Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and in the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), as updated by the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
Vroom is an innovative, end-to-end ecommerce platform that is transforming the used vehicle industry by offering a better way to buy and a better way to sell used vehicles. Our scalable, data-driven technology brings all phases of the car buying and selling process to consumers wherever they are, and offers an extensive selection of used vehicles, transparent pricing, competitive financing, and at-home pick-up and delivery. We are deeply committed to creating an exceptional experience for our customers.
We take a vertically integrated, hybrid approach and leverage the benefits of national scale and local efficiency. We are driving enduring change in the industry by reinventing all phases of the vehicle buying and selling process, from discovery to delivery and everything in between. Our platform encompasses:
•Ecommerce: We provide consumers with a personalized and intuitive ecommerce interface to research and select from thousands of fully reconditioned vehicles, with specific sorting, searching and filtering functionality. Our platform is accessible at any time on any device and provides transparent haggle-free pricing, detailed vehicle information, real-time financing and nationwide contact-free delivery right to a buyer’s driveway. For consumers looking to sell or trade in their vehicles, we provide attractive market-based pricing, real-time price quotes and convenient, contact-free at-home vehicle pick-up.
•Vehicle Operations: Our scalable and vertically integrated operations underpin our business model. We strategically source inventory from consumers, auctions, rental car companies, OEMs, and dealers. We improve our ability to acquire high-demand vehicles through enhanced supply science across all our sourcing channels and utilize national marketing efforts to drive consumer sourcing. In our reconditioning and logistics operations, we deploy a hybrid strategy that optimizes a combination of ownership and operation of assets by us with strategic third-party partnerships. We continue to leverage our last mile hub logistics operations and geographically dispersed network of reconditioning centers to further develop our regional operating model designed to improve our operating leverage, drive stronger unit economics and enhance our customer experience.
•Data Science and Experimentation: Data science and experimentation are at the core of everything we do. We rely on data science, machine learning and A/B and multivariate testing to continually drive optimization and operating leverage across our ecommerce and vehicle operations. We leverage data to increase the effectiveness of our national brand and performance marketing, enhance our customer experience, analyze market dynamics at scale, calibrate our vehicle pricing and optimize our overall inventory sales velocity. In our vehicle operations, data science and experimentation enables us to fine tune our supply, sourcing and logistics models and to streamline our reconditioning processes.
•Vehicle Financing: A critical component of our value proposition is offering vehicle financing to our customers as a seamless component of the transaction process. We currently offer integrated, real-time, individualized financing solutions through strategic partnerships with trusted lenders in automotive finance and through our subsidiary, UACC, which we acquired on February 1, 2022. The acquisition of UACC accelerated Vroom’s strategy to develop a captive financing arm and brought with it UACC’s financing expertise and extensive application processing, underwriting, securitization, and servicing capabilities.
44
Table of Contents
Based on data from Cox Automotive, there were an estimated 36.2 million used vehicle transactions in 2022. According to a 2022 NADA Auto Retailing market summary, the U.S. automotive industry generated approximately $1.2 trillion in sales in 2021. The U.S. used automotive market is highly fragmented and ripe for disruption as an industry that is notorious for consumer dissatisfaction and has one of the lowest levels of ecommerce penetration. Industry reports estimate that ecommerce penetration will grow to as much as half of all used vehicle sales by 2030. Our platform, coupled with our national presence and brand, provides a significant competitive advantage versus local dealerships and regional players that lack nationwide reach and scalable technology, operations and logistics. The traditional auto dealers and peer-to-peer market do not offer consumers what we offer.
Long-Term Roadmap
In 2022, we developed a long-term road map designed to achieve three key objectives: prioritizing unit economics over growth, significantly reducing operating expenses, and maximizing liquidity. In 2023, we have refined these three key objectives to prioritize unit economics and growth, improve costs per unit and maximize liquidity.
In order to achieve these objectives, we are focused on four strategic initiatives:
•Building a well-oiled transaction machine: Optimize our sales channels using internal and outsourced resources and digitization; streamline and digitize the title and registration process; and optimize our marketing strategies by building brand awareness, growing organic search traffic and fine-tuning paid media campaigns to improve direct traffic and drive conversion.
•Building a well-oiled metal machine: Optimize pricing and assortment of vehicles through predictive data and analytics and regionalization, as well as synchronize end-to-end supply chain to increase velocity and improve flow.
•Building a regional operating model: Build a regional operating model to improve the customer experience; increase the speed of the supply chain; lower logistics costs; and reduce markdowns.
•Building a captive finance offering: Accelerate the development of UACC as a captive financing operation, giving us the ability to better serve our customers across the credit spectrum, drive enhanced unit economics and improve our overall customer experience.
These four initiatives are designed to further our progress in building a profitable business model, enable us to build a well-oiled machine across our operations and position us to resume growth.
Recent Events
January 2023 Reduction in Force
On January 18, 2023, we executed a reduction in force as part of our continued focus on reducing variable and fixed costs as we pursue our long-term roadmap. We reduced Vroom’s headcount by approximately 275 employees based on our assessment of business needs, the efficiencies obtained by our key initiatives, and our pursuit of long-term success and profitable growth. In 2022, we significantly improved our operations, specifically in our titling, registration and transaction processes, allowing us to now run these processes more cost effectively. We incurred expenses of approximately $4.1 million for the three months ended March 31, 2023, primarily consisting of severance, as a result of this reduction in force. We expect to achieve approximately $27.0 million of annualized cost reductions as a result of the reduction in force in January.
April 2023 Reduction in Force
On April 26, 2023, as part of our ongoing reexamination of all facets of the business, we implemented an organizational restructuring that included a reduction in force. We reduced Vroom’s headcount by approximately 120 employees, or approximately 11% of Vroom employees, excluding UACC, or approximately 7% measured across the combined Company. We expect to incur total expenses of approximately $2.0 million in the second quarter of 2023, primarily consisting of severance costs, and expect to achieve approximately $15.0 million of annualized cost savings as a result of the reduction in force in April. Combined with prior reductions, this reflects an approximately 55% reduction of our employees and contractors (excluding UACC) since January 2022.
45
Table of Contents
The foregoing estimates regarding our anticipated annualized cost savings as a result of the reductions in force in January and April are in each case based upon current assumptions and expectations but are subject to known and unknown risks and uncertainties. Accordingly, we may not be able to fully realize the cost savings and benefits initially anticipated.
Nasdaq Notice
On April 14, 2023, we received written notice from The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the $1.00 per share minimum bid price requirement for continued inclusion on the Nasdaq Global Select Market pursuant to Nasdaq Listing Rule 5450(a)(1) (the "Minimum Bid Price Requirement"). The Notice has no immediate effect on the listing of our common stock, which continues to trade on the Nasdaq Global Select Market under the symbol “VRM”.
We have a period of 180 calendar days, or until October 11, 2023, to regain compliance with the Minimum Bid Price Requirement. To regain compliance, the closing bid price of our common stock must be at least $1.00 per share for a minimum of 10 consecutive business days during the 180-day period prior to October 11, 2023.
If we do not regain compliance by October 11, 2023, we may be eligible for an additional 180-calendar day compliance period by transferring the listing of our common stock to the Nasdaq Capital Market. If we fail to regain compliance during the compliance period (including a second compliance period provided by a transfer to the Nasdaq Capital Market, if applicable), then Nasdaq will notify us of its determination to delist our common stock, at which point we may appeal Nasdaq’s delisting determination to a Nasdaq hearing panel.
We intend to actively monitor the closing bid price of our common stock and will consider all available options to regain compliance with the Minimum Bid Price Requirement, which may include transferring the listing to the Nasdaq Capital Market and/or seeking stockholder approval to effect a reverse stock split. However, there can be no assurance that we will regain compliance with the Minimum Bid Price Requirement.
Convertible Note Repurchases
In March 2023, we repurchased $14.6 million in aggregate principal amount of our outstanding 0.75% unsecured Convertible Senior Notes due 2026 (the "Notes"), net of deferred issuance costs of $0.3 million, in open market transactions for $5.9 million. Subject to market conditions and availability, we may continue to opportunistically repurchase Notes from time to time to reduce our outstanding indebtedness at a discount.
Our Model
We generate revenue through the sale of used vehicles, vehicle financing and value-added products. We sell vehicles directly to consumers primarily through our Ecommerce segment as a licensed dealer.
As a result of the UACC Acquisition on February 1, 2022, we are developing a captive financing operation for Vroom customers, which will enable us to provide our customers with expanded financing solutions across the credit spectrum and an enhanced customer experience, while generating improved unit economics. We also expect to continue to generate ecommerce product revenue through interest income on UACC's finance receivables generated by loans provided to Vroom customers and UACC’s sale of such finance receivables in securitization transactions or forward flow arrangements. Additionally, we expect UACC to continue to purchase and service finance receivables originated by its network of third-party dealership customers and generate finance revenue, including interest income earned on finance receivables before the loans are sold, interest income on finance receivables held in consolidated VIEs, and, when applicable, gains on sale of securitized finance receivables. Over time, we intend to grow the third-party dealership network and business.
We also sell vehicles through wholesale channels, which provide a revenue source for vehicles that do not meet our Vroom retail sales criteria.
For the three months ended March 31, 2023, our Ecommerce, Wholesale, and Retail Financing segments represented 69.0%, 7.1%, and 16.3% of our total revenue, respectively.
46
Table of Contents
Our retail gross profit consists of two components: Vehicle Gross Profit and Product Gross Profit. Vehicle Gross Profit is calculated as the aggregate retail sales price for all vehicles sold to customers along with delivery fee revenue and document fees received from customers, less the aggregate cost to acquire such vehicles, the aggregate cost of inbound transportation for such vehicles to our vehicle reconditioning centers, which we refer to as VRCs, and the aggregate cost of reconditioning such vehicles for sale. Product Gross Profit consists of fees earned on vehicle financing originated by our third-party financing sources and any third-party value-added products sold as part of a vehicle sale. Because we are paid fees on the third-party financing and other value-added products we sell, our gross profit on such products is equal to the revenue we generate. Starting in 2022, Product Gross Profit also includes (i) interest income earned on finance receivables from Vroom customers that we originate through UACC before the loans are sold, (ii) interest income on finance receivables held in consolidated variable interest entities ("VIEs") less the interest expense incurred on securitization debt, and when applicable (iii) gain on sales of securitized finance receivables. See “—Key Operating and Financial Metrics.”
Below is an explanation of how we calculate vehicle gross profit per unit and product gross profit per unit:
Our profitability depends primarily on improving unit economics and achieving operating leverage. We deploy a hybrid strategy that optimizes a combination of ownership and operation of assets by us with strategic third-party partnerships. Our hybrid approach also applies to the third-party value-added products we sell to customers. Historically, we generated additional revenue streams without directly underwriting vehicle financing or protection products; however, the UACC Acquisition enables us to underwrite vehicle financing for our customers. As we resume growth, we expect to benefit from efficiencies and operating leverage across our business, including our marketing and technology investments, and our inventory procurement, logistics, reconditioning and sales processes.
47
Table of Contents
Our Segments
We manage and report operating results through three reportable segments:
•Ecommerce (69.0% of total revenue for the three months ended March 31, 2023): The Ecommerce segment represents retail sales of used vehicles through our ecommerce platform, revenue earned on vehicle financing originated by UACC or our third-party financing sources and sales of value-added products associated with those vehicles sales.
•Wholesale (7.1% of total revenue for the three months ended March 31, 2023): The Wholesale segment represents sales of used vehicles through wholesale channels.
•Retail Financing (16.3% of total revenue for the three months ended March 31, 2023): The Retail Financing segment represents UACC’s operations with its network of third-party dealership customers.
As part of the Business Realignment Plan (the "Realignment Plan"), we streamlined TDA's operations and closed our service center. We also reevaluated our reporting segments based on relative revenue and gross profit and significance in our long term strategy. As a result of the quantitative analysis, we determined TDA should not be reported as a separate segment as it was presented prior to the second quarter of 2022.
48
Table of Contents
Gross profit is defined as revenue less cost of sales for each segment. Reflected below is a summary of segment revenue and segment gross profit for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022(1) |
|
|
|
(in thousands) |
|
Revenue: |
|
|
|
|
|
|
Ecommerce |
|
$ |
135,633 |
|
|
$ |
675,364 |
|
Wholesale |
|
|
13,895 |
|
|
|
139,984 |
|
Retail Financing |
|
|
31,988 |
|
|
|
47,687 |
|
All Other |
|
|
14,951 |
|
|
|
60,740 |
|
Total revenue |
|
$ |
196,467 |
|
|
$ |
923,775 |
|
Gross profit (loss): |
|
|
|
|
|
|
Ecommerce |
|
$ |
10,035 |
|
|
$ |
34,320 |
|
Wholesale |
|
|
62 |
|
|
|
(2,753 |
) |
Retail Financing |
|
|
25,774 |
|
|
|
44,963 |
|
All Other |
|
|
2,934 |
|
|
|
5,110 |
|
Total gross profit |
|
$ |
38,805 |
|
|
$ |
81,640 |
|
(1) We reclassified TDA revenue and TDA gross profit from the TDA reportable segment to the “All Other” category to conform to current year presentation.
Key Operating and Financial Metrics
We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial forecasts and make strategic decisions. We believe these operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. You should read the key operating and financial metrics in conjunction with the following discussion of our results of operations and together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. We focus heavily on metrics related to unit economics as improved gross profit per unit is a key element of our growth and profitability strategies.
The calculation of our key operating and financial metrics is straightforward and does not rely on significant projections, estimates or assumptions. Nevertheless, each of our key operating and financial metrics has limitations because each focuses specifically on only one standard by which to evaluate our business, without taking into account other applicable standards, performance measures or operating trends by which our business could be evaluated. Accordingly, no single metric should be viewed as the bellwether by which our business should be measured. Rather, each key operating and financial metric should be considered in conjunction with other metrics and components of our results of operations, such as each of the other key operating and financial metrics and our revenues, inventory, loss from operations and segment results.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Ecommerce units sold |
|
|
3,933 |
|
|
|
19,473 |
|
Vehicle gross (loss) profit per ecommerce unit |
|
$ |
(151 |
) |
|
$ |
595 |
|
Product gross profit per ecommerce unit |
|
|
2,703 |
|
|
|
1,168 |
|
Total gross profit per ecommerce unit |
|
$ |
2,552 |
|
|
$ |
1,763 |
|
Average monthly unique visitors |
|
|
2,303,794 |
|
|
|
2,587,431 |
|
Ecommerce average days to sale |
|
|
279 |
|
|
|
91 |
|
Inventory turnover |
|
|
2.24 |
|
|
|
4.57 |
|
Inventory days to supply |
|
|
161 |
|
|
|
79 |
|
49
Table of Contents
Ecommerce Units Sold
Ecommerce units sold is defined as the number of vehicles sold and shipped to customers through our ecommerce platform, net of returns under our Vroom 7-Day Return Program. Ecommerce units sold excludes on-site sales of vehicles at TDA and through the Wholesale segment. Each vehicle sale through our ecommerce platform also creates the opportunity to leverage such sale to provide vehicle financing, sell value-added products and acquire trade-in vehicles from our customers, which we can either recondition and add to our inventory or sell through wholesale channels.
Vehicle Gross Profit per Ecommerce Unit
Vehicle Gross Profit per ecommerce unit, which we refer to as Vehicle GPPU, for a given period is defined as the aggregate retail sales price and delivery charges for all vehicles sold through our Ecommerce segment less the aggregate costs to acquire those vehicles, the aggregate costs of inbound transportation to the VRCs and the aggregate costs of reconditioning those vehicles in that period, divided by the number of ecommerce units sold in that period. We believe Vehicle GPPU is a key driver of our long-term profitability.
Product Gross Profit per Ecommerce Unit
Product Gross Profit per ecommerce unit, which we refer to as Product GPPU, for a given period is defined as the aggregate fees earned on sales of value-added products in that period, net of the reserves for chargebacks on such products in that period, divided by the number of ecommerce units sold in that period. Because we are paid fees on the vehicle financing and value-added products we sell, our gross profit is equal to the revenue we generate from the sale of such products. Starting in 2022, Product Gross Profit also includes (i) interest income earned on finance receivables from Vroom customers to finance vehicle sales that we originate through UACC before the loans are sold, (ii) interest income on finance receivables held in consolidated VIEs less the interest expense incurred on securitization debt, and when applicable (iii) gain on sales of securitized finance receivables, divided by the number of ecommerce units sold in that period.
Total Gross Profit per Ecommerce Unit
Total Gross Profit per ecommerce unit, which we refer to as Total GPPU, for a given period is calculated as the sum of Vehicle GPPU and Product GPPU. We view Total GPPU as a key metric of the profitability of our Ecommerce segment.
Average Monthly Unique Visitors
Average monthly unique visitors is defined as the average number of individuals who access our ecommerce platform within a calendar month. We calculate the average monthly unique visitors over any period by dividing the aggregate monthly unique visitors during such period by the number of months in that period. We use average monthly unique visitors to measure the quality of our customer experience, the effectiveness of our marketing campaigns and customer acquisition as well as the strength of our brand and market penetration.
Average monthly unique visitors is calculated using data provided by Google Analytics. The computation of average monthly unique visitors excludes individuals who access our platform multiple times within a calendar month, counting such individuals only one time for purposes of the calculation. If an individual accesses our ecommerce platform using different devices or different browsers on the same device within a given month, the first access through each such device or browser is counted as a separate monthly unique visitor.
Ecommerce Average Days to Sale
We define ecommerce average days to sale as the average number of days between our acquisition of vehicles and the final delivery of such vehicles to customers through our ecommerce platform. We calculate average days to sale for a given period by dividing the aggregate number of days between the acquisition of all vehicles sold through our ecommerce platform during such period and final delivery of such vehicles to customers by the number of ecommerce units sold in that period. Ecommerce average days to sale excludes vehicles sold on-site at TDA and through the Wholesale segment. Ecommerce average days to sale is an important metric because a reduction in the number of days between the acquisition of a vehicle and the delivery of such vehicle typically results in a higher gross profit per unit.
50
Table of Contents
Inventory turnover
Inventory turnover is a measure of how well we are optimizing our inventory. We calculate inventory turnover for a given period as total retail and wholesale cost of sales for the respective period annualized and divided by average inventory (computed using the current and immediately preceding quarter-end balances). Our inventory turnover ratio is an important metric as a higher turnover ratio reflects a more efficient use of our capital and typically results in a higher gross profit per unit.
Inventory days to supply
We define inventory days to supply as the number of days between acquisition of vehicles and sale of such vehicles to customers. We calculate inventory days to supply for a given period by dividing average inventory by total retail and wholesale cost of sales per day for the respective period. Inventory days to supply is an important metric because a reduction in the inventory days to supply typically results in a higher gross profit per unit.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe the following non-GAAP financial measures are useful in evaluating our operating performance: EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain. These non-GAAP financial measures have limitations as analytical tools in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with U.S. GAAP. Because of these limitations, these non-GAAP financial measures should be considered along with other operating and financial performance measures presented in accordance with U.S. GAAP. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with U.S. GAAP. We have reconciled all non-GAAP financial measures with the most directly comparable U.S. GAAP financial measures.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain are supplemental performance measures that our management uses to assess our operating performance and the operating leverage in our business. Because EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain
We calculate EBITDA as net loss before interest expense, interest income, income tax expense and depreciation and amortization expense.
We calculate Adjusted EBITDA as EBITDA adjusted to exclude severance costs, gain on debt extinguishment, goodwill impairment charge, and acquisition related costs. Changes in fair value of financial instruments can fluctuate significantly from period to period and previously related primarily to historical loans and debt which have been securitized, and acquired on February 1, 2022 from UACC. Our ongoing business model is to originate or purchase finance receivables with the intent to sell which we recognize at the lower of cost or fair value. As a result of current market conditions, the financial instruments related to the 2022-2 and 2023-1 securitization transactions are recognized on balance-sheet and accounted for under the fair value option. See Note 16 — Financial Instruments and Fair Value Measurements to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. As a result, the majority of our finance receivables are now carried at fair value and a significant portion of the risk of loss associated with these finance receivables have been retained by UACC. We therefore have determined we will no longer make any adjustments for such fluctuations in fair value to our Adjusted EBITDA results. We have recast the prior periods presented to conform to current period presentation. We may account for future securitizations as on balance sheet transactions depending on the market conditions.
We calculate Adjusted EBITDA excluding securitization gain as Adjusted EBITDA adjusted to exclude the securitization gain from the sale of UACC's finance receivables as it provides a useful perspective on the underlying operating results and trends as well as a means to compare our period-over-period results.
51
Table of Contents
The following table presents a reconciliation of EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain to net loss, which is the most directly comparable U.S. GAAP measure:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
|
(in thousands) |
|
Net loss |
|
$ |
(75,044 |
) |
|
$ |
(310,459 |
) |
Adjusted to exclude the following: |
|
|
|
|
|
|
Interest expense |
|
|
9,919 |
|
|
|
9,380 |
|
Interest income |
|
|
(5,942 |
) |
|
|
(3,952 |
) |
Provision (benefit) for income taxes |
|
|
273 |
|
|
|
(23,240 |
) |
Depreciation and amortization |
|
|
10,637 |
|
|
|
7,895 |
|
EBITDA |
|
$ |
(60,157 |
) |
|
$ |
(320,376 |
) |
Severance costs |
|
$ |
4,104 |
|
|
$ |
— |
|
Gain on debt extinguishment |
|
|
(8,709 |
) |
|
|
— |
|
Goodwill impairment charge |
|
|
— |
|
|
|
201,703 |
|
Acquisition related costs |
|
|
— |
|
|
|
5,653 |
|
Adjusted EBITDA |
|
$ |
(64,762 |
) |
|
$ |
(113,020 |
) |
Securitization gain |
|
|
— |
|
|
|
(29,617 |
) |
Adjusted EBITDA excluding securitization gain |
|
$ |
(64,762 |
) |
|
$ |
(142,637 |
) |
Other Key Factors and Trends Affecting our Operating Results
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors and trends, including the following:
Ability to convert visitors to our platform into customers and source vehicles from consumers
The quality of the customer experience on our ecommerce platform is critical to our ability to attract new visitors to our platform, convert such visitors into customers and increase repeat customers, as well as our ability to acquire vehicles directly from consumers. Our ability to drive higher customer conversion and increased consumer sourcing depends on our ability to make our platform a compelling choice for consumers based on our functionalities and consumer offerings.
Data science and testing drive decision making across all of our conversion and sourcing efforts. By analyzing the data generated by the millions of visitors and tens of thousands of transactions on our platform, and continually testing strategies to maximize conversion rates, we form a better understanding of consumer preferences and try to create a more tailored ecommerce experience for consumers looking to purchase vehicles. Similarly, for consumers looking to sell vehicles to us, we use a vast set of data and data science, to provide an automated pricing platform that delivers real time, market-driven appraisals, and continually test and optimize in order to further refine our approach to enhance the customer experience and drive increased vehicle purchases.
Increased conversion and consumer sourcing also depends on our ability to provide the necessary customer support and sales support. Our ongoing investment in our customer experience operations includes investments in processes, technology, and data science. We are continuing to invest in our processes, including optimizing our sales channels using internal and outsourced resources, in order to remove friction and increase transaction flow, and in technology and data science to automate and improve our customer experience, reduce costs per transaction and to drive conversion and consumer sourcing.
As part of our long-term roadmap and in response to a significant staff reduction by our primary third-party telephone sales support provider, we have been building our in-house sales team, have ceased using such third-party telephone sales provider and have meaningfully increased the level of sales supported internally, which we believe will improve our customer experience, and lower our selling costs. However, these reductions negatively impacted our sales volume in the first quarter of 2023 as we transitioned away from the third-party provider. Nevertheless, we do not expect this transition to have a long-term impact on our sales volume, or financial condition and results of operations as we reduce costs by expanding our internal sales force and leveraging our existing relationships with other sales partners,
52
Table of Contents
consistent with our long-term strategy to optimize our cost structure. The ability to successfully grow an effective internal sales team will be critical to our ability to achieve profitable growth.
In order to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, including delays in titling and registering vehicles purchased by our customers, we have undertaken various initiatives. These initiatives include increased digitization and electronic transmission of transaction documents and implementation of our digital title vault to ensure that titles are quality checked and vaulted in Vroom's name prior to listing of vehicles on our website. While these initiatives are designed to improve our transaction processing, enhance our customer experience, and reduce our regulatory risk, they have resulted in delays in listing vehicles for sale, which increased the number of days between our acquisition of vehicles and the final delivery of such vehicles to customers. As we improve the customer experience and drive efficiency in transaction processing, we expect that we will attract more visitors, improve conversion, drive greater sales and continue to source vehicles from consumers. If we cannot manage our growth effectively to maintain the quality and efficiency of our customers’ experience, our business, financial condition and results of operations could be materially and adversely affected. See “Risks Related to Our Growth and Strategy—Our prior rapid growth is not indicative of our short-term strategy under our long-term roadmap and, if and when we return to rapid growth, we may not be able to manage our growth effectively" in our Annual Report.
Ability to optimize the mix of inventory to drive increased gross profit and improvements to our unit economics
Improving unit economics and driving increased gross profit requires a number of important capabilities, including the ability to finance the acquisition of inventory at competitive rates, source high quality vehicles across various acquisition channels nationwide, secure adequate reconditioning capacity and execute effective marketing strategies to increase consumer sourcing. In addition, our ability to accurately forecast pricing and consumer demand for specific types of vehicles is critical to sourcing high quality, high-demand vehicles, as well as lower-price-point vehicles to take advantage of the expanded sales opportunities to customers across the credit spectrum enabled by the UACC Acquisition. The ability to source the optimal mix of quality inventory will be a key driver as we believe the availability of lower price point used vehicles will continue to be constrained. This ability is enabled by our data science capabilities that leverage the growing amount of data at our disposal and generate predictive data analytics that fine-tune our supply and sourcing models. As we continue to invest in our operational efficiency and data science, we expect that we will improve our unit economics and in turn drive increased gross profit.
We strategically source inventory from consumers, auctions, rental car companies, OEMs and dealers. For the three months ended March 31, 2023, vehicles sourced from consumers represent the substantial majority of our retail inventory sold. Because the quality of vehicles and associated gross margin profile vary across each channel, the mix of inventory sources has an impact on our profitability. We continually evaluate the optimal mix of sourcing channels and strive to source vehicles in a way that generates the highest sales margins and shortest inventory turns in order to maximize our average gross profit per unit and improve our unit economics. For example, purchasing vehicles at third-party auctions is competitive and, consequently, vehicle prices at third-party auctions tend to be higher than vehicle prices for vehicles sourced directly from consumers. Accordingly, as part of our sourcing strategy, we have strategically increased the percentage of vehicle sales that we source from consumers.
As we continue to make progress on our initiatives to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, a higher portion of our unit sales in the first quarter of 2023 was from aged inventory as we obtained titles for vehicles not previously listed for sale, which negatively impacted our sales margin (sales price less purchase price of vehicles sold) and GPPU. We expect to sell through the majority of our aged inventory in the first half of 2023 and we expect this to continue to negatively impact our sales margin and GPPU.
In the latter half of 2022, we began inspecting consumer sourced vehicles and making real time adjustments to acquisition pricing as a result of our scaling proprietary logistics operation, which we expect will provide improvements to our overall gross profit per unit over time.
Ability to optimize our reconditioning operations
Before a vehicle is listed for retail sale on our platform, it undergoes a thorough reconditioning process in order to meet our Vroom retail sales criteria. The efficiency of this reconditioning process is a key element in our ability to grow profitably. Our ability to recondition purchased vehicles to our quality standards is a critical component of our business. Historically, we have successfully increased our reconditioning capacity as our business has grown, and our future
53
Table of Contents
success will depend on our ability to continue to optimize our reconditioning capacity to satisfy customer demand, maximize profitability, and enhance the customer experience.
We employ a hybrid approach that combines the use of our proprietary vehicle reconditioning center ("VRC") and VRCs primarily operated by a single third-party provider to best meet our reconditioning needs. We intend to optimize reconditioning capacity and operational efficiency through distributed third-party VRC locations and additional proprietary VRCs. Our use of third-party VRCs to recondition vehicles allows us to avoid additional capital expenditures, quickly adjust capacity, maintain greater operational flexibility and broaden our geographic footprint to drive lower logistics costs. Proprietary VRCs will enable us to have increased control over our reconditioning operations, ensure adequate capacity, optimize our end-to-end supply chain and support our regional operating model. During 2022, we took action to right-size the staffing of our proprietary reconditioning operations as well as optimize the number of third-party reconditioning partner locations to align with our reduced unit sales volume, resulting in a reduction in headcount. We also relocated our reconditioning facility from Stafford, Texas to the former service center at the TDA store location which we believe better aligns our proprietary reconditioning operations in the Houston market with our reduced unit sales volume, reduces our lease and operating expenses and provides an improved work environment for our employees. Going forward, we will integrate regional management of our distributed reconditioning and logistics operations as part of our ongoing efforts to optimize our operations and enhance our customer experience.
Our existing facilities in the Atlanta area provide us with the space and opportunity to develop a secondary proprietary VRC in the future, depending on our future reconditioning needs. Going forward, we will continue to seek to optimize the combination of strategic and geographically dispersed proprietary and third-party VRCs. We will continue to leverage our data science and deep industry experience to strategically select VRC locations where we believe there is the highest supply and demand for our vehicles and enable us to leverage a regional operating model.
Ability to optimize our logistics network
As we scaled our business, we not only added proprietary line-haul capability, but also built our third-party logistics network nationwide through the development of strategic carrier arrangements with national haulers and the consolidation of our carrier base into a smaller number of carriers in dedicated operating regions. We expect that these enhanced logistics operations, combined with the expansion of strategically located VRCs, will drive efficiency in our logistics operations. We have been accelerating our strategy to optimize our hybrid approach by focusing on improving the quality and reliability of our logistics operations. We previously prioritized investment in our last mile hub delivery operations, where we had the greatest impact on the customer experience, including by investing in short-haul vehicles to make regional deliveries from our last mile hubs, and line-haul vehicles for hub-to-hub shipments on high-volume routes. We have started to focus on leveraging our proprietary logistics network for inbound transportation related to acquisitions, including driveway inspections for consumer sourced vehicles. We are also continuing to invest in our processes and technology to remove inefficiencies and increase automation. We took action to optimize our proprietary logistics operations in order to align with reduced unit sales volume, which resulted in a reduction in headcount, as well as the restructuring of our network of logistics operations. Consistent with our long-term roadmap and the continued development of our regional operating model, we intend to continue to strategically combine the operation of our proprietary fleet with the use of third-party carriers, as well as synchronize our end-to-end supply chain to increase sales velocity and optimize flow of our inventory. We plan to reduce the number of miles our vehicles travel and lower our inbound and outbound transportation costs using our regional operating model. We believe these initiatives will enable us to reduce logistics costs per mile, improve our inventory turnover and provide the highest level of customer service. We expect that optimizing our logistics network through this hybrid approach will result in improved unit economics, increased profitability and an enhanced customer experience.
Ability to leverage a regional operating model
As we scaled our business, we achieved a national presence and brand that provides a significant competitive advantage versus local and regional dealers, and has enabled us to take advantage of efficiencies and lower costs of national brand advertising. Our national vehicle operations enable us to leverage a regional operating model, which is designed to reduce our operating expenses, increase our operating leverage and improve our unit economics, while also enhancing our customer experience. The regional operating model will increasingly enhance our approach to each component of our vehicle operations. We believe the efficiencies and cost savings expected to be achieved through the regional operating model will be important components of our path to profitability.
54
Table of Contents
Ability to develop and manage our financing capabilities
Revenue earned on vehicle financing, both through our continued partnerships with third-party lenders and the development of our captive financing capabilities, present an opportunity to grow our business and drive profitability. Strategic partnerships with lenders such as Chase and Ally Financial provide enhanced revenue streams for us, as well as offering convenience, assurance and efficiency for our customers and have contributed to improvements in Product GPPU. In addition, the acquisition of UACC in February 2022 has enabled us to expand our offerings across the credit spectrum and accelerate the development of our captive financing operation, which is one of the key strategic initiatives under our long-term roadmap. We expect to develop UACC into a full captive financing arm with disciplined lending expertise, which would enable us to increase our ecommerce unit sales, expand our penetration into sales to customers across the credit spectrum and improve our unit economics.
While credit losses are inherent in the automotive finance receivables business, several variables have affected UACC’s recent loss and delinquency rates, including rising interest rates, the current inflationary environment and vehicle depreciation. UACC is currently experiencing higher loss severity and higher losses on its finance receivables, which has negatively impacted the fair value of our finance receivables and the losses recognized during the first quarter of 2023. Higher than anticipated credit losses may continue to negatively impact our business throughout the remainder of 2023, especially because UACC primarily operates in the sub-prime sector of the market which is expected to have more volatility. Furthermore, advance rates available to UACC on borrowings from the Warehouse Credit Facilities may decrease as a result of the increasing credit losses in UACC's portfolio and overall rising interest rates, which may in turn have adverse impact on our liquidity.
Ability to securitize UACC's loan portfolio
The success of UACC's business is highly dependent on the ability to securitize and sell the automotive finance receivables that it underwrites. As a result of increasing interest rates, the current inflationary environment and vehicle depreciation in the used automotive industry, UACC is experiencing higher loss severity in a soft securitization market. As a result, UACC may not be able to securitize its loan portfolio on favorable terms, or may not be able to sell the subordinate notes or residual certificates issued in its securitizations at a favorable price or at all.
We intend to structure UACC's securitization transactions to achieve off-balance sheet accounting treatment. However, if UACC fails to sell the subordinate notes or the residual interests, it will preclude us from recognizing the sale and result in the securitization trust being consolidated and remaining on balance sheet. In January 2023, UACC completed the 2023-1 securitization transaction. As a result of current market conditions, which led to unfavorable pricing, UACC retained the non-investment grade securities and residual interests and we accounted for the 2023-1 securitization transaction as secured borrowings. On April 19, 2023, UACC sold the non-investment grade securities related to the 2023-1 securitization transaction for $23.1 million. UACC still retains the residual interests related to the 2023-1 securitization transaction. The related finance receivables and securitization debt remain on balance sheet. We may account for future securitizations as on balance sheet transactions depending on the market conditions.
In addition, due to the increased loss severity, UACC elected to waive monthly servicing fees related to the 2022-2 securitization transaction in the first quarter of 2023. The waiver of monthly servicing fees related to the 2022-2 securitization transaction resulted in consolidation of the related finance receivables and securitization debt on our financial statements. Waiver of monthly servicing fees also results in reduced servicing income.
Ability to increase and better monetize value-added products
We generate revenue by earning fees for selling value-added products to customers in connection with vehicle sales. Currently, our other third-party value-added product offerings consist of protection products, such as vehicle service contracts, GAP protection and tire and wheel coverage. Our offering of value-added products in addition to vehicle financing is an integral part of providing a seamless vehicle-buying experience to our customers. We sell our protection products through our strategic relationships with third parties who bear the incremental risks associated with the underwriting of such protection products. Because we are paid fees on value-added products we sell, our gross profit is equal to the revenue we generate on such sales. As a result, such sales help drive total gross profit per unit.
55
Table of Contents
Seasonality
Used vehicle sales have historically been seasonal. The used vehicle industry typically experiences an increase in sales early in the calendar year and reaches its highest point late in the first quarter and early in the second quarter. Vehicle sales then level off through the rest of the year, with the lowest level of sales in the fourth quarter. This seasonality has historically corresponded with the timing of income tax refunds, which are an important source of funding for vehicle purchases. Additionally, used vehicles depreciate at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. While 2021 and the first half of 2022 did not follow typical market depreciation trends, with continued appreciation in used vehicle pricing throughout that period, there was a shift in the third quarter of 2022 to above average depreciation as compared to pre-pandemic levels. There remains continued uncertainty surrounding market trends. See “Risk Factors—Risks Related to Our Financial Condition and Results of Operations—We may experience seasonal and other fluctuations in our quarterly results of operations, which may not fully reflect the underlying performance of our business” in our Annual Report.
Macroeconomic Factors
Both the United States and global economies are experiencing a sustained inflationary environment and the Federal Reserve’s efforts to tame inflation have led to, and may continue to lead to, increased interest rates, which affects automotive finance rates, reducing discretionary spending and making vehicle financing more costly and less accessible to many consumers. In addition, many economists believe the global economy will experience a recessionary environment in 2023. On March 10 and March 12, 2023, the Federal Deposit Insurance Corporation ("FDIC") took control and was appointed receiver of Silicon Valley Bank and Signature Bank, respectively. Other regional banks also closed or faced risk of closure, which created additional economic uncertainty. Moreover, Russia’s invasion of Ukraine and resulting sanctions by the United States, European Union and other countries has increased global economic and political uncertainty, which has caused dramatic fluctuations in global financial markets and uncertainty about world-wide oil supply and demand, which in turn has increased the volatility of oil and natural gas prices. There is additional political uncertainty in the United States as a result of the need for the federal government to increase its debt limit. A significant escalation or expansion of economic disruption could continue to impact consumer spending, disrupt our supply chain, broaden inflationary costs, and could have a material adverse effect on our results of operations. We will continue to actively monitor and develop responses to these disruptions, but depending on duration and severity, these trends could continue to negatively impact our business throughout 2023.
Components of Results of Operations
Revenue
Retail vehicle revenue
We sell retail vehicles through both our ecommerce platform and TDA. Revenue from vehicle sales, including any delivery charges, is recognized when vehicles are delivered to the customers or picked up at our TDA retail location, net of a reserve for estimated returns. The number of units sold and the average selling price (“ASP”) per unit are the primary factors impacting our retail revenue stream.
The number of units sold depends on the volume of inventory and the selection of vehicles listed on our ecommerce platform, our ability to attract new customers, our brand awareness, our ability to expand our reconditioning operations and logistics network, and our ability to provide adequate sales and sales support to service our demand.
ASP depends primarily on our acquisition and pricing strategies (which in turn depend in part on demand predicted by our data analytics), retail used vehicle market prices, our average days to sale and our reconditioning and logistics costs.
As a data-driven company, we acquire inventory based upon demand predicted by our data analytics. We expect ASP to continue to fluctuate as a result of market conditions and based upon demand predicted by our data analytics.
Wholesale vehicle revenue
We sell vehicles that do not meet our Vroom retail sales criteria through wholesale channels. Vehicles sold through wholesale channels are acquired from customers who trade-in their vehicles when making a purchase from us,
56
Table of Contents
from customers who sell their vehicle to us in direct-buy transactions, and from liquidation of vehicles previously listed for retail sale. The number of wholesale vehicles sold and the ASP per unit are the primary drivers of wholesale revenue. The ASP per unit is affected by the mix of the vehicles we acquire and general supply and demand conditions in the wholesale market.
Product revenue
We generate revenue by financing vehicle sales through UACC, earning fees on sales of third-party financing, and sales of value-added products to our customers in connection with vehicle sales, such as vehicle service contracts, GAP protection and tire and wheel coverage.
As a result of the UACC Acquisition, we generate ecommerce product revenue from receivables generated by financing provided to Vroom customers through our captive financing operation. We earn interest income on such finance receivables before the loans are sold, interest income on finance receivables held in consolidated VIEs, and, when applicable, gain on the sales of these securitized finance receivables. We account for sales of these finance receivables in accordance with ASC Topic 860, Transfers and Servicing of Financial Assets ("ASC 860"). In order for transfers of the finance receivables to qualify as sales, the finance receivables being transferred must be legally isolated, may not be constrained by restrictions from further transfer, and must be deemed to be beyond our control. Although our long-term plan is to structure future securitization transactions to qualify for sale accounting, similar to the 2022-1 securitization transaction, for which the gain on sale was recorded in “Finance revenue”, as discussed below, current market conditions may impact our ability to achieve sales accounting treatment.
In January 2023, UACC completed the 2023-1 securitization transaction. As a result of current market conditions, which led to unfavorable pricing, UACC retained the non-investment grade securities and residual interests, and we accounted for the 2023-1 securitization transaction as secured borrowings. On April 19, 2023, UACC sold the non-investment grade securities related to the 2023-1 securitization transaction for $23.1 million. UACC still retains the residual interests related to the 2023-1 securitization transaction. The related finance receivables and securitization debt remained on balance sheet. We may account for future securitizations as on balance sheet transactions depending on the market conditions. During the first quarter of 2023, we also consolidated the 2022-2 securitization transaction and accounted for it as secured borrowings, refer to "Finance revenue" below for further details.
The revenue we are able to generate from these sales will be dependent on the current market conditions, the number of finance receivables UACC originates with our customers, the average principal balance of the finance receivables, the credit quality of the portfolio, and the price at which they are sold in securitization transactions or through forward flow arrangements.
We also earn fees on third-party financing and value-added products pursuant to arrangements with the third parties that sell and administer these products. For accounting purposes, we are an agent for these transactions and, as a result, we recognize fees on a net basis when the customer enters into an arrangement to purchase these products or obtain third-party financing, which is typically at the time of a vehicle sale. Our gross profit on product revenue is equal to the revenue we generate. Product revenue is affected by the number of vehicles sold, the attachment rate of value-added products and the amount of fees we receive on each product. Product revenue also consists of estimated profit-sharing amounts to which we are entitled based on the performance of third-party protection products once a required claims period has passed. A portion of the fees we receive is subject to chargeback in the event of early termination, default, or prepayment of the contracts by our customers. We recognize product revenue net of reserves for estimated chargebacks.
Finance revenue
Our finance revenue is related to finance receivables originated by UACC for its network of third-party dealership customers and consists of interest income earned on finance receivables before the loans are sold, interest income
57
Table of Contents
earned on finance receivables held in consolidated VIEs, and, when applicable, gains on the sale of securitized finance receivables.
UACC acquires and services finance receivables from its network of third-party dealership customers and generates revenue through the sales of these financing receivables. We account for sales of finance receivables in accordance with ASC 860.
For any securitization transactions that are accounted for as secured borrowings, we recognize interest income, which includes finance charges and servicing fees in accordance with the terms of the related customer agreements.
In February 2022, UACC completed the 2022-1 securitization transaction, which qualified as sales, therefore we recorded a gain on the sale of the finance receivables. The amount of the gain is equal to the fair value of the net proceeds received less the carrying amount of the finance receivables. Although our long-term plan is to structure future securitization transactions similar to the 2022-1 securitization transaction and account for them as sales, market conditions may impact our ability to achieve sales accounting treatment. In January 2023, UACC completed the 2023-1 securitization transaction. As a result of current market conditions, which led to unfavorable pricing, UACC retained the non-investment grade securities and residual interests and we accounted for the 2023-1 securitization transaction as secured borrowings. On April 19, 2023, UACC sold the non-investment grade securities related to the 2023-1 securitization transaction for $23.1 million. UACC still retains the residual interests related to the 2023-1 securitization transaction. The related finance receivables and securitization debt remained on balance sheet. We may account for future securitizations as on balance sheet transactions depending on the market conditions.
Servicing income represents the annual fees earned on the outstanding principal balance of the finance receivables serviced. Fees are earned monthly at an annual rate of approximately 4% for the 2022-1 securitization transaction and 3.25% for the 2022-2 and 2023-1 securitization transactions of the outstanding principal balance of the finance receivables serviced.
As a result of increasing interest rates, the current inflationary environment and vehicle depreciation in the used automotive industry, UACC is experiencing higher loss severity in a soft securitization market. The increased loss severity could lead to reduced servicing income if UACC elects to waive monthly servicing fees going forward as it did in the first quarter of 2023. The waiver of servicing fees related to the 2022-2 securitization transaction resulted in consolidation of the related finance receivables and securitization debt on our financial statements.
See “Note 3—Revenue Recognition” and "Note 4 – Variable Interest Entities and Securitizations" to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Cost of sales
Retail cost of sales
Retail cost of sales primarily includes the costs to acquire vehicles, inbound transportation costs and direct and indirect reconditioning costs associated with preparing vehicles for sale. Costs to acquire vehicles are primarily driven by the inventory source, vehicle mix and general supply and demand conditions of the used vehicle market. Inbound transportation costs include costs to transport the vehicle to our VRCs. Reconditioning costs include parts, labor and third-party reconditioning costs directly attributable to the vehicle and allocated overhead costs. Cost of sales also includes any accounting adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Wholesale cost of sales
Wholesale cost of sales primarily includes costs to acquire vehicles sold through wholesale channels as well as any accounting adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Product cost of sales
Product cost of sales consists of interest expense incurred on securitization debt related to finance receivables originated by UACC for Vroom customers.
58
Table of Contents
Finance cost of sales
Finance cost of sales consists of interest expense incurred on securitization debt originated by UACC for its network of third-party dealership customers and collection expenses related to servicing finance receivables.
Other cost of sales
Other cost of sales consists of cost of sales from CarStory's third-party customers.
Total gross profit
Total gross profit is defined as total revenue less costs associated with such revenue.
Selling, general and administrative expenses
Our selling, general, and administrative expenses, which we refer to as SG&A expenses, consist primarily of advertising and marketing expenses, outbound transportation costs, employee compensation, occupancy costs of our facilities, professional fees for accounting, auditing, tax, legal and consulting services and software and IT costs.
Depreciation and amortization
Our depreciation and amortization expense primarily includes: depreciation related to our leasehold improvements and logistics fleet; amortization related to intangible assets in acquired businesses; and capitalized internal use software costs incurred in the development of our platform and website applications. Depreciation expense related to our Vroom VRC and the portion of depreciation expense for our proprietary logistics fleet related to inbound transportation is included in cost of sales in the condensed consolidated statements of operations.
Impairment Charges
Impairment charges represent an impairment charge to write down the carrying amount of goodwill to fair value.
Gain on debt extinguishment
Gain on debt extinguishment represents the gain recognized from the repurchase of a portion of our outstanding Convertible Senior Notes due 2026 (the "Notes") in open-market transactions.
Interest expense
Our interest expense primarily includes (i) interest expense related to our vehicle floorplan facility with Ally Bank and Ally Financial (the "2022 Vehicle Floorplan Facility"), as discussed below, which is used to finance our inventory, (ii) interest expense on our Notes, and (iii) interest expense on UACC's Warehouse Credit Facilities, which is used to fund our finance receivables.
Interest Income
Interest income primarily represents interest credits earned on cash deposits maintained in relation to our 2022 Vehicle Floorplan Facility as well as interest earned on cash and cash equivalents.
Other Loss, net
Other loss, net primarily represents realized and unrealized losses on finance receivables, securitization debt and beneficial interests in securitizations as well as recoveries from losses previously recognized on finance receivables.
59
Table of Contents
Results of Operations
The following table presents our condensed consolidated results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
2023 |
|
|
|
2022 |
|
|
% Change |
|
|
|
|
(in thousands) |
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle, net |
|
$ |
|
135,270 |
|
|
$ |
|
707,186 |
|
|
|
(80.9 |
)% |
Wholesale vehicle |
|
|
|
13,895 |
|
|
|
|
139,984 |
|
|
|
(90.1 |
)% |
Product, net |
|
|
|
11,500 |
|
|
|
|
24,449 |
|
|
|
(53.0 |
)% |
Finance |
|
|
|
31,988 |
|
|
|
|
47,687 |
|
|
|
(32.9 |
)% |
Other |
|
|
|
3,814 |
|
|
|
|
4,469 |
|
|
|
(14.7 |
)% |
Total revenue |
|
|
|
196,467 |
|
|
|
|
923,775 |
|
|
|
(78.7 |
)% |
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle |
|
|
|
135,724 |
|
|
|
|
695,509 |
|
|
|
(80.5 |
)% |
Wholesale vehicle |
|
|
|
13,833 |
|
|
|
|
142,737 |
|
|
|
(90.3 |
)% |
Product |
|
|
|
897 |
|
|
|
|
— |
|
|
|
100.0 |
% |
Finance |
|
|
|
6,214 |
|
|
|
|
2,724 |
|
|
|
128.1 |
% |
Other |
|
|
|
994 |
|
|
|
|
1,165 |
|
|
|
(14.7 |
)% |
Total cost of sales |
|
|
|
157,662 |
|
|
|
|
842,135 |
|
|
|
(81.3 |
)% |
Total gross profit |
|
|
|
38,805 |
|
|
|
|
81,640 |
|
|
|
(52.5 |
)% |
Selling, general and administrative expenses |
|
|
|
96,537 |
|
|
|
|
187,994 |
|
|
|
(48.6 |
)% |
Depreciation and amortization |
|
|
|
10,531 |
|
|
|
|
7,856 |
|
|
|
34.1 |
% |
Impairment charges |
|
|
|
— |
|
|
|
|
201,703 |
|
|
|
(100.0 |
)% |
Loss from operations |
|
|
|
(68,263 |
) |
|
|
|
(315,913 |
) |
|
|
78.4 |
% |
Gain on debt extinguishment |
|
|
|
(8,709 |
) |
|
|
|
— |
|
|
|
100.0 |
% |
Interest expense |
|
|
|
9,919 |
|
|
|
|
9,380 |
|
|
|
5.7 |
% |
Interest income |
|
|
|
(5,942 |
) |
|
|
|
(3,952 |
) |
|
|
50.4 |
% |
Other loss, net |
|
|
|
11,240 |
|
|
|
|
12,358 |
|
|
|
9.0 |
% |
Loss before provision (benefit) for income taxes |
|
|
|
(74,771 |
) |
|
|
|
(333,699 |
) |
|
|
77.6 |
% |
Provision (benefit) for income taxes |
|
|
|
273 |
|
|
|
|
(23,240 |
) |
|
|
101.2 |
% |
Net loss |
|
$ |
|
(75,044 |
) |
|
$ |
|
(310,459 |
) |
|
|
75.8 |
% |
Segments
We manage and report operating results through three reportable segments:
•Ecommerce (69.0% of total revenue for the three months ended March 31, 2023): The Ecommerce segment represents retail sales of used vehicles through our ecommerce platform, revenue earned on vehicle financing originated by UACC or our third-party financing sources and sales of value-added products associated with those vehicles sales.
•Wholesale (7.1% of total revenue for the three months ended March 31, 2023): The Wholesale segment represents sales of used vehicles through wholesale channels.
•Retail Financing (16.3% of total revenue for the three months ended March 31, 2023): The Retail Financing segment represents UACC’s operations with its network of third-party dealership customers.
60
Table of Contents
Three Months Ended March 31, 2023 and 2022
Ecommerce
The following table presents our Ecommerce segment results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
|
Change |
|
|
% Change |
|
|
|
(in thousands, except unit data and average days to sale) |
|
|
|
|
|
|
|
|
Ecommerce units sold |
|
|
|
3,933 |
|
|
|
|
19,473 |
|
|
|
|
(15,540 |
) |
|
|
(79.8 |
)% |
Ecommerce revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle revenue |
|
$ |
|
124,107 |
|
|
$ |
|
652,625 |
|
|
$ |
|
(528,518 |
) |
|
|
(81.0 |
)% |
Product revenue |
|
|
|
11,526 |
|
|
|
|
22,739 |
|
|
|
|
(11,213 |
) |
|
|
(49.3 |
)% |
Total ecommerce revenue |
|
$ |
|
135,633 |
|
|
$ |
|
675,364 |
|
|
$ |
|
(539,731 |
) |
|
|
(79.9 |
)% |
Ecommerce gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle gross (loss) profit |
|
$ |
|
(594 |
) |
|
$ |
|
11,581 |
|
|
$ |
|
(12,175 |
) |
|
|
(105.1 |
)% |
Product gross profit |
|
|
|
10,629 |
|
|
|
|
22,739 |
|
|
|
|
(12,110 |
) |
|
|
(53.3 |
)% |
Total ecommerce gross profit |
|
$ |
|
10,035 |
|
|
$ |
|
34,320 |
|
|
$ |
|
(24,285 |
) |
|
|
(70.8 |
)% |
Average vehicle selling price per ecommerce unit |
|
$ |
|
31,555 |
|
|
$ |
|
33,514 |
|
|
$ |
|
(1,959 |
) |
|
|
(5.8 |
)% |
Product revenue per ecommerce unit |
|
|
|
2,931 |
|
|
|
|
1,168 |
|
|
|
|
1,763 |
|
|
|
150.9 |
% |
Gross profit per ecommerce unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle gross (loss) profit per ecommerce unit |
|
$ |
|
(151 |
) |
|
$ |
|
595 |
|
|
$ |
|
(746 |
) |
|
|
(125.4 |
)% |
Product gross profit per ecommerce unit |
|
|
|
2,703 |
|
|
|
|
1,168 |
|
|
|
|
1,535 |
|
|
|
131.4 |
% |
Total gross profit per ecommerce unit |
|
$ |
|
2,552 |
|
|
$ |
|
1,763 |
|
|
$ |
|
789 |
|
|
|
44.8 |
% |
Ecommerce average days to sale |
|
|
|
279 |
|
|
|
|
91 |
|
|
|
|
188 |
|
|
|
206.5 |
% |
Ecommerce units
Ecommerce units sold decreased 15,540, or 79.8%, from 19,473 for the three months ended March 31, 2022 to 3,933 for the three months ended March 31, 2023. This decrease was driven by our strategic decision to prioritize unit economics over unit sales volume starting in the second quarter of 2022, a reduction in third-party sales support staff, which put pressure on servicing our demand, as well as macroeconomic factors.
Ecommerce average days to sale increased from 91 days for the three months ended March 31, 2022 to 279 days for the three months ended March 31, 2023. We have undertaken various initiatives to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, in particular with titling and registration processes. While these initiatives are designed to improve our transaction processing, enhance our customer experience, and reduce our regulatory risk, they resulted in delays in listing vehicles for sale, which increased the number of days between our acquisition of vehicles and the final delivery of such vehicles to customers. We expect ecommerce average days to sale to improve over time as we continue to improve our processes and sell through aged inventory.
Vehicle Revenue
Ecommerce vehicle revenue decreased $528.5 million, or 81.0%, from $652.6 million for the three months ended March 31, 2022 to $124.1 million for the three months ended March 31, 2023. The decrease in ecommerce vehicle revenue was primarily attributable to the 15,540 decrease in ecommerce units sold, which decreased vehicle revenue by $520.8 million, and a decrease in ASP per unit, which decreased from $33,514 for the three months ended March 31, 2022 to $31,555 for the three months ended March 31, 2023 and decreased vehicle revenue by $7.7 million.
The decrease in ASP per unit was primarily due to significant market appreciation in the first quarter of 2022. We expect ASP to continue to fluctuate as a result of market conditions and based upon demand predicted by our data analytics.
61
Table of Contents
Product Revenue
Ecommerce product revenue decreased $11.2 million, or 49.3%, from $22.7 million for the three months ended March 31, 2022 to $11.5 million for the three months ended March 31, 2023. The decrease in ecommerce product revenue was primarily attributable to the 15,540 decrease in ecommerce units sold, which decreased product revenue by $18.1 million, partially offset by an increase in product revenue per unit, which increased from $1,168 for the three months ended March 31, 2022 to $2,931 for the three months ended March 31, 2023 and increased product revenue by $6.9 million. The increase in product revenue per unit is primarily due to an increase in interest income earned on finance receivables from Vroom customers originated or serviced by UACC as compared to the first quarter of 2022.
Vehicle Gross (Loss) Profit
Ecommerce vehicle gross profit of $11.6 million for the three months ended March 31, 2022 decreased $12.2 million, or 105.1%, to a gross loss of $0.6 million for the three months ended March 31, 2023. The decrease in vehicle gross profit was primarily attributable to the 15,540 decrease in ecommerce units sold, which decreased vehicle gross profit by $9.2 million. Additionally, vehicle gross profit per unit decreased $746 to $595 for the three months ended March 31, 2022 to a vehicle gross loss per unit of $151 for three months ended March 31, 2023, which decreased vehicle gross profit by $3.0 million. The decrease was primarily driven by lower sales margin and higher reconditioning costs per unit related to an increased mix of higher mileage and aged vehicles along with significant parts inflation. The decreases were partially offset by a lower inventory reserve as a result of a decrease in inventory levels as we continued to sell through our aged inventory.
As we continue to make progress on our initiatives to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, a higher portion of our unit sales in the first quarter of 2023 was from aged inventory as we obtained titles for vehicles not previously listed for sale, which negatively impacted our sales margin and GPPU. We expect to sell through the majority of our aged inventory in the first half of 2023 and we expect this to continue to negatively impact our sales margin and GPPU.
Product Gross Profit
Ecommerce product gross profit decreased $12.1 million, or 53.3%, from $22.7 million for the three months ended March 31, 2022 to $10.6 million for the three months ended March 31, 2023. The decrease in ecommerce product gross profit was primarily attributable to the 15,540 decrease in ecommerce units sold, which decreased product gross profit by $18.1 million, partially offset by a $1,535 increase in product gross profit per unit, which increased product gross profit by $6.0 million. Product gross profit per unit increased from $1,168 for the three months ended March 31, 2022 to $2,703 for the three months ended March 31, 2023, primarily due to an increase in interest income earned, less interest expense on securitization debt related to finance receivables from Vroom customers originated or serviced by UACC, as compared to the first quarter of 2022.
Wholesale
The following table presents our Wholesale segment results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
|
Change |
|
|
% Change |
|
|
|
(in thousands, except unit data) |
|
|
|
|
|
|
|
|
Wholesale units sold |
|
|
|
1,169 |
|
|
|
|
10,113 |
|
|
|
|
(8,944 |
) |
|
|
(88.4 |
)% |
Wholesale revenue |
|
$ |
|
13,895 |
|
|
$ |
|
139,984 |
|
|
$ |
|
(126,089 |
) |
|
|
(90.1 |
)% |
Wholesale gross profit (loss) |
|
$ |
|
62 |
|
|
$ |
|
(2,753 |
) |
|
$ |
|
2,815 |
|
|
|
102.3 |
% |
Average selling price per unit |
|
$ |
|
11,886 |
|
|
$ |
|
13,842 |
|
|
$ |
|
(1,956 |
) |
|
|
(14.1 |
)% |
Wholesale gross profit (loss) per unit |
|
$ |
|
53 |
|
|
$ |
|
(272 |
) |
|
$ |
|
325 |
|
|
|
119.5 |
% |
Wholesale Units
Wholesale units sold decreased 8,944, or 88.4%, from 10,113 for the three months ended March 31, 2022 to 1,169 for the three months ended March 31, 2023, primarily driven by a decrease in wholesale units purchased from consumers and a lower number of trade-in vehicles associated with the decrease in the number of ecommerce units sold.
62
Table of Contents
Wholesale Revenue
Wholesale revenue decreased $126.1 million, or 90.1%, from $140.0 million for the three months ended March 31, 2022 to $13.9 million for the three months ended March 31, 2023. The decrease was primarily attributable to the 8,944 decrease in wholesale units sold, which decreased wholesale revenue by $123.8 million, and by a lower ASP per wholesale unit, which decreased wholesale revenue by $2.3 million.
Wholesale Gross Profit (Loss)
Wholesale gross loss of $2.8 million for the three months ended March 31, 2022 changed by $2.9 million to a gross profit of $0.1 million for the three months ended March 31, 2023. The change was primarily attributable to a $325 increase in wholesale gross profit per unit from gross loss per unit of $272 for the three months ended March 31, 2022 to wholesale gross profit per unit of $53 for the three months ended March 31, 2023, which increased wholesale gross profit by $0.4 million. The increase was primarily driven by a lower inventory reserve as a result of a decrease in inventory levels, and was partially offset by lower sales margins.
Retail Financing
The following table presents our Retail Financing segment results of operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
|
Change |
|
|
% Change |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Retail Financing revenue |
|
$ |
|
31,988 |
|
|
$ |
|
47,687 |
|
|
$ |
|
(15,699 |
) |
|
|
(32.9 |
)% |
Retail Financing gross profit |
|
$ |
|
25,774 |
|
|
$ |
|
44,963 |
|
|
$ |
|
(19,189 |
) |
|
|
(42.7 |
)% |
Retail Financing Revenue
Retail Financing revenue decreased $15.7 million, or 32.9%, from $47.7 million for the three months ended March 31, 2022 to $32.0 million for the three months ended March 31, 2023. The decrease was primarily driven by the gain on sale of finance receivables of $29.6 million in the first quarter of 2022 related to the 2022-1 securitization transaction. The decrease was partially offset by an increase in interest income earned on finance receivables with third-party dealership customers as a result of the consolidation of the 2022-2 and 2023-1 securitization transactions, as well as an increase in vehicle protection product income net of chargeback reserves.
Retail Financing Gross Profit
Retail Financing gross profit decreased $19.2 million, or 42.7%, from $45.0 million for the three months ended March 31, 2022 to $25.8 million for the three months ended March 31, 2023. The decrease was primarily driven by the gain on sale of finance receivables of $29.6 million in the first quarter of 2022 related to the 2022-1 securitization transaction, as well as an increase in collection expenses related to servicing finance receivables originated by UACC and an increase in interest expense on securitization debt in the first quarter of 2023. The decrease was partially offset by an increase in interest income earned on finance receivables with third-party dealership customers as a result of the
63
Table of Contents
consolidation of the 2022-2 and 2023-1 securitization transactions, as well as an increase in vehicle protection product income net of chargeback reserves.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
2022 |
|
|
Change |
|
|
% Change |
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Compensation & benefits |
|
$ |
|
50,666 |
|
|
$ |
|
74,525 |
|
|
$ |
(23,859 |
) |
|
|
(32.0 |
)% |
Marketing expense |
|
|
|
11,471 |
|
|
|
|
33,735 |
|
|
|
(22,264 |
) |
|
|
(66.0 |
)% |
Outbound logistics (1) |
|
|
|
2,072 |
|
|
|
|
26,748 |
|
|
|
(24,676 |
) |
|
|
(92.3 |
)% |
Occupancy and related costs |
|
|
|
4,741 |
|
|
|
|
5,646 |
|
|
|
(905 |
) |
|
|
(16.0 |
)% |
Professional fees |
|
|
|
6,592 |
|
|
|
|
13,299 |
|
|
|
(6,707 |
) |
|
|
(50.4 |
)% |
Software and IT costs |
|
|
|
9,340 |
|
|
|
|
10,823 |
|
|
|
(1,483 |
) |
|
|
(13.7 |
)% |
Other |
|
|
|
11,655 |
|
|
|
|
23,218 |
|
|
|
(11,563 |
) |
|
|
(49.8 |
)% |
Total selling, general & administrative expenses |
|
$ |
|
96,537 |
|
|
$ |
|
187,994 |
|
|
$ |
(91,457 |
) |
|
|
(48.6 |
)% |
(1)Outbound logistics primarily includes third-party transportation fees as well as cost related to operating our proprietary logistics network, including fuel, tolls, and maintenance expenses associated with vehicle deliveries. Inbound transportation costs, from the point of acquisition to the relevant reconditioning facility, are included in cost of sales.
SG&A expenses decreased $91.5 million, or 48.6%, from $188.0 million for the three months ended March 31, 2022 to $96.5 million for the three months ended March 31, 2023. The total decrease was primarily caused by:
•a $24.7 million decrease in outbound logistics costs attributable to the decrease in ecommerce units sold as well as a decrease in outbound logistics cost per ecommerce unit;
•a $23.9 million decrease in compensation and benefits primarily as a result of the workforce reductions;
•a $22.3 million decrease in marketing expense contemplated by our long-term roadmap;
•a $6.7 million decrease in professional fees primarily related to costs incurred in connection with the UACC Acquisition during the first quarter of 2022, partially offset by increased legal fees related to ongoing legal and regulatory matters;
•a $1.5 million decrease in software and IT costs primarily related to volume-based fees as a result of reduced headcount;
•a $11.6 million decrease in other SG&A expenses primarily due to reduced fixed and variable costs contemplated by our long-term roadmap.
We expect SG&A expenses to decrease in the future driven by our workforce reduction in April 2023, and further reductions in both fixed and variable cost components as we continue to reevaluate the optimization of our operations. We may not be able to fully realize further cost savings and benefits initially anticipated from the long-term roadmap, and the future costs may be greater than expected.
Depreciation and amortization
Depreciation and amortization expenses increased $2.6 million, or 34.1%, from $7.9 million for the three months ended March 31, 2022 to $10.5 million for the three months ended March 31, 2023. The increase was primarily due to an additional month of amortization expense of intangible assets acquired as part of the UACC Acquisition for the three months ended March 31, 2023 and amortization related to our capitalized internal use software costs incurred in the development of our platform and website applications.
64
Table of Contents
Impairment Charges
Impairment charges represent an impairment charge of $201.7 million to write down the carrying amount of the goodwill to fair value for the three months ended March 31, 2022.
Gain on debt extinguishment
Gain on debt extinguishment represents a gain of $8.7 million for the three months ended March 31, 2023, related to the repurchase of $14.6 million in aggregate principal balance of the Notes, net of deferred issuance costs of $0.3 million, for $5.9 million.
Interest expense
Interest expense increased $0.5 million, or 5.7%, from $9.4 million for the three months ended March 31, 2022 to $9.9 million for the three months ended March 31, 2023. The increase was primarily attributable to interest expense incurred on UACC's Warehouse Credit Facilities, which increased interest expense by $2.7 million. The increase was partially offset by a decrease of $1.4 million in interest expense related to a lower outstanding balance on the 2022 Vehicle Floorplan Facilities, as well as a decrease in interest expense on the Notes of $0.8 million due to the repurchase of the Notes during the second half of 2022.
Interest income
Interest income increased $1.9 million, or 50.4%, from $4.0 million for the three months ended March 31, 2022 to $5.9 million for the three months ended March 31, 2023. The increase in interest income was primarily driven by higher interest rates earned on cash and cash equivalents.
Other loss, net
Other loss, net decreased $1.2 million, or 9.0%, from $12.4 million for the three months ended March 31, 2022 to $11.2 million for the three months ended March 31, 2023.
Quarterly Results of Operations Supplemental data
The following tables set forth our quarterly financial information for the first quarter of 2023 and the fourth quarter of 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% Change |
|
|
|
(in thousands, except unit data) |
|
|
|
|
|
|
|
Total revenues |
|
$ |
196,467 |
|
|
$ |
209,349 |
|
|
$ |
(12,882 |
) |
|
|
(6.2 |
)% |
Total gross profit |
|
$ |
38,805 |
|
|
$ |
29,459 |
|
|
$ |
9,346 |
|
|
|
31.7 |
% |
Ecommerce units sold |
|
|
3,933 |
|
|
|
4,144 |
|
|
|
(211 |
) |
|
|
(5.1 |
)% |
Ecommerce revenue |
|
$ |
135,633 |
|
|
$ |
141,758 |
|
|
$ |
(6,125 |
) |
|
|
(4.3 |
)% |
Ecommerce gross profit |
|
$ |
10,035 |
|
|
$ |
5,110 |
|
|
$ |
4,925 |
|
|
|
96.4 |
% |
Vehicle gross loss per ecommerce unit |
|
$ |
(151 |
) |
|
$ |
(1,346 |
) |
|
$ |
1,195 |
|
|
|
88.8 |
% |
Product gross profit per ecommerce unit |
|
|
2,703 |
|
|
|
2,579 |
|
|
|
124 |
|
|
|
4.8 |
% |
Total gross profit per ecommerce unit |
|
$ |
2,552 |
|
|
$ |
1,233 |
|
|
$ |
1,319 |
|
|
|
107.0 |
% |
Wholesale units sold |
|
|
1,169 |
|
|
|
1,768 |
|
|
|
(599 |
) |
|
|
(33.9 |
)% |
Wholesale revenue |
|
$ |
13,895 |
|
|
$ |
23,039 |
|
|
$ |
(9,144 |
) |
|
|
(39.7 |
)% |
Wholesale gross profit (loss) |
|
$ |
62 |
|
|
$ |
(4,359 |
) |
|
$ |
4,421 |
|
|
|
101.4 |
% |
Wholesale gross profit (loss) per unit |
|
$ |
53 |
|
|
$ |
(2,465 |
) |
|
$ |
2,518 |
|
|
|
102.2 |
% |
Retail Financing revenue |
|
$ |
31,988 |
|
|
$ |
32,537 |
|
|
$ |
(549 |
) |
|
|
(1.7 |
)% |
Retail Financing gross profit |
|
$ |
25,774 |
|
|
$ |
28,744 |
|
|
$ |
(2,970 |
) |
|
|
(10.3 |
)% |
Total selling, general, and administrative expenses |
|
$ |
96,537 |
|
|
$ |
90,760 |
|
|
$ |
5,777 |
|
|
|
6.4 |
% |
65
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
Three Months Ended December 31, |
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% Change |
|
|
|
(in thousands) |
|
|
|
|
Net (loss) income |
|
$ |
(75,044 |
) |
|
$ |
24,765 |
|
|
$ |
(99,809 |
) |
|
|
(403.0 |
)% |
Adjusted to exclude the following: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
9,919 |
|
|
|
12,076 |
|
|
|
(2,157 |
) |
|
|
(17.9 |
)% |
Interest income |
|
|
(5,942 |
) |
|
|
(6,372 |
) |
|
|
430 |
|
|
|
6.7 |
% |
Provision for income taxes |
|
|
273 |
|
|
|
2,405 |
|
|
|
(2,132 |
) |
|
|
(88.6 |
)% |
Depreciation and amortization |
|
|
10,637 |
|
|
|
10,702 |
|
|
|
(65 |
) |
|
|
(0.6 |
)% |
EBITDA |
|
$ |
(60,157 |
) |
|
$ |
43,576 |
|
|
$ |
(103,733 |
) |
|
|
(238.1 |
)% |
Severance costs |
|
$ |
4,104 |
|
|
$ |
— |
|
|
$ |
4,104 |
|
|
|
100.0 |
% |
Gain on debt extinguishment |
|
|
(8,709 |
) |
|
|
(126,767 |
) |
|
|
118,058 |
|
|
|
93.1 |
% |
Realignment costs |
|
|
— |
|
|
|
2,253 |
|
|
|
(2,253 |
) |
|
|
(100.0 |
)% |
Acceleration of non-cash stock-based compensation |
|
|
— |
|
|
|
2,439 |
|
|
|
(2,439 |
) |
|
|
(100.0 |
)% |
Other |
|
|
— |
|
|
|
3,679 |
|
|
|
(3,679 |
) |
|
|
(100.0 |
)% |
Adjusted EBITDA |
|
$ |
(64,762 |
) |
|
$ |
(74,820 |
) |
|
$ |
10,058 |
|
|
|
13.4 |
% |
Securitization gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.0 |
% |
Adjusted EBITDA excluding securitization gain |
|
$ |
(64,762 |
) |
|
$ |
(74,820 |
) |
|
$ |
10,058 |
|
|
|
13.4 |
% |
Liquidity and Capital Resources
As of March 31, 2023, we had cash and cash equivalents of $316.7 million and restricted cash of $72.0 million. Restricted cash primarily includes cash deposits required under our 2022 Vehicle Floorplan Facility of $22.1 million and restricted cash for UACC under the securitization transactions and Warehouse Credit Facilities of $48.0 million. Our primary source of liquidity is cash generated through financing activities. Additionally, we had excess borrowing capacity of $57.9 million on UACC's Warehouse Credit Facilities as of March 31, 2023.
We have no significant debt maturities due until 2026 and the payments on our securitization debt is funded by cashflows on the finance receivables within the securitization trusts.
We anticipate that our existing cash and cash equivalents, 2022 Vehicle Floorplan Facility, and UACC's Warehouse Credit Facilities will be sufficient to support our operations for at least the next twelve months from the date of this Quarterly Report on Form 10-Q.
Since inception, we experienced a continued increase in our cash usage as we scaled our business. Our long-term roadmap is designed to reduce our use of cash and position us for long-term profitable growth by prioritizing unit economics, reducing operating expenses and maximizing liquidity. On January 18, 2023, we executed a reduction in force as part of our continued focus on reducing variable and fixed costs. We incurred expenses of approximately $4.1 million, primarily consisting of severance, and expect to achieve approximately $27.0 million of annualized cost reductions as a result of the reduction in force in January 2023. Additionally, on April 26, 2023, as part of our ongoing reexamination of all facets of the business, we implemented an organizational restructuring that included a reduction in force. We expect to incur total expenses of approximately $2.0 million in the second quarter of 2023, primarily consisting of severance costs, and expect to achieve approximately $15.0 million of annualized cost savings as a result of the reduction in force in April 2023. We may not be able to fully realize the cost savings and benefits initially anticipated by our long-term roadmap or our reductions in force.
Our future capital requirements will depend on many factors, including our efforts to reduce fixed and variable expenses, investment in our internal sales force, investment in our website and mobile applications, continued automation of the selling experience, optimization of our assortment of vehicles, and increase inventory as we resume growth. We expect to use our cash and cash equivalents to finance our future capital requirements, borrowings under our 2022 Vehicle Floorplan Facility to finance our inventory, and UACC’s Warehouse Credit Facilities to fund our finance receivables. We may be required to seek additional equity or debt financing in the future to fund our operations or to fund our needs for capital expenditures. Our ability to obtain additional equity or debt financing will depend on the success of our efforts to reduce fixed and variable expenses and demonstrate we are on a path toward long-term profitable growth, as well as market conditions. There can be no assurance that such financing will be available in amounts or on terms acceptable to us, if at all. Failure to raise additional capital through debt or equity financings, and/or reduce operating costs could have a material adverse effect on our ability to meet our short and long-term liquidity needs and achieve our intended long-term business objectives.
66
Table of Contents
Convertible Senior Notes
On June 18, 2021, we issued $625.0 million aggregate principal amount of the Notes pursuant to an indenture between us and U.S. Bank National Association, as trustee (the “Indenture”).
The Notes bear interest at a rate of 0.75% per annum, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2022. The Notes will mature on July 1, 2026, subject to earlier repurchase, redemption or conversion. The total net proceeds from the offering, after deducting commissions paid to the initial purchasers and debt issuance costs, were approximately $608.9 million. During the three months ended March 31, 2023, the conditions allowing holders of the Notes to convert were not met.
During the three months ended March 31, 2023, we repurchased $14.6 million in aggregate principal amount of the Notes, net of deferred issuance costs of $0.3 million, for $5.9 million in open-market transactions. We recognized a gain on extinguishment of debt of $8.7 million for the three months ended March 31, 2023. As a result of these repurchases and repurchases made in 2022, $345.1 million aggregate principal amount of the Notes remain outstanding, net of deferred issuance costs of $5.8 million. Subject to market conditions and availability, we may continue to opportunistically repurchase Notes from time to time to reduce our outstanding indebtedness at a discount. Refer to Note 12 — Long Term Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for further discussion.
Vehicle Financing
In November 2022, we amended our floorplan facility with Ally Bank and Ally Financial (the “2022 Vehicle Floorplan Facility”). The 2022 Vehicle Floorplan Facility provides a committed credit line of up to $500.0 million which is scheduled to mature on March 31, 2024.
The amount of credit available to us on a monthly basis is equal to the product of (1) the greater of five times the aggregate number of retail units sold during the most recent month for which information is available or the aggregate number of retail units sold during the five most recent months for which information is available and (2) the greater of the average outstanding floorplan balance of all vehicles on the floorplan as of the immediately preceding month-end or the average monthly outstanding floorplan balance of all vehicles on the floorplan as of month-end for the immediately preceding five months. The amendment also provides that we may elect to increase our monthly credit line availability by an additional $25.0 million during any four months in the period from November 1, 2022 through March 31, 2024, subject to the maximum $500.0 million credit limit. Consistent with the terms of the 2020 Vehicle Floorplan Facility, we have provided Ally with a guaranty of payment of all amounts owed under the 2022 Vehicle Floorplan Facility as well as a security interest in all or substantially all tangible, intangible, and other personal property of Vroom, Inc., to secure obligations under the 2022 Vehicle Floorplan Facility.
The 2022 Vehicle Floorplan Facility bears interest at a rate equal to the Prime Rate, announced per annum by Ally Bank, plus 175 basis points. Additionally, we are subject to amended covenants and events of default. We are required to maintain a certain level of equity in the vehicles that are financed, to maintain at least 20.0% of the credit line in cash and cash equivalents, and to maintain a minimum required balance with Ally of at least 12.5% of the daily floorplan principal balance outstanding through December 31, 2022 and 15.0% effective January 1, 2023. We were required to pay a commitment fee upon execution of the 2022 Vehicle Floorplan Facility.
Finance Receivables
Subject to market conditions, we plan to sell finance receivables originated by UACC through asset-backed securitization transactions and forward flow arrangements. In January 2023, UACC sold approximately $238.7 million of rated asset-backed securities in an auto loan securitization transaction from a securitization trust, established and sponsored by UACC for proceeds of $237.8 million. The trust is collateralized by finance receivables with an aggregate principal balance of $326.4 million. These finance receivables are serviced by UACC. As a result of current market conditions, which led to unfavorable pricing, UACC retained the non-investment grade securities and residual interests, and we accounted for the 2023-1 securitization transaction as secured borrowings. On April 19, 2023, UACC sold the non-investment grade securities related to the 2023-1 securitization transaction for $23.1 million. UACC still retains the residual interests related to the 2023-1 securitization transaction.
67
Table of Contents
In February 2022, UACC sold an aggregate of $281.4 million of rated asset-backed securities and $32.3 million of residual certificates in an auto loan securitization transaction from a securitization trust, established and sponsored by UACC, for aggregate proceeds of $317.3 million. The trust is collateralized by finance receivables with an aggregate principal balance of $318.5 million and had a carrying value of $287.7 million at the time of sale. These finance receivables are serviced by UACC. UACC retained 5% of the notes and residual certificates sold as required by applicable risk retention rules.
Although our long-term strategy is to structure future securitization transactions similar to the 2022-1 securitization transaction and account for them as sales, market conditions may impact our ability to achieve sales accounting treatment. Depending on market conditions, future 2023 securitization transactions may be accounted for as secured borrowings and remain on balance sheet.
As a result of increasing interest rates, the current inflationary environment and vehicle depreciation in the used automotive industry, UACC is experiencing higher loss severity and higher losses in a soft securitization market. The increased loss severity could lead to reduced servicing income if UACC elects to waive monthly servicing fees going forward as it did in the first quarter of 2023. The waiver of monthly servicing fees related to the 2022-2 securitization transaction resulted in consolidation of the related finance receivables and securitization debt on our financial statements.
Refer to Note 4 — Variable Interest Entities and Securitizations to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for further discussion regarding our transactions with unconsolidated variable interest entities.
UACC Risk Retention Financing Facility
On May 3, 2023, UACC entered into a Risk Retention Financing Facility enabling it to finance asset-backed securities issued in its securitization transactions and held by UACC pursuant to applicable risk retention rules. Under this facility, UACC sells such retained interests and agrees to repurchase them at fair value on a future date. In its initial transaction under this facility, UACC pledged $24.5 million of its retained beneficial interests as collateral, and received proceeds of $24.1 million, with expected repurchase dates ranging from March 2025 to September 2029. The securitization trusts will distribute payments related to UACC's pledged beneficial interests in securitizations directly to the lenders, which will reduce the beneficial interests in securitizations and the related debt balance.
Warehouse Credit Facilities
UACC has four senior secured warehouse facility agreements the (“Warehouse Credit Facilities”) with banking institutions. The Warehouse Credit Facilities are collateralized by eligible finance receivables and available borrowings are computed based on a percentage of eligible finance receivables. The aggregate borrowing limit is $850.0 million with maturities between May 2024 and December 2024. As of March 31, 2023, outstanding borrowings related to the Warehouse Credit Facilities were $124.2 million and we were in compliance with all covenants related to the Warehouse Credit Facilities. Failure to satisfy these and or any other requirements contained within the agreements would restrict access to the Warehouse Credit Facilities and could have a material adverse effect on our financial condition, results of operations and liquidity. Certain breaches of covenants may also result in acceleration of the repayment of borrowings prior to the scheduled maturity. Refer to Note 11 — Warehouse Credit Facilities of Consolidated VIEs to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, for further discussion.
68
Table of Contents
Cash Flows from Operating, Investing, and Financing Activities
The following table summarizes our cash flows for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
2023 |
|
|
|
2022 |
|
|
|
(in thousands) |
|
Net cash used in operating activities |
|
$ |
|
(85,021 |
) |
|
$ |
|
(15,078 |
) |
Net cash provided by (used in) investing activities |
|
|
|
46,818 |
|
|
|
|
(211,963 |
) |
Net cash used in financing activities |
|
|
|
(45,099 |
) |
|
|
|
(190,204 |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
|
(83,302 |
) |
|
|
|
(417,245 |
) |
Cash and cash equivalents and restricted cash at beginning of period |
|
|
|
472,010 |
|
|
|
|
1,214,775 |
|
Cash and cash equivalents and restricted cash at end of period |
|
$ |
|
388,708 |
|
|
$ |
|
797,530 |
|
Operating Activities
Net cash flows used in operating activities increased by $69.9 million, from $15.1 million for the three months ended March 31, 2022 to $85.0 million for the three months ended March 31, 2023. The increase is primarily attributable to proceeds from the sale of finance receivables held for sale for the 2022-1 securitization transaction of $272.3 million during the first quarter of 2022, partially offset by a decrease in working capital of $146.3 million, primarily related to lower inventory levels, and a $58.7 million decrease in net loss after reconciling adjustments for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.
As the 2023-1 securitization transaction was accounted for as secured borrowings, the proceeds are included as a financing activity in our condensed consolidated statement of cash flows.
We finance a majority of our inventory with the 2022 Vehicle Floorplan Facility. In accordance with U.S. GAAP, we report all cash flows arising in connection with the 2022 Vehicle Floorplan Facility, as a financing activity in our condensed consolidated statement of cash flows.
Investing Activities
Net cash flows from investing activities changed $258.8 million, from net cash used in investing activities of $212.0 million for the three months ended March 31, 2022 to net cash provided by investing activities of $46.8 million for the three months ended March 31, 2023, primarily as a result of the UACC Acquisition in February 2022 which resulted in cash outflow of $268.2 million during the three months ended March 31, 2022, the consolidation of the 2022-2 securitization transaction which resulted in a cash inflow of $11.4 million during the three months ended March 31, 2023, and an increase in principal payments received on finance receivables held in consolidated VIEs of $8.3 million, partially offset by a decrease in proceeds from the sale of finance receivables for the 2022-1 securitization transaction of $29.0 million during the three months ended March 31, 2022.
Financing Activities
Net cash flows used in financing activities decreased $145.1 million from $190.2 million for the three months ended March 31, 2022 to $45.1 million for the three months ended March 31, 2023. The decrease was primarily related to proceeds from borrowings under secured financing arrangements of $238.7 million, an increase in net proceeds of $72.6 million related to our Warehouse Credit Facilities, and a decrease of $25.6 million related to repayments of our secured financing agreements, partially offset by an increase in net repayments of $186.7 million related to our Vehicle Floorplan Facility.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, among others, those related to income taxes, the realizability of inventory, stock-based compensation, revenue-related reserves, as well as impairment of goodwill and long-lived assets. We base our estimates
69
Table of Contents
on historical experience, market conditions and on various other assumptions that are believed to be reasonable. Actual results may differ from these estimates.
The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those described in Note 2—Summary of Significant Accounting Policies and Note 3—Revenue Recognition to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recently Issued and Adopted Accounting Pronouncements
Refer to “Note 2—Summary of Significant Accounting Policies” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and not yet adopted as of the date of this report.
70
Table of Contents