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 eCommerce platform for buying used cars. The Company is transforming the used car buying experience by giving consumers a wide selection, great value and quality, transparent pricing and a simple, no pressure transaction. Using the Company’s website, consumers can research and identify a vehicle, inspect it using the Company’s 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.
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
$205.9 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 "Existing 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;
|
|
|
•
|
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. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
|
|
•
|
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.
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.
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 as of and for the year ended
December 31, 2016
included in the final prospectus for Carvana Co.’s IPO filed
April 28, 2017
pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC.
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, 2017
, its results of operations for the
three and nine
months ended
September 30, 2017
and
2016
, its cash flows for the
nine
months ended
September 30, 2017
and
2016
, and the changes in its stockholders' equity for the
nine
months ended
September 30, 2017
. The Company discloses all material changes in its members’ equity for the
nine
months ended
September 30, 2016
throughout the accompanying notes, and, therefore, does not separately present a statement of changes in members’ equity for this period in its unaudited condensed consolidated financial statements. 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. From inception, the Company has funded operations through the sale of Class A Units, its IPO completed on
May 3, 2017
for net proceeds of approximately
$205.9 million
, the sale of Class C Redeemable Preferred Units, capital contributions from DriveTime 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 7 — Debt Instruments
, and has approximately
$79.9 million
available under the Floor Plan Facility to fund future vehicle inventory purchases as of
September 30, 2017
. The Company has also funded some of its capital expenditures through long-term financing with third parties as described in further detail in
Note 7 —
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Debt Instruments
. Management believes that current working capital and expected continued capital expenditure financing is sufficient to fund operations for at least one year from the financial statement issuance date.
Use of Estimates
The preparation of these 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.
Comprehensive Loss
During the
three and nine
months ended
September 30, 2017
and
2016
, the Company did not have any other comprehensive income 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 7 — Debt Instruments
and amounts held as restricted cash as required under letter of credit agreements, as explained in
Note 13 — Commitments and Contingencies
.
Income Taxes
The Company accounts for income taxes pursuant to the asset and liability method, which requires the recognition of deferred income tax assets and liabilities related to the expected future tax consequences arising from temporary differences between the carrying amounts and tax bases of assets and liabilities based on enacted statutory tax rates applicable to the periods in which the temporary differences are expected to reverse. Any effects of changes in income tax rates or laws are included in income tax expense in the period of enactment. A valuation allowance is recognized if the Company determines it is more likely than not that all or a portion of a deferred tax asset will not be recognized.
Adoption of New Accounting Standards
In October 2016, the FASB issued ASU 2016-17,
Interests Held through Related Parties That Are Under Common Control
("ASU 2016-17"), which updates the consolidation requirements when evaluating whether or not the entity is the primary beneficiary of a VIE with regard to interests held by related parties under common control. Under ASU 2016-17, entities will consider all indirect economic interests in a VIE held by related parties on a proportionate basis regardless of whether or not the related parties are under common control. The update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. Since the Company has adopted ASU 2015-02, ASU 2016-17 requires retrospective application to all periods presented. The Company adopted ASU 2016-17 on January 1, 2017 and it did not have an impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations
("ASU 2017-01"), which narrows the definition of a business and assists entities to evaluate whether transactions should be accounted for as acquisitions of assets or businesses. Under ASU 2017-01, when substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the purchase of the assets are not deemed to comprise a business. The update is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-01 on January 1, 2017 and it did not have a material impact on its consolidated financial statements.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Accounting Standards Issued But Not Yet Adopted
Since May 2014, the FASB has issued several accounting standards updates related to revenue recognition including ASC 606,
Revenue from Contracts with Customers
("ASC 606"), which amends the guidance in ASC 605,
Revenue Recognition
("ASC 605"), and provides a single, comprehensive revenue recognition model for all contracts with customers. ASC 606 contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The entity will recognize revenue to reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. ASC 606 addresses how entities should identify goods and services being provided to a customer, the unit of account for a principal versus agent assessment, how to evaluate whether a good or service is controlled before being transferred to a customer and how to assess whether an entity controls services performed by another party. ASC 606 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 with early adoption permitted. The Company will adopt ASC 606 for interim and annual periods beginning January 1, 2018 and plans to use the modified retrospective method.
The Company is continuing to evaluate all potential impacts of ASC 606. Thus far, the Company's assessment has included gaining an understanding of the new standard, inventorying its revenue streams, analyzing and mapping contract features to revenue streams and considering the enhancement of disclosures related to revenue. While the Company has not completed its evaluation, it expects similar performance obligations to result under ASC 606 as compared with deliverables and separate units of accounting currently identified under ASC 605. The Company expects adoption of ASC 606 to impact the presentation of returns on its consolidated balance sheet. Based on the evaluation to date and the manner in which the Company recognizes revenue, the Company does not anticipate a material impact on the amount or timing of its revenue recognition as a result of adopting ASC 606.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842)
(“ASU 2016-02”) related to the accounting for leases. This ASU introduces a lessee model that requires a right-of-use asset and lease obligation to be presented on the balance sheet for all leases, whether operating or financing. The ASU 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. The ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. The Company plans to adopt this ASU for its fiscal year beginning January 1, 2019. The adoption of this ASU will require the recognition of a right-of-use asset and a lease obligation for the Company’s leases (see
Note 13 — Commitments and Contingencies
).
NOTE 3 — PROPERTY AND EQUIPMENT, NET
The following table summarizes property and equipment, net as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Land and site improvements
|
$
|
11,474
|
|
|
$
|
9,355
|
|
Buildings and improvements
|
52,458
|
|
|
14,750
|
|
Transportation fleet
|
29,262
|
|
|
16,520
|
|
Software
|
15,673
|
|
|
10,065
|
|
Furniture, fixtures and equipment
|
10,728
|
|
|
3,704
|
|
Total property and equipment excluding construction in progress
|
119,595
|
|
|
54,394
|
|
Less: accumulated depreciation and amortization
|
(16,391
|
)
|
|
(9,752
|
)
|
Property and equipment excluding construction in progress, net
|
103,204
|
|
|
44,642
|
|
Construction in progress
|
22,792
|
|
|
15,950
|
|
Property and equipment, net
|
$
|
125,996
|
|
|
$
|
60,592
|
|
Depreciation and amortization expense was approximately
$3.1 million
and
$1.2 million
for the
three
months ended
September 30, 2017
and
2016
, respectively, and approximately
$7.7 million
and
$3.0 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively. These amounts primarily relate to assets associated with selling, general and
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
administrative activities and are included as a component of selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
The Company capitalized internal use software costs totaling approximately
$7.7 million
and
$2.9 million
during the
nine
months ended
September 30, 2017
and
2016
, respectively, which is included in software and construction in progress in the table above. The Company capitalized approximately
$1.9 million
and
$1.1 million
for the
three
months ended
September 30, 2017
and
2016
, respectively, and approximately
$5.5 million
and
$2.4 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively, of payroll and payroll-related costs for employees who are directly associated with and who devote time to the development of software products for internal use.
NOTE 4 — ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The following table summarizes accounts payable and other accrued liabilities as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Accounts payable
|
$
|
11,543
|
|
|
$
|
6,208
|
|
Accrued property and equipment
|
9,749
|
|
|
3,045
|
|
Sales taxes and vehicle licenses and fees
|
7,635
|
|
|
4,265
|
|
Accrued compensation and benefits
|
2,419
|
|
|
3,398
|
|
Accrued inventory costs
|
2,173
|
|
|
3,480
|
|
Accrued advertising costs
|
1,689
|
|
|
1,281
|
|
Other accrued liabilities
|
8,605
|
|
|
6,487
|
|
Total accounts payable and other accrued liabilities
|
$
|
43,813
|
|
|
$
|
28,164
|
|
NOTE 5 — RELATED PARTY TRANSACTIONS
Shared Services Agreement with DriveTime
In November 2014, the Company and DriveTime entered into a shared services agreement whereby DriveTime provided certain accounting and tax, legal and compliance, information technology, telecommunications, benefits, insurance, real estate, equipment, corporate communications, software and production and other services to facilitate the transition of these services to the Company on a standalone basis (the “Shared Services Agreement”). The Shared Services Agreement was most recently amended and restated in April 2017 and operates on a year-to-year basis after February 2019, with the Company having the right to terminate any or all services with
30
days' prior written notice and DriveTime having the right terminate certain services effective December 2017 and other services effective July 2018, in each case with
90
days' prior written notice. DriveTime provides the Company with certain benefits, tax reporting and compliance, telecommunications and information technology services under the amended agreement. Charges allocated to the Company are based on the Company’s actual use of the specific services detailed in the Shared Services Agreement. Total expenses related to the shared services agreement were approximately
$0.0 million
and
$0.1 million
for the
three
months ended
September 30, 2017
and
2016
, respectively, and approximately
$0.1 million
and
$0.5 million
for the
nine
months ended
September 30, 2017
and
2016
, respectively, which are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Aircraft Time Sharing Agreement
The Company entered into an agreement to share usage of
two
aircraft operated by Verde Investments, Inc., an affiliate of DriveTime, (“Verde”) on October 22, 2015, and the agreement was subsequently amended on May 15, 2017. Pursuant to the agreement, the Company agreed to reimburse Verde for actual expenses for each of its flights. The original agreement was for
12
months, with perpetual
12
-month automatic renewals. Either the Company or Verde can terminate the agreement with
30
days’ prior written notice. The Company reimbursed Verde approximately
$0.0 million
and
$0.1 million
under this agreement during the
three
months ended
September 30, 2017
and
2016
, respectively, and approximately
$0.4 million
and
$0.3 million
under this agreement during the
nine
months ended
September 30, 2017
and
2016
, respectively.
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, office, 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 August 2017. Lease duration varies by location, with the earliest expiration occurring in 2017. Most delivery hubs 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. The DriveTime Lease Agreement provides that the Company may take over DriveTime's leases for the inspection and reconditioning centers that the Company uses as IRCs in their entirety on July 31, 2018, subject to the Company obtaining releases of DriveTime's liability under the applicable leases and causing DriveTime to be paid for any unamortized costs.
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 monthly by multiplying the actual costs for operating the inspection centers by 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, 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, subject to the Company's ability to exercise
three
renewal options of
five
years each. The base rent for both of these leases will be subject to adjustment each year beginning January 1, 2018, increasing in an amount equal to the percentage increase in the Consumer Price Index, which amount shall not exceed
5%
and shall not be less than
2%
.
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, 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
$3.4 million
allocated to inventory and selling, general and administrative expenses, respectively. During the
three
months ended
September 30, 2016
, total costs related to these lease agreements were approximately
$0.7 million
with approximately
$0.4 million
and
$0.3 million
allocated to inventory and selling, general and administrative expenses, respectively. During the
nine
months ended
September 30, 2016
, total costs related to these lease agreements were approximately
$1.8 million
with approximately
$1.1 million
and
$0.7 million
allocated to inventory and selling, general and administrative expenses, respectively.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Corporate Office Leases
In November 2015, the Company entered into a lease agreement with Verde for its then corporate headquarters. The rent expense incurred related to this lease for the
three and nine
months ended
September 30, 2016
was approximately
$0.2 million
and
$0.6 million
. In December 2016,
Verde sold the building and assigned the lease to a third party.
During the first quarter of 2017, the Company subleased additional office space at DriveTime’s corporate headquarters in Tempe, Arizona. Pursuant to this arrangement, the Company incurred rent of approximately
$0.1 million
during the three and
nine
months ended
September 30, 2017
. This arrangement terminated in March 2017.
As discussed in
Note 13 — Commitments and Contingencies
, in September 2016, the Company entered into a lease with a third party for the second floor of its corporate headquarters in Tempe, Arizona. DriveTime guarantees up to
$0.5 million
of the Company's rent payments under that lease through
September 2019
. In connection with that lease, the Company entered into a sublease with DriveTime for the use of the first floor of the same building. Pursuant to this sublease, which has a term of
83
months and is co-terminus with DriveTime's master lease, subject to the right to exercise
three
five
-year extension options, the Company will pay DriveTime rent equal to the amounts due under DriveTime's master lease. During the
three and nine
months ended
September 30, 2017
, the rent expense incurred related to this first floor sublease was approximately
$0.2 million
and
$0.5 million
, respectively.
Vehicle Inventory Purchases
Through September 2016, the Company selected vehicle inventory and used DriveTime's auction numbers to facilitate purchases under a non-interest bearing agreement requiring periodic repayments. Vehicles purchased under this agreement were acquired by the Company at DriveTime's cost of the vehicles purchased with no markup. Beginning October 1, 2016, the Company purchased its vehicle inventory independently and made the payments itself through its vehicle inventory financing and security agreement. See
Note 7 — Debt Instruments
for further information.
Repurchase of Finance Receivables from DriveTime
On January 20, 2016, the Company repurchased approximately
$72.4 million
of finance receivables from DriveTime related to loans the Company originated and previously sold under the terms of the DriveTime receivable purchase agreement (the “DriveTime Receivable Purchase Agreement”) discussed below for a price of approximately
$74.6 million
. Such receivables were immediately sold by the Company to third party purchasers under the transfer and note purchase and security agreements for the same price of approximately
$74.6 million
.
DriveTime Receivable Purchase Agreement
In June 2014, the Company entered into the DriveTime Receivable Purchase Agreement pursuant to which the Company may sell to DriveTime and DriveTime may purchase from the Company finance receivables that the Company originates in conjunction with the sale of vehicles. As of
September 30, 2017
and
December 31, 2016
, the Company did
not
have any receivables due from DriveTime for the sales of such receivables. As of
September 30, 2017
, DriveTime is not obligated to make any additional purchases under the agreement.
Master Dealer Agreement
In December 2016, the Company entered into a master dealer agreement with DriveTime, pursuant to which the Company may sell certain ancillary products, including vehicle service contracts ("VSCs"), to customers purchasing a vehicle from the Company through its transaction platform. The Company earns a commission on each VSC sold to its customers and DriveTime subsequently administers the VSCs. The Company collects the retail purchase price of the VSCs from its customers and remits the net fee to DriveTime on a periodic basis. During the
three and nine
months ended
September 30, 2017
, the Company recognized approximately
$2.4 million
and
$6.1 million
, respectively, of commissions earned on VSCs sold to its customers and administered by DriveTime. The commission earned on the sale of these VSCs is included in other sales and revenues in the accompanying unaudited condensed consolidated statement of operations.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Credit Facility with Verde
On February 27, 2017, the Company entered into a credit facility with Verde for an amount up to
$50.0 million
(the "Verde Credit Facility"). The Company could draw up to
five
loans in minimum amounts of
$10.0 million
each during the term of the agreement. Amounts outstanding accrued interest at a rate of
12.0%
per annum, compounding semi-annually and payable in kind and scheduled to mature in August 2018. Upon execution of the agreement, the Company paid Verde a commitment fee of
$1.0 million
. Immediately prior to the Company's IPO, the outstanding balance under the Verde Credit Facility was
$35.0 million
. The outstanding principal balance of
$35.0 million
and accrued interest of approximately
$0.4 million
were repaid in full and the Verde Credit Facility agreement terminated in connection with the IPO completed on
May 3, 2017
.
IP License Agreement
In February 2017, the Company entered into a license agreement that governs the rights of certain intellectual property owned by the Company and the rights of certain intellectual property owned by DriveTime. The license agreement generally provides that each party grants to the other certain limited exclusive (other than with respect to the licensor party and its affiliates) and non-exclusive licenses to use certain of its intellectual property and each party agrees to certain covenants not to sue the other party, its affiliates and certain of its service providers in connection with various patent claims. The exclusive license to DriveTime is limited to the business that is primarily of subprime used car sales to retail customers. However, upon a change of control of either party, both parties’ license rights as to certain future improvements to licensed intellectual property and all limited exclusivity rights are terminated. The agreement does not provide a license to any of the Company's patents, trademarks, logos, customers’ personally identifiable information or any intellectual property related to the Company's vending machine, automated vehicle photography or certain other elements of the Company's brand.
Accounts Payable Due to Related Party
Amounts payable to DriveTime and Verde under the agreements explained above, as well as invoices DriveTime initially paid on behalf of the Company for vehicle reconditioning costs and general and administrative expenses, are included in accounts payable to related party in the accompanying unaudited condensed consolidated balance sheets. As of
September 30, 2017
and
December 31, 2016
, approximately
$2.1 million
and
$1.9 million
, respectively, was due to related parties primarily related to lease agreements, shared service fees, net VSC fees collected from customers and repayments to DriveTime for invoices paid on behalf of the Company.
NOTE 6 — FINANCE RECEIVABLE SALE AGREEMENTS
Transfer Agreements and Note Purchase and Security Agreements
In January 2016, the Company entered into transfer agreements pursuant to which it sold finance receivables meeting certain underwriting criteria to certain third party purchasers who engage DriveTime as servicer of such receivables. Pursuant to certain note purchase and security agreements, entered into in connection with the transfer agreements, such third party purchasers of receivables issued notes to certain parties, including Delaware Life Insurance Company (“Delaware Life”), in which Mark Walter has a substantial ownership interest. Mark Walter also indirectly controls CVAN Holdings, LLC, an Existing LLC Unitholder, and has non-controlling ownership interests in the other note purchasers under the note purchase and security agreements. On February 27, 2017, Delaware Life sold its interest in the notes under the note purchase and security agreements to an unrelated third party, but remains the administrative agent and paying agent for the note purchasers. Pursuant to the note purchase and security agreements, Delaware Life advanced
$63.0 million
through
December 31, 2016
to the trusts that purchased the Company's automotive finance receivables. Under this agreement through
September 30, 2016
, the Company had sold
$220.0 million
of finance receivables, including approximately
$72.4 million
of finance receivables repurchased from DriveTime. The Company recognized gain on loan sales of approximately
$2.4 million
and
$6.2 million
during the three and
nine
months ended
September 30, 2016
, respectively, which is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations. As of
September 30, 2017
, there was
no
unused capacity under the note purchase and security agreements.
Master Purchase and Sale Agreement and Master Transfer Agreement
In December 2016, the Company entered into a master purchase and sale agreement (the "Purchase and Sale Agreement") and a master transfer agreement (the "Master Transfer Agreement") pursuant to which it sells finance receivables meeting
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
certain underwriting criteria to certain third party purchasers, including Ally. DriveTime is the servicer of finance receivables sold under both agreements. Under the Purchase and Sale Agreement and the Master Transfer Agreement, the Company can sell up to an aggregate of
$375.0 million
, and
$292.2 million
, respectively, in principal balances of finance receivables subject to adjustment as described in the respective agreements. During the
nine
months ended
September 30, 2017
, the Company sold approximately
$241.3 million
in principal balances of finance receivables under the Purchase and Sale Agreement, and approximately
$106.6 million
in principal balances of finance receivables under the Master Transfer Agreement. As of
September 30, 2017
, there was approximately
$112.4 million
and
$177.1 million
of unused capacity under the Purchase and Sale Agreement and the Master Transfer Agreement, respectively.
In December 2016, the Company incurred approximately
$0.9 million
of costs directly attributable to establishing the Purchase and Sale Agreement and the Master Transfer Agreement. These costs are included as a component of other assets on the accompanying unaudited condensed consolidated balance sheets and are expensed as a component of selling, general and administrative expenses over the period the Company sells finance receivables under these agreements.
The total gain on loan sales related to finance receivables sold to third parties under these agreements during the three and
nine
months ended
September 30, 2017
was approximately
$6.6 million
and
$15.0 million
, which is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations.
NOTE 7 — DEBT INSTRUMENTS
Floor Plan Facility
The Company has a floor plan facility with a third party to finance its used vehicle inventory, which is secured by substantially all of its assets, other than the Company's interests in real property (the "Floor Plan Facility"). The Company most recently amended the Floor Plan Facility in August 2017 to, among other things, extend the maturity date to
December 31, 2018
, and increase the available credit to
$275.0 million
through
December 31, 2017
and to
$350.0 million
from
January 1, 2018
through
December 31, 2018
. The Company is required to make monthly interest payments at a rate per annum equal to one-month LIBOR plus
3.65%
, effective August 1, 2017. The Floor Plan Facility requires that at least
5%
of the total principal amount owed to the lender is held as restricted cash.
Repayment in an amount equal to the amount of the advance or loan must be made within
five
business days of selling or otherwise disposing of the underlying vehicle inventory. For sales involving financing originated by the Company and sold under either the Purchase and Sale Agreement or the Master Transfer Agreement as mentioned in
Note 6 — Finance Receivable Sale Agreements
, the lender has extended repayment to the earlier of
fifteen
business days after the sale of the used vehicle or
one
day following the sale of the related finance receivable. Outstanding balances related to vehicles held in inventory for more than
180
days require monthly principal payments equal to
10%
of the original principal amount of that vehicle until the remaining outstanding balance is the lesser of i)
50%
of the original principal amount or ii)
50%
of the wholesale value. Prepayments may be made without incurring a premium or penalty. Additionally, the Company is permitted to make prepayments to the lender to be held as principal payments under the Floor Plan Facility and subsequently re-borrow such amounts.
As of
September 30, 2017
, the interest rate on the Floor Plan Facility was approximately
4.88%
, the Company had an outstanding balance under this facility of approximately
$195.1 million
, borrowing capacity available of approximately
$79.9 million
and held approximately
$9.8 million
in restricted cash related to this facility. As of
December 31, 2016
, the Company held approximately
$8.4 million
in restricted cash related to this facility.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Notes Payable
From time to time, the Company enters into promissory note agreements to finance equipment for its transportation fleet. The assets financed 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 fixed annual interest rate,
five
-year term and requires monthly payments. As of
September 30, 2017
, the outstanding principal of these notes had a weighted-average interest rate of
5.8%
and totaled approximately
$16.7 million
, of which approximately
$3.4 million
is due within the next
twelve
months and is included as current portion of long-term debt in the accompanying unaudited condensed consolidated balance sheets.
Other Long-Term Debt
The Company has financed certain purchases of its property and equipment through a sale and leaseback transaction which is treated as a financing transaction in accordance with applicable accounting guidance. As of
September 30, 2017
, the liability associated with this arrangement is approximately
$3.0 million
and is included in long-term debt in the accompanying unaudited condensed consolidated balance sheet.
NOTE 8 — STOCKHOLDERS' EQUITY
Organizational Transactions
Immediately prior to the IPO, Carvana Co. amended and restated its certificate of incorporation to, among other things 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 the Garcia Parties generally entitles its holder to
ten
votes on all matters to be voted on by stockholders, for so long as the Garcia Parties maintain direct or indirect beneficial ownership of at least
25%
of the outstanding shares of Carvana Co.'s Class A common stock determined on an as-exchanged basis assuming that all of the Class A Units and Class B common stock were exchanged for Class A common stock. 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. Holders of Class B common stock are not entitled to receive dividends and would not be entitled to receive any distributions upon the liquidation, dissolution or winding down of the Company. Holders of Class A and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by applicable law.
As described in
Note 1 — Business Organization
, Carvana Group amended and restated its LLC Agreement to, among other things, provide for
two
classes of common ownership interests in Carvana Group. Carvana Group’s two remaining classes of membership interests are Class A Units and Class B Units. Carvana Co. is required to, at all times, maintain (i) a
four
-to-
five
ratio between the number of shares of Class A common stock issued by Carvana Co. and the number of Class A Units owned by Carvana Co. (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 (the "Exchange Agreement") further discussed below, and taking into account Carvana Sub’s
0.1%
ownership interest in Carvana, LLC) and (ii) a
four
-to-
five
ratio between the number of shares of Class B common stock owned by the Existing LLC Unitholders and the number of Class A Units owned by the Existing LLC Unitholders. The Company may issue shares of Class B common stock only to the extent necessary to maintain these ratios. Shares of Class B common stock are transferable only together with an equal number of LLC Units if Carvana Co., at the election of an Existing LLC Unitholder, exchanges LLC Units for shares of Class A common stock.
As part of the Organizational Transactions, 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.
As of
September 30, 2017
, there were approximately
165.8 million
and
5.6 million
Class A Units and Class B Units (as adjusted for the participation thresholds), respectively, issued and outstanding. As discussed in
Note 10 — Equity-Based Compensation
, Class B Units are issued under the Company’s Equity Incentive Plan (the “Equity Incentive Plan”) and are subject to a participation threshold and are earned over the requisite service period.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Initial Public Offering
As described in
Note 1 — Business Organization
, 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
$205.9 million
in proceeds, net of underwriting discounts and commissions and offering expenses. Carvana Co. used the proceeds 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. In connection with the IPO, 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. After the transfer Carvana Co. owned approximately
18.6 million
Class A Units.
The Company incurred approximately
$4.7 million
of legal, accounting, printing and other professional fees directly related to the IPO, including
$1.3 million
incurred during 2016, of which
$0.4 million
were paid during 2016.
Upon completion of the IPO, the total costs incurred for the IPO were charged against additional paid-in capital.
Exchange Agreement
Carvana Co. and the Existing LLC Unitholders entered into an Exchange Agreement under which each Existing LLC Unitholder (and certain permitted transferees thereof) may exchange their LLC Units for shares of the Company's Class A common stock on a
four
-to-
five
conversion ratio, or cash at the option of the Company, subject to conversion ratio adjustments for stock splits, stock dividends, reclassifications and similar transactions and subject to vesting and the respective participation threshold for Class B Units. To the extent such owners also hold Class B common stock, they will be required to deliver to Carvana Co. a number of shares of Class B common stock equal to the number of shares of Class A common stock being exchanged for. Any shares of Class B common stock so delivered will be canceled. The number of exchangeable Class B Units is determined based on the value of Carvana Co.'s Class A common stock and the applicable participation threshold.
Class C Redeemable Preferred Units
On July 27, 2015, the Company authorized the issuance of and sold approximately
14.1 million
Class C Redeemable Preferred Units to CVAN Holdings, LLC, for approximately
$65.0 million
. On
April 27, 2016
, the Company authorized the issuance of and sold approximately
18.3 million
Class C Redeemable Preferred Units for approximately
$100.0 million
to Mr. Garcia. On
July 12, 2016
, the Company authorized the issuance of and sold approximately
8.6 million
Class C Redeemable Preferred Units to CVAN Holdings, LLC, and approximately
1.7 million
Class C Redeemable Preferred Units to GV Auto I, LLC for approximately
$50.0 million
and
$9.7 million
, respectively. On December 9, 2016, the Company authorized the issuance of and sold approximately
0.5 million
Class C Redeemable Preferred Units to the Fidel Family Trust for approximately
$2.7 million
. The Company recorded the issuance and sale of Class C Redeemable Preferred Units at fair value, net of issuance costs.
In accordance with the Company’s Operating Agreement, the Class C Redeemable Preferred Units accrued a return (the “Class C Return”) at a coupon rate of
12.5%
compounding annually on the aggregate amount of capital contributions made with respect to the Class C Redeemable Preferred Units.
On
May 3, 2017
, the Company closed its IPO at a price such that the Company is no longer liable for the accrued Class C Return, and the outstanding Class C Redeemable Preferred Units converted to Class A Units on a
one
-to-one basis. As of
September 30, 2017
, all Class C Redeemable Preferred Units had converted to Class A Units and the related balance became a component of permanent equity on the accompanying unaudited condensed consolidated balance sheet.
NOTE 9 — NON-CONTROLLING INTERESTS
As discussed in
Note 1 — Business Organization
, Carvana Co. consolidates the financial results of Carvana Group and reports a non-controlling interest related to the portion of Carvana Group owned by the Existing LLC Unitholders. Changes in the ownership interest in Carvana Group while Carvana Co. retains its controlling interest will be accounted for as equity transactions.
Future direct exchanges of LLC Units will result in a change in ownership and reduce the amount recorded as non-controlling interests and increase additional paid-in capital.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Upon the exercise of options issued by Carvana Co., or the issuance of other types of equity compensation by Carvana Co. such as the issuance of restricted or non-restricted stock, payment of bonuses in stock or settlement of stock appreciation rights in stock, Carvana Group is required to issue to Carvana Co. a number of Class A Units equal to
1.25
times the number of shares of Class A common stock being issued in connection with the exercise of such options or issuance of other types of equity compensation, subject to adjustment for stock splits, stock dividends, reclassifications and similar transactions. Activity related to the Company's equity compensation plans may result in a change in ownership which will impact the amount recorded as non-controlling interest and additional paid-in capital.
The non-controlling interest related to the Class B Units is determined based on the respective participation thresholds and the share price of Class A common stock on an as-converted basis. To the extent that the number of as-converted Class B Units change or Class B Units are forfeited, the resulting difference in ownership will be accounted for as equity transactions adjusting the non-controlling interest and additional paid-in capital.
For the three and
nine
months ended
September 30, 2017
, the total adjustments related to equity compensation issued by Carvana Co., changes in the number of as-converted Class B Units and forfeitures of Class B Units was an increase in non-controlling interests and a corresponding decrease in additional paid-in capital of approximately
$0.5 million
and a decrease in non-controlling interests and a corresponding increase in additional paid-in capital of approximately
$0.3 million
, respectively, which has been included in adjustments to the non-controlling interests in the accompanying unaudited condensed consolidated statement of stockholders' equity.
As of
September 30, 2017
, Carvana Co. owned approximately
11%
of Carvana Group with the Existing LLC Unitholders owning the remaining
89%
. The non-controlling interests on the accompanying unaudited condensed consolidated statements of operations represents the portion of the loss attributable to the economic interest in Carvana Group held by the non-controlling Existing LLC Unitholders calculated based on the weighted average non-controlling interests' ownership during the periods presented.
The following table summarizes the effects of changes in ownership in Carvana Group on the Company's equity (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Nine Months Ended September 30, 2017
|
Transfers (to) from non-controlling interests:
|
|
|
|
Decrease in additional paid-in capital as a result of the Organizational Transactions
|
$
|
—
|
|
|
$
|
(174,255
|
)
|
(Decrease) increase in additional paid-in capital as a result of adjustments to the non-controlling interests
|
(513
|
)
|
|
333
|
|
Total transfers to non-controlling interests
|
$
|
(513
|
)
|
|
$
|
(173,922
|
)
|
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
NOTE 10 — EQUITY-BASED COMPENSATION
Equity-based compensation expense is recognized based on amortizing the grant-date fair value on a straight-line basis over the requisite service period, which is generally the vesting period of the award, less actual forfeitures. A summary of equity-based compensation expense recognized during the
three and nine
months ended
September 30, 2017
and
September 30, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Class B Units
|
$
|
597
|
|
|
138
|
|
|
$
|
1,237
|
|
|
$
|
421
|
|
Restricted Stock Awards
|
823
|
|
|
—
|
|
|
1,973
|
|
|
—
|
|
Options
|
467
|
|
|
—
|
|
|
835
|
|
|
—
|
|
Total equity-based compensation expense
|
$
|
1,887
|
|
|
$
|
138
|
|
|
$
|
4,045
|
|
|
$
|
421
|
|
2017 Omnibus Incentive Plan
In connection with the IPO, the Company adopted the 2017 Omnibus Incentive Plan (the "2017 Incentive Plan"). Under the 2017 Incentive Plan
14.0 million
shares of Class A common stock are available for issuance, which the Company may grant as stock options, stock appreciation rights, restricted stock, and other stock-based awards to employees, directors, officers and consultants. As of
September 30, 2017
, approximately
12.9 million
shares remain available for future equity award grants.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
During the three and
nine
months ended
September 30, 2017
, the Company issued certain employees and consultants an aggregate of approximately
0.0 million
and
0.6 million
restricted shares of Class A common stock, respectively, pursuant to the terms of the 2017 Incentive Plan with a weighted-average grant-date fair value of
$16.95
. During the three and
nine
months ended
September 30, 2017
, the Company also awarded options to purchase an aggregate of approximately
0.1 million
and
0.6 million
shares of Class A common stock, respectively, to employees, consultants and directors, with a weighted-average grant-date fair value of
$8.64
and
$8.35
, respectively. The Company determined the grant-date fair value of the options using the Black-Scholes valuation model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Nine Months Ended September 30, 2017
|
Expected volatility
(1)
|
63.0
|
%
|
|
63.0
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
Expected term (in years)
(2)
|
6.25
|
|
|
6.26
|
|
Risk-free interest rate
|
1.9
|
%
|
|
1.9
|
%
|
(1) Measured using selected high-growth guideline companies and considering the risk factors that would influence the range of expected volatility because the Company does not have sufficient historical data to provide a reasonable basis upon which to estimate the expected volatility.
(2) Expected term represents the estimated period of time until an option is exercised and was determined using the simplified method because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.
Class B Units
During the
nine
months ended
September 30, 2017
, the Company issued an aggregate of approximately
0.8 million
Class B Units to executive officers and certain other employees with a participation threshold of
$12.00
and a grant-date fair value of
$7.04
. There were
no
Class B Units issued during the three months ended
September 30, 2017
. During the three and
nine
months ended September 30, 2016, the Company issued approximately
0.4 million
and
0.9 million
Class B Units, respectively. The Class B Units issued during the
nine
months ended September 30, 2016 have per unit participation thresholds of
$4.8780
to
$5.8114
and a grant-date fair value of
$0.22
to
$0.44
. The Company determined the grant-date fair value of the Class B Units using an option pricing valuation model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Expected volatility
(1)
|
n/a
|
|
70.3
|
%
|
|
63.0
|
%
|
|
67.1
|
%
|
Expected dividend yield
|
n/a
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected term (in years)
(2)
|
n/a
|
|
1.25
|
|
|
6.25
|
|
|
2.00
|
|
Risk-free interest rate
|
n/a
|
|
0.6
|
%
|
|
1.9
|
%
|
|
1.0
|
%
|
(1) Measured using selected high-growth guideline companies and considering the risk factors that would influence the range of expected volatility because the Company does not have sufficient historical data to provide a reasonable basis upon which to estimate the expected volatility.
(2) In 2017, the expected term represents the estimated period of time determined using the simplified method because the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.
Company Performance Plan
The Company created the Performance Plan on July 25, 2016, whereby the Company was authorized to grant up to
1.0 million
performance units (the “Performance Units”) to certain employees and consultants. The Performance Units granted were subject to continued employment and were only exercisable upon a qualifying transaction, which included an initial public offering, as defined in the Performance Plan. The IPO completed on
May 3, 2017
constituted a qualifying transaction under the terms of the Performance Plan. The Company chose to settle the outstanding Performance Units in equity awards of Carvana Co. and recognized compensation expense related to the vested portion of these equity awards upon completion of the IPO.
As of
September 30, 2017
, the total unrecognized compensation expense related to outstanding equity awards was approximately
$18.3 million
, which the Company expects to recognize over a weighted-average period of approximately
3.5 years
. Total unrecognized equity-based compensation expense will be adjusted for actual forfeitures.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
NOTE 11 — LOSS PER SHARE
Basic and diluted 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. Diluted net loss per share is computed by giving effect to all potentially dilutive shares. For all periods presented, potentially dilutive shares are excluded from diluted net loss per share because they have an anti-dilutive impact. Therefore, basic and diluted net loss per share attributable to Class A common stockholders are the same for all periods presented.
As discussed in
Note 1 — Business Organization
, the Organizational Transactions are considered transactions between entities under common control and the financial statements for periods prior to the IPO and Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes. For purposes of calculating both the numerator and denominator of net loss per share for periods prior to the IPO, the Company has retroactively reflected the
15.0 million
shares issued in the IPO and the LLC Units outstanding as of the Organizational Transactions as if they had been issued and outstanding as of the beginning of each period presented. These calculations for periods prior to the IPO do not consider the options or shares of Class A common stock issued on the IPO date under the 2017 Incentive Plan.
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(39,769
|
)
|
|
$
|
(21,985
|
)
|
|
$
|
(117,078
|
)
|
|
$
|
(57,418
|
)
|
Less: Net loss attributable to non-controlling interests
|
(35,389
|
)
|
|
(19,589
|
)
|
|
(104,232
|
)
|
|
(51,159
|
)
|
Net loss attributable to Carvana Co., basic and diluted
|
$
|
(4,380
|
)
|
|
$
|
(2,396
|
)
|
|
$
|
(12,846
|
)
|
|
$
|
(6,259
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares of Class A common stock outstanding
|
15,520
|
|
|
15,000
|
|
|
15,254
|
|
|
15,000
|
|
Less: unvested weighted-average restricted stock awards
|
475
|
|
|
—
|
|
|
230
|
|
|
—
|
|
Weighted-average shares of Class A common stock to compute basic and diluted net loss per Class A common share
|
15,045
|
|
|
15,000
|
|
|
15,024
|
|
|
15,000
|
|
Net loss per share of Class A common stock, basic and diluted
|
$
|
(0.29
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.86
|
)
|
|
$
|
(0.42
|
)
|
Shares of Class B common stock do not share in the losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted net loss per share of Class B common stock under the
two
-class method has not been presented. LLC Units (adjusted for the Exchange Ratio and participation thresholds) are considered potentially dilutive shares of Class A common stock because they are exchangeable into shares of Class A common stock.
Weighted-average as-converted Class A Units of approximately
117.2 million
together with the related Class B common stock for the
three and nine
months ended
September 30, 2017
and
September 30, 2016
were evaluated under the if-converted method for potentially dilutive effects and were determined to be anti-dilutive. Outstanding Class B Units of approximately
7.5 million
and
6.5 million
at
September 30, 2017
and
September 30, 2016
, respectively, were evaluated for potentially dilutive effects and were determined to be anti-dilutive. Potentially dilutive restricted stock awards of approximately
0.5 million
and
0.2 million
for the
three and nine
months ended
September 30, 2017
, respectively, were evaluated under the treasury stock method for potentially dilutive effects and were determined to be anti-dilutive. As of
September 30, 2017
,
0.6 million
options were outstanding and evaluated under the treasury stock method for potentially dilutive effects and were determined to be anti-dilutive.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
NOTE 12 — INCOME TAXES
As a result of the IPO and Organizational Transactions, Carvana Co. owns a portion of the LLC Units of Carvana Group, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Carvana Group is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Carvana Group is passed through to and included in the taxable income or loss of its members, including Carvana Co., in accordance with the terms of the LLC Agreement. Carvana Co. is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to the allocable share of any taxable income of Carvana Group.
The Company recognizes deferred tax assets to the extent it believes these assets are more-likely-than-not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. Based on Carvana Co.'s limited operating history and future projections of taxable income, it believes there is significant uncertainty as to whether its deferred tax assets will be realized; therefore, Carvana Co. has recorded a full valuation allowance against its deferred tax assets. Additionally, Carvana Co. did not take benefit for its portion of taxable losses incurred by Carvana Group during the
three and nine
months ending
September 30, 2017
subsequent to the IPO and Organizational Transactions.
The Company recognizes uncertain income tax positions when it is more-likely-than-not the position will be sustained upon examination. As of
September 30, 2017
and
December 31, 2016
, the Company has
not
identified any uncertain tax positions and has
not
recognized any related reserves.
Tax Receivable Agreement
Carvana Co. expects to obtain an increase in its share of the tax basis in the net assets of Carvana Group when LLC Units are exchanged by the Existing LLC Unitholders and other qualifying transactions. As described in
Note 8 — Stockholders' Equity
, each change in outstanding shares of Class A common stock results in a corresponding increase or decrease in Carvana Co.'s ownership of LLC Units. The Company intends to treat any exchanges of LLC Units as direct purchases of LLC interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that Carvana Co. would otherwise pay in the future to various taxing authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the IPO, the Company entered into a Tax Receivable Agreement (“TRA”). Under the TRA, the Company generally will be required to pay to the Existing LLC Unitholders
85%
of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes directly or indirectly (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of any sales or exchanges (as determined for U.S. federal income tax purposes) to or with the Company of their interests in Carvana Group for shares of Carvana Co.'s Class A common stock or cash, including any basis adjustment relating to the assets of Carvana Group and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Company expects to benefit from the remaining
15%
of any tax benefits that it may actually realize. To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid.
If the Internal Revenue Service or a state or local taxing authority challenges the tax basis adjustments that give rise to payments under the TRA and the tax basis adjustments are subsequently disallowed, the recipients of payments under the agreement will not reimburse the Company for any payments the Company previously made to them. Any such disallowance would be taken into account in determining future payments under the TRA and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, the Company’s payments under the TRA could exceed its actual tax savings, and the Company may not be able to recoup payments under the TRA that were calculated on the assumption that the disallowed tax savings were available.
The TRA provides that if (i) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur, (ii) there is a material breach of any material obligations under the TRA; or (iii) it elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any LLC
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination.
As of
September 30, 2017
, there have been no exchanges of LLC Units and the Company has
not
recorded a liability related to the TRA.
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Lease Commitments
As of
September 30, 2017
, the Company is a tenant under various operating leases with third parties related to certain of its delivery hubs, vending machines and offices. The initial terms expire at various dates between 2017 and 2037. Many of the leases include one or more renewal options ranging from
three
to
thirty
years. Rent expense for these operating leases was approximately
$1.1 million
and
$0.2 million
for the three months ended
September 30, 2017
and
2016
, respectively, and approximately
$2.9 million
and
$0.6 million
for the nine months ended
September 30, 2017
and
2016
, respectively.
In September 2016, the Company entered into a lease with a third party for the second floor of a new corporate headquarters in Tempe, Arizona. The lease has an initial term of
83
months and has
three
five
-year extension options. At the request of the landlord, DriveTime agreed to partially guarantee the lease payments until
September 2019
. The Company started incurring rent expense for this lease in April 2017, and it is included within the third party rent expense discussed above.
The Company also has lease agreements with DriveTime that provide the Company access to and utilization of space at various DriveTime inspection and reconditioning centers, temporary storage locations and retail facilities. Additionally, the Company entered into a sublease with DriveTime for the use of the first floor of its new corporate headquarters in Tempe, Arizona. See
Note 5 — Related Party Transactions
for further related party lease information.
Letters of Credit
In October 2016, the Company obtained an unconditional, irrevocable, stand-by letter of credit for
$1.9 million
to satisfy a condition of a new lease agreement. The Company is required to maintain a cash deposit of
$1.9 million
with the financial institution that issued the stand-by letter of credit until February 2018, at which point the cash deposit requirement will be reduced by approximately
$1.0 million
until November 30, 2018, at which time the letter of credit shall expire. The Company has earned interest on this letter of credit, and as of
September 30, 2017
and
December 31, 2016
, the balance with the financial institution was approximately
$2.0 million
. This balance is classified as restricted cash in the accompanying unaudited condensed consolidated balance sheets.
Legal Matters
In the ordinary course of business, the Company may become subject to litigation or claims. The Company is not aware of any pending legal proceedings of which the outcome is reasonably possible to have a material effect on its results of operations, financial condition or cash flows.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
NOTE 14 — FAIR VALUE OF FINANCIAL INSTRUMENTS
As of
September 30, 2017
and
December 31, 2016
, the Company held certain assets that were required to be measured at fair value on a recurring basis. The following is a summary of fair value measurements at
September 30, 2017
and
December 31, 2016
(in thousands):
As of
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
105,747
|
|
|
$
|
105,747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchase price adjustment receivable
(2)
|
1,247
|
|
|
—
|
|
|
—
|
|
|
1,247
|
|
As of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
Money market funds
(1)
|
$
|
20,088
|
|
|
$
|
20,088
|
|
|
$
|
—
|
|
|
$
|
—
|
|
___________________________
(1) Classified in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets.
(2) Classified as other assets in the accompanying unaudited condensed consolidated balance sheet and as a component of other sales and revenues in the accompanying unaudited condensed consolidated statements of operations.
The fair value of the purchase price adjustment receivable is determined based on the extent to which the Company’s estimated performance of the underlying finance receivables exceeds the purchaser’s estimated performance of the underlying finance receivables as of measurement dates specified in the Master Purchase and Sale Agreement. The Company develops its estimate of future cumulative losses based on the historical performance of finance receivables it originated with similar characteristics as well as general macro-economic trends. The Company then utilizes a discounted cash flow model to calculate the present value of the expected future payment amounts. Such fair value measurement is considered Level 3 under the fair value hierarchy.
The carrying amounts of restricted cash, accounts payable and accrued liabilities and accounts payable to related party approximate fair value because their respective maturities are less than
three
months. The carrying value of the Floor Plan Facility was determined to approximate fair value due to its short-term duration and variable interest rate that approximates prevailing interest rates as of each reporting period. The carrying value of notes payable was determined to approximate fair value as each of the notes has prevailing interest rates, which have not materially changed as of
September 30, 2017
. The fair value of finance receivables, net was determined to be approximately
$39.1 million
and
$25.6 million
as of
September 30, 2017
and
December 31, 2016
, respectively, utilizing the estimated sales price based on the historical experience of the Company. Such fair value measurement of the finance receivables, net is considered Level 2 under the fair value hierarchy.
NOTE 15 — SUBSEQUENT EVENTS
LLC Unit Exchanges
Subsequent to September 30, 2017, certain LLC Unitholders have collectively exchanged approximately
0.5 million
LLC Units of Carvana Group together with approximately
0.4 million
shares of Carvana Co.'s Class B common stock for approximately
0.4 million
shares of Carvana Co.'s Class A common stock under the Exchange Agreement.
Floor Plan Facility
On November 2, 2017, the Company entered into a letter agreement with Ally Bank and Ally Financial (the "Ally Parties") to extend repayment of amounts due under the Floor Plan Facility for sales involving financing originated by the Company that are not sold to or financed by the Ally Parties. With respect to such vehicles, the Ally Parties agree to extend repayment of the advance or the loan for such vehicle to the earlier of fifteen business days after the sale of the vehicle or two business
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
days following the sale or funding of the retail installment contract.
Finance Receivable Sale Agreements
On
November 3, 2017
, the Company amended its Purchase and Sale Agreement to increase the aggregate amount of principal balances of finance receivables it can sell from
$375.0 million
to
$1.5 billion
. Also on
November 3, 2017
, the Company terminated the remaining capacity under the Master Transfer Agreement and replaced this facility by entering into a new master transfer agreement with an unrelated third party under which the third party has committed to purchase up to an aggregate of
$357.1 million
in principal balances of finance receivables.
Master Sale-Leaseback Agreement
On November 3, 2017, the Company entered into a Master Sale-Leaseback Agreement pursuant to which it may sell and lease back up to
$75.0 million
of its real property interests, including costs for construction improvements. At any time the Company may elect to, and beginning November 2, 2019, the purchaser has the right to demand that, the Company repurchase one or more sold real property interests for an amount equal to the repurchase price provided in the applicable lease and any amounts due and owing under such lease. The Company expects to sell and lease back many of its real estate holdings and improvements pursuant to this agreement.