VROOM, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those incorporated by reference into the section titled "Risk Factors" in Part I Item 1A of this Annual Report on Form 10-K. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. A discussion regarding our financial condition and results of operation for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 is presented below. A discussion regarding our financial condition and results of operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 is included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Overview Vroom is an innovative, end-to-end ecommerce platform that is transforming the used vehicle industry by offering a better way to buy and a better way to sell used vehicles. Our scalable, data-driven technology brings all phases of the car buying and selling process to consumers wherever they are, and offers an extensive selection of used vehicles, transparent pricing, competitive financing, and at-home pick-up and delivery. We are deeply committed to creating an exceptional experience for our customers. We take a vertically integrated, hybrid approach and leverage the benefits of national scale and local efficiency. We are driving enduring change in the industry by reinventing all phases of the vehicle buying and selling process, from discovery to delivery and everything in between. Our platform encompasses:
•
Ecommerce: We provide consumers with a personalized and intuitive ecommerce interface to research and select from thousands of fully reconditioned vehicles, with specific sorting, searching and filtering functionality. Our platform is accessible at any time on any device and provides transparent haggle-free pricing, detailed vehicle information, real-time financing and nationwide contact-free delivery right to a buyer's driveway. For consumers looking to sell or trade in their vehicles, we provide attractive market-based pricing, real-time price quotes and convenient, contact-free at-home vehicle pick-up.
•
Vehicle Operations: Our scalable and vertically integrated operations underpin our business model. We strategically source inventory from consumers, auctions, rental car companies, OEMs, and dealers. We improve our ability to acquire high-demand vehicles through enhanced supply science across all our sourcing channels and utilize national marketing efforts to drive consumer sourcing. In our reconditioning and logistics operations, we deploy a hybrid strategy that optimizes a combination of ownership and operation of assets by us with strategic third-party partnerships. We continue to leverage our last mile hub logistics operations and geographically dispersed network of reconditioning centers to further develop our regional operating model designed to improve our operating leverage, drive stronger unit economics and enhance our customer experience.
•
Data Science and Experimentation: Data science and experimentation are at the core of everything we do. We rely on data science, machine learning and A/B and multivariate testing to continually drive optimization and operating leverage across our ecommerce and vehicle operations. We leverage data to increase the effectiveness of our national brand and performance marketing, enhance our customer experience, analyze market dynamics at scale, calibrate our vehicle pricing and optimize our overall inventory sales velocity. In our vehicle operations, data science and experimentation enables us to fine tune our supply, sourcing and logistics models and to streamline our reconditioning processes.
•
Vehicle Financing: A critical component of our value proposition is offering
vehicle financing to our customers as a seamless component of the transaction
process. We currently offer integrated, real-time, individualized financing
solutions through strategic partnerships with trusted lenders in automotive
finance and through our
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subsidiary, UACC, which we acquired onFebruary 1, 2022 . The acquisition of UACC accelerated Vroom's strategy to develop a captive financing arm and brought with it UACC's financing expertise and extensive application processing, underwriting, securitization, and servicing capabilities. Based on data fromCox Automotive , there were an estimated 36.2 million used vehicle transactions in 2022. According to a 2022 NADA Auto Retailing market summary, theU.S. automotive industry generated approximately$1.2 trillion in sales in 2021. TheU.S. used automotive market is highly fragmented and ripe for disruption as an industry that is notorious for consumer dissatisfaction and has one of the lowest levels of ecommerce penetration. Industry reports estimate that ecommerce penetration will grow to as much as half of all used vehicle sales by 2030. Our platform, coupled with our national presence and brand, provides a significant competitive advantage versus local dealerships and regional players that lack nationwide reach and scalable technology, operations and logistics. The traditional auto dealers and peer-to-peer market do not offer consumers what we offer. Recent Events Business Realignment Plan In light of operational challenges in our business, the need to reduce our cash spend and changes in financial market sentiment, onMay 5, 2022 , our board of directors (the "Board") approved a business realignment plan designed to position the Company for long-term profitable growth by prioritizing unit economics, reducing our operating expenses and maximizing liquidity (the "Realignment Plan"). The Realignment Plan included a number of elements, such as reducing the rate of unit sales to focus on lowering SG&A and expanding GPPU; reducing marketing expense by focusing on 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 connection with the Realignment Plan, we incurred expenses of approximately$8.5 million for the year endedDecember 31, 2022 , consisting primarily of severance costs across our organization. Additionally, we recognized approximately$6.5 million of lease impairment charges for the year endedDecember 31, 2022 , related to closing physical office locations inNew York ,Detroit ,Stafford , andHouston as well as Sell Us Your Car® centers. We continued our strategic analysis of the operations at the TDA store location and decided to further streamline those operations and close the TDA service center. We repurposed the service center to replace our reconditioning facility inStafford, Texas , which we believe better aligns our proprietary reconditioning operations in theHouston market with our reduced unit sales volume, reduces our lease and operating expenses and provides an improved work environment for our employees.
The restructuring activities associated with the Realignment Plan were substantially completed during 2022. We will continue to reevaluate the optimization of our operations in the future in order to prioritize unit economics, reduce operating expenses, and maximize liquidity.
We achieved approximately
Long-Term Roadmap
In 2022, we developed a long-term road map designed to achieve three key objectives: prioritizing unit economics over growth, significantly reducing operating expenses, and maximizing liquidity. In 2023, we have refined these three key objectives to prioritize unit economics and growth, improve costs per unit and maximize liquidity.
In order to achieve these objectives, we are focused on four strategic initiatives:
•
Building a well-oiled transaction machine: Optimize our sales channels using
internal and outsourced resources and digitization; streamline and digitize the
title and registration process; and optimize our marketing strategies by
building brand awareness, growing organic search traffic and fine-tuning paid
media campaigns to improve direct traffic and drive conversion.
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•
Building a well-oiled metal machine: Optimize pricing and assortment of vehicles through predictive data and analytics and regionalization, as well as synchronize end-to-end supply chain to increase velocity and improve flow.
•
Building a regional operating model: Build a regional operating model to improve the customer experience; increase the speed of the supply chain; lower logistics costs; and reduce markdowns.
•
Building a captive finance offering: Accelerate the development of UACC as a captive financing operation, giving us the ability to better serve our customers across the credit spectrum, drive enhanced unit economics and improve our overall customer experience.
These four initiatives are designed to further our progress in building a profitable business model, enable us to build a well-oiled machine across our operations and position us to resume growth.
Reduction in Force
OnJanuary 18, 2023 , we executed a reduction in force as part of our continued focus on reducing variable and fixed costs as we pursue our long-term roadmap. We reduced Vroom's headcount by approximately 275 employees based on our assessment of business needs, the efficiencies obtained by our key initiatives, and our pursuit of long-term success and profitable growth. In 2022, we significantly improved our operations, specifically in our titling, registration and transaction processes, allowing us to now run these processes more cost effectively. We expect to incur expenses of approximately$4.0 million , primarily consisting of severance, and expect to achieve approximately$27.0 million of annualized cost reductions as a result of the reduction in force. The foregoing estimates are based upon current assumptions and expectations but are subject to known and unknown risks and uncertainties. Accordingly, we may not be able to fully realize the cost savings and benefits initially anticipated.
Convertible Note Repurchases
In 2022, we repurchased$254.3 million in aggregate principal amount of our outstanding 0.75% unsecured Convertible Senior Notes due 2026 (the "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 the Notes from time to time to reduce our outstanding indebtedness at a discount.
Third-party Sales Support
As part of our long-term roadmap and in response to a significant staff reduction by our primary third-party telephone sales support provider, we have been building our in-house sales team, have ceased using such third-party telephone sales provider and have meaningfully increased the level of sales supported internally, which we believe will improve our customer experience, and lower our selling costs. The ability to successfully grow an effective internal sales team will be critical to our ability to achieve profitable growth. The reduced staffing in our outsourced sales operations had an impact on our unit sales volume in the second half of 2022 and is expected to have an impact on our unit sales volume in the first quarter of 2023 as we transition away from the third-party provider. Nevertheless, we do not expect this transition to have a long-term impact on our sales volume, financial condition and results of operations as we reduce costs by expanding our internal sales force and leveraging our existing relationships with other sales partners, consistent with our long-term strategy to optimize our cost structure.
UACC Acquisition
OnFebruary 1, 2022 (the "Acquisition Date"), we completed the acquisition (the "UACC Acquisition") of 100% ofUnitas Holdings Corp. , including its wholly owned subsidiariesUnited PanAm Financial Corp. andUnited Auto Credit Corporation ("UACC").Unitas Holdings Corp. (now known asVroom Finance Corporation ),United PanAm Financial Corp. (now known asVroom Automotive Financial Corporation ) and UACC, as well as their other subsidiaries, are now our wholly owned subsidiaries. This acquisition accelerates our strategy of establishing a captive financing arm and 64
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underwriting vehicle financing for our customers, the results of which are included within the Ecommerce reporting segment. UACC will also continue its operations with its network of third-party dealership customers, which we intend to continue growing, including the purchases and servicing of vehicle installment contracts, which constitutes a separate reporting segment - Retail Financing. The cash consideration paid was approximately$315.4 million . Our Model We generate revenue through the sale of used vehicles, vehicle financing and value-added products. We sell vehicles directly to consumers primarily through our Ecommerce segment as a licensed dealer. As a result of the UACC Acquisition onFebruary 1, 2022 , we are developing a captive financing operation for Vroom customers, which will enable us to provide our customers with expanded financing solutions across the credit spectrum and an enhanced customer experience, while generating improved unit economics. We also expect to generate ecommerce product revenue through interest income on UACC's finance receivables generated by loans provided to Vroom customers and UACC's sale of such finance receivables in securitization transactions or forward flow arrangements. Additionally, we expect UACC to continue to purchase and service finance receivables originated by its network of third-party dealership customers and generate finance revenue, including interest income as well as gain on sale related to these finance receivables. Over time, we intend to grow the third-party dealership network and business.
We also sell vehicles through wholesale channels, which provide a revenue source for vehicles that do not meet our Vroom retail sales criteria.
For the year ended
Our retail gross profit consists of two components: Vehicle Gross Profit and Product Gross Profit. Vehicle Gross Profit is calculated as the aggregate retail sales price for all vehicles sold to customers along with delivery fee revenue and document fees received from customers, less the aggregate cost to acquire such vehicles, the aggregate cost of inbound transportation for such vehicles to our vehicle reconditioning centers, which we refer to as VRCs, and the aggregate cost of reconditioning such vehicles for sale. Product Gross Profit consists of fees earned on vehicle financing originated by our third-party financing sources and any third-party value-added products sold as part of a vehicle sale. Because we are paid fees on the third-party financing and other value-added products we sell, our gross profit on such products is equal to the revenue we generate. Starting in 2022, Product Gross Profit also includes interest income earned on finance receivables from Vroom customers that we originate through UACC to finance the vehicles we sell. It also includes gain on sales of those finance receivables once sold in a securitization transaction or forward flow arrangement that qualify for sales accounting treatment. See "-Key Operating and Financial Metrics." 65
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Below is an explanation of how we calculate vehicle gross profit per unit and product gross profit per unit:
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Our profitability depends primarily on improving unit economics and achieving
operating leverage. We deploy a hybrid strategy that optimizes a combination of
ownership and operation of assets by us with strategic third-party partnerships.
Our hybrid approach also applies to the third-party value-added products we sell
to customers. Historically, we generated additional revenue streams without
directly underwriting vehicle financing or protection products; however, the
UACC Acquisition enables us to underwrite vehicle financing for our customers.
As we resume growth, we expect to benefit from efficiencies and operating
leverage across our business, including our marketing and technology
investments, and our inventory procurement, logistics, reconditioning and sales
processes.
Our Segments
We manage and report operating results through three reportable segments:
•
Ecommerce (70.0% of 2022 revenue; 76.7% of 2021 revenue): The Ecommerce segment represents retail sales of used vehicles through our ecommerce platform and fees earned on sales of value-added products associated with those vehicle sales. Starting in 2022, the Ecommerce segment also includes interest income earned on finance receivables from Vroom customers that we originate through UACC to finance the vehicles we sell and gain on sales of those finance receivables once sold in a securitization transaction or forward flow arrangement that qualify for sales accounting treatment.
•
Wholesale (15.1% of 2022 revenue; 15.7% of 2021 revenue): The Wholesale segment represents sales of used vehicles through wholesale channels.
•
Retail Financing (7.8% of 2022 revenue): The Retail Financing segment represents UACC's operations with its network of third-party dealership customers.
As part of the Realignment Plan, we streamlined TDA's operations and closed our
service center. We also reevaluated our reporting segments based on relative
revenue and gross profit and significance in our long term strategy. As a result
of the quantitative analysis, we determined TDA should not be reported as a
separate segment as it was presented prior to the second quarter of 2022.
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Gross profit is defined as revenue less cost of sales for each segment.
Reflected below is a summary of segment revenue and segment gross profit for the
years ended
Year Ended
December 31,
2022 2021(1) 2020 (1)
(in thousands)
Revenue:
Ecommerce $ 1,364,195 $ 2,442,369 $ 915,451
Wholesale 293,528 498,981 245,580
Retail Financing 152,542 - -
All Other 138,636 242,905 196,669
Total revenue $ 1,948,901 $ 3,184,255 $ 1,357,700
Gross profit (loss):
Ecommerce $ 99,973 $ 164,746 $ 60,861
Wholesale (10,620 ) 18,120 (1,432 )
Retail Financing 138,381 - -
All Other 17,053 19,233 12,116
Total gross profit $ 244,787 $ 202,099 $ 71,545 (1) We reclassified TDA revenue and TDA gross profit from the TDA reportable segment to the "All Other" category to conform to current year presentation.
Key Operating and Financial Metrics
We regularly review a number of metrics, including the following key operating
and financial metrics, to evaluate our business, measure our performance,
identify trends in our business, prepare financial forecasts and make strategic
decisions. We believe these operational measures are useful in evaluating our
performance, in addition to our financial results prepared in accordance with
U.S. Generally Accepted Accounting Principles, or U.S. GAAP. You should read the
key operating and financial metrics in conjunction with the following discussion
of our results of operations and together with our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K. We focus heavily on metrics related to unit economics as improved gross
profit per unit is a key element of our growth and profitability strategies.
The calculation of our key operating and financial metrics is straightforward
and does not rely on significant projections, estimates or assumptions.
Nevertheless, each of our key operating and financial metrics has limitations
because each focuses specifically on only one standard by which to evaluate our
business, without taking into account other applicable standards, performance
measures or operating trends by which our business could be evaluated.
Accordingly, no single metric should be viewed as the bellwether by which our
business should be measured. Rather, each key operating and financial metric
should be considered in conjunction with other metrics and components of our
results of operations, such as each of the other key operating and financial
metrics and our revenues, inventory, loss from operations and segment results.
Year Ended
December 31,
2022 2021 2020
Ecommerce units sold 39,278 74,698 34,488
Vehicle Gross Profit per ecommerce unit
869
Product Gross Profit per ecommerce unit 1,512 1,098
896
Total Gross Profit per ecommerce unit
1,765
Average monthly unique visitors 1,866,197 1,968,656
969,890
Ecommerce average days to sale 131 74 66
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Ecommerce Units Sold
Ecommerce units sold is defined as the number of vehicles sold and shipped to customers through our ecommerce platform, net of returns under our Vroom 7-Day Return Program. Ecommerce units sold excludes sales of vehicles at TDA and through the Wholesale segment. Each vehicle sale through our ecommerce platform also creates the opportunity to leverage such sale to provide vehicle financing, sell value-added products and acquire trade-in vehicles from our customers, which we can either recondition and add to our inventory or sell through wholesale channels.
Vehicle Gross Profit per Ecommerce Unit
Vehicle Gross Profit per ecommerce unit, which we refer to as Vehicle GPPU, for a given period is defined as the aggregate retail sales price and delivery charges for all vehicles sold through our Ecommerce segment less the aggregate costs to acquire those vehicles, the aggregate costs of inbound transportation to the VRCs and the aggregate costs of reconditioning those vehicles in that period, divided by the number of ecommerce units sold in that period. We believe Vehicle GPPU is a key driver of our long-term profitability.
Product Gross Profit per Ecommerce Unit
Product Gross Profit per ecommerce unit, which we refer to as Product GPPU, for a given period is defined as the aggregate fees earned on sales of value-added products in that period, net of the reserves for chargebacks on such products in that period, divided by the number of ecommerce units sold in that period. Because we are paid fees on the vehicle financing and value-added products we sell, our gross profit is equal to the revenue we generate from the sale of such products. Starting in 2022, Product GPPU also includes interest income earned on finance receivables from Vroom customers that we originate through UACC to finance the vehicles we sell and gain on sales of those finance receivables once sold in a securitization transaction or forward flow arrangement that qualify for sales accounting treatment, divided by the number of ecommerce units sold in that period.
Total Gross Profit per Ecommerce Unit
Total Gross Profit per ecommerce unit, which we refer to as Total GPPU, for a given period is calculated as the sum of Vehicle GPPU and Product GPPU. We view Total GPPU as a key metric of the profitability of our Ecommerce segment.
Average Monthly Unique Visitors
Average monthly unique visitors is defined as the average number of individuals who access our ecommerce platform within a calendar month. We calculate the average monthly unique visitors over any period by dividing the aggregate monthly unique visitors during such period by the number of months in that period. We use average monthly unique visitors to measure the quality of our customer experience, the effectiveness of our marketing campaigns and customer acquisition as well as the strength of our brand and market penetration. Average monthly unique visitors is calculated using data provided by
Ecommerce Average Days to Sale
We define ecommerce average days to sale as the average number of days between
our acquisition of vehicles and the final delivery of such vehicles to customers
through our ecommerce platform. We calculate average days to sale for a given
period by dividing the aggregate number of days between the acquisition of all
vehicles sold through our ecommerce platform during such period and final
delivery of such vehicles to customers by the number of ecommerce units sold in
that period. Ecommerce average days to sale excludes vehicles sold at TDA and
through the Wholesale segment. Ecommerce average days to sale is an important
metric because a reduction in the number of days between the acquisition of a
vehicle and the delivery of such vehicle typically results in a higher gross
profit per unit.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. GAAP, we believe
the following non-GAAP financial measures are useful in evaluating our operating
performance: EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding
securitization gain. These non-GAAP financial measures have limitations as
analytical tools in that they do not reflect all of the amounts associated with
our results of operations as determined in accordance with U.S. GAAP. Because of
these limitations, these non-GAAP financial measures should be considered along
with other operating and financial performance measures presented in accordance
with U.S. GAAP. The presentation of these non-GAAP financial measures is not
intended to be considered in isolation or as a substitute for, or superior to,
financial information prepared and presented in accordance with U.S. GAAP. We
have reconciled all non-GAAP financial measures with the most directly
comparable U.S. GAAP financial measures.
EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain are
supplemental performance measures that our management uses to assess our
operating performance and the operating leverage in our business. Because
EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain
facilitate internal comparisons of our historical operating performance on a
more consistent basis, we use these measures for business planning purposes.
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EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain
We calculate EBITDA as net loss before interest expense, interest income, income tax expense and depreciation and amortization expense and we calculate Adjusted EBITDA as EBITDA adjusted to exclude realignment costs, acquisition related costs, change in fair value of finance receivables, goodwill impairment charge, gain on debt extinguishment, acceleration of non-cash stock-based compensation, one-time IPO related non-cash revaluation of preferred stock warrant and other costs, which primarily relate to the impairment of long-lived assets. Changes in fair value of finance receivables can fluctuate significantly from period to period and relate primarily to historical loans and debt which have been securitized, and acquired onFebruary 1, 2022 from UACC. Our ongoing business model is to originate or purchase finance receivables with the intent to sell which we recognize at the lower of cost or fair value. Therefore, these historical finance receivables acquired, which are accounted for under the fair value option, will experience fluctuations in value from period to period. We believe it is appropriate to remove this temporary volatility from our Adjusted EBITDA results to better reflect our ongoing business model. Additionally, these historical finance receivables acquired from UACC are expected to run-off within approximately 12 months. We calculate Adjusted EBITDA excluding securitization gain as Adjusted EBITDA adjusted to exclude the securitization gain from the sale of UACC's finance receivables as it provides a useful perspective on the underlying operating results and trends as well as a means to compare our period-over-period results. The following table presents a reconciliation of EBITDA, Adjusted EBITDA, and Adjusted EBITDA excluding securitization gain to net loss, which is the most directly comparableU.S. GAAP measure: Year Ended December 31, 2022 2021 2020 (in thousands) Net loss$ (451,910 ) $ (370,911 ) $ (202,799 ) Adjusted to exclude the following: Interest expense 40,693 21,948
9,656
Interest income (19,363 ) (10,341 ) (5,896 ) (Benefit) provision for income taxes (19,680 ) 754 84 Depreciation and amortization 38,707 13,215 4,654 EBITDA$ (411,553 ) $ (345,335 ) $ (194,301 ) Realignment costs$ 15,025 $ - $ - Acquisition related costs 5,653 5,090 2,080 Change in fair value of finance receivables 8,372 - - Goodwill impairment charge 201,703 - - Gain on debt extinguishment (164,684 ) - - Acceleration of non-cash stock-based compensation 2,439 -
1,262
One-time IPO related non-cash revaluation of preferred stock warrant - - 20,470 Other 5,806 - - Adjusted EBITDA$ (337,239 ) $ (340,245 ) $ (170,489 ) Securitization gain (45,589 ) - - Adjusted EBITDA excluding securitization gain$ (382,828 ) $ (340,245 ) $ (170,489 )
Other Key Factors and Trends Affecting our Operating Results
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors and trends, including the following:
Ability to convert visitors to our platform into customers and source vehicles from consumers
The quality of the customer experience on our ecommerce platform is critical to
our ability to attract new visitors to our platform, convert such visitors into
customers and increase repeat customers, as well as our ability to acquire
vehicles directly from consumers. Our ability to drive higher customer
conversion and increased consumer sourcing depends on our ability to make our
platform a compelling choice for consumers based on our functionalities and
consumer offerings.
Data science and experimentation drive decision making across all of our
conversion and sourcing efforts. By analyzing the data generated by the millions
of visitors and tens of thousands of transactions on our platform, and
continually testing strategies to maximize conversion rates, we form a better
understanding of consumer preferences and
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try to create a more tailored ecommerce experience for consumers looking to purchase vehicles. Similarly, for consumers looking to sell vehicles to us, we use a vast set of data and data science, to provide an automated pricing platform that delivers real time, market-driven appraisals, and continually experiment and test in order to further refine our approach to enhance the customer experience and drive increased vehicle purchases.
Increased conversion and consumer sourcing also depends on our ability to provide the necessary customer support and sales support. Our ongoing investment in our customer experience operations includes investments in processes, technology, and data science. We are continuing to invest in our processes, including optimizing our sales channels using internal and outsourced resources, in order to remove friction and increase transaction flow, and in technology and data science to automate and improve our customer experience, reduce costs per transaction and to drive conversion and consumer sourcing. As part of our long-term roadmap and in response to a significant staff reduction by our primary third-party telephone sales support provider, we have been building our in-house sales team, have ceased using such third-party telephone sales provider and have meaningfully increased the level of sales supported internally, which we believe will improve our customer experience, and lower our selling costs. However, these reductions negatively impacted our sales volume in the second half of 2022 and is expected to have an impact on our unit sales volume in the first quarter of 2023 as we transition away from the third-party provider. Nevertheless, we do not expect this transition to have a long-term impact on our sales volume, or financial condition and results of operations as we reduce costs by expanding our internal sales force and leveraging our existing relationships with other sales partners, consistent with our long-term strategy to optimize our cost structure. In order to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, including delays in titling and registering vehicles purchased by our customers, we have undertaken various initiatives. These initiatives include increased digitization and electronic transmission of transaction documents and implementation of our digital title vault to ensure that titles are quality checked and vaulted in Vroom's name prior to listing of vehicles on our website. While these initiatives are designed to improve our transaction processing, enhance our customer experience, and reduce our regulatory risk, they have resulted in delays in listing vehicles for sale, which increased the number of days between our acquisition of vehicles and the final delivery of such vehicles to customers. As we improve the customer experience and drive efficiency in transaction processing, we expect that we will attract more visitors, improve conversion, drive greater sales and continue to source vehicles from consumers. If we cannot manage our growth effectively to maintain the quality and efficiency of our customers' experience, our business, financial condition and results of operations could be materially and adversely affected. See "Risks Related to Our Growth and Strategy-Our prior rapid growth is not indicative of our short-term strategy under our long-term roadmap and, if and when we return to rapid growth, we may not be able to manage our growth effectively."
Ability to optimize the mix of inventory sources to drive increased gross profit and improvements to our unit economics
Improving unit economics and driving increased gross profit requires a number of important capabilities, including the ability to finance the acquisition of inventory at competitive rates, source high quality vehicles across various acquisition channels nationwide, secure adequate reconditioning capacity and execute effective marketing strategies to increase consumer sourcing. In addition, our ability to accurately forecast pricing and consumer demand for specific types of vehicles is critical to sourcing high quality, high-demand vehicles, as well as lower-price-point vehicles to take advantage of the expanded sales opportunities to customers across the credit spectrum enabled by the UACC Acquisition. The ability to source the optimal mix of quality inventory will be a key driver as we believe the availability of lower price point used vehicles will continue to be constrained. This ability is enabled by our data science capabilities that leverage the growing amount of data at our disposal and generate predictive data analytics that fine-tune our supply and sourcing models. As we continue to invest in our operational efficiency and data science, we expect that we will improve our unit economics and in turn drive increased gross profit. While lower new vehicle prices generally reduce the price of used vehicles, and therefore, reduce our cost of acquiring new inventory, in 2022 lower prices negatively 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. 71
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We strategically source inventory from consumers, auctions, rental car companies, OEMs and dealers. For the years endedDecember 31, 2022 and 2021, vehicles sourced from consumers represent approximately 80% and 69% of our retail inventory sold, respectively. Because the quality of vehicles and associated gross margin profile vary across each channel, the mix of inventory sources has an impact on our profitability. We continually evaluate the optimal mix of sourcing channels and strive to source vehicles in a way that generates the highest sales margins and shortest inventory turns in order to maximize our average gross profit per unit and improve our unit economics. For example, purchasing vehicles at third-party auctions is competitive and, consequently, vehicle prices at third-party auctions tend to be higher than vehicle prices for vehicles sourced directly from consumers. Accordingly, as part of our sourcing strategy, we have strategically increased the percentage of vehicle sales that we source from consumers. As we continue to make progress on our initiatives to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, a higher portion of our unit sales in the fourth quarter of 2022 was from aged inventory as we obtained titles for vehicles not previously listed for sale, which negatively impacted our sales margin (sales price less purchase price of vehicles sold) and GPPU. These aged units impacted our sales margin by approximately$4.0 million and vehicle GPPU decreased to a loss of$1,346 in the fourth quarter of 2022. We expect to sell through our aged inventory in the first half of 2023 and, coupled with the industry-wide decline in used vehicle prices, we expect this to continue to negatively impact our sales margin and GPPU. In the latter half of 2022, we began inspecting consumer sourced vehicles and making real time adjustments to acquisition pricing as a result of our scaling proprietary logistics operation, which we expect will provide improvements to our overall gross profit per unit over time.
Ability to optimize our reconditioning capacity
Before a vehicle is listed for retail sale on our platform, it undergoes a
thorough reconditioning process in order to meet our Vroom retail sales
criteria. The efficiency of this reconditioning process is a key element in our
ability to grow profitably. Our ability to recondition purchased vehicles to our
quality standards is a critical component of our business. Historically, we have
successfully increased our reconditioning capacity as our business has grown,
and our future success will depend on our ability to continue to optimize our
reconditioning capacity to satisfy customer demand, maximize profitability, and
enhance the customer experience.
We employ a hybrid approach that combines the use of our proprietary vehicle
reconditioning center ("VRC") and VRCs primarily operated by a single
third-party provider to best meet our reconditioning needs. We intend to
optimize reconditioning capacity and operational efficiency through third-party
VRC locations and additional proprietary VRCs. Our use of third-party VRCs to
recondition vehicles allows us to avoid additional capital expenditures, quickly
adjust capacity, maintain greater operational flexibility and broaden our
geographic footprint to drive lower logistics costs. Proprietary VRCs will
enable us to have increased control over our reconditioning operations, ensure
adequate capacity, optimize our end-to-end supply chain and support our regional
operating model. In February 2022 , Adesa, one of our third-party VRC providers
and host of a number of our last-mile hubs, communicated its intent to
discontinue its third-party reconditioning services with us as it was being
acquired by a competitor. We replaced Adesa's capacity with capacity at our
other existing provider. During 2022, we took action to right-size the staffing
of our proprietary reconditioning operations as well as optimize the number of
third-party reconditioning partner locations to align with our reduced unit
sales volume, resulting in a reduction in headcount. We also relocated our
reconditioning facility from Stafford, Texas to the former service center at the
TDA store location which we believe better aligns our proprietary reconditioning
operations in the Houston market with our reduced unit sales volume, reduces our
lease and operating expenses and provides an improved work environment for our
employees.
Our existing facilities in the Atlanta area provide us with the space and
opportunity to develop a secondary proprietary VRC in the future, depending on
our future reconditioning needs. Going forward, we will continue to seek to
optimize the combination of strategic and geographically dispersed proprietary
and third-party VRCs. We will continue to leverage our data science and deep
industry experience to strategically select VRC locations where we believe there
is the highest supply and demand for our vehicles and enable us to leverage a
regional operating model.
Ability to optimize our logistics network
As we scaled our business, we not only added proprietary line-haul capability,
but also built our third-party logistics network nationwide through the
development of strategic carrier arrangements with national haulers and the
consolidation of our carrier base into a smaller number of carriers in dedicated
operating regions. We expect that these
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enhanced logistics operations, combined with the expansion of strategically located VRCs, will drive efficiency in our logistics operations. We have been accelerating our strategy to optimize our hybrid approach by focusing on improving the quality and reliability of our logistics operations. 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. We took action to optimize our proprietary logistics operations in order to align with reduced unit sales volume, which resulted in a reduction in headcount, as well as the restructuring of our network of logistics operations. Consistent with our long-term roadmap and the continued development of our regional operating model, we intend to continue to strategically combine the operation of our proprietary fleet with the use of third-party carriers, as well as synchronize our end-to-end supply chain to increase sales velocity and optimize flow of our inventory. We plan to reduce the number of miles our vehicles travel and lower our inbound and outbound transportation costs using our regional operating model. We believe these initiatives will enable us to reduce logistics costs per mile, improve our inventory turnover and provide the highest level of customer service. We expect that optimizing our logistics network through this hybrid approach will result in improved unit economics, increased profitability and an enhanced customer experience.
Ability to leverage a regional operating model
As we scaled our business, we achieved a national presence and brand that provides a significant competitive advantage versus local and regional dealers, and has enabled us to take advantage of efficiencies and lower costs of national brand advertising. Our national vehicle operations enable us to leverage a regional operating model, which is designed to reduce our operating expenses, increase our operating leverage and improve our unit economics, while also enhancing our customer experience. The regional operating model will increasingly enhance our approach to each component of our vehicle operations. We believe the efficiencies and cost savings expected to be achieved through the regional operating model will be important components of our path to profitability.
Ability to develop and manage our financing capabilities
Revenue earned on vehicle financing, both through our continued partnerships with third-party lenders and the development of our captive financing capabilities, present an opportunity to grow our business and drive profitability. Strategic partnerships with lenders such as Chase, Ally Financial and Capital One provide enhanced revenue streams for us, as well as offering convenience, assurance and efficiency for our customers and have contributed to improvements in Product GPPU. In addition, the acquisition of UACC inFebruary 2022 has enabled us to expand our offerings across the credit spectrum and accelerate the development of our captive financing operation, which is one of the key strategic initiatives under our long-term roadmap. We expect to develop UACC into a full captive financing arm with disciplined lending expertise, which would enable us to increase our ecommerce unit sales, expand our penetration into sales to customers across the credit spectrum and improve our unit economics. While credit losses are inherent in the automotive finance receivables business, several variables have affected UACC's recent loss and delinquency rates, including rising interest rates, the current inflationary environment and vehicle depreciation. UACC is currently experiencing higher loss severity on its finance receivables, which has negatively impacted the fair value of our finance receivables and the losses recognized during 2022. Higher than anticipated 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 which is expected to have more volatility. Furthermore, advance rates available to UACC on borrowings from the Warehouse Credit Facilities may decrease as a result of the increasing credit losses in UACC's portfolio and overall rising interest rates, which may in turn have adverse impact on our liquidity. 73
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Ability to securitize UACC's loan portfolio
The success of UACC's business is highly dependent on the ability to securitize and sell the automotive finance receivables that it underwrites. As a result of increasing interest rates, the current inflationary environment and vehicle depreciation in the used automotive industry, UACC is experiencing higher loss severity in a soft securitization market. As a result, UACC may not be able to sell the subordinate notes or residual certificates issued in the securitizations at a favorable price or at all. We intend to structure UACC's securitizations to achieve off-balance sheet treatment. However, if UACC fails to sell the residual interests, it will preclude us from recognizing the sale and result in the securitization trust being consolidated and remaining on balance sheet. In 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.
Ability to increase and better monetize value-added products
We generate revenue by earning fees for selling value-added products to customers in connection with vehicle sales. Currently, our other third-party value-added product offerings consist of protection products, such as vehicle service contracts, GAP protection and tire and wheel coverage. Our offering of value-added products in addition to vehicle financing is an integral part of providing a seamless vehicle-buying experience to our customers. We sell our protection products through our strategic relationships with third parties who bear the incremental risks associated with the underwriting of such protection products. Because we are paid fees on value-added products we sell, our gross profit is equal to the revenue we generate on such sales. As a result, such sales help drive total gross profit per unit.
Seasonality
Used vehicle sales have historically been seasonal. The used vehicle industry typically experiences an increase in sales early in the calendar year and reaches its highest point late in the first quarter and early in the second quarter. Vehicle sales then level off through the rest of the year, with the lowest level of sales in the fourth quarter. This seasonality has historically corresponded with the timing of income tax refunds, which are an important source of funding for vehicle purchases. Additionally, used vehicles depreciate at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. While 2021 and the first half of 2022 did not follow typical market depreciation trends, with continued appreciation in used vehicle pricing throughout that period, there was a shift in the third quarter of 2022 to above average depreciation as compared to pre-pandemic levels. While there remains continued uncertainty surrounding market trends, the current economic outlook forecasts a return to historical seasonal trends in 2023. 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." Macroeconomic Factors Boththe United States and global economies are experiencing a sustained inflationary environment and theFederal Reserve's efforts to tame inflation have led to, and may continue to lead to, increased interest rates, which affects automotive finance rates, reducing discretionary spending and making vehicle financing more costly and less accessible to many consumers. In addition, many economists believe the global economy will experience a recessionary environment in 2023. Moreover,Russia's invasion ofUkraine and resulting sanctions bythe United States ,European Union and other countries has increased global economic and political uncertainty, which has caused dramatic fluctuations in global financial markets and uncertainty about world-wide oil supply and demand, which in turn has increased the volatility of oil and natural gas prices. A significant escalation or expansion of economic disruption could continue to impact consumer spending, disrupt our supply chain, broaden inflationary costs, and could have a material adverse effect on our results of operations. We will continue to actively monitor and develop responses to these disruptions, but depending on duration and severity, these trends could continue to negatively impact our business in 2023. 74
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Components of Results of Operations
Revenue
Retail vehicle revenue
We sell retail vehicles through both our ecommerce platform and TDA. Revenue
from vehicle sales, including any delivery charges, is recognized when vehicles
are delivered to the customers or picked up at our TDA retail location, net of a
reserve for estimated returns. The number of units sold and the average selling
price ("ASP") per unit are the primary factors impacting our retail revenue
stream.
The number of units sold depends on the volume of inventory and the selection of
vehicles listed on our ecommerce platform, our ability to attract new customers,
our brand awareness, our ability to expand our reconditioning operations and
logistics network, and our ability to provide adequate sales and sales support
to service our demand.
ASP depends primarily on our acquisition and pricing strategies, retail used vehicle market prices, our average days to sale and our reconditioning and logistics costs.
As a data-driven company, we acquire inventory based upon demand predicted by our data analytics. While we expect ASP to fluctuate in the short-term as a result of market conditions, our long-term plan is to move towards lower-priced inventory, which we expect will result in a lower ASP. The UACC Acquisition will enable us to expand our automotive financing solutions across the credit spectrum and we expect to increase our offering of lower-price-point vehicles to take advantage of those capabilities.
Wholesale vehicle revenue
We sell vehicles that do not meet our Vroom retail sales criteria through wholesale channels. Vehicles sold through wholesale channels are acquired from customers who trade-in their vehicles when making a purchase from us, from customers who sell their vehicle to us in direct-buy transactions, and from liquidation of vehicles previously listed for retail sale. The number of wholesale vehicles sold and the ASP per unit are the primary drivers of wholesale revenue. The ASP per unit is affected by the mix of the vehicles we acquire and general supply and demand conditions in the wholesale market.
Product revenue
We generate revenue by earning fees on sales of third-party financing, financing
vehicle sales through UACC, and sales of value-added products to our customers
in connection with vehicle sales, such as vehicle service contracts, GAP
protection and tire and wheel coverage.
We earn fees on third-party financing and value-added products pursuant to
arrangements with the third parties that sell and administer these products. For
accounting purposes, we are an agent for these transactions and, as a result, we
recognize fees on a net basis when the customer enters into an arrangement to
purchase these products or obtain third-party financing, which is typically at
the time of a vehicle sale. Our gross profit on product revenue is equal to the
revenue we generate. Product revenue is affected by the number of vehicles sold,
the attachment rate of value-added products and the amount of fees we receive on
each product. Product revenue also consists of estimated profit-sharing amounts
to which we are entitled based on the performance of third-party protection
products once a required claims period has passed. A portion of the fees we
receive is subject to chargeback in the event of early termination, default, or
prepayment of the contracts by our customers. We recognize product revenue net
of reserves for estimated chargebacks.
As a result of the UACC Acquisition, we also generate ecommerce product revenue
from receivables generated by financing provided to Vroom customers through our
captive financing operation. We earn interest income on such finance receivables
and receive proceeds from the sale of such finance receivables in securitization
transactions or forward flow arrangements. We account for sales of these finance
receivables in accordance with ASC Topic 860, Transfers and Servicing of
Financial Assets ("ASC 860"). In order for transfers of the finance receivables
to qualify as sales, the finance receivables being transferred must be legally
isolated, may not be constrained by restrictions from further transfer, and must
be deemed to be beyond our control. Although our long-term plan is to structure
future securitization transactions to qualify for sale accounting, similar to
the 2022 securitization transactions, for which the gain
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on sale was recorded in "Finance revenue", as discussed below, current market conditions may impact our ability to achieve sales accounting treatment. InJanuary 2023 , we completed the 2023-1 securitization. As a result of current market conditions, which led to unfavorable pricing, we retained the non-investment grade securities and residual interests, which will require us to account for the 2023-1 securitization as secured borrowings and remain on balance sheet pending the sale of such retained interests. Depending on market conditions, future 2023 securitizations may be accounted for as secured borrowings and remain on balance sheet. The gain on sales recorded in "Product revenue" for the year endedDecember 31, 2022 were immaterial. The revenue we are able to generate from these sales will be dependent on the current market conditions, the number of finance receivables UACC originates with our customers, the average principal balance of the finance receivables, the credit quality of the portfolio, and the price at which they are sold in securitization transactions or through forward flow arrangements.
Finance revenue
Our finance revenue consists of gain on the sales of finance receivables acquired by UACC from its network of third-party dealership customers, interest income earned on finance receivables, as well as interest income earned on finance receivables held in consolidated VIEs related to UACC securitization transactions consummated prior to the Acquisition Date. UACC acquires and services finance receivables from its network of third-party dealership customers and generates revenue through the sales of these financing receivables. We account for sales of finance receivables in accordance with ASC 860. All securitization transactions consummated prior to the Acquisition Date were accounted for as secured borrowings and we recognize interest income, which includes finance charges and service charges in accordance with the terms of the related customer agreements. In February andJuly 2022 , UACC completed the 2022-1 and 2022-2 securitization transactions, which qualified as sales, therefore we recorded a gain on the sale of the finance receivables. The amount of the gain is equal to the fair value of the net proceeds received less the carrying amount of the finance receivables. Although our long-term plan is to structure future securitization transactions similar to the 2022-1 and 2022-2 securitizations and account for them as sales, market conditions may impact our ability to achieve sales accounting treatment. InJanuary 2023 , we completed the 2023-1 securitization. As a result of current market conditions, which led to unfavorable pricing, we retained the non-investment grade securities and residual interests, which will require us to account for the 2023-1 securitization as secured borrowings and remain on balance sheet pending the sale of such retained interests. Depending on market conditions, future 2023 securitizations may be accounted for as secured borrowings and remain on balance sheet. Servicing income represents the annual fees earned on the outstanding principal balance of the finance receivables serviced. Fees are earned monthly at an annual rate of approximately 4% for the 2022-1 securitization and 3.25% for the 2022-2 securitization of the outstanding principal balance of the finance receivables serviced. As a result of increasing interest rates, the current inflationary environment and vehicle depreciation in the used automotive industry, UACC is experiencing higher loss severity in a soft securitization market. The increased loss severity could lead to reduced servicing income if UACC elects to waive monthly servicing fees going forward as it did in 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.
See "Note 3-Revenue Recognition" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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Table of Contents Cost of sales Retail cost of sales Retail cost of sales primarily includes the costs to acquire vehicles, inbound transportation costs and direct and indirect reconditioning costs associated with preparing vehicles for sale. Costs to acquire vehicles are primarily driven by the inventory source, vehicle mix and general supply and demand conditions of the used vehicle market. Inbound transportation costs include costs to transport the vehicle to our VRCs. Reconditioning costs include parts, labor and third-party reconditioning costs directly attributable to the vehicle and allocated overhead costs. Cost of sales also includes any accounting adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Wholesale cost of sales
Wholesale cost of sales primarily includes costs to acquire vehicles sold through wholesale channels as well as any accounting adjustments to reflect vehicle inventory at the lower of cost or net realizable value.
Finance cost of sales
Finance cost of sales consists of interest expense incurred on securitization debt and collection expenses related to servicing finance receivables originated by UACC. Other cost of sales
Other cost of sales consists of cost of sales from CarStory's third-party customers.
Total gross profit
Total gross profit is defined as total revenue less costs associated with such revenue.
Selling, general and administrative expenses
Our selling, general, and administrative expenses, which we refer to as SG&A expenses, consist primarily of advertising and marketing expenses, outbound transportation costs, employee compensation, occupancy costs of our facilities, professional fees for accounting, auditing, tax, legal and consulting services and software and IT costs. Depreciation and amortization Our depreciation and amortization expense primarily includes: depreciation related to our leasehold improvements and logistics fleet; amortization related to intangible assets in acquired businesses; and capitalized internal use software costs incurred in the development of our platform and website applications. Depreciation expense related to our Vroom VRC and the portion of depreciation expense for our proprietary logistics fleet related to inbound transportation is included in cost of sales in the consolidated statements of operations. Impairment Charges Impairment charges represent an impairment charge to write down the carrying amount of goodwill to fair value, lease impairment charges, related to closing physical office locations and Sell Us Your Car® centers, and impairment of long-lived assets no longer in use.
Gain on debt extinguishment
Gain on debt extinguishment represents the gain recognized from the repurchase of a portion of our outstanding Convertible Senior Notes due 2026 (the "Notes") in open-market transactions. Interest expense
Our interest expense primarily includes (i) interest expense related to our
vehicle floorplan facility with
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interest expense on our Notes, and (iii) interest expense on UACC's Warehouse Credit Facilities, which is used to fund our finance receivables.
Interest Income
Interest income primarily represents interest credits earned on cash deposits maintained in relation to our 2022 Vehicle Floorplan Facility as well as interest earned on cash and cash equivalents.
Other Loss (Income)
Other loss (income) primarily represents unrealized losses (gains) on finance receivables at fair value and beneficial interests in securitizations.
Results of OperationsThe following table presents our consolidated results of operations for the periods indicated:
Year Ended Year Ended
December 31, December 31,
2022 2021 % Change 2021 2020 % Change
(in thousands) (in thousands)
Revenue:
Retail vehicle, net $ 1,425,842 $ 2,583,417 (44.8 )% $ 2,583,417 $ 1,072,551 140.9 %
Wholesale vehicle 293,528 498,981 (41.2 )% 498,981 245,580 103.2 %
Product, net 62,747 88,824 (29.4 )% 88,824 38,195 132.6 %
Finance 152,542 - 100.0 % - - 0.0 %
Other 14,242 13,033 9.3 % 13,033 1,374 848.5 %
Total revenue 1,948,901 3,184,255 (38.8 )% 3,184,255 1,357,700 134.5 %
Cost of sales:
Retail vehicle 1,382,005 2,495,587 (44.6 )% 2,495,587 1,038,209 140.4 %
Wholesale vehicle 304,148 480,861 (36.7 )% 480,861 247,012 100.0 %
Finance 14,161 - 100.0 % - - 0.0 %
Other 3,800 5,708 (33.4 )% 5,708 934 100.0 %
Total cost of sales 1,704,114 2,982,156 (42.9 )% 2,982,156 1,286,155 131.9 %
Total gross profit 244,787 202,099 21.1 % 202,099 71,545 182.5 %
Selling, general and
administrative expenses 566,387 547,823 3.4 % 547,823 245,546 123.1 %
Depreciation and amortization 38,290 12,891 197.0 % 12,891 4,598 180.4 %
Impairment charges 211,873 - 100.0 % - - 100.0 %
Loss from operations (571,763 ) (358,615 ) 59.4 % (358,615 ) (178,599 ) 100.8 % Gain on debt extinguishment
(164,684 ) - 100.0 % - - 0.0 %
Interest expense 40,693 21,948 85.4 % 21,948 9,656 127.3 %
Interest income (19,363 ) (10,341 ) 87.2 % (10,341 ) (5,896 ) 75.4 % Revaluation of stock warrant
- - 0.0 % - 20,470 (100.0 )%
Other loss (income), net 43,181 (65 ) (66,532.3 )% (65 ) (114 ) (43.0 )%
Loss before provision for
income taxes (471,590 ) (370,157 ) 27.4 % (370,157 ) (202,715 ) 82.6 %
(Benefit) provision for income
taxes (19,680 ) 754 (2,710.1 )% 754 84 797.6 %
Net loss $ (451,910 ) $ (370,911 ) 21.8 % $ (370,911 ) $ (202,799 ) 82.9 %
Segments
We manage and report operating results through three reportable segments:
•
Ecommerce (70.0% of 2022 revenue; 76.7% of 2021 revenue): The Ecommerce segment
represents retail sales of used vehicles through our ecommerce platform and fees
earned on sales of value-added products associated with those vehicle sales.
Starting in 2022, the Ecommerce segment also includes interest income earned on
finance receivables from Vroom customers that we originate through UACC to
finance the vehicles
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we sell and gain on sales of those finance receivables once sold in a securitization transaction or forward flow arrangement that qualify for sales accounting treatment.
•
Wholesale (15.1% of 2022 revenue; 15.7% of 2021 revenue): The Wholesale segment represents sales of used vehicles through wholesale channels.
•
Retail Financing (7.8% of 2022 revenue): The Retail Financing segment represents UACC's operations with its network of third-party dealership customers.
Years Ended
Ecommerce
The following table presents our Ecommerce segment results of operations for the
periods indicated:
Year Ended
December 31,
2022 2021 Change % Change
(in thousands, except unit
data and average days to sale)
Ecommerce units sold 39,278 74,698 (35,420 ) (47.4 )%
Ecommerce revenue:
Vehicle revenue $ 1,304,797 $ 2,360,368 $ (1,055,571 ) (44.7 )%
Product revenue 59,398 82,001 (22,603 ) (27.6 )%
Total ecommerce revenue $ 1,364,195 $ 2,442,369 $ (1,078,174 ) (44.1 )%
Ecommerce gross profit:
Vehicle gross profit $ 40,575 $ 82,745 $ (42,170 ) (51.0 )%
Product gross profit 59,398 82,001 (22,603 ) (27.6 )%
Total ecommerce gross profit $ 99,973 $ 164,746 $ (64,773 ) (39.3 )%
Average vehicle selling price per
ecommerce unit $ 33,220 $ 31,599 $ 1,621 5.1 %
Gross profit per ecommerce unit:
Vehicle gross profit per ecommerce unit $ 1,033 $ 1,108 $ (75 ) (6.8 )%
Product gross profit per ecommerce unit 1,512 1,098 414 37.7 %
Total gross profit per ecommerce unit $ 2,545 $ 2,206 $ 339 15.4 %
Ecommerce average days to sale 131 74 57 77.2 %
Ecommerce units
Ecommerce units sold decreased 35,420, or 47.4%, from 74,698 for the year ended
December 31, 2021 to 39,278 for the year ended December 31, 2022 . This decrease
was driven by our strategic decision to prioritize unit economics over unit
sales volume, a reduction in third-party sales support staff, which put pressure
on servicing our demand, as well as macroeconomic factors.
Ecommerce average days to sale increased from 74 days for the year ended
December 31, 2021 to 131 days for the year ended December 31, 2022 . We have
undertaken various initiatives to address the operational challenges created by
our prior rapid growth from 2020 through the first quarter of 2022, in
particular with titling and registration processes. While these initiatives are
designed to improve our transaction processing, enhance our customer experience,
and reduce our regulatory risk, they resulted in delays in listing vehicles for
sale, which increased the number of days between our acquisition of vehicles and
the final delivery of such vehicles to customers. We expect ecommerce average
days to sale to improve over time as we continue to improve our processes.
Vehicle Revenue
Ecommerce vehicle revenue decreased$1,055.6 million , or 44.7%, from$2,360.4 million for the year endedDecember 31, 2021 to$1,304.8 million for the year endedDecember 31, 2022 . The decrease in ecommerce vehicle revenue was primarily attributable to the 35,420 decrease in ecommerce units sold, which decreased vehicle revenue by$1,119.2 million , partially offset by an increase in ASP per unit, which increased from$31,599 for the year endedDecember 31, 2021 to$33,220 for the year endedDecember 31, 2022 and increased vehicle revenue by$63.6 million . 79
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The increase in ASP per unit was primarily due to significant market appreciation in the second half of 2021 and the first half of 2022. In the second half of 2022, there was a return to seasonal depreciation trends. Although we expect ASP to fluctuate in the short-term as a result of market conditions, our long-term plan is to move toward lower-priced inventory, which would result in a lower ASP. Furthermore, as the UACC Acquisition begins to enable us to expand our automotive financing solutions across the credit spectrum, and we expect to increase our offering of lower-price-point vehicles to take advantage of those capabilities.
Product Revenue
Ecommerce product revenue decreased$22.6 million , or 27.6%, from$82.0 million for the year endedDecember 31, 2021 to$59.4 million for the year endedDecember 31, 2022 . The decrease in ecommerce product revenue was primarily attributable to the 35,420 decrease in ecommerce units sold, which decreased product revenue by$38.9 million , partially offset by a$414 increase in product revenue per unit, which increased product revenue by$16.3 million . Product revenue per unit increased from$1,098 for the year endedDecember 31, 2021 to$1,512 for the year endedDecember 31, 2022 , primarily due to interest income earned on finance receivables from Vroom customers originated or serviced by UACC. Vehicle Gross Profit Ecommerce vehicle gross profit decreased$42.1 million , or 51.0%, from$82.7 million for the year endedDecember 31, 2021 to$40.6 million for the year endedDecember 31, 2022 . The decrease in vehicle gross profit was primarily attributable to the 35,420 decrease in ecommerce units sold, which decreased vehicle gross profit by$39.2 million . Vehicle gross profit per unit remained relatively flat for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . Higher reconditioning costs per unit related to an increased mix of higher mileage and aged vehicles along with significant parts inflation, were offset by a lower inventory reserve. While overall inventory reserve incurred within cost of sales 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. As we continue to make progress on our initiatives to address the operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, a higher portion of our unit sales in the fourth quarter of 2022 was from aged inventory as we obtained titles for vehicles not previously listed for sale, which negatively impacted our sales margin and GPPU. These aged units impacted our sales margin by approximately$4.0 million and decreased vehicle GPPU. We expect to sell through our aged inventory in the first half of 2023 and, coupled with the industry-wide decline in used vehicle prices, we expect this to continue to negatively impact our sales margin and GPPU.
Product Gross Profit
Ecommerce product gross profit decreased$22.6 million , or 27.6%, from$82.0 million for the year endedDecember 31, 2021 to$59.4 million for the year endedDecember 31, 2022 . The decrease in ecommerce product gross profit was primarily attributable to the 35,420 decrease in ecommerce units sold, which decreased product gross profit by$38.9 million , partially offset by a$414 increase in product gross profit per unit, which increased product gross profit by$16.3 million . Product gross profit per unit increased from$1,098 for the year endedDecember 31, 2021 to$1,512 for the year endedDecember 31, 2022 , primarily due to interest income earned on finance receivables from Vroom customers originated or serviced by UACC. 80
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Wholesale
The following table presents our Wholesale segment results of operations for the
periods indicated:
Year Ended
December 31,
2022 2021 Change % Change
(in thousands, except unit data)
Wholesale units sold 20,876 37,163 (16,287 ) (43.8 )%
Wholesale revenue $ 293,528 $ 498,981 $ (205,453 ) (41.2 )%
Wholesale gross (loss) profit $ (10,620 ) $ 18,120 $ (28,740 ) (158.6 )%
Average selling price per unit $ 14,061 $ 13,427 $ 634 4.7 %
Wholesale gross (loss) profit per unit $ (509 ) $ 488 $ (997 ) (204.3 )%
Wholesale Units
Wholesale units sold decreased 16,287, or 43.8%, from 37,163 for the year ended
December 31, 2021 to 20,876 for the year ended December 31, 2022 , primarily
driven by a decrease in wholesale units purchased from consumers and a lower
number of trade-in vehicles associated with the decrease in the number of
ecommerce units sold.
Wholesale Revenue
Wholesale revenue decreased$205.5 million , or 41.2%, from$499.0 million for the year endedDecember 31, 2021 to$293.5 million for the year endedDecember 31, 2022 . The decrease was primarily attributable to the 16,287 decrease in wholesale units sold, which decreased wholesale revenue by$218.7 million , partially offset by a higher ASP per wholesale unit, which increased wholesale revenue by$13.2 million . Wholesale Gross (Loss) Profit Wholesale gross profit of$18.1 million for the year endedDecember 31, 2021 decreased by$28.7 million to a gross loss of$10.6 million for the year endedDecember 31, 2022 . The decrease was primarily attributable to a$997 change in wholesale gross loss per unit from gross profit per unit of$488 for the year endedDecember 31, 2021 to wholesale gross loss per unit of$509 for the year endedDecember 31, 2022 , which increased wholesale gross loss by$20.8 million and was primarily driven by lower sales margins. Additionally, the decrease was attributable to the 16,287 decrease in wholesale units sold, which increased wholesale gross loss by$7.9 million . In 2021 there was significant appreciation in the wholesale market, which positively impacted sales margins. Furthermore, due to our prior rapid growth and the operational challenges related to our titling and registration processes, our wholesale vehicle sales included a larger number of vehicles from our aged inventory, which negatively impacted our sales margin in 2022 and GPPU. Coupled with the industry-wide decline in used vehicle prices, we expect this to continue to negatively impact our sales margin and GPPU in the first half of 2023.
Retail Financing
The following table presents our Retail Financing segment results of operations
for the periods indicated:
Year Ended
December 31,
2022 2021 Change % Change
(in thousands)
Retail Financing revenue $ 152,542 $ - $ 152,542 100.0 %
Retail Financing gross profit $ 138,381 $ - $ 138,381 100.0 %
Retail Financing Revenue
Retail Financing revenue was $152.5 million for the year ended December 31, 2022
and included interest income of $78.6 million earned on finance receivables with
third-party dealership customers, a gain on sale of $45.6 million on the
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Retail Financing Gross Profit
Retail Financing gross profit was$138.4 million for the year endedDecember 31, 2022 and included interest income of$78.6 million earned on finance receivables with third-party dealership customers, a gain on sale of$45.6 million on theUnited Auto Credit 2022-1 and 2022-2 securitization transactions, servicing income of$13.9 million , and vehicle protection product income net of chargeback reserves, less collection expenses related to servicing finance receivables originated by UACC and interest expense incurred on securitization debt.
Selling, general and administrative expenses
Year Ended
December 31,
2022 2021 Change % Change
(in thousands)
Compensation & benefits $ 251,153 $ 204,913 $ 46,240 22.6 %
Marketing expense 79,670 125,481 (45,811 ) (36.5 )%
Outbound logistics (1) 39,023 85,788 (46,765 ) (54.5 )%
Occupancy and related costs 23,363 17,448 5,915 33.9 %
Professional fees 33,455 24,386 9,069 37.2 %
Software and IT costs 44,570 27,749 16,821 60.6 %
Other 95,153 62,058 33,095 53.3 %
Total selling, general & administrative
expenses $ 566,387 $ 547,823 $ 18,564 3.4 %
(1)
Outbound logistics primarily includes third-party transportation fees as well as
cost related to operating our proprietary logistics network, including fuel,
tolls, and maintenance expenses associated with vehicle deliveries. Inbound
transportation costs, from the point of acquisition to the relevant
reconditioning facility, are included in cost of sales.
SG&A expenses increased $18.6 million , or 3.4%, from $547.8 million for the year
ended December 31, 2021 to $566.4 million for the year ended December 31, 2022 .
The increase was primarily due to incremental SG&A expenses of $64.1 million
related to the inclusion of UACC SG&A expenses in 2022, as UACC was acquired on
February 1, 2022 . The total increase can be further broken out as follows:
•
a$46.2 million increase in compensation and benefits primarily as a result of an increase in salaries related to an increase in overall headcount and severance costs associated with reductions in force at Vroom. Despite the workforce reduction as part of our Realignment Plan and subsequent measures, overall headcount increased compared to the same period of the prior year, primarily related to the inclusion of UACC's headcount, which was acquired onFebruary 1, 2022 ;
•
a
•
a$9.1 million increase in professional fees primarily related to costs incurred in connection with the UACC Acquisition as well as increased legal fees related to ongoing legal and regulatory matters;
•
a$5.9 million increase in occupancy and related costs primarily a result of rent expense related to additional logistics and reconditioning hubs and rent expense for UACC offices; and
•
a$33.1 million increase in other SG&A expenses primarily due to operational challenges created by our prior rapid growth from 2020 through the first quarter of 2022, which resulted in approximately$25.4 million of additional costs incurred, including legal settlements and rental car expenses for rental vehicles that we provided to customers whose vehicle registrations were delayed. We regard these situational costs as non-recurring and expect them to decline significantly as we resolve the challenges that arose prior to the implementation of our digital title vault, continue to streamline and automate our titling and registration process, and implement other improvements to our transaction processing.
The above increases were partially offset by:
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•
a
•
a
We expect SG&A expenses to decrease in the future driven by reductions in both fixed and variable cost components as we continue to reevaluate the optimization of our operations. We may not be able to fully realize further cost savings and benefits initially anticipated from the long-term roadmap, and the future costs may be greater than expected.
Depreciation and amortization
Depreciation and amortization expenses increased$25.4 million , or 197.0%, from$12.9 million for the year endedDecember 31, 2021 to$38.3 million for the year endedDecember 31, 2022 . The increase was primarily due to amortization expense of intangible assets acquired as part of the UACC Acquisition, amortization related to our capitalized internal use software costs incurred in the development of our platform and website applications, and depreciation of short-haul and line-haul vehicles acquired for our proprietary logistics network.
Impairment Charges
Impairment charges represent an impairment charge in 2022 of$201.7 million to write down the carrying amount of the goodwill to fair value, lease impairment charges of$6.5 million , related to closing physical office locations,Stafford reconditioning facility and Sell Us Your Car® centers, and impairment of long-lived assets no longer in use of$3.7 million .
Gain on debt extinguishment
Gain on debt extinguishment represents a gain of$164.7 million recognized in 2022, related to the repurchase of$254.3 million in aggregate principal balance of the Notes, net of deferred issuance costs of$4.9 million , for$90.2 million .
Interest expense
Interest expense increased$18.8 million , or 85.4%, from$21.9 million for the year endedDecember 31, 2021 to$40.7 million for the year endedDecember 31, 2022 . The increase was primarily attributable to higher interest rates in the second half of 2022, which increased interest expense$9.1 million ; a full year of interest expense on the Notes that were issued inJune 2021 , which increased interest expense$3.0 million ; and interest expense incurred onUACC's Warehouse Credit Facilities, which increased interest expense$6.1 million .
Interest income
Interest income increased$9.1 million , or 87.2%, from$10.3 million for the year endedDecember 31, 2021 to$19.4 million for the year endedDecember 31, 2022 . The increase in interest income was primarily driven by higher interest credits earned by the Company related to the 2022 Vehicle Floorplan Facilities and higher interest rates earned on cash and cash equivalents.
Other loss (income)
Other loss (income) increased to$43.2 million for the year endedDecember 31, 2022 . The increase in other loss (income) was primarily driven by realized and unrealized gains and losses on the fair value of finance receivables. 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. 83
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Quarterly Results of Operations Supplemental data
The following tables set forth our quarterly financial information for the fourth and third quarter of 2022:
Three Months
Three Months Ended
Ended September
December 31, 30,
2022 2022 Change % Change
(in thousands, except unit
data)
(unaudited)
Total revenues $ 209,349 $ 340,797 $ (131,448 ) (38.6 )%
Total gross profit $ 29,459 $ 67,331 $ (37,872 ) (56.2 )%
Ecommerce units sold 4,144 6,428 (2,284 ) (35.5 )%
Ecommerce revenue $ 141,758 $ 225,441 $ (83,683 ) (37.1 )%
Ecommerce gross profit $ 5,110 $ 27,034 $ (21,924 ) (81.1 )%
Vehicle gross (loss) profit per ecommerce
unit $ (1,346 ) $ 2,267 $ (3,613 ) (159.4 )%
Product gross profit per ecommerce unit 2,579 1,939 640 33.0 %
Total gross profit per ecommerce unit $ 1,233 $ 4,206 $ (2,973 ) (70.7 )%
Wholesale units sold 1,768 3,128 (1,360 ) (43.5 )%
Wholesale revenue $ 23,039 $ 47,604 $ (24,565 ) (51.6 )%
Wholesale gross loss $ (4,359 ) $ (1,574 ) $ (2,785 ) 176.9 %
Wholesale gross loss per unit $ (2,465 ) $ (503 ) $ (1,962 ) (390.1 )%
Retail Financing revenue $ 32,537 $ 40,654 $ (8,117 ) (20.0 )%
Retail Financing gross profit $ 28,744 $ 35,954 $ (7,210 ) (20.1 )%
Total selling, general, and
administrative expenses $ 90,760 $ 134,643 $ (43,883 ) (32.6 )%
Three
Months Three Months
Ended Ended
December September
31, 30,
2022 2022 Change % Change
(in thousands)
(unaudited)
Net income (loss) $ 24,765 $ (51,127 ) $ 75,892 148.4 %
Adjusted to exclude the following:
Interest expense 12,076 9,704 2,372 24.4 %
Interest income (6,372 ) (5,104 ) (1,268 ) 24.8 %
Provision for income taxes 2,405 899 1,506 167.5 %
Depreciation and amortization 10,702 9,995 707 7.1 %
EBITDA $ 43,576 $ (35,633 ) $ 79,209 222.3 %
Realignment costs $ 2,253 $ 3,243 $ (990 ) (30.5 )%
Change in fair value of finance
receivables 3,917 (3,012 ) 6,929 230.0 %
Gain on debt extinguishment (126,767 ) (37,917 ) (88,850 ) 234.3 %
Acceleration of non-cash stock-based
compensation 2,439 - 2,439 100.0 %
Other 3,679 - 3,679 100.0 %
Adjusted EBITDA $ (70,903 ) $ (73,319 ) $ 2,416 3.3 %
Securitization gain - (15,972 ) 15,972 100.0 %
Adjusted EBITDA excluding securitization
gain $ (70,903 ) $ (89,291 ) $ 18,388 20.6 %
Liquidity and Capital Resources
As of December 31, 2022 , we had cash and cash equivalents of $398.9 million and
restricted cash of $73.1 million . Restricted cash primarily includes cash
deposits required under our 2022 Vehicle Floorplan Facility of $34.6 million ;
cash deposits of $12.5 million required under cash collateral agreements with
certain of our lenders; and restricted cash for UACC under the securitizations
and Warehouse Credit Facilities of $24.7 million . Our primary source of
liquidity is cash generated through financing activities. Additionally, we had
excess borrowing capacity of $105.8 million on UACC's Warehouse Credit
Facilities as of December 31, 2022 .
We have no significant debt maturities due until 2026 and the payments on our
securitization debt is funded by cashflows on the finance receivables within the
securitization trusts.
We anticipate that our existing cash and cash equivalents, 2022 Vehicle
Floorplan Facility, and UACC's Warehouse Credit Facilities will be sufficient to
support our operations for at least the next twelve months from the date of this
Annual Report on Form 10-K.
Since inception, we experienced a continued increase in our cash usage as we
scaled our business. Our long-term roadmap is designed to reduce our use of cash
and position us for long-term profitable growth by prioritizing unit
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economics, reducing operating expenses and maximizing liquidity. We achieved approximately$187.0 million of cost reductions and operating improvements across our operations for 2022, when compared to the first quarter annualized, primarily as a result of the Realignment Plan. Additionally, onJanuary 18, 2023 , we executed a reduction in force as part of our continued focus on reducing variable and fixed costs. We expect to incur expenses of approximately$4.0 million , primarily consisting of severance, and expect to achieve approximately$27.0 million of annualized cost reductions as a result of the reduction in force. We may not be able to fully realize the cost savings and benefits initially anticipated. Our future capital requirements will depend on many factors, including our efforts to reduce fixed and variable expenses, investment in our internal sales force, investment in our website and mobile applications, continued automation of the selling experience, optimization of our assortment of vehicles, and increase inventory when we resume growth. We expect to use our cash and cash equivalents to finance our future capital requirements, borrowings under our 2022 Vehicle Floorplan Facility to finance our inventory, andUACC's Warehouse Credit Facilities to fund our finance receivables. We may be required to seek additional equity or debt financing in the future to fund our operations or to fund our needs for capital expenditures. Our ability to obtain additional equity or debt financing will depend on the success of our efforts to reduce fixed and variable expenses and demonstrate we are on a path toward long-term profitable growth, as well as market conditions. There can be no assurance that such financing will be available in amounts or on terms acceptable to us, if at all. Failure to raise additional capital through debt or equity financings, and/or reduce operating costs could have a material adverse effect on our ability to meet our short and long-term liquidity needs and achieve our intended long-term business objectives. Convertible Senior Notes OnJune 18, 2021 , we issued$625.0 million aggregate principal amount of the Notes pursuant to an indenture between us andU.S. Bank National Association , as trustee (the "Indenture"). The Notes bear interest at a rate of 0.75% per annum, payable semiannually in arrears onJanuary 1 andJuly 1 of each year, beginning onJanuary 1, 2022 . The Notes will mature onJuly 1, 2026 , subject to earlier repurchase, redemption or conversion. The total net proceeds from the offering, after deducting commissions paid to the initial purchasers and debt issuance costs, were approximately$608.9 million . During the year endedDecember 31, 2022 , the conditions allowing holders of the Notes to convert were not met. In 2022, we repurchased$254.3 million in aggregate principal amount of the Notes, net of deferred issuance costs of$4.9 million , for$90.2 million , in open-market transactions. We recognized a gain on extinguishment of debt of$164.7 million for the year endedDecember 31, 2022 . As a result of these repurchases,$359.3 million aggregate principal amount of the Notes remain outstanding, net of deferred issuance costs of$6.5 million . Subject to market conditions and availability, we may continue to opportunistically repurchase Notes from time to time to reduce our outstanding indebtedness at a discount. Refer to Note 13 - Long Term Debt to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for further discussion.
Vehicle Financing
InNovember 2022 , we amended the 2020 Vehicle Floorplan Facility to, among other things, decrease the line of credit from$700.0 million to$500.0 million and extend the maturity date toMarch 31, 2024 (as amended, the "2022 Vehicle Floorplan Facility"). In addition, the amendment modifies the amount of credit available to us on a monthly basis to the product of (1) the greater of five times the aggregate number of retail units sold during the most recent month for which information is available or the aggregate number of retail units sold during the five most recent months for which information is available and (2) the greater of the average outstanding floorplan balance of all vehicles on the floorplan as of the immediately preceding month-end or the average monthly outstanding floorplan balance of all vehicles on the floorplan as of month-end for the immediately preceding five months. The amendment also provides that we may elect to increase our monthly credit line availability by an additional$25.0 million during any four months in the period fromNovember 1, 2022 throughMarch 31, 2024 , subject to the maximum$500.0 million credit limit. Consistent with the terms of the 2020 Vehicle Floorplan Facility, we have provided Ally with a guaranty of payment of all amounts owed under the 2022 Vehicle Floorplan Facility as well as a security interest in all or substantially all tangible, intangible, and other personal property ofVroom, Inc. , to secure obligations under the 2022 Vehicle Floorplan Facility. 85
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The 2022 Vehicle Floorplan Facility bears interest at a rate equal the Prime Rate, announced per annum byAlly Bank , plus 175 basis points. Additionally, we are subject to amended covenants and events of default. We are required to maintain a certain level of equity in the vehicles that are financed, to maintain at least 20.0% of the credit line in cash and cash equivalents, and to maintain a minimum required balance with Ally of at least 12.5% of the daily floorplan principal balance outstanding throughDecember 31, 2022 and 15.0% effectiveJanuary 1, 2023 . We were required to pay a commitment fee upon execution of the 2022 Vehicle Floorplan Facility.
Finance Receivables
Subject to market conditions, we plan to sell finance receivables originated by UACC through asset-backed securitization transactions and forward flow arrangements. In February andJuly 2022 , UACC sold an aggregate of$523.7 million of rated asset-backed securities and$49.6 million of residual certificates in auto loan securitization transactions from securitization trusts, established and sponsored by UACC, for aggregate proceeds of$582.9 million . The trusts are collateralized by finance receivables with an aggregate principal balance of$603.5 million and had a carrying value of$534.6 million at the time of sale. These finance receivables are serviced by UACC. UACC retained 5% of the notes and residual certificates sold as required by applicable risk retention rules. InJanuary 2023 , UACC sold approximately$238.7 million of rated asset-backed securities in an auto loan securitization transaction from a securitization trust, established and sponsored by UACC for proceeds of$237.8 million . The trust is collateralized by finance receivables with an aggregate principal balance of$326.4 million . These finance receivables are serviced by UACC. As a result of current market conditions, which led to unfavorable pricing, we retained the non-investment grade securities and residual interests, which will require us to account for the 2023-1 securitization as secured borrowings and remain on balance sheet pending the sale of such retained interests. Although our long-term strategy is to structure future securitization transactions similar to the 2022-1 and 2022-2 securitization transactions and account for them as sales, market conditions may impact our ability to achieve sales accounting treatment. Depending on market conditions, future 2023 securitizations may be accounted for as secured borrowings and remain on balance sheet. As a result of increasing interest rates, the current inflationary environment and vehicle depreciation in the used automotive industry, UACC is experiencing higher loss severity in a soft securitization market. The increased loss severity could lead to reduced servicing income if UACC elects to waive monthly servicing fees going forward as it did in 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. Refer to Note 4 - Variable Interest Entities and Securitizations to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for further discussion regarding our transactions with unconsolidated variable interest entities. Warehouse Credit Facilities UACC has four senior secured warehouse facility agreements the ("Warehouse Credit Facilities") with banking institutions, including the new senior secured warehouse facility agreement entered into inNovember 2022 to fund near-prime assets. The Warehouse Credit Facilities are collateralized by eligible finance receivables and available borrowings are computed based on a percentage of eligible finance receivables. The aggregate borrowing limit is$850.0 million with maturities betweenMay 2024 andDecember 2024 . As ofDecember 31, 2022 , outstanding borrowings related to the Warehouse Credit Facilities were$229.5 million and we were in compliance with all covenants related to the warehouse credit facilities. Failure to satisfy these and or any other requirements contained within the agreements would restrict access to the Warehouse Credit Facilities and could have a material adverse effect on our financial condition, results of operations and liquidity. Certain breaches of covenants may also result in acceleration of the repayment of borrowings prior to the scheduled maturity. Refer to Note 11 - Warehouse Credit Facilities of Consolidated VIEs to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, for further discussion.
Operating Leases
We enter into various noncancelable operating lease agreements for office space,
the Company's reconditioning facility, the TDA retail location, the Company's
Sell Us Your Car centers, parking lots, other facilities, and equipment used
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in the normal course of business. Operating lease obligations were$29.9 million , with$11.3 million payable within 12 months. As ofDecember 31, 2022 , we had additional operating leases that have not yet commenced with future lease payments of approximately$16.4 million . The leases are expected to commence over the next 12 months with initial lease terms of approximately 7 years. See "Note 12-Leases," to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further detail of our obligations and the timing of expected future payments. Cash Flows from Operating, Investing, and Financing Activities The following table summarizes our cash flows for the years endedDecember 31, 2022 , 2021 and 2020: Year Ended December 31, 2022 2021 2020 (in thousands) Net cash used in operating activities$ (109,065 ) $ (568,688 ) $ (355,254 ) Net cash used in investing activities (164,212 ) (104,288 ) (11,329 ) Net cash (used in) provided by financing activities (469,488 ) 797,712 1,237,035 Net (decrease) increase in cash, cash equivalents and restricted cash (742,765 ) 124,736 870,452 Cash and cash equivalents and restricted cash at beginning of period 1,214,775 1,090,039 219,587 Cash and cash equivalents and restricted cash at end of period$ 472,010 $ 1,214,775 $ 1,090,039 Operating Activities Net cash flows used in operating activities decreased by$459.6 million , from$568.7 million for the year endedDecember 31, 2021 to$109.1 million for the year endedDecember 31, 2022 . The decrease is primarily attributable to proceeds from the sale of finance receivables held for sale for the 2022-1 and 2022-2 securitization transactions of$509.6 million , a decrease in working capital of$548.6 million , primarily related to lower inventory levels, and principal payments received on finance receivables held for sale of$64.5 million , partially offset by originations of finance receivables held for sale of$625.6 million and$29.9 million in incremental net loss after reconciling adjustments for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 . We finance a majority of our inventory with the 2022 Vehicle Floorplan Facility. In accordance withU.S. GAAP, we report all cash flows arising in connection with the 2022 Vehicle Floorplan Facility, as a financing activity in our consolidated statement of cash flows.
Investing Activities
Net cash flows used in investing activities increased$59.9 million , from$104.3 million for the year endedDecember 31, 2021 to$164.2 million for the year endedDecember 31, 2022 , primarily as a result of the UACC Acquisition inFebruary 2022 which resulted in cash outflow of$267.5 million and originations of finance receivables recorded at fair value of$56.5 million , partially offset by principal payments received on finance receivables held in consolidated VIEs of$132.4 million , proceeds from the sale of finance receivables of$43.3 million , the$75.9 million cash outflow for the year endedDecember 31, 2021 for the acquisition of the CarStory business, and principal payments received on beneficial interests of$8.3 million in 2022.
Financing Activities
Net cash flows from financing activities decreased$1,267.2 million from net cash provided by financing activities of$797.7 million for the year endedDecember 31, 2021 to net cash used in financing activities of$469.5 million for the year endedDecember 31, 2022 . The decrease was primarily related to net proceeds of$608.9 million received upon issuance of the Notes in 2021, net repayments of$419.4 million related to our Vehicle Floorplan Facility, net repayments of$192.8 million related to our secured financing agreements and repurchases of the Notes of$90.2 million , partially offset by net proceeds of$53.6 million related to our Warehouse Credit Facilities. 87
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The
preparation of consolidated financial statements requires us to make estimates,
assumptions and judgments that affect the reported amounts of assets,
liabilities, revenue, and expenses and related disclosures. On an ongoing basis,
we evaluate our estimates, including, among others, those related to income
taxes, the realizability of inventory, stock-based compensation, revenue-related
reserves, as well as impairment of goodwill and long-lived assets. We base our
estimates on historical experience, market conditions and on various other
assumptions that are believed to be reasonable. Actual results may differ from
these estimates.
The critical accounting policies that reflect our more significant judgments and
estimates used in the preparation of our consolidated financial statements
include those described in Note 2-Summary of Significant Accounting Policies and
Note 3-Revenue Recognition to our consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Except as described below, there have been no material changes to our critical
accounting policies and estimates as compared to the critical accounting
policies and estimates disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2022 .
Business Combination
We account for business combinations using the acquisition method of accounting,
which requires all assets acquired and liabilities assumed to be recorded at
their respective fair values at the date of acquisition. Any excess
consideration over the fair value of assets acquired and liabilities assumed is
recognized as goodwill. The determination of the acquisition date fair value of
the assets acquired and liabilities assumed requires significant estimates and
assumptions, such as, if applicable, forecasted revenue growth rates, pre-tax
income margins and operating cash flows, royalty rates, customer attrition
rates, obsolescence rates of developed technology, and discount rates. These
estimates are inherently uncertain and subject to refinement. We use a
discounted cash flow ("DCF") method under the income approach to measure the
fair value of these intangible assets. Under this approach, the Company
estimates future cash flows and discounts these cash flows at a rate of return
that reflects the Company's relative risk. When estimating the significant
assumptions to be used in the valuation we include consideration of current
industry information, market and economic trends, historical results of the
acquired business and other relevant factors. These significant assumptions are
forward-looking and could be affected by future economic and market conditions.
We engage the assistance of valuation specialists in connection with determining
fair values of assets acquired and liabilities assumed in a business
combination.
Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed in business combinations.Goodwill is tested for impairment annually as ofOctober 1 , or whenever events or changes in circumstances indicate that an impairment may exist. We have four reporting units: Ecommerce, Wholesale, TDA and Retail Financing. In performing our annual goodwill impairment test, we first review qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing qualitative factors, we determine that it is more likely than not that the fair value of a reporting unit is more than its carrying amount, then performing the quantitative test is unnecessary and our goodwill is not considered to be impaired. However, if based on the qualitative assessment we conclude that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we elect to bypass the optional qualitative assessment as provided for under GAAP, we proceed with performing the quantitative impairment test. When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for an individual reporting unit is influenced by a number of factors, inclusive of the carrying value of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, and the amount of time in between quantitative fair value assessments and the date of acquisition. If we perform a quantitative assessment of an individual reporting unit's goodwill, our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment when estimating future cash flows and asset fair values. The quantitative goodwill impairment test requires a determination of whether the estimated fair value of a reporting unit is less than its carrying value. We estimate the fair value of our reporting units using an 88
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income approach. The income approach is applied using the discounted cash flow method which requires (1) estimating future cash flows for a discrete projection period (2) estimating the terminal value, which reflects the remaining value that the reporting unit is expected to generate beyond the projection period and (3) discounting those amounts to present value at a discount rate which is based on a weighted average cost of capital that considers the relative risk of the cash flows. The income approach requires the use of significant estimates and assumptions, which include revenue growth rates, future gross profit margins and operating expenses used to calculate projected future cash flows, determination of the weighted average cost of capital, and future economic and market conditions. The terminal value is based on an exit revenue multiple which requires significant assumptions regarding the selection of appropriate multiples that consider relevant market trading data. We base our estimates and assumptions on our knowledge of the automotive and ecommerce industries, our recent performance, our expectations of future performance and other assumptions we believe to be reasonable. Actual future results may differ from those estimates. A material change in the underlying assumptions could result in an impairment of goodwill. We also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units. As ofMarch 31, 2022 a quantitative interim goodwill impairment assessment was performed over the Company's reporting units due to further sustained declines in the Company's and comparable companies' stock prices during the three months endedMarch 31, 2022 . 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 endedDecember 31, 2022 . No goodwill impairment charges were recorded for the years endedDecember 31, 2021 and 2020. Recently Issued and Adopted Accounting Pronouncements Refer to "Note 2-Summary of Significant Accounting Policies" to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion about new accounting pronouncements adopted and not yet adopted as of the date of this report. 89
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