10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:001-39315
VROOM, INC.
(Exact Name of Registrant as Specified in Its Charter)
3600 W Sam Houston Pkwy S, Floor 4
Houston, Texas77042
(Address of principal executive offices) (Zip code)
(518)535-9125
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.001 par value VRM Nasdaq Global Select
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes☐No☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes☐No☒
As of June 30, 2022, the aggregate market value of the common stock of the registrant held by non-affiliates was $158.9 million based on the closing price of the common stock on The Nasdaq Global Select Market of the Nasdaq Stock Market LLC on such date.
As of February 28, 2023, 138,537,183 shares of the registrants’ common stock were outstanding.
Table of Contents
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the information required to be furnished pursuant to Part III of this Annual Report on Form 10-K will be set forth in, and incorporated by reference from, the registrant’s definitive proxy statement for the annual meeting of stockholders which will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year ended December 31, 2022.
Table of Contents
TABLE OF CONTENTS
Page
Part I 6
Item 1. Business 6
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 54
Item 2. Properties 55
Item 3. Legal Proceedings 55
Item 4. Mine Safety Disclosures 56
Item 6. Reserved 61
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 90
Item 8. Financial Statements and Supplementary Data 91
Item 9A. Controls and Procedures 141
Item 9B. Other Information 141
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 141
Item 10. Directors, Executive Officers, and Corporate Governance 142
Item 11. Executive Compensation 142
Item 14. Principal Accounting Fees and Services 142
Part IV
Item 15 Exhibits and Financial Statement Schedules 143
2
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"), about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding general economic and market conditions, our future results of operations and financial condition, business strategy, and plans and objectives of management for future operations, are forward-looking statements. In some cases, forward-looking statements may be identified by words such as "anticipate," "believe," "contemplate," "continue," "could," "design," "estimate," "expect," "intend," "may," "plan," "potentially," "predict," "project," "should," "target," "will," "would," or the negative of these terms or other similar terms or expressions, although not all forward-looking statements contain these identifying words.
The forward-looking statements in this Annual Report on Form 10-K are only predictions. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available. These forward-looking statements are subject to a number of known and unknown risks, uncertainties, assumptions, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including risks described in the section titled "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
Other sections of this Annual Report on Form 10-K include additional factors that could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in, or implied by, any forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report or to conform these statements to actual results or to changes in our expectations. You should read this Annual Report on Form 10-K and the documents that we reference or incorporate by reference in this Annual Report on Form 10-K and have filed as exhibits to this report with the understanding that our actual future results, levels of activity, performance, and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
3
Table of Contents
SUMMARY RISK FACTORS
Our business is subject to numerous risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include, but are not limited to, the following:
•
despite the cost saving measures, reduced growth rates and increased focus on liquidity and profitability contemplated by our Business Realignment Plan and long-term roadmap, we may need to raise additional capital through debt or equity financings to achieve our business objectives and there can be no assurance that such financings will be available in amounts or on terms acceptable to us, if at all;
•
general business and economic conditions and risks related to the larger automotive ecosystem, including consumer demand;
•
we have a history of losses and we may not achieve or maintain profitability in the future;
•
we may not be able to generate sufficient revenue to generate positive cash flow on a sustained basis;
•
our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our debt obligations;
•
we have a limited operating history and are still building out our foundational systems;
•
our prior rapid growth is not indicative of our near term growth under our long-term roadmap and, if and when we return to rapid growth, we may not be able to manage our growth effectively;
•
we may be unable to successfully complete the integration of the United Auto Credit Corporation ("UACC") business into our business and support UACC as a captive lending operation for Vroom, or realize the anticipated benefits of the UACC Acquisition or those benefits could take longer than anticipated;
•
UACC's may be unable to sell automotive finance receivables and generate gains on sales of those finance receivables, which could harm our business, results of operations, and financial condition;
•
we rely on third-party vendors for key components of our business, which exposes us to increased risks;
•
we have entered into outsourcing arrangements with third parties related to our customer experience team, and difficulties experienced in and our transition away from these arrangements have and could continue to result in an interruption of our ability to sell our vehicles and value-added products;
•
our business, sales and results of operations are materially affected by our customer experience, our reputation and our brand;
•
we face a variety of risks associated with the operation of our vehicle reconditioning centers by us and our third-party service provider, any of which could materially and adversely affect our business, financial condition and results of operations;
•
we currently rely heavily on third-party carriers to transport our vehicle inventory throughout the United States. Thus, we are subject to business risks and costs associated with such carriers and with the transportation industry, many of which are out of our control;
4
Table of Contents
•
we are optimizing our proprietary logistics operations, including vehicle pick-ups and delivery from our last mile hubs and line haul transportation of vehicles between our last mile hubs, which will further expose us to increased risks related to ownership of infrastructure and the transportation of vehicles;
•
the current geographic concentration where we provide reconditioning services and store inventory and where UACC has a high concentration of borrowers creates an exposure to local and regional downturns or severe weather or catastrophic occurrences that may materially and adversely affect our business, financial condition and results of operations;
•
if we or our third-party providers sustain cyber-attacks or other privacy or data security incidents that result in security breaches, we could suffer a loss of sales and increased costs, exposure to significant liability, reputational harm and other negative consequences;
•
we operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations and failure to comply with these laws and regulations could have a material adverse effect on our business, financial condition and results of operations;
•
we are, and may in the future be, subject to legal proceedings in the ordinary course of our business. If the outcomes of these proceedings are adverse to us, it could have a material adverse effect on our business, financial condition and results of operations; and
•
our actual operating results may differ significantly from our guidance.
5
Table of Contents
PART I
Item 1. Business
Overview
Vroom, Inc., which was incorporated under the laws of the State of Delaware in 2012, is a holding company that conducts its operations through its subsidiaries. Vroom, Inc. completed its initial public offering (“IPO”) in June 2020 and its common stock trades on The Nasdaq Global Select Market (“Nasdaq”) under the symbol VRM. Unless the context otherwise requires, references herein to “Vroom”, “the Company”, “we”, “us” or “our” refer to Vroom and its consolidated subsidiaries. Vroom owns United Auto Credit Corporation (“UACC”), a leading automotive finance company, that offers vehicle financing through third party dealers under the UACC brand and to Vroom customers under the Vroom Financial Services brand. Vroom also operates the Texas Direct Auto (“TDA”) and CarStory brands.
Our Company
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. The Company's 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. Vroom is deeply committed to creating an exceptional experience for its customers.
We take a vertically integrated, hybrid approach, which leverages 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, 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, original equipment manufacturers (“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 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 expanding last mile 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 enable 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
6
Table of Contents
strategy to develop a captive financing arm and brought with it UACC’s financing expertise and extensive application processing, underwriting, securitization, and servicing capabilities.
Our Industry and Market Opportunity
The U.S. used automotive market is the largest consumer product category. 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 industry benefits from entrenched vehicle ownership trends among American consumers, with approximately 283 million registered vehicles on the road in 2022, and approximately 91.9% of families in the United States owning at least one vehicle in 2021. Additionally, the retail used vehicle market generally has shown resilience through recessionary markets and other challenging economic cycles.
The U.S. used automotive market is ripe for disruption as an industry that is notorious for consumer dissatisfaction and has one of the lowest levels of ecommerce penetration. Across all used vehicle sales in 2021, the largest U.S. used vehicle dealer had a market-share of approximately 2%, with the top 100 used vehicle dealers collectively representing only approximately 11%, according to Automotive News. Industry reports estimate that ecommerce penetration will grow to as much as half of all used vehicle sales by 2030. Reflecting changing consumer behavior towards online purchases, in the Cox Automotive Digitization of End to End Retail Study 2021, 80% of consumers said that they want to make at least part of their vehicle purchase online and 64% of car buyers said that they want to handle more of their purchase online compared to the last time they purchased a vehicle. 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 the peer-to-peer market do not offer consumers what we offer.
Our Strategy and Long-Term Roadmap
Following our IPO in 2020, we prioritized unit sales growth over unit economics and experienced triple digit growth in each of 2020 and 2021. In light of operational challenges that arose in our business, the need to reduce our cash spend and changes in financial market sentiment, in May 2022 we adopted a business realignment plan (the “Realignment Plan”), pursuant to which we chose to slow down and improve both our operations and our customer experience, while also living within our means, prioritizing profitability and liquidity and driving unit economics. The Realignment Plan included several elements, such as reducing the rate of unit sales to focus on lowering costs and expanding gross profit per unit; reducing marketing expense by focusing on the highest-ROI channels while aligning with volume trajectory; reducing the number of physical office locations; right sizing our organization through headcount reductions to align with unit volume; and further developing our regional operating model. In furtherance of the Realignment Plan, in 2022 we continued to take measures to reduce fixed and variable costs, including further headcount reductions.
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.
To achieve these three key 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 our 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.
7
Table of Contents
•
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.
Ecommerce Operations
Vroom’s end-to-end ecommerce platform streamlines all aspects of the automotive buying and selling experience for consumers. We offer an inventory of thousands of vehicles that have passed our detailed inspections, meet our proprietary Vroom Reconditioning Standards and are backed by our free Vroom 90-Day Limited Warranty. Our platform provides comprehensive and transparent information on each of the vehicles we sell, including high-resolution photography and detailed product descriptions, which show our customers our vehicles from all angles, highlight imperfections and provide third-party vehicle history reports. In addition to the size and diversity of our inventory selection, we provide buyers with a personalized, intuitive interface with specific sorting, searching and filtering functionality. This enables our customers to research and discover the right car for their unique needs.
We price our vehicles using data science and proprietary algorithms, ensuring that buyers receive attractive, market-based, no-haggle pricing. We provide seamlessly integrated, real-time, individualized financing solutions through UACC and our strategic partnerships with trusted leaders in automotive finance and give our customers access to competitive market rates. We also offer third-party protection products, such as vehicle service contracts, GAP protection and tire and wheel coverage, all with transparent pricing. For added assurance, our Vroom 7-Day Return Program offers customers seven days or 250 miles to test drive their purchase and return their vehicle for any reason.
For consumers looking to sell their vehicles, our Sell Us Your Car® proposition offers the ease of online submission of basic vehicle information to receive an on-demand appraisal for vehicles being sold in a direct-buy transaction or traded in on a vehicle purchase. We utilize our extensive data insights and experience across thousands of transactions to generate a quote that reflects a competitive market-based price. Price quotes are valid for seven days or 250 miles. This process allows customers to shop, compare and analyze the sale of their vehicle from the convenience of their home. We offer customers national, at-home, vehicle pick-up free of charge within days of accepting our price. As an added convenience, we offer hassle-free customer payment and/or pay-off of any loans on the vehicle being sold, saving the customer time and paperwork.
Sales Operations
We use a combination of in-house customer support personnel and third-party customer service providers to operate our call centers and provide sales support to our customers. Our professional customer experience team accompanies the buyer through the process to answer their questions and address their concerns. As part of our long-term roadmap and in response to a significant staff reduction by one of our third-party telephone sales support providers, we are 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.
As part of our initiative to build a well-oiled transaction machine, we also are focused on optimizing the end-to-end paper supply chain by automating and streamlining processes from initial documentation to vehicle registration. A critical component of this initiative is our Digital Title Vault, utilizing digital scanning and OCR to remove time consuming and error-prone manual processes and ensure all for-sale vehicles have quality-assured titles in Vroom’s name that can be readily transferred to customers. These enhancements are designed to improve the customer experience while also lowering transaction costs.
Reconditioning
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. To recondition vehicles, we rely on a combination of our Vroom-owned vehicle reconditioning center ("VRC")
8
Table of Contents
along with a network of VRCs owned and operated by a third party. We combine the use of our proprietary reconditioning center (“Vroom VRC”) and third-party vehicle reconditioning centers (“third-party VRCs”) to best meet our reconditioning needs. We leverage our partnerships with this third party to recondition approximately three-fourths of the vehicles in our inventory to our Vroom Reconditioning Standards, which creates capacity to quickly and efficiently scale or contract as business needs dictate, while simultaneously reducing our capital commitments. As part of our long-term roadmap, we intend to maintain third-party partners while also pursuing low capital in-house opportunities for reconditioning to ensure adequate capacity, optimize our end-to-end supply chain and support our regional operating model. As we identify potential VRC locations, leveraging our data science and deep industry experience, we take into account a combination of factors, including proximity to customers, transportation costs, access to inbound inventory and the ability to expand capacity at any current or future third-party partners’ specific locations. Our goal is to improve the speed of our reconditioning centers through optimized capacity scheduling, integrated end-to-end inventory management, and predictive analytics. These initiatives are designed to lower reconditioning costs and inbound shipping costs per unit, and thereby improve per unit economics while enhancing the customer experience.
Logistics
We have built our national third-party logistics network through the development of strategic carrier arrangements with national haulers and consolidation of our carrier base into dedicated operating regions, while also developing our proprietary logistics capabilities. This combination of proprietary and third-party service allows us to focus on improving the quality and reliability of our logistics operations. Specifically, we have prioritized investment in our last-mile hub delivery operations, where we can have 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 are also continuing to invest in our processes and technology to remove inefficiencies and increase automation. 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.
Vroom Financial Services
We offer our customers seamlessly integrated, real-time financing for their vehicle purchases, which we regard as a critical component of our value proposition. We currently arrange reliable vehicle financing at competitive rates for our customers through UACC and by partnering with trusted leaders in automotive finance, including Chase, Ally Financial and Capital One. Strategic partnerships with such lenders offer convenience, assurance and efficiency for our customers, while providing enhanced revenue streams for us.
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, Vroom Financial Services, which is one of the key strategic initiatives under our long-term roadmap. As of December 31, 2022, UACC funded approximately $133 million in loans to Vroom's customers. As we make further investments in UACC and continue our integration efforts, 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.
In addition to its financing expertise, the UACC platform brings with it extensive application processing, underwriting, servicing, and securitization capabilities. We expect UACC to continue to service most of the auto loans it originates. Further, we intend that all loans made by UACC will be funded via existing warehouse lines and sold to third-party investors via securitization transactions or forward flow arrangements. Subject to market conditions and overall economics, we intend to structure UACC’s future securitizations as off-balance sheet transactions.
Third Party Financial Services
While serving as a captive lender for Vroom, UACC also will continue to provide lending and servicing services to its existing dealer network and will seek to expand that network over time. UACC provides funding that allows manufacturer-franchised and independent motor vehicle dealers to finance their customers' purchases of new and used automobiles, light duty trucks and vans. Currently, UACC serves a nationwide network of over 10,000 dealers in 49
9
Table of Contents
states. UACC's lending programs are primarily designed to serve consumers who have limited access to traditional motor vehicle financing. UACC services all of the retail installment sale contracts that it purchases or originates from third party dealers. As of December 31, 2022, and separately from the services it provides through Vroom Financial Services, UACC serviced a portfolio of approximately 72,000 motor vehicle contracts with an aggregate principal outstanding balance of $800.5 million.
Marketing
We operate a multi-channel marketing strategy that includes both national brand and digital performance marketing. As part of our long-term roadmap, we intend to optimize our marketing investment towards the most efficient channels, including by continuing to build brand awareness, growing organic search traffic and optimizing paid media campaigns to improve direct traffic to vroom.com. Our national presence provides a significant competitive advantage versus local dealerships and regional players that lack scalable technology, operations and logistics, and are unable to take advantage of the efficiencies and lower costs of national brand advertising and must typically rely on costly local or regional advertising campaigns. Increasing our brand awareness leads to consumers coming directly to our website and creates an opportunity for increased conversion of our existing lead base, in particular as we expand our offerings across the credit spectrum with the development of our captive financing operations, build additional transactional functionality into our ecommerce platform and build our customer relationship management database.
We leverage various digital performance channels to generate demand among consumers actively in-market to buy or sell a vehicle. This includes aggregator listing sites where we manage the distribution footprint of each VIN by continually optimizing its placement to maximize consumer demand and achieve planned conversion, sales velocity and profitability. Because brand leads convert at a higher rate than all other marketing channels, we believe that a strategic mix of national brand leads and targeted performance marketing leads will improve our marketing efficiency. We also utilize our national marketing efforts to feature our Sell Us Your Car® proposition to drive consumer sourcing of vehicles, which typically generate higher gross profit per unit when sold compared to other inventory sources.
We analyze visitor traffic and customer interaction with our platform to identify and correlate visitor behavior with sales conversion. Our analytics enable us to measure and monitor the ROI generated by our marketing placements, which we then use to optimize placement and spend across marketing channels to balance sales velocity and profitability.
Data Science and Technology
Technology and data science are at the core of everything we do, and all aspects of our business are enhanced by data science. We continuously experiment using A/B and multivariate testing methodologies to drive conversion, innovation and improved unit economics. As part of our long-term roadmap, we are expanding and continuously improving our access to data, using data science and machine learning across our business to achieve our four strategic initiatives. We use our proprietary technology, machine learning and data science models to optimize our vehicle pricing and assortment, improve vehicle gross profit per unit, optimize our marketing investments and conversion funnel, fine-tune our supply, sourcing and logistics models, streamline our reconditioning processes and optimize our overall inventory sales velocity.
Our team of data scientists and engineers continuously extract and analyze additional information, processing millions of data points daily to create models that inform purchasing, pricing and market decisions, allowing us to understand price elasticity, and also allowing us to price a significant majority of the vehicles we acquire from consumers in just a few seconds. We adjust price as a function of overall market value trend, taking into account competitor inventory, market price fluctuations, and relative inventory advantages.
Core to our underlying technology is the real-time collection of customer and inventory data. We analyze and act on the data in real time. As our systems collect new or updated incoming data signals, those signals are immediately available to downstream systems to trigger parallel event processes. Our technology supports multi-channel engagement with our customers, delivering consistent messaging via the web, in native apps and via email. In cases where customers need attention outside of our ecommerce experience, we provide customer assistance via phone.
In addition, CarStory drives automotive retail innovation by aggregating, optimizing, and distributing current market data from thousands of automotive sources. CarStory tracks over three and a half million unique VINs listed for sale every day. This data is aggregated with demand insights from dealers and enterprise brands to generate accurate
10
Table of Contents
price and sales predictions. These predictions are further enhanced by CarStory's proprietary enhanced VIN database, ensuring a comprehensive and accurate view of a vehicle.
We have also integrated UACC's underwriting platform into our ecommerce experience. The platform delivers instantaneous risk-adjusted pricing decisions by combining over 25 years of lending and servicing performance data.
Competition
The U.S. used vehicle market is highly fragmented. We face competition from a variety of sources, including the following:
•
dealerships, including traditional new and used car dealerships, large, national car dealers, such as CarMax and AutoNation, which have expanded into online sales, including “omni-channel” offerings, and used car dealers or marketplaces that have ecommerce business models or online platforms, such as Carvana, Shift or CarBravo;
•
automotive finance companies with online ecommerce businesses, such as Chase Auto Preferred and CapitalOne Auto Navigator;
•
the peer-to-peer market, utilizing sites such as Facebook, Craigslist.com, eBay Motors and Nextdoor.com and consignment websites such as CarLotz; and
•
sales by rental car companies directly to consumers of used vehicles which were previously utilized in rental fleets, such as Enterprise Car Sales.
Internet and online automotive sites could change their models to sell used vehicles and compete with us, such as Google, Amazon, AutoTrader.com, Edmunds.com, KBB.com, Autobytel.com, TrueCar.com, CarGurus and Cars.com. In addition, automobile manufacturers such as Ford and Volkswagen could change their sales models in a fashion similar to General Motors (with their platform CarBravo, a used-vehicle marketplace for General Motors-branded vehicles aimed at competing with online dealerships) or otherwise to better compete with our model through technology and infrastructure investments. While such enterprises may change their business models and endeavor to compete with us, the sale of used vehicles through ecommerce presents unique operational and technical challenges.
We view our main competitors to be the traditional auto dealers, who make up the significant portion of U.S. used vehicle sales and are still operating under an outdated business model that is ripe for disruption. We believe the primary competitive factors in the used automotive retail industry include price, selection, transparency, convenience, quality and competitive financing and that our model provides a competitive advantage with respect to these and other factors.
Human Capital Management
As of December 31, 2022, Vroom employed a total of 1,323 employees, of which 1,322 were full-time employees. The total consisted of 1,157 employees across 29 states in the United States and 166 employees based in Belgrade, Serbia, and does not include employees of United Auto Credit Corporation ("UACC"), which we acquired on February 1, 2022. Vroom employees are spread across reconditioning and logistics (23%), corporate functions (15%), transactional staff (34%), technical staff (including data and engineering) (16%) and sales and retail staff (12%). As of December 31, 2022, UACC employed a total of 683 employees, of which 671 were full-time employees. None of our employees is represented by a labor union. We consider our relationships with our employees to be good and have not experienced any interruptions of operations due to labor disagreements.
In May 2022, in connection with our Realignment Plan, and in January 2023, as part of our continued focus on reducing variable and fixed costs as we pursue our long-term roadmap, we conducted reductions in force across the Vroom business. In 2022, we significantly improved our operations, specifically in our titling, registration and transaction processes, allowing us to now run these aspects of our business with fewer people. We further reduced Vroom's headcount in January 2023 by approximately 275 employees in pursuit of our three key objectives of prioritizing unit economics, reducing operating expenses and maximizing liquidity, as outlined in our long-term roadmapand based on a careful assessment of our business needs, key initiatives, and long-term success and profitable growth. These reductions
11
Table of Contents
in force together reflected an approximately 50% reduction of Vroom employees and contractors (excluding UACC) since January 2022.
Intellectual Property
The protection of our technology and intellectual property is an important aspect of our business. We seek to protect our intellectual property rights, including our intellectual property rights in our technology, through trademark, trade secret and copyright law, as well as confidentiality agreements, procedures and other contractual commitments and other legal rights. We generally enter into confidentiality agreements and invention assignment agreements with our employees and consultants to control access to, and clarify ownership of, our proprietary information.
As of the date of this Annual Report on Form 10-K, our CarStory business has 29 U.S. patents with expirations through 2039 and five pending U.S. patent applications, and Vroom has one pending provisional patent and may obtain patents in the future. We own 21 registrations for our trademarks in the United States for Vroom and UACC, collectively, with expirations through 2032, including Vroom®, V & Design®, Get In®, Sell Us Your Car®, VroomProtect®, TDA®, DealerLane®, Texas Direct®, and United Auto Credit®; and we hold 50 registered trademarks in Colombia, Chile, Argentina, the European Union, the United Kingdom, Japan, Singapore, Mexico, Canada, South Korea and Peru for the Vroom® trademark with expirations through 2032 and have a number of pending applications to register Vroom trademarks in other foreign jurisdictions. We continually review our branding strategies and technology development efforts to assess the existence, registrability, and patentability of new intellectual property.
Intellectual property laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States, and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology, brands, or other intellectual property.
Government Regulation
Our business is and will continue to be subject to extensive U.S. federal, state and local laws and regulations. The advertising, sale, purchase, financing and transportation of used vehicles are regulated by every state in which we operate and by the U.S. federal government. The titling and registration of vehicles and the sale of value-added products also are regulated by state laws, and such laws can vary significantly from state to state. In addition, we are subject to regulations and laws specifically governing the internet and ecommerce and the collection, storage and use of personal information and other customer data. We are also subject to federal and state consumer protection laws, including prohibitions against unfair or deceptive acts or practices. The federal governmental agencies that regulate our business and have the authority to enforce such regulations and laws against us include agencies such as the U.S. Federal Trade Commission, the U.S. Department of Transportation, the U.S. Occupational Health and Safety Administration, the U.S. Department of Justice and the U.S. Federal Communications Commission. Additionally, we are subject to regulation by individual state dealer licensing authorities, state consumer protection agencies and state financial regulatory agencies. From time to time, we have been subject to audits, requests for information, investigations and other inquiries from our regulators related to customer complaints. As we encountered operational challenges in keeping up with our rapid growth from 2020 through the first quarter of 2022, we experienced an increase in customer complaints, leading to an increase in such regulatory inquiries. We endeavor to promptly respond to any such inquiries and cooperate with our regulators.
State dealer licensing authorities regulate the purchase and sale of used vehicles by dealers within their respective states. The applicability of these regulatory and legal compliance obligations to our ecommerce business is dependent on evolving interpretations of these laws and regulations and how our operations are, or are not, subject to them. We are licensed as a dealer in the States of Texas, Florida, Arizona, California and Ohio and all of our vehicle transactions are conducted under our Texas, Florida and Arizona and Ohio licenses. We believe that our activities in other states are not subject to such states’ vehicle dealer licensing laws; however, regulators in such states could seek to require us to maintain a used vehicle dealer license in order to engage in activities in that state. In addition, we may obtain a used vehicle dealer license in certain additional states to maximize operational flexibility and efficiency, enhance our customer experience and invest in relationships with state regulators.
Most states regulate retail installment sales, including setting a maximum interest rate and caps on certain fees or amounts financed. In addition, certain states require that retail installment sellers file a notice or registration document or have a sales finance license or an installment sellers license in order to solicit or originate installment sales in that state. We have obtained a motor vehicle sales finance license in Texas in connection with our Texas dealer license, a retail
12
Table of Contents
installment seller license in Florida in connection with our Florida dealer license, and filed the required notice in Arizona in connection with our Arizona dealer license. The financial regulatory agency in Pennsylvania determined that we need to obtain an installment seller license in order to enter into retail installment sales with residents of Pennsylvania. As a result, we are not currently offering third-party financing to our customers in Pennsylvania, who must obtain independent financing to the extent needed to fund any vehicle purchases on our platform. We have since obtained a Pennsylvania installment seller license and expect to resume offering financing to Pennsylvania customers in the future. We also are registered with the Indiana Department of Financial Regulation as a non-lender credit seller.
We are not operating in the Commonwealth of Massachusetts due to its prohibition on the use of temporary tags, which we typically provide to our customers upon delivery.
In addition, the ongoing expansion of our proprietary logistics operations exposes us to greater regulation from the U.S. Department of Transportation and state transportation regulators.
UACC's financing operations are subject to U.S. federal, state, and local laws and regulations regarding loan origination, acquiring motor vehicle installment sales contracts from retail sellers, credit bureau reporting, servicing, debt collection practices, and securitization transactions. Certain states require UACC to have a sales finance license, consumer credit license, or similar applicable license. UACC has obtained licenses in all states as required. In addition, UACC is subject to enforcement by the Consumer Financial Protection Bureau (“CFPB”) and state consumer protection agencies, including state attorney general offices and state financial regulatory agencies.
In addition to these laws and regulations that apply specifically to the sale and financing of used vehicles, our facilities and business operations are subject to laws and regulations relating to environmental protection, occupational health and safety, and other broadly applicable business regulations. We also are subject to laws and regulations involving taxes, tariffs, privacy and data security, anti-spam, pricing, content protection, electronic contracts and communications, mobile communications, consumer protection, information-reporting requirements, unencumbered internet access to our platform, the design and operation of websites and internet neutrality. We also are subject to laws and regulations affecting public companies, including securities laws and Nasdaq listing rules.
Additionally, we have in the past been subject to federal, state and local laws and regulations, and other government actions related to the COVID-19 pandemic, and may be subject to them in the future, including in. the event of any resurgences or the emergence of new variants.
For a discussion of the various risks we face from regulation and compliance matters, see “Risk Factors—Risks Related to Cybersecurity and Privacy—Failure to comply with federal, state and local laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, as well as our actual or perceived failure to protect such information could harm our reputation and could adversely affect our business, financial condition and results of operations”; “Risk Factors—Risks Related to Laws and Regulations——We operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Failure to comply with these laws and regulations could have a material adverse effect on our business, financial condition and results of operations”; “—If we fail to comply with the Telephone Consumer Protection Act, we may face significant damages, which could harm our business, financial condition and results of operations”; “—Government regulation of the internet and ecommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business, financial condition and results of operations”; “Risk Factors—Risks Related to Our Use of Data and Technology—We are subject to risks related to online payment methods”; “Risk Factors—Risks Related to Our Growth and Strategy—We are optimizing our proprietary logistics operations, including vehicle pick-ups and delivery from our last mile hubs and line haul transportation of vehicles between our last mile hubs, which will further expose us to increased risks related to ownership of infrastructure and the transportation of vehicles” and “Risk Factors—General Risk Factors—The full extent of the impact of the COVID-19 pandemic, including the emergence of variants or any other resurgences, is uncertain.”
13
Table of Contents
Seasonality
Used vehicle sales are 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. In line with these macro trends, our gross profit per unit has historically been higher in the first half of the year when compared to the second half of the year. 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.”
Available Information
Our website address is www.vroom.com. The information contained on, or that can be accessed through, our website is deemed not to be incorporated in this Annual Report on Form 10-K or to be part of this Annual Report on Form 10-K or any other report filed with the SEC. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy statements, and other information regarding SEC registrants, including Vroom Inc.
14
Table of Contents
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with the financial and other information contained in this Annual Report on Form 10-K, before you decide to purchase shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material or important, may also become material or important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.
Risks Related to Our Financial Condition and Results of Operations
Despite the cost saving measures, reduced growth rates and increased focus on liquidity and profitability contemplated by our Realignment Plan and long-term roadmap, we may need to raise additional capital through debt or equity financings to achieve our business objectives and there can be no assurance that such financings will be available in amounts or on terms acceptable to us, if at all.
As of December 31, 2022, we had cash and cash equivalents of $398.9 million. In May 2022, we adopted the Business Realignment Plan (the “Realignment Plan”) and thereafter adopted our long-term roadmap, each of which was designed to prioritize unit economics, reduce operating expenses and maximize liquidity. Nevertheless, our future capital requirements will depend on many factors, including our revenues, our continued efforts to reduce operating expenses, costs associated with the ongoing integration of UACC and its development into a captive financing operation, investments in our reconditioning, logistics and customer experience operations, UACC’s ability to complete additional securitization transactions, and our ability to free up restricted cash. 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, however, there can be no assurance that such financing will be available in amounts or on terms acceptable to us, if at all. Failure to reduce our cash burn rate, free up restricted cash, generate sufficient revenues, reduce operating costs and/or raise additional capital through debt or equity financings, 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. See “We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If such capital is not available to us, our business, financial condition and results of operations may be materially and adversely affected.”
We have a history of losses and we may not achieve or maintain profitability in the future.
We have not been profitable since our inception in 2012 and had an accumulated deficit of approximately $1,600.7 million as of December 31, 2022. We incurred net losses of $451.9 million and $370.9 million for the years ended December 31, 2022 and 2021, respectively. We may incur significant losses in the future for a number of reasons, including our inability to reduce costs and increase per unit profitability in accordance with our long-term roadmap, acquire and appropriately price vehicle inventory, provide the exceptional customer experience needed to attract customers, or identify and respond to emerging trends in the used car industry; a slowdown in demand for used vehicles and our related value-added products; weakness in the automotive retail industry generally; general economic conditions, including rising interest rates and inflation; global pandemics and other public health emergencies; and increasing competition, as well as other risks described in this Annual Report on Form 10-K, and we may encounter unforeseen expenses, difficulties, complications and delays in achieving profitability.
While we have reduced fixed and variable operating expenses through the implementation of our Realignment Plan, we expect to continue incurring significant operating expenses as we invest in the UACC business and develop it into a captive finance operation, invest in our proprietary logistics operations, expand our reconditioning capacity, expand our internal sales force, continue certain advertising and marketing efforts to attract customers to our platform and build our brand, continue to invest in technology development and automating key portions of our sales operations and further regionalize our operating infrastructure in accordance with our long-term roadmap. In addition, we anticipate an increase in legal and regulatory costs associated with our operational challenges, as well as continued legal, accounting, compliance and other expenses as a public company. As a result of these expenditures, we will have to generate and sustain revenue sufficient to offset our operating expenses and achieve and maintain profitability. In addition, if we reduce variable costs to respond to losses, this may limit our ability to grow our sales volume and revenues. Our ecommerce gross profit per unit increased by $339, or 15.4%, from the year ended December 31, 2021 to December 31, 2022. To reduce our losses, we will need to increase our gross profit per unit by lowering our costs per unit by, among other things,
15
Table of Contents
focusing on our regional operating model, increasing efficiencies in reconditioning and logistics, and reducing transaction and support expenses, which we may be unable to do. Accordingly, we may not achieve or maintain profitability and we may continue to incur significant losses in the future.
We may not be able to generate sufficient revenue to generate positive cash flow on a sustained basis.
We cannot assure you that we will generate sufficient revenue to offset the cost of maintaining our platform and operations. In line with the reduced unit sales contemplated by our Realignment Plan, our revenue has declined from $3,184.3 million for the year ended December 31, 2021 to $1,948.9 million for the year ended December 31, 2022. Our revenue growth also may be adversely affected by our inability to acquire and appropriately price vehicle inventory, provide the exceptional customer experience needed to attract customers, or execute effective marketing campaigns to increase traffic to our platform; a slowdown in demand for used vehicles and our related value-added products; weakness in the automotive retail industry generally; general economic conditions, including rising interest rates and inflation; global pandemics and other public health emergencies; and increasing competition. We expect our revenue to decline in the short term as we implement our long-term roadmap. You should not consider our historical revenue growth as indicative of our future performance. If our revenue declines beyond what is contemplated, our business, financial condition and results of operations will be materially and adversely affected.
Further, going forward we expect to continue making significant investments to further develop our business, and these investments may not result in increased revenue or growth on a timely basis or at all. For example, we expect to continue to expend substantial financial and other resources on developing our captive finance operation, expanding our internal sales force, continuing certain marketing and other efforts to acquire and retain customers and build our brand, improving our customer experience operations, developing our technology and data science capabilities, adding new features and functionality to our website and mobile applications and expanding of our proprietary reconditioning and logistics operations. These investments may not result in increased revenue or growth in our business. If we cannot successfully earn revenue at a rate that exceeds the costs associated with our business, we will not be able to generate positive cash flow on a sustained basis and our revenue may decline beyond what is contemplated by our long-term roadmap. Additionally, we base our expenses and investment plans on our estimates of revenue and gross profit. If our assumptions prove to be wrong, we may spend more than we anticipate or may generate less revenue than anticipated. If we fail to realize the anticipated benefits of our investments, our business, financial condition and results of operations could be materially and adversely affected.
We recognized an impairment charge related to goodwill. If our amortizable intangible assets or long lived assets become impaired in the future, we would incur additional impairment charges, which would negatively affect our operating results.
Our goodwill was fully impaired as of December 31, 2022. However, if our amortizable intangible assets or long lived assets become impaired in the future, we would incur additional impairment charges, which would negatively affect our results of operations. There is significant judgment required in the analysis of a potential impairment of identified intangible assets and other long-lived assets. Impairment may result from, among other things, significant changes in the manner of use of the acquired assets, negative industry or economic trends and/or significant underperformance relative to historic or projected operating results. As of March 31, 2022, a quantitative interim goodwill impairment assessment was performed over the Company's reporting units, due to the decline in the Company's and comparable companies' stock prices. The Company determined that the estimated fair value of the Ecommerce, Wholesale, and TDA reporting units was less than their carrying amounts. The Company recorded a goodwill impairment charge of $201.7 million in the consolidated statements of operations for the year ended December 31, 2022. See Note 8 to the Company’s Consolidated Financial Statements.
Our level of indebtedness could have a material adverse effect on our ability to generate sufficient cash to fulfill our obligations under such indebtedness, to react to changes in our business and to incur additional indebtedness to fund future needs.
As of December 31, 2022, we had outstanding $277.0 million aggregate principal amount of borrowings under our 2022 Vehicle Floorplan Facility and $365.8 million aggregate principal amount of our 0.75% Convertible Senior Notes due 2026 (the "Notes"). Our interest expense was $26.8 million for the year ended December 31, 2022, related to the 2022 Vehicle Floorplan Facility. In addition, as of December 31, 2022, UACC had $79.8 million of securitization indebtedness as well as four senior secured warehouse facility agreements the (“Warehouse Credit Facilities”) with banking institutions, with an aggregate borrowing limit of $850.0 million. As of December 31, 2022, there was $229.5 million in outstanding
16
Table of Contents
borrowings related to the Warehouse Credit Facilities. In 2022, we repurchased $254.3 million in aggregate principal amount of our Notes, net of deferred issuance costs of $4.9 million, in open market transactions for $90.2 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. However, we may be unable to repay, restructure or refinance the remaining Notes.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. Our ability to restructure or refinance our current or future debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis or failure to comply with certain restrictions in our debt instruments would result in a default under our debt instruments. In the event of a default under any of our current or future debt instruments, the lenders could elect to declare all amounts outstanding under such debt instruments to be due and payable. Furthermore, our 2022 Vehicle Floorplan Facility restricts our ability to dispose of assets and/or use the proceeds from the disposition. We may not be able to consummate any such dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.
In addition, our indebtedness under our 2022 Vehicle Floorplan Facility bears interest at variable rates. Because we have variable rate debt, fluctuations in interest rates may affect our cash flows or business, financial condition and results of operations. In light of the Federal Reserve's recent increases to the federal funds rate and expectations of future rate increases, we expect to pay higher interest under our 2022 Vehicle Floorplan Facility and incur higher interest expense in 2023 compared to 2022. The 2022 Vehicle Floorplan Facility has higher interest rates than our prior facility, and any future funding arrangements may be at higher interest rates or subject to other less favorable terms. We may attempt to minimize interest rate risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps.
Our indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our debt obligations.
As of December 31, 2022, we, including our subsidiaries, had approximately $955.9 million principal amount of consolidated indebtedness. We may incur additional indebtedness to meet future financing needs. Our indebtedness could have significant negative consequences for our security holders and our business, results of operations and financial condition by, among other things:
▪
increasing our vulnerability to adverse economic and industry conditions;
▪
limiting our ability to obtain additional financing;
▪
requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes, including the successful execution of our long-term roadmap;
▪
limiting our flexibility to plan for, or react to, changes in our business;
▪
diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of our Notes due 2026; and
▪
placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, or to pay amounts due under our indebtedness, and our cash needs may increase in the future. In addition, our existing indebtedness contains, and any future indebtedness that we may incur may contain, financial and other restrictive covenants that may limit our ability to operate our business, raise capital or make payments under our other indebtedness. For example, the delisting of our common stock from the Nasdaq Global Select Market would constitute a fundamental change under the terms of our Indenture and make our Notes redeemable at par upon delisting. If we fail to
17
Table of Contents
comply with these covenants or to make payments under our indebtedness when due, then we would be in default under that indebtedness, which could, in turn, result in that and our other indebtedness becoming immediately payable in full.
We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If such capital is not available to us, our business, financial condition and results of operations may be materially and adversely affected.
We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to successfully execute on our long-term roadmap, make certain marketing expenditures to improve our brand awareness, build and maintain our inventory of used vehicles, develop our captive finance operation, expand our internal sales force, improve our customer experience operations, develop new products or services or further improve existing products and services, expand and enhance our operating and proprietary logistics and reconditioning infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in additional equity or debt financings at the Vroom or UACC level to secure additional funds to satisfy our short or long term liquidity needs. However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all. Moreover, any debt financing that we secure in the future could involve restrictive covenants which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may be forced to obtain financing on undesirable terms or our ability to continue to pursue our business objectives, including to successfully execute our long-term roadmap, and to respond to business opportunities, challenges or unforeseen circumstances, could be significantly limited, and our business, financial condition and results of operations could be materially and adversely affected.
We currently rely on an agreement with a single lender to finance our vehicle inventory purchases under our 2022 Vehicle Floorplan Facility. If our relationship with this lender were to terminate, and we fail to acquire alternative sources of funding to finance our vehicle inventory purchases, we may be unable to maintain sufficient inventory, which would adversely affect our business, financial condition and results of operations.
We rely on a revolving credit agreement with a single lender to finance our vehicle inventory purchases under our 2022 Vehicle Floorplan Facility. Outstanding borrowings are due as financed vehicles are sold, and the 2022 Vehicle Floorplan Facility is secured by our vehicle inventory and certain other assets. If we are unable to maintain our 2022 Vehicle Floorplan Facility, which expires in March 2024, absent renewal, on favorable terms or at all, or if the agreement is terminated or expires and is not renewed with our existing third-party lender or we are unable to find a satisfactory replacement, our inventory supply may decline, resulting in fewer vehicles available for sale on our website. Moreover, the 2022 Vehicle Floorplan Facility has higher interest rates than our prior facility, and any future new funding arrangements may be at higher interest rates or subject to other less favorable terms. These financing risks, in addition to potential rising interest rates, inflation, and changes in market conditions, if realized, could negatively impact our business, financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Vehicle Financing”.
We may experience seasonal and other fluctuations in our quarterly results of operations, which may not fully reflect the underlying performance of our business.
We expect our quarterly results of operations, including our revenue, gross profit and cash flow to vary significantly in the future based in part on, among other things, vehicle-buying patterns. Vehicle sales historically have exhibited seasonality, with an increase in sales early in the year that reaches its highest point late in the first quarter and early in the second quarter, which then levels off through the rest of the year with the lowest level of sales in the fourth quarter. This seasonality historically corresponds with the timing of income tax refunds, which can provide a primary source of funds for customers’ payments on used vehicle purchases. Used vehicle prices also exhibit seasonality, with used vehicles depreciating at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. 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. While there remains continued uncertainty surrounding market trends, the current economic outlook forecasts a return to historical seasonal trends in 2023.
18
Table of Contents
Other factors that may cause our quarterly results to fluctuate include, without limitation:
•
the success of operational changes and initiatives that we have and are undertaking under in accordance with our Realignment Plan and our long-term roadmap;
•
our ability to attract new customers;
•
our ability to continue to develop our captive finance operation;
•
our ability to maintain sufficient inventory of desirable vehicles;
•
our ability to generate sales of value-added products;
•
changes in the competitive dynamics of our industry;
•
the regulatory environment;
•
expenses associated with unforeseen quality issues;
•
macroeconomic conditions, including the impact of the COVID-19 pandemic and inflation;
•
increases in interest rates;
•
seasonality of the automotive industry and third-party aggregation websites on which we rely;
•
changes that impact disposable income, including changes that impact the timing or amount of income tax refunds; and
•
litigation or other claims against us and increased legal and regulatory expenses.
In addition, a significant portion of our expenses are fixed and do not vary proportionately with fluctuations in revenues. As a result of these seasonal fluctuations, our results in any quarter may not be indicative of the results we may achieve in any subsequent quarter or for the full year, and period-to-period comparisons of our results of operations may not be meaningful.
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.
Our revenue declined from $3,184.3 million for the year ended December 31, 2021 to $1,948.9 million for the year ended December 31, 2022. Under our Realignment Plan, we reduced the rate of unit sales to focus on profitability, by among other things, lowering our operating expenses and increasing our gross profit per unit. In addition, in accordance with our long-term roadmap, we are investing in further improving and automating key aspects of our sales operations and addressing operational challenges that have arisen from our rapid growth from 2020 through the first quarter of 2022. There can be no assurance that our strategy of reducing the rate of unit sales and focusing on profitability will be successful.
We expect that, in the future, we will pursue profitable growth. However, we may not be successful in pursing profitable growth if we do not, among other things:
•
increase our gross profit per unit and reduce our operating expenses;
•
increase the number of unique visitors to our website, the number of qualified visitors to our website (i.e. those who have the intent and ability to transact), and the number of customers transacting on or through our platform;
•
further enhance the quality of our vehicle offerings and value-added products, and introduce high quality new offerings and features on our platform;
•
continue to invest in and develop our captive financing capabilities;
•
acquire sufficient high-quality inventory at an attractive cost to meet the increasing demand for our vehicles;
19
Table of Contents
•
further invest in and enhance the quality of our customer experience and logistics operations, including by transitioning to increasingly automated sales and customer experience operations and improving our customer delivery experience through our proprietary last mile hub and long haul operations;
•
expand our vehicle reconditioning capacity to satisfy increasing unit sales, including by opening additional proprietary VRCs; and
•
further develop the functionality of our website and mobile applications to facilitate fully digital transactions.
In 2020 and 2021, our business grew rapidly as new customers purchased vehicles and value-added products from us. During periods of rapid growth we have encountered, and in the future may continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly changing industries, including difficulties in our ability to achieve market acceptance of our platform and attract customers, as well as increasing competition, operational challenges and significant expenses as we grow our business. As we continue to develop our business, and particularly in light of the workforce and operating expense reductions that we have undertaken and may undertake to reduce fixed and variable costs in accordance with our long-term roadmap, we may find it difficult to adapt to meet these challenges. We also expect that our business will evolve in ways that may be difficult to predict. For example, over time our investments that are intended to drive new customer traffic to our website may be less productive than expected, our investments in developing proprietary logistics and reconditioning operations and automating our sales operations may not successfully address our existing operational challenges and we may not successfully develop our captive financing capabilities. In the event of these or any other adverse developments, our continued success will depend on our ability to successfully adjust our strategy to meet changing market dynamics. If we are unable to do so, our business, financial condition and results of operations could be materially and adversely affected.
Our prior rapid growth placed, and in the future may continue to place, significant demands on our management and our operational and financial resources. In addition to our significant growth in sales and revenues, we experienced significant growth in the number of customers on our platform as well as the amount of data that we analyze. Although we hired additional personnel, our operations did not keep pace with our top-line growth, which resulted in backlogs in our operations that adversely affected our customers' experience. In addition, our organizational structure is becoming more complex as we refine our business focus, and we will need to continue to improve our operational, financial and management controls as well as our reporting systems and procedures. This will require significant capital expenditures and the allocation of valuable management resources to grow and adapt in these areas without undermining our corporate culture of teamwork or failing to meet our financial goals. In order to address the operational challenges created by our prior rapid growth, 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 prior to listing. While these initiatives are designed to improve our transaction processing, enhance our customer experience, and reduce our regulatory risk, they have resulted in, among other things, an increase in the number of days between our acquisition of vehicles and the final delivery of such vehicles to customers. If we cannot manage our growth effectively to maintain the quality and efficiency of our customers’ experience and/or the quality of the vehicles we sell, our business, financial condition and results of operations could be materially and adversely affected.
We have a limited operating history and are still building out our foundational systems.
We commenced operations in 2012 and acquired TDA in 2015 and, as a result, have a limited operating history. Moreover, over the past several years, we brought in a new senior leadership team that has refocused our strategy, accelerated our growth and committed us to pursue a path to profitability. To execute this strategy, during prior periods of rapid growth we had to manage costs while making investments in enhancing our foundational systems as we scaled our business, including design and expansion of website functionality and features, mobile application development, advancement and deployment of sophisticated data science, lean manufacturing technology, logistics network management, and automation of our transaction processes, and work on all such foundational systems is ongoing. Fundamental to our path to long-term profitability and future growth is the further development of the functionality of our website and mobile applications to facilitate fully digital transactions and reduce the need for continued investments in staffing for the sales and sales support functions and our customer experience operations.
These types of activities and investments subject us to various costs and risks, including significant capital expenditures, additional administration and operating expenses, potential disruption of our internal control structure, acquisition and retention of sufficiently skilled personnel, demands on management time, the introduction of errors or vulnerabilities and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our
20
Table of Contents
foundational systems. There can be no assurance that we will succeed in successfully developing our capabilities in each of these areas, or that a desirable return on investment will be achieved on the investments made in these areas. A failure to successfully execute on the development of our foundational systems would adversely affect our business, financial condition and results of operations.
We are optimizing our proprietary logistics operations, including vehicle pick-ups and delivery from our last mile hubs and line haul transportation of vehicles between our last mile hubs, which will further expose us to increased risks related to ownership of infrastructure and the transportation of vehicles.
In order to enhance the quality of our logistics operations and our customer experience, we have been developing our proprietary logistics operations, including expanding our owned vehicle fleet. Additionally, we are utilizing last mile hubs around the country, through which we coordinate directly with our customers to schedule deliveries in an effort to further strengthen our customer experience. Initially, we prioritized investment in our last mile hub delivery operations and subsequently invested in short-haul trucks to make regional deliveries from our last mile hubs, and line-haul vehicles for hub-to-hub shipments on high-volume routes. As part of our long-term roadmap, we intend to increase our proprietary last mile hub and line-haul fleet over time as we build out our regional operating model. These investments will require significant capital expenditures and operating expenses, increase our current risks and expose us to new risks. These risks include local and federal regulations, vehicular crashes, injury, insufficient internal capacity, taxes, license and registration fees, insurance premiums, self-insurance levels, difficulty in recruiting and retaining qualified drivers, maintaining the truck fleet, disruption of our technology systems, equipment supply, equipment quality, and increasing equipment and operational and overhead costs. Our failure to successfully manage the expansion of our logistics operations could cause delays and increase costs in our inbound and outbound shipping, which may adversely affect our operating results and financial condition.
Our ability to expand value-added product offerings and introduce additional products and services may be limited, which could have a material adverse effect on our business, financial condition and results of operations.
Currently, our third-party value-added products consist of finance and protection products, which includes third-party financing of customers’ vehicle purchases, as well as other value-added products, such as vehicle service contracts, GAP protection and tire and wheel coverage. If we introduce new value-added products or expand existing offerings on our platform, such as music services and vehicle diagnostic and tracking services, we may incur losses or otherwise fail to enter these markets successfully. Our expansion into these markets may place us in competitive and regulatory environments with which we are unfamiliar and involve various risks, including the need to invest significant resources to familiarize ourselves with such frameworks and the possibility that returns on such investments may not be achieved for several years, if at all. In attempting to establish new offerings, we expect to incur significant expenses and face various other challenges, such as expanding our customer experience team, internal sales force and management personnel to cover these markets and complying with complicated regulations that apply to these markets. In addition, we may not successfully demonstrate the value of these value-added products to customers, and failure to do so would compromise our ability to successfully expand into these additional revenue streams. Any of these risks, if realized, could materially and adversely affect our business, financial condition and results of operations.
We rely on third-party vendors for key components of our business, which exposes us to increased risks.
In line with our hybrid business strategy, many components of our business, including our reconditioning facilities, our logistics operations, our customer financing and our customer experience teams primarily have been provided by third parties. In our reconditioning operations, we currently have one third-party service provider reconditioning the substantial majority of our inventory. We carefully select our third-party vendors, but we cannot control their actions. If our vendors terminate their relationships with us or fail to perform as we expect, our operations and reputation could suffer. One or more of these third-party vendors could choose not to do business with us, or could experience financial distress, staffing shortages or liquidity challenges, file for bankruptcy protection, go out of business, undergo a change of control, or suffer disruptions in their business due to the COVID-19 pandemic. For example, in the third quarter of 2022, one of our third-party sales support teams notified us of their intention not to renew their contract with us and significantly reduced its staff dedicated to the Company’s sales operations, which had an impact on our unit sales volume in the second half of 2022 as we transitioned away from the third-party provider. The use of third-party vendors represents an inherent risk to our Company that could have a material adverse effect on our business, financial condition and results of operations.
21
Table of Contents
Our future profitability and growth relies heavily on the effectiveness and efficiency of our marketing and branding efforts, and these efforts may not be successful.
Because we are a consumer brand, we rely heavily on marketing and advertising to increase brand visibility and attract potential customers. While we have reduced marketing expenses as part of our Realignment Plan, advertising expenditures are and will continue to be a significant component of our operating expenses, and there can be no assurance that we will achieve a meaningful return on investment on such expenditures. We continue to evolve our marketing strategies, adjusting our messages, the amount we spend on advertising and where we spend it, and no assurance can be given that we will be successful in developing effective messages and in achieving efficiency in our marketing and advertising expenditures. As a result, our future profitability and growth may depend in part on:
•
our ability to design our near-term marketing strategy to support the goals of our long-term roadmap on a substantially reduced marketing budget;
•
our ability to effectively design our marketing programs to support our regional operating model;
•
the effectiveness of our advertising campaigns and search marketing programs in generating awareness and sales;
•
our ability to prevent confusion among customers that can result from search engines that allow competitors to use or bid on our trademarks to direct customers to competitors’ websites;
•
our ability to prevent internet publication of false or misleading information regarding our platform or our competitors’ offerings; and
•
our ability to reduce our dependence on third-party aggregation websites.
We currently advertise through a blend of brand and direct advertising channels with the goal of increasing the strength, recognition and trust in the Vroom brand and driving more unique visitors to our platform. Our marketing strategy currently includes national television campaigns, and performance marketing through digital platforms, including both auto-centric lead generation platforms and broader consumer-facing platforms. As such, our marketing spend involves the use of various marketing techniques, including programmatic ad-buying, interest targeting, retargeting and email nurturing. As part of our Realignment Plan, we decreased our marketing expense by focusing on our highest-ROI channels while aligning with volume trajectory. Our future profitability and growth will depend in part on the increased efficiency of our promotional advertising and marketing programs and related expenditures, including our ability to create greater awareness of our platform and brand name, to appropriately plan for future expenditures and to drive the promotion of our platform.
Additionally, our business model relies on our ability to decrease incremental customer acquisition costs as we grow. If we are unable to recover our marketing costs through increases in customer traffic and incremental sales, if our advertising partners refuse to work with us at competitive rates or at all, or if our broad marketing campaigns are not successful or are terminated, our business, financial condition and results of operations could be materially and adversely affected.
We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our results of operations.
Our success will depend, in part, on our ability to develop and evolve our business in response to the demands of consumers and other constituents within the automotive industry, as well as competitive pressures. Although we have no plans to do so currently, in some circumstances, we may determine to grow our business through the acquisition of complementary businesses and technologies rather than through internal development, such as our UACC Acquisition in 2022, and our earlier acquisition of the CarStory business. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:
•
diversion of management time and focus from operating our business to addressing acquisition integration challenges;
•
coordination of technology, research and development and sales and marketing functions;
•
transition of the acquired company’s users to our platform;
22
Table of Contents
•
retention of employees from the acquired company;
•
potential adverse reactions to the acquisition by an acquired company’s customers;
•
cultural challenges associated with integrating employees from the acquired company into our organization;
•
integration of the acquired company’s accounting, management information, human resources and other administrative systems;
•
the need to implement or improve controls, policies and procedures at a business that, prior to the acquisition, may have lacked effective controls, policies and procedures;
•
potential write-offs of intangibles or other assets acquired in such transactions that may have an adverse effect our results of operations;
•
liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and
•
litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities and otherwise harm our business. Future acquisitions also could result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, any of which could harm our financial condition. Also, the anticipated benefits of any acquisitions may not materialize. Any of these risks, if realized, could materially and adversely affect our business, financial condition and results of operations.
Risks Related to Our Operations
We face a variety of risks associated with the operation of our VRCs by us and our third-party service provider, any of which could materially and adversely affect our business, financial condition and results of operations.
We and a third-party service provider operate our VRCs, with the substantial majority of our inventory being reconditioned by a single third-party service provider. If we are unable to maintain our relationship with our third-party service provider, such service provider ceases to provide the services we need, or such service provider is unable to effectively deliver our services to our standards on timelines and at the prices we have negotiated, and we are unable to contract with alternative providers, increase our supply from existing providers, or replace such service provider with a proprietary VRC (which may require significant time and investment), we could experience a decrease in the finished goods output sufficient to maintain or grow our inventory level, a decline in quality of our reconditioning services, delays in listing our inventory, additional expenses, delivery delays and loss of potential and existing customers and related revenues, which may materially and adversely affect our business, financial condition and results of operations.
Moreover, our future profitability and growth depends in part on developing our proprietary reconditioning and last-mile delivery operations and regionalizing the geographic reach of those operations in accordance with our long-term roadmap in order to reduce shipping costs. We have expanded our reconditioning capacity through third-party VRC locations and, as we continue to develop our business, we intend to add additional proprietary VRCs to our integrated hybrid network to ensure adequate capacity. We have right-sized our proprietary reconditioning operations in the Houston market and currently intend to add additional proprietary VRCs into our integrated network over time. 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 volume. However, there can be no guarantee that we will be able to add additional proprietary VRCs quickly enough and in optimal locations to facilitate development of our regional operating model and to address our capacity needs.
Additionally, we and our third-party service provider are required to obtain approvals, permits and licenses from state regulators and local municipalities to operate our VRCs. There could be delays in obtaining the requisite approvals, permits, financing and licenses to operate our VRCs or we may not be able to obtain them at all. If we or our third-party service provider encounter delays in obtaining or cannot obtain the requisite approvals, permits, financing and licenses to operate our VRCs in desirable locations, our business, financial condition and results of operations may be materially and adversely affected.
23
Table of Contents
We currently rely heavily on third-party carriers to transport our vehicle inventory throughout the United States. Thus, we are subject to business risks and costs associated with such carriers and with the transportation industry, many of which are out of our control.
Although we are optimizing our proprietary logistics network, including as part of our increased focus on developing our regional operating model under our long-term roadmap, we still heavily rely on third-party carriers to transport vehicles from auctions or individual sellers to VRCs, and then from our VRCs to our customers. As a result, we are exposed to risks associated with the transportation industry such as weather, traffic patterns, local and federal regulations, vehicular crashes, gasoline prices and lack of reliability of many independent carriers. Our third-party carriers’ failure to successfully manage our logistics and fulfillment process could cause a disruption in our inventory supply chain and decrease our inventory sales velocity, which may materially and adversely affect our business, financial condition and results of operations. In addition, third-party carriers who deliver vehicles to our customers could adversely affect the customer experience if they do not perform to our standards of professionalism and courtesy, which could adversely impact our business, financial condition and results of operations.
We rely on third-party service providers to provide financing, as well as value-added products to our customers, and we cannot control the availability, quality or fulfillment of these products.
We have historically relied on third-party lenders to finance all of our customers’ vehicle purchases. We will continue to rely on third-party lenders as we continue to integrate and develop UACC into a full captive lending operation. We also offer value-added products to our customers through a third-party service provider, such as vehicle service contracts, GAP protection and tire and wheel coverage. Because we utilize third-party service providers, we cannot control all of the factors that might affect the quality and fulfillment of these services and products, including (i) lack of day-to-day control over the activities of third-party service providers, (ii) that such service providers may not fulfill their obligations to us or our customers or may otherwise fail to meet expectations and (iii) that such service providers may terminate their arrangements with us on limited or no notice or may change the terms of these arrangements in a manner unfavorable to us for reasons outside of our control. Such providers also are subject to state and federal regulations and any failure by such third-party service providers to comply with applicable legal requirements could cause us financial or reputational harm. Currently, the majority of customers who purchase vehicles finance their purchases through our third-party lenders. If we are unable to maintain our relationships with our third-party lenders, there is no guarantee that UACC would be able to service the additional transaction volume and expanded credit profiles, or that we would be able to find replacement lenders who will provide our customers with financing, in which case our ability to sell our vehicles would be adversely affected; accordingly, the loss of such relationships could have a material adverse effect on our business, financial condition, and results of operations.
Our revenues and results of operations are partially dependent on the actions of these third parties. If one or more of these third-party service providers cease to provide these services or products to our customers, tighten their credit standards or otherwise provide services to fewer customers or are no longer able to provide them on competitive terms, it could have a material adverse effect on our business, revenues and results of operations. If we were unable to replace the current third-party providers upon the occurrence of one or more of the foregoing events, it could also have a material adverse effect on our business, revenues and results of operations. In addition, disagreements with such third-party service providers could require or result in costly and time-consuming litigation or arbitration.
Moreover, we receive fees from these third-party service providers in connection with finance, service and protection products purchased by our customers. A portion of the fees we receive on such products is subject to chargebacks in the event of early termination, default or prepayment of the contracts by end-customers, which could adversely affect our business, revenues and results of operations.
The current geographic concentration where we provide reconditioning services and store inventory and where UACC has a high concentration of borrowers creates an exposure to local and regional downturns or severe weather or catastrophic occurrences that may materially and adversely affect our business, financial condition and results of operations.
We currently conduct our business through multiple VRCs, including our Vroom VRC located outside Houston, Texas, where we hold approximately 12% of our inventory. In addition, our third-party reconditioning services are primarily conducted through a single provider, with facilities located in California, Florida, Arizona and other states. Any unforeseen events or circumstances that negatively affect these areas, including our facilities near Houston, which have experienced
24
Table of Contents
flooding and other damage in recent years as a result of severe weather conditions, including hurricanes, could materially and adversely affect our revenues and results of operations. Changes in demographics and population or severe weather conditions and other catastrophic occurrences in areas in which we operate or from which we obtain inventory may materially and adversely affect our results of operations. Such conditions may result in physical damage to our properties, loss of inventory and delays in the delivery of vehicles to our customers. In addition, any such events or circumstances in any of the states where UACC has a high concentration of borrowers could result in payment delays and increased risk of losses and could materially and adversely affect our revenues and results of operations.
We depend on key personnel to operate our business, and if we are unable to retain, integrate and attract qualified personnel, our ability to develop and successfully grow our business could be harmed.
We believe our success has depended, and continues to depend, on the efforts and talents of our executives and employees. Our future success depends on our continuing ability to retain, develop, motivate and attract highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to retain and attract them. In particular, we are highly dependent on the services of our leadership team to the development of our business, future vision, and strategic direction. In May 2022, Thomas H. Shortt was appointed as our Chief Executive Officer, succeeding Paul J. Hennessy. Additionally, Robert J. Mylod, Jr. was appointed as the Independent Executive Chair of the Board in order to support the leadership change in the Chief Executive Officer position. Our future performance will depend, in part, on the successful transition of the Chief Executive Officer position. If we do not successfully manage the transition, it could be viewed negatively by our customers, employees, investors, suppliers and other third-party partners, and could have an adverse impact on our business and results of operations. We also heavily rely on the continued service and performance of our senior management team, which provides leadership, contributes to the core areas of our business and helps us to efficiently execute our business, including with respect to strategic initiatives such as our long-term roadmap. If members of our senior management team, including our executive leadership, become ill, or if we are otherwise unable to retain them, we may not be able to manage our business effectively and, as a result, our business and operating results could be harmed. If the senior management team, including any new hires that we make, fails to work together effectively and to execute our plans and strategies on a timely basis then our business and future growth prospects could be harmed.
In addition, we issue equity awards to certain of our employees as part our hiring and retention efforts, and job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Our employees’ ability to sell their shares in the public market at times and/or at prices desired may lead to a larger than normal turnover rate. If the actual or perceived value of our common stock declines, it may adversely affect our ability to hire or retain employees. In addition, we may periodically change our equity compensation practices, which may include reducing the number of employees eligible for equity awards or reducing the size or value of equity awards granted per employee or undertaking other efforts that may prove an unsuccessful retention mechanism. If we are unable to attract, integrate, or retain the qualified and highly skilled personnel required to fulfill our current or future needs, our business and future growth prospects could be harmed.
Furthermore, in light of the reduction in headcount as part of our initiatives to reduce fixed and variable costs in accordance with our long-term roadmap, we may find it difficult to maintain valuable aspects of our culture, to prevent a negative effect on employee morale or attrition beyond our planned reduction in headcount, and to attract competent personnel who are willing to embrace our culture in the future. Our executive officers and other employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We may not be able to retain the services of any members of our senior management or other key employees. If we do not succeed in retaining and motivating existing employees or attracting well-qualified employees in the future, our business, financial condition and results of operations could be materially and adversely affected.
We are, and may in the future be, subject to legal proceedings in the ordinary course of our business. If the outcomes of these proceedings are adverse to us, it could have a material adverse effect on our business, financial condition and results of operations.
We are subject to various litigation matters from time to time, the outcome of which could have a material adverse effect on our business, financial condition and results of operations. Claims arising out of actual or alleged violations of law could be asserted against us by individuals, either individually or through class actions, by governmental entities in civil or criminal investigations and proceedings or by other entities. These claims could be asserted under a variety of laws, including but not limited to consumer finance laws, consumer protection laws, intellectual property laws, privacy
25
Table of Contents
laws, labor and employment laws, securities laws and employee benefit laws. These actions could expose us to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business. For example, a consolidated class action is pending in the U.S. District Court for the Southern District of New York asserting claims on behalf of a putative class of Company stockholders against us, certain of our officers, and certain of our directors, among others, alleging violations of the federal securities laws. We also are a party to certain stockholder derivative suits in which the Company is named as a nominal defendant in suits that various individual stockholders seek to bring on behalf of the Company against certain of our current and former directors and officers. These suits are pending in the U.S. District Court for the Southern District of New York and the U.S. District Court for the District of Delaware and are based on the same general course of conduct alleged in the consolidated securities class action. We believe these lawsuits are without merit and intend to vigorously contest these claims. In addition, in April 2022, the Attorney General of Texas filed a lawsuit on behalf of the State of Texas in the District Court of Travis County, Texas against the Company, alleging violation of the Texas Deceptive Trade Practices − Consumer Protection Act. See Part I, Item 3. “Legal Proceedings” for more information about these matters and the other legal proceedings to which we are subject.
Risks Related to Our Customer Experience
We have entered into outsourcing arrangements with third parties related to our customer experience team, and difficulties experienced in and our transition away from these arrangements have and could continue to result in an interruption of our ability to sell our vehicles and value-added products.
We have entered into several outsourcing arrangements with third parties related to our customer experience teams, including with respect to our customer inquiries, sales, purchases, financing, document support, customer service and other customer experience operations.
While we have begun to automate and insource key portions of our sales operations as part of our long-term roadmap, in 2022 a majority of inquiries, sales, purchases and financings of our vehicles in our ecommerce business were conducted by phone through a single third-party customer experience center. This third party notified us of their intention not to renew their contract with us beyond the term ending on December 31, 2022 and significantly reduced its staff dedicated to the Company’s sales operations in the second half of 2022. While we have engaged an internal sales team, consistent with our strategy to insource our sales operations as part of our long-term roadmap, as well as an additional third-party team, the reduced staffing at this third-party customer experience center had an impact on our unit sales volume in the second half of 2022 as we began to transition away from using their services and is expected to have an impact on our unit sales volume in the first quarter of 2023. We have ceased using this third-party provider as of January 31, 2023 and have meaningfully increased the level of sales supported internally. If we cannot successfully transition to using our internal sales team and the additional third-party resource to conduct our sales operations, we may be limited in our ability to complete customer transactions, which would make it more difficult to sell vehicles and value-added products through our platform. The ability to successfully grow an effective internal sales team will be critical to our ability to achieve profitable growth.
We also rely on other third parties to provide customer service, document support, titling and registration services and other important customer experience operations and face challenges in maintaining the quality of our customer experience. If any of these third parties are unable to perform to our standards or to provide the level of service required or expected by our customers, or we are unable to renegotiate our agreements with them on attractive terms or at all, or if we are unable to contract with alternative third-party providers, we may be forced to pursue alternatives to provide these services, which could result in delays, interruptions, additional expenses and loss of potential and existing customers and related revenues, any of which may harm our business, financial condition and results of operations.
Our business, sales and results of operations are materially affected by our customer experience, our reputation and our brand.
Our business model is primarily based on our ability to enable consumers to buy and sell used vehicles through our ecommerce platform in a seamless, transparent and hassle-free transaction. A decrease or even the perception of a decrease in the quality of our customer experience or brand could impact results. If consumers fail to perceive us as a trusted brand with a strong reputation and high standards, or if an event occurs that damages our reputation, it could adversely affect customer demand and have a material adverse effect on our business, revenues and results of operations. Our high rate of historical growth made maintaining the quality of our customer experience more difficult, and we have encountered operational challenges in keeping up with our rapid growth from 2020 through the first quarter of
26
Table of Contents
2022. Backlogs in our business developed as there was more sales volume than we had the capacity to manage, resulting in delays in processing transactions, including delays in titling and registering vehicles purchased by our customers, which have adversely affected our customer experience and have led to increased calls to our customer service teams, who have had difficulty keeping up with the increased call volume. If we cannot adequately address these challenges and deliver a positive customer experience through completion of the transaction, including if we cannot successfully transition to our new customer service model and automate and insource key portions of our sales operations in accordance with our long-term roadmap, our brand and our business will suffer. See "We have entered into outsourcing arrangements with third parties related to our customer experience team, and difficulties experienced in and our transition away from these arrangements have and could continue to result in an interruption of our ability to sell our vehicles and value-added products."
Complaints or negative publicity about our business practices, marketing and advertising campaigns, vehicle quality, customer service, delivery experience, compliance with applicable laws and regulations, data privacy and security or other aspects of our business, including on consumer platforms such as the Better Business Bureau, consumer facing blogs and social media websites, could diminish consumer confidence in our platform and adversely affect our brand. The growing use of social media increases the speed with which information and opinions can be shared and thus the speed with which our reputation can be damaged. If we fail or are perceived to fail to deliver the desired customer experience, or fail to correct or mitigate misinformation or negative information about us, our platform, our vehicle inventory, our customer experience, our brand or any aspect of our business, including information spread through social media or traditional media channels, it could materially and adversely affect our business, financial condition and results of operations.
Risks Related to the UACC Business
We may be unable to successfully complete the integration of the UACC business into Vroom’s business and support UACC as a captive lending operation for Vroom.
On February 1, 2022, we completed the UACC Acquisition. Vroom and UACC will need to continue to successfully integrate their operations and to support UACC's operations as a captive lending operation for Vroom. The ongoing integration requires significant efforts from each company, additional investments in technology and operations to scale the combined operations and the development of full credit spectrum lending capabilities at UACC. The ongoing integration of UACC may also divert management’s time and resources from our core business, which could impair our relationships with our current employees, customers and strategic partners and disrupt our operations. The failure to successfully complete such integration would undermine our ability to realize the benefits we expect to receive from the transaction and successfully execute our long-term roadmap, and our business and financial condition may be harmed as a result.
We may not realize the anticipated benefits of the UACC Acquisition or realization of those benefits could take longer than anticipated.
We acquired UACC with the expectation that the transaction would result in benefits to our business over time, including the benefits of a captive finance arm that would enable us to increase ecommerce unit sales, expand our penetration into non-prime sales, accelerate total revenue growth, enhance aggregate gross profit and GPPU, and leverage our fixed cost base. We expect that the development of our captive financing capabilities through the UACC Acquisition will be a significant element of our path to profitability and help position us for long-term growth in accordance with our long-term roadmap. Achieving these benefits will require the successful integration, development and operation of the combined businesses and it is not certain that we will succeed in those efforts. If we fail to fully integrate, develop and operate the combined businesses, we may not realize the benefits we expect to receive from the transaction or realization of those benefits may take substantially longer than anticipated. In addition to these operational risks, ownership of a captive lender will subject us to increased legal and regulatory scrutiny of our lending operations, including credit bureau reporting, loan origination practices and debt collection practices.
In addition, with regard to UACC’s financing, subject to market conditions we intend to maintain a hybrid funding approach through the use of off-balance sheet securitization transactions and forward flow arrangements. Achievement of off-balance sheet accounting treatment requires the Company to sell all of the rated notes and residual certificates in the securitization, subject to holding 5% risk retention. Execution of securitization transactions, including achievement of off-balance sheet accounting treatment for those transactions, is subject to market conditions. Even if UACC is able to complete its securitizations, it may not be able to sell its subordinated securities and those securitizations may not qualify
27
Table of Contents
for off-balance sheet accounting treatment, resulting in retention of the underlying loans (or subordinated securities) on our consolidated balance sheet, which could have an adverse impact on our liquidity. For example, as a result of current market conditions, which led to unfavorable pricing, we retained the non-investment grade securities and residual interests in UACC's January 2023 securitization, requiring that the transaction remain on balance sheet pending the sale of the additional retained interests. There can be no assurance that these additional retained interests will be sold and off-balance sheet treatment will be achieved in the future for this transaction.
UACC may be unable to sell automotive finance receivables and generate gains on sales of those finance receivables, which could harm our business, results of operations, and financial condition.
UACC provides indirect financing by drawing on its Warehouse Credit Facilities to purchase motor vehicle retail installment sales contracts and pledging eligible finance receivables as collateral, then typically selling the receivables related to the financing contract. 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 an adverse impact on our liquidity. In addition, UACC has entered into various arrangements to sell automotive finance receivables that it purchases, including through securitizations, and we expect UACC to enter into additional securitizations, loan sales to financing partners and other new arrangements in the future, subject to market conditions. If UACC is not able to sell receivables under these current or future arrangements for a variety of reasons, including increased credit losses or because it has reached its capacity under the arrangements, its financing partners exercise termination rights before it reaches capacity, general economic or credit market conditions, market disruption or it reaches the scheduled expiration date of the commitment, and it is not able to enter into new arrangements on similar terms, it may not have adequate liquidity and our business, financial condition and results of operations may be adversely affected. For example, as a result of current market conditions, which led to unfavorable pricing, we retained the non-investment grade securities and residual interests in UACC's January 2023 securitization, requiring that the transaction remain on balance sheet pending the sale of the additional retained interests. There can be no assurance that these additional retained interests will be sold and off-balance sheet treatment will be achieved in the future for this transaction. Furthermore, if its financing partners do not purchase these receivables, we could be subject to the risk that some of these receivables are not paid when due and be forced to incur unexpected asset write-offs and bad-debt expense.
UACC's securitizations may expose it to financing and other risks, and there can be no assurance that it will be able to access the securitization market in the future, which may require it to seek more costly financing.
UACC has securitized, and we expect will in the future securitize, certain of its automotive finance receivables to generate cash. In such transactions, it conveys a pool of automotive finance receivables to a special purpose vehicle, typically a trust that, in turn, issues certain securities. The securities issued by the special purpose vehicle are collateralized by the pool of automotive finance receivables. In exchange for the transfer of finance receivables to the special purpose vehicle, UACC typically receives the cash proceeds from the sale of the securities.
There can be no assurance that UACC will be able to complete additional securitizations in the future, particularly if the securitization markets become increasingly constrained. In addition, the value of any securities that UACC may retain in its securitizations, including securities retained to comply with applicable risk retention rules, might be reduced or, in some cases, eliminated as a result of an adverse change in economic conditions or the financial markets. Furthermore, although our intent is to sell loans originated by UACC using off-balance sheet securitization transactions, even if UACC is able to complete its securitizations, those securitizations may not qualify for sales accounting if market conditions do not allow for the sale of residual certificates. For example, as a result of current market conditions, which led to unfavorable pricing, we retained the non-investment grade securities and residual interests in UACC's January 2023 securitization, requiring that the transaction remain on balance sheet pending the sale of the additional retained interests. There can be no assurance that these additional retained interests will be sold and off-balance sheet treatment will be achieved in the future for this transaction. If it is not possible or economical for UACC to securitize its automotive finance receivables in the future, it would need to seek alternative financing to support its operations and to meet its existing debt obligations, which may be less efficient and more expensive than raising capital via securitizations and may have a material adverse effect on our results of operations, financial condition, and liquidity.
28
Table of Contents
UACC is currently experiencing increasing credit losses in interests it holds in automotive finance receivables and its credit scoring systems may not effectively forecast its automotive receivables loss rates. Higher than anticipated credit losses or prepayments or the inability to effectively forecast loss rates may negatively impact its operating results.
Until UACC sells automotive finance receivables, and to the extent it retains interests in automotive finance receivables after it sells them, whether pursuant to securitization transactions or otherwise, UACC is exposed to the risk that applicable customers will be unable or unwilling to repay their loans according to their terms and that the vehicle collateral securing the payment of their loans may not be sufficient to ensure full repayment. Additionally, higher energy prices (including the price of gasoline) and other consumer prices, unstable real estate values, reset of adjustable-rate mortgages to higher interest rates, geopolitical tensions (including outbreaks of military hostilities such as the ongoing military conflict between Ukraine and Russia), interest rate increases, inflation and other factors can affect consumer confidence and disposable income. While credit losses are inherent in the automotive finance receivables business, these conditions can increase loss frequency, decrease consumer demand for motor vehicles and weaken collateral values on certain types of motor vehicles in any period of extended economic slowdown or recession and could have a material adverse effect on our results of operations. Because UACC focuses predominately on sub-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on its receivables are higher than those experienced in the general motor vehicle finance industry and may be affected to a greater extent during an economic downturn.
In addition, 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 sell the subordinate notes or residual certificates issued in the securitizations at a favorable price or at all. In addition, the increased loss severity could lead to reduced servicing income if UACC elects to waive monthly servicing fees going forward as it did in January. The waiver of servicing fees on prior off-balance sheet securitizations could result in consolidation of the related finance receivables and securitization debt on Vroom’s financial statements.
UACC makes various assumptions and judgments about the automotive finance receivables it originates and may establish a valuation allowance and value beneficial ownership interests based on a number of factors. Although management may establish a valuation allowance and value beneficial ownership interests based on analysis it believes is appropriate, this may not be adequate, particularly in periods of increased industry-wide vehicle depreciation rates, which we are currently experiencing. For example, if economic conditions were to deteriorate unexpectedly, additional loan losses not incorporated in the existing valuation may occur. Several variables have historically affected UACC’s recent loss and delinquency rates, including general economic conditions and market interest rates, and such variables are likely to differ in the future. In particular, given the impact the COVID-19 pandemic had on the economy and individuals, historical loss and delinquency expectations may not accurately predict the performance of UACC's receivables and impact its ability to effectively forecast loss rates. Losses in excess of expectations could have a material adverse effect on our business, results of operations, and financial condition. Further, the rate of prepayments cannot be predicted and may be influenced by a variety of factors, including changes in the economic and social conditions of our borrowers.
29
Table of Contents
UACC relies on its internally developed credit scoring systems to forecast loss rates of the automotive finance receivables it originates. If it relies on systems that fail to effectively forecast loss rates on receivables it originates, those receivables may suffer higher losses than expected. UACC’s credit scoring systems were developed prior to the onset of the COVID-19 pandemic and, accordingly, were not designed to take into account the effect of the economic, financial and social disruptions resulting from the pandemic. UACC generally seeks to sell these receivables through securitization transactions and expects to enter into loan sales to financing partners and other new arrangements in the future. If the receivables it sells experience higher loss rates than forecasted, it may obtain less favorable pricing on the receivables it sells to those parties in the future and suffer reputational harm in the marketplace for the receivables it sells and its business, results of operations, and financial condition may be adversely affected. If UACC holds receivables that it originates on its balance sheet until it sells them in securitization transactions or, in the future, through loan sales to its financing partners or other arrangements, and to the extent those receivables fail to perform during its holding period, they may become ineligible for sale.
UACC is currently experiencing increasing credit losses on its finance receivables, which has negatively impacted the fair value of our financial receivables and the losses recognized during 2022. Increasing credit losses may continue to negatively impact our business during 2023, especially due to the fact that UACC primarily operates in the sub-prime sector of the market. As UACC has become and will continue to be an increasingly significant part of our consolidated operations, our business, results of operations, and financial condition is increasingly vulnerable to adverse developments in UACC's business.
30
Table of Contents
Risks Related to Cybersecurity and Privacy
An actual or perceived failure to maintain the security of personal information and other customer data that we collect, store, process, and use could harm our business, financial condition and results of operations.
We collect, store, process, and use personal information and other customer data, and rely in part on third parties that are not directly under our control, including our third-party customer experience teams, to manage certain areas of these operations. For example, we rely on encryption, storage, and processing technology developed by third parties to securely transmit, operate on and store such information. Due to the volume and sensitivity of the personal information and data we and these third parties manage and expect to manage in the future, as well as the nature of our customer base, the security features of our information systems are critical. Any failure or perceived failure to maintain the security of personal and other data that is provided to us by customers, employees and vendors could harm our reputation and brand and expose us to a risk of loss or litigation and possible liability, any of which could adversely affect our business, financial condition, and results of operations.
Additionally, concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could harm our business, financial condition and results of operations. We are subject to numerous federal, state and local laws and regulations regarding privacy, cybersecurity and the collection, use and disclosure of personal information and other data. The scope and interpretation of these laws continue to evolve and may be inconsistent across jurisdictions. New laws also may be enacted. See "Failure to comply with federal, state and local laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, as well as our actual or perceived failure to protect such information could harm our reputation and could adversely affect our business, financial condition and results of operations." Further, we are subject to contractual requirements and others’ privacy policies that govern how we use and protect personal information and other data. These obligations may be interpreted and applied inconsistently and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies or obligations may result in governmental enforcement actions, litigation or negative publicity that could have an adverse effect on our business. If our third-party service providers violate applicable laws, contractual obligations or our policies, then such violations also may put consumer, employee and vendor information at risk and could, in turn, harm our reputation, business and operating results.
If we or our third-party providers sustain cyber-attacks or other privacy or data security incidents that result in security breaches, we could suffer a loss of sales and increased costs, exposure to significant liability, reputational harm and other negative consequences.
Threat actors are increasingly sophisticated and can operate large-scale complex automated attacks. Similar to most IT systems and companies, there is a consistent threat from cyber-attacks, viruses, malicious software, physical break-ins, theft, ransomware, phishing, social engineering, unintentional employee error or malfeasance, system availability, and other security breaches. Further, third-party hosts or service providers are also a source of security concerns as it relates to failures of their own security systems and infrastructure. Our technology infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with third-party services, including cloud services, and/or failures by such third parties, which are beyond our control. The costs to eliminate or address evolving security threats and vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays or cessation of service and loss of existing or potential suppliers or players.
Although we have insurance coverage for losses associated with cyber-attacks, as with all insurance policies, there are coverage exclusions and limitations, and our coverage may not be sufficient to cover all possible claims, and we may still suffer losses that could have a material adverse effect on our business, including reputational damage. We also could be negatively impacted by existing and proposed U.S. laws and regulations, and government policies and practices related to cybersecurity, data privacy, and data localization. In the event that we or our service providers are unable to prevent, detect, and remediate the foregoing security threats and risks, our operations could be disrupted or we could incur financial, legal or reputational losses arising from misappropriation, misuse, leakage, falsification or intentional or accidental release or loss of information maintained in our information systems and networks, including personal information of our employees and our customers.
31
Table of Contents
Failure to comply with federal, state and local laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, as well as our actual or perceived failure to protect such information could harm our reputation and could adversely affect our business, financial condition and results of operations.
There are numerous federal, state and local laws regarding privacy and the collection, processing, storing, sharing, disclosing, using and protecting of personal information and other data, the scope of which are changing, subject to differing interpretations, and which may be costly to comply with, inconsistent between jurisdictions or conflicting with other rules. We are also subject to specific contractual requirements contained in third-party agreements governing our use and protection of personal information and other data. We generally comply with industry standards and are subject to the terms of our privacy policies and the privacy- and security-related obligations to third parties. We strive to comply with applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection, to the extent possible. However, it is possible that these obligations may be interpreted and applied in new ways or in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Additionally, new regulations could be enacted with which we are not familiar. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations or any compromise of security that results in the unauthorized release or transfer of sensitive information, which may include personally identifiable information or other customer data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause customers, vendors and third-party business partners to lose trust in us, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, if vendors, developers or other third parties that we work with violate applicable laws or our policies, such violations may also put customers’, vendors’ or receivables-purchasers’ information at risk and could in turn harm our business, financial condition and results of operations.
We expect that industry standards, laws and regulations will continue to develop regarding privacy, data protection and information security in many jurisdictions. Complying with these evolving obligations is costly. For instance, expanding definitions and interpretations of what constitutes “personal data” (or the equivalent) within the United States may increase our compliance costs and legal liability. Additionally, California has created a new data protection agency, and other states may do the same, specifically tasked to enforce California privacy laws, which would likely result in increased regulatory scrutiny in the areas of data protection and security.
A significant data breach or any failure, or perceived failure, by us to comply with any federal, state or local privacy or consumer protection-related laws, regulations or other principles or orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, investigations, proceedings or actions against us by governmental entities or others or other penalties or liabilities or require us to change our operations and/or cease using certain data sets. Depending on the nature of the information compromised, we may also have obligations to notify users, law enforcement or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by the incident.
Risks Related to Our Industry and General Economic Conditions
Our business is sensitive to changes in the prices of new and used vehicles.
Any significant changes in retail prices for new or used vehicles could have a material adverse effect on our business, financial condition and results of operations. For example, if retail prices for used vehicles rise relative to retail prices for new vehicles, it could make buying a new vehicle more attractive to our customers than buying a used vehicle, which could have a material adverse effect on our business, financial condition and results of operations and could result in reduced vehicle sales and lower revenue. Additionally, manufacturer incentives, including financing, could contribute to narrowing the price gap between new and used vehicles. While there continues to be downward pressure on the supply of lower price point vehicles, overall demand for used vehicles has recently started to decline after heightened demand during the COVID-19 pandemic. This volatility creates risks around our ability to appropriately price our vehicles and maintain our sales margins. There can be no assurance for how long these market conditions will continue.
More recently, we have observed decreases in the prices for certain new vehicles, including recent announcements by electric vehicle OEMs of reductions in the prices of several of their electric vehicle models, which has an impact on the price of similar used vehicle models.
32
Table of Contents
While lower new vehicle prices generally reduce the price of used vehicles, and therefore, reduces our cost of acquiring new inventory, in 2022 lower prices impacted the value of our inventory. This dynamic has had, and may in the future have, a negative impact on gross profit. For example, while overall inventory reserve decreased from 2021 to 2022 as a result of lower inventory levels, the decrease was partially offset by higher reserves related to our aged inventory and a $3.7 million additional reserve for recent electric vehicle OEM price decreases.
Moreover, any significant changes in retail prices due to scarcity or competition for used vehicles could impact our ability to source desirable inventory for our customers and/or the prices we pay to secure inventory, which could have a material adverse effect on our results of operations and could result in fewer used-car sales and lower revenue or lower gross profit.
Our business is dependent upon access to desirable vehicle inventory. Obstacles to acquiring attractive inventory, whether because of supply, competition or other factors, may have a material adverse effect on our business, financial condition and results of operations.
We acquire vehicles for sale from consumers, auctions, rental car companies, OEMs and dealers. There can be no assurance that the supply of desirable used vehicles will be sufficient to meet our needs. We purchased approximately 80% and 69% of our retail inventory sold from consumers in the years ended December 31, 2022 and 2021, respectively. If our brand is damaged, or consumers otherwise are unwilling to transact with us, we may not be able to source sufficient inventory, or may have to source inventory from lower margin channels. In addition, we purchase a significant amount of our inventory from certain third-party auction sources. If these third parties are unable to fulfill our inventory needs or if we are unable to source desirable used vehicles from alternative third-party providers, we may lack sufficient inventory and, as a result, may lose potential and existing customers and related revenues. Moreover, we sell consumer-sourced vehicles that do not meet our retail standards to auctions, which may result in lower revenues and also could lead to reductions in our available inventory.
Additionally, we appraise thousands of consumer vehicles daily and evaluate potential purchases based on mechanical soundness, consumer desirability and relative value in relation to retail inventory or wholesale disposition. If we fail to adjust appraisal offers to stay in line with broader market trade-in offer trends or fail to recognize those trends, it could adversely affect our ability to acquire inventory. Our ability to source vehicles through our appraisal process also could be affected by competition, both from new and used vehicle dealers directly and through third-party websites driving appraisal traffic to those dealers. In addition, we remain dependent on third parties to sell us used vehicles, and there can be no assurance of an adequate supply of desirable vehicles on terms that are attractive to us. A reduction in the availability of or access to sources of inventory for any reason could have a material adverse effect on our business, financial condition and results of operations.
Our business is dependent upon our ability to expeditiously list and sell inventory. Failure to expeditiously list and sell our inventory could have a material adverse effect on our business, financial condition and results of operations.
We have undertaken various initiatives to address the operational challenges created by our prior rapid growth, including delays in titling and registering vehicles purchased by our customers. 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 prior to listing. While these initiatives are designed to improve our transaction processing, enhance our customer experience, reduce our regulatory risk and increase efficiency in transaction processing, they have resulted in delays in listing our inventory for sale. Since vehicles depreciate rapidly, a failure to expeditiously list our inventory for sale could hurt our sales margins and gross profit per unit, and could materially and adversely affect our business, financial condition and results of operations. For example, a higher portion of our unit sales in the fourth quarter of 2022 was from aged inventory as we obtain titles for vehicles not previously listed for sale, which negatively impacted our sales margin. We expect this trend to continue through the first half of 2023 and to continue to negatively impact our sales margin.