UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ____________ to ____________

Commission File Number: 000-51060

LMP AUTOMOTIVE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

(954) 895-0352
(Registrant’s telephone number, including area code)

601 N. State Rd. 7

Plantation, FL 33317

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.

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. Yes ☒     No ☐

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 was required to submit and post such files). Yes ☒    No ☐

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒  

As of November 12, 2020, there were 9,987,191 shares of common stock, $0.0001 par value per share, issued and outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LMP AUTOMOTIVE HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AT SEPTEMBER 30, 2020 (UNAUDITED) AND DECEMBER 31, 2019

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

LMP AUTOMOTIVE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

LMP AUTOMOTIVE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

LMP AUTOMOTIVE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONT’D.)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

LMP AUTOMOTIVE HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019 (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Nature of Operations and Principles of Consolidation

Business Activity

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.

LMP Automotive Holdings, Inc. (“Automotive”) is a holding company incorporated in the state of Delaware on December 15, 2017. On December 15, 2017, the common ownership contributed 100% of its interest in LMP Motors, NSR, LMP Finance and LMP Automotive to Automotive.

Principles of Consolidation

These condensed consolidated financial statements include the amounts of Automotive and its wholly owned subsidiaries, LMP Motors, NSR, LMP Finance, and LMP Automotive, collectively referred to as the “Company.” All significant intercompany balances and transactions are eliminated in the consolidation.

Note 2 - Summary of Significant Accounting Policies

Liquidity

The Company has sustained net losses and has an accumulated deficit of approximately $12.9 million as of September 30, 2020. Management plans to make strategic acquisitions of new and pre-owned automobile dealerships to expedite the Company’s growth and to produce positive margins.  The Company completed an initial public offering (“IPO”) in December 2019 and a secondary public offering in February 2020 to help facilitate business growth and execute management’s plans to become profitable through acquisitions.  Through these two public offerings, the Company received net proceeds of approximately $27.8 million.

Management plans to continue to obtain funding through 2020 for vehicle purchases and dealership acquisitions.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures, which are included in annual financial statements, have been omitted pursuant to these rules and regulations.

Although these interim condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 are unaudited, in the opinion of management, such statements include all adjustments (consisting of normal recurring entries) and disclosure necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods presented. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future period. For more complete information, these unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019.

Use of Estimates

The preparation of the condensed consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

The Company carries its accounts receivable at cost. Accounts receivable are due upon receipt. Management has determined that no allowance for uncollectible accounts for accounts receivable is necessary as of September 30, 2020 and December 31, 2019. 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.

Inventory

The Company’s inventory consists of automobiles. Inventories are valued at the lower of cost or market, with cost determined by specific identification and with market defined as net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories as of September 30, 2020 and December 31, 2019 are recorded based on perpetual inventory records.

The Company launched its subscription and rental business in 2018, at which time it started to depreciate the corresponding fleet inventory using a monthly rate of 1% of initial cost. Fleet vehicle depreciation was $171,719 and $534,691, respectively, for the three and nine months ended September 30, 2020, and $225,606 and $741,761, respectively, for the three and nine months ended September 30, 2019.

Company management periodically reviews its inventories to determine whether any inventories have declined in value. The Company wrote down approximately $0 and $49,000 of inventory to its net realizable value during the nine months ended September 30, 2020 and year ended December 31, 2019, respectively.

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:

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.

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 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, 2020 and December 31, 2019.

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, 2020, and December 31, 2019, the fair value of these financial instruments, including cash, accounts 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.

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.

Share-based compensation plans, related expenses, and assumptions used in the Black-Scholes option pricing model are more fully described in Note 15.

Revenue Recognition

The Company recognizes revenue in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

Used Vehicle Sales Revenue

The Company’s business consists of retail and wholesale sales of used vehicles to customers. Sales are based on a physical showroom and efficient online showrooms on the Company’s websites. The Company offers a home delivery service so that it delivers the car to the place agreed upon with the client. The Company also sells used vehicles in auctions.

The Company recognizes revenue when it satisfies a performance obligation by transferring control of a vehicle to a customer. The prices of the vehicles are stated in its contracts at stand-alone selling prices, which are agreed upon with its customer prior to delivery. The Company satisfies its performance obligation for used vehicle sales upon delivery when the transfer of title, risks and rewards of ownership and control pass to the customer. The Company recognizes revenue at the agreed-upon price stated in the contract, including any delivery charges. In addition, any noncash consideration received from a customer (i.e., trade-in vehicles) is recognized at fair value. Customer payment is received, or third-party financing is confirmed prior to vehicle transfer.

The Company leases vehicles to third parties that are accounted for in accordance with FASB ASC 842, Leases. 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 direct-financing lease, 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.

Revenue on direct financing and 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 Vehicle Sales Revenues and Vehicle Sales 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.

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.

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 and 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.

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.

Customer payment has been received prior to initial vehicle transfer 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.

Rental 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, Leases. 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.

Income Taxes

Income tax expense includes federal and state taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the difference is expected to reverse. The effect of a change in the tax rate on the deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company establishes a valuation allowance when necessary to reduce its deferred tax assets to an amount that is expected to be realized.

Advertising

The Company expenses advertising and marketing costs in the period incurred. Advertising expense was approximately $6,400 and $25,600, respectively, for the three and nine months ended September 30, 2020, and approximately $13,700 and $95,600, respectively, for the three and nine months ended September 30, 2019.

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. The condensed consolidated financial statements for the nine months ended September 30, 2020 and the year ended December 31, 2020 are presented under the new standard. 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. The lease for the premises occupied in Plantation, Florida (the “Plantation lease”), was classified as an operating lease as of March 31, 2019. Operating lease expense is recognized on a straight-line basis over the term of the lease.

The adoption of the new lease standard had a significant impact on the condensed consolidated balance sheets, resulting in the recognition of $1.4 million of right-of-use assets, $0.3 million of current lease liabilities, and $1.1 million of long-term lease liabilities in the first quarter of 2019. In addition, the Company recognized an approximate $17,000 cumulative effect adjustment to accumulated deficit on the condensed consolidated statements of shareholders’ equity related to the unamortized deferred lease costs incurred in prior periods which do not meet the definition of initial direct costs under Topic 842. The adoption of Topic 842 did not have a significant impact on the lease classification or a material impact on the condensed consolidated statements of operations and liquidity.

In July 2020, the Company purchased the leased property in Plantation, Florida. The Company derecognized the right-of-use asset and operating lease liability by recording the net liability of $32,162 as a reduction of expense in the unaudited condensed consolidated statement of operations.

In September 2020, the Company entered into a new lease for premises in Fort Lauderdale, Florida (the “Fort Lauderdale lease”). The 34-month lease resulted in the recognition of an approximately $476,000 right-of-use asset and operating lease liability.

The components of the right-of-use asset and lease liabilities as of September 30, 2020 (Fort Lauderdale lease) and December 31, 2019 (Plantation lease) are as follows:

Operating Leases

During 2018, the Company entered into a lease with an entity related through common ownership for its facilities in Plantation, Florida. The five-year, triple-net lease provides for monthly payments of $28,500 plus CAM and sales taxes, with annual escalations of three percent (3%). The Company has an option to extend the lease for an additional five-year term, with annual escalations of three percent (3%). The option to extend the lease is not recognized in the right-of-use asset or operating lease liability. During July 2020, the Company purchased the facilities.

During 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 $16,113 plus operating costs and sales taxes.

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, and the Company’s existing debt does not have similar terms. Therefore, the Company used the 5-year Treasury constant maturity at the lease commencement date to discount lease payments on the Plantation lease. On the new Fort Lauderdale lease, the Company used a discount rate commensurate with other debt held by the Company on the effective date of the lease contract.

Lease Cost

Operating lease cost related to right-of-use asset on the Plantation lease was approximately ($32,135) and $168,500, respectively, for the three and nine months ended September 30, 2020, and approximately $96,700 and $290,000, respectively, for the three and nine months ended September 30, 2019. The weighted average discount rate was 2.63%.

Operating lease cost related to right-of-use asset on the Fort Lauderdale lease was approximately $14,700 for the three months ended September 30, 2020. The weighted average remaining term on the lease is 2.67 years. The weighted average discount rate was 3%.

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 2023. The Company is continuing to assess the impact of the standard on its consolidated financial statements.

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 $120,000 per employee for all current employees, effective beginning in May 2020. The Company also reduced the headcount of all nonessential employees, implemented cost cuts, and canceled certain new vehicle orders to accommodate the then-current demand. The Company has since resumed normal salaries, hiring practices, and vehicle purchases.

Note 4 - Asset Purchase Agreements

On February 19, 2020, the Company consummated an Asset Purchase Agreement whereby the Company purchased $4.2 million of assets, including vehicles ($2.87 million) and a perpetual, non-exclusive license for leasing software ($1.35 million). The vehicles were financed by two different lenders, and the Company paid approximately $526,000 in cash and issued 33,183 shares of common stock at $14.69 per share (closing price of its common stock on February 19, 2020) for the remainder of the purchase consideration.

The non-exclusive perpetual software license is for a vehicle subscription service app for upcoming launch in the Apple App and Google Play stores. The license value of $1.35 million is being amortized over its estimated economic useful life of three (3) years.

The vehicle acquisition was financed in part by two credit lines. The first line from Sutton Leasing funded the purchase of 30 vehicles for $2.4 million at the floating LIBOR rate on the date of the advance, plus 2.80%, or 4.55% interest on the date of the advance, with terms ranging from 24 to 36 months. The second line from The Bancorp Bank was a credit line for funding advances up to $850,000 at the Prime Rate per the Wall Street Journal on the date of the advance plus 2%, but not less than 4% on advances on 48-month terms. The Company used approximately $818,400 at 6.5% interest for the purchase of 13 vehicles, with terms ranging from 32 to 41 months.

On July 13, 2020, the Company entered into an Asset Purchase Agreement to purchase a 75% interest in certain assets and assume certain liabilities held by a dealership in Newnan, Georgia for $27.0 million in cash, which will be accounted for as a business combination. The acquisition has not yet been consummated.

On August 28, 2020 the Company entered into an Asset Purchase Agreement (the “WV APA”) to acquire an 85% interest in certain assets held by three dealerships in West Virginia for $12 million in cash. In connection with the WV APA, the Company has agreed to acquire certain of the dealership’s real properties at values yet to be determined. The acquisition has not yet been consummated.

Also on August 28, 2020, the Company entered into an Asset Purchase Agreement the (“TN APA”) to acquire certain assets held by a dealership in Tennessee for $2.5 million in cash. In connection with the TN APA, the Company has agreed to acquire the dealership’s real property for $5.4 million. The acquisition has not yet closed.

Note 5 – Proposed Business Combination

During the three months ended September 30, 2020, the Company entered into several agreements to acquire a controlling interest in certain dealerships as more fully described below.

On September 3, 2020, the Company entered into a Dealership Asset Purchase Agreement (“DAPA”) to acquire certain assets of a Southwest Florida dealership for $36.0 million. In connection with the DAPA, the Company has agreed to acquire the dealership’s real property for $33.1 million. The acquisition has not yet been consummated.

As part of the pending dealership acquisitions initiated during the third quarter, the Company paid deposits totaling $4,250,000. The deposits are considered current assets as the acquisitions are expected to be completed within the year.

On October 9, 2020, the Company entered into a Membership Interest Purchase Agreement (“MIPA”) to acquire a 70% interest in a group of dealership franchises and related businesses in New York for a total purchase price of $425.6 million, paid in cash and a note, which will be accounted for as a business combination. The acquisition has not yet been consummated.

Note 6 - Concentration of Credit Risk

The Company maintains its cash balances in one financial institution which is insured by the Federal Deposit Insurance Corporation (“FDIC”) for up to $250,000 per institution. From time to time, its balances may exceed these limits.

Note 7 - Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements, net is summarized as follows:

Depreciation and amortization expense related to vehicles, equipment, and leasehold improvements amounted to $39,625 and $82,790, respectively, for the three and nine months ended September 30, 2020, and $13,861 and $49,270, respectively, for the three and nine months ended September 30, 2019.

On July 8, 2020, the Company purchased the building where its headquarters were located in Plantation, Florida, from its landlord, ST RXR Investments, LLC, a related party owned by the Company’s President and Chief Executive Officer, for $3.6 million in cash.

Note 8 - Intangible Assets

Intangible assets, net, are summarized as follows:

Amortization expense amounted to $127,478 and $308,666, respectively, for the three and nine months ended September 30, 2020, and $10,135 and $19,989, respectively, for the three and nine months ended September 30, 2019.

As of September 30, 2020, future amortization of intangible assets was as follows:

Note 9 – Investment in Leasing Operations

Investment in leasing operations consists of the following:

As of September 30, 2020 and December 31, 2019, 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.

The assets held under the investment are leased to nine customers. A certain residual value of the vehicles is guaranteed by these customers, whether those customers ultimately purchase the vehicle at the end of the lease term or not.

Leasing income as included in Revenues on the consolidated condensed statements of operations consists of the following:

Note 10 - Related Party Transactions

During 2018, the Company entered into a non-interest-bearing revolving line of credit agreement with an entity related to the majority shareholder (credit limit is $4.0 million). Amounts drawn on the line of credit become due and payable on the earlier of written demand by the lender or May 21, 2020, as defined in the agreement. The line of credit was paid in full in December 2019.

During 2018, the Company entered into a lease with an entity related through common ownership for its facilities in Plantation, Florida. The five-year, triple-net lease provided for monthly payments of $28,500 plus CAM and sales taxes, with annual escalations of three percent (3%). The Company had an option to extend the lease for an additional five-year term, with annual escalations of three percent (3%). The option to extend the lease was not recognized in the right-of-use asset or operating lease liability.

On July 8, 2020, the Company terminated the lease and purchased the land and building where its headquarters are located in Plantation, Florida, from its landlord, ST RXR Investments, LLC, a related party owned by the Company’s President and Chief Executive Officer, for $3.6 million in cash. The land and building was valued based upon a third party appraisal.

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 $2,097 and $86,556 for the three- and nine-month period ended September 30, 2020.

Note 11 - Accounts Payable and Other Current Liabilities

Accounts payable and other current liabilities are summarized as follows:

Accounts Payable:

Other Current Liabilities:

Note 12 - 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 as of September 30, 2020 are as follows:

Operating Leases

During 2019, the Company entered into an agreement for the right to use certain parking spaces in Oakland Park, Florida. The month-to-month agreement calls for monthly rent of $5,000 per month, plus sales tax.

Rent expense charged to operations, inclusive of CAM and taxes, was $36,847 and $307,721, respectively, for the three and nine months ended September 30, 2020, and $98,908 and $400,032, respectively, for the three and nine months ended September 30, 2019.

Note 13 - Vehicle Financing and Notes Payable

In 2019, Mercedes-Benz Financial approved a $3.5 million financing facility for the Company’s subscription and rental fleet inventory purchases. During 2019, the Company purchased vehicles totaling approximately $2.4 million under various Note and Security Agreements with 10% cash down payments and the remaining $2.16 million financed over 36 months at an interest rate of 4.89%.

During the nine months ended September 30, 2020, Mercedes-Benz Financial increased the approval amount from $3.5 million to $10 million. During the first quarter of 2020, the Company financed vehicles previously purchased totaling approximately $802,000 under a Note and Security Agreement with no cash down payment and financed over 36 months at an interest rate of 4.09%. During the second quarter of 2020, the Company financed vehicles previously purchased totaling approximately $2.3 million under two new Note and Security Agreements with 10% cash down payment and financed over 36 months at interest rates ranging from 3.99% to 4.15%. During the third quarter of 2020, the Company financed vehicles totaling approximately $415,500 under a new Note and Security Agreement with 10% cash down payment and financed over 36 months at an interest rate of 4.15%. As of September 30, 2020 and December 31, 2019, the outstanding principal and accrued interest balance on the notes was approximately $2,455,300 and $2,104,000, respectively.

In February 2020, the Company entered into an Asset Purchase Agreement (see Note 4), which was financed in part by two credit lines.

In 2019, NextGear Capital approved a $250,000 vehicle floorplan line with an interest rate of 10% and principal payments due at 60 and 90 days and final payoff due at 120 days or upon vehicle sale. The outstanding principal and accrued interest balance was approximately $60,000 as of December 31, 2019. The balance was paid off during the first quarter of 2020

In total, the Company had an outstanding principal and accrued interest balance amounting to approximately $3,572,100 and $2,164,000 as of September 30, 2020 and December 31, 2019, respectively.

The outstanding principal and accrued interest balances were allocated between its current (due over the next twelve months) and noncurrent (due after the next twelve months) components.

Note 14 - 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.

On February 10, 2020, a partial summary judgment was granted for the plaintiff for alleged breach of its license agreement to use garage parking spaces in Miami Beach, Florida, which the Company terminated in April 2019. The current asserted losses by the plaintiff total approximately $224,250, with a potential maximum exposure under the terminated agreement of approximately $580,450. The judge has ordered the parties to further mediate the dispute, and the Company is appealing the summary judgment. During the second quarter of 2020, the Company posted a bond with the court to continue mediation of this matter.

Note 15 - Equity

In February 2020, the Company completed a secondary public offering, selling 1,200,000 shares of common stock at an offering price of $16.00 per share, and warrants to purchase shares of common stock. 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 2020, as part of its Asset Purchase Agreement, the Company issued 33,183 shares of common stock valued at a price of $14.69 per share, the closing price on the date of the transaction, or $487,454.

In May 2020, the Company offered to rescind the purchase of certain shares of Company stock, including shares converted from debt in 2018 and 2019. The Company estimates that the maximum amount of costs related to the rescission offer will be approximately $1.6 million, plus accrued interest. In July 2020, the Company paid approximately $163,000 to investors who accepted the offer, including approximately $100,000 recorded as Treasury Stock for the repurchase of 21,053 shares of Common Stock, and approximately $63,000 recorded as interest, based on a price per share of $4.75. All other offers have since expired.

In September 2020, the Company issued 75,000 shares of common stock in exchange for $249,750 in connection with the exercise of an option with an exercise price of $3.33 per share granted to an investor.

In September 2020, the Company issued 7,427 shares of common stock in connection with the cashless exercise of 10,695 underwriter warrants with exercise prices of $6.25 per share. The underwriter warrants were granted in connection with the Company’s IPO.

Note 16 - Stock Options

As of September 30, 2020 and 2019, the Company had $305,150 and $265,914, respectively, of unrecognized compensation costs related to stock options outstanding, which will be recognized through 2024. The Company recognizes forfeitures as they occur. Share-based compensation expense was $27,595 and $72,081, respectively, for the three and nine months ended September 30, 2020, and $30,137 and $79,778, respectively, for the three and nine months ended September 30, 2019. The total amount recorded in “Additional paid-in capital” related to stock options as of September 30, 2020 was approximately $632,000. The weighted average remaining contractual term for the outstanding options as of September 30, 2020 and December 31, 2019 is 2.46 and 3.54 years, respectively.

Stock option activity for the nine months ended September 30, 2020 and year ended December 31, 2019 are as follows:

Note 17 - Purchase Warrants

Common stock purchase warrant activity for the nine months ended September 30, 2020 and year ended December 31, 2019 are as follows:

In connection with the Company’s IPO, the Company granted warrants to purchase 115,000 shares of its Common Stock at $6.25 per share to its underwriters.

In February 2020, in connection with its second public offering, the Company granted warrants to purchase 36,000 shares of its Common Stock at $20.00 per share to its underwriters.

In September 2020, certain warrants were exercised in a cashless conversion for 7,427 shares of Common Stock, and 3,268 warrants to purchase Common Stock were cancelled in connection with the cashless conversion.

Note 18 - Net Loss per Share Attributable to Common Shareholders

The basic and diluted net loss per common share was the same for each period presented as the Company’s potentially dilutive shares would be antidilutive.  The weighted average shares of Common Stock outstanding were 9,920,440 and 9,724,385, respectively, for the three and nine months ended September 30, 2020, and 10,922,820 and 19,925,558, respectively, for the three and nine months ended September 30, 2019.

Note 19 - Subsequent Events

On October 1, 2020, the Company issued options to purchase 8,000 shares of Common Stock at a strike price of $30 per share.

On November 2, 2020, the Company issued options to purchase 5,000 shares of Common Stock at a strike price of $23.15 per share.

On October 9, 2020, the Company entered into a Membership Interest Purchase Agreement (“MIPA”) to acquire a 70% interest in a group of dealership franchises and related businesses in New York for a total purchase price of $425.6 million, paid in cash and a Note, which will be accounted for as a business combination. The acquisition has not yet been consummated.

On November 3, 2020, LMP Finance, LLC, a Delaware limited liability corporation, a subsidiary of the Company, entered into a letter agreement with LTO Holdings, LLC (“LTO”), pursuant to which LTO agreed to exclusively lease and/or subscribe for new vehicles from the Company for a period of two years following the date of the letter agreement in an amount of at least $24,000,000.

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, are currently inactive.

Through our wholly owned subsidiaries, we currently offer our customers the opportunity to buy, sell, rent, and subscribe for, and obtain financing for automobiles both online and in person.

We describe our business model as “Buy, Rent or Subscribe, Sell and Repeat.” This means that we “Buy” pre-owned automobiles primarily through auctions or directly from other automobile dealers, and new automobiles from manufacturers and manufacturer distributors at fleet rates. We “Rent or Subscribe” automobiles to our customers allowing them to enter into our subscription plan for automobiles in which customers have use of an automobile for a minimum of thirty (30) days. We “Sell” our inventory, including automobiles previously included in our subscription programs, to customers, and then we hope to “Repeat” the whole process.

We believe we offer a stress-free and user-friendly experience, either directly or through arrangements with third parties, that enables consumers to efficiently:

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 only offer sales and subscriptions of pre-owned and new automobiles.

Management believes that the unprecedented demand for new and used vehicles as a result of a combination of the pent-up demand caused by the pandemic and OEM shutdowns has created extreme volatility in vehicles prices and presents abnormal downside risk to values when supply normalizes. We have chosen to limit our pre-owned vehicle inventory and order new vehicles as noted above to mitigate the risk of a material inventory impairment in 2021 as well as conserve cash for our anticipated closings of certain of our contracted acquisitions.

LMP believes COVID-19 has caused a reevaluation of shopping behavior. Many people who previously would not have considered buying a car online are giving it a second thought. In a recent CarGurus survey, 60% of respondents said they were open to buying a car online compared to 32% before. LMP believes this shift began a while ago and is here to stay. We believe our company is well positioned to benefit from this paradigm shift.

Critical Accounting Policies and Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make assumptions, estimates and judgments that affect the amounts reported in the condensed consolidated financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:

Revenue Recognition

Used Vehicle Sales Revenue

Our business consists of retail and wholesale sales of used vehicles to customers. Sales are based on a physical showroom and efficient online showrooms on our websites. We offer a home delivery service so that it delivers the car to the place agreed upon with the client. We also sell used vehicles in auctions.

We recognize revenue when we satisfy a performance obligation by transferring control of a vehicle to a customer. The prices of the vehicles are stated in its contracts at stand-alone selling prices, which are agreed upon with our customer prior to delivery. We satisfy our performance obligation for used vehicle sales upon delivery when the transfer of title, risks and rewards of ownership and control pass to the customer. We recognize revenue at the agreed-upon price stated in the contract, including any delivery charges. In addition, any noncash consideration received from a customer (i.e., trade-in vehicles) is recognized at fair value. Customer payment is received, or third-party financing is confirmed prior to vehicle transfer.

We lease vehicles to third parties that are accounted for in accordance with FASB ASC 842, Leases. 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 direct-financing lease, sales-type lease, or operating lease, as appropriate. We classify leases as sales-type leases, where the present value of the sum of the lease payments and guaranteed residual value exceeds our investment in the leased vehicle. 

Revenue on direct financing and 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 Vehicle Sales Revenues and Vehicle Sales Cost of Revenues in our consolidated condensed 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.

We collect 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.

Subscription Revenue

We offer a vehicle subscription plan where a customer will pay a monthly fee in exchange for access to a vehicle. Our subscriptions in many cases 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 and the performance obligation is completed and recognized each month, the revenues earned under these contracts are recognized in accordance with ASC 606.

We recognize revenue when we satisfy a performance obligation by transferring control of a vehicle to a customer under a subscription contract. The prices of the vehicles are stated in our contracts at stand-alone subscription prices, which are agreed upon with the customer prior to delivery. We satisfy our performance obligation for monthly subscription payments upon delivery to the customer and in each subsequent month the customer retains possession of the vehicle. We recognize revenue at the agreed-upon price stated in the contract in the month earned.

We also receive a one-time, non-refundable payment as an activation fee to our vehicle subscription program. This fee is deferred and amortized to income monthly, as the performance obligation (providing a vehicle for the customer) is completed over the term of the subscription.

Customer payment has been received prior to initial vehicle transfer and on each monthly recurring anniversary date. We collect 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.

Rental 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, Leases.

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.

We collect 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.

Accounts Receivable

We carry our accounts receivable at cost. The terms of our accounts receivable require payment upon receipt. We establish an allowance based on our management’s assessment of the creditworthiness of the customers, the aged basis of the receivables, as well as current economic conditions and historical information. Management has determined that no allowance for uncollectible accounts for accounts receivable is necessary as of September 30, 2020 or December 31, 2019.

Stock-Based Compensation

We recognize the cost of services received in exchange for awards of stock options in accordance with ASC 718 “Stock Compensation”, 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. We use the Black-Scholes option pricing model to determine the fair value of stock option awards.

Income Taxes

We account for income taxes under ASC 740 - Income Taxes which codified SFAS 109, “Accounting for Income Taxes” and FIN 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of the FASB Statement No. 109.” Under the asset and liability method of ASC 740, 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 bases. 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. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that we will not realize tax assets through future operations.

Per Share Information

We compute net loss per share accordance with FASB ASC 205 Earnings per Share. FASB ASC 205 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement.

Basic EPS is computed by dividing net income/(loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all potentially dilutive common shares outstanding during the period. Diluted EPS excludes all potentially dilutive shares if their effect is anti-dilutive.

Fair Value of Financial Instruments

Our financial instruments consist of cash, prepaid expenses, net investments in sales-type leases, payables, accrued expenses and notes payable. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. We consider the carrying values of our financial instruments in the condensed consolidated financial statements to approximate fair value, due to their short-term nature.

Inventory

Our inventory consists of automobiles, which are valued at the lower of cost or market, with cost determined by specific identification and with market defined as net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventories as of September 30, 2020 and December 31, 2019 are recorded based on perpetual inventory records.

We depreciate our rental and subscription fleet inventory monthly based on 1% of initial cost. For the three and nine months ended September 30, 2020, fleet vehicle depreciation approximated $172,000 and $535,000, respectively. For the three and nine months ended September 30, 2019, fleet vehicle depreciation approximated $226,000 and $742,000, respectively.

We periodically review our automobile inventory to determine whether any inventories have become obsolete or have declined in value and record a charge to operations for known and estimated inventory obsolescence.

Property and Equipment

Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is provided for using straight-line methods over the estimated useful lives of the respective assets, ranging from 5 to 10 years.

Valuation of Long-Lived Assets

We periodically evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.

Leases

We adopted 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. The adoption of the new lease standard had a significant impact on our consolidated balance sheets but did not have a significant impact on our lease classification or a material impact on our consolidated statements of operations and liquidity.

To calculate our lease liability, we make certain assumptions related to lease term and discount rate. For lease terms, we evaluate renewal options. When available, we use the rate implicit in the lease to discount lease payments to present value. However, our lease does not provide a readily determinable implicit rate. Therefore, we estimate the rate to discount lease payments based on the 5-year Treasury constant maturity rate on the date of the lease commencement.

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. We currently plan to adopt the guidance at the beginning of fiscal 2023.

Results of Operations

Comparison of the Three and Nine Months Ended September 30, 2020 and 2019

Revenues

We generated revenues of $13,371,336 and $26,436,813 for the three- and nine-month periods ended September 30, 2020, respectively, as compared with revenues of $1,177,887 and $7,826,114 generated during the comparative three- and nine-month periods ended September 30, 2019, respectively, an increase of $12,193,449 and $18,612,699, respectively. The increase was due to an increase from sales recognized on sales-type lease contracts, used vehicle sales, interest revenue from sales-type leases, and increased subscription fee revenues.

Vehicle Sales

We incurred vehicle sales expenses of $12,249,977 and $22,838,417 for the three- and nine-month periods ending September 30, 2020, respectively, as compared to $833,168 and $6,549,897 incurred during the comparative three- and nine-month periods ended September 30, 2019, an increase of $11,416,809 and $16,288,520, respectively. Vehicle sales expenses represent the cost of vehicles sold, which comprised 96.1% and 93.0% of vehicle sales revenue for the three- and nine-month periods ended September 30, 2020 and 105% and 99.7% of vehicle sales revenue for the three- and nine-month periods ended September 30, 2019, respectively. Our margins increased for the three- and nine-months ended September 30, 2020 resulting from a relevant increase in sales-type lease contracts during the three- and nine-month periods ended September 30, 2020.

Vehicle Depreciation and Impairment

We incurred fleet vehicle depreciation of $171,719 and $534,691 for the three- and nine-month periods ending September 30, 2020, respectively, as compared to $225,606 and $741,761 incurred during the comparative three- and nine-month periods ended September 30, 2019, respectively, a decrease of $53,887 and $207,070, respectively.

We incurred vehicle inventory impairment of $0 and $91,742 for the three- and nine-month periods ending September 30, 2020, as compared to $297,857 and $676,736 incurred during the comparative three- and nine-month periods ended September 30, 2019, a decrease of $297,857 and $584,994, respectively.

The decrease in fleet vehicle depreciation and impairment charges is due to a higher percentage of sales from sales-type leases, a reduction in emphasis for renting vehicles, and purchasing new vehicles at a greater discount from our providers.

Selling, General and Administrative Expenses

We incurred selling, general and administrative expenses of $881,538 and $3,257,289 during the three- and nine-month periods ended September 30, 2020, respectively, an increase of $360,860 and $1,136,352, as compared with $520,678 and $2,120,937 incurred during the three- and nine- month periods ended September 30, 2019. The increase is mainly due to increases in payroll and insurance as we continue to increase our employee headcount, travel costs, and NASDAQ fees and other costs related to the Company’s status as a publicly traded company.

Acquisition, Consulting, and Legal Expenses

We incurred acquisition, consulting, and legal expenses of $419,322 and $1,098,242 during the three- and nine-month periods ended September 30, 2020, respectively, as compared to $57,242 and $861,156 during the comparative three- and nine-month periods ended September 30, 2019, an increase of $362,080 and $237,086 respectively. The increase in costs, especially in the third quarter of 2020, is due to various dealership acquisitions across the United States.

Net Losses

We had net losses of $752,087 and $2,256,173 for the three- and nine-month periods ended September 30, 2020, respectively, and net losses of $775,393 and $3,457,656 for the three- and nine-month periods ended September 30, 2019, respectively, for the reasons described above.

Non-GAAP Financial Measures

We have provided certain non-GAAP financial measures, including EBITDA, Subscription Leasing and Rental Margins and Vehicle Sales Margins, to supplement the financial results that are prepared in accordance with generally accepted accounting principles in the United States of America (“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, Subscription Leasing and Rental Margins 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.

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.

Subscription Leasing and Rental Margins

The following table provides a reconciliation of Subscription Leasing and Rental Margins to subscription fee and rental revenues, the most directly comparable GAAP financial measure, on a historical basis and for each of the periods indicated. 

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.

Liquidity and Capital Resources

Cash Flow Activities

As of September 30, 2020, we had an accumulated deficit of $12,856,531. 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, 2020, we had $3,330,118 in cash. The net decrease in cash of $3,177,937 during the nine-month period ended September 30, 2020 and net increase in cash of $1,649,520 during the nine-month period ended September 30, 2019 is due to the following activities:

Operating Activities

Net cash used in operating activities was $6,659,507, as compared to net cash provided of $125,538 for the nine months ended September 30, 2020 and 2019, respectively. The $6,533,969 decrease in net cash from operating activities was primarily due to $13,518,715 of vehicles purchased for use in our sales-type lease contracts during the nine-month period ended September 30, 2020, offset by $6,745,988 of vehicles sold from inventory during the period.

Investing Activities

Net cash used in investing activities was $8,597,812 as compared to $103,030 for the nine months ended September 30, 2020 and 2019, respectively. The $8,494,782 increase in net cash used in investing activities was primarily due to the cash paid for the purchase of real estate and cash paid for escrow deposits for contracted dealership and related real estate acquisitions.

Financing Activities

Net cash generated from financing activities was $12,079,382 as compared to net cash generated of $1,627,012 for the nine months ended September 30, 2020 and 2019, respectively. The $10,452,370 increase in net cash from financing activities was primarily due to cash received from the issuance of common stock of $17,578,327, which was partially offset by repayment of vehicle financing and notes payable of $5,398,943 during the nine-month period ended September 30, 2020.

Use of Cash and Cash Requirements

During the first quarter of 2019, we sold certain fleet vehicles to make payments on convertible notes and fund our common stock repurchases, as well as to purchase additional fleet vehicles and fund our monthly recurring overhead.

In the first quarter of 2019, we purchased an aggregate of 85,000 shares of our common stock from three (3) shareholders at an aggregate price of $4.75 per share, or $403,750. In April 2019, we purchased 53,600 shares of our common stock from one (1) shareholder at an aggregate price of $4.75 per share, or $254,600. These shares are currently held in treasury.

During the first quarter of 2020, we purchased $4,053,556 of vehicles for use in our sales-type lease contracts. We funded these purchases with cash received from our second public offering, where we issued 1,200,000 shares of common stock and received net proceeds of $17,328,577.

During the first quarter of 2020, we entered into an asset purchase agreement whereby we purchased $4.2 million of assets, including vehicles ($2.87 million) and a perpetual, non-exclusive license for leasing software ($1.35 million). The vehicles were financed by two different lenders, and we paid approximately $526,000 in cash and issued 33,183 shares of common stock at $14.69 per share (closing price of our common stock on February 19, 2020) for the remainder of the transaction.

The Company intends to finance acquisitions with a mixture of debt and equity offerings, plus private seller debt.

Sources of Capital

In February 2020, we completed a second 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. No additional capital raising activities took place in the second or third quarters of 2020.

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

We maintain “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, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chairman, President and Chief Executive Officer, to allow timely decisions regarding required disclosure.

The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

With respect to the quarter ended September 30, 2020, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our Chairman, President and Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

Changes in Internal Controls over Financial Reporting

No changes in our internal controls over financial reporting have come to Management’s attention during the quarter ended September 30, 2020, that have materially affected, or are likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On February 10, 2020, a partial summary judgment was granted against us for alleged breach of a license agreement to use garage parking spaces in Miami Beach, Florida which we terminated in April 2019. The current asserted losses by the plaintiff total approximately $224,250, with a potential maximum exposure under the terminated agreement of approximately $580,450. The judge has ordered the parties to further mediate the dispute. In the second quarter of 2020, we posted a bond with the court to continue mediation of this matter.

Item 1A. Risk Factors

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, and are not required to provide the information required under this item. 

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.

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.

EXHIBIT INDEX