7:34 am, May 17, 2023
Used car dealer Cazoo has laid bare just how worried it is about its future in an explosive set of revelations in its accounts.
The official documents for Cazoo Holdings Ltd, which have just been uploaded to Companies House, outline the used car dealer’s fears at continuing its operations.
The firm says it is absolutely crucial the company’s ‘realignment plan’ – outlined in January this year – is executed, otherwise its future beyond April 2024 could be at risk.
What’s more, the firm has identified ‘material weaknesses’ in its financial reporting over the past two years.
The used car dealer said: ‘We have identified material weaknesses in our internal control over financial reporting for the fiscal years ended 31 December 2022 and 2021, which may result in material misstatements of our financial statements or cause us to fail to meet our reporting obligations.
‘If these material weaknesses are not remediated our ability to accurately and timely report our financial results could be adversely affected.’
The annual accounts detail the company’s position as of the end of 2022.
The documents show Cazoo lost £839m last year – more than it reported earlier this year – on revenues of £1.24bn.
They also show that one of Cazoo’s biggest fears is the $630m-worth of convertible notes it issued to investors in February last year.
Cazoo said it is liable to repurchase these notes should its shares cease to be listed on the New York Stock Exchange.
Cazoo shares are currently trading at $1.25 – perilously close to the $1 limit the NYSE requires firms to maintain to keep their place on the exchange.
In February, Cazoo was forced to merge its share capital to boost its share price to avoid falling foul of that rule, but it has fallen back 45 per cent in the past month alone. The company now has a market cap of just £40m.
The used car dealer is also concerned that the stocking facilities – £240m at the end of 2022 – it currently has in place ‘have no fixed end date’.
Cazoo says it has tested its ability to trade as a ‘going concern’ in a number of scenarios and at present, if the company meets its plans and budget for 2023, it will still have £80m left in April next year.
However, a stress test with margins increasing only slightly and its overheads increasing by six per cent show that figure could be as low as £30m.
The accounts reveal the company is already actively planning to sell and lease back the properties it owns to raise funds.
Risks and uncertainties
In a brutally frank set of admissions, the company laid out a long list of concerns it has identified as part of its ‘principal risks and uncertainties’.
It said: ‘As a result of our business realignment plan, the wind down of operations in mainland Europe and the recently announced revised 2023 plan, our strategy has shifted from seeking to maximise our market share in the UK and mainland Europe to focusing on the UK market only and pursuing improved unit economics.
‘We may have difficulties implementing our strategy in the UK, which could have a material adverse effect on our business and results of operations.
‘We have a history of losses and we may not achieve or maintain profitability in the future.’
Cazoo adds: ‘No assurance can be given that we will succeed in achieving any improvement in our unit economics.’
The used car seller says there is a prospect it may also need to raise further funds and although this won’t be needed until the second half of next year, that money may not be forthcoming.
It said: ‘We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances – such capital may not be available to us, and therefore our business, operating results and financial condition may be materially adversely affected.
‘There is no guarantee that such financing will be available in the future on acceptable terms, or at all.’
While identifying risks like this is not unusual in an annual report – and is a duty of directors – the scope and seriousness of them will be a concern to investors.
Cazoo says if the worst were to happen the board may have to cut more jobs and reduce marketing spend further.
Cazoo said: ‘Downside scenarios such as those described, and certain inherent uncertainties in forecasting operating performance… combine to represent a material uncertainty over [the company’s] ability to continue as a going concern.
‘Management’s mitigation plans to alleviate the material uncertainty are not entirely within the company’s control and so cannot be guaranteed.’
Cazoo explains in the report that as of the end of December 2022 it had cash and cash equivalents of £258.3m.
The firm said: ‘We believe that our cash on hand, and available borrowing capacity under stocking loans and borrowings, will be adequate to meet our liquidity requirements for at least the 12 months following the date of approval of the financial statements.’
Closures and job losses
The business plan for 2023 has already seen Cazoo cut jobs, close customer centres and reduce the number of preparation sites it runs.
It has also sold its operations in Italy and Spain, shut down its car subscription business in the UK and sold its data business Cazana. This week it also completed on the deal to sell its German business.
‘The 2023 budget is expected to deliver a significant reduction in our cash consumption and continued progress towards our goal of reaching profitability, without the need to raise further external funding until H2 2024,’ said the company.
‘The 2023 budget includes actions to increase liquidity such as a prospective sale and leaseback of owned property, the continued financing of UK retail inventory and the unwinding of the UK subscriptions business to realise cash from subscription vehicles in property, plant and equipment.’
While Cazoo says it does not think it will need to raise more cash until the second half of next year, it admits this might be difficult.
The firm said: ‘We may seek to secure additional outside capital over the next 12 months beyond the date hereof.
‘While we have historically been successful in our ability to secure outside capital, as of the date hereof, we had no firm commitments of additional outside capital.
‘We can provide no assurance we will be able to continue to secure outside capital in the future or do so on terms that are acceptable to us.
‘Furthermore, we also plan to continue to closely monitor our cash flows and, if necessary, we may implement certain incremental cost savings to preserve our liquidity beyond those being implemented through the revised business plans and our 2023 budget.
‘While we currently expect we will be able to generate sufficient liquidity to fund our operations for the next 12 months beyond the date hereof, we can provide no assurance we will successfully generate such liquidity, or if necessary, secure additional outside capital or achieve incremental cost savings.’
‘Grim reading’
Paul Daly, partner at UHY Hacker Young, the accountancy firm, said the annual report wasn’t pretty.
He said: ‘The filed accounts make grim reading with the fast paced expansion going into reverse necessitating the recording of a truly staggering loss in excess of £800m.
‘Included within that is £186m attributed to the now discontinued operations – principally the ill fated European expansion – as well as £299m to write down all goodwill from acquisitions to zero.
‘On a more positive note cash reserves at 31 December remained healthy at £258m and in addition there are also liquidity options available including £66m of assets held for resale, £49m of subscription vehicles and the potential for sale and leaseback of freehold although only £16m is recorded in the balance sheet. So they do still have headroom.
‘Of course things might spiral out of the board’s control if they lose their NYSE listing status potentially triggering the repayment of the convertible loan – surely an option the investors in that loan must be considering given the healthy level of liquidity that still remains.
‘It would at least generate some level of recovery of their recent investment.’
At the end of April, Cazoo reported on the first quarter of 2023 which showed that despite falling sales and revenue, its profit per unit increased to £980. It also made £14m gross profit during the period.
Chief executive Paul Whitehead was ‘pleased’ with the used car dealer’s performance during the quarter.
He said: ‘Our focus on unit economics, together with the restructuring changes, is starting to bear fruit as evident in the significant improvement in retail GPU to £980 in Q1 2023.
‘While the broader economic environment remains challenging, demand was robust in the quarter and we sold 13,314 retail cars as our online proposition continues to resonate with consumers.
‘Reconditioning costs have continued to improve following the consolidation of our vehicle preparation centres and the relentless drive for greater efficiency from the team. We expect to see further progress across both these areas as well as across logistics spend and marketing effectiveness.’
On page 17 of its annual report, Cazoo added: ‘The directors believe that Cazoo Holdings Limited is well positioned to continue in its aim to transform the car buying and selling experience across the UK.’
