What changed in this filing

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Item 1A. Risk Factors

2022-05-05 compared with 2021-11-04 · 11 added, 77 removed, 1 unchanged (99% of the section changed)

Except as set forth below, during the nine months ended September 30, 2021, there were no changes to the Risk Factors disclosed in Item 1A.

Except as set forth below, during the three months ended March 31, 2022, there were no changes to the Risk Factors disclosed in Item 1A.

Risk Factors of our 2021 Form 10-K.

We are subject to risks associated with our dependence on manufacturer business relationships and agreements.

The success of our dealerships is dependent on vehicle manufacturers whom we rely exclusively on for our new vehicle inventory.

Our ability to sell new vehicles is dependent on a vehicle manufacturer’s ability to produce and allocate to our dealerships an attractive, high quality and desirable product mix at the right time in order to satisfy customer demand.

Manufacturers generally support their franchisees by providing direct financial assistance in various areas, including, among others, incentives, floorplan assistance and advertising assistance.

A discontinuation or change in our manufacturers’ warranty and incentive programs could adversely affect our business.

Manufacturers also provide product warranties and, in some cases, service contracts to customers.

Our dealerships perform warranty and service contract work for vehicles under manufacturer product warranties and service contracts and we bill the manufacturer directly as opposed to invoicing the customer.

In addition, we rely on manufacturers for various financing programs, OEM replacement parts, training, up-to-date product design, development of advertising materials and programs and other items necessary for the success of our dealerships.

Vehicle manufacturers may be adversely impacted by economic downturns or recessions, significant declines in the sales of their new vehicles, increases in interest rates, adverse fluctuations in currency exchange rates, declines in their credit ratings, reductions in access to capital or credit, labor strikes or similar disruptions (including within their major suppliers), supply shortages, rising raw material costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products, including due to bankruptcy, product defects, litigation, ability to keep up with technology and business model changes, poor product mix or unappealing vehicle design, governmental laws and regulations, natural disasters or other adverse events.

In particular, all our OEMs are investing material amounts to develop electric and autonomous vehicles.

These investments could cause financial strain on our OEMs or fail to deliver attractive vehicles for customers which could lead to adverse impacts on our business.

The OEMs are also impacted by the COVID-19 pandemic’s impact on the economy, factory production, parts shortages, including semiconductor chips, and other disruptions.

These and other risks could have a material adverse effect on the financial condition of any manufacturer and impact its ability to profitably design, market, produce or distribute new vehicles, which in turn could have a material adverse effect on our business, results of operations and financial condition.

During the nine months ended September 30, 2021 and through the date of this report, vehicle manufacturers were producing and delivering fewer vehicles to our dealerships due to a global semiconductor chip shortage.

The chip shortage is impacting the automobile industry’s new vehicle production which has decreased our new vehicle inventory.

Our new vehicle days’ supply of inventory was approximately 14 days for the quarter ended September 30, 2021, as compared to 20 days for the quarter ended June 30, 2021, 52 days for the quarter ended December 31, 2020, and 41 days for the quarter ended September 30, 2020.

If new vehicle days’ supply of inventory continues to decline, it will impact our ability to satisfy customer demand.

It is impossible to predict with certainty the duration of the semiconductor chip shortage, but we expect our inventory levels to be low through the remainder of 2021 and into the first half of 2022.

If our manufacturers’ production remains at current reduced levels or continues to decline, diminishing our ability to meet the immediate needs of our customers, the semiconductor shortage could have a material and adverse impact on our financial and operating results.

Additionally, many U.S.

manufacturers of vehicles, parts and supplies are dependent on imported products and raw materials in their production.

Any significant increase in existing tariffs on such goods and raw materials, or implementation of new tariffs, could adversely affect our profits on the vehicles we sell.

Vehicle manufacturers may alter their distribution models.

Certain of our vehicle manufacturers serving the U.K.

market recently announced plans to explore an agency model for selling new vehicles.

Under an agency model, our franchised dealerships would receive a fee for facilitating the sale of a new vehicle to a customer but would no longer record the vehicle in inventory, as has been historical practice.

The agency model, if adopted, would reduce revenues, although the other impacts to our U.K.

segment and consolidated results of operations remain uncertain.

We are uncertain if agency models will be widely adopted in the U.K.

and, if so, the impact to our results of operations.

We cannot assure you that manufacturers will approve our operation of dealership locations acquired in connection with the Prime Acquisition in a timely manner, if at all, which may have a material adverse effect on our acquisition strategy.

In connection with the Prime Acquisition, we must obtain manufacturer approval in order to operate the associated dealerships.

However, manufacturer approval is not a condition to the closing of the Prime Acquisition, and we are obligated to close on the Prime Acquisition even if we are unable to obtain the necessary manufacturer approvals with respect to some or all of the associated dealerships.

Receipt of manufacturer approval may be subject to established limitations or guidelines, including the:

• number of such manufacturers’ dealership locations that may be acquired by a single owner;

• number of dealership locations that may be acquired in any market or region;

• percentage of market share that may be controlled by one automotive retailer group;

• ownership of dealership locations in contiguous markets;

• performance requirements for existing dealership locations;

• frequency of acquisitions and other expansions.

In addition, some manufacturers require that no other manufacturers’ brands be sold from the same dealership location, and many manufacturers have site control agreements in place that limit our ability to change the use of the facility without their approval.

Therefore, there are no assurances we will get approval and be able to operate the dealerships associated with the Prime Acquisition.

If we are unable to obtain the necessary manufacturer consents, enter into new franchise agreements, or maintain or renew the existing franchise agreements on favorable terms in connection with the Prime Acquisition, our operations may be significantly impaired, and we may be required to sell such non-approved dealerships and related assets at our sole expense and potentially at a loss.

The Prime Acquisition, if consummated, will create numerous risks and uncertainties which could adversely affect our business, financial condition and results of operations.

After consummation of the Prime Acquisition, we will have a significantly larger business and more assets and employees than we did prior to the transaction.

The integration process will require us to expend significant capital and significantly expand the scope of our operations and financial and other systems.

Our management will be required to devote a substantial amount of time and attention to the process of integrating the operations of Prime into our business.

There is a great degree of difficulty and management involvement inherent in that process.

These difficulties include:

• integrating the operations of Prime while carrying on the ongoing operations of our business;

• managing a significantly larger company than before consummation of the Prime Acquisition;

• the possibility of faulty or inaccurate assumptions underlying our expectations regarding the integration process, including, among other things, unanticipated delays, costs or inefficiencies;

• the effects of unanticipated liabilities;

• operating a more diversified business;

• integrating two separate business cultures, which may prove to be incompatible;

• attracting, retaining and motivating the necessary personnel associated with the business of Prime following the Prime Acquisition;

• implementing uniform standards, controls, procedures, policies and information systems and controlling the costs associated with such matters;

• integrating information, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems.

As a private company, Prime was not required to obtain an audit of its internal control over financial reporting or otherwise have such internal control assessed, except to the extent required in connection with audits pursuant to GAAP;

however, following the consummation of the Prime Acquisition, the financial systems of Prime will be integrated into our financial system and subject to the internal control audit required with respect to the Company as a public company.

If any of these factors limits our ability to integrate Prime into our operations successfully or on a timely basis, our expectations regarding future results of operations, including certain run-rate synergies expected to result from the Prime Acquisition, might not be met.

As a result, we may not be able to realize the expected benefits that we seek to achieve from the Prime Acquisition.

In addition, we may be required to spend additional time or money on integration that otherwise would be spent on the development and expansion of our business, including efforts to further expand our product portfolio.

If the Prime Acquisition is consummated, our post-closing recourse for liabilities related to Prime is limited.

As part of the Prime Acquisition, we will assume certain liabilities of Prime.

There may be liabilities that we failed or were unable to discover in the course of performing due diligence investigations into Prime.

In addition, as Prime is integrated into our business, we may learn additional information about Prime, such as unknown or contingent liabilities or other issues relating to the operations of Prime.

Any such liabilities or issues, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Under the Purchase Agreement, the sellers will be liable for certain breaches of representations, warranties and covenants but our recovery may be contingent upon the aggregate damages arising out of any such breaches exceeding specified dollar thresholds and is subject to other time-based and monetary-based limitations.

Accordingly, we may not be able to enforce certain claims against the sellers with respect to liabilities of Prime.

The purchase price for the Prime Acquisition could increase significantly from our estimates, which may adversely impact our liquidity.

The estimated Purchase Price for the Prime Acquisition is based, in part, on the value of the vehicle inventory at the Prime dealerships as of July 31, 2021.

The actual purchase price will be based, in part, on the value of vehicle inventory at the Prime dealerships on the closing date of the Prime Acquisition.

The value of vehicle inventories at automobile dealerships fluctuates significantly due to changes in economic conditions, the availability of consumer financing and the seasonality of demand for vehicles, among other factors.

If the value of the vehicle inventory at the Prime dealerships is greater than we estimated at July 31, 2021, we will be required to pay additional purchase price consideration, which may require us to draw on existing sources of liquidity, including the Revolving Credit Facility and cash on hand.

To the extent we are required to pay a higher purchase price for the Prime Acquisition, we may have less liquidity to fund our other operations and growth strategies, which may adversely impact our financial condition, results of operations or cash flows.

The Russian invasion of Ukraine and the retaliatory measures imposed by the U.S., U.K., European Union and other countries and the responses of Russia to such measures have caused significant disruptions to domestic and foreign economies.

The Russia and Ukraine Conflict had an immediate impact on the global economy resulting in higher prices for oil and other commodities.

The U.S., U.K., European Union and other countries responded to Russia’s invasion of Ukraine by imposing various economic sanctions and bans.

Russia has responded with its own retaliatory measures.

These measures have impacted the availability and price of certain raw materials throughout the global economy.

The invasion and retaliatory measures also disrupted economic markets.

The global impact of these measures is continually evolving and cannot be predicted with certainty and there is no assurance that Russia’s invasion of Ukraine and responses thereto will not further disrupt the global economy and supply chain.

Further, there is no assurance that when the Russia and Ukraine Conflict ends, countries will not continue to impose sanctions and bans.

While these events have not materially interrupted our operations, these or future developments resulting from the Russia and Ukraine Conflict, such as a cyberattack on the U.S.

or our suppliers, could disrupt our operations, increase the cost or decrease the availability of certain materials necessary to produce vehicles we sell or obtain parts to complete maintenance and collision repair services, or make it difficult to access debt and equity capital on attractive terms, if at all, and impact our ability to fund business activities and/or limit future acquisition activity.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors