CarLotz, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from _____ to _____
Commission file number 001-38818
CarLotz, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 83-2456129 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 3301 W. Moore Street | Richmond | Virginia | 23230 | ||||||||
| (Address of principal executive offices, including zip code) | |||||||||||
Registrant’s telephone number, including area code: (804) 510-0744
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A common stock, par value $0.0001 per share | LOTZ | The Nasdaq Global Market | ||||||
| Redeemable warrants, exercisable for Class A common stock at an exercise price of $11.50 per share | LOTZW | The Nasdaq Global Market | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | ||||||||||||||
Non-accelerated filer | ¨ | Smaller reporting company | ☐ | ||||||||||||||
Emerging growth company | x | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
The registrant had outstanding 114,218,814 shares of common stock as of May 6, 2022.
CarLotz, Inc.
TABLE OF CONTENTS
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i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
CarLotz, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 75,328 | $ | 75,029 | |||||||
| Restricted cash | 4,011 | 4,336 | |||||||||
| Marketable securities – at fair value | 74,109 | 116,589 | |||||||||
| Accounts receivable, net | 6,922 | 8,206 | |||||||||
| Inventories | 46,095 | 40,985 | |||||||||
| Other current assets | 10,741 | 4,705 | |||||||||
| Total Current Assets | 217,206 | 249,850 | |||||||||
| Marketable securities – at fair value | 971 | 1,941 | |||||||||
| Property and equipment, net | 13,042 | 22,628 | |||||||||
| Capitalized website and internal-use software costs, net | 13,385 | 13,716 | |||||||||
| Operating lease assets | 49,608 | — | |||||||||
| Finance lease assets, net | 11,811 | — | |||||||||
| Lease vehicles, net | 2,223 | 1,596 | |||||||||
| Other assets | 553 | 558 | |||||||||
| Total Assets | $ | 308,799 | $ | 290,289 | |||||||
| Liabilities and Stockholders’ Equity (Deficit) | |||||||||||
| Current Liabilities: | |||||||||||
| Current portion of finance lease liabilities | $ | 560 | $ | 509 | |||||||
| Floor plan notes payable | 22,052 | 27,815 | |||||||||
| Accounts payable | 7,914 | 6,352 | |||||||||
| Accrued expenses | 14,369 | 14,428 | |||||||||
| Current portion of operating lease liabilities | 6,810 | — | |||||||||
| Other current liabilities | 662 | 754 | |||||||||
| Total Current Liabilities | 52,367 | 49,858 | |||||||||
| Finance lease liabilities, less current portion | 12,080 | 12,206 | |||||||||
| Operating lease liabilities, less current portion | 45,076 | — | |||||||||
| Earnout shares liability | 3,650 | 7,679 | |||||||||
| Merger warrants liability | 4,691 | 6,291 | |||||||||
| Other liabilities | 651 | 744 | |||||||||
| Total Liabilities | 118,515 | 76,778 | |||||||||
| Commitments and Contingencies (Note 15) | — | — | |||||||||
| Stockholders’ Equity (Deficit): | |||||||||||
Common stock, $0.0001 par value; 500,000,000 authorized shares, 114,111,796 and 113,996,401 shares issued and outstanding at March 31, 2022 and December 31, 2021 | 11 | 11 | |||||||||
| Additional paid-in capital | 289,191 | 287,509 | |||||||||
| Accumulated deficit | (98,752) | (73,916) | |||||||||
| Accumulated other comprehensive (loss) income | (166) | (93) | |||||||||
| Total Stockholders’ Equity (Deficit) | 190,284 | 213,511 | |||||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | 308,799 | $ | 290,289 | |||||||
See notes to condensed consolidated financial statements.
1
CarLotz, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except share and per share data)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenues: | |||||||||||
| Retail vehicle sales | $ | 50,588 | $ | 50,383 | |||||||
| Wholesale vehicle sales | 8,575 | 4,568 | |||||||||
| Finance and insurance, net | 3,705 | 1,554 | |||||||||
| Lease income, net | 146 | 107 | |||||||||
| Total Revenues | 63,014 | 56,612 | |||||||||
| Cost of sales (exclusive of depreciation) | 60,936 | 54,604 | |||||||||
| Gross Profit | 2,078 | 2,008 | |||||||||
Operating Expenses: | |||||||||||
| Selling, general and administrative | 27,674 | 18,873 | |||||||||
| Stock-based compensation expense | 1,684 | 41,963 | |||||||||
| Depreciation and amortization expense | 1,789 | 383 | |||||||||
| Management fee expense – related party | — | 2 | |||||||||
| Total Operating Expenses | 31,147 | 61,221 | |||||||||
| Loss from Operations | (29,069) | (59,213) | |||||||||
| Interest expense | 617 | 175 | |||||||||
| Other Income, net | |||||||||||
| Change in fair value of Merger warrants liability | 1,600 | 12,358 | |||||||||
| Change in fair value of earnout shares | 4,029 | 31,846 | |||||||||
| Other income (expense) | (779) | 162 | |||||||||
| Total Other Income, net | 4,850 | 44,366 | |||||||||
| Loss Before Income Tax Expense | (24,836) | (15,022) | |||||||||
| Income tax expense | — | — | |||||||||
| Net Loss | $ | (24,836) | $ | (15,022) | |||||||
| Net Loss per Share, basic and diluted | $ | (0.22) | $ | (0.15) | |||||||
| Weighted-average Shares used in Computing Net Loss per Share, basic and diluted | 114,054,597 | 100,817,385 | |||||||||
See notes to condensed consolidated financial statements.
2
CarLotz, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss)
(Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | (24,836) | $ | (15,022) | |||||||
| Other Comprehensive (Loss), net of tax: | |||||||||||
| Unrealized (losses) gains on marketable securities arising during the period | (73) | (131) | |||||||||
| Tax effect | — | — | |||||||||
| Unrealized (losses) gains on marketable securities arising during the period, net of tax | (73) | (131) | |||||||||
| Reclassification adjustment for realized losses | — | — | |||||||||
| Tax effect | — | — | |||||||||
| Reclassification adjustment for realized losses, net of tax | — | — | |||||||||
| Other Comprehensive (Loss), net of tax | (73) | (131) | |||||||||
| Total Comprehensive (Loss) | $ | (24,909) | $ | (15,153) | |||||||
See notes to condensed consolidated financial statements.
3
CarLotz, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity (Deficit)
Three Months Ended March 31, 2022 and 2021
(Unaudited)
(In thousands, except share data)
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2021 | — | $ | — | 113,996,401 | $ | 11 | $ | 287,509 | $ | (73,916) | $ | (93) | $ | 213,511 | ||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (24,836) | — | (24,836) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | (73) | (73) | ||||||||||||||||||||||||||||||||||||||||||
| Cashless exercise of options | — | — | 44,424 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 1,684 | — | — | 1,684 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to settle vested restricted stock units | — | — | 70,971 | — | (2) | — | — | (2) | ||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2022 | — | $ | — | 114,111,796 | $ | 11 | $ | 289,191 | $ | (98,752) | $ | (166) | $ | 190,284 | ||||||||||||||||||||||||||||||||||||
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss) Income | Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 31, 2020 | 2,034,751 | $ | 17,560 | 37,881,435 | $ | 4 | $ | 3,221 | $ | (34,037) | $ | 15 | $ | (30,797) | ||||||||||||||||||||||||||||||||||||
| Retroactive application of recapitalization | (2,034,751) | (17,560) | 20,739,607 | 2 | 17,558 | — | — | 17,560 | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted balance, beginning of period | — | — | 58,621,042 | 6 | 20,779 | (34,037) | 15 | (13,237) | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (15,022) | — | (15,022) | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | (131) | (131) | ||||||||||||||||||||||||||||||||||||||||||
| Accrued dividends on redeemable convertible preferred stock | — | — | — | — | (19) | — | — | (19) | ||||||||||||||||||||||||||||||||||||||||||
| PIPE issuance | — | — | 12,500,000 | 1 | 124,999 | — | — | 125,000 | ||||||||||||||||||||||||||||||||||||||||||
| Merger financing | — | — | 38,194,390 | 4 | 309,995 | — | — | 309,999 | ||||||||||||||||||||||||||||||||||||||||||
| Consideration to existing shareholders of Former CarLotz, net of accrued dividends | — | — | — | — | (62,693) | — | — | (62,693) | ||||||||||||||||||||||||||||||||||||||||||
| Transaction costs and advisory fees | — | — | — | — | (47,579) | — | — | (47,579) | ||||||||||||||||||||||||||||||||||||||||||
| Settlement of redeemable convertible preferred stock tranche obligation | — | — | — | — | 2,832 | — | — | 2,832 | ||||||||||||||||||||||||||||||||||||||||||
| Cashless exercise of options | — | — | 54,717 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Cash consideration paid to Former Carlotz optionholders | — | — | — | — | (2,465) | — | — | (2,465) | ||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 41,963 | — | — | 41,963 | ||||||||||||||||||||||||||||||||||||||||||
| Earnout liability | — | — | — | — | (74,284) | — | — | (74,284) | ||||||||||||||||||||||||||||||||||||||||||
| Merger warrants liability | — | — | — | — | (39,025) | — | — | (39,025) | ||||||||||||||||||||||||||||||||||||||||||
| KAR/AFC note payable conversion | — | — | 3,546,984 | — | 3,625 | — | — | 3,625 | ||||||||||||||||||||||||||||||||||||||||||
| KAR/AFC warrant exercise | — | — | 752,927 | — | 144 | — | — | 144 | ||||||||||||||||||||||||||||||||||||||||||
| Balance March 31, 2021 | — | $ | — | 113,670,060 | $ | 11 | $ | 278,272 | $ | (49,059) | $ | (116) | $ | 229,108 | ||||||||||||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
4
CarLotz, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash Flow from Operating Activities | |||||||||||
| Net loss | $ | (24,836) | $ | (15,022) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities | |||||||||||
| Depreciation and amortization – property, equipment, ROU assets and capitalized software | 4,097 | 105 | |||||||||
| Amortization and accretion - marketable securities | 440 | 238 | |||||||||
| Depreciation – lease vehicles | 85 | 15 | |||||||||
| Loss on marketable securities | — | — | |||||||||
| Provision for doubtful accounts | (30) | — | |||||||||
| Stock-based compensation expense | 1,684 | 41,963 | |||||||||
| Change in fair value of Merger warrants liability | (1,600) | (12,358) | |||||||||
| Change in fair value of earnout shares | (4,029) | (31,846) | |||||||||
| Change in Operating Assets and Liabilities: | |||||||||||
| Accounts receivable | 1,314 | (5,192) | |||||||||
| Inventories | (5,110) | 1,991 | |||||||||
| Other current assets | (6,036) | (5,868) | |||||||||
| Other assets | 5 | (3,038) | |||||||||
| Accounts payable | 1,562 | 3,140 | |||||||||
| Accrued expenses | 975 | 6,187 | |||||||||
| Accrued expenses – related party | — | (229) | |||||||||
| Other current liabilities | (92) | 559 | |||||||||
| Other liabilities | (93) | (245) | |||||||||
| Net Cash Used in Operating Activities | (31,664) | (19,600) | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Purchase of property and equipment | (4,091) | (586) | |||||||||
| Capitalized website and internal-use software costs | (611) | (1,154) | |||||||||
| Purchase of marketable securities | (21,974) | (217,689) | |||||||||
| Proceeds from sales of marketable securities | 64,917 | 59 | |||||||||
| Purchase of lease vehicles | (712) | — | |||||||||
| Net Cash (Used in) Provided by Investing Activities | 37,529 | (219,370) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Payments made on finance leases | (126) | — | |||||||||
| PIPE issuance | — | 125,000 | |||||||||
| Merger financing | — | 309,999 | |||||||||
| Payment made on accrued dividends | — | (4,853) | |||||||||
| Payments to existing shareholders of Former CarLotz | — | (62,693) | |||||||||
| Transaction costs and advisory fees | — | (47,579) | |||||||||
| Payments made on cash considerations associated with stock options | — | (2,465) | |||||||||
| Repayment of Paycheck Protection Program loan | — | (1,749) | |||||||||
| Payments made on note payable | — | (3,000) | |||||||||
| Payments on floor plan notes payable | (41,728) | (11,150) | |||||||||
| Borrowings on floor plan notes payable | 35,965 | 9,236 | |||||||||
See notes to condensed consolidated financial statements.
5
| Payments made for tax on equity award transactions | (2) | — | |||||||||
| Net Cash (Used in) Provided by Financing Activities | (5,891) | 310,746 | |||||||||
| Net Change in Cash and Cash Equivalents Including Restricted Cash | (26) | 71,776 | |||||||||
| Cash and cash equivalents and restricted cash, beginning | 79,365 | 2,813 | |||||||||
| Cash and cash equivalents and restricted cash, ending | $ | 79,339 | $ | 74,589 | |||||||
| Supplemental Disclosure of Cash Flow Information | |||||||||||
| Cash paid for interest | $ | 615 | $ | 402 | |||||||
| Supplementary Schedule of Non-cash Investing and Financing Activities: | |||||||||||
| Transfer from lease vehicles to inventory | $ | — | $ | 100 | |||||||
| KAR/AFC exercise of stock warrants | — | (144) | |||||||||
| KAR/AFC conversion of notes payable | — | (3,625) | |||||||||
| Convertible redeemable preferred stock tranche obligation expiration | — | (2,832) | |||||||||
| Capitalized website and internal use software costs accrued | — | (1,400) | |||||||||
See notes to condensed consolidated financial statements.
6
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Note 1 Description of Business
Defined Terms
Unless otherwise indicated or unless the context otherwise requires, the following terms used herein shall have the following meanings:
•references to “CarLotz,” “we,” “us,” “our” and the “Company” are to CarLotz, Inc. and its consolidated subsidiaries;
•references to “Acamar Partners” refer to the Company for periods prior to the consummation of the Merger referred to below;
•references to “Acamar Sponsor” are to Acamar Partners Sponsor I LLC; and
•references to the “Merger” are to the merger pursuant to that certain Agreement and Plan of Merger, dated as of October 21, 2020 (as amended by Amendment No. 1, dated December 16, 2020, the “Merger Agreement”), by and among CarLotz, Inc. (f/k/a Acamar Partners Acquisition Corp.) (the “Company”), Acamar Partners Sub, Inc., a wholly owned subsidiary of CarLotz, Inc. (“Merger Sub”), and CarLotz Group, Inc. (f/k/a CarLotz, Inc.) (“Former CarLotz”), pursuant to which Merger Sub merged with and into Former CarLotz, with Former CarLotz surviving as the surviving company and as a wholly owned subsidiary of the Company.
The Company is a used vehicle consignment and Retail RemarketingTM company based in Richmond, Virginia. The Company operates an innovative and one-of-a-kind consumer and commercial used vehicle consignment and sales business model, with an online marketplace and twenty-two retail hub locations throughout the United States, including in Alabama, California, Colorado, Georgia, Florida, Illinois, North Carolina, Tennessee, Texas, Virginia and Washington State.
Subsidiaries are consolidated when the parent is deemed to have control over the subsidiaries’ operations.
Subsidiary Operations
CarLotz, Inc. owns 100% of CarLotz Group, Inc. (a Delaware corporation), which owns 100% of CarLotz, Inc. (an Illinois corporation), CarLotz Nevada, LLC (a Delaware LLC), CarLotz California, LLC (a California LLC), CarLotz Logistics, LLC (a Delaware LLC), Orange Grove Fleet Solutions, LLC (a Virginia LLC), Orange Peel Protection Reinsurance Co. Ltd. (a Turks and Caicos Islands, British West Indies company) and Orange Peel LLC (a Virginia LLC), which owns 100% of Orange Peel Reinsurance, Ltd. (a Turks and Caicos Islands, British West Indies company).
Basis of Presentation
On January 21, 2021 (the “Closing Date”), the Company consummated the merger pursuant to that certain Agreement and Plan of Merger, dated as of October 21, 2020, by and among the Company, Merger Sub and Former CarLotz, as amended by Amendment No. 1 to the Agreement and Plan of Merger, dated December 16, 2020, by and among the Company, Merger Sub and Former CarLotz (See Note 3 “Merger” for further discussion).
Pursuant to the terms of the Merger Agreement, a business combination between the Company and Former CarLotz was effected through the merger of Merger Sub with and into Former CarLotz with Former CarLotz continuing as the surviving company. Notwithstanding the legal form of the Merger pursuant to the Merger Agreement, the Merger is accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (U.S. GAAP). Under this method of accounting, CarLotz is treated as the acquired company and Former CarLotz is treated as the acquiror for financial statement reporting and accounting purposes.
7
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
As a result of Former CarLotz being the accounting acquirer, the financial reports filed with the U.S. Securities and Exchange Commission (“SEC”) by the Company subsequent to the Merger are prepared “as if” Former CarLotz is the predecessor and legal successor to the Company. The historical operations of Former CarLotz are deemed to be those of the Company. Thus, the financial statements included in this report reflect (i) the historical operating results of Former CarLotz prior to the Merger, (ii) the combined results of the Company and Former CarLotz following the Merger on January 21, 2021, (iii) the assets and liabilities of Former CarLotz at their historical cost and (iv) the Company’s equity structure for all periods presented. The recapitalization of the number of shares of common stock attributable to the purchase of Former CarLotz in connection with the Merger is reflected retroactively to the earliest period presented and will be utilized for calculating earnings per share in all prior periods presented. No step-up basis of intangible assets or goodwill was recorded in the Merger transaction consistent with the treatment of the transaction as a reverse recapitalization of Former CarLotz.
In connection with the Merger, Acamar Partners Acquisition Corp. changed its name to CarLotz, Inc. The Company’s common stock is now listed on The Nasdaq Global Market under the symbol “LOTZ” and warrants to purchase the common stock at an exercise price of $11.50 per share are listed on The Nasdaq Global Market under the symbol “LOTZW”. Prior to the Merger, the Company neither engaged in any operations nor generated any revenue. Until the Merger, based on the Company’s business activities, it was a “shell company” as defined under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The accompanying interim condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to such rules and regulations. Therefore, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except for those related to recent accounting pronouncements adopted in the current fiscal year.
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in management’s opinion, include all adjustments, which consist of only normal recurring adjustments, necessary for the fair statement of the Company’s condensed consolidated balance sheet as of March 31, 2022 and its results of operations for the three months ended March 31, 2022 and 2021. The results for the three months ended March 31, 2022 are not necessarily indicative of the results expected for the current fiscal year or any other future periods.
Note 2 — Summary of Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies and for further information on accounting updates adopted in the prior year, see Note 2 to the audited consolidated financial statements.
During the three months ended March 31, 2022, there were no significant revisions to the Company’s significant accounting policies, other than those indicated herein related to the adoption of Leases Topic 842.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities.
Following the closing of the Merger, Former CarLotz equity holders at the effective time of the Merger will have the contingent right to receive, in the aggregate, up to 7,500,000 shares of common stock if, from the closing of the Merger until the fifth anniversary thereof, the reported closing trading price of the common stock exceeds certain thresholds. Estimating the change in fair value of the earnout liability for the earnout shares that could be earned by Former CarLotz equity holders at the effective time of the Merger requires determining both the fair value valuation model to use and inputs to the valuation model. The fair value of the earnout shares was estimated by utilizing a Monte-Carlo simulation model, which is a commonly used valuation model for this type of transaction. Inputs that have a significant effect on the earnout shares valuation include the expected volatility, starting stock price, expected term, risk-free interest rate and the earnout hurdles. See Note 6 — Fair Value of Financial Instruments.
Warrants that were issued by Acamar Partners (Merger warrants) and continue to exist following the closing of the Merger are accounted for as freestanding financial instruments. These warrants are classified as liabilities on the Company’s condensed
8
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
consolidated balance sheets and are recorded at their estimated fair value. The estimated fair value of the warrants is determined by using the market value in an active trading market. See Note 6 — Fair Value of Financial Instruments.
Beginning in the first quarter of 2020, the World Health Organization declared the outbreak and spread of the COVID-19 virus a pandemic. The outbreak is disrupting supply chains and impacting production and sales across a wide range of industries. The full economic impact of this pandemic has not been determined, including the impact on the Company’s suppliers, customers and credit markets. Due to the evolving and uncertain nature of COVID-19, it is reasonably possible that it could materially impact the Company’s estimates, particularly those noted above that require consideration of forecasted financial information, in the near to medium term. The ultimate impact will depend on numerous evolving factors that the Company may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and other economic and operational conditions the Company may face.
Restricted Cash
As of March 31, 2022 and December 31, 2021, restricted cash included approximately $4,011 and $4,336, respectively. The restricted cash is legally and contractually restricted as collateral for lines of credit, including floorplan, and for the payment of claims on the reinsurance companies.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising costs are included in selling, general and administrative expenses on the accompanying condensed consolidated statements of operations. Advertising expenses were approximately $3,154 and $2,526 for the three months ended March 31, 2022 and 2021, respectively.
Concentration of Credit Risk
Concentrations of credit risk with respect to accounts receivables are limited due to the large diversity and number of customers comprising the Company’s retail customer base.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard will affect all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. ASU 2016-02, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, and early adoption is permitted.
We adopted ASC 842 for the year beginning January 1, 2022 using the modified retrospective transition approach applied at the beginning of the period of adoption, which did not result in a cumulative-effect adjustment to retained earnings. Comparative periods presented in the financial statements continue to be presented in accordance with ASC 840. As permitted under the standard, we have elected the package of practical expedients for the transition to ASC 842, under which we did not reassess our prior conclusions regarding lease identification, lease classification, or initial direct costs for contracts existing as of the transition date. We have also elected to apply the following practical expedients for contracts existing as of the transition date and all new contracts after our adoption of ASC 842: 1) recognizing lease expense on a straight-line basis over the lease term for leases with a term of 12 months or less and not recognizing them on the balance sheet and 2) accounting for lease and non-lease components for all asset classes as a combined single unit of account. We have not elected the practical expedient related to all land easements nor the hindsight practical expedient.
The adoption of ASC 842 resulted in the recognition of $50.5 million of operating lease assets, which included an adjustment for deferred rent, and $52.6 million of operating lease liabilities on our opening consolidated balance sheet. We have
9
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
implemented new business processes, accounting policies, systems and internal controls as part of adopting the new standard. See Note 14 for additional information on leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13, as subsequently amended for various technical issues, is effective for emerging growth companies following private company adoption dates for fiscal years beginning after December 15, 2022 and for interim periods within those fiscal years. The Company is currently evaluating the impact of this standard to its financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for emerging growth companies following private company adoption dates in fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, with early adoption permitted, including adoption in an interim period. The Company is currently evaluating the impact of this standard on its financial statements.
Note 3 — Merger
On the Closing Date, the Company consummated the merger pursuant to that certain Agreement and Plan of Merger, dated as of October 21, 2020, by and among the Company, Merger Sub and Former CarLotz, as amended by Amendment No. 1, dated December 16, 2020, by and among the Company, Merger Sub and Former CarLotz.
Pursuant to the terms of the Merger Agreement, a business combination between the Company and Former CarLotz was effected through the merger of Merger Sub with and into Former CarLotz with Former CarLotz surviving as the surviving company.
The Merger was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Acamar Partners was treated as the “acquired” company for financial reporting purposes (See Note 1 - Description of the Business). Accordingly, for accounting purposes, the Merger was treated as the equivalent of Former CarLotz issuing stock for the net assets of Acamar Partners, accompanied by a recapitalization.
Prior to the Merger, Former CarLotz and Acamar Partners filed separate standalone federal, state and local income tax returns. As a result of the Merger, structured as a reverse acquisition for tax purposes, Acamar Partners was renamed CarLotz, Inc. and became the parent of the consolidated filing group, with Former CarLotz as a subsidiary.
| Recapitalization | |||||
| Cash - Acamar Partners’ trust and cash | $ | 309,999 | |||
| Cash - PIPE | 125,000 | ||||
| Less: consideration delivered to existing shareholders of Former CarLotz | (62,693) | ||||
| Less: consideration to pay accrued dividends | (4,853) | ||||
| Less: transaction costs and advisory fees paid | (47,579) | ||||
| Less: payments on cash considerations associated with stock options | (2,465) | ||||
| Net contributions from Merger and PIPE financing | 317,409 | ||||
| Liabilities relieved: preferred stock obligation | 2,832 | ||||
| Liabilities relieved: KAR/AFC note payable | 3,625 | ||||
| Liabilities relieved: historic warrant liability | 144 | ||||
| Less: earnout shares liability | (74,285) | ||||
| Less: Merger warrants liability | (39,024) | ||||
Merger warrants
10
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
The following is an analysis of the warrants to purchase shares of the Company’s stock deemed acquired as part of the Merger and outstanding during the three months ended March 31, 2022. There has been no change in outstanding stock warrants since the Merger.
March 31, 2022 | |||||
| Stock warrants outstanding - Public | 10,185,774 | ||||
| Stock warrants outstanding - Private | 6,074,310 | ||||
| Stock warrants cancelled | — | ||||
| Stock warrants exercised | — | ||||
| Stock warrants outstanding | 16,260,084 | ||||
Earnout Shares
Former CarLotz equity holders at the closing of the Merger are entitled to receive up to an additional 6,945,732 earnout shares. The earnout shares will be issued to the beneficiaries if certain targets are met in the post-acquisition period. The earnouts for the earnout shares are subject to an earnout period, which is defined as the date 60 months following the consummation of the Merger. The Merger closed on January 21, 2021, and the earnout period expires January 21, 2026. The earnout shares will be issued if any of the following conditions are achieved following January 21, 2021:
i.If at any time during the 60 months following the Closing Date (the first business day following the end of such period, the “Forfeiture Date”), the closing trading price of the common stock is greater than $12.50 over any 20 trading days within any 30 trading day period (the “First Threshold”), the Company will issue 50% of the earnout shares.
ii.If at any time prior to the Forfeiture Date, the closing trading price of the common stock is greater than $15.00 over any 20 trading days within any 30 trading day period (the “Second Threshold”), the Company will issue 50% of the earnout shares.
iii.If either the First Threshold or the Second Threshold is not met on or before the Forfeiture Date, any unissued earnout shares are forfeited. All unissued earnout shares will be issued if there is a change of control of the Company that will result in the holders of the common stock receiving a per share price equal to or in excess of $10.00 (as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations and similar transactions affecting the common stock) prior to the Forfeiture Date.
Before the contingency is met, the earnout shares will be classified as a liability under the FASB’s Accounting Standards Codification (“ASC”) Topic 815, so changes in the fair value of the earnout shares in future periods will be recognized in the condensed consolidated statement of operations. The estimated fair value of the liability is determined by using a Monte-Carlo simulation model.
Note 4 — Revenue Recognition
Disaggregation of Revenue
The significant majority of the Company’s revenue is derived from contracts with customers related to the sales of vehicles. In the following tables, revenue is disaggregated by major lines of goods and services and timing of transfer of goods and services. The Company has determined that these categories depict how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.
11
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
The tables below include disaggregated revenue under ASC 606 (Revenue from Contracts with Customers):
| Three Months Ended March 31, 2022 | |||||||||||||||||
| Vehicle Sales | Fleet Management | Total | |||||||||||||||
| Retail vehicle sales | $ | 50,588 | $ | — | $ | 50,588 | |||||||||||
| Wholesale vehicle sales | 8,575 | — | 8,575 | ||||||||||||||
| Finance and insurance, net | $ | 3,705 | $ | — | $ | 3,705 | |||||||||||
| Lease income, net | — | 146 | 146 | ||||||||||||||
| Total Revenues | $ | 62,868 | $ | 146 | $ | 63,014 | |||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||
| Vehicle Sales | Fleet Management | Total | |||||||||||||||
| Retail vehicle sales | $ | 50,383 | $ | — | $ | 50,383 | |||||||||||
| Wholesale vehicle sales | 4,568 | — | 4,568 | ||||||||||||||
| Finance and insurance, net | $ | 1,554 | $ | — | $ | 1,554 | |||||||||||
| Lease income, net | — | 107 | 107 | ||||||||||||||
| Total Revenues | $ | 56,505 | $ | 107 | $ | 56,612 | |||||||||||
The following table summarizes revenues and cost of sales for retail and wholesale vehicle sales for the periods ended:
Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Retail vehicles: | |||||||||||
| Retail vehicle sales | $ | 50,588 | $ | 50,383 | |||||||
| Retail vehicle cost of sales | 52,415 | 48,917 | |||||||||
| Gross Profit – Retail Vehicles | $ | (1,827) | $ | 1,466 | |||||||
| Wholesale vehicles: | |||||||||||
| Wholesale vehicle sales | $ | 8,575 | $ | 4,568 | |||||||
| Wholesale vehicle cost of sales | 8,521 | 5,687 | |||||||||
| Gross Profit – Wholesale Vehicles | $ | 54 | $ | (1,119) | |||||||
Retail Vehicle Sales
The Company sells used vehicles to retail customers through its 22 retail hub locations. The transaction price for used vehicles is a fixed amount as set forth in the customer contract, and the revenue recognized by the Company is inclusive of the agreed upon transaction price and any service fees. Customers frequently trade-in their existing vehicle to apply toward the transaction price of a used vehicle. Trade-in vehicles represent noncash consideration, which the Company measures at estimated fair value of the vehicle received on the trade. The Company satisfies its performance obligation and recognizes revenue for used vehicle sales at a point in time when the title to the vehicle passes to the customer, at which point the customer controls the vehicle.
The Company receives payment for used vehicle sales directly from the customer at the time of sale or from third-party financial institutions within a short period of time following the sale if the customer obtains financing.
The Company’s exchange policy allows customers to initiate an exchange of a vehicle during the first three days or 500 miles after delivery, whichever comes first. An exchange reserve is immaterial based on the Company’s historical activity.
12
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Wholesale Vehicle Sales
Vehicles that do not meet the Company’s standards for retail vehicle sales, vehicles that did not sell through the retail channel within a reasonable period of time and vehicles that the Company determines offer greater financial benefit through the wholesale channel are sold through various wholesale methods. The Company satisfies its performance obligation and recognizes revenue for wholesale vehicle sales when the vehicle is sold at auction or directly to a wholesaler and title to the vehicle passes to the next owner.
Finance and Insurance, net
The Company provides customers with options for financing, insurance and extended warranties. Certain warranties are serviced by a company owned by a major stockholder. All other services are provided by third-party vendors, and the Company has agreements with each of these vendors giving the Company the right to offer such services.
When a customer selects a service from these third-party vendors, the Company earns a commission based on the actual price paid or financed. The Company concluded that it is an agent for these transactions because it does not control the products before they are transferred to the customer. Accordingly, the Company recognizes finance and insurance revenue at the point in time when the customer enters into the contract.
Note 5 — Marketable Securities
The following table summarizes amortized cost, gross unrealized gains and losses and fair values of the Company’s investments in fixed maturity debt securities as of March 31, 2022 and December 31, 2021:
March 31, 2022 | |||||||||||||||||||||||
Amortized Cost/ Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| U.S. Treasuries | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Corporate bonds | 30,216 | 2 | (114) | 30,104 | |||||||||||||||||||
| Municipal bonds | 21,990 | 5 | (40) | 21,955 | |||||||||||||||||||
| Commercial paper | 19,997 | — | — | 19,997 | |||||||||||||||||||
| Foreign governments | 2,491 | 2 | (21) | 2,472 | |||||||||||||||||||
| Total Fixed Maturity Debt Securities | $ | 74,694 | $ | 9 | $ | (175) | $ | 74,528 | |||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
Amortized Cost/ Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||
| U.S. Treasuries | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Corporate bonds | 57,460 | — | (72) | 57,388 | |||||||||||||||||||
| Municipal bonds | 28,325 | 5 | (10) | 28,320 | |||||||||||||||||||
| Commercial paper | 19,989 | — | — | 19,989 | |||||||||||||||||||
| Foreign governments | 12,291 | 2 | (18) | 12,275 | |||||||||||||||||||
| Total Fixed Maturity Debt Securities | $ | 118,065 | $ | 7 | $ | (100) | $ | 117,972 | |||||||||||||||
13
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
The amortized cost and fair value of the Company’s fixed maturity debt securities as of March 31, 2022 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Cost | Fair Value | ||||||||||
| Due in one year or less | $ | 73,667 | $ | 73,557 | |||||||
| Due after one year through five years | 731 | 694 | |||||||||
| Due after five years through ten years | 296 | 277 | |||||||||
| Total | $ | 74,694 | $ | 74,528 | |||||||
The following tables summarize the Company’s gross unrealized losses in fixed maturity securities as of March 31, 2022 and December 31, 2021:
March 31, 2022 | |||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Corporate bonds | $ | 29,890 | $ | (98) | $ | 209 | $ | (16) | $ | 30,099 | $ | (114) | |||||||||||||||||||||||
| Municipal bonds | 19,289 | (32) | 133 | (8) | 19,422 | (40) | |||||||||||||||||||||||||||||
| Foreign governments | 2,236 | (18) | 117 | (3) | 2,353 | (21) | |||||||||||||||||||||||||||||
| Total Fixed Maturity Debt Securities | $ | 51,415 | $ | (148) | $ | 459 | $ | (27) | $ | 51,874 | $ | (175) | |||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | ||||||||||||||||||||||||||||||
| Corporate bonds | $ | 56,902 | $ | (69) | $ | 376 | $ | (3) | $ | 57,278 | $ | (72) | |||||||||||||||||||||||
| Municipal bonds | $ | 19,945 | $ | (7) | $ | 340 | $ | (3) | $ | 20,285 | $ | (10) | |||||||||||||||||||||||
| Foreign governments | $ | 12,152 | $ | (18) | $ | — | $ | — | $ | 12,152 | $ | (18) | |||||||||||||||||||||||
| Total Fixed Maturity Debt Securities | $ | 88,999 | $ | (94) | $ | 716 | $ | (6) | $ | 89,715 | $ | (100) | |||||||||||||||||||||||
Unrealized losses shown in the tables above are believed to be temporary. Fair value of investments in fixed maturity debt securities change and are based primarily on market rates. As of March 31, 2022, the Company’s fixed maturity portfolio had 16 securities with gross unrealized losses totaling $27 that had been in loss positions in excess of 12 months and 99 securities with gross unrealized losses totaling $148 that had been in loss positions less than 12 months. No single issuer had a gross unrealized loss position greater than $21, or 0.7% of its amortized cost. As of December 31, 2021, the Company’s fixed maturity portfolio had 23 securities with gross unrealized losses totaling $(6) that had been in loss positions in excess of 12 months and 106 securities with gross unrealized losses totaling $(94) that had been in loss positions less than 12 months. No single issuer had a gross unrealized loss position greater than $12 (actual), or 0.4% of its amortized cost.
The following tables summarize cost and fair values of the Company’s investments in equity securities as of March 31, 2022 and December 31, 2021:
March 31, 2022 | |||||||||||
| Cost | Fair Value | ||||||||||
| Equity securities | $ | 430 | $ | 552 | |||||||
14
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
| December 31, 2021 | |||||||||||
| Cost | Fair Value | ||||||||||
| Equity securities | $ | 432 | $ | 558 | |||||||
Proceeds from sales and maturities, gross realized gains, gross realized losses and net realized gains (losses) from sales and maturities of fixed maturity securities for the three months ended March 31, 2022 and 2021 consisted of the following:
March 31, 2022 | |||||||||||||||||||||||
| Proceeds | Gross Realized Gains | Gross Realized Losses | Net Realized Gain | ||||||||||||||||||||
| Fixed maturity debt securities | $ | 64,911 | $ | — | $ | — | $ | — | |||||||||||||||
| Equity securities | — | — | — | — | |||||||||||||||||||
| Total Marketable Securities | $ | 64,911 | $ | — | $ | — | $ | — | |||||||||||||||
March 31, 2021 | |||||||||||||||||||||||
| Proceeds | Gross Realized Gains | Gross Realized Losses | Net Realized Gain | ||||||||||||||||||||
| Fixed maturity debt securities | $ | 59 | $ | — | $ | — | $ | — | |||||||||||||||
| Equity securities | — | — | — | — | |||||||||||||||||||
| Total Marketable Securities | $ | 59 | $ | — | $ | — | $ | — | |||||||||||||||
Note 6 — Fair Value of Financial Instruments
Items Measured at Fair Value on a Recurring Basis
As of March 31, 2022 and December 31, 2021, the Company held certain assets and liabilities that were required to be measured at fair value on a recurring basis.
The following tables are summaries of fair value measurements and hierarchy level as of:
| March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Equity securities | 552 | — | — | 552 | |||||||||||||||||||
| Fixed maturity debt securities, including cash equivalents | — | 118,347 | — | 118,347 | |||||||||||||||||||
| Total Assets | $ | 552 | $ | 118,347 | $ | — | $ | 118,899 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Merger warrants liability | 2,939 | 1,752 | — | 4,691 | |||||||||||||||||||
| Earnout shares liability | — | — | 3,650 | 3,650 | |||||||||||||||||||
| Total Liabilities | $ | 2,939 | $ | 1,752 | $ | 3,650 | $ | 8,341 | |||||||||||||||
15
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
| December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Money market funds | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
| Equity securities | 558 | — | — | 558 | |||||||||||||||||||
| Fixed maturity debt securities | — | 135,346 | — | 135,346 | |||||||||||||||||||
| Total Assets | $ | 558 | $ | 135,346 | $ | — | $ | 135,904 | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Merger warrants liability | $ | 3,941 | $ | 2,350 | $ | — | $ | 6,291 | |||||||||||||||
| Earnout shares liability | — | — | 7,679 | 7,679 | |||||||||||||||||||
| Total Liabilities | $ | 3,941 | $ | 2,350 | $ | 7,679 | $ | 13,970 | |||||||||||||||
Money market funds consist of highly liquid investments with original maturities of three months or less and classified in restricted cash in the accompanying condensed consolidated balance sheets.
The Company recognizes transfers between the levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between the levels during the three months ended March 31, 2022 and 2021.
The following tables set forth a summary of changes in the estimated fair value of the Company’s Level 3 redeemable convertible preferred stock tranche obligation, historic warrants liability and earnout shares for the three months ended March 31, 2022 and 2021:
| January 1, 2022 | Issuances | Settlements | Change in fair value | March 31, 2022 | |||||||||||||||||||||||||
| Earnout shares | 7,679 | — | — | (4,029) | 3,650 | ||||||||||||||||||||||||
| Total | $ | 7,679 | $ | — | $ | — | $ | (4,029) | $ | 3,650 | |||||||||||||||||||
| January 1, 2021 | Issuances | Settlements | Change in fair value | March 31, 2021 | |||||||||||||||||||||||||
| Redeemable convertible preferred stock tranche obligation | $ | 2,832 | $ | — | $ | (2,832) | $ | — | $ | — | |||||||||||||||||||
| Historic warrants liability | 144 | (144) | — | — | |||||||||||||||||||||||||
| Earnout shares | — | 74,284 | — | (31,846) | 42,438 | ||||||||||||||||||||||||
| Total | $ | 2,976 | $ | 74,284 | $ | (2,976) | $ | (31,846) | $ | 42,438 | |||||||||||||||||||
The fair value of the earnout shares was estimated by utilizing a Monte-Carlo simulation model. The inputs into the Monte-Carlo pricing model included significant unobservable inputs. The table below summarizes the significant observable inputs used when valuing the earnout shares as of:
| March 31, 2022 | March 31, 2021 | ||||||||||
| Expected volatility | 85.00 | % | 80.00 | % | |||||||
| Starting stock price | $1.37 | $7.13 | |||||||||
| Expected term (in years) | 3.7 years | 4.70 years | |||||||||
| Risk-free interest rate | 2.44 | % | 0.87 | % | |||||||
| Earnout hurdle | $12.50-$15.00 | $12.50-$15.00 | |||||||||
16
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Fair Value of Financial Instruments Not Measured at Fair Value on a Recurring Basis
The carrying amounts of restricted cash, accounts receivable and accounts payable approximate fair value because their respective maturities are less than three months.
Beginning March 10, 2021, the Company entered into a $30,000 floor plan credit facility with Ally Financial. Concurrently, proceeds from the agreement were used to settle outstanding debt obligations on the Company’s preexisting floor plan facility with Automotive Finance Corporation (“AFC”). In June 2021, the Company expanded the floor plan credit facility by $10,000 to a total of $40,000. The carrying value of the Ally Financial floor plan notes payable outstanding as of March 31, 2022 approximates fair value due to its variable interest rate determined to approximate current market rates.
Note 7 — Accounts Receivable, Net
The following table summarizes accounts receivable as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Contracts in transit | $ | 6,117 | $ | 7,836 | |||||||
| Trade | 1 | 386 | |||||||||
| Finance commission | 593 | 284 | |||||||||
| Other | 481 | — | |||||||||
| Total | 7,192 | 8,506 | |||||||||
| Allowance for doubtful accounts | (270) | (300) | |||||||||
| Total Accounts Receivable, net | $ | 6,922 | $ | 8,206 | |||||||
Note 8 — Inventory and Floor Plan Notes Payable
The following table summarizes inventory as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Used vehicles | $ | 45,846 | $ | 40,739 | |||||||
| Parts | 249 | 246 | |||||||||
| Total | $ | 46,095 | $ | 40,985 | |||||||
Beginning March 10, 2021, the Company entered into a $30,000 floor plan credit facility, which was expanded to $40,000 in the second quarter of 2021, with Ally Financial to finance the acquisition of used vehicle inventory. Concurrently, proceeds from the agreement were used to settle outstanding debt obligations on the Company’s preexisting floor plan facility with AFC. Borrowings under the Ally Financial facility accrue interest at a variable rate based on the most recent prime rate plus 2.50% per annum. The prime rate as of March 31, 2022 was 3.50%.
Floor plan notes payable are generally due upon the sale of the related used vehicle inventory.
17
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Note 9 — Property and Equipment, Net
The following table summarizes property and equipment as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Capital lease assets | — | 12,566 | |||||||||
| Leasehold improvements | 8,030 | 4,628 | |||||||||
| Furniture, fixtures and equipment | 7,570 | 7,993 | |||||||||
| Corporate vehicles | 138 | 158 | |||||||||
| Total property and equipment | 15,738 | 25,345 | |||||||||
| Less: accumulated depreciation | (2,696) | (2,609) | |||||||||
| Less: impairment | — | (108) | |||||||||
| Property and Equipment, net | $ | 13,042 | $ | 22,628 | |||||||
Depreciation expense for property and equipment was approximately $584 and $105 for the three months ended March 31, 2022 and 2021, respectively.
Note 10 — Other Assets
The following table summarizes other assets as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Other Current Assets: | |||||||||||
| Lease receivable, net | $ | 29 | $ | 29 | |||||||
| Deferred acquisition costs | 40 | 46 | |||||||||
| Prepaid expenses | 10,133 | 3,664 | |||||||||
| Interest receivable | 539 | 966 | |||||||||
| Total Other Current Assets | $ | 10,741 | $ | 4,705 | |||||||
| Other Assets: | |||||||||||
| Lease receivable, net | $ | 16 | $ | 16 | |||||||
| Deferred acquisition costs | 30 | 35 | |||||||||
| Security deposits | 507 | 507 | |||||||||
| Total Other Assets | $ | 553 | $ | 558 | |||||||
Note 11 — Long-term Debt
The following table summarizes long-term debt as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Capital lease obligation | $ | — | $ | 12,715 | |||||||
| Finance lease liabilities | $ | 12,640 | $ | — | |||||||
| 12,640 | 12,715 | ||||||||||
| Current portion of long-term debt | — | (509) | |||||||||
| Current portion of finance lease liabilities | (560) | — | |||||||||
| Long-term Debt | $ | 12,080 | $ | 12,206 | |||||||
18
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Promissory Note
Concurrently with the closing of the Merger on January 21, 2021, the promissory note was extinguished through a cash payment of $3,000.
Convertible Notes Payable
As of December 31, 2020, the Company had a convertible note balance of $3,500. The note accrued interest at 6.00% on a 365-day basis and the outstanding interest payable as of December 31, 2020 was approximately $212. Concurrently with the closing of the Merger on January 21, 2021, the historic warrants and the note were converted to a fixed number of shares pursuant to a conversion agreement with AFC. The convertible notes were extinguished by issuing AFC 347,992 shares of Former CarLotz common stock and the warrants were exercised into 73,869 shares of Former CarLotz common stock. There are no historic warrants outstanding subsequent to the exercise.
Payroll Protection Program Loan
In April 2020, the Company received a Paycheck Protection Program (“PPP”) loan, a new loan program under the Small Business Administration’s 7(a) program providing loans to qualifying businesses, totaling approximately $1,749. As of December 31, 2020, the Company had an outstanding PPP loan balance of $1,749, which was extinguished concurrently with the closing of the Merger.
Note 12 — Accrued Expenses
The following table summarizes accrued expenses as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| License and title fees | $ | 784 | $ | 903 | |||||||
| Payroll and bonuses | 4,564 | 2,047 | |||||||||
| Deferred rent | — | 1,636 | |||||||||
| Technology | 1,120 | 1,127 | |||||||||
| Inventory | 3,612 | 2,542 | |||||||||
| Other | 4,289 | 6,173 | |||||||||
| Total Accrued Expenses | $ | 14,369 | $ | 14,428 | |||||||
Note 13 — Other Liabilities
The following table summarizes other liabilities as of:
| March 31, 2022 | December 31, 2021 | ||||||||||
| Other Liabilities, Current | |||||||||||
| Unearned insurance premiums | $ | 662 | $ | 754 | |||||||
| Other Liabilities | |||||||||||
| Unearned insurance premiums | 530 | 622 | |||||||||
| Other long-term liabilities | 121 | 122 | |||||||||
| Other Liabilities, Long-term | $ | 651 | $ | 744 | |||||||
Note 14 — Leases
The Company leases its operating facilities from various third parties under non-cancelable operating and finance leases. The leases require various monthly rental payments ranging from approximately $3 to $70, with various ending dates through September 2036. The initial term for real property leases is typically 5 to 15 years. Most leases include one or more options to
19
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
renew, with renewal terms that can extend the lease term from 1 to 5 years or more. We include options to renew (or terminate) in our lease term, and as part of our right-of-use ("ROU") assets and lease liabilities, when it is reasonably certain that we will exercise that option. ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. The leases are triple net, whereby the Company is liable for taxes, insurance and repairs. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. Most of these leases have escalating rent payments, which are being expensed on a straight-line basis and are included in operating lease amounts on the balance sheet.
The Company also leases vehicles from a third party under noncancelable operating leases and leases these same vehicles to end customers with similar lease terms, with the exception of the interest rate. The leases require various monthly rental payments from the Company ranging from $229 to $2,356 (actual) with various ending dates through March 2027. The initial term for vehicle leases is typically 36 to 72 months. Most leases do not include an option to renew. The lease payments are generally fixed throughout the term and any variable lease payments (non-recurring maintenance, taxes, registration) are not included in the measurement of the ROU asset and lease liability.
As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We have elected the practical expedient on not separating lease components from non-lease components. All leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The components of lease expense were as follows:
| Three Months Ended March 31, 2022 | |||||
Operating lease cost (1) | $ | 2,435 | |||
| Finance lease cost: | |||||
| Depreciation of lease assets | 263 | ||||
| Interest on lease liabilities | 287 | ||||
| Total finance lease cost | 550 | ||||
| Total lease cost | 2,985 | ||||
(1) Includes short-term leases and variable lease costs, which are immaterial.
Supplemental balance sheet information related to leases was as follows:
| Classification | As of March 31, 2022 | |||||||
| Assets: | ||||||||
| Operating lease assets | 49,608 | |||||||
| Finance lease assets | 11,811 | |||||||
| Total lease assets | 61,419 | |||||||
| Liabilities: | ||||||||
| Current: | ||||||||
| Current portion of operating lease liabilities | 6,810 | |||||||
| Current portion of finance lease liabilities | 560 | |||||||
| Long-term: | ||||||||
| Operating leases, less current portion | 45,076 | |||||||
| Finance leases, less current portion | 12,080 | |||||||
| Total lease liabilities | 64,526 | |||||||
(1) Finance lease assets are recorded net of accumulated depreciation of $755 as of March 31, 2022.
20
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Lease term and discount rate information related to leases was as follows:
| Lease Term and Discount Rate | As of March 31, 2022 | ||||
| Weighted Average Remaining Lease Term (in years) | |||||
| Operating leases | 8.01 years | ||||
| Finance leases | 11.92 years | ||||
| Weighted Average Discount Rate | |||||
| Operating leases | 5.87 | % | |||
| Finance leases | 10.01 | % | |||
Supplemental cash flow information related to leases was as follows:
| Three Months Ended March 31, 2022 | |||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||
| Operating cash flows from operating leases | 2,308 | ||||
| Operating cash flows from finance leases | 287 | ||||
| Financing cash flows from finance leases | 126 | ||||
| Lease assets obtained in exchange for lease obligation | |||||
| Operating leases | 51,916 | ||||
| Finance leases | — | ||||
21
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Maturities of lease liabilities were as follows:
| As of March 31, 2022 | ||||||||
Operating Leases (1) | Finance Leases (1) | |||||||
| Fiscal 2022, remaining | 7,118 | 1,281 | ||||||
| Fiscal 2023 | 9,268 | 1,669 | ||||||
| Fiscal 2024 | 8,518 | 1,694 | ||||||
| Fiscal 2025 | 7,887 | 1,721 | ||||||
| Fiscal 2026 | 6,875 | 1,766 | ||||||
| Thereafter | 26,074 | 14,322 | ||||||
| Total lease payments | 65,740 | 22,453 | ||||||
| Less: interest | (13,854) | (9,813) | ||||||
| Present value of lease liabilities | 51,886 | 12,640 | ||||||
(1) There are no legally binding minimum lease payments for leases signed but not yet commenced excluded from the table.
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 and under the previous lease accounting standard, the following is a table of facility lease commitments due for the next five years, and thereafter, as of December 31, 2021:
| Total Per Year | Total Capital Leases | ||||||||||
| 2022 | $ | 6,788 | $ | 1,643 | |||||||
| 2023 | 6,931 | 1,669 | |||||||||
| 2024 | 6,657 | 1,695 | |||||||||
| 2025 | 6,832 | 1,721 | |||||||||
| 2026 | 5,884 | 1,766 | |||||||||
| Thereafter | 23,715 | 14,322 | |||||||||
| Total | $ | 56,807 | $ | 22,816 | |||||||
| Less: amount representing interest | (10,101) | ||||||||||
| Present value of minimum lease payments | 12,715 | ||||||||||
| Less: current obligation | (509) | ||||||||||
| Long-term obligations under capital lease | $ | 12,206 | |||||||||
The following is a schedule of the approximate future minimum lease payments due to third parties and the related expected future receipts related to these lease vehicles as of December 31, 2021:
Payments Due to Third-Parties | Future Receipts | ||||||||||
| 2022 | $ | 1,435 | $ | 1,721 | |||||||
| 2023 | 1,017 | 1,205 | |||||||||
| 2024 | 605 | 716 | |||||||||
| 2025 | 180 | 216 | |||||||||
| 2026 | 55 | 69 | |||||||||
| Total | 3,292 | 3,927 | |||||||||
22
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Note 15 — Commitments and Contingencies
The Company’s facilities are subject to federal, state and local provisions regulating the discharge of materials into the environment. Compliance with these provisions has not had, nor does the Company expect such compliance to have, any material effect upon the capital expenditures, net income, financial condition or competitive position of the Company. Management believes that its current practices and procedures for the control and disposition of such materials comply with the applicable federal and state requirements.
Legal Matters
Federal Securities Litigation
On July 8, 2021, purported CarLotz stockholder Daniel Erdman, individually and on behalf of others similarly situated, filed a putative class action complaint in the United States District Court for the Southern District of New York, alleging that CarLotz and certain of its executive officers made various false and misleading statements or omissions about the Company’s business, operations, financial performance and prospects in violation of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, promulgated thereunder. See Daniel Erdman v. CarLotz, Inc., et al., 21-cv-5906 (S.D.N.Y.) The action is stated to be brought on behalf of purchasers of the securities of Acamar Partners Acquisition Corp. and CarLotz during the period from December 30, 2020 to May 25, 2021. The action seeks to recover unspecified compensatory damages allegedly caused by the defendants’ purported violations of the federal securities laws, plus interest and costs and expenses.
On July 20, 2021, purported CarLotz stockholder Michael Widuck, individually and on behalf of others similarly situated, filed a putative class action complaint in the United States District Court for the Southern District of New York, alleging that CarLotz and certain of its executive officers made various false and misleading statements or omissions about the Company’s business, operations, financial performance and prospects in violation of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, promulgated thereunder. See Michael Widuck v. CarLotz, Inc., et al., 21-cv-6191 (S.D.N.Y.). The action is stated to be brought on behalf of purchasers of the securities of Acamar Partners Acquisition Corp. and CarLotz during the period from December 30, 2020 to May 25, 2021. The action seeks to recover unspecified compensatory damages allegedly caused by the defendants’ purported violations of the federal securities laws, plus interest and costs and expenses.
On August 5, 2021, purported CarLotz stockholder Michael Turk, individually and on behalf of others similarly situated, filed a putative class action complaint in the United States District Court for the Southern District of New York, alleging that CarLotz and certain of its executive officers made various false and misleading statements or omissions about the Company’s business, operations, financial performance and prospects in violation of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5, promulgated thereunder. See Michael Turk v. CarLotz, Inc., et al., 21-cv-6627 (S.D.N.Y.) The action is stated to be brought on behalf of purchasers of the securities of Acamar Partners Acquisition Corp. and CarLotz during the period from December 30, 2020 to May 25, 2021. The action seeks to recover unspecified compensatory damages allegedly caused by the defendants’ purported violations of the federal securities laws, plus interest and costs and expenses.
The above three cases were consolidated by the Court on August 31, 2021 under In re CarLotz, Inc. Sec. Litig., 21-cv-05906 (S.D.N.Y.). On October 15, 2021, the Court appointed David Berger lead plaintiff and Kahn Swick & Foti, LLC lead counsel for the putative class. On December 14, 2021, Lead Plaintiff Berger and Additional Plaintiff Craig Bailey filed an Amended Complaint against CarLotz, various directors and officers of CarLotz, Acamar, various directors of Acamar, Acamar Partners Sponsor I LLC, and Acamar Partners Sub, Inc., purporting to assert claims on behalf of purchasers of Acamar and CarLotz securities during the period from October 22, 2020 through May 25, 2021. The Amended Complaint alleges that the defendants made various false and misleading statements or omissions about CarLotz’ business, operations, financial performance and prospects in violation of Sections 10(b), 14(a) and 20(a) of the Exchange Act; and Sections 11, 12(a)(2) and 15 of the Securities Act. The Amended Complaint sought a declaration that it is a proper class action pursuant to Fed. R. Civ. P. 23, as well as unspecified compensatory damages allegedly caused by the defendants’ purported violations of the federal securities laws, plus interest and costs and expenses, and any further relief that the Court may deem proper.
On February 17, 2022, Plaintiffs filed a Letter Motion for Leave to File Second Amended Complaint, citing the need “to resolve certain factual and legal issues bearing on the viability of certain of plaintiffs’ claims and named defendants.” On February 18, 2022, the Court granted Plaintiffs’ letter motion for leave to file a Second Amended Complaint and ordered that the Second Amended Complaint be filed by March 4, 2022.
23
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
On March 4, 2022, Lead Plaintiff Berger and Additional Plaintiff Bailey filed a Second Amended Complaint against CarLotz, various directors and officers of CarLotz, Acamar, various directors of Acamar, and Acamar Partners Sponsor I LLC, purporting to assert claims on behalf of purchasers of Acamar and CarLotz securities during the period from October 22, 2020 through May 25, 2021. The Second Amended Complaint alleges that the defendants made various false and misleading statements or omissions about CarLotz’ business, operations, financial performance and prospects in violation of Sections 10(b) and 20(a) of the Exchange Act; and Sections 11, 12(a)(2) and 15 of the Securities Act. The Second Amended Complaint seeks a declaration that it is a proper class action pursuant to Fed. R. Civ. P. 23, as well as unspecified compensatory damages allegedly caused by the defendants’ purported violations of the federal securities laws, plus interest and costs and expenses, and any further relief that the Court may deem proper. Defendants’ deadline to move, answer, or otherwise respond to the Second Amended Complaint is May 16, 2022.
Delaware Stockholder Derivative Litigation
On September 21, 2021, purported CarLotz stockholder W. Kenmore Cardoza, trustee of the W. Kenmore & Joyce M. Cardoza Revocable Trust, filed a derivative suit purportedly on behalf of CarLotz in the United States District Court for the District of Delaware against certain officers and directors of CarLotz. See Cardoza v. Mitchell, et al., 21-cv-1332 (D. Del.). The complaint, which principally concerns the same alleged misstatements or omissions at issue in In re CarLotz, Inc. Sec. Litig., asserts derivative claims for alleged violations of Sections 10(b) and 21D of the Exchange Act, breach of fiduciary duty and waste. The action seeks to recover unspecified compensatory damages on behalf of the Company, an award of costs and expenses, and other relief.
On February 14, 2022, the parties filed a stipulation and proposed scheduling order, pursuant to which Plaintiff will file an amended complaint by April 1, 2022, Defendants will answer or otherwise respond to the amended complaint within 30 days of the filing of the amended complaint, and the parties shall meet and confer on conduct of further proceedings within 7 days of the filing of the amended complaint. On February 15, 2022, the Court so-ordered the parties’ proposed schedule. On April 1, 2022, Plaintiff filed an amended complaint asserting derivative claims for alleged violations of Sections 10(b), 14(a), and 21D of the Exchange Act, breach of fiduciary duty, waste, and unjust enrichment.
On March 31, 2022, purported CarLotz stockholder Mohammad Osman filed a derivative suit purportedly on behalf of CarLotz in the United States District Court for the District of Delaware against certain officers and directors of CarLotz. See Osman v. Bor, et al., 22-cv-0431 (D. Del.). The complaint, which principally concerns the same alleged misstatements or omissions at issue in In re CarLotz, Inc. Sec. Litig., asserts derivative claims for alleged violations of Sections 10(b), 20(a), and 21D of the Exchange Act, breach of fiduciary duty and unjust enrichment. The action seeks to recover unspecified compensatory damages on behalf of the Company, an award of costs and expenses, and other relief.
On April 13, 2022, Plaintiff in the Cardoza matter moved to consolidate Cardoza and Osman and to be appointed lead plaintiff. On April 27, 2022, Plaintiff in the Osman action cross-moved to consolidate Cardoza and Osman and to be appointed lead plaintiff. The motions remain pending.
New York Stockholder Derivative Litigation
On October 20, 2021, purported CarLotz stockholder Julian Cha filed a derivative suit purportedly on behalf of CarLotz in the United States District Court for the Southern District of New York against certain officers and directors of CarLotz. See Julian Cha v. David R. Mitchell, et al., 21-cv-8623 (S.D.N.Y.). The complaint, which principally concerns the same alleged misstatements or omissions at issue in In re CarLotz, Inc. Sec. Litig., asserts derivative claims for alleged violations of Sections 10(b), 14(a), and 21D of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste. The action seeks to recover unspecified compensatory damages on behalf of the Company, an award of costs and expenses and other relief.
On October 27, 2021, purported CarLotz stockholder Mark Habib filed a derivative suit purportedly on behalf of CarLotz in the United States District Court for the Southern District of New York against certain officers and directors of CarLotz. See Mark Habib v. David R. Mitchell, et al., 21-cv-8786 (S.D.N.Y.). The complaint, which principally concerns the same alleged misstatements or omissions at issue in In re CarLotz, Inc. Sec. Litig., asserts derivative claims for alleged violations of Sections 10(b), 14(a), and 21D of the Exchange Act and breach of fiduciary duty. The action seeks to recover unspecified compensatory damages on behalf of the Company, an award of costs and expenses and other relief.
24
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
On November 15, 2021, the Court issued an order¸ inter alia, consolidating Cha and Habib under In re CarLotz, Inc. Deriv. Litig., 21-cv-8623 and appointing co-lead counsel. On February 14, 2022, the parties filed a stipulation and proposed order staying the case, which requested that all proceedings in this action be stayed pending the resolution of defendants’ forthcoming motion to dismiss the Second Amended Complaint in In re CarLotz, Inc. Sec. Litig. The Court granted that proposal and stayed the case on February 15, 2022.
In addition to the matters above, the Company is involved in certain legal matters that it considers incidental to its business. In management’s opinion, none of these legal matters will have a material effect on the Company’s financial position or results of operations.
Note 16 — Redeemable Convertible Preferred Stock
Unpaid cumulative distributions were approximately $4,800 as of December 31, 2020, and the Series A Preferred Stock had a liquidation preference of $37,114 as of December 31, 2020. Upon liquidation of Former CarLotz, proceeds in excess of the Series A Preferred Stock would have been shared pro rata among all stockholders based on the number of shares. The unpaid cumulative distributions are included as Accrued expenses — related party on the accompanying condensed consolidated balance sheets. As a result of the Merger, the Company settled Former CarLotz’ redeemable convertible preferred stock and redeemable convertible preferred stock tranche obligation with carrying values of $17,560 and $2,832, respectively, as of December 31, 2020.
Note 17 — Stock-Based Compensation Plan
Stock Option Plans
The Company has three stock incentive plans, the “2011 Stock Option Plan,” the “2017 Stock Option Plan” and the “2020 Incentive Award Plan,” to promote the long-term growth and profitability of the Company. The plans do this by providing senior management and other employees with incentive to improve shareholder value and contribute to the growth and financial success of the Company by granting equity instruments to these stakeholders.
Share-based compensation expense was recorded for the three months ended March 31, 2022 and 2021 of approximately $1,684 and $41,963, respectively.
The Company estimates the fair value of stock options using the Black-Scholes pricing model. The Black-Scholes pricing model requires the use of subjective inputs such as stock price volatility. Changes in the inputs can materially affect the fair value estimates and ultimately the amount of stock-based compensation expense that is recognized.
25
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
A summary of activity for the three months ended March 31, 2022 and 2021 for the 2011 Stock Option Plan is as follows:
| Number of Stock Options | Weighted Average Exercise Price | ||||||||||
| Balance (December 31, 2021) | 1,260,328 | $0.56 | |||||||||
| Granted | — | — | |||||||||
| Exercised | (50,964) | 0.32 | |||||||||
| Forfeited | — | — | |||||||||
| Balance (March 31, 2022) | 1,209,364 | 0.57 | |||||||||
| Vested (as of March 31, 2022) | 1,209,364 | $0.57 | |||||||||
| Number of Stock Options | Weighted Average Exercise Price | ||||||||||
| Balance (December 31, 2020) | 1,571,205 | $0.59 | |||||||||
| Granted | — | — | |||||||||
| Exercised | (56,059) | 0.24 | |||||||||
| Forfeited | — | — | |||||||||
| Balance (March 31, 2021) | 1,515,146 | 0.58 | |||||||||
| Vested (as of March 31, 2021) | 1,515,146 | $0.58 | |||||||||
The following summarizes certain information about stock options vested and expected to vest as of March 31, 2022 related to the 2011 Stock Option Plan:
Number of Stock Options | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |||||||||||||||
| Outstanding | 1,209,364 | 0.42 years | $0.57 | ||||||||||||||
| Exercisable | 1,209,364 | 0.42 years | $0.57 | ||||||||||||||
Aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the option exercise price and the estimated fair value of the Company’s common stock at the time such option exercises. This intrinsic value changes based on changes in the fair value of the Company’s underlying common stock. The aggregate intrinsic value for options outstanding and options exercisable as of March 31, 2022 was $0.80.
The terms of the 2017 Stock Option Plan provide for vesting upon certain market and performance conditions, including achieving certain triggering events, including specified levels of return on investment upon a sale of the Company. Because the 2017 Stock Option Plan has a market-based vesting condition, an open-form valuation model was used to value the options. All
26
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
stock options related to the 2017 Stock Option Plan have an exercise price of $0.92 per share. All stock options related to the 2017 Stock Option Plan expire 10 years after the grant date, which ranges from March 2028 to August 2030.
A summary of activity for the three months ended March 31, 2022 and 2021 for the 2017 Stock Option Plan is as follows:
| Number of Units | Weighted Averaged Exercise Price | ||||||||||
| Balance (December 31, 2021) | 3,936,176 | $ | 0.92 | ||||||||
| Granted | — | — | |||||||||
| Exercised | (6,371) | $ | 0.92 | ||||||||
| Forfeited | (19,111) | 0.92 | |||||||||
| Balance (March 31, 2022) | 3,910,694 | $ | 0.92 | ||||||||
Vested (as of March 31, 2022) | 3,631,681 | $ | 0.92 | ||||||||
| Number of Units | Weighted Averaged Exercise Price | ||||||||||
| Balance (December 31, 2020) | 3,961,658 | $ | 0.92 | ||||||||
| Granted | — | — | |||||||||
| Forfeited | — | — | |||||||||
| Balance (March 31, 2021) | 3,961,658 | $ | 0.92 | ||||||||
The 2017 options vest upon a change of control. Although the Merger did not meet the definition of a change of control, the Company modified the awards in connection with the Merger such that all vesting conditions were waived for 3,538,672 of the options. This modification impacted eight employees and resulted in $38,800 of share-based compensation on the modification date. The remaining options were also modified but will vest over a service period of four years and impacted 16 employees. At the time of modification, these options resulted in $186 of cash consideration and $4,500 of share based compensation that will be recognized over the service period of four years. For the three months ended March 31, 2022, $249 of share-based compensation was recognized.
The following summarizes certain information about stock options vested and expected to vest as of March 31, 2022 related to the 2017 Stock Option Plan:
Number of Stock Options | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |||||||||||||||
| Outstanding | 3,910,694 | 7.30 years | $0.92 | ||||||||||||||
| Exercisable | 3,631,681 | 7.21 years | $0.92 | ||||||||||||||
The aggregate intrinsic value for options outstanding and options exercisable as of March 31, 2022 was $0.45.
27
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
The inputs used for the 2017 Stock Option Plan were as follows:
| Balance (Expected volatility) | 80.00 | % | |||
| Expected dividend yield | — | % | |||
| Expected term (in years) | 3.6 - 4.8 years | ||||
| Risk-free interest rate | 0.32% - 0.45% | ||||
The options associated with the 2020 Incentive Award Plan vest over a service period of to four years. A summary of activity for the three months ended March 31, 2022 and 2021 for the options associated with the 2020 Incentive Award Plan is as follows:
| Number of Units | Weighted Averaged Exercise Price | ||||||||||
| Balance (December 31, 2021) | 1,469,297 | $ | 11.12 | ||||||||
| Granted | 1,573,361 | $ | 1.68 | ||||||||
| Forfeited | (74,626) | $ | 10.47 | ||||||||
Balance (March 31, 2022) | 2,968,032 | $ | 6.13 | ||||||||
| Exercisable | 388,691 | $ | 11.34 | ||||||||
| Number of Units | Weighted Averaged Exercise Price | ||||||||||
| Balance (December 31, 2020) | — | $ | — | ||||||||
| Granted | 1,409,401 | 11.35 | |||||||||
| Forfeited | — | — | |||||||||
| Balance (March 31, 2021) | 1,409,401 | $ | 11.35 | ||||||||
The grant date fair value of the options granted in the three months ended March 31, 2022 was $1.17. For the three months ended March 31, 2022, $908 of share based compensation was recognized. As of March 31, 2022, there was approximately $8,609 of total unrecognized compensation cost related to unvested options related to the 2020 Stock Incentive Award Plan.
The following summarizes certain information about stock options vested and expected to vest as of March 31, 2022 related to the 2020 Stock Option Plan:
Number of Stock Options | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | |||||||||||||||
| Outstanding | 2,968,032 | 9.20 years | $6.13 | ||||||||||||||
| Exercisable | 388,691 | 7.27 years | $11.34 | ||||||||||||||
The aggregate intrinsic value for options outstanding and options exercisable as of March 31, 2022 was $0.00.
28
CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
The inputs used for the 2020 Incentive Award Plan options were as follows for the three months ended March 31, 2022:
| Balance (Expected volatility) | 80% | ||||
| Expected dividend yield | — | % | |||
| Expected term (in years) | 6 years | ||||
| Risk-free interest rate | 2.20% | ||||
The restricted shares associated with the 2020 Incentive Award Plan vest over a service period. A summary of activity for the three months ended March 31, 2022 for the restricted shares associated with the 2020 Incentive Award Plan is as follows:
| Balance (Number of Units | Weighted Average Grant Date Fair Value | ||||||||||
| Balance (December 31, 2021) | 597,739 | $ | 5.57 | ||||||||
| Granted | 1,235,437 | $ | 1.68 | ||||||||
| Forfeited | (54,208) | $ | 5.56 | ||||||||
| Vested (as of March 31, 2022) | (71,273) | $ | 5.69 | ||||||||
Balance (March 31, 2022) | 1,707,695 | $ | 2.75 | ||||||||
The grant date fair value of the restricted shares granted in the three months ended March 31, 2022 was $1.68. For the three months ended March 31, 2022, $527 of share based compensation cost was recognized. As of March 31, 2022, there was approximately $1,454 of unrecognized compensation cost that vests over a service period of four years, approximately $2,047 of unrecognized compensation cost that vests over a service period of three years, and $164 of unrecognized compensation cost that vests over a service period of year related to unvested restricted shares related to the 2020 Stock Incentive Award Plan.
Earnout Restricted Stock Units
Former CarLotz option holders as of the effective time of the Merger received 640,421 earnout restricted stock units (Earnout RSUs). The Earnout RSUs vest if certain targets are met in the post-Merger period. The earnouts for the Earnout RSUs are subject to an earnout period, which is defined as the date 60 months following the consummation of the Merger. The Merger closed on January 21, 2021, and the earnout period expires January 21, 2026. Earnout RSUs will vest if any of the following conditions are achieved following January 21, 2021:
i.If at any time during the 60 months following the Closing Date (the first business day following the end of such period, the “Forfeiture Date”), the closing trading price of the common stock is greater than $12.50 over any 20 trading days within any 30 trading day period (the “First Threshold”), 50% of the Earnout RSUs will vest.
ii.If at any time prior to the Forfeiture Date, the closing trading price of the common stock is greater than $15.00 over any 20 trading days within any 30 trading day period (the “Second Threshold”), 50% of the Earnout RSUs will vest.
iii.If either the First Threshold or the Second Threshold is not met on or before the Forfeiture Date, any unvested Earnout RSUs are forfeited. All unvested Earnout RSUs will vest if there is a change of control of the Company that will result in the holders of the common stock receiving a per share price equal to or in excess of $10.00 (as equitably adjusted for stock splits, stock dividends, special cash dividends, reorganizations, combinations, recapitalizations and similar transactions affecting the common stock) prior to the Forfeiture Date.
The estimated fair value of the liability is determined by using a Monte-Carlo simulation model, which incorporates various assumptions, including expected stock price volatility, contractual term, dividend yield and stock price at grant date. The Company estimates the volatility of common stock on the date of grant based on the weighted-average historical stock price volatility of comparable publicly-traded companies.
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CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
A summary of activity for the three months ended March 31, 2022 and 2021 for the RSUs is as follows:
| Number of Units | Weighted Average grant date fair value | ||||||||||
| Balance (December 31, 2021) | 621,200 | $ | 10.70 | ||||||||
| Granted | — | — | |||||||||
| Forfeited | (141,350) | 10.70 | |||||||||
Balance (March 31, 2022) | 479,850 | $ | 10.70 | ||||||||
| Number of Units | Weighted Average grant date fair value | ||||||||||
| Balance (December 31, 2020) | — | $ | — | ||||||||
| Granted | 640,421 | 10.70 | |||||||||
| Forfeited | — | — | |||||||||
Balance (March 31, 2021) | 640,421 | $ | 10.70 | ||||||||
During the three months ended March 31, 2022, the Company recognized no stock-based compensation cost related to the RSUs. As of March 31, 2022, there was no additional unrecognized compensation cost related to the Earnout RSUs.
The inputs used to value the Earnout RSUs were as follows at January 21, 2021:
| Expected volatility | 80.00 | % | |||
| Starting stock price | $ | 11.31 | |||
| Expected term (in years) | 5 years | ||||
| Risk-free interest rate | 0.45 | % | |||
| Earnout hurdle | $12.50-$15.00 | ||||
Note 18 — Income Taxes
During the three months ended March 31, 2022, the Company recorded no income tax benefits for the net operating losses incurred in the period due to its uncertainty of realizing a benefit from those items. All of the Company’s operating losses since inception have been generated in the United States.
The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception through March 31, 2022 and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Management reevaluates the positive and negative evidence at each reporting period. As of March 31, 2022 and December 31, 2021, no facts or circumstances arose that affected the Company’s determination as to the full valuation allowance established against the net deferred tax assets. Accordingly, a full valuation allowance has been established against the net deferred tax assets as of March 31, 2022 and December 31, 2021.
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CarLotz, Inc. and Subsidiaries — Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share data)
Note 19 — Net Loss Per Share Attributable to Common Stockholders
The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
| Net Loss | $ | (24,836) | $ | (15,022) | |||||||
| Denominator: | |||||||||||
| Weighted average common shares outstanding, basic and diluted | 114,054,597 | 100,817,385 | |||||||||
| Net Loss per Share Attributable to Common Stockholders, basic and diluted | $ | (0.22) | $ | (0.15) | |||||||
The following table summarizes the outstanding potentially dilutive securities that were excluded from the computation of diluted net loss per share attributable to common stockholders because the impact of including them would have been antidilutive for the three months ended March 31, 2022 and 2021:
| 2022 | 2021 | ||||||||||
| Public warrants | 10,185,774 | 10,185,774 | |||||||||
| Private warrants | 6,074,310 | 6,074,310 | |||||||||
| Earnout RSUs | 479,850 | 640,421 | |||||||||
| Earnout shares | 6,945,732 | 6,945,732 | |||||||||
| Convertible notes payable | — | — | |||||||||
| Historic warrants | — | — | |||||||||
| Stock options outstanding to purchase shares of common stock | 8,088,090 | 6,886,205 | |||||||||
| Unvested RSUs | 1,707,695 | — | |||||||||
| Total | 33,481,451 | 30,732,442 | |||||||||
Note 20 — Concentrations
The suppliers that accounted for 10% or more of the Company’s vehicle purchases are presented as follows:
| Total purchases from vendor to total vehicle purchases for the three months ended March 31, | ||||||||
| Vendor | 2022 | 2021 | ||||||
| Vendor A | 20% | 62% | ||||||
| Vendor B | —% | —% | ||||||
Vendor A is a corporate vehicle sourcing partner. Typically, we purchase the vehicles from our corporate vehicle sourcing partners at the time of sale to a retail customer.
For the periods ended March 31, 2022 and 2021, no retail or wholesale customers accounted for more than 10% of the Company’s revenue.
Note 21 — Subsequent Events
In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through May 9, 2022, the date the financial statements were available to be issued.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 2021 contained in our Annual Report on Form 10-K filed with the SEC on March 15, 2022. 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,” “intends” or similar expressions. Such statements, including statements regarding our ability to: manage our business through and following the COVID-19 pandemic and the related semi-conductor chip and labor shortages; achieve revenue growth and profitability in the future; innovate and expand our technological capabilities; effectively optimize our reconditioning operations; grow existing vehicle sourcing accounts and key vehicle channels; add new corporate vehicle sourcing accounts and increase consumer sourcing; have sufficient and suitable inventory for resale; 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; improve 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 weaknesses in internal control over financial reporting; comply with laws and regulations applicable to our business; successfully defend litigation; and successfully deploy the proceeds from the merger pursuant to that certain Agreement and Plan of Merger, dated as of October 21, 2020 (as amended by Amendment No. 1, dated December 16, 2020), by and among CarLotz, Inc. (f/k/a Acamar Partners Acquisition Corp.), Acamar Partners Sub, Inc., a wholly owned subsidiary of CarLotz, Inc., and CarLotz Group, Inc. (f/k/a CarLotz, Inc.), pursuant to which Acamar Partners Sub, Inc. merged with and into Former CarLotz, with Former CarLotz surviving as the surviving company and as a wholly owned subsidiary of CarLotz, Inc. (the “Merger”), 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, 2021, filed on March 15, 2022, 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.
Website and Social Media Disclosure
We use our website (https://www.carlotz.com/) and various social media channels as a means of disclosing information about the Company and its products to its customers, investors and the public (e.g., @CarLotz411 on Twitter, CarLotz on YouTube, and CarLotz on LinkedIn). The information on our website (or any webpages referenced in this Quarterly Report on Form 10-Q) or posted on social media channels is not part of this or any other report that the Company files with, or furnishes to, the SEC. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Overview
CarLotz operates a 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 an omni-channel experience and diverse selection of vehicles. Our proprietary technology provides our corporate vehicle
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sourcing partners with real-time performance metrics and data analytics along with custom business intelligence reporting that enables vehicle triage optimization between the wholesale and retail channels.
Our consignment model facilitates the sale of a vehicle by individuals and businesses alike. For our consignment partners we offer a physical location to display the vehicle, detailing, photography, marketing, a degree of separation between the seller and buyer, and the consumer confidence associated with a national dealership. Our asset-light model is designed to allow us to obtain vehicles through consignment, thereby limiting capital risk, as those vehicles consigned to us for sale (as opposed to purchased vehicles) are still owned by our corporate vehicle sourcing partners and retail sellers.
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, vehicle rental companies, banks, 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 is designed to fully integrate with their existing technology platforms. For individuals who are our retail sellers, our goal is to 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. Buyers can browse our inventory online through our website or at our locations as well as select from our integrated financing and insurance products with ease.
Founded in 2011, CarLotz currently operates twenty-two retail hub locations in the U.S., initially launched in the Mid-Atlantic region and since expanded to the Southeast, Southwest, Midwest, West and Pacific Northwest regions of the United States. Our current facilities are located in Alabama, California, Colorado, Georgia, Florida, Illinois, North Carolina, Tennessee, Texas, Virginia and Washington State. Generally, our hubs act as both physical showrooms with retail sales and as consignment centers where we can source, process and recondition newly acquired vehicles. With the aim of improving our operating and financial results, we are planning to pause our real estate growth efforts in 2022, except for one hub which we may open in 2022.
Business Update
During the three months ended March 31, 2022, the continuing semi-conductor chip shortage, COVID-related supply chain issues constraining supply of new vehicles and an elevated vehicle wholesale pricing environment relative to historic levels has reduced the incremental value we may deliver to our corporate vehicle sourcing partners via Retail Remarketing™, at times making consignment less attractive to partners than quickly selling vehicles through the wholesale channel. Supply of used vehicles from our corporate vehicle sourcing partners has been severely constrained by the lack of new vehicle supply due to the semi-conductor 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.
During the three months ended March 31, 2022, some of our inventory was less profitable than expected and was held for sale longer than desired. As a result, our retail gross profit was negatively impacted in the first quarter of 2022 by lower front-end profits on owned vehicles as well as processing center inefficiencies, and we expect gross profit to be under pressure until the used vehicle market normalizes and we are able to improve the productivity and efficiency at our hubs. At March 31, 2022, non-competitively sourced vehicles (i.e. vehicles sourced other than from auctions) represented approximately 69% of our vehicle inventory, as compared to 75% at March 31, 2021. As part of our goal to increase non-competitively sourced vehicles, our strategy is to increase our consignments from our sourcing partners and consumer acquired vehicles and reduce our reliance on sourcing via wholesale auction.
During the three months ended March 31, 2022, we experienced a decrease in retail unit sales and revenue compared to same period in 2021. Hubs opened in 2021 have not been ramping to expected results and consequently have not provided the expected contribution to unit sales, revenue, and gross profit. Also, we experienced a weaker retail GPU performance for the three months ended March 31, 2022 compared to the same period in 2021, due to both sourcing constraints and reconditioning inefficiency. We did not experience the uptick in sales that typically occurs late in the first calendar quarter of each year in our industry, primarily due to market dynamics related to the continuing semi-conductor chip shortage, inventory constraints and COVID-related supply chain issues as well as a fall in consumer sentiment given rising interest rates, inflation, and the economic impact of the war in Ukraine.
For the three months ended March 31, 2022, the corporate vehicle sourcing partner which accounted for 68% and 31% of our sold vehicles in the three months ended March 31, 2021 and the year ended December 31, 2020, respectively, accounted for 24% of our sold vehicles. We cannot currently predict the ultimate volume and profitability of any sourced vehicles from this partner.
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As inventory levels increased and we moved through the quarter, we decreased our purchasing of vehicles through wholesale auctions as we increased our sourcing of non-competitively sourced vehicles. At March 31, 2022, consigned vehicles represented approximately 34% of our vehicle inventory.
Revenue Generation
CarLotz generates a significant majority of its revenue from contracts with retail 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 may 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. CarLotz also generates revenue from providing retail vehicle buyers with third-party options for financing, insurance, extended warranties, and other vehicle protection products, which CarLotz either marks up or earns commissions based on our customers’ purchases. Since we do not control these products before they are transferred to the consumer, we recognize net commission revenue at the time of sale.
We also sell vehicles to wholesalers or other dealers, primarily at auctions. Generally, the vehicles sold through the wholesale channel are vehicles acquired via trade-in, acquired via consignment that do not meet our quality standards for sale to retail customers, vehicles that remain unsold at the end of the consignment period, retail vehicles that did not sell through the retail channel within a reasonable period of time, or vehicles that the Company determines offer greater financial benefit through the wholesale channel.
Our revenue for the three months ended March 31, 2022 and 2021 was $63.0 million and $56.6 million, respectively.
Inventory Sourcing
We source vehicles from both corporate and consumer sellers, auctions and other wholesale channels. We source vehicles non-competitively (i.e. vehicles sourced other than from auctions) through our consignment to retail sales model, through purchases directly from consumers and through arrangements with corporate vehicle sourcing partners. We also source vehicles competitively through purchase at auction, as necessary, to provide inventory at our newer hub locations, to round out our inventory and during periods of tight supply.
We expect to maintain long-term sourcing relationships with a number of national accounts and to pursue sales from new accounts. We support our corporate vehicle sourcing partners by offering a technology platform designed to 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 tailored features designed to create value for sellers with tools for documenting and transmitting vehicle information.
We generally charge our retail sellers and some corporate vehicle sourcing partners a flat fee for our consignment services. In addition to our flat fee model, we also enter into alternative fee arrangements, such as profit sharing programs or programs with fees based on a return above a wholesale index. The profit sharing programs generally include arrangements where we share a percentage of vehicle sale profits and, in some cases, fees with our corporate sourcing partners. The programs with fees based on a return above a wholesale index generally include a payment above the wholesale price. 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, among other things, the unit’s sale price, shipping and reconditioning costs, and fees we are able to charge in connection with the sale. We do not have long-term contracts with any of our corporate vehicle sourcing partners and, under arrangements with them, they are not required to make vehicles available to us. For these and other reasons, our volume and mix of vehicles from our corporate vehicle sourcing partners has fluctuated in the past and will continue to fluctuate over time. In addition, our gross profit per unit has fluctuated in the past and is likely to fluctuate from period to period, perhaps significantly, due to, among other reasons, our mix of competitively sourced and non-competitively sourced inventory, and the sales prices and fees we are able to collect on the vehicles.
We also have dealer owned inventory, which includes inventory purchased at wholesale auctions or purchased from consumers and our corporate partners, that operates in a similar manner to traditional used car dealers and which exposes us directly to the effects of changes in vehicle prices (generally price depreciation) more directly than inventory sourced through consignment.
Our gross profit per unit has fluctuated and will continue to fluctuate from period to period, perhaps significantly, due to, among other things, our mix of competitively sourced and non-competitively sourced inventory, acquisition costs and the sales prices and fees we are able to collect on the vehicles.
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Regional Hub Network
Through our e-commerce website and twenty-two regional hubs, we aim to provide a shopping experience for today’s modern vehicle buyer, allowing our nationwide retail customers to transact online, in-person or a combination of both. We aim to 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. Our current facilities are located in Alabama, California, Colorado, Georgia, Florida, Illinois, North Carolina, Tennessee, Texas, Virginia, and Washington State.
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.
Factors Affecting our Performance
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 is likely to continue to do so until the market normalizes. To address the reduction from this supply source, we have sourced a higher percentage of our vehicles through wholesale auction channels than we have historically. Because we are purchasing these vehicles in a competitive environment and paying auction fees, there is greater risk to the Company that the margin between the cost of the vehicle and the selling price will be compressed, and, in turn, will result in reduced gross profit and retail GPU, which we expect to continue until the used vehicle market normalizes and we are able to improve the productivity and efficiency at our hubs. This risk could be compounded by our inability to turn inventory quickly and the pace at which used vehicles depreciate.
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.
Ability to Source Vehicles from Consumers
We believe that we can benefit from the significant volume of vehicles which consumers are selling to dealers and to car buying companies. We intend to increase our efforts on sourcing vehicles from the consumer market. Our ability to successfully source vehicles from consumers is dependent on our marketing, brand, process and pricing. In addition to our consignment model, we partnered with a third-party company to be able to provide instant purchase offers to potential sellers.
Further Penetration of Existing Accounts and Key Vehicle Channels
We believe that we can benefit from volume with existing corporate vehicle sourcing partners. Many of our existing sourcing partners still sell only a small percentage of their volumes through the retail channel. As Retail Remarketing™ continues to develop as a more established alternative and as CarLotz expands to serve buyers and sellers in its markets, we believe we can grow our existing commercial seller accounts, after the supply of new vehicles returns to normal.
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Seasonality
Used vehicle sales generally experience seasonality with sales typically peaking late in the first calendar quarter of each year 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 declining at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year, all other factors being equal. Because of the market dynamics related to the continuing semi-conductor chip shortage and COVID-related supply chain issues constraining supply, we have not seen the typical seasonality related to used vehicle volume and prices.
Operational Efficiency
As we scaled our business, we incurred various costs to identify new hub locations, obtain licensing, build out our hubs and hire and train our employees. The costs we incurred scaling our business are non-recurring, and we further plan to focus on operational efficiency by reducing discretionary spending, optimizing our staffing level, and focusing on the efficiency of our processing centers.
In addition to achieving cost savings and operational efficiencies, we aim to lower our days to recondition. Going forward, our strategy is to focus on efficiency and reduce our use of the third party reconditioning services which are more costly and are not as timely as our internal reconditioning resources. All of these initiatives are designed to lower reconditioning costs per unit and thereby improve per unit economics.
Technological Capabilities
We are constantly reviewing our technology platform, and our goal is to enhance our online platform for seamless end-to-end transactions and to continually enhance both the car buying and selling experience. Our B2B portal and integration framework are designed to support the assignment, reconditioning, sale and remittance of vehicles from corporate vehicle sourcing partners. We plan to invest in our core suite of technology to enhance the buyer and seller experience, improve our B2B vehicle sourcing and enhance our business intelligence capabilities.
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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Retail vehicles sold | 2,270 | 2,554 | |||||||||
| Number of hubs | 22 | 11 | |||||||||
| Average monthly unique visitors | 257,022 | 178,783 | |||||||||
| Vehicles available for sale | 2,184 | 1,581 | |||||||||
| Retail gross profit per unit | $ | 827 | $ | 1,182 | |||||||
Percentage of unit sales sourced non-competitively(1) | 65 | % | 99 | % | |||||||
(1) Vehicles are sourced non-competitively through our consignment to retail sales model, through purchases directly from consumers and through arrangements with corporate vehicle sourcing partners.
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.
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Number of Hubs
We define a hub as a physical location at which we may sell and purchase, recondition and store vehicles within a market.
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. We view vehicles available-for-sale as a key measure of our growth potential. 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 non-competitively sourced
We define percentage of unit sales sourced non-competitively as the percentage derived by dividing the number of vehicles sold during the period that were sourced non-competitively (i.e., number of vehicles sourced other than from auctions) divided by the total number of vehicles sold during the period. The percentage of unit sales sourced non-competitively dropped in the first quarter of 2022 due to the low supply of vehicles available from our corporate vehicle sourcing accounts as a result of the chip shortage.
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 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 the exchange of a vehicle until the earlier of the first three days or 500 miles after delivery.
Wholesale Vehicle Sales
Vehicles that do not meet the Company’s standards for retail vehicle sales, retail vehicles that did not sell through the retail channel within a reasonable period of time and vehicles that the Company determines offer greater financial benefit through the wholesale channel are sold through various wholesale methods. 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
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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, as well as revenue (net of depreciation and other costs to maintain the vehicles) earned on our owned vehicles leased to B2B lease customers.
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 and is included as a charge to Lease income, net. Amortization of capitalized website and internal-use software costs is computed using the straight-line method over 3 years. Amortization of operating lease right-of-use assets is rent expense, included in selling, general, and administrative expenses.
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 $40 million revolving floor plan facility with Ally.
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Results of Operations
The following table presents our condensed consolidated statements of operations for the periods indicated:
Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ($ in thousands) | |||||||||||
| Revenues: | |||||||||||
| Retail vehicle sales | $ | 50,588 | $ | 50,383 | |||||||
| Wholesale vehicle sales | 8,575 | 4,568 | |||||||||
| Finance and insurance, net | 3,705 | 1,554 | |||||||||
| Lease income, net | 146 | 107 | |||||||||
| Total Revenues | 63,014 | 56,612 | |||||||||
| Cost of sales (exclusive of depreciation) | 60,936 | 54,604 | |||||||||
| Gross Profit | 2,078 | 2,008 | |||||||||
Operating Expenses: | |||||||||||
| Selling, general and administrative | 27,674 | 18,873 | |||||||||
| Stock based compensation expense | 1,684 | 41,963 | |||||||||
| Depreciation and amortization expense | 1,789 | 383 | |||||||||
| Management fee expense – related party | — | 2 | |||||||||
| Total Operating Expenses | 31,147 | 61,221 | |||||||||
| Loss from Operations | (29,069) | (59,213) | |||||||||
| Interest expense | 617 | 175 | |||||||||
| Other Income (Expense), net | |||||||||||
| Change in fair value of Merger warrants liability | 1,600 | 12,358 | |||||||||
| Change in fair value of earnout provision | 4,029 | 31,846 | |||||||||
| Other (expense) income | (779) | 162 | |||||||||
| Total Other Income, net | 4,850 | 44,366 | |||||||||
| Loss Before Income Tax Expense | (24,836) | (15,022) | |||||||||
| Income tax expense | — | — | |||||||||
| Net Loss | $ | (24,836) | $ | (15,022) | |||||||
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, as well as revenue (net of depreciation and other costs to maintain the vehicles) earned on our owned vehicles leased to B2B lease customers.
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Three Months Ended March 31, 2022 and 2021
The following table presents certain information from our condensed consolidated statements of operations by channel:
Three Months Ended March 31, | |||||||||||||||||
| 2022 | 2021 | Change | |||||||||||||||
| ($ in thousands, except per unit metrics) | |||||||||||||||||
| Revenue: | |||||||||||||||||
| Retail vehicle sales | $ | 50,588 | $ | 50,383 | 0.4 | % | |||||||||||
| Wholesale vehicle sales | 8,575 | 4,568 | 87.7 | % | |||||||||||||
| Finance and insurance, net | 3,705 | 1,554 | 138.4 | % | |||||||||||||
| Lease income, net | 146 | 107 | 36.4 | % | |||||||||||||
| Total revenues | 63,014 | 56,612 | 11.3 | % | |||||||||||||
| Cost of sales: | |||||||||||||||||
| Retail vehicle cost of sales | 52,415 | 48,917 | 7.2 | % | |||||||||||||
| Wholesale vehicle cost of sales | 8,521 | 5,687 | 49.8 | % | |||||||||||||
| Total cost of sales | $ | 60,936 | $ | 54,604 | 11.6 | % | |||||||||||
| Gross profit: | |||||||||||||||||
| Retail vehicle gross profit (loss) | $ | (1,827) | $ | 1,466 | (224.6) | % | |||||||||||
| Wholesale vehicle gross profit (loss) | 54 | (1,119) | 104.8 | % | |||||||||||||
| Finance and insurance gross profit | 3,705 | 1,554 | 138.4 | % | |||||||||||||
| Lease income, net | 146 | 107 | 36.4 | % | |||||||||||||
| Total gross profit | $ | 2,078 | $ | 2,008 | 3.5 | % | |||||||||||
Retail gross profit per unit(1): | |||||||||||||||||
| Retail vehicle gross profit (loss) | (1,827) | 1,466 | (224.6) | % | |||||||||||||
| Finance and insurance gross profit | 3,705 | 1,554 | 138.4 | % | |||||||||||||
| Total retail vehicle and finance and insurance gross profit | 1,878 | 3,020 | (37.8) | % | |||||||||||||
| Retail vehicle unit sales | 2,270 | 2,554 | (11.1) | % | |||||||||||||
| Retail vehicle gross profit per unit | $ | 827 | $ | 1,182 | (30.0) | % | |||||||||||
______________
(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 $0.2 million, or 0.4%, to $50.6 million during the three months ended March 31, 2022, from $50.4 million in the comparable period in 2021. The increase was primarily driven by an increase in average sale price per unit of $2,631, to $21,875 that was offset by a decrease in retail vehicle unit sales to 2,270 retail vehicles in the three months ended March 31, 2022, compared to 2,554 retail vehicles in the comparable period in 2021. The average sale price has increased consistent with macroeconomic trends in the used car industry.
Wholesale Vehicle Revenue
Wholesale vehicle revenue increased by $4.0 million, or 87.7%, to $8.6 million during the three months ended March 31, 2022, from $4.6 million in the comparable period in 2021. 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 $2.1 million, or 138.4%, to $3.7 million during the three months ended March 31, 2022, from $1.6 million in the comparable period in 2021. This increase in F&I revenue was driven by higher penetration of contract sales per unit sold and higher profit per contract.
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Lease Income, net
Lease income, net was $0.1 million during the three months ended March 31, 2022 and 2021.
Cost of Sales
Cost of sales increased by $6.3 million, or 11.6%, to $60.9 million during the three months ended March 31, 2022, from $54.6 million in the comparable period in 2021. The increase was due to an increased average acquisition price of the vehicles we sold in that period.
Retail Vehicle Gross Profit
Retail vehicle gross profit (loss) decreased by $(3.3) million, or (224.6)%, to $(1.8) million during the three months ended March 31, 2022, from $1.5 million in the comparable period in 2021. The decrease in retail gross profit for the three months ended March 31, 2022 resulted from a decrease in front-end margin per unit compared to the same period in 2021, driven by decreased front-end margins due to a combination of elevated acquisition prices of inventory primarily sourced through auction towards the end of prior year and the lowering of retail prices relative to the acquisition costs as the inventory matured. Additionally, as a result of adjusting the carrying value of inventory to the lower of cost or net realizable value, gross profit decreased by $(0.1) million, reducing retail gross profit per unit by $48, for the three months ended March 31, 2022.
Wholesale Vehicle Gross Profit
Wholesale vehicle gross profit (loss) increased by $1.2 million, to $0.1 million during the three months ended March 31, 2022, from $(1.1) million in the comparable period in 2021. The increase was primarily due to a decrease in the number of delisted consignment units compared to the same period in 2021.
F&I Gross Profit
F&I revenue consists of 100% gross margin products for which there are no costs associated with the products. Therefore, changes in F&I gross profit and the associated drivers are identical to changes in F&I revenue and the associated drivers.
Components of SG&A
Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ($ in thousands) | |||||||||||
Compensation and benefits(1) | $ | 10,798 | $ | 6,856 | |||||||
| Marketing | 3,154 | 2,526 | |||||||||
| Technology | 1,535 | 2,925 | |||||||||
| Accounting and legal | 2,065 | 2,819 | |||||||||
| Insurance | 2,236 | 1,336 | |||||||||
| Occupancy | 3,291 | 1,032 | |||||||||
Other costs(2) | 4,595 | 1,379 | |||||||||
| Total selling, general and administrative expenses | $ | 27,674 | $ | 18,873 | |||||||
(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 logistics and other administrative expenses.
Selling, general and administrative expenses increased by $8.8 million, to $27.7 million during the three months ended March 31, 2022, from $18.9 million in the comparable period in 2021. Costs related to the expansion of the Company since the prior year period increased $5.6 million, primarily due to insurance, occupancy and vehicle listing costs. Compensation and benefits increased $3.9 million due to increased corporate headcount and new hub openings. Marketing expense increased $0.6
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million in connection with marketing higher levels of inventory online and our national expansion, and technology expense decreased $(1.4) million due to elevated costs in the prior year quarter when the Company began website enhancements.
Non-GAAP Financial Measures
To supplement the interim unaudited condensed consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (GAAP), we also present the following non-GAAP measures: EBITDA, Adjusted EBITDA and Adjusted retail GPU. We believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team, and it also improves investors’ understanding of our underlying operating performance and their ability to analyze our ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
EBITDA is defined as net loss attributable to common stockholders adjusted to exclude interest expense, income tax expense and depreciation and amortization expense.
Adjusted EBITDA is EBITDA adjusted to exclude certain expenses related to the Company’s capital structure and management fee expense prior to the Merger, stock compensation expense and other non-operating income and expenses, including interest, investment gain/loss and nonrecurring income/expense.
Adjusted retail GPU is retail gross profit per unit adjusted to exclude the change in the inventory reserve for owned inventory to record inventory at the lower of cost or net realizable value. Retail gross profit per unit is the aggregate retail and F&I gross profit in a given period divided by retail vehicles sold during that period.
Management believes the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is useful to investors in comparing the Company’s performance prior to the Merger and the Company’s performance following the Merger.
Management believes the inclusion of supplementary adjustments to retail gross profit per unit in presented Adjusted retail GPU is useful to investors in presenting the Company’s gross profit per unit on units actually sold during the period in comparing the Company’s performance to prior periods that did not have a material change in the inventory reserve.
EBITDA, Adjusted EBITDA and Adjusted retail GPU have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of the results as reported under GAAP. These measures may not be comparable to similarly titled measures reported by other companies.
The following tables reconcile EBITDA and Adjusted EBITDA to net loss attributable to common stockholders and Adjusted retail GPU to retail gross profit per unit for the periods presented:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ($ in thousands) | |||||||||||
| Net Loss | $ | (24,836) | $ | (15,022) | |||||||
| Adjusted to exclude the following: | |||||||||||
| Interest expense | 617 | 175 | |||||||||
| Income tax expense | — | — | |||||||||
| Depreciation and amortization expense | 1,789 | 383 | |||||||||
| EBITDA | $ | (22,430) | $ | (14,464) | |||||||
| Other expense | 779 | (162) | |||||||||
| Stock compensation expense | 1,684 | 41,963 | |||||||||
| Management fee expense - related party | — | 2 | |||||||||
| Change in fair value of warrants liability | (1,600) | (12,358) | |||||||||
| Change in fair value of earnout provision | (4,029) | (31,846) | |||||||||
| Adjusted EBITDA | $ | (25,596) | $ | (16,865) | |||||||
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| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | Change | Change | ||||||||||||||||||||
| Adjusted retail gross profit per unit(1): | |||||||||||||||||||||||
| Retail vehicle gross profit | $ | (1,827) | $ | 1,466 | $ | (3,293) | (225) | % | |||||||||||||||
| Finance and insurance gross profit | 3,705 | 1,554 | 2,151 | 138 | % | ||||||||||||||||||
| Total retail gross profit | 1,878 | 3,020 | (1,142) | (38) | % | ||||||||||||||||||
| Change in inventory reserve(2) | 109 | — | 109 | 100 | % | ||||||||||||||||||
| Total adjusted retail gross profit | 1,987 | 3,020 | (1,033) | (34) | % | ||||||||||||||||||
| Retail vehicle units sold | 2,270 | 2,554 | (284) | (11) | % | ||||||||||||||||||
| Retail vehicle adjusted gross profit per unit | $ | 875 | $ | 1,182 | $ | (307) | (26) | % | |||||||||||||||
(1)Adjusted gross profit per unit is calculated as gross profit for retail vehicles and finance and insurance, excluding any cost of sales associated with recording existing inventory to net realizable value, each of which is divided by the total number of retail vehicles sold in the period.
(2)The change in inventory reserve represents the impact on the Condensed Consolidated Statements of Operations related to the adjustment for lower of cost or net realizable value of inventory in the period.
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 interim unaudited condensed consolidated financial statements). In connection with the Merger, pursuant to subscription agreements dated October 21, 2020 by and between Acamar Partners Acquisition Corp. (“Acamar Partners”) and certain strategic and accredited investors (the “PIPE Investors”), with respect to a private placement of shares of Acamar Partners Class A common stock, the Company issued and sold 12.5 million shares of Acamar Partners Class A common stock to the PIPE Investors at a price per share of $10.00 and an aggregate purchase price of $125.0 million.
Since inception, we have generally operated at a loss for most periods. As of March 31, 2022, we had cash and cash equivalents, restricted cash and short-term marketable securities of $153.4 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 for at least the next 12 months. We expect to continue to operate at a loss until we bring our hubs to maturity, achieve scale and are able to leverage our operating costs. Our hubs opened in 2021 have not been ramping to expected results and consequently have not provided the expected contribution to unit sales, revenue and gross profit. We may also seek additional funds as needed through alternative sources of liquidity, including equity or debt financings or other arrangements. 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 2021, the Company expanded the floor plan credit facility by $10 million to a total of $40 million. As of March 31, 2022, we had $22.1 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 $90 million calculated in accordance with U.S. GAAP.
Advances under the Ally Facility bear interest at a per annum rate designated from time to time by the Lender determined using a 365/360 simple interest method of calculation, unless expressly prohibited by law. The interest rate is currently the prime rate plus 2.50% per annum, or 6%. Advances under the Ally Facility, if not demanded earlier, are due and payable for each vehicle financed under the Ally Facility as and when such vehicle is sold, leased, consigned, gifted, exchanged,
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transferred, or otherwise disposed of. Interest under the Ally Facility is due and payable upon demand, but, in general, in no event later than 60 days from the date of request for payment. Upon any event of default (including, without limitation, our obligation to pay upon demand any outstanding liabilities of the Ally Facility), the Lender may, at its option and without notice to us, exercise its right to demand immediate payment of all liabilities and other indebtedness and amounts owed to the Lender and its affiliates by us and our affiliates.
The Ally Facility is secured by a grant of a security interest in certain vehicle inventory and other assets of the Company.
We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our interim unaudited condensed consolidated financial statements.
Cash Flows — Three Months Ended March 31, 2022 and 2021
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| ($ in thousands) | |||||||||||
| Cash Flow Data: | |||||||||||
| Net cash (used in) operating activities | $ | (31,664) | $ | (19,600) | |||||||
| Net cash provided by (used in) investing activities | 37,529 | (219,370) | |||||||||
| Net cash provided by (used in) financing activities | (5,891) | 310,746 | |||||||||
Operating Activities
For the three months ended March 31, 2022, net cash used in operating activities was $(31.7) million, primarily driven by net loss of $(24.8) million adjusted for non-cash charges of $0.6 million and net changes in our operating assets and liabilities of $(7.5) million. The non-cash adjustments primarily relate to a decrease in fair value of the warrants and earnout shares of $(5.6) million, offset by depreciation and amortization of $4.1 million and stock compensation of $1.7 million. The changes in operating assets and liabilities were primarily driven by an increase in inventories $(5.1) million and an increase other current assets of $(6.0) million, partially offset by an increase in accrued expenses of $1.0 million, an increase in accounts payable of $1.6 million, and a decrease in accounts receivable of $1.3 million.
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 were 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.
Investing Activities
For the three months ended March 31, 2022, net cash provided by investing activities was $37.5 million, primarily driven by sales and maturities of marketable securities of $64.9 million and partially offset by the purchase of property and equipment of $(4.1) million and purchases of marketable securities of $(22.0) million.
For the three months ended March 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.
Financing Activities
For the three months ended March 31, 2022, net cash used in financing activities was $(5.9) million, primarily driven by payments on floor plan notes payable of $(41.7) million, partially offset by borrowings on the floor plan facility of $36.0 million.
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For the three months ended March 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.
Material Contractual Obligations
The Company had contractual obligations as of March 31, 2022 that are material to an assessment of the Company’s short- and long-term cash requirements. As of March 31, 2022, the Company has total outstanding debt of $22.1 million under the floorplan facility, which represents the principal amount outstanding due to the uncertainty of forecasting the timing of expected variable interest rate payments. Borrowings under the floorplan facility are payable when the underlying vehicle is sold, which is expected to be in 2022.
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 interim unaudited 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 contained in Form 10-K filed with the SEC on March 15, 2022.
There have been no changes to our critical accounting policies during the three months ended March 31, 2022.
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 interim unaudited 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 March 31, 2022, 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 Wall Street Journal plus 2.50% per annum and, as of March 31, 2022, the prime rate as published in The Wall Street Journal
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was 3.5%. We believe a change to our interest rate of 1% applicable to our outstanding indebtedness would have an immaterial financial impact. As of March 31, 2022, we had total outstanding debt of $22.1 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 retail 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 December 31, 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 March 31, 2022 due to the existence of material weaknesses in internal control over financial reporting that were identified in connection with the audits of our consolidated financial statements as of December 31, 2021 and 2020 and for the years in the three year period ended December 31, 2021, and which are still being remediated.
Material Weaknesses in Internal Control Over Financial Reporting
Control Environment
We did not maintain an effective control environment to enable the identification and mitigation of risks of material misstatement, either individually or in the aggregate, based on the criteria established in the COSO Framework relating to the lack of sufficient accounting and financial reporting resources to address internal control over financial reporting.
Specifically, we did not attract, develop and retain accounting and financial resources commensurate with the size and complexity of our organization to support the oversight of processes and procedures in applying internal control over financial reporting to adequately prevent or detect accounting errors.
Control Activities
We did not design and implement effective control activities to enable the identification and mitigation of risks of material misstatement, either individually or in the aggregate, based on the criteria established by the COSO Framework. We have identified deficiencies in the principles associated with the control activities component of the COSO Framework relating to our: (i) inability to appropriately and timely reconcile account balances to detect accounting errors and evaluate balances for completeness and accuracy, and (ii) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives.
The following deficiencies in control activities, among others, contributed to accounting errors or the potential for there to have been accounting errors that are material to the financial statements:
•Lack of sufficient resources within the accounting and financial reporting department to review for the completeness and accuracy of source data supporting account reconciliations.
•Inadequate segregation of duties.
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•Inadequate general information technology controls in the areas of access security and program change-management over certain information technology systems that support the Company’s financial reporting processes.
Remediation Efforts to Address Material Weaknesses
Remediation of the identified material weaknesses and strengthening of our internal control environment will require a substantial effort throughout 2022 and beyond as necessary. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
While we have taken steps to address the material weaknesses, our current information technology systems have limited automated capabilities which create manual processes that require the time of our accounting and financial reporting resources. We are creating more streamlined and efficient accounting processes to allow the accounting and financial reporting resources to effectively operate the controls that we have designed and implemented.
We are designing and implementing controls to establish and maintain appropriate segregation of duties, formalize accounting policies and controls around user access and change management and evaluating options for a new ERP system.
We will also continue to attract, develop and retain competent management to ensure oversight of our processes and procedures in applying internal control over financial reporting.
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.
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 three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The information with respect to this Part II, Item 1 can be found in Note 15 to our interim unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
In addition to the other information set forth in this report, readers should carefully consider the additional risk factor included below as well as the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect our business, financial condition or future results. The risks described in our most recent Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The impact of COVID-19 may implicate and exacerbate other risks discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, including but not limited to risks relating to general economic conditions. This situation continues to evolve and additional impacts may arise that we are not currently aware of. Due to the unprecedented nature of the COVID-19 pandemic and responses thereto, we cannot identify all of the risks we face from the pandemic and its aftermath.
Our failure to meet the continued listing requirements of The Nasdaq Global Market could result in a delisting of our common stock.
Our common stock is listed on The Nasdaq Global Market (“Nasdaq”), and we are required to satisfy the continued listing requirements of Nasdaq to maintain such listing, including, among other things, the maintenance of a minimum closing bid price of $1.00 per share. Nasdaq Listing Rule 5450(a)(1) requires listed securities maintain a minimum closing bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum closing bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. In order to regain compliance, the closing bid price of the Company’s common stock must be at least $1.00 per share for a minimum of 10 consecutive business days. Although we are currently in compliance with the continued listing requirements of Nasdaq, there can be no assurance that we will be able to maintain compliance in the future.
The delisting of our common stock from Nasdaq may make it more difficult for us to raise capital on favorable terms in the future, or at all. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. Further, if our common stock were to be delisted from Nasdaq, our common stock would cease to be recognized as a covered security, and we would be subject to additional regulation in each state in which we offer our securities. Moreover, there is no assurance that any actions that we take to restore our compliance with the Nasdaq minimum bid requirement would stabilize the market price or improve the liquidity of our common stock, prevent our common stock from falling below the Nasdaq minimum bid price required for continued listing again or prevent future non-compliance with Nasdaq’s listing requirements.
There can be no assurance that we will continue to meet the minimum bid price requirement, or any other requirement in the future. If we fail to meet the minimum bid price requirement, or other applicable Nasdaq listing requirements, including maintaining minimum levels of stockholders’ equity or market values of our common stock, our common stock could be delisted. Delisting from Nasdaq would cause us to pursue eligibility for trading of our common stock on other markets or exchanges, or on an over-the-counter market. In such case, our stockholders’ ability to trade or obtain quotations of the market value of our common stock would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices of these securities. There can be no assurance that our common stock, if delisted from the Nasdaq, would be listed on a national securities exchange, a national quotation service or the over-the-counter markets. Delisting from the Nasdaq could also result in negative publicity, make it more difficult for us to raise additional capital, adversely affect the market liquidity of our common stock, decrease securities analysts’ coverage of us or diminish investor, supplier and employee confidence. In addition, our stock could become a “penny stock,” which would make trading of our common stock more difficult.
Use of social media may adversely impact our reputation or subject us to fines or other penalties.
Use of social media platforms, user review and recommendation websites and other forms of online communications provides individuals with access to a broad audience of consumers and other interested persons and increases the speed with which information and opinions can be shared. Regardless of their accuracy, negative posts or communications regarding our marketplace may be posted on social media platforms at any time and could quickly proliferate, which may harm our brand, reputation or business. The harm may be immediate, without affording us an opportunity for redress or correction. If we fail to
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mitigate any misinformation or negative information, including information spread through social media channels, it could have a material adverse effect on our business, sales and results of operations.
We also use social media platforms as marketing tools or as channels to disseminate information. For example, the Company and its executive officers maintain Facebook, Instagram, YouTube, Twitter, LinkedIn, and other social media accounts, where certain information that may be relevant to customers and investors is disseminated. Our reputation or brand could be adversely impacted by, among other things, customer perceptions of our use of social media or customer perceptions of statements on social media platforms made by us, our employees or other third parties. In addition, as laws and regulations rapidly evolve to govern the use of these platforms, any failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.
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Exhibit Index
Item 6. Exhibits and Financial Statement Schedules
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1† | ||||||||
10.2† | ||||||||
| 10.3† | ||||||||
| 10.4† | ||||||||
| 10.5*† | ||||||||
| 10.5.1*† | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1* | ||||||||
| 32.2* | ||||||||
| 101.INS* | XBRL Instance Document | |||||||
| 101.SCH* | XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded with the Inline XBRL document and included in Exhibit 101) | |||||||
_____________________
* Filed herewith
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† Indicates a management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CarLotz, Inc. | |||||
By: | /s/ THOMAS W. STOLTZ | ||||
Thomas W. Stoltz | |||||
Chief Financial Officer | |||||
| (Duly Authorized Officer and Principal Financial Officer) | |||||
Date: May 9, 2022 | |||||||||||||||||
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