CARLOTZ, INC. Introduction
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 precede 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; attracts, train and retain key personnel, including sales and customer service personnel; 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 while simultaneously providing buyers with prices that are, on average, below those of traditional dealerships. 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. Through our marketplace model, we generate significant value for both sellers and buyers through price, selection and experience. 30
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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(TM) service that fully integrates with their existing technology platforms. For individualswho are our retail sellers, we offer a hassle-free selling experience while allowing them to generate up to$1,000 or more for their vehicle, net of all fees and expenses, than when utilizing the alternative wholesale sales channel and 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 at prices generally lower than our competitors. Buyers can browse our extensive, and growing, inventory online through our website or at our locations as well as select from our fully integrated financing and insurance products with ease. We believe our marketplace model drives higher returns relative to our competition. Through the industry's leading consignment-to-retail sales model,CarLotz is able to obtain non-competitively sourced inventory to sell. Consigned vehicles represent on average approximately 75% of our vehicle inventory at our hubs after an initial ramp-up period following the opening of a new hub, during which we usually have a higher portion of purchased vehicles to ensure a well-stocked inventory, with approximately 60% or more of our total vehicles sales originating from our growing relationships with corporate vehicle sourcing partners. Founded in 2011,CarLotz currently operates eleven retail hub locations in theU.S. , initially launched in the Mid-Atlantic region and since expanded to the Southeast, Southcentral, Midwest andPacific Northwest regions ofthe United States . Our current facilities are located inVirginia ,North Carolina ,Florida ,Illinois ,Texas ,Tennessee , 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 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. With experience from our initial locations, we have learned how to scale our hub and processing operations to drive efficiencies. As we continue to grow our physical and online footprint, these hubs and the vast amount of information they provide will continue to be an important source of value to our buyers, sellers and our business model. 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. Using this technology, we are able to lower the days-to-sale while assisting sellers to receive higher vehicle values and track every step of the sales process. For our retail buyers, we offer a fully digital and hassle-free process that offers our full range of services, from vehicle selection to at home, touchless delivery, 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. 31 Table of Contents 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 theU.S. Consigned vehicles represent on average approximately 75% of our vehicle inventory at our hubs after an initial ramp-up period following the opening of a new hub during which we usually have a higher portion of purchased vehicles to ensure a well-stocked inventory. 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 for vehicles acquired via trade-in or vehicles acquired via consignment that do not meet our quality standards for sale to retail customers or that remain unsold at the end of the consignment period.CarLotz also generates revenue from providing retail vehicle buyers with options for financing, insurance and extended warranties.CarLotz also offers retail vehicle customers with the option to lease a vehicle, in which case we usually obtain an operating lease from a third party lessor and enter into a corresponding operating lease with our customer at a higher interest rate, from which generate revenue on the spread between such interest rates. Our revenue for the three months endedMarch 31, 2021 and 2020 was$56.6 million and$25.4 million , respectively. Our strategy is to generate significant growth going forward by expanding into new geographic markets, innovating and expanding our technological leadership, further penetrating existing accounts and key vehicle channels, adding new corporate vehicle sourcing accounts, investing in brand and tactical marketing and increasing our service offerings and further optimizing our pricing.
Inventory Sourcing
We source vehicles from both corporate and consumer sellers. Through the industry's leading consignment to retail sales model, we have access to non-competitively sourced vehicles. At our mature retail hubs (year three or later of operation), we generally source 60% or more of our vehicles non-competitively from our corporate vehicle sourcing partners, 15% non-competitively from consumers, 15% non-competitively from other sources and 10% is competitively sourced, meaning other buyers have the ability to purchase the same vehicle. We maintain stable long-term relationships with numerous key blue-chip national accounts with a robust sales pipeline of potential new accounts. We support our corporate vehicle sourcing partners by offering an attractive sell-through rate and our integrated technology platforms allow 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. For the three months endedMarch 31, 2021 , one of our corporate vehicle sourcing partners, with whom we do not have long-term consignment contracts, accounted for more than 60% of the cars we sold and more than 60% of our retail vehicle revenues during this period was derived from the sale of these cars. Such concentrations can result from a variety of factors, some of which are beyond our control, and we may elect to source a higher percentage of our vehicles from one or more corporate vehicle sourcing partners for a variety of reasons. If a corporate vehicle sourcing partner from which we are sourcing a significant portion of our vehicles was to cease or significantly reduce making vehicles available to us, we would likely need to increase our sourcing of vehicles from other vehicle sourcing partners potentially on less favorable terms and conditions. Such an effort may take a number of months and may not precisely replicate the variety and quality of vehicles that we have been sourcing from a single source. 32 Table of Contents 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 our corporate vehicle sourcing partners and do not require them to make vehicles available to us, our mix of vehicles under alternative fee arrangements is likely to fluctuate over time. Our gross profit per unit is therefore likely to fluctuate from period to period, perhaps significantly, due to mix of flat fee and alternative fee arrangements as well as due to the sales prices and fees we are able to collect on the vehicles we source under alternative fee arrangements. We have an alternative fee arrangement with the corporate vehicle sourcing partner that accounted for approximately 60% of our vehicles sourced during the first quarter of 2021. Under this fee arrangement, vehicles are returned to the corporate vehicle sourcing partner from consignment if the vehicle has not been sold through our retail channel within a specified time period. In such instances, we are responsible for the expenses we have incurred with respect to the vehicle, including shipping costs and any refurbishment costs we have incurred. We have returned a number of vehicles from consignment during the first quarter of 2021. The ramp up of sourcing during the fourth quarter of 2020 put pressure on our processing centers resulting in slower vehicle processing time and increased days to sale. The expenses associated with these returned vehicles reduced our gross profit during the first quarter of 2021. We have taken steps to match our intake of vehicles under this arrangement to our sales and reconditioning capacity. Our hubs with integrated vehicle processing centers allow us to add value by efficiently reconditioning vehicles and quickly moving them to market. Our step-by-step process includes all aspects of preparing a vehicle for sale, including a 133-point inspection, mechanical and body reconditioning, paint, detail, merchandising and imaging. Our reconditioning program is driven by years of experience that allows us to cost-effectively repair, enhance and process a large number of vehicles. 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 deep industry experience and taking into account a combination of factors, including proximity to buyers and sellers, transportation costs, access to inbound inventory and sustainable low-cost labor. All of these initiatives are designed to lower reconditioning costs per unit.
Regional Hub Network
Through our full service e-commerce website and eleven regional hubs, we provide a seamless shopping experience for today's modern vehicle buyer, allowing our nationwide retail customers to fully transact online, in-person or a combination of both (including contactless delivery). We have a full-spectrum of inventory, including high-value and commercial vehicles, available for delivery anywhere in theU.S. , with sales completed in all 50 states. Our regional hubs allow for test drives and on-site purchase, which we plan to expand to nationwide coverage.
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. 33
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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 strategy of opening at least 14 new hubs in 2021 and more than 40 hubs by the end of 2023. Three new hubs were opened in the first three months endedMarch 31, 2021 inMerritt Island, Florida ,Nashville, Tennessee , andSeattle, Washington . 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. As we increase the number of retail hubs, we expect to raise service levels, enabling increased per vehicle economics. 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(TM) continues to develop as a more established alternative and asCarLotz expands to service buyers and sellers nationwide, we anticipate substantial growth with our existing commercial sellers.
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, the commercialization of our proprietary technology solutions for our corporate vehicle sourcing partners and the creation of industry standards for retail remarketing communication and marketplace analytics.
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 deep industry experience and taking into account a combination of factors, including proximity to buyers and sellers, transportation costs, access to inbound inventory and sustainable low-cost labor. 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 to cover appearance, roadside assistance, key insurance and wheel and tire production, (ii) expansion of our digital wholesale remarketing alternatives for corporate vehicle sourcing partners by building an in-house wholesale vehicle market for those vehicles that we do not sell through our retail channel and (iii) 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. Due to our rapid growth, our overall sales patterns to date have not reflected the general seasonality of the used vehicle industry, but we expect this to change once our business and markets mature. 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.
Impact of COVID-19
InMarch 2020 , theWorld Health Organization declared the outbreak and spread of the COVID-19 virus a pandemic. During initial shelter in place orders and economic shutdowns, we saw a decrease in sales activity as consumers for the most part stayed home during the months of March through May of 2020. As our sales began to return to pre-COVID-19 levels late in the second quarter of 2020, the ongoing OEM plant shut-downs and repossession moratoriums limited vehicle supply from our corporate vehicle sourcing partners through most of the third quarter. During this time, we maintained our aggressive cost cutting measures by limiting marketing expense and inventory purchases in an effort to preserve liquidity. As we exited the third quarter and relaxed our capital preservation strategy, we saw record consignment and inventory volume that led to record quarterly unit sales and revenue in the fourth quarter of 2020 and first quarter of 2021. 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. 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, certain automobile manufacturers have slowed production of new vehicles. The reduction in supply of new vehicles has limited the supply of used vehicles, and may continue to do so in the near term. We cannot provide assurance of the ultimate significance and duration of COVID-19's 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 on our customers and corporate vehicle sourcing partners. However, we are optimistic that we will see continued economic recovery through the remainder of the fiscal year endingDecember 31, 2021 due to the widespread distribution of the COVID-19 vaccine and the relaxation of economic restrictions. 35 Table of Contents 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 March 31, 2021 2020 Retail vehicles sold 2,554 1,453 Number of hubs 11 8 Average monthly unique visitors 178,783 56,931 Vehicles available for sale 1,581 1,681 Retail gross profit per unit$ 1,182 $ 1,637 Percentage of unit sales via consignment 82 % 48 % 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 return policy. The number of retail vehicles sold is the primary contributor to our revenues and, indirectly, 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 individualwho 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. Until we reach an optimal pooled inventory level, 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.
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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, each of which generates potential additional revenue from also 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 our competitive advantage in the market.
Components of Results of Operations
Revenues
Retail Vehicle Sales
CarLotz 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 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 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. Extended warranties sold beginningJanuary 1, 2019 are serviced by a company owned by a major shareholder. 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 When a customer requests a vehicle lease, we may enter into a lease with the customer for a vehicle owned by us. Income received for leases of owned vehicles under noncancelable operating leases is recorded in Lease income, net in the consolidated statements of operations.
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.
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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 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 expense and income 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$30 million revolving floor plan facility with Ally. 38 Table of Contents Results of Operations The following table presents our consolidated statements of operations for the periods indicated: Three Months Ended March 31, 2021 2020 Revenues: Retail vehicle sales$ 50,383 $ 21,042 Wholesale vehicle sales 4,568 3,311 Finance and insurance, net 1,554 892 Lease income, net 107 145 Total Revenues 56,612 25,390 Cost of sales (exclusive of depreciation) 54,604 22,918 Gross Profit 2,008 2,472 Operating Expenses: Selling, general and administrative 18,873 3,916 Stock-based compensation expense 41,963 34 Depreciation expense 383 100 Management fee expense - related party
2 62 Total Operating Expenses 61,221 4,112 Loss from Operations (59,213) (1,640) Interest Expense 175 149 Other Income (Expense), net Change in fair value of Merger warrants liability 12,358 -
Change in fair value of redeemable convertible preferred stock tranche obligation
- 284
Change in fair value of earnout provision 31,846 -
Other income (expense) 162 3
Total Other Income (Expense), net 44,366 287
Loss Before Income Tax Expense (15,022) (1,502)
Income tax expense - 5
Net Loss $ (15,022) $ (1,507) 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 lease customers and
the related leases we enter into with third party lessors.
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Three Months Ended
The following table presents certain information from our condensed consolidated statements of operations by channel:
Three Months Ended March 31,
2021 2020 Change
($ in thousands, except per unit metrics)
Revenue:
Retail vehicle sales $ 50,383 $ 21,042 139.4 %
Wholesale vehicle sales 4,568 3,311 38.0 %
Finance and insurance, net 1,554 892 74.2 %
Lease income, net 107 145 (26.2) %
Total revenues 56,612 25,390 123.0 %
Cost of sales:
Retail vehicle cost of sales $ 48,917 19,555 150.2 %Wholesale vehicle cost of sales 5,687 3,363 69.1 % Total cost of sales$ 54,604 $ 22,918 138.3 % Gross profit: Retail vehicle gross profit$ 1,466 $ 1,487 (1.4) % Wholesale vehicle gross profit (1,119) (52) (2,051.9) % Finance and insurance gross profit 1,554
892 74.2 %
Lease income, net 107 145 (26.2) %
Total gross profit $ 2,008 $ 2,472 (18.8) %
Retail gross profit per unit(1):
Retail vehicles gross profit $ 1,466 $ 1,487 (1.4) %
Finance and insurance gross profit 1,554 892 74.2 %
Total retail vehicles and finance and insurance
gross profit $ 3,020 $ 2,379 26.9 %
Retail vehicles unit sales 2,554 1,453 75.8 %
Retail vehicles gross profit per unit $ 1,182 $ 1,637 (27.8) %
Gross profit per unit is calculated as gross profit for retail vehicles and (1) 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$29.3 million , or 139.4%, to$50.4 million during the three months endedMarch 31, 2021 , from$21.0 million in the comparable period in 2020. The increase was primarily driven by an increase in average sale price per unit of$5,260 and an increase in retail vehicle unit sales to 2,554 retail vehicles in the three months endedMarch 31, 2021 , compared to 1,453 retail vehicles in the comparable period in 2020. The three months endedMarch 31, 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 sales were up 63%, with the balance of the increase coming from hubs we have opened in 2021. Wholesale Vehicle Revenue Wholesale vehicle revenue increased by$1.3 million , or 38.0%, to$4.6 million during the three months endedMarch 31, 2021 , from$3.3 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. 40 Table of Contents Finance and Insurance (F&I)
F&I revenue increased by$0.7 million , or 74.2%, to$1.6 million during the three months endedMarch 31, 2021 , from$0.9 million in the comparable period in 2020. This increase in F&I gross profit was driven by our increase in retail unit sales and higher average selling price.
Lease Income, net
Lease income, net was unchanged at
Cost of Sales
Cost of sales increased by$31.7 million , or 138.3%, to$54.6 million during the three months endedMarch 31, 2021 , from$22.9 million in the comparable period in 2020. The increase was primarily due to an increased average selling 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 was unchanged at$1.5 million during the three months endedMarch 31, 2021 , as compared to the comparable period in 2020. The level gross profit level was a result of a decrease in retail gross profit per unit for the three months endedMarch 31, 2021 , and from the retail gross profit per unit in the comparable period in 2020, which was offset by increased unit sales. The decrease in retail gross profit per unit was driven by an increase in days to sale, due to higher than ideal inventory levels, and a reduction in price on aged vehicles.
Wholesale Vehicle Gross Profit
Wholesale vehicle gross profit (loss) decreased by$1.0 million , to$(1.1) million during the three months endedMarch 31, 2021 , from$(0.1) million in the comparable period in 2020. The decrease was primarily driven by the number of delisted consignment units that were sent to wholesale, and the cost incurred to prepare those vehicles for sale at the time of consignment.
F&I Gross Profit
F&I revenue consists of 100% gross margin products for which gross profit equals
revenue. Therefore, changes in F&I gross profit and the associated drivers are
identical to changes in F&I revenue and the associated drivers.
Components of SG&A
Three Months Ended March 31,
2021 2020
($ in thousands)
Compensation and benefits(1) $ 6,856 $ 2,118
Marketing 2,526 541
Technology 2,925 158
Other costs(2) 6,566 1,099
Total selling, general and administrative expenses $
18,873
Compensation and benefits includes all payroll and related costs, including
benefits, and payroll taxes, except those related to preparing vehicles for (1) 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.
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(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$15.0 million , to$18.9 million during the three months endedMarch 31, 2021 , from$4.0 million in the comparable period in 2020. Compensation and benefits increased$4.7 million due to increased corporate headcount and new hub openings, marketing expense increased$2.0 million in connection with higher levels of inventory and our national expansion, technological expense increased$2.8 million due to the technological transformation the Company has begun, and other costs increased$5.5 million , primarily due to legal, accounting and insurance costs related to being a public company.
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,CarLotz has generally operated at a loss for most periods.CarLotz expects that as it adds hubs as part of its planned expansion and brings them to maturity, it will continue to operate at a loss until we achieve scale and are able to leverage our operating costs. We believe we have sufficient funds to achieve scale and operating leverage until the time when we are able to fund additional expansion with cash generated from operating activities. However, if the funds from the Merger are not sufficient to fully fund the planned expansion of our business, we may need to engage in equity or debt financings to secure additional funds. 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
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. 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. 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. 42 Table of Contents Advances under the Ally Facility will bear interest at a per annum rate designated from time to time by the Lender and will be 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. 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. 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. As ofMarch 31, 2021 , we had cash and cash equivalents, restricted cash and short-term marketable securities of$248.2 million . We believe our available cash, restricted cash, short-term marketable securities and liquidity available under the Ally Facility are sufficient to fund our operations and expansion plans for at least the next 12 months.
Cash Flows - Three Months Ended
The following table summarizes our cash flows for the periods indicated:
Three Months Ended
March 31,
2021 2020
($ in thousands)
Cash Flow Data:
Net cash provided by (used in) operating activities $ (19,600) $ 1,125
Net cash provided by (used in) investing activities (219,486) (659)
Net cash provided by (used in) financing activities 310,746 (1,710)
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Operating Activities
For the three months ended March 31, 2021 , net cash used in operating activities
was $(19.6) million , primarily driven by net loss of $(15.0) million adjusted
for non-cash charges of $(1.9) million and net changes in our operating assets
and liabilities of $(2.7) million . The non-cash adjustments primarily relate to
a decrease in fair value of the warrants and earnout shares of $44.2 million ,
partially offset by an increase in stock compensation of $(42.0) million . The
changes in operating assets and liabilities are primarily driven by an increase
in other current assets of $5.9 million , an increase in accounts receivable of
$5.2 million , and an increase in other long-term assets of $3.0 million ,
partially offset by an increase in accrued expenses of $(5.9) million , an
increase in accounts payable of $(3.1) million , and a decrease in inventories of
$(2.0) million .
For the three months ended March 31, 2020 , net cash provided by operating
activities was $1.1 million , primarily driven by net changes in our operating
assets and liabilities of $2.8 million and net loss of $(1.5) million , adjusted
for non-cash charges of $(0.1) million . The changes in operating assets and
liabilities were primarily driven by a decrease in inventories of $(1.8) million
and a decrease in accounts receivable of $(1.2) million , partially offset by a
decrease in accounts payable of $(0.3) million . The non-cash adjustments
primarily relate to an increase in fair value of the preferred stock tranche
obligation of $0.3 million and an increase in depreciation and amortization
expense of property and equipment of $0.1 million .
Investing Activities
For the three months endedMarch 31, 2021 , net cash used in investing activities was$(219.5) million , primarily driven by purchases of marketable securities of$(217.7) million and the purchase of property and equipment of$(1.7) million . For the three months endedMarch 31, 2020 , net cash used in investing activities of$(0.7) million was primarily driven by purchases of marketable securities of$(0.4) million and by the purchase of lease vehicles of$(0.2) million .
Financing Activities
For the three months endedMarch 31, 2021 , net cash provided by financing activities was$310.7 million , primarily driven by the issuance of common stock to the PIPE investors and Former CarLotz shareholders of$319.9 million , partially offset by the repayment of debt of$(12.2) million and the payment of cash consideration on options of$(2.5) million , partially offset by borrowings on the floorplan facility of$9.2 million . For the three months endedMarch 31, 2020 , net cash used in financing activities was$(1.7) million , primarily driven by repayment of the floor plan note payable of$(11.2) million , partially offset by borrowings on the floor plan facility of$7.1 million . Contractual Obligations
The following table includes aggregated information about contractual
obligations that affect our liquidity and capital needs. As of
Payments Due by Period
Less than 1 More than
Total Year 1 - 3 Years 3 - 5 Years 5 years
($ in thousands)
Floor plan facility(1) $ 4,125 $ 4,125 $ - $ - $ -
Operating lease obligations 18,236 2,158 7,210 4,891 3,977
Total $ 22,361 $ 6,283 $ 7,210 $ 4,891 $ 3,977
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Represents the principal amount outstanding as of
uncertainty of forecasting the timing of expected variable interest rate (1) 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 within 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
As a result of activity throughMarch 31, 2021 , we are supplementing the Critical Accounting Policy and Estimates section included 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 with the below disclosure.
Determination of the Fair Value of Financial Instruments
Estimated fair value of warrants
Warrants that were issued byAcamar Partners and continue to exist following the closing of the Merger are accounted for as freestanding financial instruments. These warrants are classified as liabilities on our condensed consolidated balance sheet and are recorded at their estimated fair value. At the end of each reporting period, changes in the estimated fair value during the period are recorded in our condensed consolidated statement of operations. We will continue to adjust these liabilities for changes in fair value until the earlier of their exercise, termination or other form of settlement. The estimated fair value of the warrants is determined by using the market value in an active trading market.
Estimated fair value of earnout provision
Before the contingency is met, the earnout shares will be classified as a liability under the FASB's ASC Topic 815, so changes in the fair value of the earnout shares in future periods will be recognized in the statement of operations. The estimated fair value of the liability is determined by using a Monte-Carlo simulation model. The accounting for the earnout shares was also evaluated under ASC Topic 480 to determine if the arrangement should be classified as a liability. As part of that analysis, it was determined that the earnout shares are freestanding and not liability classified. It was next evaluated whether the earnout shares represent a derivative instrument pursuant to ASC Topic 815. Paragraph ASC 815-10-15-74(a) states that a reporting entity shall not consider contracts that are both (a) indexed to an entity's own stock and (b) classified in stockholders equity in its statement of financial position to be derivative instruments. In order to conclude that the earnout shares meet this scope exception and whether they should be accounted for as equity under ASC 815-40, it was evaluated whether the earnout shares meet both of these requirements. The Merger Agreement contains a change in control provision that could impact the settlement of the earnout shares and therefore results in the earnout shares being classified as a liability pursuant to ASC 815.
There have been no additional changes to our critical accounting policies during
the three months ended
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.
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