CARLOTZ, INC. The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained herein and the consolidated financial statements and notes thereto for the year endedDecember 31, 2020 contained in our Current Report on Form 8-K/A filed with theSEC onMarch 15, 2021 . Unless the context otherwise requires, references to "we", "us", "our" and the "Company" are intended to mean the business and operations ofCarLotz, Inc. and its consolidated subsidiaries. Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. These statements are based on the beliefs and assumptions of our management team. Although we believe our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words "believes," "estimates," "expects," "projects," "forecasts," "may," "will," "should," "seeks," "plans," "scheduled," "anticipates" or "intends" or similar expressions. Such statements, including statements regarding our ability to: execute our geographic expansion policy; manage our business through the COVID-19 pandemic; achieve our expected revenue growth and effectively manage growth; achieve and maintain profitability in the future; innovate and expand our technological leadership; invest in additional reconditioning capacity; further penetrate existing accounts and key vehicle channels; add new corporate vehicle sourcing partners; increase our service offerings and price optimization; effectively promote our brand and increase brand awareness; expand our product offerings and introduce additional products and services; enhance future operating and financial results; acquire and protect intellectual property; attract, train and retain key personnel, including sales and customer service personnel; acquire and integrate other companies and technologies; remediate material weakness in internal control over financial reporting; comply with laws and regulations applicable to our business; and successfully defend litigation are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results or other outcomes to differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed onMarch 15, 2021 , and those described from time to time in our future reports filed with theSEC . Many of these risk factors are outside of our control, and as such, they involve risks which are not currently known that could cause actual results to differ materially from those discussed or implied herein. The forward-looking statements in this document are made as of the date on which they are made and we do not undertake to update our forward-looking statements.
Overview
CarLotz is a leading consignment-to-retail used vehicle marketplace that provides our corporate vehicle sourcing partners and retail sellers of used vehicles with the ability to easily access the retail sales channel. Our mission is to create the world's greatest vehicle buying and selling experience. We operate a technology-enabled buying, sourcing and selling model that offers a seamless omni-channel experience and comprehensive selection of vehicles. Our proprietary technology provides our corporate vehicle sourcing partners with real-time performance metrics and data analytics along with custom business intelligence reporting that enables price and vehicle triage optimization between the wholesale and retail channels. We offer our products and services to (i) corporate vehicle sourcing partners, (ii) retail sellers of used vehicles and (iii) retail customers seeking to buy used vehicles. Our corporate vehicle sourcing partners include fleet leasing companies, rental car companies, banks, captive finance companies, third-party remarketers, wholesalers, corporations managing their own fleets and OEMs. We offer our corporate vehicle sourcing partners a pioneering, Retail Remarketing™ service that fully integrates with their existing technology platforms. For individuals who are our retail sellers, we offer a hassle-free selling experience that allows them to stay fully informed by tracking the sale process through our easy to navigate online portal. We offer our retail customers a hassle-free vehicle buying experience. Buyers can browse our inventory online through our website or at our locations as well as select from our fully integrated financing and insurance products with ease. Founded in 2011,CarLotz currently operates sixteen retail hub locations in theU.S. , initially launched in the Mid-Atlantic region and since expanded to the Southeast, Southcentral, Midwest, West andPacific Northwest regions ofthe United States . 30 -------------------------------------------------------------------------------- Our current facilities are located inVirginia ,North Carolina ,Florida ,Illinois ,Texas ,Tennessee ,California ,Colorado andWashington State . Our hubs act as both physical showrooms with retail sales volumes and as consignment centers where we can source, process and recondition newly acquired vehicles. Our ability to source vehicles through these locations is important to our asset-light business model. At these hubs, our vehicles undergo an extensive 133-point inspection and reconditioning process in preparation for resale. Our hubs are more than just locations to buy, sell and repair vehicles and are crucial to the information and data-analytics that we make available to our corporate vehicle sourcing partners and retail customers. For our corporate vehicle sourcing partners, we have developed proprietary technology that integrates with their internal systems and supports every step in the consignment, reconditioning and sales process. For our retail buyers, we have developed a fully digital, end-to-end e-commerce platform that includes every step in the vehicle selection, financing and check-out process. To supplement these systems, we have developed custom-built data analytics tools that provide real time information to our corporate vehicle sourcing partners, retail sellers, retail buyers and ourselves. For our retail buyers, we offer a fully digital and hassle-free process that offers our full range of services, as we continue to expand our technological solutions. Our strategy is to roll out a fully integrated mobile application while continuing to expand our digital car buying platform. Business Update We experienced strong retail GPU and gross profit performance for the three months endedJune 30, 2021 , due primarily to higher average selling prices for vehicles sourced in the first half of the quarter via purchase and consignment at lower relative cost as average used vehicle selling prices were appreciating, resulting from high consumer demand. As previously disclosed, inmid-May 2021 , the corporate vehicle sourcing partner that accounted for more than 60% of the cars we sold during the fourth quarter of 2020 and the three months endedMarch 31, 2021 informed us that it would be pausing its consignment of vehicles to us, with immediate effect, due to the current strength of the wholesale market for vehicles. In order to secure sufficient inventory for sale following such pause in consignments, we significantly increased our purchasing of vehicles through wholesale auctions. AtJune 30, 2021 , consigned vehicles represented approximately 20% of our vehicle inventory. This mix has continued into the third quarter to date. Retail GPU and gross profit decreased during the second half of the quarter as average used vehicle sale prices began to level off, reducing the margin between our selling prices and vehicle acquisition costs that we benefited from in the first half of the quarter. In the past few weeks, we began discussions with our corporate vehicle sourcing partner that paused their consignments with respect to the potential resumption of consignments. We have consigned several vehicles in the last week. We cannot provide assurance, though, as to when this corporate vehicle sourcing partner will consign a material volume of vehicles, and if the price, types and quality of such vehicles will be attractive to us. During the first half of 2021 and continuing in the third quarter to date, due to the continuing chip shortage and COVID-related supply chain issues constraining supply coupled with significant consumer demand influenced by COVID-related financial stimulus, there has been a sustained compression of the margin between retail and wholesale prices, which has reduced the value we can deliver to our corporate vehicle sourcing partners via Retail Remarketing™, making consignment less attractive to partners than quickly selling vehicles through the wholesale channel. While this gap between retail and wholesale prices is beginning to return, supply of used vehicles from our corporate vehicle sourcing partners is severely constrained by the lack of new vehicle supply due to the chip shortage. Due to the continued uncertainty influencing the used vehicle market, we are unable to predict when there will be a return to a more normalized used vehicle market. Having to source a significant majority of our vehicles via wholesale auction during a period of severe supply constraints has limited the types of cars available to us for purchase to generally lower aged vehicles with higher average price points than in prior quarters. This difference in inventory has resulted in increasing average days to sale and increasing our exposure to depreciation in selling prices as well as lower unit sales. We have experienced depreciation in retail gross profit in the third quarter, and we expect gross profit to be at decreased levels until the used vehicle market normalizes and the mix of inventory changes. As a result of the factors described above, our hubs opened in 2021 have not been ramping to expected results and consequently have not provided the expected contribution to gross profit. We expect a similar extended ramp up period to profitability and unit sales with additional hubs that we open prior to market conditions normalizing. 31 -------------------------------------------------------------------------------- Revenue GenerationCarLotz generates a significant majority of its revenue from contracts with customers related to the sales of vehicles. We sell used vehicles to our retail customers from our hubs located throughout theU.S. Customers also frequently trade-in their existing vehicle to apply toward the transaction price of a used vehicle, for which we generate revenue on the sale of a used vehicle to the customer trading-in their vehicle and on the traded-in vehicle when it is sold to a new owner. We also sell vehicles to wholesalers or other dealers, primarily at auctions. Generally, the vehicles sold to wholesalers or other dealers are vehicles acquired via trade-in, acquired via consignment that do not meet our quality standards for sale to retail customers, or vehicles that remain unsold at the end of the consignment period.CarLotz generates revenue from providing retail vehicle buyers with options for financing, insurance and extended warranties. Our revenue for the six months endedJune 30, 2021 and 2020 was$94.6 million and$44.7 million , respectively. Inventory Sourcing We source vehicles from both corporate and consumer sellers, and auctions. We source vehicles non-competitively through the industry's leading consignment to retail sales model, and we also source vehicles competitively through purchase as necessary to provide inventory at our newer hub locations, to round out our inventory and during periods such as the one we are currently experiencing when market conditions reduce the incremental value we are able to provide to our sourcing partners through the retail channel as compared to the wholesale channel. We maintain long-term sourcing relationships with numerous key blue-chip national accounts and have a sales pipeline of potential new accounts. We support our corporate vehicle sourcing partners by offering an integrated technology platform that allows our supply partners to track the sale process of their vehicles in real-time, along with a custom system for managing customer leads and leads from third party providers. Our proprietary application includes a suite of features tailored to create significant value for both buyers and sellers with tools for photographing, documenting and transmitting vehicle information. This includes a proprietary custom-built vehicle retailing and wholesaling platform that creates and verifies all documents for the purchase, sale and financing over the web or in-hub. Our technology offers a custom system for managing customer leads, scheduling appointments and test drives from our applications and websites as well as from third party providers. In addition to our flat fee model, we also enter into alternative fee arrangements with certain corporate vehicle sourcing partners based on a return above a wholesale index or based on a profit share program. Under these alternative fee arrangements, our gross profit for a particular unit could be higher or lower than the gross profit per unit we would realize under our flat fee pricing model depending on the unit's sale price, and fees we are able to charge in connection with the sale. As we do not have long-term contracts with any of our corporate vehicle sourcing partners and do not require them to make vehicles available to us, our volume and mix of vehicles from our corporate vehicle sourcing partners has and will continue to fluctuate over time. We also have dealer owned inventory that operates in a similar manner to traditional used car dealers and which exposes us more directly to the effects of changes in vehicle prices and, particularly when sourcing via wholesale auction purchase, to the margin between retail and wholesale prices. Our gross profit per unit is therefore likely to fluctuate from period to period, perhaps significantly, due to our mix of flat fee, dealer owned and alternative fee arrangements as well as due to our acquisition costs and the sales prices and fees we are able to collect on the vehicles. Generally, our hubs have integrated vehicle processing centers, which allows us to recondition vehicles at the hub. Our step-by-step process includes all aspects of preparing a vehicle for sale, including a 133-point inspection, mechanical and body reconditioning, detail, merchandising and imaging. As we scale our business, our plan is to invest in increased processing capacity. In addition to achieving cost savings and operational efficiencies, we aim to lower our days to sale. Going forward, our strategy is to make capital investments in additional hubs with integrated vehicle processing centers by leveraging our data analytics and industry experience and taking into account a combination of factors, including proximity to buyers and sellers, transportation costs and access to inbound inventory. All of these initiatives are designed to lower reconditioning costs per unit. Regional Hub Network Through our full service e-commerce website and sixteen regional hubs, we provide a seamless shopping experience for today's modern vehicle buyer, allowing our nationwide retail customers to transact online, in-person or a combination of both. We offer a full-spectrum of inventory, including high-value and commercial vehicles, available for delivery anywhere in theU.S. Our regional hubs allow for test drives and on-site purchase, which we plan to expand to nationwide coverage. 32 -------------------------------------------------------------------------------- Finance and Insurance (F&I)CarLotz also generates revenue from providing retail vehicle buyers with options for financing, insurance and extended warranties; these services are provided by third parties that payCarLotz a commission based on our customers' purchases. Since we do not control these products before they are transferred to the consumer, we recognize commission revenue at the time of sale. We plan to expand our F&I product offering to drive additional gross profit. Factors Affecting our Performance Expansion into New Geographic Markets We actively monitor attractive markets to enter, with a focus on highly concentrated or growing demographic areas and attractive start-up costs. Our real estate team has identified new hub locations, in furtherance of our goal of opening 14 to 16 new hubs in 2021. Seven new hubs were opened in the six months endedJune 30, 2020 inFlorida ,Tennessee ,Virginia ,California ,Illinois andWashington . In addition, we had a new hub open inColorado onJuly 26, 2021 . We believe an expanded footprint will enable us to increase our vehicle sales and further penetrate our national vehicle sourcing partners while also attracting new corporate vehicle sourcing partners that were previously unavailable due to our geographic limitations. The laws of certain states that we enter may currently or in the future restrict our operations or limit the fees we can charge for certain services. Further Penetration of Existing Accounts and Key Vehicle Channels We believe that we can benefit from significant untapped volume with existing corporate vehicle sourcing partners and that our growing footprint will allow us to better serve our national accounts. Many of our existing sourcing partners still sell less than 5% of their volumes through the retail channel. As Retail Remarketing™ continues to develop as a more established alternative and asCarLotz expands to service buyers and sellers nationwide, we anticipate growth with our existing commercial sellers, after the supply constraints return to normal. Innovation and Expanded Technological Leadership We are constantly reviewing our technology platform, and our strategy is to leverage our existing technological leadership through our end-to-end e-commerce platform to continually enhance both the car buying and selling experience, while providing insightful data analytics in real time. Over the next two years, we plan to invest significantly in our core suite of technology to enhance the buyer and seller experience, improve our B2B vehicle sourcing and enhance our business intelligence capabilities with increased machine learning and artificial intelligence. In addition, we plan to invest significant amounts for various retail and processing enhancements. Investments in Additional Processing Capacity As we scale our business, our plan is to invest in increased processing capacity. In addition to achieving cost savings and operational efficiencies, we aim to lower our days to sale. Going forward, our strategy is to make capital investments in additional processing centers by leveraging our data analytics and industry experience and taking into account a combination of factors, including proximity to buyers and sellers, transportation costs and access to inbound inventory. All of these initiatives are designed to lower reconditioning costs per unit and thereby improve per unit economics. Addition of New Corporate Vehicle Sourcing Accounts We plan to leverage our national footprint in order to access new corporate vehicle sourcing partners, which may not have been accessible in the past due to our current limited geographic reach. Additional vehicle volume from new accounts would allow us to improve our consigned vehicle market share at existing and new locations. Investment in Brand and Tactical Marketing With a portion of the additional capital we raised in connection with the Merger, we ramped up our local advertising and began to focus on a more national audience. Our plan includes analytics-driven, targeted marketing investments to accelerate growth while being accretive to margins. With improved awareness of our brand and our services, we plan to identify, attract and convert new corporate vehicle sourcing partners at optimized cost. 33 -------------------------------------------------------------------------------- Increased Service Offerings and Price Optimization As we further develop the CarLotz brand, we believe our enhanced platform will support increased revenue from product sales and optimized vehicle pricing. Areas of potential further investment in service offerings include (i) expansion of existing and new F&I products that may cover appearance, roadside assistance, key insurance and wheel and tire production and (ii) further development of a front-end digital solution to source more vehicles from consumers. Seasonality Used vehicle sales exhibit seasonality with sales typically peaking late in the first calendar quarter and diminishing through the rest of the year, with the lowest relative level of vehicle sales expected to occur in the fourth calendar quarter. Used vehicle prices also exhibit seasonality, with used vehicle prices depreciating at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. Historically, this has led our gross profit per unit to be higher on average in the first half of the year than in the second half of the year. Because of the market dynamics that drove up the average sales price of used cars, we could see used car prices depreciating at a faster rate than historically seen in the last two quarters of the year. Impact of COVID-19 Our ability to acquire and sell used vehicles can be negatively impacted by a number of factors that are outside of our control. Due to the impacts of the COVID-19 pandemic and shortages of semi-conductor chips and other automotive supplies starting in 2020, certain automobile manufacturers have slowed production of new vehicles. The reduction in supply of new vehicles has limited the supply of used vehicles available through our corporate sourcing partners and may continue to do so for the remainder of 2021 and beyond. To address the reduction from this supply source, we have begun sourcing the majority of our vehicles through wholesale auction channels. Because we are purchasing these vehicles, there is greater risk to the Company on the margin between the cost of the vehicle and the selling price, and we have seen compression of gross profit during the third quarter, which we expect to continue through the balance of the year. This risk could be compounded by our inability to turn inventory quickly and the pace at which used vehicles depreciate due to recent declines in retail market prices. We cannot provide assurance of the ultimate significance and duration of COVID-19 and the variants' disruption to our operations for several reasons, including, but not limited to, uncertainty regarding the duration of the pandemic and related disruptions, the impact of governmental orders and regulations that have been, and may in the future be, imposed, and the impact of COVID-19 and the variants on our customers and corporate vehicle sourcing partners. Like many companies, COVID-19 has increased our focus on the health and safety of our guests, employees and their families. To maintain a safe work environment, we have implemented procedures aligned with theCenters for Disease Control and Prevention to limit the spread of the virus and provide a safe environment for our guests and teammates. Some of the measures taken include encouraging our teammates to take advantage of flexible work arrangements, acquiring additional corporate office space and mandating social distancing. Key Operating Metrics We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our progress and make strategic decisions. Our operating metrics (which may be changed or adjusted over time as our business scales up or industry dynamics change) measure the key drivers of our growth, including opening new hubs, increasing our brand awareness through unique site visitors and continuing to offer a full spectrum of used vehicles to service all types of customers. Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Retail vehicles sold 2,009 1,376 4,563 2,829 Number of hubs 15 8 15 8 Average monthly unique visitors 177,377 52,236 178,080 57,346 Vehicles available for sale 1,431 819 1,431 819 Retail gross profit per unit$ 2,175 $ 1,858 $ 1,619 $ 1,744 Percentage of unit sales via consignment 60 % 60 % 72 % 55 % 34 -------------------------------------------------------------------------------- Retail Vehicles Sold We define retail vehicles sold as the number of vehicles sold to customers in a given period, net of returns. We currently have a three-day, 500 mile exchange policy. The number of retail vehicles sold is the primary contributor to our revenues and gross profit, since retail vehicles enable multiple complementary revenue streams, including all finance and insurance products. We view retail vehicles sold as a key measure of our growth, as growth in this metric is an indicator of our ability to successfully scale our operations while maintaining product integrity and customer satisfaction. Number of Hubs We define a hub as a physical location at which we may recondition and store vehicles purchased and sold within a market. Our hubs cover a geographic area of approximately 300 miles, while some of our commercial accounts expand our coverage up to 1,000 miles, based on available inventory type. This is a key metric as each hub expands our service area, vehicle sourcing, reconditioning and storage capacity. Average Monthly Unique Visitors We define a monthly unique visitor as an individual who has visited our website within a calendar month, based on data provided by Google Analytics. We calculate average monthly unique visitors as the sum of monthly unique visitors in a given period, divided by the number of months in that period. We view average monthly unique visitors as a key indicator of the strength of our brand, the effectiveness of our advertising and merchandising campaigns and consumer awareness. Vehicles Available-for-Sale We define vehicles available-for-sale as the number of vehicles listed for sale on our website on the last day of a given reporting period. Along with our hub expansion, we view vehicles available-for-sale as a key measure of our growth. Growth in vehicles available-for-sale increases the selection of vehicles available to consumers in all of our markets simultaneously, which we believe will allow us to increase the number of vehicles we sell. Moreover, growth in inventory units available is an indicator of our ability to scale our vehicle sourcing, inspection and reconditioning operations. Retail Gross Profit per Unit We define retail gross profit per unit as the aggregate retail and F&I gross profit in a given period divided by retail vehicles sold during that period. Total retail gross profit per unit is driven by sales of used vehicles and the profit margin and fees on sale of those vehicles, each of which may generate additional revenue from providing retail vehicle buyers with options for financing, insurance and extended warranties. We believe gross profit per unit is a key measure of our growth and long-term profitability. Percentage of unit sales sourced via consignment We define percentage of unit sales sourced via consignment as the percentage derived by dividing the number of vehicles sold during the period that were sourced via consignment divided by the total number of vehicles sold during the period. This is key because this metric underlies part of our competitive advantage in the market. The percentage of unit sales sourced via consignment dropped in the second quarter of 2021 due to the pause by our largest vehicles sourcing partner, which led to our sourcing more of our vehicles competitively at auction. GPU for the quarter remained strong because of increased finance and insurance penetration and dealer inventory sourced in the first half of the quarter being sold at attractive prices to the retail buyer in a macroeconomic environment where the average used vehicle sales price was appreciating. GPU was lower in the second half of the quarter as dealer inventory was sourced at higher prices while selling prices leveled off. We have experienced lower gross profit on vehicle sales in the third quarter to date. We anticipate this will continue in the third and fourth quarters as we expect gross profit to be at decreased levels until the used vehicle market normalizes and the mix of inventory changes. Components of Results of Operations Revenues Retail Vehicle SalesCarLotz sells used vehicles to retail customers through its hubs in various cities throughout the continentalU.S. Revenue from retail vehicle sales is recognized when the title to the vehicle passes to the customer, at which point the customer controls 35 -------------------------------------------------------------------------------- the vehicle. We recognize revenue based on the total purchase price stated in the contract, including any processing fees. Our exchange policy allows customers to initiate a return until the earlier of the first three days or 500 miles after delivery. Wholesale Vehicle Sales We sell wholesale vehicles primarily through auction as wholesale vehicles acquired often do not meet our standards for retail vehicle sales. Revenue from wholesale vehicle sales is recognized when the vehicle is sold, either at auction or directly to a wholesaler, and title to the vehicle passes to the buyer. Finance and Insurance, net We provide customers with options for financing, insurance and extended warranties. Certain warranties sold beginningJanuary 1, 2019 are serviced by a company owned by a major stockholder. All other such services are provided by third-party vendors with whom we have agreements giving us the right to offer such services directly. When a customer selects a service from these third-party vendors, we earn a commission based on the actual price paid or financed. We recognize finance and insurance revenue at the point in time when the customer enters into the contract. Lease Income, net Lease income, net represents revenue earned on the spread between the interest rate on leases we enter into with our B2B lease customers and the related leases we enter into with third party lessors. Cost of Sales Cost of sales includes the cost to acquire used vehicles and the related reconditioning costs to prepare the vehicles for resale. Vehicle reconditioning costs include parts, labor, inbound transportation costs and other costs such as mechanical inspection, vehicle preparation supplies and repair costs. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value. Selling, General and Administrative Expenses Selling, general and administrative expenses primarily include compensation and benefits, marketing, facilities cost, technology expenses, logistics and other administrative expenses. Advertising costs are expensed as incurred. Depreciation and Amortization Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which is: the lesser of 15 years or the underlying lease terms for leasehold improvements, one to five years for equipment, furniture and fixtures, and five years for corporate vehicles. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Major remodels and improvements are capitalized. Depreciation on vehicles leased to B2B customers is calculated using the straight-line over the estimated useful life. Non-Operating Expenses Non-operating expenses represent the change in fair value of the Merger warrants and the earnout shares. Additional non-operating income and expense include interest income on marketable securities, floor plan interest incurred on borrowings to finance the acquisition of used vehicle inventory under the Company's former$12 million revolving floor plan facility withAutomotive Finance Corporation and floor plan interest incurred on borrowings to finance the acquisition of used vehicle inventory under the Company's current$40 million revolving floor plan facility with Ally. 36 -------------------------------------------------------------------------------- Results of Operations The following table presents our condensed consolidated statements of operations for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 ($ in thousands) Revenues: Retail vehicle sales$ 44,230 $ 23,652 $ 94,613 $ 44,694 Wholesale vehicle sales 4,660 1,725 9,228 5,036 Finance and insurance, net 1,780 895 3,334 1,787 Lease income, net 98 127 205 272 Total Revenues 50,768 26,399 107,380 51,789 Cost of sales (exclusive of depreciation) 46,586 23,670 101,190 46,588 Gross Profit 4,182 2,729 6,190 5,201 Operating Expenses: Selling, general and administrative 19,386 3,073 38,259 6,989 Stock based compensation expense 3,704 3 45,667 37 Depreciation expense 95 91 478 191 Management fee expense - related party - 70 2 132 Total Operating Expenses 23,185 3,237 84,406 7,349 Loss from Operations (19,003) (508) (78,216) (2,148) Interest expense 184 107 359 256 Other Income (Expense), net Change in fair value of Merger warrants liability 325 - 12,683 - Change in fair value of redeemable convertible preferred stock tranche obligation - 345 - 629 Change in fair value of earnout provision 12,210 - 44,056 - Other (expense) income (553) 61 (391) 64 Total Other Income (Expense), net 11,982 406 56,348 693 Loss Before Income Tax Expense (7,205) (209) (22,227) (1,711) Income tax expense - 4 - 9 Net Loss$ (7,205) $ (213) $ (22,227) $ (1,720) Presentation of Results of Operations We present operating results down to gross profit for our three distinct revenue channels along with our net lease income: Retail Vehicle Sales: Retail vehicle sales represent sales of vehicles to our retail customers through our hubs in various cities. Wholesale Vehicle Sales: Wholesale vehicle sales represent sales of vehicles through wholesale channels, primarily through wholesale auctions. Finance and Insurance: Finance and insurance represents commissions earned on financing, insurance and extended warranty products that we offer to our retail vehicle buyers. Lease Income, net: Lease income, net represents revenue earned on the spread between the interest rate on leases we enter into with our B2B lease customers and the related leases we enter into with third party lessors. 37 -------------------------------------------------------------------------------- Three and Six Months EndedJune 30, 2021 and 2020 The following table presents certain information from our condensed consolidated statements of operations by channel: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Change 2021 2020 Change ($ in thousands, except per unit metrics) ($ in thousands, except per unit metrics) Revenue: Retail vehicle sales$ 44,230 $ 23,652 87.0 %$ 94,613 $ 44,694 111.7 % Wholesale vehicle sales 4,660 1,725 170.1 % 9,228 5,036 83.2 % Finance and insurance, net 1,780 895 98.9 % 3,334 1,787 86.6 % Lease income, net 98 127 (22.8) % 205 272 (24.6) % Total revenues 50,768 26,399 92.3 % 107,380 51,789 107.3 % Cost of sales: Retail vehicle cost of sales$ 41,641 $ 21,991 89.4 %$ 90,558 $ 41,546 118.0 % Wholesale vehicle cost of sales 4,945 1,679 194.5 % 10,632 5,042 110.9 % Total cost of sales$ 46,586 $ 23,670 96.8 %$ 101,190 $ 46,588 117.2 % Gross profit: Retail vehicle gross profit$ 2,589 $ 1,661 55.9 %$ 4,055 $ 3,148 28.8 % Wholesale vehicle gross profit (285) 46 719.6 % (1,404) (6) (23,300.0) % Finance and insurance gross profit 1,780 895 98.9 % 3,334 1,787 86.6 % Lease income, net 98 127 (22.8) % 205 272 (24.6) % Total gross profit$ 4,182 $ 2,729 53.2 %$ 6,190 $ 5,201 19.0 % Retail gross profit per unit(1): Retail vehicles gross profit 2,589 1,661 55.9 % 4,055 3,148 28.8 % Finance and insurance gross profit 1,780 895 98.9 % 3,334 1,787 86.6 % Total retail vehicles and finance and insurance gross profit 4,369 2,556 70.9 % 7,389 4,935 49.7 % Retail vehicles unit sales 2,009 1,376 46.0 % 4,563 2,829 61.3 % Retail vehicles gross profit per unit$ 2,175 $ 1,858 17.1 %$ 1,619 $ 1,744 (7.2) % ______________ (1)Gross profit per unit is calculated as gross profit for retail vehicles and finance and insurance, each of which is divided by the total number of retail vehicles sold in the period. Retail Vehicle Sales Retail vehicle sales revenue increased by$20.6 million , or 87.0%, to$44.2 million during the three months endedJune 30, 2021 , from$23.7 million in the comparable period in 2020. The increase was primarily driven by an increase in retail vehicle unit sales to 2,009 retail vehicles in the three months endedJune 30, 2021 , compared to 1,376 retail vehicles in the comparable period in 2020 and an increase in average sale price per unit of$4,757 , to$21,393 during the three months endedJune 30, 2021 . The average sale price has increased consistent with macroeconomic trends in the used car industry and as a result of selling a higher percentage of higher priced vehicles. Same-hub unit sales represented 41% of our total unit sales growth of 633 units, with the balance of the increase in unit sales coming from hubs we have opened in 2021. Retail vehicle sales revenue increased by$49.9 million , or 111.7%, to$94.6 million during the six months endedJune 30, 2021 , from$44.7 million in the comparable period in 2020. The increase was primarily driven by an increase in retail vehicle unit sales to 4,563 retail vehicles in the six months endedJune 30, 2021 , compared to 2,829 retail vehicles in the comparable period in 2020 and an increase in average sale price per unit of$4,903 , to$20,177 during the six months endedJune 30, 2021 . The average sale price has increased consistent with macroeconomic trends in the used car industry and as a result of selling a higher percentage of higher priced vehicles. The six months endedJune 30, 2021 had better in-stock levels when compared to the in-stock levels based on the Covid-19 outlook for the comparable period in 2020. Same-hub unit sales represented 67% of our total unit sales growth of 1,734 units, with the balance of the increase in unit sales coming from hubs we have opened in 2021. 38 -------------------------------------------------------------------------------- Wholesale Vehicle Revenue Wholesale vehicle revenue increased by$2.9 million , or 170.1%, to$4.7 million during the three months endedJune 30, 2021 , from$1.7 million in the comparable period in 2020. The increase was primarily due to an increased average selling price of the wholesale vehicles sold, combined with an increase in wholesale vehicle unit sales. Wholesale vehicle revenue increased by$4.2 million , or 83.2%, to$9.2 million during the six months endedJune 30, 2021 , from$5.0 million in the comparable period in 2020. The increase was primarily due to an increased average selling price of the wholesale vehicles sold, combined with an increase in wholesale vehicle unit sales. Finance and Insurance (F&I) F&I revenue increased by$0.9 million , or 98.9%, to$1.8 million during the three months endedJune 30, 2021 , from$0.9 million in the comparable period in 2020. This increase in F&I revenue was driven by our increase in retail unit sales and higher penetration of contract sales per unit sold. F&I revenue increased by$1.5 million , or 86.6%, to$3.3 million during the six months endedJune 30, 2021 , from$1.8 million in the comparable period in 2020. This increase in F&I revenue was driven by our increase in retail unit sales and higher penetration of contract sales per unit sold. Lease Income, net Lease income, net was$0.1 million during the three months endedJune 30, 2021 , and 2020. Lease income, net decreased by$0.1 million , or 24.6%, to$0.2 million during the six months endedJune 30, 2021 , from$0.3 million in the comparable period in 2020. Cost of Sales Cost of sales increased by$22.9 million , or 96.8%, to$46.6 million during the three months endedJune 30, 2021 , from$23.7 million in the comparable period in 2020. The increase was primarily due to an increased average acquisition price of the vehicles we sold in that period combined with an increase in the number of vehicles sold. Cost of sales increased by$54.6 million , or 117.2%, to$101.2 million during the six months endedJune 30, 2021 , from$46.6 million in the comparable period in 2020. The increase was primarily due to an increased average acquisition price of the vehicles we sold in that period combined with an increase in the number of vehicles sold. Retail Vehicle Gross Profit Retail vehicle gross profit increased by$0.9 million , or 55.9%, to$2.6 million during the three months endedJune 30, 2021 , from$1.7 million in the comparable period in 2020. The increase in retail gross profit for the three months endedJune 30, 2021 resulted from an increase in units sold, aided by more hubs in operation, and an increase in retail gross profit per unit compared to the same period in 2020. The increase in retail gross profit per unit was driven by increased profit margins due to higher prices relative to the acquisition costs. Retail vehicle gross profit increased by$1.0 million , or 28.8%, to$4.1 million during the six months endedJune 30, 2021 , from$3.1 million in the comparable period in 2020. The increase in retail gross profit for the six months endedJune 30, 2021 , resulted from an increase in units sold, aided by more hubs in operation, and was slightly offset by a decrease in retail gross profit per unit compared to the same period in 2020. The decrease in retail gross profit per unit was driven by a higher portion of our sales in the first quarter of 2021 falling under an alternative fee arrangement with a corporate sourcing partner that does not reimburse repair and shipping expenses. Wholesale Vehicle Gross Profit Wholesale vehicle gross profit (loss) decreased by$(0.3) million , to$(0.3) million during the three months endedJune 30, 2021 , from$0.0 million in the comparable period in 2020. The decrease was primarily driven by the number of delisted consignment units, primarily from our largest corporate account that paused sourcing, that were sent to wholesale, and the cost incurred to prepare those vehicles for sale at the time of consignment. 39 -------------------------------------------------------------------------------- Wholesale vehicle gross profit (loss) decreased by$(1.4) million , to$(1.4) million during the six months endedJune 30, 2021 , from$0.0 million in the comparable period in 2020. The decrease was primarily driven by the number of delisted consignment units, primarily from our largest corporate account that paused sourcing, that were sent to wholesale, and the cost incurred to prepare those vehicles for sale at the time of consignment. F&I Gross Profit F&I revenue consists of 100% gross margin products for which there are no costs associated with the products. Therefore, changes in F&I gross profit and the associated drivers are identical to changes in F&I revenue and the associated drivers. Components of SG&A Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 ($ in thousands) ($ in thousands)
Compensation and benefits(1) $ 5,907$ 1,409 $ 12,763 $ 3,527 Marketing 3,906 399 6,432 940 Technology 2,453 118 5,378 276 Other costs(2) 7,120 1,147 13,686 2,246 Total selling, general and administrative expenses$ 19,386 $ 3,073 $ 38,259 $ 6,989 (1)Compensation and benefits includes all payroll and related costs, including benefits, and payroll taxes, except those related to preparing vehicles for sale, which are included in cost of sales, and those related to the development of software products for internal use, which are capitalized to software and depreciated over the estimated useful lives of the related assets. (2)Other costs include all other selling, general and administrative expenses such as facilities costs, logistics and other administrative expenses. Selling, general and administrative expenses increased by$16.3 million , to$19.4 million during the three months endedJune 30, 2021 , from$3.1 million in the comparable period in 2020. Costs related to being a public company increased$6.0 million , primarily due to legal, accounting and insurance costs, compensation and benefits increased$4.5 million due to increased corporate headcount and new hub openings, marketing expense increased$3.5 million in connection with marketing higher levels of inventory online and our national expansion, and technology expense increased$2.3 million due to website enhancements the Company has begun. Selling, general and administrative expenses increased by$31.3 million , to$38.3 million during the six months endedJune 30, 2021 , from$7.0 million in the comparable period in 2020. Costs related to being a public company increased$11.4 million , primarily due to legal, accounting and insurance costs, compensation and benefits increased$9.2 million due to increased corporate headcount and new hub openings, marketing expense increased$5.5 million in connection with marketing higher levels of inventory online and our national expansion, and technology expense increased$5.1 million due to website enhancements the Company has begun. Liquidity and Capital Resources Sources of liquidity Our main source of liquidity is cash generated from financing activities, which primarily includes proceeds from the Merger (see Note 3 - Merger in our condensed consolidated financial statements). Since inception, we have generally operated at a loss for most periods. As ofJune 30, 2021 , we had cash and cash equivalents, restricted cash, and short-term marketable securities of$259.2 million . We believe our available cash, restricted cash, short-term marketable securities and liquidity available under the Ally Facility are sufficient to fund our operations and expansion plans for at least the next 12 months. We expect that as we add hubs as part of our planned expansion and bring them to maturity, we will continue to operate at a loss until we achieve scale and are able to leverage our operating costs. Our hubs 40 -------------------------------------------------------------------------------- opened in 2021 have not been ramping to expected results and consequently have not provided the expected contribution to gross profit. If this continues to be the case, our cash on hand together with cash generated from operating activities may therefore be insufficient to fully fund the planned expansion of our business over the next couple years. In such a case, we would need to revise our expansion strategy or engage in equity or debt financings to secure additional funds in order to fund our continued expansion or we would need to slow or postpone the expansion to preserve cash. We may also require additional funds to the extent our plans change, if we elect to acquire complementary businesses or due to unforeseen circumstances. However, additional funds may not be available when we need them on terms that are acceptable to us, or at all. Debt obligations OnMarch 10, 2021 , we entered into an Inventory Financing and Security Agreement (the "Ally Facility") withAlly Bank , aUtah chartered state bank ("Ally Bank "), and Ally Financial, Inc., aDelaware corporation ("Ally" and, together withAlly Bank , the "Lender"), pursuant to which the Lender may provide up to$30 million in financing, or such lesser sum which may be advanced to or on behalf of us from time to time, as part of our floorplan vehicle financing program. In June, the Company expanded the floor plan credit facility by$10 million to a total of$40 million . As ofJune 30, 2021 , we had$29.4 million principal outstanding under the Ally Facility, primarily from increased sourcing through vehicle purchases. Under the Ally Facility, the Company is subject to financial covenants that require the Company to maintain at least 10% of the credit line in cash and cash equivalents, to maintain at least 10% of the credit line on deposit withAlly Bank and to maintain a minimum tangible net worth of$90 million calculated in accordance withU.S. GAAP. Advances under the Ally Facility bear interest at a per annum rate designated from time to time by the Lender determined using a 365/360 simple interest method of calculation, unless expressly prohibited by law. The interest rate is currently the prime rate plus 2.50% per annum, or 5.75%. Advances under the Ally Facility, if not demanded earlier, are due and payable for each vehicle financed under the Ally Facility as and when such vehicle is sold, leased, consigned, gifted, exchanged, transferred, or otherwise disposed of. Interest under the Ally Facility is due and payable upon demand, but, in general, in no event later than 60 days from the date of request for payment. Upon any event of default (including, without limitation, our obligation to pay upon demand any outstanding liabilities of the Ally Facility), the Lender may, at its option and without notice to us, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to the Lender and its affiliates by us and our affiliates. The Ally Facility is secured by a grant of a security interest in certain vehicle inventory and other assets of the Company. Prior to our entry into the Ally Facility, we had a$12.0 million revolving floor plan facility available with AFC (the "AFC Facility") to finance the acquisition of used vehicle inventory available on a revolving basis. The AFC Facility was secured by all of our assets. In connection with the entry into the Ally Facility, we repaid in full and terminated the AFC Facility. OnDecember 2, 2020 ,CarLotz issued a promissory note (the "Note") to AFC. Under the terms of the Note, AFC agreed to make one advance toCarLotz upon request of$3.0 million . Amounts due under the Note accrued interest at 6.0% per year on a 365-day basis. The Note was due and payable on the earlier of the closing of the Merger andDecember 2, 2022 . Amounts drawn on the Note were used for working capital purposes in the ordinary course of business. The Note was repaid upon the consummation of the Merger. InApril 2020 , we received a loan totaling approximately$1.7 million from theSmall Business Administration under the PPP to help us keep our workforce employed and avoid further headcount reduction during the COVID-19 crisis. The full amount of the PPP loan was repaid in connection with the closing of the Merger. InDecember 2019 , we entered into a note purchase agreement with AFC under which AFC agreed to purchase up to$5.0 million in notes, with the initial tranche equal to$3.0 million issued at closing and two additional tranches of at least$1.0 million on or prior toSeptember 20, 2021 , of which$0.5 million was issued prior to the completion of the Merger. The notes were converted into FormerCarLotz common stock immediately prior to the consummation of the Merger and received the Merger consideration. 41 --------------------------------------------------------------------------------
Cash Flows - Six Months Ended
Six Months Ended June 30,
2021 2020
($ in thousands)
Cash Flow Data:
Net cash provided by (used in) operating activities $ (70,664) $ 4,702
Net cash provided by (used in) investing activities (189,099) (791)
Net cash provided by (used in) financing activities 340,752 (2,552)
Operating Activities
For the six months ended June 30, 2021 , net cash used in operating activities
was $(70.7) million , primarily driven by net loss of $(22.2) million adjusted
for non-cash charges of $(9.8) million and net changes in our operating assets
and liabilities of $(38.6) million . The non-cash adjustments primarily relate to
a decrease in fair value of the warrants and earnout shares of $(56.7) million ,
partially offset by stock compensation of $45.7 million . The changes in
operating assets and liabilities are primarily driven by an increase in
inventories $(36.3) , an increase other current assets of $(5.5) million and an
increase in other long-term assets of $(4.1) million , partially offset by an
increase in accrued expenses of $6.2 million and an increase in accounts payable
of $2.5 million .
For the six months ended June 30, 2020 , net cash provided by operating
activities was $4.7 million , primarily driven by net changes in our operating
assets and liabilities of $6.8 million , partially offset by a net loss of
$(1.7) million and non-cash charges with a $(0.4) million impact on operating
cash flows. The changes in operating assets and liabilities were primarily
driven by a decrease in inventories of $5.1 million , an increase of accounts
payable $0.7 million and an increase in accrued expenses of $1.0 million ,
partially offset by an increase in accounts receivable of $(0.3) million . The
non-cash adjustments primarily relate to an increase in fair value of the
preferred stock tranche obligation of $(0.6) million offset by depreciation and
amortization expense of property and equipment and lease vehicles of
$0.1 million and $0.1 million , respectively.
Investing Activities
For the six months ended June 30, 2021 , net cash used in investing activities
was $(188.9) million , primarily driven by purchases of marketable securities of
$(307.6) million , the purchase of property and equipment of $(3.7) million and
capitalized software costs of $(6.6) million , partially offset by proceeds from
sales and maturities of marketable securities of $129.0 million .
For the six months ended June 30, 2020 , net cash used in investing activities of
$(0.8) million was primarily driven by purchases of marketable securities of
$(0.7) million and the purchase of lease vehicles of $(0.1) million .
Financing Activities
For the six months ended June 30, 2021 , net cash provided by financing
activities was $340.8 million , primarily driven by the issuance of common stock
to the PIPE investors and Former CarLotz shareholders of $435.0 million , an
advance from the holder of marketable securities of $4.7 million , and borrowings
on the floor plan facility of $52.4 million , partially offset by the payments
made to existing shareholders of Former CarLotz as part of the Merger of $(62.7)
million , transaction costs and advisory fees of $(47.6) million , payments on
floor plan notes payable of $(29.1) million , payments made on accrued dividends
of $(4.9) million , repayment of debt of $(4.7) million and the payment of cash
consideration on options of $(2.5) million .
For the six months ended June 30, 2020 , net cash used in financing activities
was $(2.6) million , primarily driven by repayment of the floor plan note payable
of $(13.4) million , partially offset by borrowings on the floor plan facility of
$8.6 million and long-term debt borrowings of $2.2 million .
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Contractual Obligations
The following table includes aggregated information about contractual
obligations that affect our liquidity and capital needs. As of June 30, 2021 our
contractual obligations were as follows:
Payments Due by Period
Less than 1 More than
Total Year 1 - 3 Years 3 - 5 Years 5 years
($ in thousands)
Floor plan facility(1) $ 29,427 $ 29,427 $ - $ - $ -
Operating lease obligations 25,506 1,719 8,459 6,160 9,168
Total $ 54,933 $ 31,146 $ 8,459 $ 6,160 $ 9,168
______________
(1)Represents the principal amount outstanding as of June 30, 2021 . Due to the
uncertainty of forecasting the timing of expected variable interest rate
payments, interest payment amounts are not included in the table. Borrowings
under the floor plan facility are payable when the underlying vehicle is sold,
which is expected to be less than one year.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee
contracts, retained or contingent interests, certain derivative instruments and
variable interest entities that either have, or are reasonably likely to have, a
current or future material effect on our consolidated financial statements.
Critical Accounting Policies and Estimates
For information on critical accounting policies, see "Critical Accounting Policy and Estimates" in the Management's Discussion and Analysis of Financial Condition and Results of Operations attached as Exhibit 99.2 to our Current Report on Form 8-K/A filed with theSEC onMarch 15, 2021 and Part I, Item 2 of the Quarterly Report on Form 10-Q for the period endedMarch 31, 2021 . Recently Issued and Adopted Accounting Pronouncements See the section titled "Recently Issued Accounting Pronouncements" in Note 2 in the "Notes to Condensed Consolidated Financial Statements" in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional information. Item 3. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Cash and cash equivalents include highly liquid investments that are due on demand or have a remaining maturity of three months or less at the date of purchase. As ofJune 30, 2021 , cash and cash equivalents consisted of bank deposits, money market placements and debt securities that have a remaining maturity of three months or less at the date of purchase. The cash and cash equivalents are held primarily for working capital purposes. These interest-earning instruments are subject to interest rate risk. To date, fluctuations in interest income have not been significant. Our surplus cash has been invested in money market fund accounts, interest-bearing savings accounts andU.S. government debt securities as well as corporate debt securities from time to time. We have not entered into investments for trading or speculative purposes. Due to the conservative nature of our investment portfolio, which is predicated on capital preservation of investments with short-term maturities, we do not believe an immediate one percentage point change in interest rates would have a material effect on the fair market value of our portfolio, and therefore, we do not expect our operating results or cash flows to be significantly affected by changes in market interest rates. We also have exposure to changing interest rates in connection with the floor plan facility. Interest rate risk is highly sensitive due to many factors, includingU.S. monetary and tax policies,U.S. and international economic factors and other factors beyond our control. Advances under the floor plan facility accrue interest at the most recent prime rate published in The 43 --------------------------------------------------------------------------------Wall Street Journal plus 2.50% per annum and, as ofJune 30, 2021 , the prime rate as published inThe Wall Street Journal was 3.25%. We believe a change to our interest rate of 1% applicable to our outstanding indebtedness would have an immaterial financial impact. As ofJune 30, 2021 , we had total outstanding debt of$29.4 million under the floor plan facility. Credit Risk Financial instruments that potentially subject us to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Substantially all of our cash and cash equivalents were deposited in accounts at one financial institution, and account balances may at times exceed federally insured limits. Management believes that we are not exposed to significant credit risk due to the financial strength of the depository institution in which the cash is held. Concentrations of credit risk with respect to trade receivables are limited due to the large diversity and number of customers comprising our customer base. Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as ofJune 30, 2021 . Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as ofJune 30, 2021 due to the existence of a material weakness in internal control over financial reporting that was identified in connection with the audits of our consolidated financial statements as ofDecember 31, 2019 and 2018 and for the years in the three year period endedDecember 31, 2019 , and which is still being remediated.
Material Weakness in Internal Control Over Financial Reporting
Prior to the Merger, we were a private company with limited internal accounting and financial reporting personnel and other resources to address our internal control over financial reporting. In connection with the audits of our consolidated financial statements as ofDecember 31, 2019 and 2018 and for the years in the three year period endedDecember 31, 2019 , we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. As defined in the standards established by thePublic Company Accounting Oversight Board , a "material weakness" is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to (i) our lack of sufficient accounting and financial reporting resources to address internal control over financial reporting and personnel with requisite knowledge and experience in application ofU.S. GAAP andSEC rules and (ii) general information technology controls in the areas of user access and program change-management over certain information technology systems that support the Company's financial reporting processes.
Remediation Efforts to Address Material Weakness
We are taking steps to remediate this material weakness through the implementation of appropriate segregation of duties, formalization of accounting policies and controls, hiring of additional qualified accounting and finance personnel, and engagement of financial consultants to enable the implementation of internal controls over financial reporting. We are also applying a more rigorous review of the monthly financial reporting processes to ensure that the performance of the control is evidenced through appropriate documentation that is consistently maintained and evaluating necessary changes to our formalized process to ensure key controls are identified, the control design is appropriate and the necessary evidentiary documentation is maintained throughout the process. We also plan to implement certain accounting systems to automate manual processes.
The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations.
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--------------------------------------------------------------------------------Changes in Internal Control Over Financial Reporting
Except as disclosed above, there were no changes in our internal control over financial reporting that occurred during the six months endedJune 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 45
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