0001690820-18-000109.txt : 20181107 0001690820-18-000109.hdr.sgml : 20181107 20181107163538 ACCESSION NUMBER: 0001690820-18-000109 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 110 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181107 DATE AS OF CHANGE: 20181107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARVANA CO. CENTRAL INDEX KEY: 0001690820 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 814549921 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38073 FILM NUMBER: 181166838 BUSINESS ADDRESS: STREET 1: 1930 W. RIO SALADO PARKWAY CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: (480) 719-8809 MAIL ADDRESS: STREET 1: 1930 W. RIO SALADO PARKWAY CITY: TEMPE STATE: AZ ZIP: 85281 10-Q 1 cvna-20180930.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2018 

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______



Commission File Number: 001-38073
CARVANA CO. 
(Exact name of registrant as specified in its charter)


Delaware 81-4549921 
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.) 
1930 W. Rio Salado Parkway, Tempe, Arizona 85281
(Address of principal executive offices) (Zip Code) 

(480) 719-8809
(Registrant's telephone number, including area code)



N/A
(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ý Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   ¨
Accelerated filer  ¨
Non-accelerated filer  ý (Do not check if a smaller reporting company)
Smaller reporting company   ¨
Emerging growth company ý
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes  ý No
As of November 2, 2018, the registrant had 38,849,394 shares of Class A common stock outstanding and 105,215,869 shares of Class B common stock outstanding.





INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017
Unaudited Condensed Consolidated Statements of Stockholders' Equity / Members' Deficit for the Nine Months Ended September 30, 2018 and 2017
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits






PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 30, 2018December 31, 2017
ASSETS 
Current assets: 
Cash and cash equivalents $439,794 $172,680 
Restricted cash 18,471 14,443 
Accounts receivable, net 23,498 14,105 
Finance receivables held for sale, net 88,151 45,564 
Vehicle inventory 339,005 227,446 
Other current assets 26,446 15,480 
Total current assets 935,365 489,718 
Property and equipment, net 251,942 148,681 
Intangible assets, net 9,243  
Goodwill 9,353  
Other assets 6,200 2,738 
Total assets $1,212,103 $641,137 
LIABILITIES & STOCKHOLDERS' EQUITY 
Current liabilities: 
Accounts payable and accrued liabilities $96,861 $50,306 
Accounts payable due to related party 3,512 1,802 
Floor plan facility 349,392 248,792 
Current portion of other long-term debt 7,838 5,131 
Total current liabilities 457,603 306,031 
Senior unsecured notes342,481  
Other long-term debt, excluding current portion 96,179 48,469 
Other liabilities 9,072 7,093 
Total liabilities 905,335 361,593 
Commitments and contingencies (Note 14) 
Stockholders' equity: 
Class A Convertible Preferred Stock, $0.01 par value, $1,000 liquidation value per share - 25 and 100 shares authorized, issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 24,627 97,127 
Preferred stock, $0.01 par value - 50,000 shares authorized; none issued and outstanding as of September 30, 2018 and December 31, 2017   
Class A common stock, $0.001 par value - 500,000 shares authorized; 38,269 and 18,096 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 38 18 
Class B common stock, $0.001 par value - 125,000 shares authorized; 105,813 and 114,664 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 106 115 
Additional paid in capital 130,284 41,375 
Accumulated deficit (45,949)(12,899)
Total stockholders' equity attributable to Carvana Co. 109,106 125,736 
Non-controlling interests 197,662 153,808 
Total stockholders' equity 306,768 279,544 
Total liabilities & stockholders' equity $1,212,103 $641,137 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2



CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
 
Three Months Ended September 30,Nine Months Ended September 30,
2018 2017 2018 2017 
Sales and operating revenues: 
Used vehicle sales, net $486,269 $208,113 $1,258,247 $550,442 
Wholesale vehicle sales
21,440 7,459 48,195 21,003 
Other sales and revenues, including $6,696, $2,414, $16,351 and $6,070, respectively, from related parties 27,212 9,807 64,187 22,372 
Net sales and operating revenues 534,921 225,379 1,370,629 593,817 
Cost of sales 477,615 204,963 1,230,054 547,616 
Gross profit 57,306 20,416 140,575 46,201 
Selling, general and administrative expenses 115,768 58,676 294,606 156,595 
Interest expense, including $0, $0, $0 and $1,382, respectively, to related parties 5,649 838 13,355 5,404 
Other expense, net 308 671 955 1,280 
Net loss before income taxes (64,419)(39,769)(168,341)(117,078)
Income tax provision     
Net loss (64,419)(39,769)(168,341)(117,078)
Net loss attributable to non-controlling interests (48,377)(35,389)(135,291)(59,717)
Net loss attributable to Carvana Co. $(16,042)$(4,380)$(33,050)$(57,361)
Dividends on Class A convertible preferred stock (1,230) (3,950) 
Accretion of beneficial conversion feature on Class A convertible preferred stock   (1,380) 
Net loss attributable to Class A common stockholders $(17,272)$(4,380)$(38,380)$(57,361)
Net loss per share of Class A common stock, basic and diluted(1)
$(0.50)$(0.29)$(1.43)$(0.86)
Weighted-average shares of Class A common stock, basic and diluted(1)(2)
34,655 15,045 26,927 15,024 

(1) Amounts for periods prior to the initial public offering have been retrospectively adjusted to give effect to 15.0 million shares of Class A common stock issued in the initial public offering and the Organizational Transactions described in Note 1.
(2) Weighted-average shares of Class A common stock outstanding have been adjusted for unvested restricted stock awards.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3



CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / MEMBERS' DEFICIT
(Unaudited)
(In thousands)

Class A Convertible Preferred Stock Class A Common Stock Class B Common Stock 
Members' Deficit Shares Amount Shares Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Non-controlling Interests Total Stockholders' Equity 
Balance, December 31, 2016 $(115,961)— $— — $— — $— $— $— $— $— 
Equity-based compensation expense prior to Organizational Transactions 158 — — — — — — — — — — 
Accrued return on Class C Redeemable Preferred Units (9,439)— — — — — — — — — — 
Net loss prior to Organizational Transactions (49,942)— — — — — — — — — — 
Conversion of Class C Redeemable Preferred Units for Class A Units 260,411 — — — — — — — — — — 
Effect of Organizational Transactions (85,227)— — — — 117,236 117 (174,255)— 259,365 85,227 
Issuance of Class A common stock sold in initial public offering, net of underwriters' discounts and commissions and offering expenses — — — 15,000 15 — — 205,910 — — 205,925 
Net loss subsequent to Organizational Transactions — — — — — — — — (7,419)(59,717)(67,136)
Adjustments to the non-controlling interests — — — — — — — 333 — (333)— 
Issuance of restricted stock awards, net of forfeitures — — — 538 1 — — (1)— — — 
Restricted stock surrendered in lieu of withholding taxes — — — (27)— — — (399)— — (399)
Options exercised — — — 2 — — — 28 — — 28 
Equity-based compensation expense subsequent to Organizational Transactions — — — — — — — 3,831 — — 3,831 
Balance, September 30, 2017 $— — $— 15,513 $16 117,236 $117 $35,447 $(7,419)$199,315 $227,476 


4



CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY / MEMBERS' DEFICIT - (Continued)
(Unaudited)
(In thousands)
Class A Convertible Preferred Stock Class A Common Stock Class B Common Stock 
Members' Deficit Shares Amount Shares Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Non-controlling Interests Total Stockholders' Equity 
Balance, December 31, 2017 $— 100 $97,127 18,096 $18 114,664 $115 $41,375 $(12,899)$153,808 $279,544 
Net loss — — — — — — — — (33,050)(135,291)(168,341)
Issuance of Class A common stock sold in follow-on offering, net of underwriters' discounts and commissions and offering expenses — — — 6,600 7 — — 172,280 — — 172,287 
Adjustment to non-controlling interests related to follow-on offering — — — — — — — (132,375)— 132,375 — 
Issuance of LLC Units related to business acquisitions — — — — — — — — — 9,981 9,981 
Adjustment to non-controlling interests related to business acquisitions — — — — — — — 1,297 — (1,297)— 
Conversions of Class A Convertible Preferred Stock — (75)(73,880)3,808 4 — — 73,876 — — — 
Adjustment to non-controlling interests related to conversion of Class A Convertible Preferred Stock — — — — — — — (51,289)— 51,289 — 
Accretion of beneficial conversion feature on Class A Convertible Preferred Stock — — 1,380 — — — — (1,380)— — — 
Dividends on Class A Convertible Preferred Stock — — — — — — — (3,950)— — (3,950)
Exchanges of LLC Units — — — 9,783 9 (8,851)(9)13,203 — (13,203)— 
Establishment of deferred tax assets related to increases in tax basis in Carvana Group — — — — — — — 73,961 — — 73,961 
Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group — — — — — — — (73,961)— — (73,961)
Contribution of Class A common stock from related party— — — (165)— — — — — — — 
Issuance of Class A common stock to settle vested restricted stock units — — — 162 — — — — — — — 
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes — — — (64)— — — (1,376)— — (1,376)
Options exercised — — — 49 — — — 642 642 
Equity-based compensation expense — — — — — — — 17,981 — — 17,981 
Balance, September 30, 2018 $— 25 $24,627 38,269 $38 105,813 $106 $130,284 $(45,949)$197,662 $306,768 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5



CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
2018 2017 
Cash Flows from Operating Activities: 
Net loss $(168,341)$(117,078)
Adjustments to reconcile net loss to net cash used in operating activities: 
Depreciation and amortization expense 16,301 7,746 
Loss on disposal of property and equipment 542 882 
Provision for bad debt and finance receivable allowance 1,375 805 
Gain on loan sales (35,655)(14,982)
Equity-based compensation expense 17,981 3,989 
Amortization and write-off of debt issuance costs 1,055 1,407 
Originations of finance receivables (872,382)(361,265)
Proceeds from sale of finance receivables 1,114,304 361,659 
Purchase of finance receivables(253,041) 
Changes in assets and liabilities: 
Accounts receivable (9,434)(6,159)
Vehicle inventory (110,312)(5,962)
Other current assets (11,879)(1,206)
Other assets (420)(1,722)
Accounts payable and accrued liabilities 44,827 8,694 
Accounts payable to related party 1,710 258 
Other liabilities (506)6,920 
Net cash used in operating activities (263,875)(116,014)
Cash Flows from Investing Activities: 
Purchases of property and equipment (107,228)(59,408)
Business acquisitions, net of cash acquired (6,670) 
Net cash used in investing activities (113,898)(59,408)
Cash Flows from Financing Activities: 
Proceeds from floor plan facility 1,297,419 674,411 
Payments on floor plan facility (1,196,819)(644,641)
Proceeds from issuance of senior unsecured notes 350,000  
Proceeds from Verde Credit Facility  35,000 
Payments on Verde Credit Facility  (35,000)
Proceeds from long-term debt 46,179 7,596 
Payments on long-term debt (8,817)(1,137)
Payments of debt issuance costs, including $0 and $1,000 to related parties, respectively (6,309)(1,000)
Net proceeds from issuance of Class A common stock 172,287 206,323 
Proceeds from exercise of stock options 642 28 
Tax withholdings related to restricted stock awards (1,376)(399)
Dividends paid on Class A Convertible Preferred Stock (4,279) 
Payments of costs related to issuance of Class A Convertible Preferred Stock (12) 
Net cash provided by financing activities 648,915 241,181 
Net increase in cash, cash equivalents and restricted cash 271,142 65,759 
Cash, cash equivalents and restricted cash at beginning of period 187,123 49,450 
Cash, cash equivalents and restricted cash at end of period $458,265 $115,209 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — BUSINESS ORGANIZATION

Description of Business

Carvana Co. and its wholly-owned subsidiary Carvana Co. Sub (collectively, "Carvana Co.") together with its consolidated subsidiaries (the “Company”) is a leading e-commerce platform for buying used cars. The Company is 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. Using the website, customers can complete all phases of a used vehicle purchase transaction including financing their purchase, trading in their current vehicle and purchasing complementary products such as vehicle service contracts and GAP waiver coverage. Each element of the Company's business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.

Organization and Initial Public Offering

Carvana Co. is a holding company that was formed as a Delaware corporation on November 29, 2016 for the purpose of completing an initial public offering ("IPO") and related transactions in order to operate the business of Carvana Group, LLC and its subsidiaries (collectively, "Carvana Group"). Substantially all of the Company’s assets and liabilities represent the assets and liabilities of Carvana Group. 

Carvana Group was formed as a limited liability company by DriveTime Automotive Group, Inc. (together with its subsidiaries and affiliates “DriveTime”) and commenced operations in 2012. Prior to November 1, 2014, Carvana Group was a wholly-owned subsidiary of DriveTime. On November 1, 2014 (the “Distribution Date”), DriveTime distributed its member units in Carvana Group to the unit holders of DriveTime on a pro rata basis (the “Distribution”). Carvana Group accounted for the Distribution as a spinoff transaction in accordance with ASC 505-60, Equity — Spinoffs and Reverse Spinoffs and reflected assets and liabilities before and after the Distribution Date at their historical basis.

On May 3, 2017, Carvana Co. completed its IPO of 15.0 million shares of Class A common stock at a public offering price of $15.00 per share. Carvana Co. received approximately $205.8 million in proceeds, net of underwriting discounts and commissions and offering expenses, which it used to purchase approximately 18.8 million newly-issued membership interests of Carvana Group at a price per unit equal to 0.8 times the initial public offering price less underwriting discounts and commissions and offering expenses.

Also in connection with the IPO, the Company completed the following organizational transactions (the “Organizational Transactions”):

• Carvana Group amended and restated its limited liability company operating agreement (the "LLC Agreement") to, among other things, (i) eliminate a class of preferred membership interests, (ii) provide for two classes of common ownership interests in Carvana Group held by the then-existing holders of LLC units (the "Original LLC Unitholders" and together with any holders of LLC units issued subsequent to the IPO, the "LLC Unitholders") consisting of Class B common units (the “Class B Units”) and Class A common units (the “Class A Units”), and (iii) appoint Carvana Co. as the sole manager of Carvana Group;
• Carvana Co. amended and restated its certificate of incorporation to authorize (i) 50.0 million shares of Preferred Stock, par value $0.01 per share, (ii) 500.0 million shares of Class A common stock, par value $0.001 per share, and (iii) 125.0 million shares of Class B common stock, par value $0.001 per share. Each share of Class A common stock generally entitles its holder to one vote on all matters to be voted on by stockholders. Each share of Class B common stock held by Ernest Garcia, II, Ernie Garcia, III and entities controlled by one or both of them (collectively, the "Garcia Parties") generally entitles its holder to ten votes on all matters to be voted on by stockholders. All other shares of Class B common stock generally entitle their holders to one vote per share on all matters to be voted on by stockholders;
• Carvana Group converted its outstanding Class C Redeemable Preferred Units into approximately 43.1 million Class A Units;
7


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
• Carvana Co. issued approximately 117.2 million shares of Class B common stock to holders of Class A Units, on a four-to-five basis with the number of Class A Units they owned, for nominal consideration; and,
• Carvana Co. transferred approximately 0.2 million Class A Units to Ernest Garcia, II in exchange for his 0.1% ownership interest in Carvana, LLC, a majority-owned subsidiary of Carvana Group.

In accordance with the LLC Agreement, Carvana Co. has all management powers over the business and affairs of Carvana Group and conducts, directs and exercises full control over the activities of Carvana Group. Class A Units and Class B Units (the "LLC Units") do not hold voting rights, which results in Carvana Group being considered a variable interest entity ("VIE"). Due to Carvana Co.'s power to control and its significant economic interest in Carvana Group, it is considered the primary beneficiary of the VIE and the Company consolidates the financial results of Carvana Group. As of September 30, 2018, Carvana Co. owned approximately 25.5% of Carvana Group and the LLC Unitholders owned the remaining 74.5%.

The Organizational Transactions described above are considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes.

Follow-On Public Offering

On April 30, 2018, the Company completed a follow-on offering of 6.6 million shares of its Class A common stock at a public offering price of $27.50 per share and received net proceeds from the offering of approximately $172.3 million after underwriting discounts and commissions and offering expenses. The Company used the net proceeds to purchase approximately 8.3 million newly-issued LLC Units in Carvana Group, which used the net proceeds primarily for general corporate purposes.

A holder of Class A common stock (the "Selling Stockholder") and certain LLC Unitholders (the "Selling LLC Unitholders") sold a total of approximately 6.1 million shares of Class A common stock as part of the offering. The Selling LLC Unitholders exchanged approximately 6.9 million LLC Units for approximately 5.6 million shares of Class A common stock to be sold in the offering, and to the extent such Selling LLC Unitholder held Class B common stock, the corresponding shares of Class B common stock were immediately retired by the Company. The Company did not receive any proceeds from the sale of the approximately 6.1 million shares of Class A common stock by the Selling Stockholder and the Selling LLC Unitholders.

Convertible Preferred Stock

On December 5, 2017, Carvana Co. amended and restated its certificate of incorporation to authorize 100,000 shares of Class A Convertible Preferred Stock, with an initial stated value of $1,000 per share and a par value of $0.01 per share (the "Convertible Preferred Stock") and, effective December 5, 2017, Carvana Group amended its LLC Agreement to, among other things, create a class of convertible preferred units. On December 5, 2017, Carvana Co. sold 100,000 shares of Convertible Preferred Stock for net proceeds of approximately $98.5 million, which it used to purchase 100,000 newly-issued convertible preferred units of Carvana Group (the "Convertible Preferred Units") at a price per unit equal to the initial stated value of the Convertible Preferred Stock less issuance costs. 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. All intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included within our most recent Annual Report on Form 10-K.
  
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of September 30, 2018, results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows and changes in stockholders'
8


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
equity for the nine months ended September 30, 2018 and 2017. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

As discussed in Note 1 — Business Organization, Carvana Group is considered a VIE and Carvana Co. consolidates its financial results due to the determination that it is the primary beneficiary. The Company reviews subsidiaries and affiliates, as well as other entities, to determine if it should be considered variable interest entities, and whether it should change the consolidation determinations based on changes in its characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with non-substantive voting interests. To determine whether or not the entity is consolidated with the Company’s results, the Company also evaluates which interests are variable interests in the VIE and which party is the primary beneficiary of the VIE.

Liquidity

The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. The Company has incurred losses from inception through September 30, 2018, and expects to incur additional losses in the future. As the Company continues to fund growth into new markets, fund construction of vending machines and inspection and reconditioning centers and enhance technology and software development efforts, it needs access to substantial capital. From inception, the Company has funded operations through the sale of Class A Units, the sale of Class C Redeemable Preferred Units, capital contributions from DriveTime, its IPO completed on May 3, 2017 for net proceeds of approximately $205.8 million, its follow-on offering completed on April 30, 2018 for net proceeds of approximately $172.3 million, its issuance of Class A Convertible Preferred Stock on December 5, 2017 for net proceeds of approximately $98.5 million, the issuance of senior unsecured notes for net proceeds of approximately $342.5 million on September 21, 2018, and short-term funding from the Company’s majority owner.  The Company has historically funded vehicle inventory purchases through its Floor Plan Facility, described in further detail in Note 8 — Debt Instruments, and had approximately $0.6 million available under the Floor Plan Facility to fund future vehicle inventory purchases as of September 30, 2018. The Company amended the Floor Plan Facility on November 2, 2018 to increase the amount by $300.0 million and extend the maturity date to October 31, 2020. The Company has also funded certain of its capital expenditures through long-term financing with third parties as described in further detail in Note 8 — Debt Instruments. The Company has historically entered into various agreements under which it sells the finance receivables it originates to third parties. As of September 30, 2018, the Company sells finance receivables under multiple agreements. On November 2, 2018, the Company increased the available amount under and extended these facilities. The Company plans to extend or enter into new agreements to sell its finance receivables to third parties prior to the expiration of the agreements. Management believes that its current working capital and expected continued inventory and capital expenditure financing are sufficient to fund operations for at least one year from the financial statement issuance date.

Use of Estimates

The preparation of these accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Certain accounting estimates involve significant judgments, assumptions and estimates by management that have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period, which management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ materially from these judgments and estimates, which could have a material impact on the carrying values of the Company’s assets and liabilities and the results of operations. 

Segments

Business segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. Based on the way the Company manages its business, the Company has determined that it currently operates with one reportable segment. The chief operating decision maker focuses on consolidated results in assessing operating performance and allocating resources. Furthermore, the Company offers similar products and services and uses similar
9


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
processes to sell those products and services to similar classes of customers throughout the United States (“U.S.”). Substantially all revenue is generated and all assets are held in the U.S. for all periods presented.

Comprehensive Loss

During the three and nine months ended September 30, 2018 and 2017, the Company had no other components of comprehensive loss and, therefore, the net loss and comprehensive loss were the same for all periods presented.

Restricted Cash

The restricted cash includes the deposit required under the Company's Floor Plan Facility, which is 5% of the outstanding floor plan facility principal balance, as explained in Note 8 — Debt Instruments and amounts held as restricted cash as required under letter of credit agreements, as explained in Note 14 — Commitments and Contingencies. 

Revenue Recognition

The Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January 1, 2018 using the modified retrospective method. ASC 606 prescribes a five-step model that includes: (1) identify the contract; (2) identify the performance obligations; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations; and (5) recognize revenue when (or as) performance obligations are satisfied. Based on the manner in which the Company historically recognized revenue, the adoption of ASC 606 did not have a material impact on the amount or timing of its revenue recognition and the Company recognized no cumulative effect adjustment upon adoption.

Used Vehicle Sales

The Company sells used vehicles directly to its customers through its website. The prices of used vehicles are set forth in the customer contracts at stand-alone selling prices which are agreed upon prior to delivery. The Company satisfies its performance obligation for used vehicle sales upon delivery when the transfer of title, risks and rewards of ownership and control pass to the customer. The Company recognizes revenue at the agreed upon purchase price stated in the contract, including any delivery charges, less an estimate for returns. Estimates for returns are based on an analysis of historical experience, trends and sales data. Changes in these estimates are reflected as an adjustment to revenue in the period identified. The amount of consideration received for used vehicle sales includes noncash consideration representing the value of trade-in vehicles, if applicable, as stated in the contract. Prior to the delivery of the vehicle, the payment is received or financing has been arranged. Payments from customers that finance their purchases with third parties are typically due and collected within 30 days of delivery of the used vehicle. Revenue excludes any sales taxes that are collected from customers.

Wholesale Vehicle Sales

The Company sells vehicles to wholesalers. These vehicles sold to wholesalers are primarily acquired from customers that do not meet the Company’s quality standards to list and sell through its website. The Company satisfies its performance obligation for wholesale vehicle sales when the wholesale purchaser obtains control of the underlying vehicle, which is upon delivery when the transfer of title, risks and rewards of ownership and control pass to the customer. The Company recognizes revenue at the amount it expects to receive for the used vehicle, which is the fixed price determined at the auction. The purchase price of the wholesale vehicle is typically due and collected within 30 days of delivery of the wholesale vehicle.

Other Sales and Revenues

Other sales and revenues include gains on the sales of finance receivables, commissions on vehicle service contracts (“VSCs”), GAP waiver coverage, and interest income received on finance receivables prior to selling them to investors. The Company accounts for the sale of finance receivables in accordance with ASC 860, Transfers and Servicing of Financial Assets as described in the footnotes to the Company's annual financial statements included in its Annual Report filed on Form 10-K with the SEC on March 6, 2018.

Customers purchasing used vehicles from the Company may enter into contracts for VSCs. The Company sells and receives a commission on VSCs under a master dealer agreement with DriveTime, pursuant to which the Company sells VSCs that DriveTime administers and is the obligor. The Company recognizes commission revenue at the time of sale, net of a reserve
10


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
for estimated contract cancellations. The reserve for cancellations is estimated based upon historical experience and recent trends and is reflected as a reduction of other sales and revenues. Changes in these estimates are reflected as an adjustment to revenue in the period identified.

Customers that finance their used vehicle purchases with the Company may enter into contracts to purchase GAP waiver coverage, which provides customers with the promise that whoever then holds the underlying finance receivable will not attempt collection of a loan balance that is in excess of the value of the financed vehicle in the event of a total loss. The price of GAP waiver coverage is set forth in each contract. GAP waiver coverage is recognized as the performance obligation is satisfied over the period of coverage, generally on a straight-line basis over the term of the related finance receivable, less a reserve for cancellations. The reserve for cancellations is estimated based upon historical experience and recent trends and is reflected as a reduction of other sales and revenues. Changes in these estimates are reflected as an adjustment to other sales and revenues in the period identified. Upon selling the finance receivable, the Company recognizes any remaining deferred revenue. DriveTime administers the GAP waiver coverage.

Adoption of New Accounting Standards

As discussed above, the Company adopted ASC 606 on January 1, 2018 using the modified retrospective method. ASC 606 requires the reserve for vehicle inventory returns to be presented separately from vehicle inventory, where the Company previously presented it. As of December 31, 2017, the reserve for estimated returns included within vehicle inventory was approximately $2.6 million. As of September 30, 2018, the reserve for estimated returns included within other current assets was approximately $4.6 million. Furthermore, based on the manner in which the Company recognizes revenue, the adoption of ASC 606 did not have a material impact on the amount or timing of its revenue recognition and the Company recognized no cumulative effect adjustment upon adoption.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classification of Certain Receipts and Payments (“ASU 2016-15”), which provides additional clarity on the classification of specific events on the statement of cash flows including debt prepayment and extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from settlement of insurance claims, distributions received from equity method investees and beneficial interests in securitization transactions. The Company adopted this ASU on January 1, 2018. The adoption of ASU 2016-15 did not have a material effect on its consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows — Restricted Cash (“ASU 2016-18”), which requires the statement of cash flows to include restricted cash with its cash and cash equivalents balance and a reconciliation between all cash items on the balance sheet and the balance presented in the statement of cash flows. In addition, changes in restricted cash related to transfers between cash and cash equivalents and restricted cash will not be presented as cash flow activities in the statement of cash flows. The Company adopted ASU 2016-18 on January 1, 2018 on a retrospective basis. As a result, changes in restricted cash are no longer presented as investing cash flow activities and the restricted cash balance is included with cash and cash equivalents in the beginning and end of period balances on the Company's consolidated statements of cash flows for all periods presented. For the nine months ended September 30, 2017, changes in restricted cash included within cash used in investing activities, as originally presented, was approximately $1.5 million.

Accounting Standards Issued But Not Yet Adopted

Since February 2016, the FASB has issued several accounting standards updates related to the new leasing model in ASC 842, Leases (“ASC 842”). ASC 842 introduces a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for certain leases, whether operating or financing. ASC 842 eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. Expense recognition on the income statement remains similar to current lease accounting guidance. ASC 842 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and should be applied using a modified retrospective approach, with the option to elect various practical expedients. The Company plans to adopt ASC 842 for its fiscal year beginning January 1, 2019. The adoption of ASC 842 will require the recognition of a right-of-use asset and a lease obligation for the Company’s leases (see Note 14 — Commitments and Contingencies). While the Company is still evaluating the full effect this guidance will have on its consolidated financial statements and related disclosures, the Company anticipates recognizing right-of-use assets and operating lease liabilities, which will have a material impact upon adoption primarily on its consolidated balance sheets and related disclosures, and will increase total assets and liabilities.

11


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and earlier adoption is permitted beginning in the first quarter of fiscal 2019. The Company is currently evaluating the impact on its consolidated financial statements, and plans to adopt ASU 2016-13 for its fiscal year beginning January 1, 2020. Finance receivables originated in connection with the Company’s vehicle sales are held for sale and are sold to third parties. As a result, the Company does not presently hold any finance receivables until maturity. Therefore, the Company does not expect adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which is intended to simplify the goodwill impairment test by eliminating the second step of the goodwill impairment test, which requires performing a hypothetical purchase price allocation. Under ASU 2017-04, goodwill impairment should be recognized based on the amount by which a reporting unit's carrying amount exceeds its fair value, but should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, may be early adopted after January 1, 2017, and should be applied on a prospective basis. The Company does not expect adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation — Stock Compensation (Topic 718) ("ASU 2018-07") related to the accounting for share-based payment transactions for acquiring goods and services from nonemployees. Under ASU 2018-07, the intent is to simplify and align most requirements for share-based payments to nonemployees with the requirements for share-based payments granted to employees under ASC 718, including measuring the equity instruments at the grant-date fair value. ASU 2018-07 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, and will be applied on a modified retrospective basis through a cumulative-effect adjustment to accumulated deficit. The Company plans to adopt ASU 2018-07 for its fiscal year beginning January 1, 2019 and is currently assessing the impact, if any, the guidance will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13") related to updated requirements over the disclosures of fair value measurements. Under ASU 2018-13, certain disclosure requirements for fair value measurements will be eliminated, modified or added to facilitate better communication around recurring and nonrecurring fair value measurements. ASU 2018-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with some amendments applied prospectively, some applied retrospectively and early adoption permitted. The Company plans to adopt ASU 2018-13 for its fiscal year beginning January 1, 2020 and is currently assessing the impact the guidance will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"). The intent of this pronouncement is to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software as defined in ASC 350-40. Under ASU 2018-15, the capitalized implementation costs related to a cloud computing arrangement will be amortized over the term of the arrangement and all capitalized implementation amounts will be required to be presented in the same line items of the financial statements as the related hosting fees. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company plans to adopt ASU 2018-15 for its fiscal year beginning January 1, 2020 and is currently assessing the impact, if any, the guidance will have on its consolidated financial statements.

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). ASU 2018-17 requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety for determining whether a decision-making fee is a variable interest. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the amendments in ASU 2018-17 retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company is currently assessing the impact, if any, the guidance will have on its consolidated financial statements.

12


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 3 — PROPERTY AND EQUIPMENT, NET 

The following table summarizes property and equipment, net as of September 30, 2018 and December 31, 2017 (in thousands):
September 30, 2018December 31, 2017
Land and site improvements $44,042 $11,656 
Buildings and improvements 108,116 60,804 
Transportation fleet 52,742 39,153 
Software 32,335 21,009 
Furniture, fixtures and equipment 18,005 12,239 
Total property and equipment excluding construction in progress 255,240 144,861 
Less: accumulated depreciation and amortization on property and equipment (36,836)(20,453)
Property and equipment excluding construction in progress, net 218,404 124,408 
Construction in progress 33,538 24,273 
Property and equipment, net $251,942 $148,681 

Depreciation and amortization expense on property and equipment was approximately $6.1 million and $3.1 million for the three months ended September 30, 2018 and 2017, respectively, and approximately $15.6 million and $7.7 million for the nine months ended September 30, 2018 and 2017, respectively. These amounts primarily relate to selling, general and administrative activities and are included as a component of selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS, NET 

On April 12, 2018, the Company acquired Car360, Inc. ("Car360"), a provider of app-based photo capture technology, for approximately $16.7 million, net of cash acquired of approximately $0.4 million. The purchase price was comprised of approximately $6.7 million cash, net of cash acquired, and approximately 0.5 million Class A Units of Carvana Group, with a fair value of approximately $10.0 million.

The purchase price was allocated to net tangible assets of approximately $0.2 million and intangible assets of approximately $9.9 million based on their fair values on the acquisition date and a related deferred tax liability of approximately $2.5 million. The excess of the purchase price over the amounts allocated to assets acquired and liabilities assumed and the deferred tax liability was approximately $9.4 million, which has been recorded as goodwill.

The historical results of operations for Car360 were not significant to the Company's consolidated results of operations for the periods presented. Certain estimated values for the acquisition, including goodwill and intangible assets, are not yet finalized and are subject to revision as additional information becomes available and more detailed analyses are completed.

13


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table summarizes intangible assets and goodwill related to the Car360 acquisition as of September 30, 2018 (in thousands):

Useful LifeSeptember 30, 2018
Intangible assets: 
Developed technology 7 years$8,642 
Customer relationships 5 years523 
Non-compete agreements 5 years774 
Intangible assets, acquired cost 9,939 
Less: accumulated amortization (696)
Intangible assets, net $9,243 
Goodwill N/A $9,353 

Amortization expense during the three and nine months ended September 30, 2018 was approximately $0.4 million and $0.7 million, respectively. As of September 30, 2018, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 6.3 years. The anticipated annual amortization expense to be recognized in future years as of September 30, 2018 is as follows (in thousands):

Expected Future Amortization 
Remainder of 2018 $374 
20191,494 
20201,494 
20211,494 
20221,494 
Thereafter 2,893 
Total $9,243 


NOTE 5 — ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES 

The following table summarizes accounts payable and other accrued liabilities as of September 30, 2018 and December 31, 2017 (in thousands):
September 30, 2018December 31, 2017
Accounts payable $28,972 $10,546 
Sales taxes and vehicle licenses and fees 22,604 9,034 
Reserve for returns and cancellations9,501 4,545 
Accrued compensation and benefits 7,991 5,054 
Accrued property and equipment 7,138 8,325 
Accrued advertising costs 3,835 4,265 
Accrued interest 2,506 774 
Other accrued liabilities 14,314 7,763 
Total accounts payable and other accrued liabilities
$96,861 $50,306 


14


CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 6 — RELATED PARTY TRANSACTIONS 

Lease Agreements

In November 2014, the Company and DriveTime entered into a lease agreement that governs the Company’s access to and utilization of temporary storage, reconditioning, offices and parking space at various DriveTime inspection and reconditioning centers ("IRCs") and retail facilities (the "DriveTime Lease Agreement"). The DriveTime Lease Agreement was most recently amended in March 2018. Lease duration varies by location, with initial terms expiring between 2018 and 2024. Most of the retail facilities have two-year terms and the Company is entitled to exercise up to two consecutive one-year renewal options at up to ten of these locations.

Under the DriveTime Lease Agreement, the Company pays a monthly rental fee related to its pro rata utilization of space at each facility plus a pro rata share of each facility’s actual insurance costs and real estate taxes. The Company is additionally responsible for paying for any tenant improvements it requires to conduct its operations and its share of estimated costs incurred by DriveTime related to preparing these sites for use. As it relates to locations where the Company reconditions vehicles, the Company’s share of facility and shared reconditioning supplies expenses are calculated based on the actual costs for operating the inspection centers and the Company’s pro rata share of total reconditioned vehicles and parking spaces at such inspection centers in a given month. Management has determined that the costs allocated to the Company are based on a reasonable methodology.

Separate from the DriveTime Lease Agreement, in December 2016, the Company entered into a lease agreement related to a vehicle inspection and reconditioning center in Tolleson, Arizona, with Verde Investments, Inc., an affiliate of DriveTime ("Verde"), with an initial term of approximately 15 years. The lease agreement requires monthly rental payments and can be extended for four additional five-year periods. In February 2017, the Company also entered into a lease with DriveTime for sole occupancy of a fully-operational inspection and reconditioning center in Winder, Georgia, where the Company previously maintained partial occupancy. The lease has an initial term of eight years and three renewal options of five years each.

Expenses related to these lease agreements are allocated based on usage to inventory and selling, general and administrative expenses in the accompanying unaudited condensed consolidated balance sheets and statements of operations. Costs allocated to inventory are recognized as cost of sales when the inventory is sold. During the three months ended September 30, 2018, total costs related to these lease agreements were approximately $2.2 million with approximately $1.2 million and $1.0 million allocated to inventory and selling, general and administrative expenses, respectively. During the nine months ended September 30, 2018, total costs related to these lease agreements were approximately $6.7 million with approximately $3.3 million and $3.4 million allocated to inventory and selling, general and administrative expenses, respectively. During the three months ended September 30, 2017, total costs related to these lease agreements were approximately $1.8 million with approximately $0.6 million and $1.2 million allocated to inventory and selling, general and administrative expenses, respectively. During the nine months ended September 30, 2017, total costs related to these lease agreements were approximately $5.2 million with approximately $1.8 million and $