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As filed with the Securities and Exchange Commission on March 31, 2017.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Carvana Co.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5500   81-4549921

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

4020 E. Indian School Road

Phoenix, Arizona 85018

Telephone: (602) 852-6604

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Ernie Garcia, III

Chief Executive Officer

4020 E. Indian School Road

Phoenix, Arizona 85018

Telephone: (602) 852-6604

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies of all communications, including communications sent to agent for service, should be sent to:

 

Robert M. Hayward, P.C.

Robert E. Goedert

Kirkland & Ellis LLP

300 North LaSalle

Chicago, Illinois 60654

Telephone: (312) 862-2000

 

Alan F. Denenberg, Esq.

Davis Polk & Wardwell LLP

1600 El Camino Real

Menlo Park, California 94025

Telephone: (650) 752-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate
Offering Price(1)(2)
  Amount of
Registration Fee

Class A Common Stock, par value $0.001 per share

  $100,000,000   $11,590

 

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. The prospectus is not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer and sale is not permitted.

 

SUBJECT TO COMPLETION DATED MARCH 31, 2017

Preliminary Prospectus dated                 , 2017

Shares

 

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Class A Common Stock

 

 

This is the initial public offering of shares of Class A common stock of Carvana Co., par value $0.001 per share. Carvana Co. is offering             shares of its Class A common stock to be sold in the offering.

Prior to this offering, there has been no public market for the Class A common stock of Carvana Co. It is currently estimated that the initial public offering price per share will be between $         and $        . Carvana Co. intends to list its Class A common stock on the New York Stock Exchange (the “NYSE”) under the symbol “CVNA.”

Carvana Co. has two authorized classes of common stock: Class A and Class B. Holders of the Class A common stock are entitled to one vote per share. Ernest Garcia, II, Ernie Garcia, III, and entities controlled by one or both of them (collectively, the “Garcia Parties”) are entitled to ten votes per share of Class B common stock they beneficially own, for so long as the Garcia Parties maintain, in the aggregate, direct or indirect beneficial ownership of at least 25% of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock). All other holders of Class B common stock are each entitled to one vote per share. All holders of Class A and Class B common stock will vote together as a single class except as otherwise required by applicable law. Holders of the Class B common stock do not have any right to receive dividends or distributions upon the liquidation or winding up of Carvana Co.

Carvana Co. will contribute the net proceeds from this offering to its wholly owned subsidiary, Carvana Co. Sub LLC (“Carvana Sub”), that will in turn use such net proceeds to purchase newly-issued units (“LLC Units”) in Carvana Group, LLC (“Carvana Group”). The purchase price for the LLC Units will be equal to the initial public offering price of the shares of Class A common stock less the underwriting discounts and commissions referred to below. Carvana Group will use the net proceeds it receives in connection with this offering as described under “Use of Proceeds.” Upon completion of this offering, Carvana Co. will have, indirectly through Carvana Sub, acquired             LLC Units representing a     % economic interest in Carvana Group and, although Carvana Co. will initially have an indirect minority economic interest in Carvana Group, Carvana Sub will be the sole manager of Carvana Group and, through Carvana Group, operate and control its business. The existing owners of Carvana Group will hold the remaining             LLC Units representing a     % economic interest in Carvana Group. LLC Units are, from time to time, exchangeable for shares of Class A common stock or, at our election, for cash. See “Organizational Structure — Exchange Agreement.” Carvana Co. will be a holding company, and upon consummation of this offering and the application of the net proceeds therefrom, its sole asset will be its indirect equity interest in the LLC Units of Carvana Group. Immediately following this offering, the holders of Class A common stock will collectively own 100% of the economic interests in Carvana Co. and have     % of the voting power of Carvana Co. The holders of our Class B common stock will have the remaining     % of the voting power of Carvana Co.

Carvana Co. is an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, has elected to comply with certain reduced public company reporting requirements.

 

 

See “Risk Factors” beginning on page 17 to read about factors you should consider before buying shares of our Class A common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

       Per share      Total

Initial public offering price

     $                  $            

Underwriting discounts and commissions(1)

     $                  $            

Proceeds, before expenses, to Carvana Co.

     $                  $            

 

(1) See “Underwriting” for additional information regarding underwriting compensation.

The underwriters have the option to purchase up to an additional             shares of Class A common stock from us at the initial public offering price less the underwriting discounts and commissions for a period of 30 days after the date of this prospectus.

The underwriters expect to deliver shares of Class A common stock against payment in New York, New York on                 , 2017.

 

 

 

Wells Fargo Securities       BofA Merrill Lynch       Citigroup       Deutsche Bank Securities

 

 

 

Baird   William Blair   BMO Capital Markets   JMP Securities

Prospectus dated                         , 2017.


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TABLE OF CONTENTS

 

     Page  

Basis of Presentation

     i  

Market and Industry Data

     ii  

Trademarks and Tradenames

     ii  

Prospectus Summary

     1  

Risk Factors

     17  

Forward-Looking Statements

     49  

Use of Proceeds

     51  

Dividend Policy

     52  

Capitalization

     53  

Dilution

     55  

Selected Consolidated Financial Data

     57  

Unaudited Pro Forma Consolidated Financial Data

     58  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     65  

Business

     91  

Organizational Structure

     104  

Management

     115  

Executive Compensation

     120  

Principal Stockholders

     130  

Certain Relationships and Related Party Transactions

     132  

Description of Certain Indebtedness

     140  

Description of Capital Stock

     141  

Shares Eligible for Future Sale

     149  

Material U.S. Federal Income Tax Consideration for Non-U.S. Holders

     152  

Underwriting

     156  

Legal Matters

     165  

Experts

     165  

Where You Can Find More Information

     165  

Index to Consolidated Financial Statements

     F-1  

 

 

Through and including             , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 


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BASIS OF PRESENTATION

In connection with the consummation of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the organizational transactions and this offering, which we refer to collectively as the ‘‘Organizational Transactions.’’ See ‘‘Organizational Structure’’ for a description of the Organizational Transactions and a diagram depicting our anticipated structure after giving effect to the Organizational Transactions, including this offering.

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “our business” and “our company” refer to and similar references refer: (1) on or following the consummation of the Organizational Transactions, including this offering, to Carvana Co. and its consolidated subsidiaries, including Carvana Group, and (2) prior to the consummation of the Organizational Transactions, including this offering, to Carvana Group and its consolidated subsidiaries.

We will be a holding company and upon consummation of this offering and the application of net proceeds therefrom our sole asset will be the capital stock of a wholly owned subsidiary, Carvana Sub, whose sole asset will be LLC Units of Carvana Group. Carvana Co. will be the sole managing member of Carvana Sub, and Carvana Sub will be the sole managing member of Carvana Group. Carvana Group will be the predecessor of the issuer, Carvana Co., for financial reporting purposes. Carvana Co. will be the reporting entity following this offering.

Accordingly, this prospectus contains the historical financial statements of Carvana Group and its consolidated subsidiaries. The unaudited pro forma consolidated financial data of Carvana Co. presented in this prospectus has been derived from the application of pro forma adjustments to the historical consolidated financial statements of Carvana Group and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to the Organizational Transactions as described in ‘‘Organizational Structure,’’ including the consummation of this offering and other related transactions, as if all such transactions had occurred on January 1, 2016. See ‘‘Unaudited Pro Forma Consolidated Financial Data’’ for a complete description of the adjustments and assumptions underlying the unaudited pro forma consolidated financial data included in this prospectus.

Throughout this prospectus, we provide a number of key operating metrics used by management, some of which are used by our competitors in the automotive retail industry, including retail units sold, number of markets, monthly unique visitors, inventory units available, average days to sale and total gross profit. We define retail units sold as the number of vehicles sold to customers in a given period, net of returns under our seven-day return policy. We define a market as a metropolitan area in which we have commenced local advertising and offer free home delivery to customers with a Carvana employee and branded delivery truck. We define a monthly unique visitor as an individual who has visited our website within a calendar month. We define inventory units available as the number of vehicles listed for sale on our website on the last day of a given reporting period. We define average days to sale as the average number of days between vehicle acquisition by us and delivery to a customer for all retail units sold in a period. However, this metric does not include any retail units that remain unsold at period end. We define total gross profit per unit as the aggregate gross profit in a given period divided by retail units sold in that period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The consolidated financial statements of Carvana Group in this prospectus include Carvana Group’s accounts presented on a consolidated basis. Carvana Group was formed as an Arizona limited liability company by DriveTime Automotive Group, Inc. (together with its subsidiaries and affiliates other than us, “DriveTime”) and commenced operations in 2012. On March 10, 2015, Carvana Group converted to a Delaware limited liability company. Prior to November 1, 2014, we were a wholly-owned subsidiary of DriveTime. On November 1, 2014, DriveTime distributed the units of Carvana, LLC to its unitholders on a pro-rata basis (the “Spinoff”). Following the Spinoff, the unitholders of DriveTime contributed the Carvana, LLC units to Carvana Group. We have accounted for the distribution as a spinoff transaction in accordance with applicable U.S. generally accepted accounting principles and have reflected assets and liabilities before and after November 1, 2014 at their historical basis.

 

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Prior to November 1, 2014, Carvana Group’s historical consolidated financial statements included expense allocations related to certain functions provided by DriveTime, including, but not limited to, general corporate expenses related to accounting and finance, human resources, payroll and benefits, equipment, corporate communications, software and production. These expenses have been allocated to us based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis determined by management. Management considers the basis on which the expenses have been allocated to reasonably reflect the utilization of the services provided to, or the benefit received by, us for all periods presented prior to November 1, 2014. The allocations may not, however, reflect the expenses we would have incurred as an independent company for the periods presented prior to November 1, 2014. Actual costs that may have been incurred if we had been a stand-alone entity would depend on a number of factors, including the organizational structure, whether functions were outsourced or performed by employees, and strategic decisions made in areas such as information technology and infrastructure. We are unable to determine the amount of costs that would have been incurred had we been independent.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information in this prospectus concerning economic conditions, our industry, our markets and our competitive position is based on a variety of sources, including information from independent industry analysts and publications, as well as our own estimates and research.

Our estimates are derived from publicly available information released by third party sources, as well as data from our internal research, and are based on such data and our knowledge of our industry, which we believe to be reasonable. The independent industry publications used in this prospectus were not prepared on our behalf. While we are not aware of any misstatements regarding any information presented in this prospectus, forecasts, assumptions, expectations, beliefs, estimates and projects involve risk and uncertainties and are subject to change based on various factors, including those described under the headings “Forward-Looking Statements” and “Risk Factors.”

References in this prospectus to (i) “DealerSocket 2015” refer to the DealerSocket Independent Dealership Action Report Fall 2015 and (ii) “DealerSocket 2016” refer to the DealerSocket 2016 Independent Dealership Action Report.

TRADEMARKS AND TRADENAMES

This prospectus includes our trademarks and service marks, “Carvana,” “Carvana Certified,” “CarvanaCare” and “Cardian Angel,” which are protected under applicable intellectual property laws and are the property of the issuer or its subsidiaries. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies, such as “Amazon,” “Google,” “Vroom” and “Shift” which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our Class A common stock. For a more complete understanding of us and this offering, you should read and carefully consider the entire prospectus, including the more detailed information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes. Some of the statements in this prospectus are forward-looking statements. See “Forward-Looking Statements.” Unless otherwise stated, this prospectus assumes no exercise of the underwriters’ option to purchase additional shares.

Our Company

Carvana is a leading eCommerce platform for buying used cars. We are transforming the used car buying experience by giving consumers what they want – a wide selection, great value and quality, transparent pricing and a simple, no pressure transaction. Each element of our business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.

We provide a refreshingly different and convenient car buying experience that can save buyers time and money. On our platform, consumers can research and identify a vehicle, inspect it using our proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices. Our transaction technologies and online platform transform a traditionally time consuming process by allowing customers to secure financing, complete a purchase and schedule delivery online in as little as 10 minutes.

Our technology and infrastructure allow us to seamlessly and cost efficiently deliver this car buying experience to our customers. We use proprietary algorithms to optimize our nationally pooled inventory of over 7,300 vehicles, inspect and recondition our vehicles based on our “Carvana Certified” 150-point inspection process and operate our own logistics network to deliver cars directly to customers as soon as the next day. Customers in certain markets also have the option to pick up their vehicle at one of our proprietary vending machines, which provides an exciting pick-up experience for the customer while decreasing our variable costs, increasing scalability and building brand awareness.

From the launch of our first market in January 2013 through December 31, 2016, we purchased, reconditioned, sold and delivered approximately 27,500 vehicles to customers through our website, generating $541.8 million in revenue. Our sales have grown as we have added new markets and increased our market penetration in our current markets. As of December 31, 2016, our in-house distribution network services 21 metropolitan markets, and we plan to continue to expand our network into additional markets. Since we launched our first market in 2013, we have grown organically across the United States, adding two markets in 2014, six in 2015 and 12 in 2016.

Our revenues have grown from $4.6 million in 2013 and $41.7 million in 2014 to $130.4 million in 2015. For the year ended December 31, 2016, we generated $365.1 million in revenue, representing a 180.0% increase over the $130.4 million in revenue that we generated for the year ended December 31, 2015. We continue to invest heavily in growth and generated a net loss of $93.1 million for the year ended December 31, 2016, compared to a net loss of $36.8 million for the year ended December 31, 2015.

 



 

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The following graphic illustrates the cumulative number of vehicles sold through our website on a quarterly basis along with selected milestones of our business.

 

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Industry Overview

The U.S. automotive industry generated approximately $1.1 trillion in sales in 2015, which comprised roughly 20% of the U.S. retail economy and made it the largest consumer retail market in the United States according to the U.S. Census Bureau. Edmunds.com estimates U.S. used vehicle sales at over $710 billion in 2015, representing approximately 38 million used vehicle transactions at an average sales price of $18,552.

The used car auto retail industry is highly fragmented. There are approximately 63,000 used car dealerships in North America, comprised of 45,000 independent used car dealerships and nearly 18,000 franchise dealerships, according to the DealerSocket 2015. The largest dealer brand commands approximately 1.6% of the U.S. market and the top 100 used car auto retailers collectively hold approximately 7.0% of U.S. market share, according to Edmunds.com, publicly-listed dealership filings and Automotive News.

Consumers in this large and fragmented market have a distinct set of expectations that are challenging for traditional used car retailers to address.

 

   

Wide selection.    Traditional used car retailers are limited by staging capacity and anticipated local demand; and they generally lack the logistical capabilities to source vehicles from other locations quickly and cost-effectively.

 

   

Value.    Traditional used car retailers have high overhead costs and must pass these costs on to their customers.

 



 

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Confidence in quality.    Traditional used car retailers may lack the scale and expertise to consistently purchase high quality vehicles and uniformly recondition them.

 

   

Control and no pressure.    According to DealerSocket 2016, 81% of North American consumers do not enjoy the car buying process, and U.S. car salespeople are among the least trusted professionals according to a 2015 Gallup poll.

 

   

Fast, simple purchasing process.    Buying a car at a traditional auto dealership is often a multi-part transaction including vehicle purchase, trade-in, financing and complementary products, and requires over three hours on average, according to the 2016 Car Buyer Journey report from Autotrader.

Historically, consumers have discovered vehicles for sale through local print and broadcast media as well as word of mouth, and would go to dealerships to educate themselves on potential purchases. However, 97% of customer vehicle purchases involve online research, according to the Cars Online 2014 report from Capgemini, and the typical used car buyer spends approximately nine hours researching a prospective car purchase online, according to the 2016 Car Buyer Journey report from Autotrader.

As eCommerce has become more established, reaching 8.4% of total retail sales in the U.S. in the third quarter of 2016 according to the U.S. Census Bureau, consumers have become more comfortable buying taste-driven, higher-priced products such as consumer electronics and home furnishings online. Similarly, auto consumers are interested in eCommerce solutions for their car purchasing needs — 75% of U.S. car buyers would consider completing their entire car purchase online if given the opportunity, according to Accenture’s 2015 Automotive Digital Survey.

Our Solution

In response to these evolving consumer needs, we built Carvana to provide a no pressure, no haggle experience with flexible and fast transactions. We aim to deliver the best selection, best value and best experience for used car buyers.

 

   

The Best Selection.    As of December 31, 2016, we offer all consumers a nationally pooled inventory of over 7,300 high-quality used vehicles. We evaluate all of the vehicles that we own and offer for sale using our 150-point “Carvana Certified” inspection process, which we are able to perform at scale across our network of inspection and reconditioning centers (“IRCs”). We use proprietary algorithms to optimize our inventory acquisition based on extensive used vehicle market and customer behavior data. Furthermore, our nationally pooled inventory system maximizes the breadth of vehicle selection for our customers in any given location. This results in a higher likelihood that customers are able to find the make, model, year and color combination that they desire. In contrast, traditional dealerships are limited in range of selection because they typically optimize a local inventory of a few hundred vehicles at each dealership location, even if they own thousands of vehicles across multiple distributed locations.

 

   

The Best Value.    Our proprietary technology and vertically-integrated business model allow us to enjoy a significantly lower variable cost structure versus traditional dealerships and provide substantial value to our customers. We do not require a network of brick-and-mortar dealerships staffed with sales personnel; instead, we utilize both an in-house logistics network and proprietary vending machines to facilitate trade-ins and vehicle delivery. Additionally, we believe our pooled inventory approach will result in lower average days to sale, which we expect will help improve margins due to decreased vehicle depreciation resulting in higher unit selling price. These savings are passed on to the consumer through sales prices that averaged $1,430 below Kelley Blue Book Suggested Retail Value per vehicle during the year ended December 31, 2016. Furthermore, we are able to provide personalized and highly-transparent financing terms based on basic customer information that results in faster transaction times, clear lending terms and competitive interest rates.

 



 

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The Best Experience.    We aim to provide the best car buying experience available for our customers through a fully-integrated, convenient online shopping experience. Our proprietary 360-degree vehicle imaging technology provides transparency by allowing customers to view vehicle features and imperfections. We provide automated trade-in valuations, financing and warranties. Customers can easily select among various pricing and pre-approved financing terms and receive approval in seconds. We offer a premium fulfillment experience with pick-up and delivery options available, including pick-up at our vending machines in some markets. Our in-house customer advocates are available to answer customer questions that arise throughout the process. Finally, we offer seven-day return and 100-day warranty policies with every car we sell.

We believe that our customers value the ease of use and transparency of our platform. They have responded favorably to our solution, as illustrated by the ratings we receive. Our customers rated us an average of 4.8 out of 5.0 as of December 31, 2016, and 95% of them said they would recommend us to a friend when responding to over 4,250 satisfaction surveys we solicited from our inception through December 31, 2016. These positive reactions create opportunities for repeat customers and a strong referral network.

Our Competitive Strengths

Our business model is disrupting the traditional used vehicle sales model. Carvana’s primary goal is to rapidly scale vehicle unit sales by focusing on delivering an unparalleled customer experience. Since our inception in 2012, we have been developing and leveraging the following key strengths of our robust platform, which we believe provide significant competitive advantages.

 

   

Purpose-built vertically-integrated eCommerce platform.    Our platform combines a comprehensive online sales experience with a vertically-integrated supply chain, which gives us control of all critical operations and transaction elements and facilitates a fast, simple and consistent user experience.

 

   

Differentiated shopping experience.    We have developed market-leading technology that makes the online vehicle purchasing process intuitive, transparent and fun. Coupled with our certification process and seven–day return policy, this generates the confidence and trust in our platform needed to buy a car online.

 

   

Proprietary financing technology.    Our differentiated financing solutions allow customers to choose their preferred financing from thousands of pre-approved down payment and monthly payment combinations and enable us to generate automotive finance receivables that we typically sell to third party financing partners at a premium.

 

   

Efficient logistics network and attractive fulfillment experience.    Our proprietary logistics software, in-house delivery network and multi-story glass tower vending machines differentiate us from competitors by allowing us to predictably and efficiently transport cars while providing customers a distinctive fulfillment experience.

 

   

Scaled used vehicle infrastructure.    We currently leverage a network of three IRCs and supporting software for our vehicle reconditioning and logistics activities that required significant investments in time and capital and provide substantial capacity for growth.

 

   

Scale driving powerful network effects.    Our logistics capabilities allow us to offer every car in our inventory to customers across our markets. As we add markets, we expect to increase overall demand, which would enable us to carry a larger and broader inventory and in turn, improve our offering across markets and increase our market share.

 



 

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Our Growth Strategies

The foundation of our business is retail vehicle unit sales. This drives the majority of our revenue and allows us to capture additional revenue streams associated with financing, vehicle service contracts (“VSCs”) and trade-in vehicles. As we mature, we believe we will continue to improve conversion on these revenue streams and expand our offering of complementary products. However, all of these additional revenue opportunities are derived from retail vehicle unit sales and as a result, our growth strategies are primarily focused on this metric.

Our ability to generate vehicle sales is a function of the number of markets we operate in, our penetration in those markets and our ability to build and maintain our brand by offering great value, transparency and outstanding customer service. We plan to continue growing our vehicle unit sales, number of markets, market penetration and complementary product revenues, while enhancing our competitive positioning, by executing the following key elements of our growth strategy:

 

   

Increase sales through further penetration of our existing markets.    We believe that our markets are at an early stage of growth when measured by market share. We plan to continue marketing and actively building our brand in existing markets by improving our operations, opening additional vending machines, increasing our inventory size and growing brand awareness.

 

   

Continue to enter key geographic markets.    We believe there is a substantial opportunity to utilize our capital-light expansion model and proven go-to-market strategy to enter additional markets by expanding our existing logistics network and advertising in those markets.

 

   

Continue to innovate and extend our technology leadership.    We believe that the complexity of the automotive retail transaction provides substantial opportunity for technology investment and that our leadership and continued growth will enable us to responsibly invest in further differentiating ourselves from competitors’ offerings.

 

   

Develop broad consumer awareness of our brand.    We intend to attract new customers through advertising, public relations, and customer referrals. We also plan to build vending machines in additional markets to capitalize on the publicity they generate and believe our brand building efforts will be further enhanced once we are able to economically launch national advertising campaigns.

 

   

Develop new products.    We plan to leverage our platform to increase monetization opportunities by introducing new complementary products and services. The car purchasing and ownership cycle provides many opportunities to add value for our customers, and our technology and process automation knowledge position us well to provide these services in unique and differentiated ways.

Risks Associated with Our Business

There are a number of risks related to our business, this offering and our Class A common stock that you should consider before you decide to participate in this offering. You should carefully consider all the information presented in the section entitled “Risk Factors” in this prospectus. Some of the principal risks related to our business include the following:

 

   

our history of losses and ability to maintain profitability in the future;

 

   

our ability to effectively manage our rapid growth;

 

   

our limited operating history;

 

   

the seasonal and other fluctuations in our quarterly operating results;

 

   

our relationship with DriveTime;

 

   

our management’s accounting judgments and estimates;

 



 

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the highly competitive industry in which we participate;

 

   

the changes in prices of new and used vehicles; and

 

   

the Garcia Parties’ control over the outcome of matters requiring stockholder approval, including the election of directors.

These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, you could lose all or part of your investment in our Class A common stock.

General Corporate Information

Carvana Co. was incorporated as a Delaware corporation on November 29, 2016 in anticipation of this offering. Our corporate headquarters are located at 4020 East Indian School Road, Phoenix, Arizona 85018. Our telephone number is (602) 852-6604. Our website address is www.carvana.com. The information on, or accessible through, our website is not deemed to be part of this prospectus.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of the last day of the fiscal year following the fifth anniversary of the completion of this offering, the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, the date on which we are deemed to be a large accelerated filer (this means the market value of our ordinary shares that are held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year), or the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.

An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation in this prospectus and expect to elect to take advantage of other reduced burdens in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

The JOBS Act also permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.

Ownership and Organizational Structure

Following this offering and the consummation of the Organizational Transactions, we will be a holding company and our sole asset will be the capital stock of a wholly owned subsidiary, Carvana Sub, whose sole

 



 

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asset will be its membership interest in Carvana Group. We will operate and control all of the business and affairs and consolidate the financial results of Carvana Group. See “Organizational Structure” for a complete description of the Organizational Transactions.

In connection with the Organizational Transactions:

 

   

We will amend and restate Carvana Group’s existing operating agreement (the “LLC Operating Agreement”) to, among other things, (i) eliminate a class of preferred membership interests, (ii) provide for LLC Units consisting of two classes of common ownership interests in Carvana Group (Class B common units held by certain employees and consultants subject to vesting and a participation threshold (“Class B Units”), and Class A common units held by the other Carvana Group owners, including the Garcia Parties and Carvana Sub (“Class A Units”)), and (iii) appoint our wholly owned subsidiary, Carvana Sub, as the sole manager of Carvana Group. See “Organizational Structure — Amended and Restated Operating Agreement of Carvana Group.”

 

   

We and our wholly owned subsidiary, Carvana Sub, will enter into an exchange agreement with the holders of LLC Units (the “LLC Unitholders”) pursuant to which the LLC Unitholders (other than Carvana Sub) will be entitled to exchange LLC Units, together with shares of Class B common stock in the case of Class A Units, for a number of shares of Class A common stock determined in accordance with the Exchange Agreement or, at our election, for cash. See “Organizational Structure — Exchange Agreement.”

 

   

We will enter into a tax receivable agreement (the “Tax Receivable Agreement”) with the LLC Unitholders that will provide for the payment by Carvana Co. to LLC Unitholders of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income taxes we actually realize (or, under certain circumstances are deemed to realize in the case of an early termination payment by us, a change in control or a material breach by us of our obligations under the Tax Receivable Agreement, as discussed below) as a result of (i) the increase in our proportionate share of the existing tax basis of the assets of Carvana Group and an adjustment in the tax basis of the assets of Carvana Group reflected in that proportionate share as a result of purchases of LLC Units from the LLC Unitholders (other than Carvana Sub) by Carvana Sub and (ii) certain other tax benefits related to our entering into the Tax Receivable Agreement, including tax benefits attributable to payments that we are required to make under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. See “Organizational Structure — Tax Receivable Agreement.”

We estimate that the net proceeds to us from the sale of our Class A common stock in this offering, after deducting underwriting discounts and commissions and estimated expenses payable by us, will be approximately $             million ($             million if the underwriters exercise their option to purchase additional shares in full), based on an assumed initial public offering price of $             per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). We will contribute such net proceeds to our wholly owned subsidiary, Carvana Sub, that will in turn use such net proceeds as follows:

 

   

pay $             million to acquire             newly-issued LLC Units in Carvana Group at a purchase price per LLC Unit equal to the initial offering price per share of Class A common stock in this offering, less underwriting discounts and commissions. In turn, Carvana Group intends to:

 

   

repay all outstanding borrowings under a $50.0 million credit facility from Verde Investment, Inc., an affiliate of DriveTime, (the “Verde Credit Facility”);

 

   

pay an estimated $             million of expenses incurred in connection with the Organizational Transactions; and

 

   

use the remaining proceeds for general corporate purposes. See “Use of Proceeds.”

 



 

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The following diagram depicts our anticipated structure upon the completion of this offering and the use of proceeds therefrom. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities.

 

LOGO

 

(1) Upon completion of this offering, the Garcia Parties will collectively control approximately     % of the voting interest in us (or approximately     % if the underwriters exercise their option to purchase additional shares in full). The remaining LLC Unitholders will collectively control approximately         % of the voting interest in us (or approximately         % if the underwriters exercise their option to purchase additional shares in full). See “Principal Stockholders” for additional information about the other LLC Unitholders that will beneficially own more than 5% of our outstanding shares of Class B common stock following the completion of this offering. In addition to the Garcia Parties, our existing owners include a limited number of third parties that have invested in Class A Units, as well as certain of our employees who have been issued Class B Units pursuant to the LLC Plan.

 

(2) Shares of Class A common stock and Class B common stock will vote as a single class. Each outstanding share of Class A common stock will be entitled to one vote on all matters to be voted on by stockholders generally. The shares of Class B common stock have no economic rights. Each share of our Class B common stock held by the Garcia Parties entitles its holder to ten votes on all matters to be
  voted on by stockholders generally for so long as the Garcia Parties maintain direct or indirect

 



 

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  beneficial ownership of at least 25% of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock). All other shares of our Class B common stock entitle their holder to one vote per share on all matters to be voted on by stockholders generally. In accordance with the exchange agreement to be entered into in connection with the Organizational Transactions, LLC Unitholders will be entitled to exchange LLC Units, together with shares of Class B common stock in the case of Class A Units, for shares of Class A common stock determined in accordance with the Exchange Agreement or, at our election, for cash.

 

(3) During 2016, Carvana, LLC established a bonus plan for certain non-executive employees (the “Existing Performance Plan”), participants in which will be issued an aggregate of             restricted shares of Class A common stock upon the completion of this offering pursuant to the terms of our new 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) (assuming an initial public offering price of $             per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). We will also issue an aggregate of             restricted shares of Class A common stock (assuming an initial public offering price of $             per shares, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus) upon the completion of this offering to certain of our non-executive employees who are not participants in the Existing Performance Plan. Upon the pricing of this offering, we also expect to award options to purchase an aggregate of             shares of Class A common stock to approximately                  employees, with an exercise price set at the initial public offering price. The options awarded upon pricing of the offering will be contingent upon completion of the offering, and a portion of the options will be unvested as of the date of grant. All of the unvested option awards will be time-vesting over a five year period.

 

(4) Assumes no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full, (i) the holders of Class A common stock will have     % of the voting power in Carvana Co., (ii) the holders of Class B common stock will have     % of the voting power of Carvana Co., (iii) the LLC Units held by the remaining LLC Unitholders will constitute     % of the outstanding LLC Units in Carvana Group, and (iv) Carvana Co. will own, indirectly through its wholly owned subsidiary, Carvana Sub,     % of the outstanding LLC Units in Carvana Group.

Our corporate structure following the offering, as described above, is commonly referred to as an “Up-C” structure, which is commonly used by partnerships and limited liability companies when they undertake an initial public offering of their business. Our Up-C structure will allow the existing owners of Carvana Group to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for income tax purposes following the offering. One of these benefits is that future taxable income of Carvana Group that is allocated to such owners will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the LLC Units that the existing owners will continue to hold are exchangeable for shares of our Class A common stock or, at our option, for cash from Carvana Sub, the Up-C structure also provides the existing owners of Carvana Group potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. See “Organizational Structure” and “Description of Capital Stock.”

Following this offering, each of the existing owners of Carvana Group Class A Units will also hold a number of shares of our Class B common stock equal to                  the number of Class A Units they own. Our Class A common stock and Class B common stock will have what is commonly referred to as a “high/low vote structure,” which means that certain shares of our Class B common stock will have ten votes per share, while other shares of Class B common stock and all shares of Class A common stock will only have one vote per share. Each share of our Class B common stock held by the Garcia Parties, which includes Ernie Garcia, III, our Chief Executive Officer, as well as his father (who is also our controlling shareholder) will entitle its holder to ten votes per share for so long as the Garcia Parties maintain direct or indirect

 



 

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beneficial ownership of at least 25% of our total outstanding shares of common stock. All other shares of our Class B common stock will have one vote per share, which is on par with the voting rights of our Class A common stock. This high/low vote structure will enable the Garcia Parties to control the outcome of matters submitted to our stockholders for approval, including the election of our directors, as well as the overall management and direction of our company. Furthermore, the Garcia Parties will continue to exert a significant degree of influence, or actual control, over matters requiring shareholder approval until they own as little as approximately 25% of our outstanding common stock. We believe that maintaining this control by the Garcia Parties will be important for enabling them to successfully guide the implementation of our company’s growth strategies and strategic vision. Meanwhile, holders of our Class A common stock will have economic and voting rights similar to those of holders of common stock of non-Up-C structured public companies that have a high/low vote structure.

Carvana Co. will hold, indirectly through its wholly owned subsidiary, Carvana Sub, LLC Units, and therefore receive the same benefits as our existing owners on account of its ownership in an entity treated as a partnership, or “passthrough” entity, for income tax purposes. As Carvana Sub purchases LLC Units from the existing owners under the mechanism described above, Carvana Co. will obtain a step-up in tax basis in its share of Carvana Group’s assets. This step-up in tax basis will provide Carvana Co. with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to Carvana Co. Carvana Co. expects to enter into an agreement under which it will agree to pay the existing owners of Carvana Group 85% of the value of these tax benefits; however, the remaining 15% of the value of such benefits will be available to Carvana Co.

Generally, Carvana Co. will receive a pro rata share of any distributions made by Carvana Group to its members. However, pursuant to the LLC Operating Agreement, tax distributions will be made quarterly by Carvana Group to the holders of Class A Units on a pro rata basis based on Carvana Group’s net taxable income and to the holders of Class B Units based on such holder’s allocable share of Carvana Group’s net taxable income (rather than on a pro rata basis). Such tax distributions will be calculated based upon an assumed tax rate, which, under certain circumstances, may cause Carvana Group to make tax distributions that, in the aggregate, exceed the amount of taxes that Carvana Group would have paid if it were a similarly situated corporate taxpayer. Funds used by Carvana Group to satisfy its tax distribution obligations will not be available for reinvestment in our business. See “Risk Factors — Risks Related to Our Organizational Structure.”

Upon completion of this offering, we will be controlled by the Garcia Parties because the Garcia Parties will control approximately     % of the voting interest in us (or approximately     % if the underwriters exercise their option to purchase additional shares of our Class A common stock in full).

As a result of the Organizational Transactions:

 

   

the investors in this offering will collectively own             shares of our Class A common stock and we will hold, indirectly through our wholly owned Subsidiary, Carvana Sub,              LLC Units;

 

   

certain of our former and current employees will own             shares of restricted Class A common stock issued pursuant to the 2017 Incentive Plan;

 

   

the Garcia Parties will own             LLC Units and             shares of Class B common stock;

 

   

the remaining LLC Unitholders will own             LLC Units and             shares of Class B common stock;

 

   

our Class A common stock will collectively represent approximately      % of the voting power in us; and

 

   

our Class B common stock will collectively represent approximately      % of the voting power in us.

 



 

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THE OFFERING

 

Issuer

Carvana Co.

 

Class A common stock offered by us

             shares.

 

Option to purchase additional shares of our Class A common stock

             shares.

Class A common stock to be outstanding immediately after this offering

             shares (or          shares if the underwriters’ option is exercised in full). If all outstanding LLC Units held by the LLC Unitholders were exchanged for newly-issued shares of Class A common stock in accordance with the Exchange Agreement (based upon an assumed offering price of $             per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus),              shares of Class A common stock (or             shares if the underwriters’ option is exercised in full) would be outstanding.

 

Class B common stock to be outstanding immediately after this offering

             shares. Immediately after this offering, the LLC Unitholders will own 100% of the outstanding shares of our Class B common stock.

 

Ratio of shares of Class A common stock to LLC Units

After this offering, Carvana Group will maintain a one-to-             ratio between the number of shares of Class A common stock issued by us and the number of LLC Units owned by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities and subject to adjustment as set forth in the Exchange Agreement).

 

Voting

Each share of our Class A common stock entitles its holder to one vote on all matters to be voted on by stockholders generally.

 

  After this offering, the LLC Unitholders will hold a number of shares of Class B common stock equal to                  the number of Class A Units held by the LLC Unitholders (other than Carvana Sub). Each share of our Class B common stock held by the Garcia Parties entitles its holder to ten votes on all matters to be voted on by stockholders generally for so long as the Garcia Parties maintain direct or indirect beneficial ownership of at least 25% of the outstanding shares of our Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock).

As a result, the Garcia Parties will have the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our

 



 

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outstanding Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. All other shares of our Class B common stock entitle their holders to one vote per share on all matters to be voted on by stockholders generally. See “Description of Capital Stock —Common Stock — Voting Rights.”

 

  Holders of our Class A and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

 

  Upon completion of this offering, we will be controlled by the Garcia Parties. Upon completion of this offering, the Garcia Parties will control approximately     % of the voting interest in us (or approximately     % if the underwriters exercise their option to purchase additional shares in full). See “Organizational Structure” and “Management — Corporate Governance.”

 

Voting power held by holders of Class A common stock

    % (or 100% if all outstanding LLC Units were exchanged for newly-issued shares of Class A common stock in accordance with the Exchange Agreement).

 

Voting power held by holders of Class B common stock

    % (or 0% if all outstanding LLC Units were exchanged for newly-issued shares of Class A common stock in accordance with the Exchange Agreement).

 

Use of proceeds

We estimate, based upon an assumed initial public offering price of $             per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), we will receive net proceeds from this offering of approximately $             million (or $         million if the underwriters exercise their option in full to purchase additional shares of Class A common stock), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to contribute the net proceeds to our wholly owned subsidiary, Carvana Sub, that will in turn acquire             newly-issued LLC Units (or             LLC Units if the underwriters exercise their option in full to purchase additional shares of Class A common stock) in Carvana Group at a purchase price per LLC Unit equal to                      the initial public offering price per share of Class A common stock in this offering, less underwriting discounts and commissions. In turn, Carvana Group intends to apply the net proceeds it receives from us to repay all outstanding borrowings under the Verde Credit Facility, to pay expenses incurred in connection with the Organizational Transactions and for general corporate purposes.

 

  See ‘‘Use of Proceeds” and “Organizational Structure.”

 



 

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Dividend policy

We currently intend to retain any future earnings for investment in our business and do not expect to pay any dividends in the foreseeable future. The declaration and payment of all future dividends, if any, will be at the discretion of our board of directors (our “Board”) and will depend upon our financial condition, earnings, contractual restrictions, or applicable laws and other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Exchange rights of holders of the LLC Units

Prior to this offering, we will enter into an exchange agreement with the LLC Unitholders so that they may exchange LLC Units, together with shares of Class B common stock, in the case of Class A Units, for shares of Class A common stock in accordance with the terms of the Exchange Agreement or, at our election, for cash. Any shares of Class B common stock so delivered will be cancelled. See “Organizational Structure —Exchange Agreement.”

 

Tax receivable agreement

We will enter into a Tax Receivable Agreement with Carvana Group and the LLC Unitholders that will provide for the payment by us to such persons of 85% of the amount of tax benefits, if any, that we actually realize (or in some circumstances are deemed to realize) as a result of (1) the increase in our proportionate share of the existing tax basis of the assets of Carvana Group and an adjustment in the tax basis of the assets of Carvana Group reflected in that proportionate share as a result of any future exchanges of LLC Units held by the LLC Unitholders for shares of our Class A common stock or cash described under “Organizational Structure — Exchange Agreement” and (2) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. See “Organizational Structure — Tax Receivable Agreement.”

 

Registration rights agreement

We intend to enter into a Registration Rights Agreement with certain LLC Unitholders in connection with this offering. The Registration Rights Agreement will provide such LLC Unitholders certain registration rights whereby, following our initial public offering and the expiration of any related lock-up period, such LLC Unitholder can require us to register under the Securities Act shares of Class A common stock issuable to them upon exchange of their LLC Units. The Registration Rights Agreement will also provide for piggyback registration rights for certain LLC Unitholders. See “Certain Relationships and Related Party Transactions — Registration Rights Agreement.”

 



 

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Risk factors

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

 

Trading symbol

“CVNA.”

Unless otherwise indicated, all information in this prospectus:

 

   

assumes the effectiveness of the Organizational Transactions, including the amendment and restatement of the operating agreement of Carvana Group, as well as the effectiveness of our amended and restated certificate of incorporation and bylaws, which we will adopt prior to the completion of this offering;

 

   

assumes an initial public offering price of $             per share, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus;

 

   

assumes that the underwriters’ option to purchase             additional shares of Class A common stock from us is not exercised;

 

   

excludes the shares of Class A common stock that may be issuable upon exercise of redemption and exchange rights held by the LLC Unitholders; and

 

   

excludes             shares of Class A common stock reserved for future issuance,              restricted shares of Class A common stock to be issued to certain employees upon the completion of this offering and options to purchase an aggregate of              shares of common stock to be issued to approximately                      employees upon the pricing of this offering, with an exercise price set at the initial public offering price, in each case under our 2017 Incentive Plan and assuming an initial public offering price of $             per shares, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus.

 



 

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SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

The following tables present, as of the dates and for the periods indicated, (1) the summary historical consolidated financial and other data for Carvana Group and its consolidated subsidiaries and (2) the summary unaudited pro forma financial data for Carvana Co. and its consolidated subsidiaries including Carvana Group. Carvana Group is the predecessor of Carvana Co. for financial reporting purposes. The summary consolidated statement of operations data for the years ended December 31, 2014 and December 31, 2015 and December 31, 2016 and the summary consolidated balance sheet data as of December 31, 2015 and December 31, 2016 have been derived from the audited consolidated financial statements of Carvana Group and its subsidiaries included elsewhere in this prospectus. The summary consolidated balance sheet data as of December 31, 2014 presented below has been derived from the audited consolidated financial statements of Carvana Group and its subsidiaries not included in this prospectus.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. The information set forth below should be read together with ‘‘Use of Proceeds,’’ ‘‘Capitalization,’’ ‘‘Selected Consolidated Financial Data,’’ ‘‘Unaudited Pro Forma Consolidated Financial Data’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

The summary unaudited pro forma consolidated financial data of Carvana Co. presented below have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma financial data as of and for the year ended December 31, 2016, give effect to the Organizational Transactions as described in ‘‘Organizational Structure,’’ including the consummation of this offering, the use of proceeds therefrom and related transactions, as described in ‘‘Use of Proceeds” and ‘‘Unaudited Pro Forma Consolidated Financial Data,’’ as if all such transactions had occurred on January 1, 2016, with respect to the statement of operations data and as of December 31, 2016 with respect to the balance sheet data. The unaudited pro forma financial data include various estimates that are subject to material change and may not be indicative of what our operations or financial position would have been had this offering and related transactions taken place on the dates indicated, or that may be expected to occur in the future. See ‘‘Unaudited Pro Forma Consolidated Financial Data’’ for a complete description of the adjustments and assumptions underlying the summary unaudited pro forma consolidated financial data.

 



 

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The summary historical consolidated financial and other data of Carvana Co. have not been presented as Carvana Co. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

     Historical Carvana Group     Pro Forma
Carvana Co.(1)
 
     Years Ended December 31,     Year Ended
December 31,
2016
 
      2014     2015     2016    
     (in thousands, except per share and selected
other data)
 

Consolidated Statements of Operations Data:

        

Used vehicle sales, net

   $ 41,123     $ 124,972     $ 341,989     $                   

Wholesale vehicle sales

     522       3,743       10,163    

Other sales and revenues(2)

     34       1,677       12,996    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales and operating revenues

     41,679       130,392       365,148    

Cost of sales

     42,103       129,046       345,951    
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (424     1,346       19,197    

Selling, general and administrative expenses

     14,684       36,678       108,676    

Interest expense

     108       1,412       3,587    

Other expense, net

     22       36       46    
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (15,238     (36,780     (93,112  

Income tax provision

                    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (15,238   $ (36,780   $ (93,112   $  
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data(1):

        

Pro forma weighted average shares of Class A common stock outstanding:

        

Basic

         $  

Diluted

         $  

Pro forma net loss available to Class A common stock per share:

        

Basic

         $  

Diluted

         $  

Selected Other Data:

        

Number of markets at period end

     3       9       21    

Retail units sold

     2,105       6,523       18,761    

Inventory units available on website

     652       1,842       7,310    

Total gross (loss) profit per unit

   $ (201   $ 206     $ 1,023    

Consolidated Balance Sheets Data (at period end):

        

Cash and cash equivalents

   $ 6,929     $ 43,134     $ 39,184     $                   

Vehicle inventory

     26,371       68,038       185,506    

Total assets

     40,104       136,012       335,833    

Floor Plan Facility

     5,619       42,302       165,313    

 

(1) See “Unaudited Pro Forma Consolidated Financial Data” for the description of the assumptions underlying the pro forma calculations.

 

(2) Includes $460 of other sales and revenues from related parties for the year ended December 31, 2016.

 



 

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RISK FACTORS

This offering and an investment in our Class A common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our Class A common stock. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flows and prospects could be materially and adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose all or part of your investment in our Class A common stock.

Risks Related to Our Business

We have a history of losses and we may not achieve or maintain profitability in the future.

We have not been profitable since our inception in 2012 and had an accumulated loss of approximately $152.6 million as of December 31, 2016. We incurred net losses of $15.2 million, $36.8 million and $93.1 million, respectively, in the years ended December 31, 2014, December 31, 2015 and December 31, 2016. We expect to make significant investments to further develop and expand our business and these investments may not result in increased revenue or growth on a timely basis or at all. In addition, as a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will have to generate and sustain increased revenue to achieve and maintain profitability.

We expect to continue to incur losses at least in the near term as we invest in and strive to grow our business. We may incur significant losses in the future for a number of reasons, including slowing demand for used cars and our related products and services, increasing competition, weakness in the automotive retail industry generally, as well as other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications and delays in generating revenue or profitability. If our revenue slows, we may not be able to reduce costs in a timely manner because many of our costs are fixed at least in the short term. In addition, if we reduce variable costs to respond to losses, this may limit our ability to acquire customers and grow our revenues. Accordingly, we may not achieve or maintain profitability and we may continue to incur significant losses in the future.

Our recent, rapid growth may not be indicative of our future growth and, if we continue to grow rapidly, we may not be able to manage our growth effectively.

Our revenue grew from $41.7 million for the year ended December 31, 2014 to $130.4 million and $365.1 million for the years ended December 31, 2015 and December 31, 2016, respectively. We expect that, in the future, even if our revenue increases, our rate of growth may decline. In any event, we will not be able to grow as fast or at all if we do not:

 

   

increase the number of unique visitors to our website and the number of customers;

 

   

further improve the quality of our product offering, features and complementary products and services, and introduce high quality new products, services and features;

 

   

introduce additional third party products and services; or

 

   

acquire sufficient appropriate inventory at an attractive cost and high quality to meet the increasing demand for our vehicles.

There can be no assurance that we will meet these objectives. We expect to continue to expend substantial financial and other resources on:

 

   

marketing and advertising, including an increase to our television advertising expenditures;

 

   

expansion of our vehicle inventory; and

 

   

general administration, including legal, accounting and other compliance expenses related to being a public company.

 

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Our historical rapid growth has placed and may continue to place significant demands on our management and our operational and financial resources. We have experienced significant growth in the number of users of our platform as well as the amount of data that we analyze. We have hired and expect to continue hiring additional personnel to support our rapid growth. Our organizational structure is becoming more complex as we add staff, and we will need to improve our operational, financial and management controls as well as our reporting systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, teamwork and attention to the car buying experience for the consumer. If we cannot manage our growth effectively to maintain the quality and efficiency of our customers’ car buying experience and the quality of the vehicles we sell, our business could be harmed and our results of operations and financial condition could be materially and adversely affected.

Our business has grown rapidly as additional customers have purchased used cars and complementary products and services through our platform. However, our business is relatively new and has operated at substantial scale for only a limited period of time. Given this limited history, it is difficult to predict whether we will be able to maintain or grow our business. We also expect that our business will evolve in ways that may be difficult to predict. For example, over time our investments intended to drive new customer traffic to our website may be less productive than expected. In the event of this or any other adverse developments, our continued success will depend on our ability to successfully adjust our strategy to meet changing market dynamics. If we are unable to do so, our business could be harmed and our results of operations and financial condition could be materially and adversely affected.

Our limited operating history makes it difficult to evaluate our current business and future prospects and the risk of your investment.

We launched our first market in 2013 and do not have a long history operating as a commercial company. In addition, we have only operated independently of DriveTime since November 1, 2014 and following our Spinoff, we remained dependent on DriveTime for a number of important operations, including locations for certain of our inspection and reconditioning centers (“IRCs”), vehicle inventory purchasing and a number of administrative services. We continue to utilize DriveTime for certain services. Due to this and other factors, our operating results are not predictable and our historical results may not be indicative of our future results. In order for our revenues to continue to increase, we need to successfully enter new markets, acquire more customers and expand our brand awareness. The foregoing may not happen at all or may not happen as quickly as we expect. Our failure to expand our brand awareness, successfully enter new markets, acquire new customers and gain repeat customers would harm our business, financial condition and results of operation.

We may experience seasonal and other fluctuations in our quarterly operating results, which may not fully reflect the underlying performance of our business.

We expect our quarterly results of operations, including our revenue, gross profit and profitability, if any, and cash flow to vary significantly in the future, based in part on, among other things, consumers’ car buying patterns. Used vehicle sales exhibit seasonality with sales peaking late in the first calendar quarter and diminishing through the rest of the year, with the lowest relative level of vehicle sales expected to occur in the fourth calendar quarter. Due to our rapid growth, our sales patterns to date have not reflected the general seasonality of the used vehicle industry, but we expect this to change once our business and markets mature. Used vehicle prices also exhibit seasonality, with used vehicles depreciating at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. Historically, this has led our gross profit per unit to be higher on average in the first half of the year than in the second half of the year. Other factors that may cause our quarterly results to fluctuate include, without limitation:

 

   

our ability to attract new customers;

 

   

changes in the competitive dynamics of our industry;

 

   

the regulatory environment;

 

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expenses associated with unforeseen quality issues and manufacturer recalls; and

 

   

litigation or other claims against us.

In addition, a significant portion of our expenses are fixed and do not vary proportionately with fluctuations in revenues. Accordingly, our results in any quarter may not indicate the results we may achieve in any subsequent quarter or for the full year, and period-to-period comparisons of our operating results may not be meaningful.

Through shared service and other agreements that were not negotiated at arm’s length, we historically benefited from DriveTime’s expertise and economies of scale, and continue to utilize DriveTime and its affiliates for certain services and processes and as a lender to us.

We were incubated by, and benefited from, our relationship and a series of arrangements with DriveTime that were not negotiated at arm’s length, as DriveTime is controlled by our controlling shareholder, who is also the father of our Chief Executive Officer. Currently, many services that DriveTime historically provided to us (including certain accounting, finance, legal, human resources, payroll and benefits, information technology, real estate and inventory purchasing) are now provided by alternative vendors or have been brought in-house. Consequently, certain of our historical costs may not accurately reflect our future costs to the extent that DriveTime no longer provides us with such services or refuses to continue doing so at currently contracted-for prices.

For example, DriveTime built our existing IRCs and now leases them to us. If we are unable to time-efficiently and cost effectively construct or acquire additional IRCs in the future, our production capacity may not be sufficient to satisfy customer demand. In addition, we lease most of our logistics hubs from DriveTime. If we cannot similarly lease space for logistics hubs in our future markets from DriveTime, we may not be able to expand into new markets as quickly as we have historically and we may incur additional costs in such expansion.

We continue to engage DriveTime and its affiliates, and other entities controlled by our controlling shareholder, to provide us with certain services, including the administration of VSCs sold to our customers. We also continue to utilize DriveTime for certain information technology and tax systems and services. For example, we rely on DriveTime’s inventory management system and accounting system to support our revenue recognition process. Should DriveTime fail to adequately perform any of these services or maintain these systems, our financial condition and results of operations may be adversely affected. Additionally, DriveTime has in the past and may in the future purchase automotive finance receivables from us.

DriveTime performs ongoing servicing and collections on automotive finance receivables originated by us before and after we sell such automotive finance receivables. If DriveTime is unwilling to enter into servicing arrangements in our future facilities on terms or at prices consistent with their historical prices or at all, our ability to sell such receivables may be adversely affected, and if DriveTime refuses to continue servicing and collecting on automotive finance receivables originated by us prior to our sale of the same to third parties, our ability to adequately prepare such receivables for sale may be adversely affected.

In February 2017, we entered into the $50.0 million Verde Credit Facility with an affiliate of DriveTime. We can not assure you that similar funds would have been available to us from a third party lender.

DriveTime is currently in the process of evaluating strategic alternatives, including the potential sale of the company to interested third parties. If such a sale is completed, there can be no assurances that DriveTime will enter into any new agreements or arrangements, or extensions or renewals of existing agreements or arrangements, with us on the same or similar terms or at all.

See “Certain Relationships and Related Party Transactions—Our Relationship with DriveTime.”

 

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Our results of operations and financial condition are subject to management’s accounting judgments and estimates, as well as changes in accounting policies.

The preparation of our financial statements requires us to make estimates and assumptions affecting the reported amounts of our assets, liabilities, revenues and expenses. If these estimates or assumptions are incorrect, it could have a material adverse effect on our results of operations or financial condition. We have identified several accounting policies as being “critical” to the fair presentation of our financial condition and results of operations because they involve major aspects of our business and require us to make judgments about matters that are inherently uncertain. These policies are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the notes to consolidated financial statements included in this prospectus.

The implementation of new accounting requirements or other changes to U.S. generally accepted accounting principles could have a material adverse effect on our reported results of operations and financial condition.

We participate in a highly competitive industry, and pressure from existing and new companies may adversely affect our business and operating results.

We face significant competition from companies that provide listings, information, lead generation, and car buying services designed to reach consumers and enable dealers to reach these consumers.

Our current and future competitors may include:

 

   

traditional used car dealerships that could increase investment in technology and infrastructure to compete directly with our online model;

 

   

Internet and online automotive sites that could change their models to directly compete with us, such as Google, Amazon, AutoTrader.com, eBay Motors, Edmunds.com, KBB.com, Autobytel.com, TrueCar.com and Cars.com;

 

   

providers of offline, membership-based car buying services such as the Costco Auto Program;

 

   

used car dealers or marketplaces with eCommerce business or online platforms such as Vroom and Shift; and

 

   

automobile manufacturers such as General Motors, Ford and Volkswagon that could change their sales models through technology and infrastructure investments.

We also expect that new competitors will continue to enter the online and traditional automotive retail industry with competing brands, business models, products and services, which could have an adverse effect on our revenue, business and financial results. For example, traditional car dealerships could transition their selling efforts online allowing them to sell cars across state lines and compete directly with our online offering and pricing model with no negotiation. There can be no assurance we will not experience competition from DriveTime, the company from which we were spun off and with which we currently have a number of business relationships. In addition, DriveTime is currently in the process of evaluating strategic alternatives, including the potential sale of the company to interested third parties. If such a sale is completed, it may be more likely that DriveTime determines to compete with us to a greater extent than presently. Furthermore, there can be no assurances that DriveTime will enter into any new agreements or arrangements, or extensions or renewals of existing agreements or arrangements, with us on the same or similar terms or at all. Furthermore, we have a cross-license agreement with DriveTime pursuant to which DriveTime has obtained limited licenses to some of our intellectual property. Additionally, existing eCommerce businesses, such as Amazon, could directly enter the online used car market. Some of these companies have significantly greater resources than we do and may be able to provide customers access to a greater inventory of vehicles at lower prices while delivering a competitive online experience.

Our competitors may also develop and market new technologies that render our existing or future business model, products and services less competitive, unmarketable or obsolete. For example,

 

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technology is currently being developed to produce automated, driverless vehicles that could eventually reduce the demand for, or replace, traditional cars including the used vehicles that we sell. Additionally, car rideshare services, such as Uber and Lyft, are becoming increasingly popular as a means of transportation and may decrease consumer demand for the used cars we sell, particularly as urbanization increases. Furthermore, new technologies such as autonomous driving software have the potential to change the dynamics of car ownership in the future. In addition, if our competitors develop business models, products or services with similar or superior functionality to our solutions, it may adversely impact our business.

Our competitors may also impede our ability to reach consumers or commence operations in certain jurisdictions. For example, our competitors may increase their search engine optimization efforts and outbid us for search terms on various search engines. Additionally, our competitors could use their political influence and increase lobbying efforts resulting in new regulations or interpretations of existing regulations that would prevent us from operating in certain jurisdictions.

Our current and potential competitors may have significantly greater financial, technical, marketing and other resources than we have, and the ability to devote greater resources to the development, promotion and support of their products and services. Additionally, they may have more extensive automotive industry relationships, longer operating histories and greater name recognition than we have. As a result, these competitors may be able to respond more quickly with new technologies and to undertake more extensive marketing or promotional campaigns. If we are unable to compete with these companies, the demand for our used cars, products and services could substantially decline.

Private plaintiffs and federal, state and local regulatory and law enforcement authorities continue to scrutinize advertising, sales, financing and insurance activities in the sale and leasing of used vehicles. If, as a result, other automotive retailers adopt more transparent, consumer-oriented business practices, our differentiation versus those retailers could be reduced.

In addition, if one or more of our competitors, or DriveTime, were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors may also establish or strengthen cooperative relationships with our current or future third party data providers, technology partners, or other parties with whom we have relationships, thereby limiting our ability to develop, improve and promote our solutions. We may not be able to compete successfully against current or future competitors, and competitive pressures may harm our revenue, business and financial results.

Our business is sensitive to changes in the prices of new and used vehicles.

Any significant changes in retail prices for new or used vehicles could have a material adverse effect on our revenues and results of operations. For example, if retail prices for used vehicles rise relative to retail prices for new vehicles, it could make buying a new vehicle more attractive to our customers than buying a used vehicle, which could have a material adverse effect on our results of operations and could result in reduced used car sales and lower revenue. Additionally, manufacturer incentives could contribute to narrowing the price gap between new and used vehicles. Used vehicle prices may also decline due to an increased number of new vehicle lease returns over the next several years. While lower used vehicle prices reduce our cost of acquiring new inventory, lower prices could also lead to reductions in the value of inventory we currently hold, which could have a negative impact on gross profit. Furthermore, any significant changes in wholesale prices for used vehicles could have a material adverse effect on our results of operations by reducing wholesale margins.

Our business is dependent upon access to desirable vehicle inventory. Obstacles to acquiring attractive inventory, whether because of supply, competition, or other factors may have a material adverse effect on our business, sales and results of operations.

We acquire cars for sale through numerous sources, including wholesale auction and directly from consumers. There can be no assurance that the supply of desirable used vehicles will be sufficient to meet

 

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our needs. A reduction in the availability of or access to sources of inventory could have a material adverse effect on our business, sales and results of operations.

Additionally, we evaluate tens of thousands of potential cars daily using a proprietary algorithm to predict mechanical soundness, consumer desirability and relative value as prospective inventory. If we fail to adjust appraisal offers to stay in line with broader market trade-in offer trends, or fail to recognize those trends, it could adversely affect our ability to acquire inventory. Our ability to source vehicles through our appraisal process could also be affected by competition, both from new and used car dealers directly and through third party websites driving appraisal traffic to those dealers. In addition, we remain dependent on third parties to sell us used vehicles, and there can be no assurance of an adequate supply of such vehicles on terms that are attractive to us.

Our business is dependent upon our ability to expeditiously sell inventory. Failure to expeditiously sell our inventory could have a material adverse effect on our business, sales and results of operations.

Our purchases of used vehicles are based in large part on projected demand. If actual sales are materially less than our forecasts, we would experience an over-supply of used vehicle inventory. An over-supply of used vehicle inventory will generally cause downward pressure on our product sales prices and margins and increase our average days to sale.

Used vehicle inventory has typically represented a significant portion of total assets. Having such a large portion of our total assets in the form of used vehicle inventory for an extended period of time subjects us to depreciation and other risks that affect our results of operations. Accordingly, if we have excess inventory or our average days to sale increases, we may be unable to liquidate such inventory at prices that allow us to meet margin targets or to recover our costs could have a material adverse effect on our results of operations.

Our ability to sell automotive finance receivables and generate gains on sales of these finance receivables may decline in the future and any material reduction could harm our business, results of operations and financial condition.

We provide financing to customers and typically sell the receivables related to the financing contract to third party investors or, in limited instances, DriveTime. For example, we entered into agreements in December 2016 pursuant to which third party purchasers committed to purchase an aggregate of $667.2 million of automotive finance receivables we originate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Finance Receivables.” Consistent with our experience under similar prior arrangements, we expect to exceed our capacity to sell automotive finance receivables under these agreements prior to the fourth quarter of 2017. As we use the available capacity under each agreement, we plan to enter into new arrangements to sell additional vehicle finance receivables. If we reach our capacity under these or future arrangements, and we cannot replace them with new arrangements, we may be unable to generate adequate liquidity and our business, financial condition and results of operations may be adversely affected.

Additionally, there can be no assurance that our relationships with the investors who purchase these receivables or DriveTime will continue in the future or that such investors will renew our agreements with them when they expire or that they will not terminate them due to a breach by us of our agreements with them or otherwise. If they or DriveTime cease to purchase these receivables, it would have a material adverse effect on our ability to continue originating finance receivables and adversely impact our operating results. Furthermore, we would be subject to the risk that some of these receivables are not paid when due and we are forced to incur unexpected asset write-offs and bad debt expense.

We depend on the sale of automotive finance receivables for a substantial portion of our gross profit.

In connection with the sale of used cars, many of our customers use our financing services to finance a portion of the purchase price of their vehicle. The prices we are able to charge for finance receivables that we sell are based on a variety of factors, including the terms and credit risk associated with the automotive

 

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finance receivables, the historical credit performance of the finance receivables we sell, investor demand and other factors. If these variables or others were to change, we might be required to reduce our sales prices on finance receivables, sell fewer of them or both, which could reduce our gains on sales of finance receivables. Any material reduction in our interest rate spread or gains on sale of finance receivables could have a material adverse effect on our business, results of operations and financial condition. Furthermore, customers may elect to finance their car purchases through other parties who may be able to offer more attractive terms in which case we would lose the source of a significant portion of our historical gross profit.

Our ability to resell automotive finance receivables is dependent on our ability to originate desirable finance receivables. If customers or third parties provide us incorrect or fraudulent data, we may offer credit terms that do not align with the customer’s credit profile, and our operating results may be harmed.

We offer financing to our customers to facilitate their purchases of used vehicles. The terms of the financing we offer are dependent in part on our assessment of such customers’ credit-worthiness, which is based on data gathered from customers and third parties. If the information we rely on is inaccurate or fraudulent, we may offer inappropriate terms to our customers, resulting in originating receivables that we are unable to collect or sell because they are based on an inaccurate credit profile. Originating a material amount of receivables with inaccurate or fraudulent credit profiles could have a material adverse effect on our business, results of operations and financial condition.

The success of our business relies heavily on our marketing and branding efforts and these efforts may not be successful.

We believe that an important component of our growth will be the growth of visitors to our website. Because we are a consumer brand, we rely heavily on marketing and advertising to increase brand visibility with potential customers. We currently advertise through a blend of brand and direct advertising channels with the goal of increasing the strength, recognition and trust in the Carvana brand and driving more unique visitors to our website. We recorded expenses of approximately $4.1 million, $10.8 million and $27.0 million on advertising in the years ended December 31, 2014, December 31, 2015 and December 31, 2016, respectively.

Our business model relies on our ability to scale rapidly and to decrease incremental customer acquisition costs as we grow. If we are unable to recover our marketing costs through increases in customer traffic and in the number of transactions by users of our platform, or if our broad marketing campaigns are not successful or are terminated, it could have a material adverse effect on our growth, results of operations and financial condition.

We rely on Internet search engines and social networking sites to help drive traffic to our website, and if we fail to appear prominently in the search results or fail to drive traffic through paid advertising, our traffic would decline and our business would be adversely affected.

We depend in part on Internet search engines, such as Google, Bing and Yahoo! and social networking sites such as Facebook to drive traffic to our website. Our ability to maintain and increase the number of visitors directed to our website is not entirely within our control. Our competitors may increase their search engine optimization efforts and outbid us for search terms on various search engines, resulting in their websites receiving a higher search result page ranking than ours. Additionally, Internet search engines could revise their methodologies in a way that would adversely affect our search result rankings. If Internet search engines modify their search algorithms in ways that are detrimental to us, or if our competitors’ efforts are more successful than ours, overall growth in our customer base could slow or our customer base could decline. Internet search engine providers could provide automotive dealer and pricing information directly in search results, align with our competitors or choose to develop competing services. Our website has experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users directed to our website through Internet search engines could harm our business and operating results.

 

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We operate in a highly regulated industry and are subject to a wide range of federal, state and local laws and regulations. Failure to comply with these laws and regulations could have a material adverse effect on our business, results of operations and financial condition.

We are subject to a wide range of federal, state and local laws and regulations. Our sale and purchase of used vehicles and related activities, including the sale of complementary products and services, are subject to state and local licensing requirements, federal and state laws regulating vehicle advertising, state laws related to title and registration and state laws regulating vehicle sales and service. The financing we offer to customers is subject to federal and state laws regulating the provision of consumer finance. Our facilities and business operations are subject to laws and regulations relating to environmental protection and health and safety. In addition to these laws and regulations that apply specifically to our business, we will also be subject to laws and regulations affecting public companies upon the completion of this offering, including securities laws and NYSE listing rules. The violation of any of these laws or regulations could result in administrative, civil or criminal penalties or in a cease-and-desist order against our business operations, any of which could damage our reputation and have a material adverse effect on our business, sales and results of operations. We have incurred and will continue to incur capital and operating expenses and other costs to comply with these laws and regulations.

Our logistics operations, which we depend upon to transport vehicles from auctions to our inspections and reconditioning centers, then on to our logistics hubs, and finally to our vending machines, fulfillment centers or directly to customers, are subject to the regulatory jurisdiction of the U.S. Department of Transportation (the “DOT”) and states through which our vehicles travel, which have broad administrative powers with respect to our logistics operations. Vehicle dimensions and driver hours of service are also subject to both federal and state regulation. More restrictive limitations on vehicle weight and size, trailer length and configuration, or driver hours of service would increase our costs, and if we are unable to pass these cost increases on to our customers, may increase our operating expenses and adversely affect our financial condition, operating results and cash flows. If we fail to comply with the DOT regulations or regulations become more stringent, we could experience increased inspections, regulatory authorities could take remedial action including imposing fines or shutting down our operations or we could be subject to increased audit and compliance costs. If any of these events occur, our financial condition, operating results and cash flows would be adversely affected.

Our sale of used vehicles and financing offerings are subject to the state and local licensing requirements of the jurisdictions in which we operate. Regulators of jurisdictions in which our customers reside, but for which we do not have a dealer or financing license, could require that we obtain a license or otherwise comply with various state regulations. Despite our belief that we are not subject to the licensing requirements of those jurisdictions, regulators may seek to impose punitive fines for operating without a license or demand we seek a license in those jurisdictions, any of which may inhibit our ability to do business in those jurisdictions, increase our operating expenses and adversely affect our financial condition and results of operations.

The foregoing description of laws and regulations to which we are or may be subject is not exhaustive, and the regulatory framework governing our operations is subject to continuous change.

Changes in the laws and regulations to which our business and industry is subject could have a material adverse effect on our business, sales, results of operations and financial condition.

Recent federal legislative and regulatory initiatives and reforms may result in an increase in expenses or a decrease in revenues, which could have a material adverse effect on our results of operations. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) regulates, among other things, the provision of consumer financing. The Dodd-Frank Act established a new consumer financial protection agency, the Consumer Financial Protection Bureau (“CFPB”), with broad regulatory powers. The CFPB is responsible for administering and enforcing laws and regulations related to consumer financial products and services, including our provision of vehicle financing and our receivables sale facilities. The evolving regulatory environment in the wake of the Dodd-Frank Act and the creation of

 

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the CFPB may increase the cost of regulatory compliance or result in changes to business practices that could have a material adverse effect on our results of operations.

The Patient Protection and Affordable Care Act of 2010, as it is phased in over time, significantly affects the provision of health care services and will increase the costs we incur to provide our employees with health coverage. Current federal labor policy could lead to increased unionization efforts, which could increase labor costs, disrupt facility operations, and have a material adverse effect on our business, sales and results of operations.

The enactment of new laws and regulations or the interpretation of existing laws and regulations in an unfavorable way may affect the operation of our business, directly or indirectly, which could result in substantial regulatory compliance costs, civil or criminal penalties, including fines, adverse publicity, decreased revenues and increased expenses.

If we fail to comply with the Telephone Consumer Protection Act, we may face significant damages, which could harm our business, financial condition, results of operations and cash flows.

We utilize telephone calls and text messaging as a means of responding to customer interest in purchasing and/or financing vehicles. We generate leads from our website by prompting potential customers to provide their phone numbers so that we can contact them in response to their interest in financing terms or a specific vehicle. We also pay third parties for leads. A portion of our revenue comes from sales and/or financing that involves a call made by our internal call centers to these potential customers.

The Telephone Consumer Protection Act (the “TCPA”), as interpreted and implemented by the Federal Communications Commission (the “FCC”), imposes significant restrictions on utilization of telephone calls and text messages to residential and mobile telephone numbers as a means of communication, when the prior consent of the person being contacted has not been obtained. Violations of the TCPA may be enforced by the FCC or by individuals through litigation, including class actions, and statutory penalties for TCPA violations range from $500 to $1,500 per violation, which is often interpreted to mean per phone call.

While we have implemented processes and procedures to comply with the TCPA, any failure by us or the third parties on which we rely for data to adhere to, or successfully implement, appropriate processes and procedures in response to existing or future regulations could result in legal and monetary liability, fines and penalties, or damage to our reputation in the marketplace, any of which could have a material adverse effect on our business, financial condition and results of operations. Additionally, any changes to the TCPA or its interpretation that further restrict the way we contact and communicate with our potential customers or generate leads, or any governmental or private enforcement actions related thereto, could adversely affect our ability to attract customers and harm our business, financial condition, results of operations and cash flows.

Government regulation of the Internet and eCommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and eCommerce. Existing and future regulations and laws could impede the growth of the Internet, eCommerce or mobile commerce. These regulations and laws may involve taxes, privacy and data security, anti-spam, pricing, content protection, electronic contracts and communications, mobile communications, consumer protection, information reporting requirements, unencumbered Internet access to our services and the design and operation of websites. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or eCommerce. Unfavorable regulations and laws could diminish the demand for used cars and complementary products and services and increase our cost of doing business.

 

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Our failure to maintain a reputation of integrity and to otherwise maintain and enhance our brand could adversely affect our business, sales and results of operations.

Our business model is based on our ability to provide customers with a transparent and simplified solution to car buying that will save them time and money. Accordingly, our reputation as a company that is founded on the fundamental principle of integrity is critical to our success. If we fail to maintain the high standards on which our reputation is built, or if an event occurs that damages this reputation, it could adversely affect consumer demand and have a material adverse effect on our business, sales and results of operations. Even the perception of a decrease in the quality of our brand could impact results.

Complaints or negative publicity about our business practices, marketing and advertising campaigns, compliance with applicable laws and regulations, the integrity of the data that we provide to users, data privacy and security issues, and other aspects of our business, especially on blogs and social media websites, and irrespective of their validity, could diminish customer confidence in our platform and adversely affect our brand. The growing use of social media increases the speed with which information and opinions can be shared and thus the speed with which reputation can be affected. If we fail to correct or mitigate misinformation or negative information, including information spread through social media or traditional media channels, about us or the vehicles we offer, our customer experience, or any aspect of our brand, it could have a material adverse effect on our business, sales and results of operations.

Our ability to grow our complementary product and service offerings may be limited, which could negatively impact our growth rate, revenues and financial performance.

If we introduce or expand additional offerings for our platform, such as services or products involving new cars, vehicle trade-ins, financing, insurance, deficiency waivers, customized accessories, leasing or maintenance, we may incur losses or otherwise fail to enter these markets successfully. Our expansion into these markets will place us in competitive and regulatory environments with which we are unfamiliar and involve various risks, including the need to invest significant resources and the possibility that returns on such investments will not be achieved for several years, if at all. In attempting to establish new service or product offerings, we expect to incur significant expenses and face various other challenges, such as expanding our customer advocate and management personnel to cover these markets and complying with complicated regulations that apply to these markets. In addition, we may not successfully demonstrate the value of these complementary products and services to consumers, and failure to do so would compromise our ability to successfully expand into these additional revenue streams. Any of these risks, if realized, could adversely affect our business and results of operations.

If we do not adequately address the shift to mobile device technology by our customers, operating results could be harmed and our growth could be negatively affected.

Our future success depends in part on our ability to provide adequate functionality for visitors who use mobile devices to shop for used cars and the number of transactions with us that are completed by those users. In the year ended December 31, 2015, approximately 52.2% of unique visitors to our website were attributable to mobile devices and in the year ended December 31, 2016, this figure grew to approximately 54.1%. The shift to mobile technology by our users may harm our business in the following ways:

 

   

customers visiting our website from a mobile device may not accept mobile technology as a viable long-term platform to buy or sell a vehicle. This may occur for a number of reasons, including our ability to provide the same level of website functionality to a mobile device that we provide on a desktop computer, the actual or perceived lack of security of information on a mobile device and possible disruptions of service or connectivity;

 

   

we may not continue to innovate and introduce enhanced products that can be suitably conveyed on mobile platforms;

 

   

consumers using mobile devices may believe that our competitors offer superior products and features based in part on our inability to provide sufficient website functionality to convince a mobile device user to transact with us; or

 

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regulations related to consumer finance disclosures, including the Truth in Lending Act, may be interpreted, in the context of mobile devices, in a manner which could expose us to legal liability in the event we are found to have violated applicable laws.

If we do not develop suitable functionality for users who visit our website using a mobile device, our business and operating results could be harmed.

Our business is subject to risks related to the larger automotive ecosystem, including consumer demand, global supply chain challenges and other macroeconomic issues.

Decreases in consumer demand could adversely affect the market for used vehicle purchases and, as a result, reduce the number of consumers using our platform. Consumer purchases of new and used vehicles generally decline during recessionary periods and other periods in which disposable income is adversely affected. For example, the number of new vehicle sales in the United States decreased from approximately 16.4 million in 2007 to approximately 10.6 million in 2009, according to the Bureau of Economic Analysis. Purchases of new and used vehicles are typically discretionary for consumers and have been, and may continue to be, affected by negative trends in the economy and other factors, including rising interest rates, the cost of energy and gasoline, the availability and cost of credit, reductions in business and consumer confidence, stock market volatility, increased regulation and increased unemployment. Increased environmental regulation has made, and may in the future make, used cars more expensive and less desirable for consumers. In addition, our business may be negatively affected by challenges to the larger automotive ecosystem, including urbanization, global supply chain challenges and other macroeconomic issues. For example, car rideshare services, such as Uber and Lyft, are becoming increasingly popular as a means of transportation and may decrease consumer demand for the used cars we sell, particularly as urbanization increases. Additionally, new technologies such as autonomous driving software have the potential to change the dynamics of car ownership in the future. Any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.

The current geographic concentration where we provide services creates an exposure to local economies, regional downturns or severe weather or catastrophic occurrences that may materially adversely affect our financial condition and results of operations.

We currently conduct business through three IRCs located in Winder, Georgia, Blue Mound, Texas and Delanco, New Jersey, managing fulfillment to 21 metropolitan areas across the southeast, mid-Atlantic, and Midwest regions and Texas. We hold the significant majority of our inventory at these three locations. While we have insurance to cover losses on those vehicles, events such as fire, flood, or hail could impact our business. In addition, our business is currently more susceptible to regional conditions than the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect our revenues and profitability. These factors include, among other things, changes in demographics and population. Severe weather conditions and other catastrophic occurrences in areas in which we operate or from which we obtain inventory may materially adversely affect our results of operations. Such conditions may result in physical damage to our properties, loss of inventory, delays in the delivery of vehicles to our logistics hubs, fulfillment centers and vending machines or to our customers. Any of these factors may disrupt our businesses and materially adversely affect our financial condition and result of operations. Furthermore, there can be no assurance that we will be able to successfully replicate our business model and achieve levels of success as we enter new markets.

We may require additional debt and equity capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances. If such capital is not available to us, our business, operating results and financial condition may be harmed.

We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to increase our marketing expenditures to improve our brand awareness, build and maintain our inventory of quality used vehicles, develop new

 

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products or services (including vehicle financing services) or further improve existing products and services, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us, or at all. In addition, any debt financing that we secure in the future could involve restrictive covenants which may make it more difficult for us to obtain additional capital and to pursue business opportunities. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

We rely on agreements with third parties to finance our vehicle inventory purchases. If we fail to maintain adequate relationships with third parties to finance our vehicle inventory purchases, we may be unable to maintain sufficient inventory, which would adversely affect our business and results of operations.

We rely on agreements with third party lenders to finance our vehicle inventory purchases. If we are unable to extend the agreements on favorable terms or at all, or if the agreements expire and are not renewed, our inventory supply may decline, resulting in fewer vehicles available for sale on our website. Obtaining new funding arrangements may be at higher interest rates or other less favorable terms. These financing risks, in addition to rising interest rates and changes in market conditions, if realized could negatively impact our results of operations and financial condition.

We make certain representations concerning the automotive finance receivables we sell. If those representations are not correct, we could be required to repurchase the receivables. Any significant required repurchases could have an adverse effect upon our ability to operate and fund our business.

We generally seek to sell automotive finance receivables to third parties. If these receivables do not meet the specified representations, we have in the past, and may in the future, be forced to repurchase these receivables. If we sell a significant amount of receivables that do not meet the predetermined representations, we may be required to use cash on hand or obtain alternative financing in order to repurchase them. Any significant repurchases could have a material adverse effect on our business, results of operations and financial condition.

We rely on our proprietary credit scoring model in the forecasting of automotive finance receivable loss rates. If we are unable to effectively forecast loss rates, it may negatively impact our operating results.

We rely on our internally developed models to forecast loss rates of the automotive finance receivables we originate. We generally seek to sell these receivables to third parties. If the receivables we sell to third parties experience higher loss rates than forecasted, we may obtain less favorable pricing on the receivables we sell to those parties in the future and suffer reputational harm in the marketplace for the receivables we sell and our business, results of operations and financial condition may be adversely affected. We hold receivables we originate on our balance sheet until we sell them to third parties, and to the extent those receivables fail to perform during our holding period, they may become ineligible for sale. If we rely on a model that fails to effectively forecast loss rates on receivables we originate and these receivables suffer higher losses than expected, our business, results of operations and financial condition may be adversely affected.

 

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We rely on internal and external logistics to transport our vehicle inventory throughout our markets and the United States. Thus, we are subject to business risks and costs associated with the transportation industry. Many of these risks and costs are out of our control, and any of them could have a material adverse effect on our business, financial condition and results of operations.

We rely on a combination of internal and external logistics to transport vehicles from auctions to our IRCs, then to our logistics hubs, and finally to our vending machines, fulfillment centers or directly to customers. As a result, we are exposed to risks associated with the transportation industry such as weather, traffic patterns, gasoline prices, recalls affecting our vehicle fleet, local and federal regulations, vehicular crashes, insufficient internal capacity, rising prices of external transportation vendors, fuel prices and taxes, license and registration fees, insurance premiums, self-insurance levels, difficulty in recruiting and retaining qualified drivers, disruption of our technology systems, and increasing equipment and operational costs. Our failure to successfully manage our logistics and fulfillment process could cause a disruption in our inventory supply chain and distribution, which may adversely affect our operating results and financial condition.

We face a variety of risks associated with the construction and operation of our vending machines and fulfillment centers, any of which could adversely affect our financial condition and results of operations.

We are required to obtain approvals, permits and licenses from state regulators and local municipalities to construct and operate our vending machines and fulfillment centers. We may face delays in obtaining the requisite approvals, permits and licenses to construct and operate our vending machines and fulfillment centers or we may not be able to obtain them at all. If we encounter delays in obtaining or cannot obtain the requisite approvals, permits and licenses to construct and operate our vending machines and fulfillment centers in desirable locations our financial condition and results of operations may be adversely affected.

We often lease the real estate on which we construct and operate our vending machines. Our landlords may recognize the unique nature and use of our vending machines and the difficulty they could have finding a replacement tenant if we vacate the site. Consequently, our landlords may offer us unfavorable leasing terms. If we are required to enter into inflexible and expensive leases to construct and operate our vending machines our financial condition and results of operations may be adversely affected.

We depend on one supplier to construct portions of our vending machines and to provide technical support and maintenance on our vending machines. If we are unable to maintain our relationship with our supplier, such supplier ceases to produce the vending machines, or such supplier is unable to effectively deliver our vending machine orders on timelines and at the price we have negotiated, and we are unable to contract with an alternative supplier we may not be able to construct new vending machines or continue to operate existing vending machines and our financial condition and operating results may be adversely affected. Additionally, the durability of our vending machines is unknown and we may be required to incur significant maintenance and other expenses to keep them operating properly. If we are required to incur significant expenses to maintain our vending machines our financial condition and operating results may be adversely affected.

We collect, process, store, share, disclose and use personal information and other data, and our actual or perceived failure to protect such information and data could damage our reputation and brand and harm our business and operating results.

We collect, process, store, share, disclose and use personal information and other data provided by consumers. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of such information. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Any failure or perceived failure to maintain the security of personal and other data that is provided to us by consumers and vendors could harm our reputation and brand and expose us to a risk of loss or litigation and possible liability, any of which could adversely affect our business and operating results.

 

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Additionally, concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy related matters, even if unfounded, could harm our business and operating results.

There are numerous federal, state and local laws regarding privacy and the collection, processing, storing, sharing, disclosing, using and protecting of personal information and other data, the scope of which are changing, subject to differing interpretations, and which may be costly to comply with and may be inconsistent between jurisdictions or conflict with other rules. We generally comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties. We strive to comply with applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection, to the extent possible. However, it is possible that these obligations may be interpreted and applied in new ways or in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices or that new regulations could be enacted. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to consumers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of sensitive information, which may include personally identifiable information or other customer data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause consumers, vendors and receivable purchasers to lose trust in us, which could have an adverse effect on our business. Additionally, if vendors, developers or other third parties that we work with violate applicable laws or our policies, such violations may also put consumer, vendor or receivables purchasers’ information at risk and could in turn harm our reputation, business and operating results.

A significant disruption in service on our website could damage our reputation and result in a loss of consumers, which could harm our business, brand, operating results and financial condition.

Our brand, reputation and ability to attract customers depend on the reliable performance of our website and the supporting systems, technology and infrastructure. We may experience significant interruptions with our systems in the future. Interruptions in these systems, whether due to system failures, programming or configuration errors, computer viruses, or physical or electronic break-ins, could affect the availability of our inventory on our website and prevent or inhibit the ability of customers to access our website. Problems with the reliability or security of our systems could harm our reputation, result in a loss of customers and result in additional costs.

Substantially all of the communications, network and computer hardware used to operate our website are located at co-location facilities. Although we have multiple locations, our systems are not fully redundant. In addition, we do not own or control the operation of these facilities. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical break-ins, computer viruses, earthquakes, and similar events. The occurrence of any of these events could damage our systems and hardware or could cause them to fail.

Problems faced by our third party web hosting providers could adversely affect the experience of our customers. For example, our third party web hosting providers could close their facilities without adequate notice. Any financial difficulties, up to and including bankruptcy, faced by our third party web hosting providers or any of the service providers with whom they contract may have negative effects on our business, the nature and extent of which are difficult to predict. If our third party web hosting providers are unable to keep up with our growing capacity needs, our business could be harmed.

Any errors, defects, disruptions, or other performance or reliability problems with our network operations could interrupt our customers’ access to our inventory and our access to data that drives our inventory purchase operations as well as cause delays and additional expense in arranging access to new facilities and services, any of which could harm our reputation, business, operating results and financial condition.

 

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Failure to adequately protect our intellectual property, technology and confidential information could harm our business and operating results.

Our business depends on our intellectual property, technology and confidential information, the protection of which is crucial to the success of our business. For example, we have developed proprietary algorithms to price the vehicles we purchase and sell and the financing we offer customers. We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect these algorithms and our other intellectual property, technology and confidential information. In addition, we attempt to protect our intellectual property, technology and confidential information by requiring certain of our employees and consultants to enter into confidentiality and assignment of inventions agreements and certain third parties to enter into nondisclosure agreements. These agreements may not effectively grant all necessary rights to any inventions that may have been developed by the employees and consultants. In addition, these agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property, or technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our website features, software and functionality or obtain and use information that we consider proprietary. Changes in the law or adverse court rulings may also negatively affect our ability to prevent others from using our technology.

We currently hold rights to the “carvana.com” Internet domain name and various other related domain names. The regulation of domain names in the United States is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain all domain names that use the name Carvana or are otherwise important for our business.

We may be subject to claims asserting that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employees or claims asserting ownership of what we regard as our own intellectual property.

Although we try to ensure that our employees, consultants and advisors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that these individuals or we have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops intellectual property that we regard as our own. The assignment of intellectual property may not be self-executing or the assignment agreement may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property.

We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results.

We may from time to time face allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors or non-practicing entities. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering some features,

 

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purchase licenses or modify our products and features while we develop non-infringing substitutes or may result in significant settlement costs.

Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, our operating results and our reputation.

Our platform utilizes open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.

In addition, we use open source software in our platform and expect to use open source software in the future. The term of various open source licenses have not been interpreted by United States courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our platform. By the terms of certain open source licenses, we could be required to release the source code of our proprietary software, and to make our proprietary software available under open source licenses, if we combine our proprietary software with open source software in a certain manner. In the event that portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, or to re-engineer all or a portion of our technologies or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and services. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with usage of open source software cannot be eliminated and could negatively affect our business and operating results.

Our business is sensitive to conditions affecting automotive manufacturers, including manufacturer recalls.

Adverse conditions affecting one or more automotive manufacturers could have a material adverse effect on our sales and results of operations and could impact the supply of vehicles. In addition, manufacturer recalls are a common occurrence that have accelerated in frequency and scope in recent years. Recalls and the increased regulatory scrutiny surrounding selling used vehicles with open safety recalls could adversely affect used vehicle sales or valuations, could cause us to temporarily remove vehicles from inventory, could cause us to sell affected vehicles at a loss, could force us to incur increased costs and could expose us to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on our business, financial condition and results of operations.

We rely on third party technology to complete critical business functions. If that technology fails to adequately serve our needs and we cannot find alternatives, it may negatively impact our operating results.

We rely on third party technology for certain of our critical business functions, including customer identity verification for financing, transportation fleet telemetry, network infrastructure for hosting the website and inventory data, software libraries and development environments and tools, services to allow customers to digitally sign contracts, customer service call center management software and automation controls and software for our vending machines. If these technologies fail or we cannot maintain our relationships with the technology providers and we cannot find suitable alternatives, our financial condition and operation results may be adversely affected.

We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.

We believe our success has depended, and continues to depend, on the efforts and talents of our executives and employees. Our future success depends on our continuing ability to attract, develop,

 

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motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In addition, the loss of any of our key employees or senior management, including our Chief Executive Officer, Ernie Garcia, III, or our Chief Financial Officer, Mark Jenkins, could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. Our executive officers and other employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We may not be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be materially and adversely affected.

The obligations associated with being a public company will require significant resources and management attention, and we will incur increased costs as a result of becoming a public company.

As a public company, we will face increased legal, accounting, administrative and other costs and expenses that we have not incurred as a private company. We expect to incur additional costs related to operating as a public company. After the completion of this offering, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which requires that we file annual, quarterly and current reports with respect to our business and financial condition and proxy and other information statements, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act and the Public Company Accounting Oversight Board (“PCAOB”) and the listing requirements of the NYSE, each of which imposes additional reporting and other obligations on public companies. As a public company, we will be required to, among other things:

 

   

prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance with the federal securities laws and rules and the NYSE rules;

 

   

expand the roles and duties of our Board and committees thereof and management;

 

   

hire additional financial and accounting personnel and other experienced accounting and finance staff with the expertise to address complex accounting matters applicable to public companies;

 

   

institute more comprehensive financial reporting and disclosure compliance procedures;

 

   

involve and retain to a greater degree outside counsel and accountants to assist us with the activities listed above;

 

   

enhance our investor relations function;

 

   

establish new internal policies, including those relating to trading in our securities and disclosure controls and procedures;

 

   

comply with the NYSE listing standards; and

 

   

comply with the Sarbanes-Oxley Act.

We expect these rules and regulations and changes in laws, regulations and standards relating to corporate governance and public disclosure, which have created uncertainty for public companies to increase legal and financial compliance costs and make some activities more time consuming and costly. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, financial condition and results of operations.

 

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We also expect that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These increased costs may require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives.

We may acquire other companies or technologies, which could divert our management’s attention, result in additional dilution to our stockholders and otherwise disrupt our operations and harm our operating results.

Our success will depend, in part, on our ability to grow our business in response to the demands of consumers and other constituents within the automotive industry as well as competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses and technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming, and costly, and we may not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:

 

   

diversion of management time and focus from operating our business to addressing acquisition integration challenges;

 

   

coordination of technology, research and development and sales and marketing functions;

 

   

transition of the acquired company’s users to our website and mobile applications;

 

   

retention of employees from the acquired company;

 

   

cultural challenges associated with integrating employees from the acquired company into our organization;

 

   

integration of the acquired company’s accounting, management information, human resources and other administrative systems;

 

   

the need to implement or improve controls, policies and procedures at a business that prior to the acquisition may have lacked effective controls, policies and procedures;

 

   

potential write-offs of intangibles or other assets acquired in such transactions that may have an adverse effect our operating results;

 

   

liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and

 

   

litigation or other claims in connection with the acquired company, including claims from terminated employees, consumers, former stockholders, or other third parties.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities and otherwise harm our business. Future acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses, or the write-off of goodwill, any of which could harm our financial condition. Also, the anticipated benefits of any acquisitions may not materialize. Any of these risks, if realized, could materially and adversely affect our business and results of operations.

We are, and may in the future be, subject to legal proceedings in the ordinary course of our business. If the outcomes of these proceedings are adverse to us, it could have a material adverse effect on our business, results of operations and financial condition.

We are subject to various litigation matters from time to time, which could have a material adverse effect on our business, results of operations and financial condition. Claims arising out of actual or alleged

 

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violations of law could be asserted against us by individuals, either individually or through class actions, by governmental entities in civil or criminal investigations and proceedings or by other entities. These claims could be asserted under a variety of laws, including but not limited to consumer finance laws, consumer protection laws, intellectual property laws, privacy laws, labor and employment laws, securities laws and employee benefit laws. These actions could expose us to adverse publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including but not limited to suspension or revocation of licenses to conduct business. See “Business — Legal Proceedings.”

Errors in our retail installment contracts with our customers may render them unenforceable.

We enter into purchase agreements, buyer’s orders, retail installment contracts and other contracts with our customers that are generated automatically based upon information the customer enters into our website. The contracts are intended to comply with the applicable consumer lending and other commercial and legal requirements of the relevant jurisdiction in which the sale is made. We face the risk, however, that the auto-generated forms may inadvertently contain errors, omissions or otherwise fail to comply with applicable regulations in a manner that would render such contracts unenforceable. For example, most jurisdictions impose a maximum interest rate cap that we can charge our customers. If we inadvertently or otherwise exceed the relevant cap, our retail installment contracts in such jurisdiction may be unenforceable, and in some instances, we may be required to pay damages or repay any financing charges previously collected. If a significant number of our retail installment contracts are rendered unenforceable, our financial condition and results of operations may be adversely affected.

Risks Related to Our Organizational Structure

Our principal asset after the completion of this offering will be our indirect interest in Carvana Group, and, accordingly, we will depend on distributions from Carvana Group to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Carvana Group’s ability to make such distributions may be subject to various limitations and restrictions.

Upon the consummation of this offering, we will be a holding company and will have no material assets other than our indirect ownership of LLC Units of Carvana Group. As such, we will have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Carvana Group and its subsidiaries and distributions we receive from Carvana Group. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.

Carvana Group will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, taxable income of Carvana Group will be allocated to the LLC Unitholders, including Carvana Sub, our wholly owned subsidiary. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Carvana Group. Under the terms of the LLC Operating Agreement, Carvana Group will be obligated to make tax distributions to LLC Unitholders, including us. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” We intend to cause Carvana Group to make cash distributions to the owners of LLC Units in an amount sufficient to (1) fund all or part of their tax obligations in respect of taxable income allocated to them and (2) cover our operating expenses, including payments under the Tax Receivable Agreement. However, Carvana Group’s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Carvana Group is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Carvana Group insolvent. If

 

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we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement, such payments generally will be deferred and will accrue interest until paid. Nonpayment for a specified period, however, may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement, unless, generally, such nonpayment is due to a lack of sufficient funds. See “Organizational Structure — Tax Receivable Agreement” and “Organizational Structure — Amended and Restated Operating Agreement of Carvana Group.” In addition, if Carvana Group does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See “— Risks Related to This Offering and Ownership of Our Class A Common Stock” and “Dividend Policy.”

The Garcia Parties will continue to control us following this offering and their interests may conflict with or differ from your interests as a stockholder.

Based on shares outstanding as of December 31, 2016, prior to this offering, the Garcia Parties beneficially owned approximately     % of the LLC Units. Immediately following this offering and the application of net proceeds therefrom, the Garcia Parties will beneficially own approximately     % of the LLC Units and are entitled to ten votes per share for so long as the Garcia Parties maintain direct or indirect beneficial ownership of at least 25% of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock), thereby giving the Garcia Parties the ability to control the outcome of matters requiring stockholder approval, even if they own significantly less than a majority of the shares of our outstanding Class A and Class B common stock, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. Because the Garcia Parties hold their economic ownership interest in our business through the LLC, rather than through the public company, the Garcia Parties may have conflicting interests with holders of shares of our Class A common stock. For example, the Garcia Parties may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreement that we will enter into in connection with this offering, and whether and when we should terminate the Tax Receivable Agreement and accelerate the obligations thereunder. In addition, the structuring of future transactions may take into consideration these tax considerations or other considerations even where no similar benefit would accrue to us. See “Organizational Structure — Tax Receivable Agreement.”

Conflicts of interest could arise between our stockholders and the LLC Unitholders, which may impede business decisions that could benefit our stockholders.

Holders of LLC Units have the right to consent to certain amendments to the operating agreement of the LLC, as well as to certain other matters. Holders of these voting rights may exercise them in a manner that conflicts with the interests of our stockholders. Circumstances may arise in the future when the interests of the LLC Unitholders conflict with the interests of our stockholders. As we control the LLC, we have certain obligations to the LLC Unitholders that may conflict with fiduciary duties our officers and directors owe to our stockholders. These conflicts may result in decisions that are not in the best interests of stockholders.

Upon the listing of our shares on the NYSE, we will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, but do not currently intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Upon completion of this offering, the Garcia Parties will continue to control a majority of the combined voting power of Carvana Co. As a result, we will be a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and need not comply

 

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with certain requirements, including the requirement that a majority of the Board consist of independent directors and the requirements that our compensation and nominating and governance committees be composed entirely of independent directors. Following this offering, we do not intend to utilize these exemptions. For so long as we qualify as a “controlled company,” we will maintain the option to utilize some or all of these exemptions. If we utilize these exemptions, we may not have a majority of independent directors and our compensation and nominating and governance committees may not consist entirely of independent directors, and such committees will not be subject to annual performance evaluations. Accordingly, in the event we rely on these exemptions in the future, you would not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE. See “Management —Controlled Company Status.”

The Tax Receivable Agreement with the LLC Unitholders requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.

In connection with the consummation of this offering, we will enter into a Tax Receivable Agreement with the LLC Unitholders. Pursuant to the Tax Receivable Agreement, we will be required to make cash payments to such LLC Unitholders equal to 85% of the tax benefits, if any, that we actually realize, or, in some circumstances, are deemed to realize, as a result of (1) the increase in our wholly owned subsidiary’s proportionate share of the existing tax basis of the assets of the LLC and an adjustment in the tax basis of the assets of the LLC reflected in that proportionate share as a result of any future exchanges of LLC Units held by the LLC Unitholders for shares of our Class A common stock or cash, as described under “Organizational Structure — Exchange Agreement” and (2) certain other tax benefits related to payments we make under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, which tax reporting positions will be based on the advice of our tax advisors. Any payments made by us to the LLC Unitholders under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent that we are unable to make payments under the Tax Receivable Agreement, such payments generally will be deferred and will accrue interest until paid. Nonpayment for a specified period, however, may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement, unless, generally, such nonpayment is due to a lack of sufficient funds. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that may be deemed realized under the Tax Receivable Agreement. The payments under the Tax Receivable Agreement are also not conditioned upon the LLC Unitholders maintaining a continued ownership interest in the LLC. See “Organizational Structure — Tax Receivable Agreement.”

The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the timing of exchanges by the LLC Unitholders, the amount of gain recognized by such LLC Unitholders, the amount and timing of the taxable income we generate in the future and the federal tax rates then applicable.

The amounts that we may be required to pay to the LLC Unitholders under the Tax Receivable Agreement may be accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we ultimately realize.

The Tax Receivable Agreement provides that if (1) certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, (2) we materially breach any of our material obligations under the Tax Receivable Agreement or (3) that if, at any time, we elect an early termination of the Tax Receivable Agreement, then the Tax Receivable Agreement will terminate and our

 

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obligations, or our successor’s obligations, to make payments under the Tax Receivable Agreement would accelerate and become immediately due and payable. The amount due and payable in that circumstance is based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement. See “Organizational Structure — Tax Receivable Agreement.” We may need to incur debt to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise.

As a result of a change in control or our election to terminate the Tax Receivable Agreement early, (1) we could be required to make cash payments to the LLC Unitholders that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and (2) we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreement.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the LLC Unitholders that will not benefit Class A common stockholders to the same extent as they will benefit the LLC Unitholders.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the LLC Unitholders that will not benefit the holders of our Class A common stock to the same extent. We will enter into a Tax Receivable Agreement with the LLC Unitholders, which will provide for the payment by us to the LLC Unitholders of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (1) the increase in our wholly owned subsidiary’s proportionate share of the existing tax basis of the assets of the LLC and an adjustment in the tax basis of the assets of the LLC reflected in that proportionate share as a result of any future exchanges of LLC Units held by an LLC Unitholder for shares of our Class A common stock or cash, as described under “Organizational Structure — Exchange Agreement” and (2) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Unit exchanges, and the resulting amounts we are likely to pay out to LLC Unitholders pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. See “Organizational Structure — Tax Receivable Agreement.” Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.

We will not be reimbursed for any payments made to the LLC Unitholders under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

We will not be reimbursed for any cash payments previously made to the LLC Unitholders pursuant to the Tax Receivable Agreement if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to an LLC Unitholder will be netted against any future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement. However, a challenge to any tax benefits initially claimed by us may not arise for a number of years following the initial time of such payment or, even if challenged early, such excess cash payment may be greater than the amount of future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement and, as a result, there may not be future cash payments to net against. The applicable U.S. federal income tax rules are complex and factual in nature, and there can be no assurance that the IRS or a court will not disagree with our tax reporting positions. As a result, it is possible that we could make cash payments under the Tax

 

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Receivable Agreement that are substantially greater than our actual cash tax savings. See “Organizational Structure — Tax Receivable Agreement.”

We may not be able to realize all or a portion of the tax benefits that are currently expected to result from future exchanges of LLC Units for our Class A common stock, the utilization of certain tax attributes previously held by Carvana Group and from payments made under the Tax Receivable Agreement.

Our ability to realize the tax benefits that we currently expect to be available as a result of the increases in tax basis created by any future exchanges of LLC Units (together with shares of our Class B common stock in the case of Class A Units) for our Class A common stock and by the payments made pursuant to the Tax Receivable Agreement, and our ability to utilize the pre-offering net operating losses of Carvana Group and the interest deductions imputed under the Tax Receivable Agreement all depend on a number of assumptions, including that we earn sufficient taxable income each year during the period over which such deductions are available and that there are no adverse changes in applicable law or regulations. If our actual taxable income were insufficient or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders’ equity could be negatively affected. See “Organizational Structure — Tax Receivable Agreement.”

In certain circumstances, Carvana Group will be required to make distributions to us and the LLC Unitholders and the distributions may be substantial.

Carvana Group will be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to its members, including us. We intend to cause Carvana Group to make tax distributions quarterly to the holders of Class A Units on a pro rata basis based on Carvana Group’s net taxable income and to the holders of Class B Units based on such holder’s allocable share of Carvana Group’s net taxable income (rather than on a pro rata basis). Funds used by Carvana Group to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, these tax distributions may be substantial, and will likely exceed (as a percentage of Carvana Group’s income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. As a result of the potential differences in the amount of net taxable income allocable to us and the LLC Unitholders, it is possible that we will receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to Carvana Group, the LLC Unitholders would benefit from any value attributable to such accumulated cash balances as a result of its ownership of Class A common stock following an exchange of its LLC Units (including any exchange upon an acquisition of us). See “Dividend Policy.”

Unanticipated changes in effective tax rates or adverse outcomes resulting from examination of our income or other tax returns could adversely affect our operating results and financial condition.

We are subject to income taxes in the United States, and our tax liabilities will be subject to the allocation of expenses in differing jurisdictions. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

expiration of, or detrimental changes in, research and development tax credit laws; or

 

   

changes in tax laws, regulations or interpretations thereof.

In addition, we may be subject to audits of our income, sales and other transaction taxes by U.S. federal and state authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.

 

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If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if it (1) is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (2) is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As the sole managing-member of Carvana Sub, we will control and manage Carvana Sub, which, by virtue of being the sole managing-member of Carvana Group, will, in turn, control and manage Carvana Group. On that basis, we believe that neither our interest in Carvana Sub nor Carvana Sub’s interest in Carvana Group are “investment securities” under the 1940 Act. Therefore, we have less than 40% of the value of our total assets (exclusive of U.S. government securities and cash items) in “investment securities.” However, if we were to lose the right to manage and control Carvana Sub or if Carvana Sub were to lose the right to manage and control Carvana Group, interests in Carvana Group or Carvana Sub could be deemed to be “investment securities” under the 1940 Act.

We intend to conduct our operations so that we will not be deemed to be an investment company. However, if we were deemed to be an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Liquidity

Our substantial indebtedness could adversely affect our financial flexibility and our competitive position and prevent us from fulfilling our obligations under our credit agreement.

As of December 31, 2016, we had, on a consolidated basis, $170.8 million aggregate principal amount of outstanding indebtedness represented by our vehicle inventory financing and security agreement dated as of December 30, 2015 and amended on November 9, 2016 and February 10, 2017 (as amended, the “Floor Plan Facility”) between us and Ally Bank and promissory note agreements as of various dates in 2016 between us and third party providers of equipment financing. Additionally, we may borrow up to an aggregate of $50.0 million under the Verde Credit Facility under which $             was drawn as of             .

Our substantial indebtedness could have significant effects on our business. For example, it could:

 

   

make it more difficult for us to satisfy our obligations with respect to our current and future indebtedness, including our Floor Plan Facility;

 

   

increase our vulnerability to adverse changes in prevailing economic, industry and competitive conditions;

 

   

require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, the execution of our business strategy and other general corporate purposes;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

increase our cost of borrowing;

 

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restrict us from exploiting business opportunities;

 

   

place us at a disadvantage compared to our competitors that have fewer debt obligations; and

 

   

limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy and other general corporate purposes.

We expect to use cash flow from operations to meet current and future financial obligations, including funding our operations, debt service requirements and capital expenditures. The ability to make these payments depends on our financial and operating performance, which is subject to prevailing economic, industry and competitive conditions and to certain financial, business, economic and other factors beyond our control.

Despite current indebtedness levels, we may incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial indebtedness.

We may incur significant additional indebtedness in the future. We may also consider investments in joint ventures or acquisitions, which may increase our indebtedness. If new debt is added to our currently anticipated indebtedness levels, the related risks that we face could intensify.

We may not be able to generate sufficient cash flow to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance outstanding debt obligations depends on our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and by financial, business and other factors beyond our control. We may not be able to maintain a sufficient level of cash flow from operating activities to permit us to pay the principal, premium, if any, and interest on the our indebtedness. Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which would also adversely affect our ability to incur additional indebtedness.

We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants. These alternative measures may not be successful, and we may be unable to meet our scheduled debt service obligations.

In the absence of such cash flows and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service obligations. We may not be able to consummate these asset sales to raise capital or sell assets at prices and on terms that we believe are fair and any proceeds that we do receive may not be adequate to meet any debt service obligations then due. If we cannot meet our debt service obligations, the holders of our indebtedness may accelerate such indebtedness and, to the extent such indebtedness is secured, foreclose on our assets. In such an event, we may not have sufficient assets to repay our indebtedness. If any of these risks are realized, our business and financial condition would be adversely affected.

Risks Related to This Offering and Ownership of our Class A Common Stock

The Garcia Parties control us and will continue to control us following this offering and their interests may conflict with ours or yours in the future.

Immediately following this offering of Class A common stock, the Garcia Parties will not hold any of our Class A common stock, but will together hold approximately     % of the voting power of our outstanding capital stock through their beneficial ownership of our Class B common stock. The Garcia Parties are

 

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entitled to ten votes per share of Class B common stock they beneficially own, for so long as the Garcia Parties maintain, in the aggregate, direct or indirect beneficial ownership of at least 25% of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock). Our Class A common stock, which is the stock we are selling in this offering, will have one vote per share. So long as the Garcia Parties continue to beneficially own a sufficient number of shares of Class B common stock, even if they beneficially own significantly less than 50% of the shares of our outstanding capital stock, the Garcia Parties will continue to be able to effectively control our decisions. For example, if the Garcia Parties hold Class B common stock amounting to 25% of our outstanding capital stock, they would collectively control     % of the voting power of our capital stock.

As a result, the Garcia Parties will have the ability to elect all of the members of our Board and thereby control our policies and operations, including the appointment of management, future issuances of our Class A common stock or other securities, the payment of dividends, if any, on our Class A common stock, the incurrence of debt by us, amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions, and the interests of the Garcia Parties may not in all cases be aligned with your interests.

In addition, the Garcia Parties will be able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our Board and could preclude any acquisition of our company. This concentration of voting control could deprive you of an opportunity to receive a premium for your shares of Class A common stock as part of a sale of our company and ultimately might affect the market price of our Class A common stock.

In addition, the Garcia Parties may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment, even though such transactions might involve risks to you. For example, the Garcia Parties could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets. The Garcia Parties may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. One of the Garcia Parties, Ernest Garcia, II, is the chairman of the board of directors and largest shareholder of DriveTime, which could compete more directly with us in the future. In particular, DriveTime is currently in the process of evaluating strategic alternatives, including the potential sale of the company to interested third parties. If such a sale is completed, it may be more likely that DriveTime determines to compete with us to a greater extent than presently. Furthermore, there can be no assurances that DriveTime will enter into any new agreements or arrangements, or extensions or renewals of existing agreements or arrangements, with us on the same or similar terms or at all. Our amended and restated certificate of incorporation will provide that none of the Garcia Parties or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his or her director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. The Garcia Parties also may pursue acquisition opportunities that may otherwise be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

For a description of the dual class structure, see the section “Description of Capital Stock.”

You will suffer immediate and substantial dilution in the net tangible book value of the Class A common stock you purchase.

The price you pay for shares of our Class A common stock sold in this offering is substantially higher than our pro forma net tangible book value per share. Based on the initial public offering price for our Class A common stock of $             per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus, you will incur immediate dilution in net tangible book value per share of $            . Dilution is the difference between the offering price per share and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after the offering.

 

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As a result of this dilution, investors purchasing stock in this offering may receive significantly less than the full purchase price that they paid for the stock purchased in this offering in the event of liquidation. See ‘‘Dilution.’’

You may be diluted by future issuances of additional Class A common stock or LLC Units in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.

Our amended and restated certificate of incorporation will authorize us to issue shares of our Class A common stock and options, rights, warrants and appreciation rights relating to our Class A common stock for the consideration of and on the terms and conditions established by our Board in its sole discretion, whether in connection with acquisitions or otherwise. The LLC Operating Agreement also authorizes Carvana Group to issue additional LLC Units whether in connection with an acquisition or otherwise. The LLC Unitholders may, at any time following the expiration of the lock-up period under the lock-up agreements, require Carvana Group to redeem all or a portion of their LLC Units in exchange for, at our election, (1) a cash payment by Carvana Group or (2) newly issued shares of Class A common stock, in each case in accordance with the terms and conditions of the Exchange Agreement. See “Organizational Structure — Exchange Agreement.” The market price of shares of our Class A common stock could decline as a result of these exchanges or the perception that an exchange could occur. These exchanges, or the possibility that these exchanges may occur, also might make it more difficult for holders of our Class A common stock to sell such stock in the future at a time and at a price that they deem appropriate.

We have reserved             shares of Class A common stock for issuance under our 2017 Incentive Plan, and we will grant an aggregate of             restricted shares of Class A common stock to certain employees upon completion of this offering and options to purchase             shares of Class A common stock to certain directors and employees upon pricing of this offering with an exercise price set at the initial public offering price, in each case assuming an initial public offering price of $             per shares, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus. Any Class A common stock that we issue, including under our 2017 Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

We and our officers and directors and certain LLC Unitholders, subject to certain exceptions, will agree that, without the prior written consent of Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Deutsche Bank Securities Inc., on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Class A common stock or any securities convertible into or exercisable or exchangeable for shares of Class A common stock; or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of Class A common stock, subject to certain exceptions. Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Deutsche Bank Securities Inc., in their sole discretion, may release the Class A common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. See ‘‘Underwriting.’’

The market price of our Class A common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our Class A common stock might impede our ability to raise capital through the issuance of additional shares of Class A common stock or other equity securities.

Pursuant to the LLC Operating Agreement, we may elect to issue shares of Class A common stock to fund a redemption of LLC Units for cash. Any sales in connection with exchange rights, or the prospect of any such sales, could materially impact the market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities. For a further description of the exchange rights, see ‘‘Organizational Structure — Exchange Agreement.’’

 

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In connection with the completion of this offering, we intend to enter into a Registration Rights Agreement with certain LLC Unitholders. Any sales in connection with the Registration Rights Agreement, or the prospect of any such sales, could materially impact the market price of our Class A common stock and could impair our ability to raise capital through future sales of equity securities. For a further description of our Registration Rights Agreement, see ‘‘Certain Relationships and Related Party Transactions —Registration Rights Agreement.’’

Our Class A common stock price may be volatile or may decline regardless of our operating performance and you may not be able to resell your shares at or above the initial public offering price.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering an active trading market will not develop or continue or, if developed, that any market will be sustained, which could make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price of our Class A common stock will be determined by negotiations between us and the representatives of the underwriters based upon a number of factors and may not be indicative of prices that will prevail in the open market following the consummation of this offering. See ‘‘Underwriting.’’ Consequently, you may not be able to sell our shares of Class A common stock at prices equal to or greater than the price you paid in this offering.

Volatility in the market price of our Class A common stock may prevent you from being able to sell your shares at or above the price you paid for them. Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this ‘‘Risk Factors’’ section and this prospectus, as well as the following:

 

   

our operating and financial performance and prospects;

 

   

our quarterly or annual earnings or those of other companies in our industry compared to market expectations;

 

   

future announcements concerning our business or our competitors’ businesses;

 

   

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

   

the size of our public float;

 

   

coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;

 

   

market and industry perception of our success, or lack thereof, in pursuing our growth strategy;

 

   

strategic actions by us or our competitors, such as acquisitions or restructurings;

 

   

changes in laws or regulations which adversely affect our industry or us;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

changes in senior management or key personnel;

 

   

issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;

 

   

adverse resolution of new or pending litigation against us; and

 

   

changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.

As a result, volatility in the market price of our Class A common stock may prevent investors from being able to sell their Class A common stock at or above the initial public offering price or at all. These broad market and industry factors may materially reduce the market price of our Class A common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our Class A common stock is low. As a result, you may suffer a loss on your investment.

 

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Substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end. If there are substantial sales of shares of our Class A common stock, the price of our Class A common stock could decline.

The price of our Class A common stock could decline if there are substantial sales of our Class A common stock, particularly sales by our directors, executive officers, and significant stockholders, or if there is a large number of shares of our Class A common stock available for sale. After this offering, we will have outstanding             shares of our Class A common stock, based on the number of shares outstanding as of December 31, 2016. All of the shares of Class A common stock sold in this offering will be available for sale in the public market. Substantially all of our outstanding shares of Class A common stock are currently restricted from resale as a result of market standoff and “lock-up” agreements, as more fully described in “Shares Eligible for Future Sale.” These shares will become available to be sold 181 days after the date of this prospectus. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements.

After our initial public offering, certain of our LLC Unitholders will have rights, subject to some conditions, to require us to file registration statements covering Class A common stock issuable to them upon exchange of their LLC Units. We would be required to include Class A common shares in registration statements that we may file for ourselves or our stockholders, subject to market standoff and lockup agreements. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standoff or lock-up agreements.

Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Deutsche Bank Securities Inc. may, in their sole discretion, permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements.

The market price of the shares of our Class A common stock could decline as a result of the sale of a substantial number of our shares of Class A common stock in the public market or the perception in the market that the holders of a large number of such shares intend to sell their shares.

We do not intend to pay dividends on our Class A common stock for the foreseeable future.

We currently have no intention to pay dividends on our Class A common stock at any time in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board may deem relevant. Certain of our debt instruments contain covenants that restrict the ability of our subsidiaries to pay dividends to us. In addition, despite our current indebtedness, we may still be able to incur additional debt in the future, and such indebtedness may restrict or prevent us from paying dividends on our Class A common stock. Furthermore, our ability to declare and pay dividends may be limited by instruments governing future indebtedness we may incur.

Delaware law and certain provisions in our certificate of incorporation may prevent efforts by our stockholders to change the direction or management of our company.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, our certificate of incorporation and our amended and restated by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our Board, including, but not limited to, the following:

 

   

the Garcia Parties are entitled to ten votes for each share of our Class B common stock they hold of record on all matters submitted to a vote of stockholders for so long as the Garcia Parties maintain

 

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direct or indirect beneficial ownership of at least 25% of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock);

 

   

at such time as there are no outstanding shares of Class B common stock, only our Board may call special meetings of our stockholders;

 

   

we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and

 

   

we require advance notice and duration of ownership requirements for stockholder proposals.

Our amended and restated certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law (the “DGCL”), and will prevent us from engaging in a business combination with a person (excluding the Garcia Parties and their transferees) who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless board or stockholder approval is obtained prior to the acquisition. See “Description of Capital Stock — Anti-Takeover Provisions.” These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire, including actions that you may deem advantageous, or negatively affect the trading price of our Class A common stock. In addition, because our Board is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.

These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our Board or initiate actions that are opposed by our then-current Board, including delay or impede a merger, tender offer or proxy contest involving our company. The existence of these provisions could negatively affect the price of our common stock and limit opportunities for you to realize value in a corporate transaction.

For information regarding these and other provisions, see “Description of Capital Stock.”

Our certificate of incorporation will provide, subject to certain exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Pursuant to our certificate of incorporation, as will be in effect upon the completion of this offering, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (3) any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate or our bylaws or (4) any other action asserting a claim against us that is governed by the internal affairs doctrine. The forum selection clause in our certificate may have the effect of discouraging lawsuits against us or our directors and officers and may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.

Our certificate of incorporation will authorize us to issue one or more series of preferred stock. Our Board will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series,

 

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without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our Class A common stock at a premium to the market price, and materially adversely affect the market price and the voting and other rights of the holders of our Class A common stock.

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to auditor attestation requirements and disclosure about our executive compensation, that apply to other public companies.

We are an ‘‘emerging growth company,’’ as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not ‘‘emerging growth companies,’’ including, but not limited to, (1) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (3) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of shareholder approval of any golden parachute payments not previously approved. We have elected to adopt these reduced disclosure requirements. We cannot predict if investors will find our Class A common stock less attractive as a result of our taking advantage of these exemptions and as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile.

We will remain an ‘‘emerging growth company’’ for up to five years or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenue exceeds $1 billion, (b) the date that we become a ‘‘large accelerated filer’’ as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most-recently completed second fiscal quarter and (c) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the preceding three-year period.

As a public reporting company, we will be subject to rules and regulations established from time to time by the SEC regarding our internal control over financial reporting. If we fail to remediate material weaknesses in our internal control over financial reporting or otherwise establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, or report them in a timely manner.

Upon completion of this offering, we will become a public reporting company subject to the rules and regulations established from time to time by the SEC and the NYSE. These rules and regulations will require that, among other things, we establish and periodically evaluate procedures with respect to our internal control over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. Our management team, including our Chief Executive Officer and Chief Financial Officer, has limited experience managing a publicly traded company, and limited experience complying with the increasingly complex and changing laws pertaining to public companies.

In addition, as a public company we will be required to document and test our internal control over financial reporting pursuant to Section 404 of the ‘Sarbanes-Oxley Act so that our management can certify as to the effectiveness of our internal control over financial reporting by the time our second annual report is filed with the SEC and thereafter, which will require us to document and make significant changes to our internal control over financial reporting. Likewise, our independent registered public accounting firm will be engaged to provide an attestation report on the effectiveness of our internal control over financial reporting at such time as we cease to be an ‘‘emerging growth company,’’ as defined in the JOBS Act.

If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our

 

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internal control over financial reporting, when required, or if material weaknesses in our internal control over financial reporting is identified, we could be subject to regulatory scrutiny, a loss of public and investor confidence, and to litigation from investors and stockholders, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition.

An active trading market for our Class A common stock may never develop or be sustained.

Although we have applied to list the shares of our Class A common stock for trading on the NYSE, an active trading market for our Class A common stock may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. Accordingly, if an active trading market for our Class A common stock does not develop or is not maintained, the liquidity of our Class A common stock, your ability to sell your shares of our Class A common stock when desired and the prices that you may obtain for your shares of Class A common stock will be adversely affected.

We will have broad discretion in the use of net proceeds from this offering.

We intend to contribute the net proceeds from this offering to our wholly owned subsidiary, Carvana Sub, that will in turn acquire newly-issued LLC Units in Carvana Group at a purchase price per LLC Unit equal to the initial offering price per share of Class A common stock in this offering less underwriting discounts and commissions. In turn, Carvana Group intends to apply the net proceeds it receives from us to repay all outstanding borrowings under the Verde Credit Facility, to pay expenses incurred in connection with the Organizational Transactions and for general corporate purposes. Our management will have broad discretion over the use and investment of the net proceeds of this offering, and accordingly, investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds with only limited information concerning management’s specific intentions. See “Use of Proceeds.”

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If we fail to meet the expectations of analysts for our operating results, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

our history of losses and ability to maintain profitability in the future;

 

   

our ability to effectively manage our rapid growth;

 

   

our limited operating history;

 

   

the seasonal and other fluctuations in our quarterly operating results;

 

   

our relationship with DriveTime;

 

   

our management’s accounting judgments and estimates, as well as changes to accounting policies;

 

   

our ability to compete in the highly competitive industry in which we participate;

 

   

the changes in prices of new and used vehicles

 

   

our ability to acquire desirable inventory;

 

   

our ability to sell our inventory expeditiously;

 

   

our ability to sell and generate gains on the sale of automotive finance receivables;

 

   

our dependence on the sale of automotive finance receivables for a substantial portion of our gross profits;

 

   

our reliance on potentially fraudulent credit data for the automotive finance receivables we sell;

 

   

our ability to successfully market and brand our business;

 

   

our reliance on Internet searches to drive traffic to our website;

 

   

our ability to comply with the laws and regulations to which we are subject;

 

   

the changes in laws and regulations to which we are subject;

 

   

our ability to comply with the TCPA;

 

   

the evolution of regulation of the Internet and eCommerce;

 

   

our ability to maintain reputational integrity and enhance our brand;

 

   

our ability to grow complementary product and service offerings;

 

   

our ability to address the shift to mobile device technology by our customers;

 

   

risks related to the larger automotive ecosystem;

 

   

the geographic concentration where we provide services;

 

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our ability to raise additional capital;

 

   

our ability to maintain adequate relationships with the third parties that finance our vehicle inventory purchases;

 

   

the representations we make in our finance receivables we sell;

 

   

our reliance on our proprietary credit scoring model in the forecasting of loss rates;

 

   

our reliance on internal and external logistics to transport our vehicle inventory;

 

   

the risks associated with the construction and operation of our IRCs, fulfillment centers and vending machines, including our dependence on one supplier for construction and maintenance for our vending machines;

 

   

our ability to protect the personal information and other data that we collect, process and store;

 

   

disruptions in availability and functionality of our website;

 

   

our ability to protect our intellectual property, technology and confidential information;

 

   

our ability to defend against claims that our employees, consultants or advisors have wrongfully used or disclosed trade secrets or intellectual property;

 

   

our ability to defend against intellectual property disputes;

 

   

our ability to comply with the terms of open source licenses;

 

   

conditions affecting automotive manufacturers, including manufacturer recalls;

 

   

our reliance on third party technology to complete critical business functions;

 

   

our dependence on key personnel to operate our business;

 

   

the costs associated with becoming a public company;

 

   

the diversion of management’s attention and other disruptions associated with potential future acquisitions;

 

   

the legal proceedings to which we may be subject in the ordinary course of business;

 

   

potential errors in our retail installment contracts with our customers that could render them unenforceable; and

 

   

other factors disclosed in the section entitled “Risk Factors” and elsewhere in this prospectus.

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based on many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this prospectus in the context of these risks and uncertainties.

We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this prospectus are made only as of the date hereof. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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USE OF PROCEEDS

We estimate, based upon an assumed initial public offering price of $             per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), we will receive net proceeds from this offering of approximately $             million (or $             million if the underwriters exercise their option in full to purchase additional shares of Class A common stock), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to contribute such net proceeds to our wholly owned subsidiary, Carvana Sub, that will in turn use such net proceeds as follows:

 

   

$         million to acquire             newly-issued LLC Units (or             LLC Units if the underwriters exercise their option in full to purchase additional shares of Class A common stock) in Carvana Group at a purchase price per LLC Unit equal to                      the initial public offering price per share of Class A common stock in this offering, less underwriting discounts and commissions. In turn, Carvana Group intends to:

 

   

repay all outstanding borrowings under the Verde Credit Facility, under which $             million was outstanding as of             , 2017, and which has a current interest rate of 12.0% per annum and matures in August 2018 (borrowings under the Verde Credit Facility were used to fund working capital on a short term basis);

 

   

pay an estimated $         million of expenses incurred in connection with the Organizational Transactions; and

 

   

use the remaining proceeds for general corporate purposes.

Pending use of the net proceeds from this offering described above, we may invest the net proceeds in short- and intermediate-term interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the United States government.

Assuming no exercise of the underwriters’ option to purchase additional shares, each $1.00 increase or decrease in the assumed initial public offering price of $             per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 increase or decrease in the number of shares offered in this offering would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming that the initial public offering price per share for the offering remains at $             (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the development and growth of our business and to repay indebtedness and, therefore, we do not anticipate paying any cash dividends in the foreseeable future. Additionally, because we are a holding company, our ability to pay dividends on our Class A common stock may be limited by restrictions on the ability of our subsidiaries to pay dividends or make distributions to us. Any future determination to pay dividends will be at the discretion of our Board, subject to compliance with covenants in current and future agreements governing our and our subsidiaries’ indebtedness, and will depend on our results of operations, financial condition, capital requirements and other factors that our Board deems relevant.

 

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CAPITALIZATION

The following table describes our cash and cash equivalents and consolidated capitalization as of December 31, 2016:

 

   

of Carvana Group on an actual basis; and

 

   

of Carvana Co. on a pro forma as adjusted basis, after giving effect to the Organizational Transactions, including our sale of              shares of class A common stock in this offering at an assumed initial public offering price of $             per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and repayment of all outstanding borrowings under the Verde Credit Facility.

You should read this table in conjunction with the consolidated financial statements and the related notes, ‘‘Use of Proceeds,’’ ‘‘Organizational Structure,’’ ‘‘Unaudited Pro Forma Consolidated Financial Data’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ included elsewhere in this prospectus.

 

     As of December 31,
2016
 
     Historical
Carvana
Group
    Pro Forma
As
Adjusted
 
     (dollars in millions,
except per share data)
 

Cash and cash equivalents(1)

   $ 39.2     $             
  

 

 

   

 

 

 

Indebtedness:

    

Notes payable

   $ 5.5     $  

Floor Plan Facility(2)

     165.3    

Verde Credit Facility(1)

        
  

 

 

   

 

 

 

Total indebtedness

     170.8    
  

 

 

   

 

 

 

Temporary equity — Class C redeemable preferred units(3)

     251.0    
  

 

 

   

 

 

 

Total equity:

    

Members’ deficit

     (116.0  

Class A common stock, $0.001 par value per share,             million shares authorized;             million shares issued and outstanding, on an actual basis;             shares authorized, on a pro forma as adjusted basis;             shares issued and outstanding, on a pro forma as adjusted basis

        

Class B common stock, $0.001 par value per share,             million shares authorized;             million shares issued and outstanding, on an actual basis;             shares authorized, on a pro forma as adjusted basis;             shares issued and outstanding, on a pro forma as adjusted basis

        

Additional paid-in-capital

        

Retained earnings (deficit)

        
  

 

 

   

 

 

 

Members’/ stockholders’ equity (deficit)

     (116.0  

Non-controlling interests(4)

        
  

 

 

   

 

 

 

Total members’/ stockholders’ equity (deficit)

     (116.0  
  

 

 

   

 

 

 

Total capitalization

   $ 305.8     $  
  

 

 

   

 

 

 

 

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(1) On February 27, 2017, we entered into the Verde Credit Facility with aggregate borrowing availability up to $50.0 million. Amounts borrowed and repaid under the agreement cannot be reborrowed. The Verde Credit Facility bears interest at a rate of 12% and is scheduled to mature in August 2018. The Verde Credit Facility will be repaid entirely with the proceeds of this offering.

 

     Pro forma as adjusted cash and cash equivalents assumes the repayment of $             which is outstanding under the Verde Credit Facility as of                     , 2017. An increase in the amount outstanding under the Verde Credit Facility will result in a decrease in the amount of cash and cash equivalents as of the closing of this offering.

 

(2) Our Floor Plan Facility provides for aggregate borrowings of up to $200.0 million. As of December 31, 2016, approximately $165.3 million was outstanding under the Floor Plan Facility and $34.7 million of borrowing capacity remained available (reflecting an aggregate total commitment of $200.0 million). See “Description of Certain Indebtedness — Floor Plan Facility.”

 

(3) In connection with the Organizational Transactions, the holders of Class C redeemable preferred units (the “Class C Preferred Units”) will exchange Class C Preferred Units for Class A common units (“Class A Units”) of Carvana Group. As the Class C Preferred Units are redeemable on a one-to-one basis into Class A units, we classify them as temporary equity.

 

(4) On a pro forma basis, includes the Carvana Group interests not owned by our wholly owned subsidiary, Carvana Sub, which represents             % of Carvana Group’s LLC Units. The LLC Unitholders will hold the non-controlling economic interest in Carvana Group. Carvana Co. will hold     % of the economic interest in Carvana Group.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share (which is the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma basis by approximately $             million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each 1,000,000 increase or decrease in the number of shares of Class A common stock offered in this offering would increase or decrease each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization on a pro forma basis by approximately $             million, based on an assumed initial public offering price of $             per share (which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of our Class A common stock to be outstanding after the completion of this offering excludes              shares of Class A common stock reserved for future issuance,              restricted shares of Class A common stock to be issued to certain employees upon the completion of this offering and options to purchase an aggregate of              shares of common stock to be issued to approximately              employees upon the pricing of this offering, with an exercise price set at the initial public offering price, in each case under our 2017 Incentive Plan and assuming an initial public offering price of $             per shares, which is the midpoint of the estimated public offering price range set forth on the cover of this prospectus.

 

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DILUTION

Because the LLC Unitholders do not own any Class A common stock or other economic interests in Carvana Co., we have presented dilution in pro forma net tangible book value per share assuming that all of the LLC Unitholders (other than Carvana Sub) had their LLC Units redeemed or exchanged for newly-issued shares of Class A common stock rather than for cash (based upon an assumed offering price of $         per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) and the cancellation for no consideration of all of their shares of Class B common stock (which are not entitled to receive distributions or dividends, whether cash or stock from Carvana Co.) in order to more meaningfully present the dilutive impact to the investors in this offering. We refer to the assumed redemption or exchange of all LLC Units for shares of Class A common stock as described in the previous sentence as the “Assumed Redemption.”

Dilution results from the fact that the initial public offering price per share of the Class A common stock is substantially in excess of the pro forma net tangible book value per share of Class A common stock after this offering. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of Class A common stock outstanding. If you invest in our Class A common stock, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock after this offering

Pro forma net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock, after giving effect to the Organizational Transactions, the incurrence of amounts borrowed under the Verde Credit Facility as of                     , 2017 assuming such amount remains drawn at the time of the completion of this offering, and the Assumed Redemption. Our pro forma net tangible book value as of December 31, 2016 was $         million, or $         per share of Class A common stock. This represents an immediate increase in net tangible book value to the LLC Unitholders of $         per share and an immediate dilution to new investors in this offering of $         per share. We determine dilution by subtracting the pro forma net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of Class A common stock. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $           

Pro forma net tangible book value per share as of December 31, 2016 before this offering(1)

   $              

Increase in net tangible book value per share attributable to the investors in this offering

   $     
  

 

 

    

Pro forma net tangible book value per share after this offering and repayment of the Verde Credit Facility

      $  
     

 

 

 

Dilution per share to the investors in this offering

      $  
     

 

 

 

 

(1) The computation of pro forma net tangible book value per share as of December 31, 2016 before this offering is as follows:

 

(in thousands, except per share data)

      

Book value of tangible assets

   $  

Less: total liabilities

  
  

 

 

 

Pro forma net tangible book value

   $               
  

 

 

 

Shares of Class A common stock to be outstanding after the Organizational Transactions

  

Assumed redemption

  
  

 

 

 

Shares of Class A common stock outstanding after assumed redemption

  
  

 

 

 

Pro forma net tangible book value per share

   $  
  

 

 

 

 

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A $1.00 increase or decrease in the assumed initial public offering price of $         per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase or decrease pro forma net tangible book value by $         million, or $         per share, and would increase or decrease the dilution per share to the investors in this offering by $         based on the assumptions set forth above.

The following table summarizes as of December 31, 2016, after giving effect to the Organization Transactions (including this offering), the number of shares of Class A common stock purchased from us, the total consideration paid and the average price per share paid by the LLC Unitholders and by the purchasers in this offering, based upon an assumed initial public offering price of $         per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) and before deducting estimated underwriting discounts and commissions and offering expenses, after giving effect to the Assumed Redemption:

 

     Shares of Class A
Common Stock
Purchased
    Total Consideration        
     Number      Percent     Amount      Percent     Average Price
Per Share
 

Existing owners

               $                        $           

Investors in this offering

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100   $        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

The discussion and tables above assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock. In addition, the discussion and tables above exclude shares of Class B common stock, because holders of the Class B common stock are not entitled to distributions or dividends, whether cash or stock, from Carvana Co. If the underwriters’ option to purchase additional shares of Class A common stock is exercised in full, after giving effect to the Assumed Redemption, the LLC Unitholders would own approximately      % and the investors in this offering would own approximately      % of the total number of shares of our Class A common stock outstanding after this offering. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, after giving effect to the Assumed Redemption, the pro forma net tangible book value (deficit) per share after this offering would be $             per share, and the dilution in the pro forma net tangible book value (deficit) per share to the investors in this offering would be $             per share.

The tables and calculations above are based on the number of shares of Class A common stock outstanding as of December 31, 2016 (after giving effect to the Organizational Transactions), and exclude an aggregate of              shares of Class A common stock reserved for issuance under our 2017 Incentive Plan that we expect to adopt in connection with this offering. To the extent that any new options or other equity incentive grants are issued in the future with an exercise price or purchase price below the initial public offering price, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables present, as of the dates and for the periods indicated, the selected consolidated financial data for Carvana Group and its subsidiaries. Carvana Group is the predecessor of Carvana Co. for financial reporting purposes. The selected consolidated statement of operations data for each of the years ended December 31, 2014, 2015 and 2016 and the selected consolidated balance sheet data as of December 31, 2015 and December 31, 2016 presented below have been derived from the audited consolidated financial statements of Carvana Group and its subsidiaries, included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2014 presented below has been derived from the audited consolidated financial statements of Carvana Group and its subsidiaries not included in this prospectus. The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period.

The information set forth below should be read together with the ‘‘Prospectus Summary — Summary Historical Financial and Other Data,’’ ‘‘Use of Proceeds,’’ ‘‘Capitalization,’’ ‘‘Unaudited Pro Forma Consolidated Financial Data,’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

The selected consolidated financial data of Carvana Co. have not been presented as Carvana Co. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.

 

    Historical Carvana Group  
    Year Ended December 31,  
    2014     2015     2016  
    (in thousands)  

Consolidated Statements of Operations Data:

     

Sales and operating revenues:

     

Used vehicle sales, net

  $ 41,123     $ 124,972     $ 341,989  

Wholesale vehicle sales

    522       3,743       10,163  

Other sales and revenue(1)

    34       1,677       12,996  
 

 

 

   

 

 

   

 

 

 

Net sales and operating revenues

    41,679       130,392       365,148  

Cost of sales

    42,103       129,046       345,951  
 

 

 

   

 

 

   

 

 

 

Gross (loss) profit

    (424     1,346       19,197  

Selling general and administrative expenses

    14,684       36,678       108,676  

Interest expense

    108       1,412       3,587  

Other expense, net

    22       36       46  
 

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (15,238     (36,780     (93,112
 

 

 

   

 

 

   

 

 

 

Income tax provision

                 

Net loss

  $ (15,238   $ (36,780   $ (93,112
 

 

 

   

 

 

   

 

 

 

Consolidated Balance Sheet Data (at period end):

     

Cash and cash equivalents

  $ 6,929     $ 43,134     $ 39,184  

Vehicle inventory

    26,371       68,038       185,506  

Total assets

    40,104       136,012       335,833  

Floor Plan Facility

    5,619       42,302       165,313  

 

(1) Includes $460 of other sales and revenues from related parties for the year ended December 31, 2016.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following unaudited pro forma condensed consolidated information sets forth our unaudited pro forma and historical condensed consolidated statements of operations for the year ended December 31, 2016 and the unaudited pro forma and historical consolidated balance sheet at December 31, 2016. The unaudited pro forma consolidated financial information gives effect to the Organizational Transactions and related agreements, including the issuance of shares of Class A common stock in this offering and the use of proceeds from this offering as if each had occurred on December 31, 2016, for the the unaudited pro forma consolidated balance sheet, and January 1, 2016, for the unaudited pro forma consolidated statements of operations for the year ended December 31, 2016. The unaudited pro forma adjustments are based on available information and certain assumptions that we believe are reasonable.

The unaudited pro forma consolidated financial information should be read in conjunction with the sections of this prospectus entitled “Use of Proceeds,” “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus. The unaudited pro forma consolidated financial information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations or financial position that we would have reported had the Organizational Transactions, borrowings under the Verde Credit Facility and this offering been completed on the dates indicated and should not be taken as representative of our future consolidated results of operations or financial position.

The pro forma adjustments related to the Organizational Transactions and borrowings under the Verde Credit Facility, both excluding this offering, which we refer to as the Organizational Transaction Adjustments and Borrowings Under the Verde Credit Facility, are described in the notes to the unaudited pro forma consolidated financial information, and principally include the following:

 

   

the conversion of our Class C Preferred Units into Class A Units of Carvana Group;

 

   

the amendment and restatement of Carvana Group’s LLC Operating Agreement to, among other things, (i) eliminate a class of preferred membership interests, (ii) provide for LLC Units consisting of the Class B Units and Class A Units, and (iii) appoint our wholly owned subsidiary, Carvana Sub, as the sole manager of Carvana Group;

 

   

the amendment and restatement of Carvana Co.’s certificate of incorporation to, among other things, provide for Class A common stock and Class B common stock;

 

   

the issuance of shares of Class B common stock to holders of Class A Units, on a one-to-             basis with the number of Class A Units they own, for nominal consideration;

 

   

the impact of federal, state, local and foreign income taxes on the income allocated to us as a taxable corporation; and

 

   

borrowings under the Verde Credit Facility and the use of the related proceeds for general working capital needs both occurring subsequent to December 31, 2016 through                     , 2017.

The pro forma adjustments related to this offering, which we refer to as the Offering Adjustments, are described in the notes to the unaudited pro forma consolidated financial information, and principally include the following:

 

   

the issuance of shares of our Class A common stock in this offering in exchange for net proceeds of approximately $            , assuming an initial public offering price of $             per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions but before estimated offering expenses payable by us;

 

   

the repayment of all outstanding borrowings under the Verde Credit Facility;

 

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the application of a portion of the net proceeds from this offering to acquire, indirectly through our wholly owned subsidiary, Carvana Sub, newly-issued LLC Units from Carvana Group at a purchase price per LLC Unit equal to                      the initial public offering price per share of Class A common stock, less underwriting discounts and commissions;

 

   

compensation expense related to the granting of options to purchase shares of our Class A common stock, which we expect will be granted to certain employees at the time of this offering; and

 

   

compensation expense related to the issuance of restricted Class A common stock, which we expect will be granted to certain employees at the time of this offering.

Except as otherwise indicated, the unaudited pro forma consolidated financial information presented assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock from us.

As described in greater detail under “Organizational Structure — Tax Receivable Agreement,” in connection with the closing of this offering, we will enter into the Tax Receivable Agreement with the LLC Unitholders that will provide for the payment by us to the continuing Carvana Group unitholders of 85% of the amount of cash savings, if any, in U.S. federal, state, local and foreign income tax we actually realize (or, under certain circumstances, are deemed to realize) as a result of (i) the increase in our proportionate share of the existing tax basis of the assets of Carvana Group and an adjustment in the tax basis of the assets of Carvana Group reflected in that proportionate share as a result of purchases of LLC Units from the LLC Unitholders (other than Carvana Sub) by Carvana Sub and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement.

Due to the uncertainty in the amount and timing of future exchanges of the LLC Units by LLC Unitholders, the unaudited pro forma consolidated financial information assumes that no exchanges of LLC Units have occurred and therefore no increases in tax basis in Carvana Group assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information. However, if all of the LLC Unitholders were to exchange their LLC Units immediately following the completion of this offering, we would recognize a deferred tax asset of approximately $             and a liability of approximately $            , assuming: (i) all exchanges occurred on the same day; (ii) a price of $             per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus); (iii) a constant corporate tax rate of     %; (iv) we will have sufficient taxable income to fully utilize the tax benefits; and (v) no material changes in tax law. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things: (i) the amount and timing of future exchanges of LLC Units by LLC Unitholders, and the extent to which such exchanges are taxable, (ii) the price per share of our Class A common stock at the time of the exchanges, (iii) the amount and timing of future income against which to offset the tax benefits, and (iv) the tax rates then in effect.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We have not included any pro forma adjustments relating to these costs.

 

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Carvana Co. and Subsidiaries

Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2016

(in thousands)

 

     Historical
Carvana
Group
    Organizational
Transaction
Adjustments
and Borrowings
Under the
Verde Credit
Facility (a)(g)
    As Adjusted
for the
Organizational
Transactions
    Offering
Adjustments
    Pro Forma
Carvana Co.,
as Adjusted
for this
Offering and
Use of
Proceeds
 
ASSETS           

Current Assets:

          

Cash and cash equivalents

   $ 39,184     $     $     $ (b)(c)    $  

Restricted cash

     10,266          

Accounts receivable, net

     5,692          

Finance receivables held for sale, net

     24,771          

Vehicle inventory

     185,506          

Other current assets

     9,822           (c)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     275,241          

Property and equipment, net

     60,592          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 335,833     $              $     $              $           
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES, TEMPORARY EQUITY, AND MEMBERS’/ STOCKHOLDERS’ EQUITY (DEFICIT)

          

Current liabilities:

          

Accounts payable and accrued liabilities

   $ 28,164     $     $              $ (c)    $  

Accounts payable due to related party

     1,884          

Floor Plan Facility

     165,313          

Current portion of notes payable

     1,057          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     196,418          

Notes payable, excluding current portion

     4,404          

Verde Credit Facility

           (h)        (b)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     200,822          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

          

Temporary equity — Class C redeemable preferred stock

     250,972       (f)       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Members’/Stockholders’ equity (deficit):

          

Members deficit

     (115,961     (d)(e)(f)(h)       

Class A common stock

           (e)        (b)   

Class B common stock

           (e)       

Additional paid-in capital

           (e)        (b)(c)(d)   

Retained earnings (accumulated deficit)

              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total members’/ stockholders’ equity (deficit) attributable to Carvana Co

     (115,961        

Non-controlling interest

           (d)(e)(f)        (d)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total members’ / stockholders’ equity (deficit)

     (115,961        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, and members’ / stockholders’ equity (deficit)

   $ 335,833     $     $     $     $  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Carvana Co. and Subsidiaries

Notes to Unaudited Pro Forma Consolidated Balance Sheet

 

(a) Carvana Co. was formed on November 29, 2016 and will have no material assets or results of operations until the completion of this offering and therefore its historical financial position and results of operation are not shown in a separate column in the unaudited pro forma consolidated balance sheet.

 

(b) We estimate that net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions, estimated offering expense payable by us and repayment of all outstanding borrowings under the Verde Credit Facility, will be approximately $            , based on an assumed initial public offering price of $             per share, (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). This amount has been determined based on the assumption that the underwriters’ option to purchase additional shares of our Class A common stock is not exercised. A reconciliation of the gross proceeds from this offering to net cash proceeds is set forth below (in thousands, except share and per share data):

 

Assumed initial public offering price per share

   $               

Shares of Class A common stock issued in this offering

  
  

 

 

 

Gross proceeds

  

Less: estimated underwriting discounts and commissions

  

Less: estimated offering expenses (including amounts previously deferred)

  

Less: repayment of Verde Credit Facility

  
  

 

 

 

Net cash proceeds

   $               
  

 

 

 

 

(c) We are deferring certain costs associated with this offering, including certain legal, accounting and other related expenses, which have been recorded in other assets in our consolidated balance sheet. Upon completion of this offering, these deferred costs will be charged against the proceeds from this offering with a corresponding reduction to additional paid-in-capital.

 

(d) Upon completion of the Organizational Transactions, Carvana Sub will become the sole manager of Carvana Group. Although we will have an indirect minority economic interest in Carvana Group, through Carvana Sub, we will have the sole voting interest in, and control the management of, Carvana Group. As a result, we will consolidate the financial results of Carvana Group and will report a non-controlling interest related to the LLC Units held by the LLC Unitholders on our consolidated balance sheet. The computation of the non-controlling interest following the consummation of this offering, based on an assumed initial public offering price of $         per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) is as follows:

 

     Units      Percentage  

LLC Units indirectly held by Carvana Co.

                

Non-controlling interest in Carvana Group held by the LLC Unitholders

     
  

 

 

    

 

 

 
                
  

 

 

    

 

 

 

 

     If the underwriters exercise their option to purchase additional shares of our Class A common stock in full, Carvana Co. would own , indirectly through its wholly owned subsidiary,         % of the economic interest of Carvana Group and the LLC Unitholders would own the remaining         % of the economic interest of Carvana Group.

 

     Following the consummation of this offering, the LLC Units held by the LLC Unitholders, representing the non-controlling interest, will be exchangeable at the election of the LLC Unitholders for shares of Class A common stock, (subject to customary adjustments, including for stock splits, stock dividends and reclassifications), or, at our election, for cash, in accordance with the terms of the Exchange Agreement.

 

(e) As a C corporation we will no longer record members’ deficit in the consolidated balance sheet. To reflect the C corporation structure of our equity, we will separately present the value of our common stock, additional pain-in capital and retained earnings. The portion of members’ deficit associated with additional paid-in capital was estimated as the remainder of capital contributions we have received less amounts attributed to the par value of common stock and the amount allocated to the non-controlling interest.

 

     In connection with this offering we will issue                 shares of Class B common stock to LLC Unitholders, on a one-to-             basis with the number of LLC Units they own, for nominal consideration. The Garcia Parties are entitled to ten votes per share of Class B common stock they beneficially own, for so long as the Garcia Parties maintain, in the aggregate, direct or indirect beneficial ownership of at least 25% of the outstanding shares of Class A common stock (determined on an as-exchanged basis assuming that all of the Class A Units were exchanged for Class A common stock). All other holders of Class B common stock are each entitled to one vote per share. The holders of the Class B common stock will not be entitled to receive any distributions from or participate in any dividends declared by our board of directions.

 

(f) In connection with the Organizational Transactions, the holders of Class C Preferred Units will exchange Class C Preferred Units for Class A Units on a one-to-one basis.

 

(g) Due to the uncertainty in the amount and timing of future exchanges of LLC Units by the LLC Unitholders, the unaudited pro forma consolidated financial information assumes that no exchanges of interests have occurred and therefore no increases in tax basis in Carvana Group assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information.
(h) Adjustment reflects borrowings of $             made under the Verde Credit Facility and the use of the related proceeds for general working capital needs both occurring subsequent to December 31, 2016.

 

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Carvana Co. and Subsidiaries

Unaudited Pro Forma Statements of Operations For the Year Ended December 31, 2016

(in thousands, except per share data)

 

     Historical
Carvana
Group
    Organizational
Transaction
Adjustments
and Borrowings
Under the
Verde Credit
Facility(i)
    As Adjusted
for the
Organizational
Transactions
     Offering
Adjustments
    Pro Forma
Carvana Co.,
as Adjusted
for this
Offering and
Use of
Proceeds
 

Sales and operating revenues:

           

Used vehicles sales, net

   $ 341,989     $              $               $              $           

Wholesale vehicles sales

     10,163           

Other sales and revenues(1)

     12,996           
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net sales and operating revenues

     365,148           

Cost of sales

     345,951           
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     19,197           

Selling, general and administrative expenses

     108,676            (j)(k)   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loss from operations

     (89,479         
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

     (3,587         

Other income (expense), net

     (46         
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Loss before income taxes

     (93,112         

Income tax provision

           (l)         (l)   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss

     (93,112         

Net loss attributable to non-controlling interests

           (m)         (m)   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net loss attributable to Carvana Co.

   $ (93,112   $     $      $     $  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Pro forma net loss available to Class A common stock per share (n):

           

Basic

 

  $  
           

 

 

 

Diluted

 

  $  
           

 

 

 

Pro forma weighted-average shares of Class A common stock(n):

           

Basic

 

 
           

 

 

 

Diluted

 

 
           

 

 

 

 

(1) Historical Carvana Group includes $460 of other sales and revenues from related parties.

 

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Carvana Co. and Subsidiaries

Notes to Unaudited Pro Forma Consolidated Statements of Operations

 

(i) Carvana Co. was formed on November 29, 2016 and will have no material assets or results of operations until the completion of this offering and therefore its historical results of operation are not shown in a separate column in the unaudited pro forma consolidated statements of operations.

 

(j) In connection with this offering, we intend to issue             shares of restricted Class A common stock to certain employees with an aggregate value of $         based on an assumed initial public offering price of $             per share (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). This adjustment represents the increase in compensation expense we expect to incur following the completion of this offering assuming the restricted stock was granted on January 1, 2016. The restricted Class A common stock will be issued to participants in the Existing Performance Plan.

 

(k) In connection with this offering, we expect to grant             stock options to certain employees. This adjustment represents the increase in compensation expense we expect to incur following the completion of this offering. The amount was calculated assuming the stock options were granted on January 1, 2016 at exercise price of $             (which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). The grant date fair value was determined using the Black-Scholes valuation model using the following assumptions:

 

Expected volatility

        %  

Expected dividend yield

     %     

Expected term (in years)

     

Risk-free interest rate

     

 

     Expected volatility is based on comparable companies using daily stock prices.

 

(l) Carvana Group has been, and will continue to be, treated as a partnership for U.S. federal and state income tax purposes. As such, income generated by Carvana Group will flow through to its partners, including us, and is generally not subject to tax at the Carvana Group level. Following the Organizational Transactions, we will be subject to U.S. federal income taxes, in addition to state, local and foreign income taxes with respect to our allocable share of any taxable income of Carvana Group. As a result, the unaudited pro forma consolidated statements of operations reflect adjustments to our income tax expense to reflect an effective income tax rate of         % for the year ended December 31, 2016, which was calculated assuming the U.S. federal rates currently in effect and the highest statutory rates apportioned to each applicable state and local jurisdiction.

 

(m) Upon completion of the Organizational Transactions, Carvana Sub will become the sole manager of Carvana Group. Although we will have an indirect minority economic interest in Carvana Group, through Carvana Sub we will have the sole voting interest in, and control the management of, Carvana Group. As a result, we will consolidate the financial results of Carvana Group and will report a non-controlling interest related to the LLC Units held by the LLC Unitholders in our consolidated statements of operations. Adjustment relates to a reclassification from net loss to net loss attributable to non-controlling interests in Carvana Group.

 

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(n) Pro forma basic net loss per share is computed by dividing the net loss attributable to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. Pro forma diluted net loss per share is computed by adjusting the net loss attributable to Class A common stockholders and the weighted-average shares of Class A common stock outstanding to give effect to potentially dilutive securities. Shares of our Class B common stock are not entitled to receive any distributions or dividends and are therefore not included in the computation of pro forma basic or diluted net loss per share. The following table sets forth the adjustments to determine net loss attributable to Class A common stockholders, basic and diluted, and pro forma weighted-average shares of Class A common stock outstanding, basic and diluted (in thousands, except per share data):

 

     Unaudited Pro Forma
Carvana Co.
 
     Year ended
December  31,

2016
 

Basic net loss per share:

  

Net loss

   $  

Less: Net loss attributable to non-controlling interests

  
  

 

 

 

Net loss attributable to Class A common stockholders

   $  
  

 

 

 

Weighted-average shares of Class A common stock outstanding, basic

  
  

 

 

 

Basic net loss per share

   $  
  

 

 

 

Diluted net loss per share(1):

  

Net loss attributable to Class A common stockholders

   $  

Add: Net loss attributable to non-controlling interests(2)

  
  

 

 

 

Net loss attributable to Class A common stockholders

   $  
  

 

 

 

Weighted-average shares of Class A common stock outstanding, basic

  

Add: Assumed conversion of LLC Units to shares of Class A common stock(2)

  
  

 

 

 

Weighted-average shares of Class A common stock outstanding, diluted

  
  

 

 

 

Diluted net loss per share

   $  
  

 

 

 

 

  (1) Excludes the effect of common stock equivalents as their inclusion would have been anti-dilutive.

 

  (2) The LLC Units held by the LLC Unitholders are potentially dilutive securities and the calculation of pro forma diluted net loss per share assumes that all LLC Units were exchanged for shares of Class A common stock at the beginning of the period (based upon an assumed offering price of $             per share, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus). This adjustment was made for purposes of calculating pro forma diluted net loss per share only and does not necessarily reflect the amount of exchanges that may occur subsequent to this offering.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The discussion contains forward-looking statements that are based on the beliefs of management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly in the sections entitled “Risk Factors” and “Forward-Looking Statements.”

Overview

Carvana is a leading eCommerce platform for buying used cars. We are transforming the used car buying experience by giving consumers what they want — a wide selection, great value and quality, transparent pricing and a simple, no pressure transaction. Each element of our business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.

From the launch of our first market in January 2013 through December 31, 2016, we purchased, reconditioned, sold and delivered approximately 27,500 vehicles to customers through our website, generating $541.8 million in revenue. The following graphic illustrates the cumulative number of vehicles sold through our website on a quarterly basis along with selected milestones of our business.

 

LOGO

 

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Our business combines a comprehensive online sales experience with a vertically-integrated supply chain that allows us to sell high quality vehicles to our customers transparently and efficiently at a low price. Using our website, customers can complete all phases of a used vehicle purchase transaction. Specifically, our online sales experience allows customers to:

 

   

Purchase a used vehicle.    As of December 31, 2016, we list over 7,300 vehicles for sale on our website, where customers can select and purchase a vehicle, including arranging financing and signing contracts, directly from their desktop or mobile device. Selling used vehicles to retail customers is the primary driver of our business. Selling used vehicles generates revenue equal to the selling price of the vehicle, less an allowance for returns, and also enables multiple additional revenue streams, including vehicle service contracts (“VSCs”) and trade-ins.

 

   

Finance their purchase.    Customers can pay for their Carvana vehicle using cash, our proprietary loan origination platform or financing from third parties such as banks or credit unions. Customers who choose to apply for our in-house financing fill out a short application form, select from a range of financing terms we provide, and, if approved, apply the financing to their purchase in our online checkout process. We generally seek to sell the automotive finance receivables we originate to third party financing partners and earn a premium on each sale.

 

   

Protect their purchase.    Customers have the option to protect their vehicle with a CarvanaCare-branded VSC as part of our online checkout process. VSCs provide customers with insurance against certain mechanical repairs after the expiration of their vehicle’s original manufacturer warranty. We earn a fee for selling VSCs on behalf of an affiliate of DriveTime and, historically, third parties, who are the obligors under these VSCs. We generally have no contractual liability to customers for claims under these agreements.

 

   

Sell us their car.    We allow our customers to trade-in a vehicle and apply the trade-in value to their purchase, or to sell us a vehicle independent of a purchase. Using our digital appraisal tool, customers can complete a short appraisal form and receive an offer for their trade-in nearly instantaneously. We generate trade-in offers using a proprietary valuation algorithm supported by extensive used vehicle market and customer behavior data. When customers accept our offer, we take their vehicles into inventory and sell them either at auction as a wholesale sale or through our website as a retail sale. Vehicles sold at auction typically do not meet the quality or condition standards required to be included in retail inventory displayed for sale on our website.

To enable a seamless customer experience, we have built a vertically-integrated used vehicle supply chain, supported by proprietary software systems and data.

 

   

Vehicle sourcing and acquisition.    We acquire the majority of our used vehicle inventory from wholesale auctions. We also, to a lesser extent, acquire vehicles from consumers and directly from used vehicle suppliers, including franchise and independent dealers, leasing companies, and car rental companies. Using proprietary machine learning algorithms and data from a variety of internal and external sources, we evaluate tens of thousands of vehicles daily to determine their fit with consumer demand, internal profitability targets, and our existing inventory mix.

 

   

Inspection and reconditioning.    After acquiring a vehicle, we transport it to one of our inspection and reconditioning centers (“IRCs”), where it undergoes a 150-point inspection and is reconditioned to meet “Carvana Certified” standards. This process is supported by a custom used vehicle inventory management system, which tracks vehicles through each stage of the process and is seamlessly integrated with auto parts suppliers to facilitate the procurement of required parts.

 

   

Photography and merchandising.    We photograph vehicles using our proprietary photo booths located at each of our IRCs. This allows us to display interactive, 360-degree images of each vehicle on our website. We also annotate each vehicle image with a list of features and imperfections to assist our customers in their evaluation of each vehicle for purchase. Our 360-degree photo and annotation processes are enabled by proprietary imaging technology and integrations with various vehicle data providers for vehicle feature and option information.

 

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Logistics and fulfillment.    We transport vehicles purchased by our customers to their local market for home delivery or pick-up. In markets where we have launched operations, delivery to the customer is completed by a Carvana employee in a branded delivery truck. In a subset of these markets, customers have the option of picking up their car at one of our vending machines. These vending machines are multi-story glass towers where our customers deposit a token into a coin slot and an automated platform delivers the purchased vehicle to a garage bay where the customer is waiting. Our vending machines provide an attractive and unique customer pick-up experience, developing brand awareness while lowering our variable vehicle delivery expense. Our logistics and fulfillment operations are supported by our proprietary vehicle transportation management system, which optimizes the scheduling of transport routes and delivery slots.

Unit Sales

Since launching to customers in Atlanta, Georgia in January 2013, we have experienced rapid growth in sales through our website. During the year ended December 31, 2016, the number of vehicles we sold to retail customers grew by 187.6% to 18,761, compared to 6,523 in the year ended December 31, 2015. During the year ended December 31, 2015, our unit sales grew by 209.9% to 6,523, compared to 2,105 in the year ended December 31, 2014.

We view the number of vehicles we sell to retail customers as the most important measure of our growth, and we expect to continue to focus on building a scalable platform to increase our retail units sold. This focus on retail units sold is motivated by several factors:

 

   

Retail units sold enable multiple revenue streams, including the sale of the vehicle itself, the sale of automotive finance receivables originated to finance the vehicle, the sale of VSCs, and the sale of vehicles acquired from customers as trade-ins.

 

   

Retail units sold are the primary driver of customer referrals and repeat sales. Each time we sell a vehicle to a new customer, that customer becomes a candidate to refer future customers and can become a repeat buyer in the future.

 

   

Retail unit sales allow us to benefit from economies of scale due to our centralized online sales model. We believe our model provides meaningful operating leverage in acquisition, reconditioning, transport, customer service and delivery.

We plan to invest heavily in technology and infrastructure to support growth in unit sales. This includes continued investment in our acquisition, reconditioning, and logistics network, as well as continued investment in product development and engineering to deliver customers a best-in-class experience.

Markets

Our growth in retail units sold is driven by expansion into new markets and increased penetration in our existing markets. We define a market as a metropolitan area in which we have commenced local advertising and offer free home delivery to customers with a Carvana employee and branded delivery truck. Opening a new market involves hiring a market operations manager and a team of customer advocates, connecting the market to our existing logistics network, and initiating local advertising. Each new market has typically required approximately $500,000 in capital expenditures, primarily related to the acquisition of 1 to 2 branded delivery trucks, a multi-car hauler to connect the market to our logistics network, and furniture, fixtures and equipment in a local office space. As a market scales, we may elect to build a vending machine in the market to improve fulfillment and further increase customer awareness. Each new vending machine has required $4.5 million to $5.5 million of capital expenditures, depending on the number of stories in the vending machine tower and local market conditions.

Our capital- and headcount-light expansion model has enabled us to increase our rate of market openings in each of the past four years. After opening Atlanta, Georgia in 2013, we opened two markets in

 

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2014, six in 2015, and 12 in 2016, bringing our total number of markets to 21 at December 31, 2016. Over this period, we have continually improved our market expansion playbook, which we believe provides us with the capability to accelerate this rate of market openings in the future.

When we open a market, we commence advertising using a blend of brand and direct advertising channels. Our advertising spend in each market is approximately proportionate to each market’s population, subject to adjustments based on specific characteristics of the market, used vehicle market seasonality and special events such as vending machine openings. Each market takes time to ramp due to the prolonged nature of the used vehicle sales cycle. According to IHS Automotive, the average consumer buys a used vehicle about once every five years, meaning many customers we reach through our advertising will not be in the market for a used vehicle for several years. Moreover, with a five-year sales cycle, word of mouth, referrals and repeat purchases impact sales over an extended time period. These effects historically have led to increased market penetration over time following the market opening. This pattern is presented on a one-time basis in the chart below.

 

LOGO

 

  (1) Market penetration is based on our retail unit sales to customers in that market compared to an estimate of used vehicle market size in that market based on U.S. used vehicle sales per capita. For additional details see “—Market Cohorts.” The quarter in which a market opens is its first quarter of operation.

 

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Market Cohorts

Many of our markets are in a nascent stage, making company-wide measures potentially less informative than measurements of seasoned markets. More than half of our markets opened in 2016. The table below provides alternative metrics related to unit sales performance, examining our progress based on when we commenced operations in the market. Markets are grouped into cohorts based on the year in which they began local delivery operations; for example, all markets opened during 2015 are included in the 2015 cohort.

We measure penetration in each cohort based on our retail unit sales to customers in that cohort and an estimate of used vehicle market size in that cohort based on U.S. used vehicle sales per capita. Cohorts differ based on the number and average population of markets in the cohort, the timing of market openings in the first fiscal year of the cohort, and differences in used vehicle sales per capita or other demographic or economic differences across cohorts. However, taken as a whole, they illustrate how our penetration over time evolves as markets age. The following tables present additional data for each of the cohorts for the years ended December 31, 2016 and 2015.

 

     Year Ended December 31, 2016  

Cohort(1)

   Market
Population
(in millions)(2)
     Retail
Units Sold(3)
     YoY
Growth(3)
    Market
Penetration(4)
    Advertising
Expense per
Retail Unit Sold(5)
 

2013

     5.7        6,288        85.0     0.9   $ 568  

2014

     4.3        2,715        182.5     0.5   $ 991  

2015

     21.1        4,337        622.8     0.2   $ 2,363  

2016

     32.1        1,458        n/a       0.0   $ 5,093  

 

     Year Ended December 31, 2015  

Cohort(1)

   Market
Population

(in millions)(2)
     Retail
Units Sold(3)
     YoY
Growth(3)
    Market
Penetration(4)
    Advertising
Expense per
Retail Unit Sold(5)
 

2013

     5.7        3,399        165.1     0.5   $ 875  

2014

     4.3        961        436.9     0.2   $ 2,866  

2015

     21.1        600        n/a       0.0   $ 5,731  

 

(1) Markets are grouped into cohorts based on the year in which they began local delivery operations. For example, all markets opened during 2015 are included in the 2015 cohort.

 

(2) Total market population is equal to the sum of population for all markets in the cohort based on 2015 data from the U.S. Census Bureau. A list of markets included in each cohort is provided under “— Markets.”

 

(3) Retail units sold is equal to total retail units sold in the cohort in the reporting period. Year-over-year growth in retail units sold is the percent change in retail units sold from the prior period.

 

(4) Market penetration is equal to total retail unit sales in each cohort divided by estimated total used vehicle sales in each cohort in the reporting period. Estimated total used vehicle sales is equal to total population in the cohort multiplied by estimated 2015 U.S. used vehicle sales per capita. Estimated 2015 U.S. used vehicle sales per capita is calculated by dividing total U.S. used vehicle sales of 38.3 million in 2015 from Edmunds.com by total U.S. population of 321.4 million in 2015 from the U.S. Census Bureau.

 

(5) Advertising expense per retail unit sold in each cohort is the advertising expenses incurred by the open markets in the cohort divided by the retail units sold in the cohort in the reporting period. Actual advertising expense per market varies. Advertising expense in each market is budgeted based on market size, as well as the specific characteristics of that market. Corporate advertising expenses are excluded from the cohort advertising expenses.

 

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Our oldest cohort, the 2013 cohort, contains one market, Atlanta, GA, where we began delivery operations to customers in January 2013. Retail sales for this cohort totaled 6,288 vehicles in the year ended December 31, 2016, an increase of 85.0% from the prior year. Market penetration for this cohort in this time period expanded to 0.9% compared to 0.5% in the prior year. This growth in market penetration was accompanied by a 35.1% reduction in advertising expense per retail unit sold to $568 per unit from $875 per unit in the prior year period. This reflects advertising expenditures being spread over an increased number of units sold, as well as growing brand recognition, increasing word of mouth referrals and internal improvements, including more extensive vehicle inventory and various mobile and desktop website enhancements.

Our second oldest cohort, the 2014 cohort, is comprised of two markets, Nashville, TN and Charlotte, NC. We launched operations in Nashville, TN in May 2014 and in Charlotte, NC in September 2014. Retail sales in this cohort totaled 2,715 units in the year ended December 31, 2016, a 182.5% increase over the prior year. Market penetration in this cohort increased to 0.5% in the year ended December 31, 2016 from 0.2% in the year ended December 31, 2015. Subsequent cohorts have followed similar patterns of increased market penetration and declining advertising expense per retail unit sold as each cohort matures. We believe this illustrates the replicability of our model as we expand into new markets.

In addition to sales in our markets, we also sell vehicles to customers outside of our markets. Retail units sold to customers outside of our markets were 3,963 or 21.1% of total retail units sold in the year ended December 31, 2016 and 1,563 or 24.0% of total retail units sold in the year ended December 31, 2015. Since we primarily advertise in our markets, customers who buy a vehicle from outside of our markets do so with limited incremental advertising expense above our local advertising budget. In the future, we may begin national advertising, which we anticipate will increase sales outside our markets; however, we ultimately expect these sales to decline as a percent of total sales as we open more markets over time.

Revenue and Gross Profit

Our expansion into new markets and increased penetration in existing ones has led to growth in retail unit sales. We generate revenue on retail units sold from four primary sources: the sale of the vehicle, gains on the sales of loans originated to finance the vehicle, sales of VSCs, and wholesale sales of vehicles we acquire from customers as trade-ins.

Our largest source of revenue, used vehicle sales, totaled $342.0 million during the year ended December 31, 2016. As we continue to expand to new markets and increase penetration in existing ones, we expect used vehicle sales to increase as we increase retail units sold. We generate gross profit on used vehicle sales from the difference between the retail selling price of the vehicle and our cost of sales associated with acquiring the vehicle and preparing it for sale.

Wholesale sales of trade-ins and other vehicles acquired from customers totaled $10.2 million during the year ended December 31, 2016. We expect wholesale sales to increase with retail units sold and as we expand our suite of product offerings to customers who may wish to trade-in or to sell us a car independent of a retail sale. We generate gross profit on wholesale vehicle sales from the difference between the wholesale selling price of the vehicle and our cost of sales associated with acquiring the vehicle and preparing it for sale.

Other sales and revenues, which includes gains on the sales of loans we originate and sales commissions on VSCs, totaled $13.0 million during the year ended December 31, 2016. We expect other sales and revenues to increase with retail units sold and as we improve our ability to offer attractive financing solutions and VSCs to our customers. Other sales and revenues are 100% gross margin products for which gross profit equals revenue.

Our total gross profit per retail unit sold has increased from a gross loss of $1,165 per unit in 2013, to a gross loss of $201 per unit in 2014, to a gross profit of $206 per unit in 2015, to a gross profit of $1,023 per unit in 2016. Our increases in gross profit per unit were driven by several factors, including decreases in average days to sale over the first two years of our operations, enhanced vehicle purchasing and pricing

 

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algorithms, increased efficiencies in vehicle reconditioning and transport, increased conversion on complementary products, such as VSCs, and increased monetization of customer financing.

During our growth phase, our highest priority will continue to be generating demand and building an infrastructure to support growth in retail units sold. Secondarily, we plan to pursue several strategies designed to increase our total gross profit per unit. These strategies include the following:

 

   

Reduce average days to sale.    As we continue to expand our number of markets and increase penetration in our existing markets, we expect our average days to sale to decline, leading to higher average selling prices and increased used vehicle gross profit. However, gross profit increases may not always be commensurate with any reductions in average days to sale. See “— Inventory and Pricing.”

 

   

Increase conversion on existing products.    We plan to continue to improve our website to highlight the benefits of our complementary product offerings, including financing, VSCs and trade-ins.

 

   

Add new products and services.    We plan to utilize our online sales platform to offer additional complementary products and services to our customers.

Inventory and Pricing

We establish prices for our vehicles using proprietary pricing algorithms that recommend initial retail price points, as well as retail price markdowns for specific vehicle-based factors, including sales history, consumer interest, and prevailing market prices. We typically price our vehicles at a discount to Kelley Blue Book’s Suggested Retail Value, as well as the average retail market price for each vehicle in the relevant market. According to Blackbook and Fitch, the average used car price declines by approximately 18% per year, or approximately $10 per day on a $20,000 vehicle. This reduction in price over time is incorporated into our vehicle prices, which we reduce periodically.

Reductions in used vehicle prices over time means that average days to sale impacts the average selling price of our vehicles. Average days to sale depends on the number of vehicles we hold in inventory and the number of customers we attract to purchase those vehicles. Since the second quarter of 2015, we have increased the size of our inventory pool as we have increased our number of markets. This balancing of markets and inventory has resulted in average days to sale that have been roughly flat over this period.

Our goal is to increase both our number of markets and our sales growth at a faster rate than we increase our inventory size, which we believe would decrease average days to sale due to a relative increase in demand versus supply. Reductions in average days to sale lead to fewer vehicle price reductions, and therefore higher average selling prices, other things being equal. Higher average selling prices in turn lead to higher gross profit per unit sold all other factors being equal.

Relationship with DriveTime

Carvana was founded as a subsidiary of DriveTime in 2012 and subsequently spun out of DriveTime as a standalone entity in November 2014. DriveTime consolidated Carvana in its financial statements through July 2015. DriveTime has over 23 years of operating history purchasing, reconditioning, selling and financing vehicles throughout the United States. DriveTime is controlled by our controlling shareholder, who is also the father of Ernie Garcia, III, our Chief Executive Officer.

We were incubated by, and benefit from, our relationship and a series of arrangements with DriveTime that were not negotiated at arm’s length. For example, we have contractual lease agreements with DriveTime allowing us to utilize three of their largest IRCs for vehicle reconditioning and distribution. Under these lease agreements, we presently operate IRCs in Winder, Georgia, Blue Mound, Texas and Delanco, New Jersey, which at full utilization will provide us with the ability to purchase and recondition over 150,000 vehicles per year. We also benefit from favorable leases from DriveTime for our office locations, as well as storage lots for our vehicle inventory. Through September 30, 2016, we also purchased

 

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most of our inventory of vehicles through DriveTime. Beginning in October 2016, however, we began to purchase all of our vehicle inventory independently and made payments ourselves through our vehicle inventory financing and security agreement. Through December 31, 2015, DriveTime purchased all of our customers’ loans from us. We also historically relied on DriveTime to provide certain accounting, finance, legal, human resources and information technology services for us. DriveTime is currently in the process of evaluating strategic alternatives, including the potential sale of the company to interested third parties. If such a sale is completed, there can be no assurances that DriveTime will enter into any new agreements or arrangements, or extensions or renewals of existing agreements or arrangements, with us on the same or similar terms or at all. See “Certain Relationships and Related Party Transactions — Relationship with DriveTime.”

Key Operating Metrics

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our progress, and make strategic decisions. Our key operating metrics reflect the key drivers of our growth, including opening new markets, increasing brand awareness and enhancing the selection of vehicles we make available to our customers. Our key operating metrics also demonstrate our ability to translate these drivers into retail sales and to monetize these retail sales through a variety of product offerings.

 

     Year Ended December 31,  
      2014     2015      2016  

Retail units sold

     2,105       6,523        18,761  

Number of markets

     3       9        21  

Average monthly unique visitors

     108,551       198,521        378,776  

Inventory units available on website

     652       1,842        7,310  

Average days to sale

     117       95        89  

Total gross (loss) profit per unit

   $ (201   $ 206      $ 1,023  

Retail Units Sold

We define retail units sold as the number of vehicles sold to customers in a given period, net of returns under our seven-day return policy. We view retail units sold as a key measure of our growth for several reasons. First, retail units sold is the primary driver of our revenues and, indirectly, gross profit, since retail unit sales enable multiple complementary revenue streams, including financing, VSCs and trade-ins. Second, growth in retail units sold increases the base of available customers for referrals and repeat sales. Third, growth in retail units sold is an indicator of our ability to successfully scale our logistics, fulfillment, and customer service operations.

Number of Markets

We define a market as a metropolitan area in which we have commenced local advertising and offer free home delivery to customers with a Carvana employee and branded delivery truck. We view the number of markets we serve as a key driver of our growth. As we increase our number of markets, the population of consumers who have access to our fully-integrated customer experience increases, which in turn helps to increase the number of vehicles we sell.

Average Monthly Unique Visitors

We define a monthly unique visitor as an individual who has visited our website within a calendar month, based on data provided by Google Analytics. We calculate average monthly unique visitors as the sum of monthly unique visitors in a given period, divided by the number of months in that period. We view average monthly unique visitors as a key indicator of the strength of our brand, the effectiveness of our advertising and merchandising campaigns and consumer awareness.

 

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Inventory Units Available

We define inventory units available as the number of vehicles listed for sale on our website on the last day of a given reporting period. Until we reach an optimal pooled inventory level, we view inventory units available as a key measure of our growth. Growth in inventory units available increases the selection of vehicles available to consumers in all of our markets simultaneously, which we believe will allow us to increase the number of vehicles we sell. Moreover, growth in inventory units available is an indicator of our ability to scale our vehicle purchasing, inspection and reconditioning operations.

Average Days to Sale

We define average days to sale as the average number of days between vehicle acquisition by us and delivery to a customer for all retail units sold in a period. However, this metric does not include any retail units that remain unsold at period end. We view average days to sale as a useful metric due to its impact on used vehicle average selling price, as discussed under “— Inventory and Pricing.”

Total Gross Profit per Unit

We define total gross profit per unit as the aggregate gross profit in a given period divided by retail units sold in that period. Total gross profit per unit is driven by sales of used vehicles, each of which generates up to three additional revenue sources: gains on the sales of loans originated to finance the vehicle, sales of VSCs and wholesale sales of vehicles we acquire from customers as trade-ins. We believe gross profit per unit is a key measure of our growth and long-term profitability.

Factors Affecting our Performance

We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below and in the section titled “Risk Factors” of this prospectus.

Growth in Number of Markets

We plan to continue to open new markets to expand the number of consumers we serve with our fully-integrated customer experience. As of December 31, 2016, we operated in 21 markets that collectively represent approximately 19.7% of the U.S. population based on 2015 data from the U.S. Census Bureau, leaving a significant fraction of consumers unserved. Growth in our number of markets depends on our ability to hire qualified employees, identify cost-effective logistics routes, and secure local and national, as applicable, advertising availability.

Growth in Penetration of Existing Markets

We believe that many of our markets remain in a nascent stage of market penetration and that our growing brand awareness, continued inventory optimization, and ongoing product enhancement efforts will enable us to substantially grow sales in existing markets. We plan to pursue several strategies to increase penetration in existing markets, including:

 

   

Growth in brand awareness.    Our growth depends on our ability to strengthen our brand through advertising, and the construction of new vending machines, which have historically increased customer awareness in the markets where they are located. The goal of these endeavors is to increase the number of visitors to our website and increase the likelihood that visitors will purchase vehicles from us.

 

   

Optimization of inventory selection.    We plan to continue to optimize and broaden the selection of vehicles we make available to our customers. Expanding our inventory selection increases the likelihood that each visitor to our site finds a vehicle that matches his or her preferences and benefits all existing markets simultaneously due to our nationally pooled inventory model. Expanding our

 

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inventory selection depends on our ability to source and acquire a sufficient number of appropriate used vehicles, to develop processes for effectively utilizing capacity in our IRCs, and to hire and train employees to staff these centers.

 

   

Enhancement of mobile sales platform.    We plan to continue investing in our mobile platform to enhance our customers’ ability to search for, research, finance, and purchase vehicles entirely on mobile devices, including smartphones and tablets. According to DealerSocket 2016, over 33% of auto research occurred on a mobile device. Data from eMarketer indicates that U.S. consumers bought nearly $75 billion in goods and services via mobile devices in 2015. This accounted for 22% of total eCommerce and represented 80% growth since 2013. Growth in mobile-only sales depends on our ability to deliver innovative products that facilitate our customers’ mobile experience, as well as customers’ tastes for buying exclusively on mobile devices.

 

   

Referrals and repeat customers.    Our growth is enhanced by providing a superior customer experience, which drives our ability to generate customer referrals and repeat sales.

Growth in Monetization of Retail Units Sold

We plan to pursue several strategies to increase our gross profit per retail unit sold.

 

   

Reduction in average days to sale.    As discussed in “— Inventory and Pricing,” we believe our gross profit per retail unit sold will increase as average days to sale decreases, since used vehicle prices decline over time. Our average days to sale depends on our ability to open new markets and increase penetration in existing markets by increasing brand awareness, enhancing our mobile and desktop website, and providing great customer experiences.

 

   

Growth in existing complementary revenue streams.    We plan to continue to improve our website to highlight the benefits of our current complementary product and service offerings, including financing, trade-ins, and VSCs. In particular, we believe we have an opportunity to grow our penetration of trade-ins by developing new products and advertising campaigns that are focused on our automated online appraisal tool, the Cardian Angel.

 

   

Addition of new products and services.    We plan to utilize our online sales platform to offer additional complementary products and services to our customers. To the extent that our customers purchase these products and services, this could lead to increased revenue and gross profit per retail unit sold.

Capacity Utilization

We believe our network of IRCs and connecting logistics routes has excess capacity, and we plan to utilize this capacity as we increase retail sales volumes. Increasing capacity utilization will positively affect gross profit per unit by reducing per unit overhead costs.

Seasonality

Used vehicle sales exhibit seasonality with sales peaking late in the first calendar quarter and diminishing through the rest of the year, with the lowest relative level of vehicle sales expected to occur in the fourth calendar quarter. Due to our rapid growth, our overall sales patterns to date have not reflected the general seasonality of the used vehicle industry, but we expect this to change once our business and markets mature. Used vehicle prices also exhibit seasonality, with used vehicles depreciating at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. Historically, this has led our gross profit per unit to be higher on average in the first half of the year than in the second half of the year. See “Risk Factors — Risks Related to Our Business — We may experience seasonal and other fluctuations in our quarterly operating results, which may not fully reflect the underlying performance of our business.”

 

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Investment in Growth

We have aggressively invested in the growth of our business and we expect this investment to continue. We anticipate that our operating expenses will increase substantially as we continue to open new markets, expand our logistics network and increase our advertising spending, including increases in television advertising expenditures. These investments are expected to increase our losses at least in the near term, and there is no guarantee that we will be able to realize the return on our investments.

Components of Results of Operations

Used Vehicle Sales

Used vehicle sales represent the aggregate sales of used vehicles to customers through our website. Revenue from used vehicles sales is recognized upon delivery or pick-up of the vehicle by the customer and reported net of a reserve for expected returns. Factors affecting used vehicle sales revenue include the number of retail units sold and the average selling price of these vehicles. At our current stage of growth, changes in retail units sold are a much larger driver of changes in revenue than are changes in average selling price.

The number of used vehicle units we sell depends on the number of markets we serve, our volume of website traffic in these markets, our inventory selection, the effectiveness of our branding and marketing efforts, the quality of our customer sales experience, our volume of referrals and repeat customers, the competitiveness of our pricing, competition from other used car dealerships, and general economic conditions. On a quarterly basis, the number of used vehicle units we sell is also affected by seasonality, with demand for used vehicles reaching a seasonal high point in the first quarter of each year, commensurate with the timing of tax refunds, and diminishing through the rest of the year, with the lowest relative level of vehicle sales expected to occur in the fourth calendar quarter.

Our average retail selling price depends on the mix of vehicles we acquire and hold in inventory, retail market prices in our markets, our average days to sale, and our pricing strategy. We may opportunistically choose to shift our inventory mix to higher or lower cost vehicles, or to opportunistically raise or lower our prices relative to market to take advantage of supply or demand imbalances, which could temporarily lead to average selling prices increasing or decreasing. We anticipate that our average days to sale will decline over time as we continue to launch new markets, which we believe will have a positive impact on our average retail selling price, other things being equal.

Wholesale Vehicle Sales

Wholesale vehicle sales is equal to the aggregate proceeds we receive on vehicles sold to wholesalers. The vehicles we sell to wholesalers are primarily acquired from our customers who trade-in their existing vehicles when making a purchase from us, although, to a lesser extent, we also acquire vehicles from customers who do not purchase another vehicle from us. Factors affecting wholesale vehicle sales include the number of wholesale units sold and the average wholesale selling price of these vehicles. The average selling price of our wholesale units is driven by the mix of wholesale vehicles we purchase, as well as general supply and demand conditions in the applicable wholesale vehicle market.

Other Sales and Revenues

We generate other sales and revenues primarily through the sales of automotive finance receivables we originate and sell to third parties and commissions we receive on VSCs. Prior to December 9, 2016, the VSCs were sold and administered by third parties. On December 9, 2016, the Company entered into a master dealer agreement with DriveTime, pursuant to which we sell VSCs that DriveTime administers. The commission revenues we recognize on VSCs depends on the number of retail units we sell, the conversion rate of VSCs on these sales, commission rates we receive, VSC early cancellation frequency, product features and regional and statutory restrictions.

 

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We generally seek to sell the automotive finance receivables we generate under committed forward flow arrangements with third parties who acquire these receivables at premium prices without recourse to us for their post-sale performance. Factors affecting revenue from these sales include the number of automotive finance receivables we originate, the average principal balance of these receivables, the credit quality of the portfolio and the price at which we are able to sell them to third parties. The number of receivables we originate is driven by the number of used vehicles sold and the percentage of our sales for which we provide financing, which is influenced by the financing terms we offer our customers relative to alternatives available to the customer. The average principal balance is driven primarily by the mix of vehicles we sell, since higher average selling prices typically mean higher average receivable balances. The price at which we resell these automotive finance receivables is driven by the terms of our forward flow arrangements and applicable interest rates.

Cost of Sales

Cost of sales includes the cost to acquire vehicles and the reconditioning and transportation costs associated with preparing the vehicles for resale. Vehicle acquisition costs are driven by the mix of vehicles we acquire, the source of those vehicles, and supply and demand dynamics in the wholesale vehicle market. Reconditioning costs consist of direct costs, including parts, labor, and third party repair expenses directly attributable to specific vehicles, as well as indirect costs, such as IRC overhead. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition to the IRC. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value.

Used Vehicle Gross Profit

Used vehicle gross profit equals the vehicle sales price minus our costs of sales associated with vehicles that we list for retail sale on our website. Used vehicle gross profit per unit equals our aggregate used vehicle gross profit in any measurement period divided by the number of retail units sold in such period.

Wholesale Vehicle Gross Profit

Wholesale vehicle gross profit equals the vehicle sales price minus our cost of sales associated with vehicles we sell to wholesalers. Factors affecting wholesale gross profit include the number of wholesale units sold, the average wholesale selling price of these vehicles, and the acquisition price we offer to the customer.

Other Gross Profit

Other sales and revenues consist of 100% gross margin products for which gross profit equals revenue. Therefore, changes in gross profit and the associated drivers are identical to changes in revenues from these products and the associated drivers.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses include expenses associated with advertising to customers, operating our logistics hub, fulfillment center and vending machine operations, operating our logistics and fulfillment network, and other corporate overhead expenses, including expenses associated with IT, product development, engineering, accounting, finance, and business development. We anticipate that these expenses will increase as we grow. SG&A expenses exclude the costs of inspecting and reconditioning vehicles, which are included in cost of sales.

 

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Interest Expense

Interest expense includes interest incurred on our Floor Plan Facility and interest incurred on our notes payable, which are used to fund inventory and our transportation fleet, respectively.

Results of Operations

 

     Year Ended December 31,  
     2014     2015     Change     2016      Change  
     (dollars in thousands, except per unit amounts)  
Net sales and operating revenues:                                

Used vehicle sales, net

   $ 41,123     $ 124,972       203.9   $ 341,989        173.7

Wholesale vehicle sales

     522       3,743       617.0     10,163        171.5

Other sales and revenues(1)

     34       1,677       4,832.4     12,996        675.0
  

 

 

   

 

 

     

 

 

    

Total net sales and operating revenues

   $ 41,679     $ 130,392       212.8   $ 365,148        180.0
  

 

 

   

 

 

     

 

 

    

Gross profit:

           

Used vehicle gross (loss) profit

   $ (449   $ (212     n/a     $ 5,944        n/a  

Wholesale vehicle (loss) gross profit

     (9     (119     n/a       257        n/a  

Other gross profit(1)

     34       1,677       4,832.4     12,996        675.0
  

 

 

   

 

 

     

 

 

    

Total gross (loss) profit

   $ (424   $ 1,346       n/a     $ 19,197        1,326.2
  

 

 

   

 

 

     

 

 

    

Market information:

           

Markets, beginning of period

     1       3       200.0     9        200.0

Market launches

     2       6       200.0     12        100.0
  

 

 

   

 

 

     

 

 

    

Markets, end of period

     3       9       200.0     21        133.3
  

 

 

   

 

 

     

 

 

    

Unit sales information:

           

Used vehicles unit sales

     2,105       6,523       209.9     18,761        187.6

Wholesale vehicles unit sales

     137       1,070       681.0     2,651        147.8

Per unit selling prices:

           

Used vehicles

   $ 19,536     $ 19,159       (1.9 %)    $ 18,229        (4.9 %) 

Wholesale vehicles

   $ 3,810     $ 3,498       (8.2 %)    $ 3,834        9.6

Per unit gross profit:(2)

           

Used vehicle gross profit

   $ (213   $ (33     n/a     $ 317        n/a  

Wholesale vehicle gross profit

   $ (65   $ (111     n/a     $ 97        n/a  

Other gross profit

   $ 16     $ 257       1,506.3   $ 693        169.6

Total gross (loss) profit

   $ (201   $ 206       n/a     $ 1,023        396.6

 

(1) Includes $460 of other sales and revenues from related parties for the year ended December 31, 2016.

 

(2) All gross profit per unit amounts are per used vehicle sold, except wholesale vehicle gross profit which is per wholesale vehicle sold.

Used Vehicle Sales

Fiscal 2016 Versus Fiscal 2015.    Used vehicle sales increased by $217.0 million to $342.0 million during the year ended December 31, 2016, compared to $125.0 million during the year ended December 31, 2015. The increase in revenue was primarily due to an increase in the number of used vehicles sold from 6,523 to 18,761. The increase in unit sales was driven in part by growth to 21 markets as of December 31, 2016 from nine markets as of December 31, 2015. The increase in units sold was also driven by growth in existing markets due to expanded inventory selection, enhanced marketing efforts, increased brand awareness, and customer referrals. We anticipate that unit sales will continue to grow as we launch new markets and increase penetration in existing markets. The average selling price of our retail

 

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units sold decreased to $18,229 in the year ended December 31, 2016 from $19,159 in the prior period, reflecting a broadening of our inventory mix to include lower cost vehicles.

Fiscal 2015 Versus Fiscal 2014.    Used vehicle sales increased by $83.8 million to $125.0 million during the year ended December 31, 2015, compared to $41.1 million during the year ended December 31, 2014. The increase in revenue was primarily due to an increase in the number of used vehicles sold from 2,105 to 6,523, which was the result of operating in nine markets as of December 31, 2015 compared to three markets as of December 31, 2014 and growth in the existing markets as a result of our marketing efforts, increased brand awareness and customer referrals. The average selling price of our retail units sold decreased to $19,159 in 2015 from $19,536 in 2014, reflecting a broadening of our inventory mix to include lower cost vehicles.

Wholesale Vehicle Sales

Fiscal 2016 Versus Fiscal 2015.    Wholesale vehicle sales increased by $6.4 million to $10.2 million during the year ended December 31, 2016, compared to $3.7 million during the year ended December 31, 2015. We primarily obtain our wholesale inventory from customer trade-ins. As our retail unit sales have increased, so have the trade-ins we receive. Therefore, we have had more units available for sale to wholesalers over time and our revenues attributed to wholesale vehicle sales have increased.

Fiscal 2015 Versus Fiscal 2014.    Wholesale vehicle sales increased by $3.2 million to $3.7 million during the year ended December 31, 2015, compared to $0.5 million during the year ended December 31, 2014. This increase was primarily due to an increase in retail units sold since we obtain most of our wholesale inventory from customer trade-ins.

Other Sales and Revenues

Fiscal 2016 Versus Fiscal 2015.    Other sales and revenues primarily consist of gains on the sales of loans we originate and commissions we receive on VSCs. Other sales and revenues increased by $11.3 million to $13.0 million during the year ended December 31, 2016, compared to $1.7 million during the year ended December 31, 2015. Our increase in VSC sales was driven by the increase in units sold, as well as an increase in the attachment rate of VSCs to retail units sold. In January 2016, we began selling most of the automotive finance receivables we originated to third parties at a premium. Prior to 2016, we sold the loans we originated to DriveTime, at par. See “Certain Relationships and Related Party Transactions—Relationship with DriveTime.”

Fiscal 2015 Versus Fiscal 2014.    Other sales and revenues increased by $1.6 million to $1.7 million during the year ended December 31, 2015, compared to an inconsequential amount during the year ended December 31, 2014. This increase was driven primarily by an increase in VSC sales resulting from growth in retail units sold and a higher conversion rate on VSCs for retail units sold. We did not recognize gain on loan sales in either 2015 or 2014 because prior to 2016, we sold all of the loans we originated to DriveTime, at par. See “Certain Relationships and Related Party Transactions — Relationship with DriveTime.”

Used Vehicle Gross Profit

Fiscal 2016 Versus Fiscal 2015.    Used vehicle gross profit increased by $6.1 million to $5.9 million during the year ended December 31, 2016, compared to a loss of $0.2 million during the year ended December 31, 2015. This increase was driven primarily by an increase in used vehicle gross profit per unit to $317 for the year ended December 31, 2016 compared to a loss of $33 for the year ended December 31, 2015. The increase in vehicle gross profit per unit was driven by enhancements in our proprietary vehicle purchasing and pricing technology, as well as by cost efficiencies in the reconditioning and transportation of our vehicles.

Fiscal 2015 Versus Fiscal 2014.    Used vehicle gross loss improved by $0.2 million to a loss of $0.2 million in 2015, compared to a loss of $0.4 million in 2014. This decrease in gross loss was driven primarily

 

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by a decrease in used vehicle gross loss per unit to a loss of $33 from a loss of $213. The decrease in vehicle gross loss per unit was driven primarily by a decrease in average days to sale, commensurate with the launch of several new markets in late 2014 and in 2015.

Wholesale Vehicle Gross Profit

Fiscal 2016 Versus Fiscal 2015.    Wholesale vehicle gross profit increased by $0.4 million to $0.3 million during the year ended December 31, 2016, compared to a loss of $0.1 million during the year ended December 31, 2015. This increase was driven primarily by an increase in wholesale gross profit per wholesale unit to $97 from a loss of $111. The increase in wholesale gross profit per unit was driven by improvements in our automated appraisal algorithms and wholesale disposition processes.

Fiscal 2015 Versus Fiscal 2014.    Wholesale vehicle gross profit decreased by $0.1 million to a loss of $0.1 million during the year ended December 31, 2015, compared to a loss of $0.0 million during the year ended December 31, 2014. This decrease was driven primarily by a decrease in wholesale gross profit per wholesale unit to a loss of $111 from a loss of $65 and an increase in wholesale units sold.

Other Gross Profit

Other sales and revenues consist of 100% gross margin products for which gross profit equals revenue. Therefore, changes in other gross profit and the associated drivers are identical to changes in other sales and revenues and the associated drivers.

Components of SG&A

 

     Year Ended December 31,  
     2014      2015      2016  
     (in thousands)  

Compensation and benefits(1)

   $ 4,413      $ 11,657      $ 37,220  

Advertising expense

     4,078        10,779        26,988  

Market occupancy costs(2)

     526        554        1,768  

Logistics(3)

     488        1,382        8,350  

Other overhead costs(4)

     5,179        12,306        34,350  
  

 

 

    

 

 

    

 

 

 

Total

   $ 14,684      $ 36,678      $ 108,676  
  

 

 

    

 

 

    

 

 

 

 

(1) Compensation and benefits includes all payroll and related costs, including benefits, payroll taxes, and unit-based compensation, except those related to reconditioning vehicles which are included in cost of sales.

 

(2) Market occupancy costs includes rent, utilities, security, repairs and maintenance, and depreciation of buildings and improvements, including vending machines and fulfillment centers, excluding the portion related to reconditioning vehicles which is included in cost of sales, and excluding the portion related to our corporate office which is included in other overhead costs.

 

(3) Logistics includes fuel, maintenance, and depreciation related to owning and operating our own transportation fleet, and third party transportation fees.

 

(4) Other overhead costs include all other overhead and depreciation expenses such as IT expenses, limited warranty, travel, insurance, bad debt, title and registration, and other administrative expenses.

Fiscal 2016 Versus Fiscal 2015.    Selling, general and administrative expenses increased by $72.0 million to $108.7 million during the year ended December 31, 2016, compared to $36.7 million during the year ended December 31, 2015. The increase is partially due to an increase in compensation and benefits of $25.6 million, which was driven by expansion into new markets and growth in headcount at our Phoenix headquarters, including in our product and engineering, accounting, finance, legal, real estate, information

 

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technology, and human resources departments. These expenses will increase as we expand to additional markets and as we incur increased expenses as a public company, in absolute terms. Advertising, market occupancy, logistics and other overhead expenses increased during the year ended December 31, 2016 compared to the prior period primarily due to an increase in number of markets. In 2016, logistics expenses also included significant charges from third parties prior to the development of our in-house logistics network.

Fiscal 2015 Versus Fiscal 2014.    Selling, general and administrative expenses increased by $22.0 million to $36.7 million during the year ended December 31, 2015, compared to $14.7 million during the year ended December 31, 2014. The increase is primarily due to an increase of $6.7 million in advertising, commensurate with expansion to six new markets. The increase is also due to an increase of $7.2 million in compensation and benefits, which was driven by a rise in total headcount associated with our growth.

Interest Expense

Fiscal 2016 Versus Fiscal 2015.    Interest expense increased by $2.2 million to $3.6 million during the year ended December 31, 2016, compared to $1.4 million during the year ended December 31, 2015. In order to expand the inventory we make available to customers, we increased our borrowings under our Floor Plan Facility. The increase in interest expense is due to the increases in the outstanding balance.

Fiscal 2015 Versus Fiscal 2014.    Interest expense increased by $1.3 million to $1.4 million during the year ended December 31, 2015, compared to $0.1 million during the year ended December 31, 2014. The interest expense was associated with the interest incurred on our Floor Plan Facility which commenced in December 2014 and interest incurred on our note payable to related parties which commenced in November 2014. This note was repaid in July 2015.

 

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Quarterly Key Metrics and Results of Operations

The following table sets forth selected key metrics and unaudited quarterly results of operations data for each of the quarters indicated. We have prepared the unaudited quarterly information on a basis consistent with the audited financial statements included elsewhere in this prospectus. In the opinion of management, the financial information in these tables reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus. The historical quarterly operating results presented below are not necessarily indicative of the results that may be attained during a full year of operations or any future period.

 

    Quarter Ended — All Periods Unaudited  
    Mar 31,
2014
    Jun 30,
2014
    Sept 30,
2014
    Dec 31,
2014
    Mar 31,
2015
    Jun 30,
2015
    Sept 30,
2015
    Dec 31,
2015
    Mar 31,
2016
    Jun 30,
2016
    Sept 30,
2016
    Dec 31,
2016
 
    (Dollars in thousands, except per unit amounts)  

Number of markets

    1       2       3       3       4       5       5       9       11       14       16       21  

Average days to sale

    168       114       109       107       95       97       105       85       83       93       92       89  

Average monthly unique visitors

    46,923       94,874       160,747       131,661       155,953       197,730       196,031       244,370       337,486       326,791       388,673       462,153  

Inventory units available on website

    270       485       517       652       895       1,367       1,107       1,842       2,951       4,516       4,565       7,310  

Retail units sold

    315       436       579       775       1,212       1,343       1,776       2,192       3,783       4,355       5,023       5,600  

Total gross (loss) profit per retail unit sold

  $ (29   $ 390     $ (428   $ (435   $ 117     $ 308     $ 130     $ 255     $ 1,046     $ 1,386     $ 1,347     $ 435  

Sales and operating revenue

                       

Used vehicle sales, net

  $ 6,220     $ 9,269     $ 11,648     $ 13,986     $ 22,845     $ 27,174     $ 34,062     $ 40,891     $ 68,495     $ 80,488     $ 92,115     $ 100,891  

Wholesale vehicle sales

    70       170       144       138       436       1,184       1,167       956       1,559       2,475       2,870       3,259  

Other sales and revenues (1)

    8       10       3       13       322       249       439       667       2,897       3,563       3,859       2,677  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total sales and operating revenues

    6,298       9,449       11,795       14,137       23,603       28,607       35,668       42,514       72,951       86,526       98,844       106,827  

Cost of sales

    6,307       9,279       12,043       14,474       23,461       28,193       35,438       41,954       68,994       80,489       92,078       104,390  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

    (9     170       (248     (337     142       414       230       560       3,957       6,037       6,766       2,437  

Selling, general and administrative expenses

    2,082       2,961       4,012       5,629       6,637       7,621       9,218       13,202       20,632       23,344       27,995       36,705  

Interest expense

                      108       269       439       310       394       710       796       725       1,356  

Other (income) expense, net

    (2     4             20             2       (21     55       (60     5       31       70  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

  $ (2,089   $ (2,795   $ (4,260   $ (6,094   $ (6,764   $ (7,648   $ (9,277   $ (13,091   $ (17,325   $ (18,108   $ (21,985   $ (35,694
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes $460 of other sales and revenues from related parties for the quarter ended December 31, 2016.

 

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Quarterly Revenue and Gross Profit Trends

Our revenues have increased in each quarter since our inception. The sequential increases in quarterly revenues have been the result of increases in the number of retail units sold as well as the introduction of new revenue streams. Retail units sold have increased as we have opened new markets and increased penetration in our existing markets, and also as we have expanded our selection of vehicle inventory, advertising and word of mouth referrals.

Used vehicle sales generally exhibit seasonality with sales usually peaking late in the first calendar quarter and diminishing through the rest of the year, resulting in the lowest relative level of used vehicle sales expected to occur in the fourth calendar quarter. Due to our rapid growth, our overall sales patterns have not matched the general seasonality of the used vehicle industry; however, we have historically experienced higher revenue growth rates in the first quarter of the calendar year than in each of the last three quarters of the calendar year. As we mature, we expect revenues may decrease in each of the last three quarters of the calendar year relative to the first quarter.

Used vehicle prices also exhibit seasonality, with used vehicles depreciating at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year. Historically, this has led our gross profit per retail unit sold to be higher on average in the first half of the year than in the second half of the year. See “Risk Factors — Risks Related to Our Business — We may experience seasonal and other fluctuations in our quarterly operating results, which may not fully reflect the underlying performance of our business.”

Gross profit in the fourth quarter of each year has also historically been adversely affected by our Cyber Monday promotion, which lowers average selling price in late November and early December. Gross profit in the fourth quarter of 2016 was also particularly impacted by the sale and markdown of certain inventory that was no longer a fit for our retail inventory due to open manufacturer recalls. Additionally, our transition to new receivables purchasers on December 29, 2016 temporarily delayed our sale of certain receivables, and an increase in market interest rates prior to the closing of the master purchase and sale agreement and master transfer agreement adversely affected the premium at which we were able to sell receivables originated prior to such increase.

Quarterly Selling, General, and Administrative Trends

Selling, general and administrative expenses have increased in each quarter as a result of the expansion of our business. Volume of sales, continued expansion of our infrastructure and employee headcount has contributed to the increase in these expenses. During the fourth quarter of 2016, we increased our headcount substantially in preparation for the anticipated increase in sales as we continue to enter new markets, as well as in preparation for becoming a public company.

Liquidity and Capital Resources

General

Our principal sources of liquidity are our cash generated from operations and financing activities. Cash generated from our operating activities primarily includes cash derived from the sale of used retail vehicles, wholesale vehicles, commissions on VSCs sold in connection with the sale of used vehicles, and proceeds from the sale of automotive finance receivables we originated in connection with the sale of used vehicles. Historically, cash generated from our financing activities has also reflected proceeds from our sale of Class C Preferred Units, which total $227.4 million since inception. Additionally, we issued Class A Units in repayment of a $50.0 million note payable to DriveTime.

We have incurred accumulated losses of $152.6 million from our operations from inception through December 31, 2016, and expect to incur additional losses in the future. Our ability to service our debt, fund working capital, capital expenditures and business development efforts will depend on our ability to generate

 

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cash from operating and financing activities, which is subject to our future operating performance, as well as to general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control. We believe that our existing sources of liquidity including future debt and equity financing, will be sufficient to fund our operations, including lease obligations, debt service requirements, capital expenditures, and working capital obligations for at least the next 12 months. However, our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities into new and existing markets, and the timing and extent of our spending to support our technology and software development efforts. To the extent that existing cash and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Floor Plan Facility

In October 2014, DriveTime and Carvana entered into an inventory and financing agreement and a cross collateral, cross default and guaranty with Ally Bank and Ally Financial (together “Ally”) to finance our used vehicle inventory, which was secured by DriveTime and Carvana’s vehicle inventory. On July 27, 2015, the agreement was amended and restated to remove DriveTime as a guarantor party to the agreements. On December 30, 2015, we amended and restated our inventory financing and security agreement with Ally governing the $125.0 million line of credit available under our floor plan facility (the “Floor Plan Facility”). We further amended the Floor Plan Facility on November 9, 2016 to increase the line of credit to $200.0 million and extend the maturity to December 27, 2017. This agreement may be extended for an additional 364-day period at Ally’s sole discretion. As of December 31, 2016, $165.3 million borrowings were outstanding under the Floor Plan Facility, the interest rate was 4.57% and $34.7 million remained available for borrowing. See “Description of Certain Indebtedness.”

Other Notes Payable

Throughout 2016, we issued notes payable to acquire haulers and equipment for use in our logistics operations. The assets purchased with the proceeds from these notes serve as the collateral for each note and certain security agreements related to these assets have cross collateralization and cross default provisions with respect to one another. Each note has a five-year term, fixed interest rate and requires monthly principal and interest payments. As of December 31, 2016, the outstanding principal of these notes totaled approximately $5.5 million and had a weighted-average interest rate of approximately 4.8%.

Finance Receivables

Our customers can obtain vehicle financing directly on our website. Historically, we have entered into various arrangements to sell the finance receivables we originate to third parties and to a lesser extent related parties. In January 2016, we entered into transfer agreements pursuant to which we indirectly sell automotive finance receivables meeting certain underwriting criteria to third party purchasers. Sales of receivables are a source of cash from operations and remove these loans from our balance sheet without recourse for their post-sale performance. See “Certain Relationships and Related Party Transactions — Transfer Agreements and Note Purchase and Security Agreements.” Under the transfer agreements and note purchase and security agreements, we could sell up to $230.0 million in principal balances of the finance receivables in this manner. As of December 31, 2016, we had sold all $230.0 million. We plan to enter into similar arrangements in the future. We have also continued to sell automotive finance receivables to DriveTime.

In December 2016, we entered into a master purchase and sale agreement with Ally pursuant to which we sell Ally automotive finance receivables meeting certain underwriting criteria. Under such sale agreement, Ally has committed to purchase up to an aggregate of $375.0 million in principal balances of automotive finance receivables that we originate, subject to adjustment as described in the agreement. During the year ended December 31, 2016, we sold approximately $21.3 million in principal balances of

 

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automotive finance receivables under this agreement and there was approximately $353.7 million of unused capacity under this agreement as of December 31, 2016. See “Certain Relationships and Related Party Transactions — Other Agreements — Master Purchase and Sale Agreement.”

In December 2016, we entered into a master transfer agreement with an unrelated third party pursuant to which we sell automotive finance receivables meeting certain underwriting criteria to such party. Under such sale agreement, the third party has committed to purchase up to an aggregate of $292.2 million in principal balances of automotive finance receivables that we originate. The third party purchaser finances a majority of these purchases with borrowings from Ally. During the year ended December 31, 2016, we sold approximately $8.5 million in principal balances of automotive finance receivables under this agreement and there was approximately $283.7 million of unused capacity under this agreement as of December 31, 2016. See “Certain Relationships and Related Party Transactions — Other Agreements — Master Transfer Agreement.”

Credit Facility with Verde

On February 27, 2017, we entered into a credit facility with Verde Investments, Inc., an affiliate of DriveTime, (“Verde”) for an amount up to $50.0 million. We may, but are not required to, draw up to five loans in minimum amounts of $10.0 million each during the term of the agreement. Amounts borrowed and repaid under the agreement cannot be reborrowed. As of March 31, 2017, $20.0 million has been drawn under the credit facility. Amounts outstanding accrue interest at a rate of 12.0% per annum, compounding semi-annually and payable in kind and mature in August 2018. The credit facility requires prepayment without penalty upon a sale of Carvana Group’s equity with proceeds of at least $5.0 million, upon issuance by Carvana Group of unsecured debt of at least $5.0 million or upon a change of control transaction involving Carvana Group. The proceeds of the borrowings under the credit facility will be used to provide cash for working capital and general corporate purposes. Upon execution of the agreement, Carvana Group paid to Verde a fee of $1.0 million in consideration of their commitment to make the financing available. The credit facility may at Verde’s request be secured by certain real property owned by us and, upon such request, would be subject to recording of a mortgage evidencing such security interest. The credit facility is subject to certain customary covenants, and as of March 31, 2017, we were in compliance with all covenants and such covenants will not restrict our ability to consummate this offering. All outstanding borrowings under the credit facility will be repaid in full and the credit facility agreement will be terminated in connection with this offering. See “Use of Proceeds.”

Cash Flows

The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the years ended December 31, 2014, 2015 and 2016.

 

     Year Ended
December 31,
 
     2014     2015     2016  
     (in thousands)  

Net cash used in operating activities

   $ (30,161   $ (53,508   $ (240,225

Net cash used in investing activities

     (3,768     (16,065     (47,690

Net cash provided by financing activities

     39,614       105,778       283,965  
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     5,685       36,205       (3,950

Cash and cash equivalents at beginning of period

     1,244       6,929       43,134  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 6,929     $ 43,134     $ 39,184  
  

 

 

   

 

 

   

 

 

 

 

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Operating Activities

For the year ended December 31, 2016, net cash used in operating activities was $240.2 million, an increase of $186.7 million compared to net cash used in operating activities of $53.5 million for the year ended December 31, 2015. Significant changes impacting net cash used in operating activities comparing the year ended December 31, 2016 and 2015 are as follows:

 

   

Our net loss was $93.1 million during the year ended December 31, 2016, an increase of $56.3 million from a net loss of $36.8 million during the year ended December 31, 2015 due to costs associated with our operating in additional markets and expanding our corporate infrastructure.

 

   

Purchases of vehicle inventory were $117.5 million during the year ended December 31, 2016, an increase of $75.8 million from $41.7 million during the year ended December 31, 2015 related to the increase in the number of vehicles available to our customers.

 

   

During the year ended December 31, 2016, our automotive finance receivables originations and repurchases exceeded proceeds from the sales of these receivables by $16.5 million due to the timing of originations and repurchases and the subsequent sales of the related receivables to third parties.

 

   

At December 31, 2015, our accounts payable to related party was $21.4 million, primarily related to vehicle inventory purchases, which we repaid during the year ended December 31, 2016. At December 31, 2016, we had accounts payable to related party of $1.9 million, primarily related to shared service fees, repayments to DriveTime for invoices paid on our behalf and lease payments. See “Certain Relationships and Related Party Transactions — Our Relationship with DriveTime.”

For the year ended December 31, 2015, net cash used in operating activities was $53.5 million, an increase of $23.3 million compared to net cash used in operating activities of $30.2 million for the year ended December 31, 2014. Significant changes impacting net cash used in operating activities comparing the year ended December 31, 2015 and 2014 are as follows:

 

   

Our net loss was $36.8 million during the year ended December 31, 2015, an increase of $21.5 million from a net loss of $15.2 million during the year ended December 31, 2014 due to costs associated with our operating in additional markets and expanding our corporate infrastructure.

 

   

Purchases of vehicle inventory were $41.7 million during the year ended December 31, 2015, an increase of $24.3 million from $17.4 million during the year ended December 31, 2014 related to the increase in the number of vehicles available to our customers.

 

   

The cash provided by operating activities associated with accounts payable to related party was $21.4 million during the year ended December 31, 2015 compared to $0.0 during the year ended December 31, 2014 due to the timing of payments to DriveTime primarily related to vehicle inventory purchased during 2015.

Investing Activities

Cash used in investing activities was $47.7 million and $16.1 million during the year ended December 31, 2016 and 2015, respectively, an increase of $31.6 million. The increase relates to the increase in purchases of property and equipment of $25.6 million, reflecting the expansion of our business operations into new markets and the increase in restricted cash of $8.2 million due to the increase in our Floor Plan Facility of $123.0 million to fund the increase in our vehicle inventory.

Cash used in investing activities was $16.1 million and $3.8 million during the years ended December 31, 2015 and 2014, respectively, an increase of $12.3 million. The increase relates to the increase in purchases of property and equipment of $10.2 million, reflecting the expansion of our business operations into new markets and the restricted cash requirement of $2.1 million in 2015 due to our Floor Plan Facility established in 2015 to fund the vehicle inventory purchases.

 

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Financing Activities

Cash provided by financing activities was $284.0 million and $105.8 million during the years ended December 31, 2016 and 2015, respectively, an increase of $178.2 million. The net increase relates to the following significant financing activities:

 

   

Proceeds from the issuance of Class C Preferred Units increased by $97.4 million from $65.0 million in the year ended December 31, 2015 to $162.4 million in the year ended December 31, 2016. The issuance of preferred units has been utilized to fund our continuing expansion into new markets and general working capital needs.

 

   

In the year ended December 31, 2015, we paid a cash dividend of $33.5 million to facilitate the sale of our Class C Preferred Units. We did not make any dividend payments in the year ended December 31, 2016, which resulted in a related increase in cash provided by financing activities in 2016 compared to the prior period.

 

   

Proceeds from the Floor Plan Facility increased by $285.5 million due to increased borrowing requirements to fund the expansion of our vehicle inventory.

 

   

Payments on the Floor Plan Facility increased by $199.2 million due to the timing of payments under the facility.

Cash provided by financing activities was $105.8 million and $39.6 million during the years ended December 31, 2015 and 2014, respectively, an increase of $66.2 million. The net increase relates to the following significant financing activities:

 

   

Proceeds from the issuance of Class C Preferred Units were $65.0 million during the year ended December 31, 2015. The issuance of preferred units has been utilized to fund our continuing expansion into new markets and general working capital needs.

 

   

We made a dividend payment of $33.5 million during the year ended December 31, 2015 and did not make any dividend payments during 2014, which resulted in a decreased in cash provided by financing activities in 2015.