Vroom, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020. Vroom operates an online used-vehicle marketplace and reports Ecommerce, Texas Direct Auto (TDA) and Wholesale segments. The quarter was materially affected by COVID-19 disruptions and the company’s June 11 IPO.
Financial performance and liquidity
Amounts below are in millions except per-share data, percentages and unit metrics.
| Metric | Q2 2019 | Q2 2020 | Six months 2019 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $260.9 | $253.1 | $496.0 | $628.9 |
| Gross profit / margin | $13.8 / 5.3% | $7.6 / 3.0% | $25.9 / 5.2% | $26.0 / 4.1% |
| Operating loss | $(31.3) | $(41.4) | $(57.5) | $(82.3) |
| Net loss | $(33.3) | $(63.2) | $(60.5) | $(104.3) |
| Net loss per share, basic and diluted | $(6.90) | $(2.00) | $(12.16) | $(5.21) |
- Q2 revenue fell 3.0% year over year, while six-month revenue rose 26.8%. Q2 retail vehicle revenue was $196.2 million; wholesale revenue was $50.9 million; product revenue was $5.7 million.
- Q2 operating expenses included $47.9 million of SG&A. Q2 results also included a $21.3 million noncash preferred-stock-warrant revaluation charge. Adjusted EBITDA, a non-GAAP measure, was a loss of $39.0 million versus a $61.5 million EBITDA loss.
- Cash and cash equivalents were $651.0 million at June 30; restricted cash was $21.9 million. The company reported $4 thousand of operating cash flow for the first half, compared with $127.9 million used in the prior-year period. Management attributed the change mainly to lower inventory and reduced working-capital needs; it should not be read as evidence of sustained operating cash generation.
- Inventory was $141.1 million, down from $205.7 million at year-end 2019. Vehicle floorplan borrowings were $109.8 million, down from $173.5 million. The facility’s borrowing capacity at June 30 was $200 million, with $90.2 million unused; the facility allows commitments up to $450 million and expires in March 2021.
- The IPO raised approximately $504.0 million net of underwriting discount and before $7.5 million of offering expenses. Preferred stock converted into common stock at the IPO. The company had an accumulated deficit of $679.4 million and reported no long-term term-loan balance.
Material changes versus prior comparable period
- Q2 Ecommerce revenue rose 45.2% to $175.6 million and units sold rose 74.1% to 6,713. Yet Ecommerce gross profit per unit fell 43.2% to $1,075, including vehicle gross profit per unit down 75.4% to $314. Management linked the pressure to COVID-era price reductions intended to clear pre-pandemic inventory. June Ecommerce gross profit per unit recovered to $1,714, versus $191 in May, according to management.
- Q2 TDA revenue fell 68.9% to $26.6 million; units sold declined 60.2% to 1,110. TDA gross profit fell 84.7% to $0.9 million. Wholesale gross profit turned to a $0.5 million loss from $0.4 million profit.
- For the first half, Ecommerce revenue nearly doubled to $408.7 million, but total gross profit was essentially flat as lower vehicle margins and weaker TDA and Wholesale results offset growth. SG&A rose 32.4% to $106.3 million, including higher marketing, compensation and outbound logistics expense.
- Reported per-share losses are affected by the IPO and the conversion of preferred shares, which substantially increased common shares outstanding; 2019 also included preferred-stock accretion attributable to common stockholders.
Outlook, management commentary and risks
- No specific numeric revenue, earnings or margin guidance is provided. Management anticipated COVID-related operating effects would continue at least through 2020 and said the ultimate duration and magnitude were uncertain. It expected Ecommerce to remain the primary growth driver and intended to rebuild inventory strategically.
- Management stated that cash and the floorplan facility were expected to fund working capital and capital expenditure needs for at least twelve months from the filing date, while noting that facility renewal or replacement financing was not assured. The company expected to continue incurring losses and investing toward profitability.
- COVID-19 reduced demand early in the crisis, disrupted reconditioning, carrier availability and vehicle delivery, and delayed titling and registration. Six of 13 third-party reconditioning centers were partly or fully closed in April. TDA’s Q2 unit sales were approximately 63.4% below Q1. Transportation costs increased as carrier capacity tightened.
- About one-third of the workforce was furloughed effective May 3; most furloughed employees had returned by early August. Salaries were restored to pre-pandemic levels by July. Marketing was substantially reduced through May, and vendor and landlord payment reductions or deferrals were negotiated.
- The May Rocket Auto agreement provides for Vroom inventory listings on Rocket’s platform, with sales conducted through Vroom. Vroom issued 183,870 shares upfront and may issue up to 8,641,914 additional shares over four years based on sales volume.
- Key risks include used-car pricing and inventory valuation, vehicle sourcing and sales velocity, reliance on a single floorplan lender and facility expiry, third-party reconditioning and logistics capacity, TDA’s geographic concentration, COVID-related demand and operations, regulation, and competition. No legal proceedings were identified as reasonably expected to have a material adverse effect, and the company reported no material off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed ineffective at June 30 because of material weaknesses in financial-reporting staffing and expertise, account reconciliation and journal-entry review, segregation of duties, and IT general controls. Management said additional analyses and post-close procedures supported the fairness of the financial statements and described remediation efforts.
Important facts for investors to verify
- Whether the June improvement in Ecommerce gross profit per unit persisted after quarter-end, and whether vehicle margins recover without sacrificing sales volume.
- Whether operating cash flow becomes sustainable once inventory is rebuilt, rather than relying on inventory reductions and IPO proceeds.
- Current availability, covenant headroom and renewal or replacement plans for the floorplan facility before its March 2021 expiry.
- The trajectory of TDA demand, third-party carrier capacity and costs, and reconditioning throughput as COVID-related disruptions evolve.
- The actual share issuance and dilution under the Rocket Auto agreement, alongside equity awards and other potential share issuance.
- Progress remediating material weaknesses and whether subsequent filings report effective disclosure and financial-reporting controls.