 2023. The Company currently plans to adopt the guidance at the beginning of fiscal year 2023. The Company is continuing to assess the impact of the standard on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.” The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted the new guidance in the first quarter of 2021. The adoption of the guidance had no impact on our consolidated financial statements.
13
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements.” The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We adopted the new guidance in the first quarter of 2021. The adoption of the guidance had no impact on our consolidated financial statements.
The Company early adopted ASU 2020-06 Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity on a modified retrospective basis to financial instruments outstanding on January 1, 2021. This ASU simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas. There was no impact on accumulated deficit or other components of equity on the date of adoption. As a result, there were no convertible instruments outstanding at the time of adoption and the Company applied the update in determining the appropriate accounting for the preferred stock and 2021 Warrants issued during the quarter. See Note 17 – Equity.
The Company accounts for the 2021 Warrants as liability-classified instruments based on an assessment of the specific terms of the 2021 Warrants with the applicable authoritative guidance in FASB ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the 2021 Warrants require classification as a liability pursuant to ASC 480 and meet the requirements for equity classification under ASC 815, including whether the 2021 Warrants are indexed to the Company’s own equity and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.
2021 Warrants that meet all of the criteria for equity classification are initially measured at fair value or relative fair value, depending on the circumstances, and are recorded as a component of additional paid-in capital at the time of issuance, and are not subsequently remeasured. 2021 Warrants that do not meet all the criteria for equity classification are recorded at their initial fair value as a liability on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of liability-classified 2021 Warrants are recognized as a gain or loss on the statements of operations.
The Company accounts for the 2021 Warrants in accordance with ASC 815-40 under which the 2021 Warrants do not meet the criteria for equity classification and must be recorded as liabilities.
Note 3 - Global Pandemic
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spreads globally beyond the point of origin. On March 20, 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.
The
full impact of the COVID-19 outbreak continues to evolve as of the date of these condensed consolidated financial statements. As such,
it is uncertain as to the full magnitude that the pandemic will have on the Company’s consolidated financial condition, liquidity,
and future results of operations. Management is actively monitoring the impact of the global situation on its consolidated financial
condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global
responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations,
financial condition, or liquidity for fiscal year 2020. To curb the financial impacts of the outbreak, the Company initially reduced
the total compensation to a maximum of $
Beginning in January 2021, the Company resumed normal salaries, hiring practices, and vehicle purchases.
In the third quarter of 2021, U.S. industry
retail new vehicle unit sales decreased
Note 4 - Asset Purchase Agreements
On
February 19, 2020, the Company consummated an Asset Purchase Agreement whereby the Company purchased approximately $
The
non-exclusive perpetual software license is for a vehicle subscription service app in the Apple App and Google Play stores. The license
value of approximately $
14
The
vehicle acquisition was financed in part by two credit lines.
Note 5 - Acquisitions
Beckley Acquisitions – March 2021
On
March 3, 2021, through majority owned subsidiaries, the Company acquired a group of West Virginia dealerships and related real estate
for a purchase price totaling approximately $
The following table summarizes the total consideration.
| Cash | $ | |||
| Rollover equity | ||||
| Total consideration | $ |
The following table summarizes the allocation of the total consideration to the tangible and intangible assets acquired and the liabilities assumed based on the respective fair values at the acquisition date. The Company is still reviewing fair values of the assets acquired and the liabilities assumed, and rollover equity as provisional. Therefore, the fair values are provisional measurements and may be subject to change.
Net Assets Acquired – March 2021 Beckley acquisitions
| Assets acquired | ||||
| New vehicles | $ | |||
| Used vehicles | ||||
| Parts & accessories | ||||
| Property & equipment | ||||
| Real property | ||||
| Operating leases right of use assets | ||||
| Other assets | ||||
| Franchise rights | ||||
| Tradename | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accrued personal property tax | ||||
| Accrued vacation | ||||
| We owes | ||||
| Intransit floorplan liability | ||||
| Operating lease liabilities | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
The fair value of the franchise rights was based on the excess earnings method. The fair value of the tradename was based on the relief from royalty method. The franchise rights and tradename are indefinite lived assets and not subject to amortization.
15
The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which is attributable primarily to expected synergies and an assembled workforce. Total goodwill is expected to be deductible for tax purposes.
The consolidated statements of operations include the following revenue and net income attributable to the acquired dealerships since the date of the acquisition:
| 2021 | ||||
| Revenue | $ | |||
| Net income | $ |
The following unaudited pro forma summary in the three and nine month periods ended September 30, 2021 and 2020, respectively, presents consolidated information as if the acquisition had occurred on January 1, 2020:
| Pro Forma | Pro Forma | |||||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | |||||||||||||
| Net income | ( | ) | ( | ) | ( | ) | ||||||||||
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: accounting for inventory on a specific identification method, compensation expense, recognition of interest expense for financing related to stores, and corporate income taxes based on geographic location. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
Beckley Subaru Acquisition – May 2021
On
May 5, 2021, through a majority-owned subsidiary, the Company acquired a Subaru dealership in West Virginia for a purchase price totaling
approximately $
The following table summarizes the total consideration.
| Cash | $ | |||
| Rollover equity | ||||
| Total consideration | $ |
16
The following table summarizes the allocation of the total consideration to the tangible and intangible assets acquired and the liabilities assumed based on the respective fair values at the acquisition date. The Company is still reviewing fair values of the assets acquired and the liabilities assumed, and rollover equity as provisional. Therefore, the fair values are provisional measurements and may be subject to change.
Net Assets Acquired – May 2021 Beckley Subaru acquisition
| Assets acquired | ||||
| New vehicles | $ | |||
| Used vehicles | ||||
| Property & equipment | ||||
| Operating leases right of use assets | ||||
| Other assets | ||||
| Franchise rights | ||||
| Tradename | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accrued personal property tax | ||||
| Accrued vacation | ||||
| We owes | ||||
| Assumed floorplan | ||||
| Operating lease liabilities | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
The fair value of the franchise rights was based on the excess earnings method. The fair value of the trade name was based on the relief from royalty method. The franchise rights and trade name are indefinite lived assets and not subject to amortization.
The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which is attributable primarily to expected synergies and an assembled workforce. Total goodwill is expected to be deductible for tax purposes.
The consolidated statements of operations include the following revenue and net income attributable to the acquired dealerships since the date of the acquisition:
| 2021 | ||||
| Revenue | $ | |||
| Net income | $ |
The following unaudited pro forma summary in the three and nine month periods ended September 30, 2021 and 2020, respectively, presents consolidated information as if the acquisition had occurred on January 1, 2020:
| Pro Forma | Pro Forma | |||||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | |||||||||||||
| Net income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: accounting for inventory on a specific identification method, compensation expense, recognition of interest expense for financing related to stores, and corporate income taxes based on geographic location. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
As
a result of the Beckley Acquisitions in March 2021, the Company issued noncontrolling interests in two of its wholly-owned subsidiaries,
LMP Beckley 001 Holdings, LLC (“001”) and LMP Beckley 002 Holdings, LLC (“002”), to the sellers of the Beckley
Acquisitions. The noncontrolling interests represent
17
The
sellers and the Company agreed to both put options exercisable by the noncontrolling interest holders and call options exercisable
by the Company for the remaining
The Company allocates income and losses to the noncontrolling interest holders based on the applicable membership interest percentage. At each reporting period, the redeemable noncontrolling interests are recognized at the higher of (1) the initial carrying amounts of the noncontrolling interests as adjusted for accumulated income or loss attributable to the noncontrolling interest holders, or (2) the contractually-defined redemption values as of the balance sheet date, as long as the contractually-defined redemption values exceed the initial amounts of the noncontrolling interests. If the contractually-defined redemption values exceed the carrying amounts of noncontrolling interests as adjusted for accumulated income or loss attributable to noncontrolling interests holders, but not the initial amounts of the noncontrolling interests, the noncontrolling interests are recorded at the initial amounts. Adjustments to the carrying amount of redeemable noncontrolling interests are charged against retained earnings (or additional paid-in capital if there are no retained earnings).
The components of redeemable noncontrolling interests as of September 30, 2021 are as follows:
| Beginning balance | $ | |||
| Noncontrolling interests issued in connection with all Beckley Acquisitions | ||||
| Net income attributable to noncontrolling interests through September 30, 2021 | ||||
| Distributions to noncontrolling interests | ( | ) | ||
| Adjustments to redemption value through September 30, 2021 | ||||
| Ending balance, September 30, 2021 | $ |
A reconciliation of shareholders’ equity attributable to LMP Automotive Holdings, Inc., shareholders’ equity attributable to noncontrolling interests, and total shareholders’ equity as of September 30, 2021 is as follows:
| Shareholders’ equity attributable to LMP Automotive Holdings, Inc. | $ | |||
| Shareholders’ equity attributable to noncontrolling interests | ||||
| Total shareholders’ equity | $ |
As of December 31, 2020, there was no shareholders’ equity attributable to noncontrolling interests.
Fuccillo Acquisition
On
March 4, 2021, through majority owned subsidiaries, the Company acquired two Southwest Florida dealerships and related real estate for
an aggregate purchase price of approximately $
18
The following table summarizes the allocation of the total consideration to the tangible and intangible assets acquired and the liabilities assumed based on the respective fair values at the acquisition date. The Company is still reviewing fair values of the assets acquired and the liabilities assumed, including the noncontrolling interests as being provisional. Therefore, the fair values are provisional measurements and may be subject to change.
| Net Assets Acquired | ||||
| Assets acquired | ||||
| New vehicles | $ | |||
| Used vehicles | ||||
| Parts & accessories | ||||
| Property & equipment | ||||
| Real property | ||||
| Other assets | ||||
| Franchise rights | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| We owes | ||||
| Prepaid maintenance program credit | ||||
| Customer deposits | ||||
| Total liabilities assumed | ||||
| Net Assets Acquired | $ | |||
The fair value of the franchise rights was based on the excess earnings method. The franchise rights are indefinite lived assets and not subject to amortization.
The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which is attributable primarily to expected synergies and an assembled workforce. Total goodwill is expected to be deductible for tax purposes.
The consolidated statements of operations include the following revenue and net income attributable to the acquired dealerships since the date of the acquisition:
| 2021 | ||||
| Revenue | $ | |||
| Net income | $ | |||
The following unaudited pro forma summary in the three and nine month periods ended September 30, 2021 and 2020, respectively, presents consolidated information as if the acquisition had occurred on January 1, 2020:
| Pro Forma | Pro Forma | |||||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | |||||||||||||
| Net income | ( | ) | ( | ) | ||||||||||||
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: accounting for inventory on a specific identification method, compensation expense, recognition of interest expense for financing related to stores, and corporate income taxes based on geographic location. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
Concurrent
with the Fuccillo acquisition, the Company sold
19
Related
agreements were also executed which allow for the Company’s subsidiaries to repurchase the
The
Company is accounting for this arrangement as deferred compensation, and at September 30, 2021 has recognized a liability which represents
the computed purchase price less the outstanding principal and interest owed on the nonrecourse notes of approximately $
Bachman Acquisition
On
March 23, 2021, through wholly owned subsidiaries, the Company acquired a Tennessee dealership and related real estate for approximately
$
The following table summarizes the allocation of the total consideration to the tangible and intangible assets acquired and the liabilities assumed based on the respective fair values assumed at the acquisition date. The Company is still reviewing fair values of the assets acquired and the liabilities assumed, including the noncontrolling interests as being provisional. Therefore, the fair values are provisional measurements and may be subject to change.
Net Assets Acquired
| Assets acquired | ||||
| New vehicles | $ | |||
| Used vehicles | ||||
| Parts & accessories | ||||
| Property & equipment | ||||
| Real property | ||||
| Other assets | ||||
| Franchise rights | ||||
| Tradenames | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Accrued personal property tax | ||||
| Customer deposits | ||||
| We owes | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
The fair value of the franchise rights was based on the excess earnings method. The fair value of the tradename was based on the relief from royalty method. The franchise rights and tradename are indefinite lived assets and not subject to amortization.
The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which is attributable primarily to expected synergies and an assembled workforce. Total goodwill is expected to be deductible for tax purposes.
The consolidated statements of operations include the following revenue and net income attributable to the acquired dealership since the date of the acquisition:
| 2021 | ||||
| Revenue | $ | |||
| Net income | $ | |||
20
The following unaudited pro forma summary in the three and nine month periods ended September 30, 2021 and 2020, respectively, presents consolidated information as if the acquisition had occurred on January 1, 2020:
| Pro Forma | Pro Forma | |||||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | |||||||||||||
| Net income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: accounting for inventory on a specific identification method, compensation expense, recognition of interest expense for financing related to stores, and corporate income taxes based on geographic location. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
On
March 23, 2021, concurrent with the Bachman acquisition, the Company sold
Related agreements were also executed which allow for the Company to repurchase the 15% equity interests at any time for the greater of a) the equity holder’s positive capital account, if any, or b) $100. The Company is accounting for this arrangement as an equity award under a share-based compensation arrangement and on the date of the transaction recorded equity of $455,000, which represents the fair value of the equity interest, and compensation of $110,733, representing the difference between the fair value of the equity award and the purchase price paid by the officer and is recorded in selling, general & administrative expenses of the accompanying consolidated statement of operations.
LTO Acquisition
On
March 9, 2021, through a wholly owned subsidiary, the Company acquired a
Prior
to the acquisition, LTO had acquired vehicles from the Company pursuant to sales-type leases. At the acquisition date, the Company had
receivable balances of approximately $
The following table summarizes the total consideration:
| Cash | $ | |||
| Acquisition holdback due seller | ||||
| Common stock | ||||
| Rollover equity | ||||
| Effective settlement of receivables | ||||
| Total consideration | $ |
21
The following table summarizes the allocation of the total consideration to the tangible and intangible assets acquired and the liabilities assumed based on the respective fair values assumed at the acquisition date. The Company is still reviewing fair values of the assets acquired and the liabilities assumed, including the noncontrolling interest as provisional. Therefore, the fair values are provisional measurements and may be subject to change.
Net Assets Acquired
| Assets acquired | ||||
| Cash | $ | |||
| Leased vehicles | ||||
| Vehicles | ||||
| Property & equipment | ||||
| Operating leases right of use assets | ||||
| Other assets | ||||
| Intangible assets | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Liabilities assumed | ||||
| Customer deposits | ||||
| Operating lease liabilities | ||||
| Notes payable | ||||
| Accrued liabilities | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
The fair value of in place leases was based on the direct costs associated with obtaining a new lessee and the opportunity costs associated with lost rentals. In place leases have a useful life of thirty months and is subject to amortization.
The excess of the consideration transferred in the acquisition over the net amounts assigned to the fair value of the tangible assets and identifiable intangible assets acquired was recorded as goodwill, which is attributable primarily to expected synergies and an assembled workforce. Total goodwill is expected to be deductible for tax purposes.
The consolidated statements of operations include the following revenue and net income attributable to the acquired entity since the date of the acquisition:
| 2021 | ||||
| Revenue | $ | |||
| Net income | $ | |||
The following unaudited pro forma summary in the three and nine month periods ended September 30, 2021 and 2020, respectively, presents consolidated information as if the acquisition had occurred on January 1, 2020:
| Pro Forma | Pro Forma | |||||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net revenue | $ | $ | $ | |||||||||||||
| Net income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: accounting for inventory on a specific identification method, compensation expense, recognition of interest expense for financing related to stores, and corporate income taxes based on geographic location. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
22
White Plains Chrysler Dodge Jeep RAM Acquisition
On
October 6, 2021, the Company closed on the acquisition of assets related to the ownership and operation of the White Plains Chrysler
Jeep Dodge Ram (“White Plains CDJR) as contemplated by that certain Dealership Asset Purchase Agreement, dated as of March 31,
2021, by and among the Company and Chrysler Jeep of White Plains, Inc. The consideration paid by the Company for the acquisition was
As a result of limited access to White Plains CDJR information required to prepare initial accounting, together with the limited time since the acquisition date and the effort required to conform the financial statements to the Company's practices and policies, the initial accounting for the business combination is incomplete at the time of this filing. As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, pre-acquisition contingencies and goodwill. Also, the Company is unable to provide pro forma revenues and earnings of the combined entity. This information will be included in the Company's annual report on Form 10-K for the year ended December 31, 2021.
Central Avenue Chrysler Dodge Jeep RAM Acquisition
On
April 1, 2021, the Company entered into a dealership asset purchase agreement effective as of March 31, 2021 (the “Central Avenue
DAPA”), for the acquisition of the assets of a Chrysler Dodge Jeep RAM dealership located in Yonkers, New York. In exchange for
the acquisition of such assets, the Company will pay to the sellers an aggregate amount of $
Houston Nissan and Cadillac Acquisitions
On
July 16, 2021, the Company entered into a dealership asset purchase agreement (the “Houston DAPA”) to acquire the assets
of a franchised Nissan and Cadillac dealership in Houston, Texas. In exchange for the acquisition of such assets, the Company will pay
to the sellers an aggregate amount of $
East Hartford KIA Acquisition
On
July 21, 2021, the Company entered into a dealership asset purchase agreement (the “Hartford DAPA”) to acquire the assets
of a franchised KIA dealership in East Hartford, Connecticut. In exchange for the acquisition of such assets, the Company will pay to
the sellers an aggregate amount of $
23
Clifton Park Chrysler Dodge Jeep RAM Acquisition
On
July 23, 2021, the Company entered into a dealership asset purchase agreement (the “Clifton DAPA”) to acquire the assets
of a franchised Chrysler Jeep Dodge Ram dealership in Clifton Park, New York. In exchange for the acquisition of such assets, the Company
will pay to the sellers an aggregate amount of $
Yonkers KIA Acquisition
On
August 5, 2021, the Company entered into a dealership asset purchase agreement (the “Yonkers DAPA”) to acquire the assets
of a franchised KIA dealership located on Central Avenue in Yonkers, New York. In exchange for the acquisition of such assets, the Company
will pay to the sellers an aggregate amount of $
Greeneville Chrysler Dodge Jeep RAM Acquisition
On
August 24, 2021, the Company entered into a dealership asset purchase agreement (the “Greeneville DAPA”) to acquire the assets
of a franchised Chrysler Jeep Dodge Ram dealership located in Greeneville, Tennessee. In exchange for the acquisition of such assets,
the Company will pay to the sellers an aggregate amount of $
Maserati & Alfa Romeo of St. Petersburg Acquisitions
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “MAR DAPA”) to acquire the assets
related to a franchised Maserati and Alfa Romeo motor vehicle dealership (the “MAR Dealership”) located in Pinellas Park,
Florida. In exchange for the acquisition of such assets, the Company will pay $
24
Alan Jay Nissan Acquisition
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “AJN DAPA”) to purchase the assets
of a franchised Nissan motor vehicle dealership located in Sebring, Florida. In exchange for the acquisition of such assets, the Company
will pay $
Alan Jay Ford Lincoln of Sebring & Alan Jay Ford of Wauchula Acquisitions
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “AJF DAPA”) to acquire the assets
related to a franchised Ford and Lincoln motor vehicle dealership located in Sebring and Wauchula, Florida. In exchange for the acquisition
of such assets, the Company will pay $
Alan Jay Toyota Acquisition
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “AJT DAPA”) to acquire the assets
related to a franchised Toyota motor vehicle dealership located in Sebring, Florida. In exchange for the acquisition of such assets,
the Company will pay $
Clewiston Chrysler Dodge Jeep RAM, Wauchula Chrysler Dodge Jeep RAM, Wauchula Chevrolet, Sebring Chevy Buick GMC Cadillac & Allstar Preowned Acquisitions
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “Clewiston DAPA”) to acquire the
assets related to a franchised Chrysler Dodge Jeep RAM motor vehicle dealership located in Clewiston, Florida, a franchised Chevrolet
motor vehicle dealership located in Wauchula, Florida, a franchised Chevrolet Buick GMC Cadillac motor vehicle dealership located in
Sebring, Florida and a preowned motor vehicle dealership located in Sebring, Florida. In exchange for the acquisition of such assets,
the Company will pay an aggregate of $
Alan Jay KIA Acquisition
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “AJK DAPA”) to acquire the assets
related to a franchised KIA dealership located in Sebring, Florida. In exchange for the acquisition of such assets, the Company will
pay $
McGavock Auto Group Acquisitions
On
September 10, 2021, the Company entered into a dealership asset purchase agreement (the “McGavock DAPA”) to acquire the assets
related to franchised Nissan motor vehicle dealerships located in Abilene, Amarillo, West Texas, Lubbock and San Marcos, Texas. In exchange
for the acquisition of such assets, the Company will pay $
Note 6 - Concentration of Credit Risk
The
Company maintains its cash balances in two financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”)
for up to $
25
Note 7 - Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements, net is summarized as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Land | $ | $ | ||||||
| Vehicles | $ | $ | ||||||
| Building | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Leasehold and building improvements | ||||||||
| Less: accumulated depreciation and amortization | ( |
) | ( |
) | ||||
| $ | $ | |||||||
Depreciation and amortization expense related to vehicles, equipment, and leasehold improvements totaled approximately $
Note 8 - Intangible Assets
Intangible assets, net, are summarized as follows:
| September 30,
2021 |
December 31,
2020 |
|||||||
| Software license | $ | $ | ||||||
| Website design and other intangibles | ||||||||
| Less: Accumulated amortization | ( |
) | ( |
) | ||||
| In place leases | ||||||||
| Less: Accumulated amortization | ( |
) | ||||||
| Franchise rights | ||||||||
| Tradenames | ||||||||
| $ | $ | |||||||
Amortization
expense associated with software license and website and other intangibles amounted to approximately $
Amortization
expense associated with in place leases amounted to approximately $
Future amortization of intangible assets at September 30, 2021 are as follows:
| Year ending December 31, | ||||
| 2021 (three months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| $ | ||||
Note 9 - Goodwill
Changes in the carrying value of goodwill as of September 30, 2021 is as follows:
| September 30, 2021 |
||||
| Balance, December 31, 2020 | $ | |||
| Goodwill acquired from acquisitions | ||||
| Balance, September 30, 2021 | $ | |||
26
Note 10 - Investment in Sales-type leases
Investment in sales-type leases consists of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Sales-type leases: | ||||||||
| Minimum lease payments receivable | $ | $ | ||||||
| Unearned income | ( | ) | ( | ) | ||||
| Guaranteed residual value of vehicles | ||||||||
| Total investment in sales-type leases | $ | $ | ||||||
As
of September 30, 2021 and December 31, 2020, the total investment in sales-type leases is classified as short-term as all leases are
due within one year of the balance sheet date. Gross leasing revenues were approximately $
The
assets held under the investment are leased to three customers, one of which is LTO Holdings LLC (LTO), an entity that is
Net leasing income as included in Revenues on the consolidated condensed statements of operations consists of the following:
| For
the Three Months Ended | For
the Nine Months Ended | |||||||||||||||
| September 30,
2021 | September 30,
2020 | September 30, 2021 | September 30,
2020 | |||||||||||||
| Interest income from sales-type leases | $ | $ | $ | $ | ||||||||||||
| Selling profit (loss) at commencement of sales-type leases | ||||||||||||||||
| Operating lease income (loss) | ||||||||||||||||
| Net leasing income | $ | $ | $ | $ | ||||||||||||
Note 11 - Related Party Transactions
On
July 8, 2020, the Company terminated the lease and purchased the land and building located in Plantation, Florida where its previous
headquarters were located from its landlord, ST RXR Investments, LLC, a related party owned by the Company’s President and Chief
Executive Officer, for approximately $
The
Company leases vehicles under its subscription and sales-type programs to certain officers and directors under 6-month contracts. Total
payments made by officers and directors for the vehicle leases amounted to approximately $
The
Company’s Beckley dealerships lease certain of their premises from the current
To
help facilitate the first quarter of 2021 acquisition of Kia of Port Charlotte and Kia of Cape Coral, the Company agreed to provide financing,
in the form of promissory notes to the minority owners: Kevin West and Associates LLC and Rosciti & Associates LLC totaling $
In
March 2021, the Company signed an unsecured Revolving Line of Credit Agreement with a shareholder (the Line) and received funding of
$
On
March 23, 2021, in connection with the consummation of the Bachman Acquisition, LMP Greeneville 001 Holdings, LLC, an indirect wholly
owned subsidiary of LMP Automotive, transferred fifteen percent (
On
October 13, 2021, the Company signed a $
27
Note 12 - Accounts Payable and Other Current Liabilities
Accounts payable and other current liabilities are summarized as follows:
Accounts Payable:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Total accounts payable | $ | $ | ||||||
Other Current Liabilities:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued payroll | $ | $ | ||||||
| Deferred revenues | ||||||||
| Other accruals | ||||||||
| Sales & other taxes payable | ||||||||
| Contingent consideration | ||||||||
| Accrued interest | ||||||||
| We owes | ||||||||
| Accrued legal expenses | ||||||||
| Customer deposits on hand | ||||||||
| Accrued insurance | ||||||||
| Chargeback reserves | ||||||||
| Accrued advertising | ||||||||
| Litigation accrual | ||||||||
| Total other current liabilities | $ | $ | ||||||
Note 13 – Income Taxes
Components of income tax benefit for the period ended September 30, 2021 and December 31, 2020 are as follows:
| September 30, 2021 | December 31,
2020 | |||||||
| Current Income Tax Expense - Federal | ||||||||
| Current Income Tax Expense - State | ||||||||
| Total Current Income Tax Expense | ||||||||
| Deferred Income Tax Expense (Benefit) - Federal | ||||||||
| Deferred Income Tax Expense (Benefit) - State | ||||||||
| Total Deferred Income Tax Expense (Benefit) | ||||||||
| Total Provision for Income Taxes | ||||||||
28
The tax effects of temporary differences which give rise to the significant portions of deferred tax assets or liabilities at September 30, 2021 and December 31, 2020 are as follows:
| September 30, 2021 | December 31,
2020 | |||||||
| Deferred Tax Assets: | ||||||||
| Reserves & Allowances | ||||||||
| Other Accrued Expenses | ||||||||
| Net operating loss carryforward | ||||||||
| Other | ||||||||
| Acquisition Expenses | ||||||||
| Amortization | ||||||||
| Liability Classified Awards | ||||||||
| Stock Options | ||||||||
| Total deferred tax assets | ||||||||
| Deferred Tax Liabilities: | ||||||||
| Depreciation | ( | ) | ( | ) | ||||
| Amortization | ||||||||
| Net deferred tax liability | ( | ) | ( | ) | ||||
| Less Valuation Allowance | ( | ) | ( | ) | ||||
| Total Net Deferred Tax Assets | ||||||||
The
Company will have approximately $
ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At September 30, 2021 and December 31, 2020, a full valuation allowance was required.
In addition, the Company performed a comprehensive review of its uncertain tax positions and determined that no adjustments were necessary relating to unrecognized tax benefits at September 30, 2021. The Company's federal and state income tax returns are subject to examination by taxing authorities for three years after the returns are filed, and the Company's federal and state income tax returns for 2017 through 2020 remain open to examination.
29
The reconciliation of the income tax benefit is computed at the U.S. federal statutory rate as follows:
| September 30, 2021 | December 31,
2020 | |||||||
| Federal statutory income tax | % | % | ||||||
| Consolidation Adjustments | % | % | ||||||
| Federal & State Minimum Taxes | % | % | ||||||
| Permanent Differences | - | % | % | |||||
| Change in Tax Credits | % | % | ||||||
| Change in Tax Rate | % | % | ||||||
| Change in Valuation Allowance | % | % | ||||||
| State income taxes, net of federal benefit | % | % | ||||||
| Other Adjustments | % | % | ||||||
| Prior Year Adjustments | % | % | ||||||
| Total | % | % | ||||||
For the year ended December 31, 2020, there was no income tax expense recorded.
Note 14 - Lease Commitments
The annual minimum lease payments, including fixed rate escalations, on the Company’s operating lease liability with an unrelated party in Fort Lauderdale, Florida and leases for our dealerships in West Virginia and Connecticut as of September 30, 2021 are as follows:
| Years Ending December 31: | ||||
| 2021 (three months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total minimum lease payments | ||||
| Less: amount representing interest | ( |
) | ||
| Present value of future payments | ||||
| Less: current obligations | ( |
) | ||
| Long-term obligations | $ | |||
Operating Leases
Rent
expense charged to operations, inclusive of common area maintenance and taxes, was approximately
$
Note 15 - Vehicle Financing and Notes Payable
In
2019, Mercedes-Benz Financial approved an approximately $
In
2020, Mercedes-Benz Financial increased the approval amount from $
30
In February 2020, the Company entered into an Asset Purchase Agreement (see Note 4), which was financed in part by two credit lines.
| ● |
| ● |
On
March 4, 2021, the Company entered into a Credit Agreement (the “Original Credit Agreement”) by and among the Company, certain
subsidiaries of the Company identified as floor plan borrowers therein (collectively, the “Floor Plan Borrowers”), certain
other subsidiaries of the Company identified as Guarantors identified therein (the “Guarantors”), and Truist Bank, as Administrative
Agent, Lender and Swingline Lender (in such capacities, “Truist”).
On March 4, 2021, the Company received an initial
Term Loan of approximately $
The Term Loan accrues interest at a rate per annum
equal to the LIBOR Rate (as defined in the Credit Agreement) plus the Applicable Margin (as defined in the Credit Agreement) in effect
from time to time.
The Floor Plan Facility matures on March 4, 2023. All amounts borrowed pursuant to the Floor Plan Facility accrue interest at the LIBOR Rate (as defined in the Credit Agreement) plus 1.25% per annum.
Subject to certain exceptions, the Company and the Floor Plan Borrowers are jointly and severally liable for the obligations under the Credit Agreement, which are also guaranteed by the Guarantors and are secured by a first priority security interest in substantially all of the Company’s, the Floor Plan Borrowers’ and the Guarantors’ assets.
The Credit Agreement contains financial covenants which require the Company and its subsidiaries to maintain (i) a Consolidated Leverage Ratio of no greater than 6.00:1.00 until December 31, 2021 and, thereafter, 5.00:1.00, (ii) a Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least 1.20:1.00, (iii) a Consolidated Trust Equity Percentage (as defined in the Credit Agreement) of at least 30%, in each case, tested quarterly and (iv) Liquidity (as defined in the Credit Agreement) of at least $8,000,000 at all times.
The Credit Agreement also includes a number of customary negative covenants. Such covenants, among other things, limit or restrict the ability of the Company, the Floor Plan Borrowers and the Guarantors to:
| ● | incur additional indebtedness; |
| ● | incur liens on assets; |
| ● | engage in mergers or consolidations or fundamental changes; |
| ● | make investments, loans and advances, including acquisitions; |
| ● | pay dividends and distributions or repurchase capital stock; |
| ● | dispose of assets; |
| ● | enter into certain transactions with affiliates; |
31
| ● | enter into certain agreements that would restrict the ability to incur liens on assets; |
| ● | enter into sale leaseback transactions; |
| ● | enter into certain hedging transactions; | |
| ● | amend organizational documents and other material contracts; |
| ● | change fiscal periods; and | |
| ● | amend the documents governing the acquisitions described below in Item 2 |
The aforementioned restrictions are subject to certain exceptions including (i) the ability to incur additional indebtedness, liens, investments and dividends and distributions, subject, in each case, to compliance with certain financial metrics and/or certain other conditions and (ii) a number of other traditional exceptions that grant the Company continued flexibility to operate and develop its business.
The Credit Agreement also includes customary affirmative covenants, representations and warranties and events of default.
The foregoing description of the Credit Agreement does not purport to be complete and is qualified in its entirety by the full text of the Credit Agreement, which was attached as Exhibit 10.1 to our 8-K dated March 8, 2021, and is incorporated herein by reference.
As of September 30, 2021, the total
unpaid principal and accrued interest due under the Truist Loan was approximately $
In
total, the Company had an outstanding principal and accrued interest balance in the Term Loans, Floor Plan Facility, vehicle financing
and notes payable of approximately $
Note 16 - Contingencies
The Company is subject to asserted claims and liabilities that arise in the ordinary course of business. The Company maintains third-party insurance to mitigate potential losses from these actions. In the opinion of management, the amount of the ultimate liability with respect to these actions will not materially affect the Company’s financial position or results of operations.
Note 17 - Equity
In February 2020, the Company completed a secondary public offering, selling
In
February 2020, as part of its asset purchase agreement, the Company issued
During
the three months ended March 31, 2021, the Company issued
During
the three months ended March 31, 2021, the Company issued
During
the three months ended March 31, 2021, the Company issued
In
February 2021, the Company issued
32
In
April 2021, the Company issued
On
September 2, 2021,
On
September 24, 2021,
Conversion rights
Each
share of Series A Convertible Preferred Stock is convertible at the option of the holder into shares of common stock at any
time after the date of issuance.
Dividends
Holders of the Series A Convertible Preferred Stock (the “Holders”) are entitled to receive dividends equal to common stock on an as-converted basis as if such dividends are paid on shares of the common stock.
Liquidation Preference
Upon liquidation, whether voluntary or involuntary, the Holders shall be entitled to receive out of the assets, the same amount that a holder of common stock would receive if the Series A Convertible Preferred Stock were fully converted to common stock without preference.
Voting Rights
Holders of Series A Convertible Preferred Stock have no voting rights. The Company cannot alter the preferences or rights of the Holders or increase the number of authorized shares of Preferred Stock without a majority approval from the Holders of Series A Convertible Preferred Stock.
Note 18 - Stock Options
As of September 30, 2021 and 2020, the
Company had approximately $
Stock option activity for the nine months ended September 30, 2021 is as follows:
| Weighted | ||||||||
| Number of | Avg. Exercise | |||||||
| Shares | Price | |||||||
| Outstanding as of December 31, 2020 | $ | |||||||
| Options granted | ||||||||
| Options exercised | ( | ) | ||||||
| Options forfeited or expired | ( | ) | ||||||
| Outstanding as of March 31, 2021 | $ | |||||||
| Vested as of March 31, 2021 | $ | |||||||
| Expected to vest as of March 31, 2021 | $ | |||||||
| Outstanding as of March 31, 2021 | $ | |||||||
| Options granted | ||||||||
| Options exercised | ( | ) | ||||||
| Options forfeited or expired | ( | ) | ||||||
| Outstanding as of June 30, 2021 | $ | |||||||
| Vested as of June 30, 2021 | $ | |||||||
| Expected to vest as of June 30, 2021 | $ | |||||||
| Outstanding as of June 30, 2021 | $ | |||||||
| Options granted | ||||||||
| Options exercised | - | |||||||
| Options forfeited or expired | - | |||||||
| Outstanding as of September 30, 2021 | $ | |||||||
| Vested as of September 30, 2021 | $ | |||||||
| Expected to vest as of September 30, 2021 | $ | |||||||
33
Note 19 - Purchase Warrants
Common stock purchase warrant activity for the nine months ended September 30, 2021 is as follows:
| Number of Warrants | Weighted Avg. Exercise Price | |||||||
| Outstanding as of December 31, 2019 | $ | |||||||
| Issued | ||||||||
| Cancelled | ( | ) | ||||||
| Exercised | ( | ) | ||||||
| Outstanding as of December 31, 2020 | $ | |||||||
| Issued | ||||||||
| Cancelled | ||||||||
| Exercised | ( | ) | ||||||
| Outstanding as of March 31, 2021 | $ | |||||||
| Issued | ||||||||
| Cancelled | ||||||||
| Exercised | ||||||||
| Outstanding as of June 30, 2021 | $ | |||||||
| Issued | ||||||||
| Cancelled | ||||||||
| Exercised | ||||||||
| Outstanding as of September 30, 2021 | $ | |||||||
In
connection with the Company’s IPO in December 2019, the Company granted warrants (“2019 Warrants”) to purchase
In
February 2020, in connection with its second public offering, the Company granted 2020 Warrants to purchase
In
February 2021, the Company issued 2021 Warrants to purchase
During
the three months ended March 31, 2021,
Note 20 - Earnings per Share
We compute net loss per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared and participation rights in undistributed earnings. Shares of our Series A Convertible Preferred Stock are considered participating securities because these awards contain a non-forfeitable right to dividends. Under the two-class method, undistributed earnings allocated to participating securities are subtracted from net income attributable to the Company in determining net income attributable to common shareholders.
Additionally, in accordance with ASC 480, Distinguishing Liabilities from Equity, the increase in the redemption value for the noncontrolling interest of one of our acquisitions reduces income attributable to common shareholders.
Basic earnings per common share are computed by dividing net income or loss attributable to common shareholders by the weighted-average common shares outstanding. Diluted earnings per common share are computed by dividing the net income attributable to common shareholders by the diluted weighted average common shares outstanding. The dilutive effect of outstanding stock options is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options, would be used to purchase common stock at the average market price for the period. The assumed proceeds include the purchase price the optionee pays, the windfall tax benefit that we receive upon assumed exercise and the unrecognized compensation expense at the end of each period.
34
The calculation of basic earnings per common share and diluted earnings per share is summarized below as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Calculation of income for basic earnings per share: | ||||||||||||||||
| Net income (loss) attributable to LMP Automotive Holdings | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Change in noncontrolling interest redemption value | ( | ) | ( | ) | ||||||||||||
| ( | ) | ( | ) | ( | ) | |||||||||||
| Less: net income allocated to preferred shareholders | - | - | - | |||||||||||||
| Net income (loss) attributable to common shareholders | ( | ) | ( | ) | ( | ) | ||||||||||
| Weighted average shares of common stock outstanding, basic | ||||||||||||||||
| Basic net income (loss) per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Calculation of income for diluted earnings per share: | ||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average shares of common stock outstanding, basic | ||||||||||||||||
| Dilutive effect of stock equivilents | ||||||||||||||||
| Diluted net income (loss) per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
For the three months ended September
30, 2021, shares subject to options and warrants to purchase common stock with an exercise price greater than the average market price
for the year were not included in the computation of diluted earnings per common share because the effect would have been antidilutive.
The number of shares that could potentially become dilutive in the future was
Note 21 - Segments
Certain financial information on segment revenues is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| New vehicle retail | $ | $ | $ | $ | ||||||||||||
| Used vehicle retail | ||||||||||||||||
| Used vehicle wholesale | ||||||||||||||||
| Finance and insurance, net | ||||||||||||||||
| Service, body and parts | ||||||||||||||||
| Fleet and other | ||||||||||||||||
| Total revenues | $ | $ | $ | $ | ||||||||||||
| Segment net income (loss) - Retail & Fleet (1) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| (1) |
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Note 22 - Subsequent Events
White Plains Chrysler Dodge Jeep RAM Acquisition
On
October 6, 2021, the Company closed on the acquisition of assets related to the ownership and operation of the White Plains Chrysler
Jeep Dodge Ram (“White Plains CDJR) as contemplated by that certain dealership asset purchase agreement, dated as of March 31,
2021, by and among the Company and Chrysler Jeep of White Plains, Inc. The consideration paid by the Company for the acquisition was
As a result of limited access to White Plains CDJR information required to prepare initial accounting, together with the limited time since the acquisition date and the effort required to conform the financial statements to the Company's practices and policies, the initial accounting for the business combination is incomplete at the time of this filing. As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, pre-acquisition contingencies and goodwill. Also, the Company is unable to provide pro forma revenues and earnings of the combined entity. This information will be included in the Company's annual report on Form 10-K for the year ended December 31, 2021.
Preferred Stock Conversion
On
October 12, 2021,
On
October 27, 2021,
Asset Purchase and Debt Financing
On
October 14, 2021, the Company purchased an airplane for approximately $5.6 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties. All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
Business Overview
LMP Automotive Holdings, Inc. (“LMP,” the “Company,” or “we”) was formed as a Delaware corporation on December 15, 2017. Samer Tawfik, our founder, Chairman, President and Chief Executive Officer, contributed one hundred percent (100%) of the equity interests in each of LMP Motors.com, LLC and LMP Finance, LLC to the Company in December 2017, and in January 2018, 601 NSR, LLC and LMP Automotive Holdings, LLC made the Company their sole member. We refer to these transactions as the reorganization. As a result of the reorganization, the Company now owns one hundred percent (100%) of the equity in each of these four entities. LMP Motors.com, LLC currently operates our automobile sales business. LMP Finance, LLC currently operates our rental and subscription business. 601 NSR, LLC and LMP Automotive Holdings, LLC were formed to enter into future potential strategic acquisitions, however, 601 NSR, LLC is inactive.
In March 2021, LMP Automotive Holdings, Inc. acquired a majority interest in ten new vehicle franchises through its wholly-owned subsidiaries LMP Grande 001 Holdings, LLC, LMP Beckley 001 Holdings, LLC, LMP Beckley 002 Holdings, LLC and LMP Greeneville 001 Holdings, LLC and purchased a 100% interest in the related real estate at five of the dealerships through LMP Automotive Holdings, LLC.
In May 2021, LMP Automotive Holdings, Inc. acquired a majority interest in one new vehicle franchise through its wholly-owned subsidiary LMP Beckley 002 Holdings, LLC.
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Through our subsidiaries, we currently offer our customers the opportunity to buy, sell, lease, and subscribe for, and obtain financing for automobiles both online and in person.
With the acquisition of majority ownership in eleven new vehicle franchises and an automobile leasing company, we have transformed our business model from our previous “Buy, Subscribe, Sell and Repeat” model and have expanded into a Franchised dealership model that includes our prior offerings plus all the offerings of franchised dealership operations including automobile sales, service, financing and warranty products.
Our platform is designed to streamline the automobile transaction value chain by digitizing a substantial part of the sales and transaction process. We believe this will enhance the consumer experience by creating operational efficiencies that are designed to improve our financial and business performance. We also intend to centralize sales, title, tag, finance, insurance, and logistics operations, to create additional financial and operational benefits, as well as a positive consumer experience. We believe that bringing more of the vehicle shopping and transaction experience online will provide consumers with a broader range of purchase, rental and subscription options while eliminating time spent in negotiation and haggling. Currently, we offer sales, leasing and subscriptions of pre-owned and new automobiles along with the associated financing and insurance products. In addition, we provide service and body shop work and sales of accessories and automotive parts.
Critical Accounting Estimates
Business Combinations
Under the acquisition method of accounting, we recognize tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. We record the excess of the fair value of the purchase consideration over the value of the net assets acquired as goodwill. The accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets. These estimates are based upon a number of factors, including historical experience, market conditions, and information obtained from the management of acquired companies. Critical estimates in valuing certain intangible assets include, but are not limited to:
| ● | Forecasted revenue growth rates, |
| ● | Forecasted margin rates, and |
| ● | discount rates. |
Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
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Results of Operations
Third Quarter 2021 compared to Third Quarter 2020
Revenues
We generated revenues of approximately $141.4 million for the three months ended September 30, 2021 as compared with revenues of approximately $13.4 million during the three months ended September 30, 2020, an increase of approximately $128.1 million. The revenue was generated from sales of new and used vehicles totaling approximately $126.3 million, finance and insurance products totaling approximately $4.9 million, service, body shop and parts sales totaling approximately $9.6 million, and fleet and other totaling approximately $648,000 million. The increase was primarily the result of the acquisition of eleven new vehicle franchises which generated approximately $128.1 million in revenue during the three months ended September 30, 2021.
Cost of Revenues
We incurred total cost of sales of approximately $113.8 million for the three months ended September 30, 2021 as compared to approximately $12.5 million for the three months ended September 30, 2020. Cost of revenues consisted of the cost of vehicles sold totaling approximately $108.1 million, and the cost of parts and service body shop costs totaling approximately $5.2 million, and fleet and other totaling approximately $555,000. These costs resulted in a gross profit of approximately $27.6 million, or 19.5%, for the three months ended September 30, 2021, as compared to a gross profit of approximately $877,000, or 6.6%, for the three months ended September 30, 2020. The increase was primarily the result of the acquisition of eleven new vehicle franchises which increased cost of revenues by approximately $105.9 million, offset by a reduction of approximately $4.6 million in sales-type leases.
Selling, General and Administrative Expenses
We incurred selling, general and administrative expenses of approximately $20.5 million during the three-month period ended September 30, 2021 as compared with approximately $1.4 million for the three months ended September 30, 2020. The increase resulted from the Company’s acquisition of eleven new vehicle franchises which increased selling, general and administrative expenses by approximately $16.6 million and compensation expense associated with redeemable noncontrolling interests of approximately $1.5 million.
Depreciation and Amortization
We recognized depreciation and amortization of approximately $876,000 for the three months ended September 30, 2021 as compared to approximately $167,000 for the three months ended September 30, 2020, an increase of approximately $709,000.
Net Income (Loss)
We had net income attributable to controlling interest of approximately $4.8 million for the three months ended September 30, 2021 as compared to net loss of approximately $752,000 for the three months ended September 30, 2020 for the reasons described above. Basic and diluted net earnings (loss) per share was $0.47 and $(0.08) for the three months ended September 30, 2021 and 2020, respectively, based upon weighted average common shares outstanding of 10,118,277 (basic), 10,188,803 (diluted) and 9,920,440 (basic and diluted), respectively.
Non-GAAP Financial Measures
We have provided certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA and Vehicle Sales Margins, to supplement the financial results that are prepared in accordance with U.S. GAAP. Management uses these financial metrics internally in analyzing our financial results to assess operational performance and to determine our future capital requirements. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP. We believe that both management and investors benefit from referring to these financial metrics in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these financial metrics are useful to investors and others to understand and evaluate our operating results and it allows for a more meaningful comparison between our performance and that of our competitors. Our use of EBITDA, Adjusted EBITDA and Vehicle Sales Margins have limitations as analytical tools, and you should not consider these performance measures in isolation from or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider these financial metrics along with other financial performance measures, including total revenues, total gross profit and net loss presented in accordance with GAAP.
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EBITDA
We define EBITDA as net loss before interest expense, income tax expense, depreciation (including fleet vehicles and inventory impairment) and amortization.
The following table provides a reconciliation of EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis and for each of the periods indicated.
| For the Three Months Ended September 30, | ||||||||||||
| EBITDA | 2021 | 2020 | Change | |||||||||
| Net income (loss) | $ | 5,492,793 | $ | (752,087 | ) | $ | 6,244,880 | |||||
| Interest expense (1) | 1,134,751 | 97,903 | 1,036,848 | |||||||||
| Income tax provision | 468,802 | - | 468,802 | |||||||||
| Depreciation and amortization | 876,428 | 167,103 | 709,325 | |||||||||
| Fleet vehicle depreciation | 331,144 | 134,209 | 196,935 | |||||||||
| EBITDA | $ | 8,303,918 | $ | (352,872 | ) | $ | 8,656,790 | |||||
(1) Excludes floorplan interest
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, employee bonuses stock compensation, adjustments to warrant liability, acquisition expenses, consulting, legal and auditing expenses incurred in connection with the acquisitions during the quarter, and equity based compensation.
| For the Three Months September 30, | ||||||||||||
| Adjusted EBITDA | 2021 | 2020 | Change | |||||||||
| EBITDA | $ | 8,303,918 | $ | (352,872 | ) | $ | 8,656,790 | |||||
| Employee Bonuses & Stock Compensation | 1,442,231 | - | 1,442,231 | |||||||||
| Adjustment in warrant liability | (1,180,157 | ) | - | (1,180,157 | ) | |||||||
| Acquisition expenses | 1,206,583 | - | 1,206,583 | |||||||||
| Consulting, legal and auditing | 1,919,018 | - | 1,919,018 | |||||||||
| Equity based compensation | 191,104 | - | 191,104 | |||||||||
| Legal settlement | - | 113,752 | (113,752 | ) | ||||||||
| Adjusted EBITDA | $ | 11,882,697 | $ | (239,120 | ) | $ | 12,121,817 | |||||
Vehicle Sales Margins
We calculate vehicle sales margins by deducting vehicle sales cost of revenues from vehicle sales revenue.
The following table provides a reconciliation of vehicle sales margins to vehicle sales revenue, the most directly comparable GAAP financial measure, on a historical basis and for each of the periods indicated.
| For the Three Months Ended | ||||||||||||
| September 30, | ||||||||||||
| Vehicle Sales Margin | 2021 | 2020 | Change | |||||||||
| Vehicle sales | $ | 126,294,429 | $ | 7,732,648 | $ | 118,561,781 | ||||||
| Cost of vehicle sales | 108,090,440 | 7,552,672 | 100,537,768 | |||||||||
| Gross profit | $ | 18,203,989 | $ | 179,976 | $ | 18,024,013 | ||||||
| Sales margin | 14.4 | % | 2.3 | % | 12.1 | % | ||||||
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First Nine Months 2021 compared to First Nine Months 2020
Revenues
We generated revenues of approximately $314.5 million for the nine months ended September 30, 2021 as compared with revenues of approximately $26.4 million during the nine months ended September 30, 2020, an increase of approximately $288.1 million. The revenue was generated from sales of new and used vehicles totaling approximately $275.4 million, finance and insurance products totaling approximately $10.9 million, service, body shop and parts sales totaling approximately $21.2 million, and fleet and other totaling approximately $7.0 million. The increase was primarily the result of the acquisition of eleven new vehicle franchises which generated approximately $290.0 million in revenue since their acquisitions in March and May 2021.
Cost of Revenues
We incurred total cost of sales of approximately $254.5 million for the nine months ended September 30, 2021 as compared to approximately $23.6 million for the nine months ended September 30, 2020. Cost of revenues consisted of the cost of vehicles sold totaling approximately $239.8 million, and the cost of parts and service body shop costs totaling approximately $11.5 million, and fleet and other totaling approximately $3.2 million. These costs resulted in a gross profit of approximately $60.0 million, or 19.1%, for the nine months ended September 30, 2021, as compared to a gross profit of approximately $2.9 million, or 10.8%, for the nine months ended September 30, 2020. The increase was primarily the result of the acquisition of eleven new vehicle franchises which increased cost of revenues by approximately $241.2 million, offset by a reduction of approximately $10.3 million in sales-type leases.
Selling, General and Administrative Expenses
We incurred selling, general and administrative expenses of approximately $53.0 million during the nine month period ended September 30, 2021 as compared with approximately $4.5 million for the nine months ended September 30, 2020. The increase resulted from the Company’s acquisition of eleven new vehicle franchises which increased selling, general and administrative expenses by approximately $34.0 million and compensation expense associated with redeemable noncontrolling interests of approximately $10.1 million. In addition, the Company incurred acquisition related expenses of approximately $2.8 million and one-time charges of approximately $1.4 million in fees associated with our stock offering during nine months ended September 30, 2021.
Depreciation and Amortization
We recognized depreciation and amortization of approximately $1.4 million for the nine months ended September 30, 2021 as compared to approximately $389,000 for the nine months ended September 30, 2020, an increase of approximately $1.0 million.
Net Income (Loss)
We had net income attributable to controlling interest of approximately $1.1 million for the nine months ended September 30, 2021 as compared to a net loss of approximately $2.3 million for the nine months ended September 30, 2020 for the reasons described above. Basic and diluted net loss per share was $(0.74) and $(0.23) for the nine months ended September 30, 2021 and 2020, respectively, based upon weighted average common shares outstanding of 10,082,073 and 9,724,385, respectively.
Non-GAAP Financial Measures
We have provided certain non-GAAP financial measures, including EBITDA, Adjusted EBITDA and Vehicle Sales Margins, to supplement the financial results that are prepared in accordance with U.S. GAAP. Management uses these financial metrics internally in analyzing our financial results to assess operational performance and to determine our future capital requirements. The presentation of this financial information is not intended to be considered in isolation or as a substitute for the financial information prepared in accordance with GAAP. We believe that both management and investors benefit from referring to these financial metrics in assessing our performance and when planning, forecasting, and analyzing future periods. We believe these financial metrics are useful to investors and others to understand and evaluate our operating results and it allows for a more meaningful comparison between our performance and that of our competitors. Our use of EBITDA, Adjusted EBITDA and Vehicle Sales Margins have limitations as analytical tools, and you should not consider these performance measures in isolation from or as a substitute for analysis of our results as reported under GAAP. Because of these limitations, you should consider these financial metrics along with other financial performance measures, including total revenues, total gross profit and net loss presented in accordance with GAAP.
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EBITDA
We define EBITDA as net loss before interest expense, income tax expense, depreciation (including fleet vehicles and inventory impairment) and amortization.
The following table provides a reconciliation of EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis and for each of the periods indicated.
| For the | ||||||||||||
| Nine
Months Ended September 30, | ||||||||||||
| EBITDA | 2021 | 2020 | Change | |||||||||
| Net income (loss) | $ | 2,636,645 | $ | (2,256,173 | ) | $ | 4,892,818 | |||||
| Interest expense (1) | 2,532,423 | 212,226 | 2,320,197 | |||||||||
| Income tax provision | 1,098,003 | - | 1,098,003 | |||||||||
| Depreciation and amortization | 1,422,934 | 388,631 | 1,034,303 | |||||||||
| Fleet vehicle depreciation | 834,806 | 362,972 | 471,834 | |||||||||
| Vehicle impairment | - | 91,742 | (91,742 | ) | ||||||||
| EBITDA | $ | 8,524,811 | $ | (1,200,602 | ) | $ | 9,725,413 | |||||
(1) Excludes floorplan interest
Adjusted EBITDA
We define Adjusted EBITDA as EBITDA, employee bonuses stock compensation, adjustments to warrant liability, acquisition expenses, consulting, legal and auditing expenses incurred in connection with the acquisitions during the quarter, and equity based compensation.
| For the Nine Months | ||||||||||||
| September 30, | ||||||||||||
| Adjusted EBITDA | 2021 | 2020 | Change | |||||||||
| EBITDA | $ | 8,524,811 | $ | (1,200,602 | ) | $ | 9,725,413 | |||||
| Employee Bonuses & Stock Compensation | 10,553,421 | - | 10,553,421 | |||||||||
| Adjustment in warrant liability | (1,188,772 | ) | - | (1,188,772 | ) | |||||||
| Acquisition expenses | 2,789,164 | - | 2,789,164 | |||||||||
| Consulting, legal and auditing | 3,736,267 | - | 3,736,267 | |||||||||
| Equity based compensation | 462,413 | - | 462,413 | |||||||||
| Legal settlement | 3,000 | 113,752 | (110,752 | ) | ||||||||
| Adjusted EBITDA | $ | 24,880,304 | $ | (1,086,850 | ) | $ | 25,967,154 | |||||
Vehicle Sales Margins
We calculate vehicle sales margins by deducting vehicle sales cost of revenues from vehicle sales revenue.
The following table provides a reconciliation of vehicle sales margins to vehicle sales revenue, the most directly comparable GAAP financial measure, on a historical basis and for each of the periods indicated.
| For
the Nine Months Ended | ||||||||||||
| September 30, | ||||||||||||
| Vehicle Sales Margin | 2021 | 2020 | Change | |||||||||
| Vehicle sales | $ | 275,350,701 | $ | 10,955,759 | $ | 264,394,942 | ||||||
| Cost of vehicle sales | 239,792,900 | 10,828,576 | 228,964,324 | |||||||||
| Gross profit | $ | 35,557,801 | $ | 127,183 | $ | 35,430,618 | ||||||
| Sales margin | 12.9 | % | 1.2 | % | 11.8 | % | ||||||
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Liquidity and Capital Resources
Cash Flow Activities
As of September 30, 2021, we had an accumulated deficit of approximately $14.7 million. We have sustained net losses since inception and have funded operations primarily through sales of our common stock and issuance of debt. As of September 30, 2021, we had approximately $29.7 million in cash, including approximately $10.9 million in restricted cash pursuant to our debt agreement. The net increase in cash was approximately $25.8 million during the nine months ended September 30, 2021 as compared to an approximately $3.2 million decrease for the nine months ended September 30, 2020.
Operating Activities
Net cash provided by operating activities was approximately $32.4 million for the nine months ended September 30, 2021 as compared to net cash used in operating activities of approximately $6.7 million the nine months ended September 30, 2020. The approximately $39.0 million increase in net cash from operating activities was primarily due to an increase in net income of approximately $4.9 million, an increase in accounts payable and other liabilities of approximately $17.1 million, an increase in net investment in sales-type leases of approximately $20.0 million and an increase in deferred compensation of approximately 9.5 million, which were offset by an increase in accounts receivable of approximately $10.6 million and a decrease in net cash provided by prepaid expenses and other assets of $4.0 million as compared to the nine months ended September 30, 2020.
Investing Activities
Net cash used in investing activities was approximately $144.4 million for the nine months ended September 30, 2021 as compared to approximately $8.6 million for the nine months ended September 30, 2020. The increase in net cash used in investing activities was primarily due to cash paid for new vehicle franchises and related real estate acquisitions.
Financing Activities
Net cash provided by financing activities was approximately $137.8 million for the nine months ended September 30, 2021 as compared to net cash generated of approximately $12.1 million for the nine months ended September 30, 2020. The increase of approximately $125.7 million in net cash from financing activities was primarily due to cash received from the issuance of Series A Convertible Preferred Stock and 2021 Warrants for an aggregate of approximately $18.7 million, proceeds of approximately $24.7 million from floorplan financing, and approximately $94.8 million from a term loan, net of discount, and repayments, during the nine months ended September 30, 2021, offset by proceeds received during the first quarter of 2020 from issuing common stock of approximately $17.3 million.
Use of Cash and Cash Requirements
During the first quarter of 2021, the Company financed the acquisition of a controlling interest in ten new vehicle franchises and an automotive leasing company totaling approximately $139.5 million through the issuance of 20,100 shares of Series A Convertible Preferred Stock and 2021 Warrants for an aggregate of approximately $18.7 million, proceeds of approximately $52.9 million from floorplan financing, and approximately $95.0 million from a term loan, net of discount.
During the second quarter of 2021 the Company financed the acquisition of a controlling interest in one new vehicle franchise totaling approximately $4.4 million through additional term loan financing of approximately $3.1 million.
During the third quarter of 2021 there were no new financings or dealership franchise acquisitions.
The Company intends to finance acquisitions with a mixture of debt and equity offerings, including private seller debt.
Sources of Capital
In February 2020, we completed a follow-on public offering, selling 1,200,000 shares of common stock at an offering price of $16.00 per share. Aggregate gross proceeds from the offering were approximately $19.2 million, and net proceeds received after underwriting fees and offering expenses were approximately $17.3 million.
In February 2021, the Company received approximately $18.7 million, net of fees, in exchange for the issuance and sale of 20,100 shares of Series A Convertible Preferred Stock, convertible into shares of common stock at a conversion price of $17.50 per share, and 2021 Warrants to purchase 861,429 shares of the Company’s common stock at an exercise price of $21.00 per share.
In March 2021, the Company received approximately $95.0 million, net of discount, from a term loan and floorplan financing of approximately $53.7 million from Truist Bank.
In May 2021, the Company received an additional approximately $3.1 million, from a term loan, and an additional floorplan financing commitment of approximately $5.9 million from Truist Bank.
43
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for a Smaller Reporting Company.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2021, being the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2021, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as discussed in Part II, Item 4. Controls and Procedures in the Form 10-Q for the quarterly period ended March 31, 2021 and shown below:
| ● | The Company had failed to maintain a sufficient complement of experienced personnel to execute their responsibilities with respect to internal control over financial reporting. |
| ● | The Company did not complete a risk assessment to appropriately design controls in response to the risk of misstatement relating to the complex accounting and reporting requirements associated with the acquisitions and related financing transactions. |
During the 3rd quarter, the management of the Company commenced the process of re-evaluating the adequacy of design of its various business and entity level processes and underlying internal controls at both the corporate level and over the financially significant information received from its newly acquired dealerships. As a result of this ongoing evaluation, several additional material weaknesses in our internal controls over financial reporting were noted as follows:
| ● | The Company did not maintain a formalized set of accounting policies, |
| ● | The Company did not maintain a formalized risk assessment process to identify financial risks and implement mitigating controls and monitoring activities, |
| ● | The Company did not maintain effective controls over the review and approval of journal entries, account reconciliations, review of significant accounts and disclosures, and adequate documentation of management assumptions, estimates and judgements, and |
| ● | The Company did not have adequate segregation of duties. |
44
During the third quarter, the Company hired a chief financial officer who, as the key process owner for internal controls over financial reporting, continues to review and approve the periodic interim financial statements and the underlying schedules and disclosures. The chief financial officer is purposefully leading the ongoing remediation initiative by coordinating with the external consultants and other process owners and is providing regular updates to the Audit Committee.
The Company has also hired additional qualified and experienced finance and accounting personnel, on both a full-time and contracted basis to assist in the preparation and review of its financial statements and SEC filings. These individuals include a new corporate controller, a new controller at the dealership level, a manager of financial reporting and a staff accountant. The Company has augmented its internal resources with financial expertise in such areas as technical accounting and SEC pronouncements and valuations.
In addition, the Company engaged a firm with the requisite experience to provide management with Sarbanes-Oxley Act (“SOX”) compliance advisory and internal control services, to accomplish the Company’s objectives of SOX compliance. The advisory firm has since assisted management in preparing a comprehensive quantitative and qualitative Financial Risk Assessment (“FRA”) for 2021. The completion of the FRA is viewed as a required task under SOX.
Management has also finalized a plan pursuant to its scoping and financial risk assessment exercise, to document several higher priority entity and business processes by the end of the year.
Management expects to make and report continuous progress in the effective remediation of the identified material weaknesses; and in designing and operating a commensurate internal control and disclosure control environment.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Except for the above, there were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rule 13a-15(d) or 15(d) of the Exchange Act during the quarter ended September 30, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to a claim for alleged breach of its license agreement to use garage parking spaces in Miami Beach, Florida, which the Company terminated in April 2019. On February 10, 2020, a partial summary judgment was granted for the plaintiff. The asserted losses by the plaintiff total approximately $224,250, with a potential maximum exposure under the terminated agreement of approximately $580,450. The judge ordered the parties to further mediate the dispute, and the Company appealed the partial summary judgment. During the second quarter of 2020, the Company posted a bond with the court to continue mediation of this matter. In February 2021, the Company reached a final settlement and agreed to pay a total of $550,000, $270,000 within 3 days of the final settlement and two payments of $140,000 each on or before June 30, 2021 and September 30, 2021, respectively. The Company made the initial payment required under the agreement on February 8, 2021, made the second payment of $140,000 on June 30, 2021 and made the third and final payment of $140,000 on September 30, 2021.
Item 1A. Risk Factors
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, which could materially affect our business, financial condition, or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Other than those previously disclosed by us in our current reports on Form 8-K as filed with the SEC, there have been no unregistered sales of equity securities during the period covered by this Quarterly Report.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits.
The exhibits required by this item are set forth in the Exhibit Index attached hereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LMP AUTOMOTIVE HOLDINGS, INC. | ||
| /s/ Samer Tawfik | ||
| By: | Samer Tawfik | |
| Title: | Chief Executive Officer | |
| (Principal Executive Officer) | ||
| Date: | November 16, 2021 | |
| /s/ Robert Bellaflores | ||
| By: | Robert Bellaflores | |
| Title: | Chief Financial Officer | |
| (Principal Financial Officer and Principal Accounting Officer) | ||
| Date: | November 16, 2021 | |
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EXHIBIT INDEX
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