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    LOTZ   US1425521085

CARLOTZ, INC.

(LOTZ)
  Report
Delayed Nasdaq  -  12:55 2022-09-28 pm EDT
0.3221 USD   +0.34%
09/22CarLotz Announces Industry-Leading ‘Drivers Seat Advantage' Program to Benefit Used Car Buyers
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09/19CarLotz, Inc.(NasdaqGM:LOTZ) dropped from S&P Global BMI Index
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08/12Carlotz, Inc. : Entry into a Material Definitive Agreement (form 8-K)
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CARLOTZ : Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction (form 10-Q/A)

08/13/2021 | 03:18pm EDT
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 ended December 31, 2020 contained in our Current
Report on Form 8-K/A filed with the SEC on March 15, 2021. Unless the context
otherwise requires, references to "we", "us", "our" and the "Company" are
intended to mean the business and operations of CarLotz, 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 ended December 31, 2020,
filed on March 15, 2021, and those described from time to time in our future
reports filed with the SEC. 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 the
U.S., initially launched in the Mid-Atlantic region and since expanded to the
Southeast, Southcentral, Midwest, West and Pacific Northwest regions of the
United States.
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Our current facilities are located in Virginia, North Carolina, Florida,
Illinois, Texas, Tennessee, California, Colorado and Washington 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 ended June 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, in mid-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 ended March
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. At June 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.
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Revenue Generation
CarLotz 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 the U.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 ended June 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 the U.S. Our
regional hubs allow for test drives and on-site purchase, which we plan to
expand to nationwide coverage.
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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 pay CarLotz 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
ended June 30, 2020 in Florida, Tennessee, Virginia, California, Illinois and
Washington. In addition, we had a new hub open in Colorado on July 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 as
CarLotz 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.
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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 the Centers 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  %


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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 Sales
CarLotz sells used vehicles to retail customers through its hubs in various
cities throughout the continental U.S. Revenue from retail vehicle sales is
recognized when the title to the vehicle passes to the customer, at which point
the customer controls
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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 beginning January 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 with Automotive
Finance Corporation and floor plan interest incurred on borrowings to finance
the acquisition of used vehicle inventory under the Company's current $40
million revolving floor plan facility with Ally.
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Results of Operations
The following table presents our condensed consolidated statements of operations
for the periods indicated:
                                                    Three Months Ended June 30,                 Six Months Ended June 30,
                                                      2021                  2020                 2021                  2020
                                                                               ($ 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
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Three and Six Months Ended June 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 ended June 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 ended
June 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 ended June 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 ended June 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 ended June
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 ended June 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 ended June 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
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Wholesale Vehicle Revenue
Wholesale vehicle revenue increased by $2.9 million, or 170.1%, to $4.7 million
during the three months ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2021,
and 2020.
Lease income, net decreased by $0.1 million, or 24.6%, to $0.2 million during
the six months ended June 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 ended June 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 ended June 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 ended June 30, 2021, from $1.7 million in the comparable
period in 2020. The increase in retail gross profit for the three months ended
June 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 ended June 30, 2021, from $3.1 million in the comparable
period in 2020. The increase in retail gross profit for the six months ended
June 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 ended June 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
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Wholesale vehicle gross profit (loss) decreased by $(1.4) million, to $(1.4)
million during the six months ended June 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 ended June 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 ended June 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 of
June 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
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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

On March 10, 2021, we entered into an Inventory Financing and Security Agreement
(the "Ally Facility") with Ally Bank, a Utah chartered state bank ("Ally Bank"),
and Ally Financial, Inc., a Delaware corporation ("Ally" and, together with Ally
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 of June 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 with Ally
Bank and to maintain a minimum tangible net worth of $90 million calculated in
accordance with U.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.
On December 2, 2020, CarLotz issued a promissory note (the "Note") to AFC. Under
the terms of the Note, AFC agreed to make one advance to CarLotz 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 and December 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.
In April 2020, we received a loan totaling approximately $1.7 million from the
Small 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.
In December 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 to September 20, 2021, of which $0.5 million was issued
prior to the completion of the Merger. The notes were converted into Former
CarLotz common stock immediately prior to the consummation of the Merger and
received the Merger consideration.
                                       41
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Cash Flows - Six Months Ended June 30, 2021 and 2020 The following table summarizes our cash flows for the periods indicated:

                                                                      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.

                                       42
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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 the SEC on March 15, 2021 and Part I, Item 2 of
the Quarterly Report on Form 10-Q for the period ended March 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 of June 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
and U.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,
including U.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
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Wall Street Journal plus 2.50% per annum and, as of June 30, 2021, the prime
rate as published in The 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 of June 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 the SEC'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 of June 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 of June 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 of
December 31, 2019 and 2018 and for the years in the three year period ended
December 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 of December 31, 2019 and 2018 and for the
years in the three year period ended December 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 the
Public 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 of U.S. GAAP and SEC 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.

                                       44
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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 ended June 30, 2021 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
                                       45

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08/09Carlotz : Announces Second Quarter Fiscal 2022 Financial Results - Form 8-K
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08/09Shift Technologies to Buy CarLotz in Shares; Both Shares Up Sharply After-Hours
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08/09Carlotz, Inc. : Results of Operations and Financial Condition, Other Events (form 8-K)
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08/09CARLOTZ, INC. Management's Discussion and Analysis of Financial Condition and Results ..
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