Canada Drives Ltd. has been placed into creditor protection by a B.C. court after the Vancouver online marketplace company’s attempt to pivot into car sales during the pandemic led to heavy losses and insolvency.
The company is now looking to exit the car-selling business, shed assets, part ways with much of its 326-person staff and return to its original business of matching consumers seeking automobile financing with dealerships.
Earlier this week, the company and related entities were placed into protection under the Companies’ Creditors Arrangement Act by a B.C. Supreme Court justice, with PricewaterhouseCoopers, appointed as monitor. Creditors including Toronto-Dominion Bank, Google and Amazon Web Services.
The fate of Canada Drives is the culmination of a string of unfortunate macroeconomic events and strategic missteps that hurt what had been a prosperous, cash-generating and profitable company since its inception in 2010. Canada Drives generated $86-million in revenue and operating profit of $10.5-million in the year ended Jan. 31 2020, according to court filings. Its primary pursuit was a leads-based business, matching consumers with dealerships looking to sell them cars and arrange financing.
Then the pandemic hit. Prospective buyers were reluctant to come into dealerships, which cut into Canada Drives’ business, according to an affidavit filed with the court by founder and co-chief executive Cody Green.
In October, 2020, Canada Drives decided to enter the online car-selling business, which had been popularized by vendors including Carvana Co. in the U.S. and Clutch Technologies Inc. in Canada. The pandemic-fuelled move “was not only more compatible with customers’ purchasing practices, but also greatly increased” Canada Drives’ potential market, Mr. Green wrote.
Instead of serving as a matching service and data gatherer, Canada Drives would be responsible for all parts of the used-car-buying process: It would source, buy and store cars, recondition them and then transport them to buyers. There were no showrooms. All buying would be done online, with buyers having the option to return cars for their full money back within seven days.
Unlike its traditional business, the shift required heavy spending on assets and people, and financing to support its growth. Canada Drives secured financing from TD and Automotive Finance Canada Inc. to procure and store cars until they were sold.
Mr. Green said in the affidavit that the online car business “proved to be a challenge from the outset.” After the business experienced sustained losses last year “it became apparent” the new business “was unsustainable in the long term.”
Rapidly rising interest rates through 2022 increased borrowing costs to buy and hold vehicles for sale “at an unprecedented rate,” while the value of inventory began to “rapidly depreciate” as values came down across the industry, Mr. Green wrote.
Rising rates cut into consumer confidence and spending, and led to deteriorating conditions for companies seeking funding. Canada Drives lost $80.5-million last year on revenue of $298-million, compared with a net loss of $5.3-million on revenue of $54.6-million in the 12 months ended Jan 31, 2021.
Other online used-car sellers struggled. Carvana’s stock has dropped by about 95 per cent from its 52-week high, and Clutch cut 150 people, or 65 per cent of its staff, in January and pulled out of several markets after an attempted eight-figure financing failed to materialize.
Clutch CEO Dan Park said in an e-mail Wednesday that “after a year of hard work and tough decisions, we feel like our business is stronger than ever and positioned for continued success.” He maintained that “demand for high-quality used cars has remained very strong and we continue to be very excited to be providing Canadians a faster, easier and simpler way of buying a car.”
Canada Drives tried to raise $100-million last year but only secured half of that in the form of convertible notes paying 5 per cent annually, $40-million of which came from publicly traded Goeasy Ltd. KAR Auction Services Inc. provided the rest.
KAR issued a notice of default and demanded repayment on March 16, days after a potential sale of Canada Drives fell through when an unidentified prospective buyer couldn’t secure financing in time, Mr. Green wrote. Four days after receiving the notice from KAR, Canada Drives filed for creditor protection.
Mr. Green maintained that Canada Drives “can be restructured to once again be a viable business with significant future potential” in its original form. But he warned it is “in urgent need of protection” to ensure an orderly wind-down, including the sale of more than 1,200 remaining cars, eight delivery trucks and 63 trailers.