Vroom, Inc. 10-Q

Item 2 . Management’s Discussion and Analysis o f Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those incorporated by reference into the section titled "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (the “Annual Report”), as updated by the section titled "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. Overview Vroom is an innovative, end-to-end ecommerce platform that is transforming the used vehicle industry by offering a better way to buy and a better way to sell used vehicles. We are deeply committed to creating an exceptional experience for our customers. We are driving enduring change in the industry on a national scale. We take a vertically integrated, asset-light approach that is reinventing all phases of the vehicle buying and selling process, from discovery to delivery and everything in between. Our platform encompasses: • Ecommerce: We offer an exceptional ecommerce experience for our customers. In contrast to legacy dealerships and the peer-to-peer market, we provide consumers with a personalized and intuitive ecommerce interface to research and select from thousands of fully reconditioned vehicles. Our platform is accessible at any time on any device and provides transparent pricing, 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 auctions, consumers, rental car companies, original equipment manufacturers (“OEMs”) and dealers. We improve our ability to acquire high-demand vehicles through enhanced supply science across all our sourcing channels and we have expanded our national marketing efforts to drive consumer sourcing. In our reconditioning and logistics operations, we deploy an asset-light strategy that optimizes a combination of ownership and operation of assets by us with strategic third-party partnerships. This hybrid approach provides flexibility, agility and speed without taking on unnecessary risk and capital investment, and drives improved unit economics and operating leverage. • 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 the customer experience, analyze market dynamics at scale, calibrate our vehicle pricing and optimize our overall inventory sales velocity. On the operations side, data science and experimentation enables us to fine tune our supply, sourcing and logistics models and to streamline our reconditioning processes. Based on data from Cox Automotive, there were an estimated 37.2 million used vehicle transactions in 2020. The U.S. used automotive market is also highly fragmented, with over 42,000 dealers and millions of peer-to-peer transactions across the country. It also is 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 and cannot offer consumers what we offer. 24 Table of Contents Our Model We generate revenue through the sale of used vehicles and value-added products. We sell vehicles directly to consumers primarily through our Ecommerce segment. As the largest segment in our business, Ecommerce revenue grew 81.1% from the three months ended March 31, 2020 to the three months ended March 31, 2021, and we expect Ecommerce to continue to outgrow our other segments as it is the core focus of our growth strategy. We also sell vehicles through wholesale channels, which provide a revenue source for vehicles that do not meet our Vroom retail sales criteria. Additionally, we generate revenue through the retail sale of used vehicles and value-added products at Houston-based Texas Direct Auto, or TDA. For the three months ended March 31, 2021, our Ecommerce, Wholesale and TDA segments represented 71.4%, 20.0% and 8.1% of our total revenue, respectively. 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 any finance and protection products sold as part of a vehicle sale. Because we are paid fees on the value-added products we sell, our gross profit on such products is equal to the revenue we generate. See “—Key Operating and Financial Metrics.” Below is an explanation of how we calculate vehicle gross profit per unit and product gross profit per unit: Our profitability depends primarily on increasing unit sales and operating leverage, as well as improving unit economics. We deploy an asset-light 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, which enables us to generate additional revenue streams without taking on the risk associated with underwriting vehicle financing or protection products. As we scale, 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. Inventory Sourcing We source our vehicle inventory from a variety of channels, including auctions, consumers, rental car companies, OEMs and dealers. 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 to generate the highest sales margins and shortest inventory turns, both of which contribute to increased gross profit per unit. We generate a vast set of predictive data derived from market demand, pricing dynamics, vehicle acquisitions and subsequent sales, and we leverage that data to optimize future vehicle acquisitions, which we believe will be enhanced by the acquisition of CarStory. See “—Recent Events—CarStory Acquisition.” As we scale, we expect to continue to leverage the data at our disposal to optimize and enhance the volume and selection of vehicles in our inventory and, in turn, drive revenue growth and profitability. We are also exploring third party inventory strategies, which offers the possibility of 25 Table of Contents expand ing our sourcing channels thro ugh third party sellers while offering us attractive revenue models in an asset light, debt free structure. See “— Other Key Factors and Trends Affecting our Operating Results—Ability to drive growth by cost effectively increasing the volume and selection o f vehicles in our inventory.” Vehicle Reconditioning Before a vehicle is listed for retail sale on our platform, it undergoes a thorough reconditioning process in order to meet our Vroom retail sales criteria. The efficiency of this reconditioning process is a key element in our ability to profitably grow. To recondition vehicles, we rely on a combination of our Vroom VRC along with a network of VRCs owned and operated by third parties, and we intend to continue to expand our network of third-party VRCs. Utilizing this hybrid approach, we have increased our total reconditioning capacity to approximately 2,300 units per week as of March 31, 2021, with approximately two-thirds from our twenty-three third-party VRCs. As we increase the number of vehicles in our inventory and expand our reconditioning capacity, we expect that reconditioning costs and inbound shipping costs per unit will decrease as we benefit from economies of scale and operating leverage in reconditioning costs. See “—Other Key Factors and Trends Affecting our Operating Results—Ability to expand and optimize our reconditioning capacity to satisfy increasing demand.” Logistics Network For our logistics operations, we primarily have used national third-party carriers, which has allowed us to efficiently deliver vehicles to customers throughout the United States while focusing on expanding other critical components of our business, such as the volume and selection of vehicles in our inventory. We optimized our third-party logistics network nationally through the development of strategic carrier arrangements with national haulers and consolidated our carrier base into dedicated operating regions. This strategy enhanced the flexibility, agility and speed of our growth while reducing the need for additional capital commitments as we scaled our business. Since the start of the COVID-19 pandemic, we have experienced a reduced supply of carriers combined with increased demand for carriers from competitors, resulting in increased shipping prices and delays. In response to these disruptions, and to further enhance the quality of our logistics operations and our customer experience, we have been accelerating our strategy to optimize our hybrid approach by expanding our proprietary logistics network. Initially we have been prioritizing investment in our last-mile delivery operations where we can have the greatest impact on the customer experience. We also have invested in short-haul trucks to make regional deliveries from our last mile hubs, and have begun to invest in long-haul vehicles for hub-to-hub shipments. Consistent with our hybrid approach, as we scale our business, we continue to strategically combine the operation of our expanded proprietary fleet with the use of third-party carriers, which we expect will enable us to both accommodate our growth and provide the highest level of customer service. See “—Other Key Factors and Trends Affecting our Operating Results—Ability to expand and develop our logistics network.” Value-Added Products We generate revenue by earning fees for selling value-added products to customers in connection with vehicle sales. Currently, our third-party value-added product offering consists of finance and protection products, including financing from third-party lenders for our customers’ vehicle purchases, as well as sales of vehicle service contracts, GAP protection and tire and wheel coverage. As we scale our business, we intend to introduce additional value-added products that will be attractive to our customers and drive revenue and profitable growth. We expect that both expanded product offerings and increased attachment rates in value-added product sales will have a positive impact on our profitability. See “—Other Key Factors and Trends Affecting our Operating Results—Ability to increase and better monetize value-added products.” Our Segments We manage and report operating results through three reportable segments: • Ecommerce (71.4% of total revenue for the three months ended March 31, 2021): 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. • Wholesale (20.0% of total revenue for the three months ended March 31, 2021): The Wholesale segment represents sales of used vehicles through wholesale channels. • TDA (8.1% of total revenue for the three months ended March 31, 2021): The TDA segment represents retail sales of used vehicles from TDA and fees earned on sales of value-added products associated with those vehicle sales. 26 Table of Contents Gross profit is defined as revenue less cost of sales for each segment. Reflected below is a summary of segment revenue and segment gross profit for the three months ended March 31, 202 1 and 20 20: Three Months Ended March 31, 2021 2020 (1) (in thousands) Revenue: Ecommerce $ 422,308 $ 233,172 Wholesale 118,024 55,578 TDA 47,587 86,582 All Other 3,199 440 Total revenue $ 591,118 $ 375,772 Gross profit (loss): Ecommerce $ 31,837 $ 14,267 Wholesale (282 ) (1,292 ) TDA 2,791 5,258 All Other 1,830 154 Total gross profit $ 36,176 $ 18,387 (1) We reclassified other revenue and other gross profit related to the vehicle repair service at TDA from the TDA reportable segment to the “All Other” category to conform to current year presentation. Key Operating and Financial Metrics We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial forecasts and make strategic decisions. We believe these operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with U.S. Generally Accepted Accounting Principles, or U.S. GAAP. You should read the key operating and financial metrics in conjunction with the following discussion of our results of operations and together with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. We focus heavily on metrics related to unit economics as improved gross profit per unit is a key element of our growth and profitability strategies. The calculation of our key operating and financial metrics is straightforward and does not rely on significant projections, estimates or assumptions. Nevertheless, each of our key operating and financial metrics has limitations because each focuses specifically on only one standard by which to evaluate our business, without taking into account other applicable standards, performance measures or operating trends by which our business could be evaluated. Accordingly, no single metric should be viewed as the bellwether by which our business should be measured. Rather, each key operating and financial metric should be considered in conjunction with other metrics and components of our results of operations, such as each of the other key operating and financial metrics and our revenues, inventory, loss from operations and segment results. Three Months Ended March 31, 2021 2020 Ecommerce units sold 15,504 7,930 Vehicle Gross Profit per ecommerce unit $ 1,151 $ 845 Product Gross Profit per ecommerce unit 903 954 Total Gross Profit per ecommerce unit $ 2,054 $ 1,799 Average monthly unique visitors 1,550,258 947,014 Listed vehicles 11,280 5,107 Ecommerce average days to sale 83 68 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 through the TDA and Wholesale segments. As we continue to expand our ecommerce business, we expect that 27 Table of Contents ecommerce units sold will be the primary driver of our revenue growth. Additionally, each vehicle sale through our ecommerce platform also creates the opportunity to leverage such sale to sell value-added products. Continued ecommerce growth will also increase the number of trade-in vehicles acquired 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. As we continue to expand our ecommerce business, we believe Vehicle GPPU will be 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 value-added products we sell, our gross profit is equal to the revenue we generate from the sale of value-added products. We plan to continue to introduce initiatives to increase the attachment rates of value-added products and expand our offerings of value-added products which will grow our Product GPPU. Total Gross Profit per Ecommerce Unit Total Gross Profit per ecommerce unit, which we refer to as Total GPPU, for a given period is calculated as the sum of Vehicle GPPU and Product GPPU. We view Total GPPU as a key metric of the profitability of our Ecommerce segment. Average Monthly Unique Visitors Average monthly unique visitors is defined as the average number of individuals who access our ecommerce platform within a calendar month. We calculate the average monthly unique visitors over any period by dividing the aggregate monthly unique visitors during such period by the number of months in that period. We use average monthly unique visitors to measure the quality of our customer experience, the effectiveness of our marketing campaigns and customer acquisition as well as the strength of our brand and market penetration. Average monthly unique visitors is calculated using data provided by Google Analytics. The computation of average monthly unique visitors excludes individuals who access our platform multiple times within a calendar month, counting such individuals only one time for purposes of the calculation. If an individual accesses our ecommerce platform using different devices or different browsers on the same device within a given month, the first access through each such device or browser is counted as a separate monthly unique visitor. Listed Vehicles We define listed vehicles as the aggregate number of vehicles listed on our platform at any given point in time. Listed vehicles includes vehicles that are available for sale, pending sale and “coming soon”. Listed vehicles is a key indicator of our performance because we believe that the number of vehicles listed on our platform is a key driver of vehicle sales and revenue growth. Increasing the number of vehicles listed on our platform results in a greater selection of vehicles for our customers, creating demand and increasing conversion. 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 through the TDA and Wholesale segments. 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. 28 Table of Contents Non-GAAP Financial Measures In addition to our results determined in accordance with U.S. GAAP, we believe EBITDA and Non-GAAP net loss per share, as adjusted, which are non-GAAP financial measures, are useful in evaluating our operating performance. 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 and Non-GAAP net loss per share, as adjusted are supplemental performance measures that our management uses to assess our operating performance and the operating leverage in our business. Because EBITDA and Non-GAAP net loss per share, as adjusted facilitate internal comparisons of our historical operating performance on a more consistent basis, we use these measures for business planning purposes. We are not presenting Adjusted EBITDA, Adjusted loss from operations, Non-GAAP net loss, and Non-GAAP net loss per share as there were no relevant adjustments for the three months ended March 31, 2021 and 2020. EBITDA We calculate EBITDA as net loss before interest expense, interest income, income tax expense and depreciation and amortization expense. The following table presents a reconciliation of EBITDA to net loss, which is the most directly comparable U.S. GAAP measure: Three Months Ended March 31, 2021 2020 (in thousands) Net loss $ (77,189 ) $ (41,059 ) Adjusted to exclude the following: Interest expense 3,812 2,826 Interest income (2,296 ) (1,956 ) Provision for income taxes 156 53 Depreciation and amortization expense 2,906 970 EBITDA $ (72,611 ) $ (39,166 ) 29 Table of Contents N on-GAAP n et loss per share, as adjusted Non-GAAP net loss per share, as adjusted has been computed to give effect to, as of the beginning of each period presented, (i) the shares of common stock issued in connection with our IPO (ii) the automatic conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock that occurred upon the consummation of our IPO and (iii) the shares of common stock issued in connection with our follow-on public offering, all of which occurred in 2020. The following table presents a reconciliation of Non-GAAP net loss per share, as adjusted to net loss per share, which is the most directly comparable U.S. GAAP measure: Three Months Ended March 31, 2021 2020 Net loss $ (77,189 ) $ (41,059 ) Net loss per share, basic and diluted $ (0.57 ) $ (4.85 ) Weighted-average number of shares outstanding used to compute net loss per share, basic and diluted 135,497,511 8,471,456 Add: unweighted adjustment for common stock issued in connection with IPO — 24,437,500 Add: unweighted adjustment for conversion of redeemable convertible preferred stock in connection with IPO — 85,533,394 Add: unweighted adjustment for common stock issued in connection with follow-on public offering — 10,800,000 Less: Adjustment for the impact of the above items already included in weighted-average number of shares outstanding for the periods presented — — Weighted-average number of shares outstanding used to compute net loss per share, as adjusted, basic and diluted 135,497,511 129,242,350 Non-GAAP net loss per share, as adjusted, basic and diluted $ (0.57 ) $ (0.32 ) Recent Events CarStory Acquisition On January 7, 2021, we completed the acquisition of 100% of Vast Holdings, Inc. (d/b/a CarStory), a leader in AI-powered analytics and digital services for automotive retail. Leveraging its machine learning, informed by more than 7 million listings per day and more than 18 million consumer sessions per month, CarStory brings the industry’s most complete and accurate view of predictive market data to our national ecommerce and vehicle operations platform. We expect CarStory to continue to drive automotive retail innovation by aggregating, optimizing and distributing current market data from thousands of automotive sources and offering its digital retailing services to dealers, top automotive financial services companies and household names in automotive industry research and retailing. The acquisition date fair value of the consideration transferred was approximately $117.1 million, comprised of $77.0 million in cash, $39.1 million of common stock issued, and $1.0 million of unvested stock options assumed. Update on the Impact of the COVID-19 Pandemic Measures implemented by governmental authorities around the world to reduce the spread of COVID-19 disrupted our operations and adversely affected our financial performance beginning late in the first quarter of 2020. After the initial disruption in our ecommerce operations, the used vehicle market began to recover and consumer demand for used vehicles increased and now exceeds pre-pandemic levels. This recovery has been bolstered by the introduction of COVID-19 vaccines nationwide. 30 Table of Contents We believe the COVID-19 pandemic has reinforced our business model and we have been able to navigate the impact of COVID-19 on our business to date. However, the full extent of the future impact of the COVID-19 pandemic on our operational and financial performance is currently uncertain and will depend on many factors outside our control, including, without limitation, the timing, extent, trajectory and duration of the pandemic; the availability, adoption and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for used vehicles. We will continue to monitor and assess the impact of the COVID-19 pandemic on our business and our results of operations and financial condition as the pandemic continues to evolve. See Pa rt I, Item 1A of our Annual Report under the heading “Risk Factors” for more information. 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 utilize data science to drive revenue growth by cost effectively increasing the volume and selection of vehicles in our inventory Our growth is primarily driven by vehicle sales. Vehicle sales growth, in turn, is largely driven by the volume of inventory and the selection of vehicles listed on our platform. Accordingly, we believe that having the appropriate volume and mix of vehicle inventory is critical to our ability to drive growth. The continued growth of our vehicle inventory 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. 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. The acquisition of CarStory will enhance our predictive market data capabilities. As we continue to invest in our operational efficiency and data analytics, we expect that we will continue to cost effectively increase the volume and optimize the selection of our ecommerce inventory. Our data analytics are complex models that incorporate numerous assumptions and predictions about consumer and industry dynamics. As with all predictions, the output of our data analytics is subject to inherent uncertainty and reflects judgment and expertise when providing data-driven decisions based on those analytics. Ability to capitalize on the continued migration of vehicle purchasers to ecommerce platforms through data-driven marketing efforts While the overall ecommerce penetration rate in used vehicle sales remains low, over the last several years, ecommerce used vehicle sales have experienced significant growth. There has been a shift in consumer buying patterns towards more convenient, personalized, and on-demand purchases, as well as a demand for ecommerce across more diverse categories, including the used vehicle market. We expect that the ecommerce model for buying and selling used vehicles will continue to grow. Our ability to continue to benefit from this trend will be an important driver of our future performance. We seek to improve our brand awareness among consumers through national marketing campaigns in order to strengthen our customer acquisition funnel. We also use digital performance marketing such as search engine marketing, automotive aggregator sites and social media to acquire customers more cost effectively. Our aggregate marketing spend has significantly increased over time and we expect to continue to invest in both national brand marketing and performance marketing efforts. As we leverage our national brand, we believe this investment in marketing spend will drive additional demand and sales. We also believe that we have the ability to drive down the cost of acquisition per unit sold by increasing the efficiency of our marketing spend. Ability to convert visitors to our platform into customers 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. Our ability to drive higher customer conversion depends on our ability to make our platform a compelling choice for consumers based on our functionalities and consumer offerings. 31 Table of Contents Data analytics and experimentation drive decision making across all of our conversion 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 preferenc es and try to create a more tailored ecommerce experience. Increased conversion also depends on our ability to provide the necessary customer service and sales support to respond to increased demand. Our ongoing investment in our sales and sales support operations includes investments in people, processes and technology. We are continuing to invest in (1) people, to mitigate bottlenecks; (2) in our processes, to remove friction and increase sales flow; and (3) in technology, to automate and improve our customer experience and drive conversion. We have continued to expand our sales and sales support team and expect to continue expanding these capabilities commensurate with our expected sales growth throughout the remainder of 2021. We also recently engaged two additional customer service providers to expand our customer service operations as we scale our business. As we continue to invest in our brand and improve the customer experience, we expect that we will attract more visitors, improve conversion and drive greater sales. Ability to optimize the mix of inventory sources to drive increased gross profit and improvements to our unit economics We strategically source inventory from auctions, consumers, rental car companies, OEMs and dealers. Consumers and auctions represent the vast majority of our inventory sources, accounting for approximately 54% and 37% of our retail inventory sold for the three months ended March 31, 2021, 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 maximizes our average gross profit per unit and improves 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 seek to increase the percentage of vehicle sales that we source from consumers. Furthermore, we are currently experiencing unprecedented market conditions, caused in part by the shortage of microchips and delays in new car manufacturing, which increases demand for used vehicles, putting downward pressure on supply and upward pressure on wholesale pricing. As used vehicle supply is constrained and wholesale pricing is high in traditional channels, we will continue to focus on acquiring vehicles from consumers. Our ability to increase the percentage of inventory sourced directly from consumers will depend on the popularity and success of our ecommerce platform. In order to continue to increase the percentage of vehicles that we source directly from consumers, we also have expanded our national marketing efforts that are focused on our Sell Us Your Car ® proposition, which we believe will result in more customers gaining familiarity with our platform. We expect that, as consumers experience the convenience of our platform to sell or trade in their used vehicles, the percentage of inventory we source directly from consumers will continue to grow. We are also exploring third-party inventory strategies, which offers the possibility of expanding our sourcing channels through third party sellers while offering us attractive revenue models in an asset light, debt free structure. Ability to expand and optimize our reconditioning capacity to satisfy increasing demand 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 expand and optimize our reconditioning capacity to satisfy increasing customer demand. We employ a hybrid approach that combines the use of our Vroom VRC and third-party VRCs to best meet our reconditioning needs. As we continue to grow our business, we intend to continue to increase reconditioning capacity and operational efficiency through third-party VRC locations. Additionally, our use of third-party VRCs to recondition vehicles allows us to avoid additional capital expenditures, quickly increase capacity, maintain greater operational flexibility and broaden our geographic footprint to drive lower logistics costs. We have continued to expand our third-party VRC operations and, as of the date of this Quarterly Report on Form 10-Q, have a total of twenty-three third-party VRCs throughout the U.S. We leverage our data analytics and deep industry experience to strategically select VRC locations where we believe there is the highest supply and demand for our vehicles. We expect that the increase in reconditioning capacity and investment in technology will lower our reconditioning costs per unit and drive greater operational efficiency, higher gross profit per unit and improved unit economics over time. 32 Table of Contents Ability to expand and develop our logistics network We primarily use third-party carriers and have optimized our third-party logistics network nationwide through the development of strategic carrier arrangements with national haulers and the consolidation of our carrier base into a smaller number of carriers in dedicated operating regions. We expect that these enhanced logistics operations, combined with the expansion of strategically located VRCs, will drive efficiency in our logistics operations. Our VRCs also serve as pooling points to aggregate acquired vehicles and we are using certain VRCs as hubs for staging vehicles for last-mile delivery to customers, which we expect to provide an improved experience for customers. As of March 31, 2021, we had eighteen hubs and we delivered over 16% of our ecommerce units sold with our proprietary last-mile service. Recently, as a result of the continued prevalence of the COVID-19 pandemic, we have experienced a reduced supply of carriers combined with increased demand for carriers from competitors, resulting in increased shipping prices and delays. In response to these disruptions, and to further enhance the quality of our logistics operations and our customer experience, we are accelerating our strategy to optimize our hybrid approach by expanding our proprietary logistics network. Currently, we are prioritizing investment in our last-mile delivery operations where we can have the greatest impact on the customer experience. We also have invested in short-haul trucks to make regional deliveries from our last mile hubs, and have begun to invest in long-haul vehicles for hub-to-hub shipments. As we invest in our expanded logistics operations, we expect to incur increased operating expenses and capital expenditures associated with purchasing or leasing fleet vehicles, leasing space for delivery hubs, hiring qualified drivers, and operating and maintaining fleet vehicles, offset in part by reduced third-party logistics expense. Consistent with our hybrid approach, we continue to strategically combine the operation of our expanded proprietary fleet with the use of third-party carriers, which we expect will enable us to both accommodate our growth and provide the highest level of customer service. Over time, as our business scales, 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 increase and better monetize value-added products Our offering of value-added products is an integral part of providing a seamless vehicle-buying experience to our customers. These products provide added revenue streams for us as well as offering convenience, assurance and efficiency for our customers. We sell our third-party value-added products through our strategic relationships with multiple lenders and other third parties who bear the incremental risks associated with the underwriting of finance and protection products. We have entered into strategic partnerships with lenders such as Chase, Ally, and Santander which have contributed to improvements in Product GPPU. Additionally, through our on-going data analytics, experimentation and further development of our ecommerce technology, we expect to increase attachment rates of our existing value-added products while finding new opportunities to include additional finance and protection products, as well as other value-added 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. We expect that, as we scale our business, we will increase the breadth and variety of value-added products offered to customers and improve attachment rates to our vehicle sales, which in turn will grow revenue and drive profitability. Seasonality Used vehicle sales are seasonal. The used vehicle industry typically experiences an increase in sales early in the calendar year and reaches its highest point late in the first quarter and early in the second quarter. Vehicle sales then level off through the rest of the year, with the lowest level of sales in the fourth quarter. This seasonality has historically corresponded with the timing of income tax refunds, which are an important source of funding for vehicle purchases. Additionally, used vehicles depreciate at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. In line with these macro trends, our gross profit per unit has historically been higher in the first half of the year when compared to the second half of the year. See “Risk Factors—Risks Related to Our Financial Condition and Results of Operations—We may experience seasonal and other fluctuations in our quarterly results of operations, which may not fully reflect the underlying performance of our business” in our Annual Report. 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, are 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. 33 Table of Contents The number of units sold depends on the volume of inventory and the selection of vehicles listed on our ecommerce platform, our ability to a ttract new customers, our brand awareness and our ability to expand our reconditioning operations and logistics network. 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. We have begun to strategically take advantage of a broader portion of the used vehicle market by adding more lower priced vehicles to our inventory. As a data-driven company, we acquire inventory based upon demand predicted by our data analytics. Wholesale vehicle revenue We sell vehicles that do not meet our Vroom retail sales criteria through wholesale channels. Vehicles sold through wholesale channels are acquired from customers who trade-in their vehicles when making a purchase from us, 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 value-added products to our customers in connection with vehicle sales, including fees earned on customer vehicle financing from third-party lenders and fees earned on sales of other value-added products, such as vehicle service contracts, GAP protection and tire and wheel coverage. We earn fees on these 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. Other revenue Other revenue consists of labor and parts revenue earned by us for vehicle repair services at TDA and, commencing in the first quarter of 2021, revenue from CarStory. See Note 3—Revenue Recognition to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Cost of sales 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. Total gross profit Total gross profit is defined as total revenue less costs associated with such revenue. 34 Table of Contents 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 and professional fees for accounting, auditing, tax, legal and consulting services. We expect that our SG&A expenses will increase in the future as we expand our operations, including our proprietary logistics operations, hire additional employees and continue to increase our marketing spend. We have continued to expand our sales and sales support team, processes and technology and expect to continue to expand these capabilities commensurate with our expected sales growth throughout the remainder of 2021. We also recently engaged two additional customer service providers to expand our customer service operations as we scale our business. We also will continue to incur increased expenses associated with being a public company, including costs of accounting, audit, legal, regulatory and tax-related services associated with maintaining compliance with SEC and Nasdaq requirements, director and officer insurance costs, and investor and public relations costs. Depreciation and amortization Our depreciation and amortization expense primarily includes: depreciation related to our leasehold improvements and company vehicles; 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 is included in cost of sales in the condensed consolidated statements of operations. Interest expense Our interest expense includes interest expense related to our vehicle floorplan facility with Ally Bank and Ally Financial (the “2020 Vehicle Floorplan Facility”), as discussed below, which is used to finance our inventory. Interest Income Interest income primarily represents interest credits earned on cash deposits maintained in relation to our 2020 Vehicle Floorplan Facility as well as interest earned on cash and cash equivalents. Results of Operations The following table presents our consolidated results of operations for the periods indicated: Three Months Ended March 31, 2021 2020 % Change (in thousands) Revenue: Retail vehicle, net $ 454,323 $ 308,710 47.2 % Wholesale vehicle 118,024 55,578 112.4 % Product, net 15,572 11,044 41.0 % Other 3,199 440 627.0 % Total revenue 591,118 375,772 57.3 % Cost of sales 554,942 357,385 55.3 % Total gross profit 36,176 18,387 96.7 % Selling, general and administrative expenses 109,114 58,380 86.9 % Depreciation and amortization 2,594 966 168.5 % Loss from operations (75,532 ) (40,959 ) 84.4 % Interest expense 3,812 2,826 34.9 % Interest income (2,296 ) (1,956 ) 17.4 % Revaluation of stock warrant — (790 ) (100.0 )% Other income, net (15 ) (33 ) (54.5 )% Loss before provision for income taxes (77,033 ) (41,006 ) 87.9 % Provision for income taxes 156 53 194.3 % Net loss $ (77,189 ) $ (41,059 ) 88.0 % 35 Table of Contents Segments We manage and report operating results through three reportable segments: • Ecommerce (71.4% of total revenue for the three months ended March 31, 2021): 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. • Wholesale (20.0% of total revenue for the three months ended March 31, 2021): The Wholesale segment represents sales of used vehicles through wholesale channels. • TDA (8.1% of total revenue for the three months ended March 31, 2021): The TDA segment represents retail sales of used vehicles from TDA and fees earned on sales of value-added products associated with those vehicle sales. 36 Table of Contents Three Months Ended March 31, 2021 and 2020 Ecommerce The following table presents our Ecommerce segment results of operations for the periods indicated: Three Months Ended March 31, 2021 2020 Change % Change (in thousands, except unit data and average days to sale) Ecommerce units sold 15,504 7,930 7,574 95.5 % Ecommerce revenue: Vehicle revenue $ 408,314 $ 225,606 $ 182,708 81.0 % Product revenue 13,994 7,566 6,428 85.0 % Total ecommerce revenue $ 422,308 $ 233,172 $ 189,136 81.1 % Ecommerce gross profit: Vehicle gross profit $ 17,843 $ 6,701 $ 11,142 166.3 % Product gross profit 13,994 7,566 6,428 85.0 % Total ecommerce gross profit $ 31,837 $ 14,267 $ 17,570 123.2 % Average vehicle selling price per ecommerce unit $ 26,336 $ 28,450 $ (2,114 ) (7.4 )% Gross profit per ecommerce unit: Vehicle gross profit per ecommerce unit $ 1,151 $ 845 $ 306 36.2 % Product gross profit per ecommerce unit 903 954 (51 ) (5.3 )% Total gross profit per ecommerce unit $ 2,054 $ 1,799 $ 255 14.2 % Ecommerce average days to sale 83 68 15 22.1 % Ecommerce units Ecommerce units sold increased 7,574, or 95.5%, from 7,930 for the three months ended March 31, 2020 to 15,504 for the three months ended March 31, 2021. This increase was attributable to higher inventory levels, strong national brand recognition driven by our national advertising campaign, an acceleration in the popularity of our business model due to disruptions related to the COVID-19 pandemic, as well as further process improvements in our ecommerce platform. Average monthly unique visitors to our website grew from 947,014 for the three months ended March 31, 2020 to 1,550,258 for the three months ended March 31, 2021, representing year over year growth of 63.7%. We expect ecommerce units sold to continue to grow in the future as we increase our inventory selection and marketing efforts as well as improve conversion. Ecommerce average days to sale increased from 68 days for the three months ended March 31, 2020 to 83 days for the three months ended March 31, 2021. The increase is primarily driven by a continuation of the constraints experienced in the fourth quarter of 2020 in sales support meeting the accelerating demand, the sale of aged inventory, and to a lesser extent due to an increase in consumer sourced vehicles, which generally take longer to deliver to our VRCs than auction sourced vehicles. We expect to continue to invest in consumer support functions and related technology and to continue to improve the sales and logistics processes. Vehicle Revenue Ecommerce vehicle revenue increased $182.7 million, or 81.0%, from $225.6 million for the three months ended March 31, 2020 to $408.3 million for the three months ended March 31, 2021. The increase in ecommerce vehicle revenue was primarily attributable to the 7,574 increase in ecommerce units sold, which increased vehicle revenue by $215.5 million, partially offset by a lower ASP per unit, which decreased from $28,450 for the three months ended March 31, 2020 to $26,336 for the three months ended March 31, 2021 and decreased vehicle revenue by $32.8 million. We expect to continue to sell vehicles with a lower ASP per unit than historical levels and we expect ecommerce vehicle revenue to continue to grow driven by increases in ecommerce units sold. 37 Table of Contents Product Revenue Ecommerce product revenue increased $6.4 million, or 85.0%, from $7.6 million for the three months ended March 31, 2020 to $14.0 million for the three months ended March 31, 2021. The increase in ecommerce product revenue was primarily attributable to the 7,574 increase in ecommerce units sold, which increased product revenue by $7.2 million, partially offset by a slight decrease in product revenue per unit, which decreased product revenue by $0.8 million. We expect ecommerce product revenue will continue to grow in the future driven by increases in ecommerce units sold, new product offerings, initiatives to improve product attachment rates and increases in per unit profit. Vehicle Gross Profit Ecommerce vehicle gross profit increased $11.1 million, or 166.3%, from $6.7 million for the three months ended March 31, 2020 to $17.8 million for the three months ended March 31, 2021. The increase in vehicle gross profit was primarily attributable to the 7,574 increase in ecommerce units sold, which increased vehicle gross profit by $6.4 million as well as a $306 increase in vehicle gross profit per unit, which increased vehicle gross profit by $4.7 million. Vehicle gross profit per unit increased from $845 for the three months ended March 31, 2020 to $1,151 for the three months ended March 31, 2021, primarily attributable to improvements in reconditioning costs as well as a higher inventory reserve in the first quarter of 2020 due to the beginning of the COVID-19 pandemic . As we continue to mature our infrastructure and increase and optimize our network of VRCs, we expect ecommerce vehicle gross profit per unit to increase in the future driven by optimizing our acquisition strategy and reducing costs in logistics and reconditioning. Product Gross Profit Ecommerce product gross profit increased $6.4 million, or 85.0%, from $7.6 million for the three months ended March 31, 2020 to $14.0 million for the three months ended March 31, 2021. The increase in ecommerce product gross profit was primarily attributable to the 7,574 increase in ecommerce units sold which increased product gross profit by $7.2 million, partially offset by a slight decrease in product revenue per unit, which decreased product revenue by $0.8 million. We expect ecommerce product revenue will continue to grow in the future driven by increases in ecommerce units sold, new product offerings, initiatives to improve product attachment rates and increases in per unit profit. Wholesale The following table presents our Wholesale segment results of operations for the periods indicated: Three Months Ended March 31, 2021 2020 Change % Change (in thousands, except unit data) Wholesale units sold 8,641 4,685 3,956 84.4 % Wholesale revenue $ 118,024 $ 55,578 $ 62,446 112.4 % Wholesale gross loss $ (282 ) $ (1,292 ) $ 1,010 (78.2 )% Average selling price per unit $ 13,659 $ 11,863 $ 1,796 15.1 % Wholesale gross loss per unit $ (33 ) $ (276 ) $ 243 (88.0 )% Wholesale Units Wholesale units sold increased 3,956, or 84.4%, from 4,685 for the three months ended March 31, 2020 to 8,641 for the three months ended March 31, 2021, primarily driven by an increase of wholesale grade units purchased from consumers, an increase in the number of trade-in vehicles as a result of the increase in number of ecommerce units sold, and the liquidation of the remaining aged inventory that commenced in the fourth quarter of 2020. Wholesale Revenue Wholesale revenue increased $62.4 million, or 112.4%, from $55.6 million for the three months ended March 31, 2020 to $118.0 million for the three months ended March 31, 2021. The increase was primarily attributable to the 3,956 increase in wholesale units sold, which increased wholesale revenue by $46.9 million, as well as a higher ASP per wholesale unit, which increased from $11,863 for the three months ended March 31, 2020 to $13,659 for the three months ended March 31, 2021 and increased wholesale revenue by $15.5 million. 38 Table of Contents Wholesale Gross Loss Wholesale gross loss decreased $1.0 million from $1.3 million for the three months ended March 31, 2020 to $0.3 million for the three months ended March 31, 2021. The decrease was primarily attributable to a $243 decrease in wholesale gross loss per unit, which decreased wholesale gross loss by $2.1 million, partially offset by an increase in wholesale units sold, which increased wholesale gross loss by $1.1 million. The decrease in wholesale gross loss per unit was primarily attributable to higher sales margins during the three months ended March 31, 2021 as a result of improved wholesale market conditions as well as a higher inventory reserve in the first quarter of 2020 due to the beginning of the COVID-19 pandemic . TDA The following table presents our TDA segment results of operations for the periods indicated: Three Months Ended March 31, 2021 2020 (1) Change % Change (in thousands, except unit data and average days to sale) TDA units sold 1,775 3,035 (1,260 ) (41.5 )% TDA revenue: Vehicle revenue $ 46,009 $ 83,105 $ (37,096 ) (44.6 )% Product revenue 1,578 3,477 (1,899 ) (54.6 )% Total TDA revenue $ 47,587 $ 86,582 $ (38,995 ) (45.0 )% TDA gross profit: Vehicle gross profit $ 1,213 $ 1,781 $ (568 ) (31.9 )% Product gross profit 1,578 3,477 (1,899 ) (54.6 )% Total TDA gross profit $ 2,791 $ 5,258 $ (2,467 ) (46.9 )% Average vehicle selling price per TDA unit $ 25,921 $ 27,382 $ (1,461 ) (5.3 )% Gross profit per TDA unit: Vehicle gross profit per TDA unit $ 683 $ 586 $ 97 16.6 % Product gross profit per TDA unit 889 1,146 (257 ) (22.4 )% Total gross profit per TDA unit $ 1,572 $ 1,732 $ (160 ) (9.2 )% TDA average days to sale 56 50 6 12.0 % (1) We reclassified other revenue and gross profit related to the vehicle repair service at TDA from the TDA reportable segment to the “All Other” category to conform to current year presentation. TDA units TDA units sold decreased 1,260, or 41.5%, from 3,035 for the three months ended March 31, 2020 to 1,775 for the three months ended March 31, 2021. The decrease was a result of reduced inventory at the TDA location as the ecommerce business continues to scale. Vehicle Revenue TDA vehicle revenue decreased $37.1 million, or 44.6%, from $83.1 million for the three months ended March 31, 2020 to $46.0 million for the three months ended March 31, 2021. The decrease in TDA vehicle revenue was primarily due to the 1,260 decrease in TDA units sold, which decreased TDA vehicle revenue by $34.5 million and a lower ASP per unit, which decreased from $27,382 for the three months ended March 31, 2020 to $25,921 for the three months ended March 31, 2021 and decreased revenue by $2.6 million. Product Revenue TDA product revenue decreased $1.9 million, or 54.6%, from $3.5 million for the three months ended March 31, 2020 to $1.6 million for the three months ended March 31, 2021. The decrease in TDA product revenue was primarily attributable to the 1,260 decrease in TDA units sold, which decreased TDA product revenue by $1.4 million, as well as the decrease in product revenue per unit, which decreased revenue by $0.5 million. 39 Table of Contents Vehicle Gross Profit TDA vehicle gross profit decreased $0.6 million, or 31.9%, from $1.8 million for the three months ended March 31, 2020 to $1.2 million for the three months ended March 31, 2021. The decrease in vehicle gross profit was primarily attributable to the 1,260 decrease in TDA units sold, which decreased TDA vehicle gross profit by $0.7 million, partially offset by a $97 increase in TDA vehicle gross profit per unit, which increased vehicle gross profit by $0.1 million. Vehicle gross profit per unit increased from $586 for the three months ended March 31, 2020 to $683 for the three months ended March 31, 2021, primarily attributable to improvements in reconditioning costs as well as a higher inventory reserve in the first quarter of 2020 due to the beginning of the COVID-19 pandemic . Product Gross Profit TDA product gross profit decreased $1.9 million, or 54.6% from $3.5 million for the three months ended March 31, 2020 to $1.6 million for the three months ended March 31, 2021. The decrease in TDA product gross profit was primarily attributable to the 1,260 decrease in TDA units sold, which decreased TDA product gross profit by $1.4 million as well as the decrease in product gross profit per unit, which decreased gross profit by $0.5 million. Selling, general and administrative expenses Three Months Ended March 31, 2021 2020 Change % Change (in thousands) Compensation & benefits $ 39,870 $ 20,321 $ 19,549 96.2 % Marketing expense 29,558 17,915 11,643 65.0 % Outbound logistics (1) 15,366 5,792 9,574 165.3 % Occupancy and related costs 3,922 2,697 1,225 45.4 % Professional fees 3,998 2,459 1,539 62.6 % Other 16,400 9,196 7,204 78.3 % Total selling, general & administrative expenses $ 109,114 $ 58,380 $ 50,734 86.9 % (1) Outbound logistics includes fuel, maintenance and depreciation related to operating our proprietary logistics network, and third party transportation fees, except the portion related to inbound transportation from the point of acquisition to the relevant reconditioning facility, which is included in cost of sales Selling, general and administrative expenses increased $50.7 million, or 86.9%, from $58.4 million for the three months ended March 31, 2020 to $109.1 million for the three months ended March 31, 2021. The increase was primarily due to: • a $19.5 million increase in compensation and benefits as a result of an increase in headcount, an increase in variable fees for third-party sales and sales support providers, as well as a $2.2 million increase in stock-based compensation from $0.6 million for the three months ended March 31, 2020 to $2.8 million for the three months ended March 31, 2021, as a result of our initial public offering (the “IPO”); • an $11.6 million increase in marketing expense as we expanded our national broad-reach advertising and aired our first Super Bowl commercial; • a $9.6 million increase in outbound logistics costs attributable to the growth in ecommerce units sold, which increased outbound logistics costs by $5.5 million, and increases in market rates of logistics providers, which increased outbound logistics costs by $4.1 million; and • a $7.2 million increase in other selling, general, and administrative expenses primarily related to additional insurance costs associated with being a publicly traded company and volume-based fees for software licenses as our business continues to scale. We expect selling, general and administrative expenses to increase in the future as we scale our business and sell more ecommerce units. We also expect to continue to invest in and improve our customer experience and invest in expanding our proprietary logistics network including our last-mile delivery operations. 40 Table of Contents Depreciation and amortization Depreciation and amortization expenses increased $1.6 million, or 168.5%, from $1.0 million for the three months ended March 31, 2020 to $2.6 million for the three months ended March 31, 2021. The increase was primarily due to amortization expense of intangible assets acquired as part of the acquisition of the CarStory business on January 7, 2021. Interest expense Interest expense increased $1.0 million, or 34.9%, from $2.8 million for the three months ended March 31, 2020 to $3.8 million for the three months ended March 31, 2021. The increase was primarily attributable to a higher outstanding balance of the 2020 Vehicle Floorplan Facility due to the increase in vehicle inventory levels as the business continues to scale. Interest income Interest income increased $0.3 million, or 17.4%, from $2.0 million for the three months ended March 31, 2020 to $2.3 million for the three months ended March 31, 2021. The increase in interest income was primarily driven by higher cash and cash equivalent balances for the three months ended March 31, 2021 as compared to March 31, 2020, as a result of the IPO and follow-on public offering. Liquidity and Capital Resources Our operations historically have been financed primarily from the sale of redeemable convertible preferred stock and borrowings under our 2020 Vehicle Floorplan Facility. On June 11, 2020, we completed our IPO in which we sold 24,437,500 shares of our common stock, which included 3,187,500 shares sold pursuant to the exercise by the underwriters of an over-allotment option to purchase additional shares, for proceeds of $504.0 million, net of the underwriting discount and before deducting offering expenses of $7.5 million. On September 15, 2020, we completed our follow-on public offering in which we sold 10,800,000 shares of common stock for proceeds of $569.5 million, net of the underwriting discount and before deducting offering expenses of $1.5 million. As of March 31, 2021, we had cash and cash equivalents of $940.3 million. We anticipate that our existing cash and cash equivalents and the 2020 Vehicle Floorplan Facility will be sufficient to support our working capital and capital expenditure requirements for at least the next twelve months from the date of this Quarterly Report on Form 10-Q. For the three months ended March 31, 2021, we generated a net loss. We have not been profitable since our inception in 2012 and we expect to incur additional losses in the future. We historically have funded vehicle inventory purchases primarily through our floorplan financing arrangements. Our cash flows from operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts. The timing of our cash flows from operating activities can also vary among periods due to the timing of payments made or received. Our future capital requirements will depend on many factors, including our rate of revenue growth, our efforts to reduce costs per unit, the expansion of our inventory and sales and marketing activities, investment in our reconditioning, logistics and customer experience operations, enhancements to our ecommerce platform, and increased hiring efforts. 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. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations and financial condition could be adversely affected. Vehicle Financing As of March 31, 2021, we finance our inventory with a vehicle floorplan facility (the “2020 Vehicle Floorplan Facility”) with Ally Bank, which provides a committed credit line of up to $450.0 million. The amount of credit available to us under the 2020 Vehicle Floorplan Facility is determined on a monthly basis based on a calculation that considers average outstanding borrowings and vehicle units paid off by us within the three immediately preceding months. Approximately $162.2 million was available under this facility as of March 31, 2021. The maturity date of 2020 Vehicle Floorplan Facility is September 30, 2022. We are required to pay an availability fee on the average unused capacity from the prior quarter if it was greater than 50% of the calculated floorplan allowance, as defined. We are subject to financial covenants that require us to maintain a certain level of equity in the vehicles that are financed, to maintain at least 7.5% of the credit line in cash and cash equivalents and to maintain 10% of the monthly daily floorplan principal balance outstanding on deposit with Ally Bank. 41 Table of Contents Outstanding borrowings are due as the vehicles financed are sold, or in any event, on the maturity date. The 2020 Vehicle Floorplan Facility bears interest at a rate equal to the 1-Month LIBOR rate applicable in the immediat ely preceding month plus a spread of 425 basis points. Cash Flows from Operating, Investing, and Financing Activities The following table summarizes our cash flows for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 (in thousands) Net cash provided by (used in) operating activities $ 29,554 $ (25,145 ) Net cash used in investing activities (79,384 ) (1,699 ) Net cash (used in) provided by financing activities (73,372 ) 9,600 Net decrease in cash and cash equivalents and restricted cash (123,202 ) (17,244 ) Cash and cash equivalents and restricted cash at beginning of period 1,090,039 219,587 Cash and cash equivalents and restricted cash at end of period $ 966,837 $ 202,343 Operating Activities Net cash flows from operating activities changed by $54.7 million, or 217.5%, from net cash used in operating activities of $25.1 million for the three months ended March 31, 2020 to net cash provided by operating activities of $29.6 million for the three months ended March 31, 2021. The increase is primarily attributable to lower inventory levels and higher accounts payable and accrued expenses for the three months ended March 31, 2021, resulting in a decrease in the use of cash of $92.3 million. Additionally, this increase was partially offset by $36.5 million in incremental net loss after reconciling adjustments for the three months ended March 31, 2021 as compared to for the three months ended March 31, 2020. We finance substantially all our inventories with the 2020 Vehicle Floorplan Facility. In accordance with U.S. GAAP relating to the statement of cash flows, we report all cash flows arising in connection with the 2020 Vehicle Floorplan Facility, as a financing activity in our statement of cash flows. Investing Activities Net cash flows used in investing activities increased $77.7 million, from $1.7 million for the three months ended March 31, 2020 to $79.4 million for the three months ended March 31, 2021, primarily as a result of the acquisition of the CarStory business on January 7, 2021. Financing Activities Net cash flows from financing activities changed by $83.0 million from net cash provided by financing activities of $9.6 million for the three months ended March 31, 2020 to net cash used in financing activities of $73.4 million for the three months ended March 31, 2021. The decrease was primarily related to a net decrease in cash of $67.9 million related to net repayments under our 2020 Vehicle Floorplan Facility and a net decrease in cash of $21.7 million related to the net issuance of Series H preferred stock in 2020. Contractual Obligations and Commitments There have been no material changes to our contractual obligations or commitments outside of the ordinary course of business as compared to those described in our Annual Report. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. 42 Table of Contents Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. In preparing the condensed consolidated financial statements, we 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. Due to the evolving and uncertain nature of the COVID-19 pandemic, it is reasonably possible that it could materially impact our estimates, particularly those noted above that require consideration of forecasted financial information, in the near to medium term. The ultimate impact will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer behavior in response to the pandemic and other economic and operational conditions we may face. The critical accounting policies that reflect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements include those described in Note 2—Summary of Significant Accounting Policies and Note 3—Revenue Recognition to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and Note 2—Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report. Except as described in Note 2 to our condensed consolidated financial statements, 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, 2020. Recently Issued and Adopted Accounting Pronouncements See Note 2—Summary of Significant Accounting Policies to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion about new accounting pronouncements adopted and not yet adopted as of the date of this report.