ITEM I. FINANCIAL STATEMENTS
CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and par values)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,047 | | | $ | 403 | |
| Restricted cash | 150 | | | 233 | |
| Accounts receivable, net | 428 | | | 206 | |
| Finance receivables held for sale, net | 393 | | | 356 | |
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| Vehicle inventory | 2,865 | | | 3,149 | |
| Beneficial interests in securitizations | 401 | | | 382 | |
Other current assets, including $8 and $12, respectively, due from related parties | 207 | | | 163 | |
| Total current assets | 5,491 | | | 4,892 | |
| Property and equipment, net | 3,261 | | | 1,560 | |
Operating lease right-of-use assets, including $15 and $17, respectively, from leases with related parties | 659 | | | 369 | |
| Intangible assets, net | 82 | | | 4 | |
| Goodwill | 847 | | | 9 | |
Other assets, including $3 and $7, respectively, due from related parties | 162 | | | 181 | |
| Total assets | $ | 10,502 | | | $ | 7,015 | |
| LIABILITIES & STOCKHOLDERS' EQUITY | | | |
| Current liabilities: | | | |
Accounts payable and accrued liabilities, including $24 and $27, respectively, due to related parties | $ | 981 | | | $ | 656 | |
| Short-term revolving facilities | 1,118 | | | 2,053 | |
| Current portion of long-term debt | 212 | | | 152 | |
Other current liabilities, including $4 and $3, respectively, from leases with related parties | 57 | | | 29 | |
| Total current liabilities | 2,368 | | | 2,890 | |
| Long-term debt, excluding current portion | 6,605 | | | 3,208 | |
Operating lease liabilities, excluding current portion, including $11 and $13, respectively, from leases with related parties | 640 | | | 361 | |
| Other liabilities | 25 | | | 31 | |
| Total liabilities | 9,638 | | | 6,490 | |
| Commitments and contingencies (Note 17) | | | |
| Stockholders' equity: | | | |
Preferred stock, $0.01 par value - 50,000 shares authorized; none issued and outstanding as of June 30, 2022 and December 31, 2021 | — | | | — | |
Class A common stock, $0.001 par value - 500,000 shares authorized; 105,789 and 89,930 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | — | | | — | |
Class B common stock, $0.001 par value - 125,000 shares authorized; 82,900 shares issued and outstanding as of June 30, 2022 and December 31, 2021 | — | | | — | |
| Additional paid-in capital | 1,526 | | | 795 | |
| | | |
| Accumulated deficit | (987) | | | (489) | |
| Total stockholders' equity attributable to Carvana Co. | 539 | | | 306 | |
| Non-controlling interests | 325 | | | 219 | |
| Total stockholders' equity | 864 | | | 525 | |
| Total liabilities & stockholders' equity | $ | 10,502 | | | $ | 7,015 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and per share amounts)
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Sales and operating revenues: | | | | | | | |
| Used vehicle sales, net | $ | 2,962 | | | $ | 2,504 | | | $ | 5,694 | | | $ | 4,304 | |
Wholesale sales and revenues, including $7, $16, $21 and $22, respectively, from related parties | 704 | | | 557 | | | 1,279 | | | 797 | |
Other sales and revenues, including $50, $49, $98 and $91, respectively, from related parties | 218 | | | 275 | | | 408 | | | 480 | |
| Net sales and operating revenues | 3,884 | | | 3,336 | | | 7,381 | | | 5,581 | |
Cost of sales, including $9, $3, $18 and $4, respectively, to related parties | 3,488 | | | 2,784 | | | 6,687 | | | 4,691 | |
| Gross profit | 396 | | | 552 | | | 694 | | | 890 | |
Selling, general and administrative expenses, including $7, $6, $13 and $12, respectively, to related parties | 721 | | | 470 | | | 1,448 | | | 867 | |
| Interest expense | 116 | | | 43 | | | 180 | | | 73 | |
| Other (income) expense, net | (3) | | | (6) | | | 10 | | | (13) | |
| Net (loss) income before income taxes | (438) | | | 45 | | | (944) | | | (37) | |
| Income tax provision | 1 | | | — | | | 1 | | | — | |
| Net (loss) income | (439) | | | 45 | | | (945) | | | (37) | |
| Net (loss) income attributable to non-controlling interests | (201) | | | 23 | | | (447) | | | (23) | |
| Net (loss) income attributable to Carvana Co. | $ | (238) | | | $ | 22 | | | $ | (498) | | | $ | (14) | |
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| Net (loss) earnings per share of Class A common stock - basic | $ | (2.35) | | | $ | 0.27 | | | $ | (5.20) | | | $ | (0.18) | |
| Net (loss) earnings per share of Class A common stock - diluted | $ | (2.35) | | | $ | 0.26 | | | $ | (5.20) | | | $ | (0.18) | |
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Weighted-average shares of Class A common stock - basic (1) | 101,450 | | | 81,398 | | | 95,773 | | | 79,751 | |
| Weighted-average shares of Class A common stock - diluted | 101,450 | | | 176,015 | | | 95,773 | | | 79,751 | |
(1) Weighted-average shares of Class A common stock - basic - outstanding have been adjusted for unvested restricted stock awards.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In millions, except number of shares, which are reflected in thousands)
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| Class A Common Stock | | Class B Common Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Accumulated Deficit | | Non-controlling Interests | | Total Stockholders' Equity |
| Balance, December 31, 2020 | 76,512 | | | $ | — | | | 95,592 | | | $ | — | | | $ | 742 | | | $ | (354) | | | $ | 414 | | | $ | 802 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (36) | | | (46) | | | (82) | |
| Exchanges of LLC Units | 3,247 | | | — | | | (3,073) | | | — | | | 12 | | | — | | | (12) | | | — | |
| Establishment of deferred tax assets related to increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | 225 | | | — | | | — | | | 225 | |
| Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | (225) | | | — | | | — | | | (225) | |
| Issuance of Class A common stock to settle vested restricted stock units | 62 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | (2) | | | — | | | — | | | — | | | (9) | | | — | | | — | | | (9) | |
| Options exercised | 15 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity-based compensation | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | 10 | |
| Balance, March 31, 2021 | 79,834 | | | $ | — | | | 92,519 | | | $ | — | | | $ | 755 | | | $ | (390) | | | $ | 356 | | | $ | 721 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 22 | | | 23 | | | 45 | |
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| Exchanges of LLC Units | 3,189 | | | — | | | (3,118) | | | — | | | 12 | | | — | | | (12) | | | — | |
| Establishment of deferred tax assets related to increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | 217 | | | — | | | — | | | 217 | |
| Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | (217) | | | — | | | — | | | (217) | |
| Issuance of Class A common stock to settle vested restricted stock units | 59 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | (2) | | | — | | | — | | | — | | | (8) | | | — | | | — | | | (8) | |
| Options exercised | 26 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Equity-based compensation | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | 11 | |
| Balance, June 30, 2021 | 83,106 | | | $ | — | | | 89,401 | | | $ | — | | | $ | 771 | | | $ | (368) | | | $ | 367 | | | $ | 770 | |
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CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Continued)
(Unaudited)
(In millions, except number of shares, which are reflected in thousands)
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| Class A Common Stock | | Class B Common Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Accumulated Deficit | | Non-controlling Interests | | Total Stockholders' Equity |
| Balance, December 31, 2021 | 89,930 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 795 | | | $ | (489) | | | $ | 219 | | | $ | 525 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (260) | | | (246) | | | (506) | |
| Exchanges of LLC Units | 27 | | | — | | | — | | | — | | | 1 | | | — | | | (1) | | | — | |
| Establishment of deferred tax assets related to increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
| Contribution of Class A common stock from related party | (97) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class A common stock to settle vested restricted stock units | 139 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | — | | | — | | | — | | | — | | | (12) | | | — | | | — | | | (12) | |
| Options exercised | 63 | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
| Equity-based compensation | — | | | — | | | — | | | — | | | 43 | | | — | | | — | | | 43 | |
| Balance, March 31, 2022 | 90,062 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 829 | | | $ | (749) | | | $ | (28) | | | $ | 52 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (238) | | | (201) | | | (439) | |
| Issuances of Class A common stock, net of underwriters' discounts and commissions and offering expenses | 15,625 | | | — | | | — | | | — | | | 1,227 | | | — | | | — | | | 1,227 | |
| Adjustment to non-controlling interests related to equity offerings | — | | | — | | | — | | | — | | | (554) | | | — | | | 554 | | | — | |
| Exchanges of LLC Units | 19 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Establishment of deferred tax assets related to increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | 21 | | | — | | | — | | | 21 | |
| Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group | — | | | — | | | — | | | — | | | (21) | | | — | | | — | | | (21) | |
| Contribution of Class A common stock from related party | (2) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class A common stock to settle vested restricted stock units | 48 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Issuance of Class A common stock under ESPP | 27 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
| Options exercised | 10 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity-based compensation | — | | | — | | | — | | | — | | | 18 | | | — | | | — | | | 18 | |
| Balance, June 30, 2022 | 105,789 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 1,526 | | | $ | (987) | | | $ | 325 | | | $ | 864 | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| Cash Flows from Operating Activities: | | | |
| Net loss | $ | (945) | | | $ | (37) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | |
| Depreciation and amortization expense | 101 | | | 46 | |
| Equity-based compensation expense | 42 | | | 18 | |
| Loss on disposal of property and equipment | 2 | | | 1 | |
| Provision for bad debt and valuation allowance | 8 | | | 6 | |
| Amortization and write-off of debt issuance costs | 12 | | | 5 | |
| Unrealized loss on warrants to acquire Root Class A common stock | 5 | | | — | |
| Unrealized loss (gain) on beneficial interests in securitization | 10 | | | (4) | |
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| Changes in finance receivable related assets: | | | |
| Originations of finance receivables | (3,960) | | | (3,289) | |
| Proceeds from sale of finance receivables, net | 3,921 | | | 3,254 | |
| Gain on loan sales | (235) | | | (338) | |
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| Principal payments received on finance receivables held for sale | 113 | | | 78 | |
| Other changes in assets and liabilities: | | | |
| Vehicle inventory | 333 | | | (926) | |
| Accounts receivable | (29) | | | (111) | |
| Other assets | (19) | | | (60) | |
| Accounts payable and accrued liabilities | 122 | | | 216 | |
| Operating lease right-of-use assets | (102) | | | (4) | |
| Operating lease liabilities | 140 | | | 6 | |
| Other liabilities | (6) | | | — | |
| Net cash used in operating activities | (487) | | | (1,139) | |
| Cash Flows from Investing Activities: | | | |
| Purchases of property and equipment | (361) | | | (194) | |
| Payments for acquisitions, net of cash acquired | (2,189) | | | — | |
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| Principal payments received on and proceeds from sale of beneficial interests | 25 | | | 20 | |
| Net cash used in investing activities | (2,525) | | | (174) | |
| Cash Flows from Financing Activities: | | | |
| Proceeds from short-term revolving facilities | 8,159 | | | 4,664 | |
| Payments on short-term revolving facilities | (9,094) | | | (4,024) | |
| Proceeds from issuance of long-term debt | 3,416 | | | 710 | |
| Payments on long-term debt | (66) | | | (29) | |
| Payments of debt issuance costs | (65) | | | (11) | |
| Net proceeds from issuance of Class A common stock | 1,227 | | | — | |
| Proceeds from equity-based compensation plans | 3 | | | 1 | |
| Tax withholdings related to restricted stock units and awards | (7) | | | (17) | |
| Net cash provided by financing activities | 3,573 | | | 1,294 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 561 | | | (19) | |
| Cash, cash equivalents and restricted cash at beginning of period | 636 | | | 329 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,197 | | | $ | 310 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 LLC (collectively, "Carvana Co."), together with its consolidated subsidiaries (the "Company"), is the leading e-commerce platform for buying and selling used cars. The Company is transforming the used car sales 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 ("VSC") 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
Carvana Co. is a holding company that was formed as a Delaware corporation on November 29, 2016 for the purpose of completing its 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, except the Company's Senior Notes (as defined in Note 10 — Debt Instruments) which were issued by Carvana Co. and guaranteed by its and Carvana Group's existing domestic restricted subsidiaries.
In accordance with Carvana Group LLC's amended and restated limited liability company agreement (the "LLC Agreement"), Carvana Co. is the sole manager of Carvana Group and conducts, directs and exercises full control over the activities of Carvana Group. There are two classes of common ownership interests in Carvana Group, Class A common units (the "Class A Units") and Class B common units (the "Class B Units"). As further discussed in Note 11 — Stockholders' Equity, the Class A Units and Class B Units (collectively, 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 June 30, 2022, Carvana Co. owned approximately 55.6% of Carvana Group and the LLC Unitholders (as defined in Note 11 — Stockholders' Equity) owned the remaining 44.4%.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying 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 the Company's most recent Annual Report on Form 10-K filed on February 24, 2022.
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 June 30, 2022, results of operations and changes in stockholder's equity for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 2022 and 2021. 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.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Liquidity
Since inception, the Company has incurred losses, and expects to incur additional losses in the future as it continues to build inspection and reconditioning centers ("IRCs") and vending machines, serve more of the U.S. population, and enhance technology and software. Since March 31, 2022, the Company has completed an equity offering of 15.6 million shares of Class A common stock for net proceeds of $1.2 billion and issued a total of $3.275 billion in aggregate principal amount of 10.25% senior unsecured notes due 2030 (the "2030 Notes"). The Company used a portion of the net proceeds from the Class A common stock offering for general corporate purposes and to pay any costs, fees and expenses incurred by it in connection with the offering. The Company used the net proceeds from the issuance and sale of the 2030 Notes (a) to finance the $2.2 billion acquisition of the U.S. physical auction business of ADESA, Inc. ("ADESA") and other ancillary transactions to occur in connection therewith, and to pay related fees and expenses in connection therewith and (b) for working capital, capital expenditures and other general corporate purposes. In March 2022, the Company's forward flow partner committed to purchase a total of $5.0 billion of the Company's finance receivables through March 2023, and such facility had $3.2 billion of unused capacity as of June 30, 2022. In addition, the Company has a $3.0 billion floor plan facility effective through September 22, 2022 and $2.0 billion thereafter through March 31, 2023. Management believes that current working capital, results of operations, and existing financing arrangements are sufficient to fund operations for at least one year from the financial statement issuance date.
Use of Estimates
The preparation of these 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.
Adoption of New Accounting Standards
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606 instead of being recorded at fair value. The Company early adopted ASU 2021-08 during the three months ended June 30, 2022, and it did not have a material effect on its condensed consolidated financial statements as there were no business combinations affected by the retrospective application to January 1, 2022.
NOTE 3 — BUSINESS COMBINATIONS
Acquisition of ADESA U.S. Physical Auction Business
On May 9, 2022, the Company completed its previously announced acquisition of 100% of the equity interests in the U.S. physical auction business of ADESA from KAR Auction Services, Inc. ("KAR") for approximately $2.2 billion in cash. Proceeds from the issuance and sale of the 2030 Notes were used to fund the acquisition. The acquisition included 56 sites throughout the U.S. with 6.5 million square feet of buildings on more than 4,000 acres of land, significantly expanding the Company's infrastructure and enhancing its customer offering by facilitating a broader selection of vehicles and faster delivery times.
The following table summarizes the preliminary allocation of the purchase price consideration to identifiable assets acquired and liabilities assumed as of June 30, 2022:
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| | | | | |
| Assets Acquired | Preliminary Purchase Price Allocation |
| (in millions) |
| Current assets | $ | 208 | |
| Property and equipment | 1,281 | |
| Operating lease right-of-use assets | 188 | |
| Intangible assets | 79 | |
| Other assets | 1 | |
| Total Assets Acquired | 1,757 | |
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| Liabilities Assumed | |
| Current liabilities | 233 | |
| Operating lease liabilities | 167 | |
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| Total Liabilities Assumed | 400 | |
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| Net Assets Acquired | 1,357 | |
| Purchase price consideration | 2,195 | |
| Goodwill | $ | 838 | |
Identifiable intangible assets acquired consist of the following:
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| Fair Value | | Useful Life |
| Customer relationships | $ | 50 | | | 10 years |
| Developed technology | $ | 29 | | | 3 years |
Preliminary measurements of fair value are subject to change during the measurement period based on the Company's continuing review of matters related to the acquisition and could be material. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Customer relationships were valued using the multi-period excess earnings method of the income approach. Developed technology was valued using the replacement cost method of the cost approach. Significant assumptions used in the valuations were revenues and attrition rate and are classified as Level 3 due to the lack of observable market data. No residual values were assigned to the customer relationships and developed technology intangible assets and they are amortized on an economic useful life basis commensurate with future anticipated cash flows and straight line, respectively. The remaining weighted-average amortization period for the intangible assets acquired was approximately 7.1 years.
Real property was valued using market comparable transactions of the market approach, for which the key assumption is the similarity of the acquired property to market comparable transactions. Personal property was valued using the replacement cost method of the cost approach, for which the key assumptions are the costs of similar personal property in new condition and economic obsolescence rates.
The acquisition resulted in the recognition of $838 million of goodwill, which is deductible for tax purposes and represents the future economic benefits expected to arise from anticipated synergies and intangible assets that do not qualify for separate recognition, including an assembled workforce, non-contractual relationships and other agreements.
For the three months ended June 30, 2022, the Company recognized $108 million of wholesale sales and revenues, $103 million of cost of sales, and a net loss of $21 million from ADESA operations, which includes $20 million of depreciation and amortization, including acquired intangible assets amortization expense of $4 million.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following unaudited pro forma combined results of operations information for the three and six months ended June 30, 2022 and 2021 have been prepared as if the ADESA acquisition occurred on January 1, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unaudited |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) |
| Revenues | $ | 3,968 | | | $ | 3,560 | | | $ | 7,680 | | | $ | 6,036 | |
| Net loss | (485) | | | (11) | | | (1,075) | | | (167) | |
| Net loss attributable to non-controlling interests | (216) | | | (5) | | | (478) | | | (83) | |
| Net loss attributable to Carvana Co. | $ | (269) | | | $ | (6) | | | $ | (597) | | | $ | (84) | |
| | | | | | | |
| Net loss per share of Class A common stock - basic and diluted | $ | (2.54) | | | $ | (0.06) | | | $ | (5.65) | | | $ | (0.88) | |
| Weighted-average shares of Class A common stock - basic and diluted | 105,743 | | | 97,064 | | | 105,731 | | | 95,428 | |
The unaudited pro forma combined results of operations information reflect the following pro forma adjustments:
| | | | | | | | | | | | | | | | | | | | | | | |
| Unaudited |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Increase/(Decrease) (in millions) |
| Interest expense | $ | 36 | | | $ | 86 | | | $ | 123 | | | $ | 173 | |
| Lease expense | 1 | | | (6) | | | 5 | | | (11) | |
| Depreciation and amortization expense | 7 | | | (1) | | | 13 | | | (4) | |
| Intercompany revenues and cost of sales | $ | (2) | | | $ | (5) | | | $ | (7) | | | $ | (10) | |
The unaudited pro forma combined results of operations information is provided for informational purposes only and is not necessarily intended to represent the results that would have been achieved had the ADESA acquisition been consummated on January 1, 2021 or indicative of the results that may be achieved in the future.
NOTE 4 — PROPERTY AND EQUIPMENT, NET
The following table summarizes property and equipment, net as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| (in millions) |
| Land and site improvements | $ | 1,297 | | | $ | 303 | |
| Buildings and improvements | 1,080 | | | 643 | |
| Transportation fleet | 589 | | | 347 | |
| Software | 204 | | | 169 | |
| Furniture, fixtures and equipment | 166 | | | 97 | |
| Total property and equipment excluding construction in progress | 3,336 | | | 1,559 | |
| Less: accumulated depreciation and amortization on property and equipment | (410) | | | (294) | |
| Property and equipment excluding construction in progress, net | 2,926 | | | 1,265 | |
| Construction in progress | 335 | | | 295 | |
| Property and equipment, net | $ | 3,261 | | | $ | 1,560 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Depreciation and amortization expense on property and equipment was $85 million and $30 million for the three months ended June 30, 2022 and 2021, respectively, of which $45 million and $23 million were recorded to selling, general and administrative expense, respectively, $12 million and $7 million were capitalized to vehicle inventory, respectively, and $28 million and $5 million were recorded to cost of sales, respectively, including $11 million and $5 million previously capitalized to vehicle inventory.
Depreciation and amortization expense on property and equipment was $138 million and $57 million for the six months ended June 30, 2022 and 2021, respectively, of which $81 million and $45 million were recorded to selling, general and administrative expense, respectively, $21 million and $12 million were capitalized to vehicle inventory, respectively, and $36 million and $9 million were recorded to cost of sales, respectively, including $18 million and $9 million previously capitalized to vehicle inventory, respectively.
NOTE 5 — GOODWILL AND INTANGIBLE ASSETS, NET
The following table summarizes goodwill and intangible assets, net as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | |
| | | June 30,
2022 | | December 31,
2021 |
| | | | | |
| | | (in millions) |
| Intangible assets: | | | | | |
| Customer relationships | | | $ | 50 | | | $ | — | |
| Developed technology | | | 41 | | | 9 | |
| Non-compete agreements | | | 1 | | | 1 | |
| Intangible assets, acquired cost | | | 92 | | | 10 | |
| Less: accumulated amortization | | | (10) | | | (6) | |
| Intangible assets, net | | | $ | 82 | | | $ | 4 | |
| | | | | |
| Goodwill | | | $ | 847 | | | $ | 9 | |
Amortization expense was $4 million and less than $1 million during the three months ended June 30, 2022 and 2021 and $4 million and $1 million during the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 6.5 years. The anticipated annual amortization expense to be recognized in future years as of June 30, 2022, is as follows:
| | | | | |
| Expected Future
Amortization |
| (in millions) |
| Remainder of 2022 | $ | 13 | |
| 2023 | 17 | |
| 2024 | 18 | |
| 2025 | 14 | |
| 2026 | 7 | |
| |
| Thereafter | 13 | |
| Total | $ | 82 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 6 — ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The following table summarizes accounts payable and other accrued liabilities as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| (in millions) |
Accounts payable, including $24 and $27, respectively, due to related parties | $ | 294 | | | $ | 141 | |
| Accrued compensation and benefits | 100 | | | 45 | |
| Sales taxes and vehicle licenses and fees | 100 | | | 102 | |
| Accrued interest expense | 90 | | | 42 | |
| Reserve for returns and cancellations | 57 | | | 44 | |
| Accrued property and equipment | 46 | | | 85 | |
| Customer deposits | 37 | | | 34 | |
| Accrued advertising costs | 36 | | | 40 | |
| Other accrued liabilities | 221 | | | 123 | |
Total accounts payable and accrued liabilities | $ | 981 | | | $ | 656 | |
| | | |
NOTE 7 — RELATED PARTY TRANSACTIONS
Lease Agreements
In November 2014, the Company and DriveTime Automotive Group (together with its consolidated affiliates, collectively, “DriveTime”), a related party of the Company due to Ernest Garcia II, Ernest Garcia III, and entities controlled by one or both of them (collectively the "Garcia Parties") controlling and owning substantially all of the interests in 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 facilities (the "DriveTime Lease Agreement"). The DriveTime Lease Agreement was most recently amended in December 2018. Lease duration varies by location, with cancellable terms, provided 60 days' prior written notice is given, expiring between 2022 and 2024. The Company has the right to exercise up to two consecutive one-year renewal options at up to ten of these locations, less the number of locations renewed under the DriveTime Hub Lease Agreement described below.
In March 2017, the Company and DriveTime entered into a lease agreement that governs the Company's access to and utilization of office and parking space at various DriveTime facilities (the "DriveTime Hub Lease Agreement"). The DriveTime Hub Lease Agreement was most recently amended in July 2021. Lease expiration varies by location with most having cancellable terms, provided 60 days' prior written notice is given, expiring between 2022 and 2023 and the Company having the right to exercise up to two consecutive one-year renewal options at up to ten of these locations, less the number of locations renewed under the DriveTime Lease Agreement described above.
The DriveTime Lease Agreement and the DriveTime Hub Lease Agreement both have non-cancellable lease terms of less than twelve months with rights to terminate at the Company's election with 60 days' prior written notice and extension options as described above. At non-reconditioning locations, it is not reasonably certain that the Company will exercise its options to extend the leases or abstain from exercising its termination rights within these lease agreements to create a lease term greater than one year and therefore the Company accounts for them as short-term leases. For these locations, the Company makes variable monthly lease payments based on 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. Management has determined that the costs allocated to the Company are based on a reasonable methodology. The DriveTime Lease Agreement includes the Blue Mound and Delanco IRCs. At both of these locations, the Company expects to extend the lease terms beyond twelve months, therefore those locations are not considered short-term leases. The Company occupies all of the space at these IRCs and makes monthly lease payments based on DriveTime's actual rent expense. In addition, the Company is responsible for the actual insurance costs and real estate taxes at these IRC locations.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
At all locations, the Company is additionally responsible for paying for any tenant improvements it requires to conduct its operations. Management has determined that the costs allocated to the Company are based on a reasonable methodology.
In February 2017, the Company entered into a lease agreement with DriveTime for sole occupancy of a fully operational IRC 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.
In November 2018, the Company entered into a sublease agreement from DriveTime of a fully operational IRC near Cleveland, Ohio. The lease has an initial term of three years, subject to the Company's ability to exercise three renewal options of five years each. In July 2021, the Company exercised the first renewal option to extend through October 2026 and agreed to assume the lease from DriveTime effective October 1, 2021.
Expenses related to these operating 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. Total costs related to these operating lease agreements, including those noted above, were $1 million during each of the three months ended June 30, 2022 and 2021, and $2 million and $3 million during the six months ended June 30, 2022 and 2021, respectively, allocated between inventory and selling, general and administrative expenses.
In February 2019, the Company entered into an agreement to assume a lease of an IRC near Nashville, Tennessee that DriveTime leased from an unrelated landlord. While the Company solely occupies the IRC, DriveTime is not fully released from the lease obligations by the landlord. The lease expires in October 2023, subject to the ability to exercise three renewal options of five years each.
Corporate Office Leases
In September 2016, the Company entered into a lease for the second floor of its corporate headquarters in Tempe, Arizona. In connection with that lease, the Company entered into a sublease with DriveTime for the use of the first floor of the same building. The lease and sublease each have a term of 83 months, subject to the right to exercise three five-year extension options. Pursuant to the sublease, the Company will pay the rent equal to the amounts due under DriveTime's master lease directly to DriveTime's landlord. The rent expense incurred related to this first floor sublease was less than $1 million during each of the three and six months ended June 30, 2022 and 2021.
In December 2019, Verde Investments, Inc. ("Verde"), a related party of the Company due to the Garcia Parties controlling and owning substantially all of the interests in Verde, purchased an office building in Tempe, Arizona that the Company leased from an unrelated landlord prior to Verde's purchase. In connection with the purchase, Verde assumed that lease. The lease has an initial term of ten years, subject to the right to exercise two five-year extension options. The rent expense incurred under the lease with Verde was less than $1 million during each of the three and six months ended June 30, 2022 and 2021.
Wholesale Revenue
DriveTime purchases wholesale vehicles from the Company through competitive online auctions that are managed by an unrelated third party and through the Company's wholesale marketplace platform. The Company recognized $7 million and $16 million of wholesale sales and revenues from DriveTime during the three months ended June 30, 2022 and 2021, respectively, and $21 million and $22 million during the six months ended June 30, 2022 and 2021, respectively.
Retail Vehicle Acquisitions and Reconditioning
During the second quarter of 2021, the Company began acquiring reconditioned retail vehicles from DriveTime. The purchase price of each vehicle was equal to the wholesale price of the vehicle plus a fee for transportation and reconditioning services. In addition, DriveTime performs reconditioning services for the Company at DriveTime reconditioning centers. As of June 30, 2022, $3 million related to vehicles and reconditioning services were included in vehicle inventory in the accompanying unaudited condensed consolidated balance sheets. The Company also recognized $9 million and $2 million of
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
cost of goods sold during the three months ended June 30, 2022 and 2021, respectively, and $18 million and $2 million during the six months ended June 30, 2022 and 2021, respectively.
Master Dealer Agreement
In December 2016, the Company entered into a master dealer agreement with DriveTime (the "Master Dealer Agreement"), pursuant to which the Company may sell VSCs to customers purchasing a vehicle from the Company. The Company earns a commission on each VSC sold to its customers, and DriveTime is obligated by and subsequently administers the VSCs. The Company collects the retail purchase price of the VSCs from its customers and remits the purchase price net of commission to DriveTime. During the three months ended June 30, 2022 and 2021, the Company recognized $49 million and $45 million, respectively, and during the six months ended June 30, 2022 and 2021, the Company recognized approximately $96 million and $83 million, respectively of commissions earned on VSCs sold to its customers and administered by DriveTime, net of a reserve for estimated contract cancellations. The commission earned on the sale of these VSCs is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations. In November 2018, the Company amended the Master Dealer Agreement to allow the Company to receive payments for excess reserves based on the performance of the VSCs versus the reserves held by the VSC administrator, once a required claims period for such VSCs has passed. In August 2020 and April 2021, the Company and DriveTime amended the Master Dealer Agreement to adjust excess reserve payment calculations and timing and the scope of DriveTime's after-sale administration services, respectively. The Company recognized $1 million and $4 million during the three months ended June 30, 2022 and 2021, respectively, and approximately $2 million and $8 million during the six months ended June 30, 2022 and 2021, respectively, related to payments for excess reserves to which it expects to be entitled, which is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations.
Beginning in 2017, DriveTime also administers the Company's limited warranty provided to all customers and a portion of the Company's GAP waiver coverage under the Master Dealer Agreement. The Company pays a per-vehicle fee to DriveTime to administer the limited warranty included with every purchase and prior to the first quarter of 2020 paid a per-contract fee to DriveTime to administer a portion of the GAP waiver coverage it sells to its customers. Since the first quarter of 2020, the Company's GAP waiver coverage sales have been administered by an unrelated party. The Company incurred $5 million and $3 million during the three months ended June 30, 2022 and 2021, respectively, and approximately $9 million and $6 million during the six months ended June 30, 2022 and 2021, respectively, related to the administration of limited warranty and GAP waiver coverage.
Servicing and Administrative Fees
DriveTime provides servicing and administrative functions associated with the Company's finance receivables. The Company incurred expenses of $2 million and $1 million during the three months ended June 30, 2022 and 2021, respectively, and approximately $4 million and $3 million during the six months ended June 30, 2022 and 2021, respectively, related to these services.
Aircraft Time Sharing Agreement
The Company entered into an agreement to share usage of two aircraft owned by Verde and operated by DriveTime on October 22, 2015, and the agreement was subsequently amended in 2017. Pursuant to the agreement, the Company agreed to reimburse DriveTime 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 DriveTime can terminate the agreement with 30 days’ prior written notice. The Company reimbursed DriveTime less than $1 million under this agreement during each of the three and six months ended June 30, 2022 and 2021.
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 primarily 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 February 2021 and operates on a year-to-year basis, with the Company having the right to terminate any or all services with 30 days' prior written notice and DriveTime having the right to terminate any or all services
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
with 90 days' prior written notice. Charges allocated to the Company are based on the Company’s actual use of the specific services detailed in the Shared Services Agreement. The Company incurred less than $1 million in expenses related to the Shared Services Agreement during each of the three and six months ended June 30, 2022 and 2021.
Accounts Payable Due to Related Party
As of June 30, 2022 and December 31, 2021, $24 million and $27 million, respectively, was due to related parties primarily related to the agreements mentioned above, and is included in accounts payable and accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.
Contributions of Class A Common Shares From Ernest Garcia III
On January 5, 2022, in recognition of the Company selling its 1 millionth vehicle in Q4 2021, the Company's CEO, Ernie Garcia III ("Mr. Garcia"), committed to giving current employees 23 shares of Class A common stock from his personal shareholdings once they reach their two-year employment anniversary ("CEO Milestone Gift" or "Gift"). As a result and during the three months ended March 31, 2022, the Company granted 23 restricted stock units ("RSUs") to each current employee, which vest after they complete their second year of employment, for a total of 435,035 RSUs granted during the period. For every gift that vests, and pursuant to a contribution agreement (the "Contribution Agreement") entered into by and between the Company and Mr. Garcia on February 22, 2022, Mr. Garcia will contribute to the Company, at the end of each fiscal quarter, the number of shares of its Class A common stock, granted pursuant to the CEO Milestone Gift, that have vested during such quarter. The shares contributed shall be shares of Class A common stock that Mr. Garcia individually owns, at no charge. The contribution is intended to fund restricted stock unit awards to certain employees of the Company upon their satisfying the applicable employment tenure requirements. During the three and six months ended June 30, 2022, 1,771 and 99,107 RSUs, respectively, vested and were contributed by Mr. Garcia. Although the Company does not expect Mr. Garcia to incur any tax obligations related to the contribution, the Company has indemnified Mr. Garcia from any such obligations that may arise.
NOTE 8 — FINANCE RECEIVABLE SALE AGREEMENTS
The Company originates loans for its customers and sells them to partners and investors pursuant to finance receivable sale agreements. Historically, the Company has sold loans through two types of arrangements: forward flow agreements, including a master purchase and sale agreement and master transfer agreements, and fixed pool loan sales, including securitization transactions.
Master Purchase and Sale Agreement
In December 2016, the Company entered into a master purchase and sale agreement (the "Master Purchase and Sale Agreement" or "MPSA") with Ally Bank and Ally Financial (collectively the "Ally Parties"). Pursuant to the MPSA, the Company sells finance receivables meeting certain underwriting criteria under a committed forward flow arrangement without recourse to the Company for their post-sale performance. Throughout 2021 and 2022, the Company and the Ally Parties have amended the MPSA to, among other things and subject to the terms of the agreement, broaden the set of finance receivables covered by the MPSA and provide additional flexibility in the timing of sales of finance receivables. In March 2021, the Ally Parties committed to purchase up to a maximum of $4.0 billion of principal balances of finance receivables through March 2022. On each of March 17, 2022 and March 22, 2022, the Ally Parties amended the MPSA to, in aggregate, extend the scheduled commitment termination date to March 21, 2023 and increase the Ally Parties' commitment to purchase finance receivables to $5.0 billion, an increase of $1.0 billion from the previous commitment.
During the three months ended June 30, 2022 and 2021, the Company sold $1.3 billion and $597 million, respectively, in principal balances of finance receivables under the MPSA. During the six months ended June 30, 2022 and 2021, the Company sold $1.8 billion and $1.1 billion, respectively, in principal balances of finance receivables under the MPSA and had $3.2 billion of unused capacity as of June 30, 2022.
Securitization Transactions
The Company sponsors and establishes securitization trusts to purchase finance receivables from the Company. The securitization trusts issue asset-backed securities, some of which are collateralized by the finance receivables that the Company sells to the securitization trusts. Upon sale of the finance receivables to the securitization trusts, the Company recognizes a gain
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
or loss on sales of finance receivables. The net proceeds from the sales are the fair value of the assets obtained as part of the transactions and typically include cash and at least 5% of the beneficial interests issued by the securitization trusts to comply with Risk Retention Rules, as further discussed in Note 9 — Securitizations and Variable Interest Entities.
During the three months ended June 30, 2022 and 2021, the Company sold $605 million and $1.2 billion, respectively, in principal balances of finance receivables through securitization transactions. During each of the six months ended June 30, 2022 and 2021, the Company sold approximately $2.0 billion in principal balances of finance receivables through securitization transactions.
Gain on Loan Sales
The total gain related to finance receivables sold to financing partners and pursuant to securitization transactions was $130 million and $200 million during the three months ended June 30, 2022 and 2021, respectively, and $235 million and $338 million during the six months ended June 30, 2022 and 2021, respectively, which is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations.
NOTE 9 — SECURITIZATIONS AND VARIABLE INTEREST ENTITIES
As noted in Note 8 — Finance Receivable Sale Agreements, the Company sponsors and establishes securitization trusts to purchase finance receivables from the Company. The securitization trusts issue asset-backed securities, some of which are collateralized by the finance receivables that the Company sells to the securitization trusts. Upon sale of the finance receivables to the securitization trusts, the Company recognizes a gain or loss on sales of finance receivables. The net proceeds from the sales are the fair value of the assets obtained as part of the transactions and typically include cash and at least 5% of the beneficial interests issued by the securitization trusts to comply with Regulation RR of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Risk Retention Rules"). The beneficial interests retained by the Company include, but are not limited to, rated notes and certificates of the securitization trusts. The holders of the certificates issued by the securitization trusts have rights to cash flows only after the holders of the notes issued by the securitization trusts have received their contractual cash flows. The securitization trusts have no direct recourse to the Company’s assets, and holders of the securities issued by the securitization trusts can look only to the assets of the securitization trusts that issued their securities for payment. The beneficial interests held by the Company are subject principally to the credit and prepayment risk stemming from the underlying finance receivables.
The securitization trusts established in connection with asset-backed securitization transactions are VIEs. For each VIE that the Company establishes in its role as sponsor of securitization transactions, it performs an analysis to determine whether or not it is the primary beneficiary of the VIE. The Company’s continuing involvement with the VIEs consists of retaining a portion of the securities issued by the VIEs and performing ministerial duties as the trust administrator. As of June 30, 2022, the Company is not the primary beneficiary of these securitization trusts because its retained interests in the VIEs do not have exposures to losses or benefits that could potentially be significant to the VIEs. As such, the Company does not consolidate the securitization trusts.
The assets the Company retains in the unconsolidated VIEs are presented as beneficial interests in securitizations on the accompanying unaudited condensed consolidated balance sheets, which as of June 30, 2022 and December 31, 2021 were $401 million and $382 million, respectively. The Company held no other assets or liabilities related to its involvement with unconsolidated VIEs as of June 30, 2022 and December 31, 2021.
The following table summarizes the carrying value and total exposure to losses of its assets related to unconsolidated VIEs with which the Company has continuing involvement, but is not the primary beneficiary at June 30, 2022 and December 31, 2021. Total exposure represents the estimated loss the Company would incur under severe, hypothetical circumstances, such as
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
if the value of the interests in the securitization trusts and any associated collateral declined to zero. The Company believes the possibility of this is remote. As such, the total exposure presented below is not an indication of the Company's expected losses.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Carrying Value | | Total Exposure | | Carrying Value | | Total Exposure |
| | | | | | | |
| (in millions) |
| Rated notes | $ | 300 | | | $ | 300 | | | $ | 282 | | | $ | 282 | |
| Certificates and other assets | 101 | | | 101 | | | 100 | | | 100 | |
| Total unconsolidated VIEs | $ | 401 | | | $ | 401 | | | $ | 382 | | | $ | 382 | |
The beneficial interests in securitizations are considered securities available for sale subject to restrictions on transfer pursuant to the Company’s obligations as a sponsor under Risk Retention Rules. As described in Note 10 — Debt Instruments, the Company has entered into secured borrowing facilities through which it finances certain of these retained beneficial interests in securitizations. These securities are interests in securitization trusts, thus there are no contractual maturities. The amortized cost and fair value of securities available for sale as of June 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | |
| (in millions) |
| Rated notes | $ | 314 | | | $ | 300 | | | $ | 282 | | | $ | 282 | |
| Certificates and other assets | 97 | | | 101 | | | 93 | | | 100 | |
| Total securities available for sale | $ | 411 | | | $ | 401 | | | $ | 375 | | | $ | 382 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 10 — DEBT INSTRUMENTS
Debt instruments, excluding finance leases, which are discussed in Note 16 — Leases, as of June 30, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| (in millions) |
| Asset-based financing: | | | |
| Floor plan facility | $ | 1,118 | | | $ | 1,877 | |
| Finance receivable facilities | — | | | 176 | |
| Financing of beneficial interest in securitizations | 314 | | | 282 | |
| Notes payable | 7 | | | 10 | |
| Real estate financing | 486 | | | 447 | |
| Total asset-based financing | 1,925 | | | 2,792 | |
| Senior notes | 5,725 | | | 2,450 | |
| Total debt | 7,650 | | | 5,242 | |
| Less: current portion | (1,236) | | | (2,154) | |
Less: unamortized debt issuance costs (1) | (88) | | | (34) | |
| Total included in long-term debt, net | $ | 6,326 | | | $ | 3,054 | |
(1) The unamortized debt issuance costs related to long-term debt are presented as a reduction of the carrying amount of the
corresponding liabilities on the accompanying condensed consolidated balance sheets. Unamortized debt issuance costs related to revolving debt arrangements are presented within other assets on the accompanying condensed consolidated balance sheets and not included here.
Short-Term Revolving Facilities
Floor Plan Facility
The Company has a floor plan facility with a lender to finance its used vehicle inventory (the "Floor Plan Facility"), which is secured by the Company's vehicles, general intangibles, accounts receivable, and finance receivables. Under the Floor Plan Facility, repayment of amounts drawn for the purchase of a vehicle should generally be made within several days after selling or otherwise disposing of the vehicle. 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 reborrow such amounts. The Floor Plan Facility also requires monthly interest payments and that at least 7.5% of the total principal amount owed to the lender is held as restricted cash.
Effective October 1, 2020, the Company amended the Floor Plan Facility to increase the line of credit to $1.25 billion, reduce the interest rate to one-month LIBOR plus 3.15% and extend the maturity date to March 31, 2023. Effective March 1, 2021, the interest rate was reduced to one-month LIBOR plus 2.65%. Effective July 1, 2021, the line of credit was increased to $1.75 billion, and the LIBOR-based interest rate was amended to a substantially similar rate tied to a prime rate minus 0.50%, in advance of the cessation of LIBOR. Effective December 1, 2021, the line of credit was increased to $2.25 billion. Effective February 1, 2022, the Company amended its Floor Plan Facility to increase the line of credit to $3.0 billion through September 22, 2022. The Company is also required to pay the lender an availability fee based on the average unused capacity during the prior calendar quarter.
As of June 30, 2022 and December 31, 2021, the Company had $1.1 billion and $1.9 billion, respectively, outstanding under this facility, unused capacity of $1.9 billion and $373 million, respectively, and held $84 million and $141 million,
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
respectively, in restricted cash related to this facility. During the three months ended June 30, 2022, the Company's effective interest rate on this facility was approximately 3.31%. For the year ended December 31, 2021, the Company's effective interest rate on this facility was approximately 2.55%.
Active Finance Receivable Facilities
The Company has various short-term revolving credit facilities to fund certain automotive finance receivables originated by the Company prior to selling them, which are typically secured by the finance receivables pledged to them (the "Finance Receivable Facilities").
In January 2020, the Company entered into an agreement pursuant to which a lender agreed to provide a revolving credit facility, which was subsequently increased to $500 million, to fund certain automotive finance receivables originated by the Company. In June 2021, the Company amended its agreement to, among other things, extend the maturity date to January 24, 2023.
In February 2020, the Company entered into an agreement pursuant to which a second lender agreed to provide a $500 million revolving credit facility to fund certain automotive finance receivables originated by the Company. In December 2021, the Company amended its agreement to, among other things, increase the line of credit to $600 million, and extend the maturity date to December 8, 2023.
On April 30, 2021, the Company entered into an agreement pursuant to which a third lender agreed to provide a $500 million revolving credit facility to fund certain automotive finance receivables originated by the Company. The Company can draw upon this facility until October 30, 2022. In December 2021, the Company amended its agreement to, among other things, increase this line of credit to $600 million.
On October 15, 2021, the Company entered into an agreement pursuant to which a fourth lender agreed to provide a $350 million revolving credit facility to fund certain automotive finance receivables originated by the Company. The Company can draw upon this facility until April 15, 2023.
On March 18, 2022, the Company entered into an agreement pursuant to which a fifth lender agreed to provide a $500 million revolving credit facility to fund certain automotive finance receivables originated by the Company. The Company can draw upon this facility until September 18, 2023.
The facilities require that any undistributed amounts collected on the pledged finance receivables be held as restricted cash. The facilities require monthly payments of interest and fees based on usage and unused facility amounts. The facilities self-amortize from the end of the draw period until maturity, offer full prepayment rights, and have no credit sublimits or aging restrictions, subject to negotiated concentration limits. The subsidiaries that entered into these facilities are each wholly-owned, special purpose entities whose assets are not available to the general creditors of the Company. As of June 30, 2022 and December 31, 2021, the Company had zero and $176 million, respectively, outstanding under these facilities, unused capacity of $2.6 billion and $1.9 billion, respectively, and held $33 million and $67 million, respectively, in restricted cash related to these facilities. During the three months ended June 30, 2022, the Company's effective interest rate on these facilities was approximately 2.58%. For the year ended December 31, 2021, the Company's effective interest rate on these facilities was approximately 1.64%.
Long-Term Debt
Senior Unsecured Notes
The Company has issued various tranches of senior unsecured notes (collectively, the "Senior Notes") each under a separate indenture (collectively, the "Indentures"), as further described below.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table summarizes components of the Company's senior unsecured notes:
| | | | | | | | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 | | Interest Rate |
| | | | | |
| (in millions, except percentages) |
| 2025 Senior Unsecured Notes due October 1, 2025 ("2025 Notes") | $ | 500 | | | $ | 500 | | | 5.625 | % |
| 2027 Senior Unsecured Notes due April 15, 2027 ("2027 Notes") | 600 | | 600 | | 5.500 | % |
| 2028 Senior Unsecured Notes due October 1, 2028 ("2028 Notes") | 600 | | 600 | | 5.875 | % |
| 2029 Senior Unsecured Notes due September 1, 2029 ("2029 Notes") | 750 | | 750 | | 4.875 | % |
| 2030 Senior Unsecured Notes due May 1, 2030 ("2030 Notes") | 3,275 | | | — | | | 10.250 | % |
| Total principal amount | 5,725 | | | 2,450 | | | |
| Less: unamortized debt issuance cost | (82) | | | (28) | | | |
| Total debt | $ | 5,643 | | | $ | 2,422 | | | |
Each of the 2025 Notes, the 2027 Notes, the 2028 Notes and the 2029 Notes were issued pursuant to an indenture entered into by and among the Company, each of the guarantors party thereto and U.S. Bank National Association, as trustee. The 2030 Notes were issued pursuant to an indenture entered into by and among the Company, each of the guarantors party thereto and U.S. Bank Trust Company, National Association, as trustee. The interest on each of the Senior Notes is payable semi-annually, beginning on March 1, 2022 for the 2029 Notes, October 15, 2021 for the 2027 Notes, April 1, 2021 for the 2025 Notes and 2028 Notes, and November 1, 2022 for the 2030 Notes. The Senior Notes mature as specified in the table above unless earlier repurchased or redeemed and are guaranteed by the Company's existing domestic restricted subsidiaries (other than the subsidiaries formed for inventory, finance receivables, securitization facilities, or immaterial subsidiaries).
The Company may redeem some or all of each issuance of Senior Notes at redemption prices set forth in each respective indenture, plus any accrued and unpaid interest to the redemption date. Prior to those redemption dates, the Company may redeem up to 35% of the aggregate principal amount at a redemption price equal to 100% plus the respective interest rate specified in the table above, together with accrued and unpaid interest to, but not including, the date of redemption, with the net cash proceeds of certain equity offerings. With respect to the 2030 Notes, the Company may, at its option, redeem in the aggregate of up to 10% of the original aggregate principal amount of the 2030 Notes during the period from, and including, May 1, 2025 to, but excluding May 1, 2027, at a redemption price equal to 105.125% of the 2030 Notes to be redeemed, plus accrued and unpaid interest thereon to the relevant redemption rate. In addition, the Company may, at its option, redeem some or all of the Senior Notes prior to its redemption date, by paying a make-whole premium plus any accrued and unpaid interest to, but not including, the redemption date. If the Company experiences certain change of control events, it must make an offer to purchase all of the Senior Notes at 101% of the principal amount thereof, plus any accrued and unpaid interest, to the repurchase date.
The Indentures contain restrictive covenants that limit the ability of the Company and certain of its subsidiaries to, among other things and subject to certain exceptions, incur additional debt or issue preferred stock, create new liens, make intercompany payments, pay dividends and make other distributions in respect of the Company's capital stock, redeem or repurchase the Company’s capital stock or prepay subordinated indebtedness, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers or consolidations. Certain of these covenants will be suspended if any of the Senior Notes are assigned an investment grade rating from any two of Moody’s Investors Service, Inc., Standard & Poor’s Rating Services, and Fitch Ratings, Inc., and there is no continuing default.
Notes Payable
The Company has entered into promissory note and disbursement agreements to finance certain equipment for its transportation fleet and building improvements. 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, a two- to five-year term and requires monthly payments. As of June 30, 2022 and December 31, 2021, the outstanding principal of these notes had a weighted-average interest rate of 6.7% and 6.4%, respectively, and totaled $7 million and $10 million, respectively, net of unamortized debt issuance costs, of which $6 million and $7 million as of June 30, 2022 and December 31, 2021, respectively, was due within the next twelve
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
months and is included in current portion of long-term debt in the accompanying unaudited condensed consolidated balance sheets.
Real Estate Financing
The Company finances certain purchases and construction of its property and equipment through various sale and leaseback transactions. As of June 30, 2022, none of these transactions have qualified for sale accounting due to meeting the criteria for finance leases, or forms of continuing involvement, such as repurchase options or renewal periods that extend the lease for substantially all of the asset's remaining useful life, and are therefore accounted for as financing transactions. These arrangements require monthly payments and have initial terms of 20 to 25 years. Some of the agreements are subject to renewal options of up to 25 years and some are subject to base rent increases throughout the term. As of June 30, 2022 and December 31, 2021, the outstanding liability associated with these sale and leaseback arrangements, net of unamortized debt issuance costs, was $483 million and $444 million, respectively, and was included in long-term debt in the accompanying unaudited condensed consolidated balance sheets.
Financing of Beneficial Interests in Securitizations
As discussed in Note 9 — Securitizations and Variable Interest Entities, the Company has retained certain beneficial interests in securitizations pursuant to the Company’s obligations as a sponsor under Risk Retention Rules. Beginning in June 2019, the Company entered into secured borrowing facilities through which it finances certain retained beneficial interests in securitizations whereby the Company sells such interests and agrees to repurchase them for their fair value at a stated time of repurchase.
As of June 30, 2022 and December 31, 2021, the Company has pledged $314 million and $282 million, respectively, of its beneficial interests in securitizations as collateral under the repurchase agreements with expected repurchases ranging from July 2024 to September 2028. The securitization trusts distribute payments related to the Company's pledged beneficial interests in securitizations directly to the lenders, which reduces the beneficial interests in securitizations and the related debt balance. Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral, the repurchase price of the pledged collateral will be increased by the amount of the decline.
The outstanding balance of these facilities, net of unamortized debt issuance costs, was $311 million and $279 million as of June 30, 2022 and December 31, 2021, respectively, of which $112 million and $93 million, respectively, was included in current portion of long-term debt in the accompanying unaudited condensed consolidated balance sheets.
As of June 30, 2022, the Company was in compliance with all debt covenants.
NOTE 11 — STOCKHOLDERS' EQUITY
Organizational Transactions
Carvana Co.'s amended and restated certificate of incorporation, among other things, authorizes (i) 50 million shares of Preferred Stock, par value $0.01 per share, (ii) 500 million shares of Class A common stock, par value $0.001 per share, and (iii) 125 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 Units 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.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Carvana Group's amended and restated LLC Agreement provides for two classes of common ownership interests in Carvana Group: (i) Class A Units and (ii) Class B Units (together, the "LLC 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 and outstanding 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 Co. Sub, LLC'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 original holders of LLC units prior to the IPO (the "Original LLC Unitholders") and the number of Class A Units owned by the Original 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 if an Original LLC Unitholder elects to exchange them, together with 1.25 times as many LLC Units, for consideration from the Company. Such consideration from the Company can be, at the Company’s election, either shares of Class A common stock or cash.
As of June 30, 2022 and December 31, 2021, there were 236 million and 216 million Class A Units, and 2 million and 3 million Class B Units, respectively, (as adjusted for the participation thresholds and closing price of Class A common stock on June 30, 2022 and December 31, 2021), issued and outstanding. As discussed in Note 13 — Equity-Based Compensation, Class B Units were issued under the Company’s LLC Equity Incentive Plan (the "LLC Equity Incentive Plan") and are subject to a participation threshold, and are earned over the requisite service period.
Equity Offerings
On April 26, 2022, the Company completed a public offering of 15.625 million shares of its Class A common stock for total net proceeds of $1.2 billion, after deducting underwriting discounts and offering expenses. The Garcia Parties purchased an aggregate of 5.4 million shares of the Class A common stock offered at the public offering price. The Company used the net proceeds to purchase 19.5 million newly-issued LLC Units in Carvana Group.
Exchange Agreement
Carvana Co. and the Original LLC Unitholders together with any holders of LLC Units issued subsequent to the IPO (together, the "LLC Unitholders") entered into an Exchange Agreement under which each LLC Unitholder (and certain permitted transferees thereof) may receive shares of the Company's Class A common stock in exchange for their LLC Units on a four-to-five conversion ratio, or cash at the option of the Company, subject to (i) conversion ratio adjustments for stock splits, stock dividends, reclassifications and similar transactions, (ii) vesting for certain LLC Units, and (iii) the respective participation threshold for Class B Units. To the extent such owners also hold Class B common stock, they are 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 are 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.
During the three months ended June 30, 2022 and 2021, certain LLC Unitholders exchanged less than 1 million and 4 million LLC Units and zero and 3 million shares of Class B common stock for less than 1 million and 3 million newly-issued shares of Class A common stock, respectively. During the six months ended June 30, 2022 and 2021, certain LLC Unitholders exchanged less than 1 million and 8 million LLC Units and zero and 6 million shares of Class B common stock for less than 1 million and 6 million newly-issued shares of Class A common stock, respectively. Simultaneously, and in connection with these exchanges, Carvana Co. received less than 1 million and 4 million LLC Units during the three months ended June 30, 2022 and 2021, respectively, and less than 1 million and 8 million LLC Units during the six months ended June 30, 2022 and 2021, respectively, increasing its total ownership interest in Carvana Group, and canceled the exchanged shares of Class B common stock.
Class A Non-Convertible Preferred Units
On October 2, 2018, Carvana Group, LLC amended its LLC Agreement to create a class of non-convertible preferred units (the "Class A Non-Convertible Preferred Units"), effective September 21, 2018. The Class A Non-Convertible Preferred Units were created in connection with Carvana Co.'s issuance of its Senior Notes, as discussed further and defined in Note 10 — Debt Instruments. On October 2, 2020, Carvana Group, LLC amended and restated its LLC Agreement to, among other things, authorize the issuance of 1.1 million Class A Non-Convertible Preferred Units to be sold to Carvana Co. in connection with the issuance of its 2025 and 2028 Notes and authorize the issuance of additional Class A Non-Convertible Preferred Units, in each
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
case in consideration for the capital contribution made or deemed to have been made by Carvana Co. of the net proceeds of senior unsecured notes issuances. On March 29, 2021, Carvana Group, LLC issued 0.6 million Class A Non-Convertible Preferred Units in connection with the issuance of its 2027 Notes. On August 16, 2021, Carvana Group LLC issued 0.8 million Class A Non-Convertible Preferred Units in connection with the issuance of its 2029 Notes. On May 6, 2022, Carvana Group LLC issued 3.3 million Class A Non-Convertible Preferred Units in connection with the issuance of its 2030 Notes. Carvana Co. used its net proceeds from the 2023 Notes, the 2025 and 2028 Notes, the 2027 Notes, the 2029 Notes and the 2030 Notes, to purchase 0.6 million, 1.1 million, 0.6 million, 0.8 million, and 3.3 million, respectively, of Class A Non-Convertible Preferred Units.
When Carvana Co. makes payments on the Senior Notes, Carvana Group makes an equal cash distribution, as necessary, to the Class A Non-Convertible Preferred Units. For each $1,000 principal amount of Senior Notes that Carvana Co. repays or otherwise retires, one Class A Non-Convertible Preferred Unit is canceled and retired.
NOTE 12 — 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 LLC Unitholders. Changes in the ownership interest in Carvana Group while Carvana Co. retains its controlling interest will be accounted for as equity transactions. Exchanges of LLC Units result in a change in ownership and reduce the amount recorded as non-controlling interests and increase additional paid-in capital.
Upon the issuance of shares of Class A common stock by Carvana Co. related to the Company’s equity compensation plans such as the exercise of options, 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.
During the six months ended June 30, 2022 and 2021, the total adjustments related to exchanges of LLC Units were a decrease in non-controlling interests and a corresponding increase in additional paid-in capital of $1 million and $24 million, respectively, which have been included in exchanges of LLC Units in the accompanying unaudited condensed consolidated statements of stockholders' equity. During the six months ended June 30, 2022, Carvana Co. utilized its net proceeds from its equity offering to purchase LLC Units, which resulted in adjustments to increase non-controlling interests and to decrease additional paid-in capital by $554 million, which have been included in adjustment to non-controlling interests related to equity offerings in the accompanying unaudited condensed consolidated statements of stockholders' equity.
As of June 30, 2022, Carvana Co. owned approximately 55.6% of Carvana Group with the LLC Unitholders owning the remaining 44.4%. The net loss attributable to the non-controlling interests on the accompanying unaudited condensed consolidated statements of operations represents the portion of the net loss attributable to the economic interest in Carvana Group held by the non-controlling LLC Unitholders calculated based on the weighted average non-controlling interests' ownership during the periods presented.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| (in millions) |
| Transfers from (to) non-controlling interests: | | | |
| Decrease as a result of issuances of Class A common stock | $ | (554) | | | $ | — | |
| | | |
| Increase as a result of exchanges of LLC Units | 1 | | | 24 | |
| | | |
| | | |
| Total transfers from (to) non-controlling interests | $ | (553) | | | $ | 24 | |
NOTE 13 — EQUITY-BASED COMPENSATION
Equity-based compensation 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 recognized during the three and six months ended June 30, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in millions) |
| | | | | | | |
| Restricted Stock Units and Awards excluding those granted in relation to the CEO Milestone Gift | $ | 8 | | | $ | 8 | | | $ | 17 | | | $ | 15 | |
| Restricted Stock Units granted in relation to the CEO Milestone Gift | 6 | | | — | | | 37 | | | — | |
| Options | 4 | | | 2 | | | 7 | | | 5 | |
| Class A Units | — | | | 1 | | | — | | | 1 | |
| Total equity-based compensation | 18 | | | 11 | | | 61 | | | 21 | |
| Equity-based compensation capitalized to property and equipment | (2) | | | (1) | | | (4) | | | (3) | |
| Equity-based compensation capitalized to inventory | (2) | | | — | | | (15) | | | — | |
| Equity-based compensation, net of capitalized amounts | $ | 14 | | | $ | 10 | | | $ | 42 | | | $ | 18 | |
As of June 30, 2022, the total unrecognized compensation related to outstanding equity awards was $210 million, which the Company expects to recognize over a weighted-average period of approximately 3.4 years. Total unrecognized equity-based compensation will be adjusted for actual forfeitures.
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 million shares of Class A common stock are available for issuance, which the Company may grant as stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards to employees, directors, officers and consultants. The majority of equity granted by the Company, other than equity granted in relation to the CEO Milestone Gift, vests over four year periods based on continued employment with the Company. As of June 30, 2022, approximately 8 million shares remain available for future equity-based award grants under this plan.
Employee Stock Purchase Plan
In May 2021, the Company adopted an employee stock purchase plan (the "ESPP"). On July 1, 2021, the ESPP went into effect. The ESPP allows substantially all employees, excluding members of senior management, to acquire shares of the Company’s Class A common stock through payroll deductions over six-month offering periods, commencing on January 1 and July 1 of each year. The per share purchase price is equal to 90% of the fair market value of a share of the Company’s Class A common stock on the last day of the offering period. Participant purchases are limited to maximums that may vary between
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
$10,000 and $25,000 of stock per calendar year. The Company is authorized to grant up to 0.5 million shares of Class A common stock under the ESPP.
As of June 30, 2022, the Company issued 27,462 shares of Class A common stock and 470,044 shares remained available for future issuance. The per share price of shares purchased on June 30, 2022 was $20.32 and the per share discount from market value for shares purchased was $2.26. During the three and six months ended June 30, 2022, the Company incurred less than $1 million of equity-based compensation expense related to the ESPP.
Class A Units
During 2018, the Company granted certain employees Class A Units with service-based vesting over two- to four-year periods and a grant-date fair value of $18.58 per Class A Unit. The grantees entered into the Exchange Agreement under which each LLC Unitholder (and certain permitted transferees thereof) may receive shares of the Company's Class A common stock in exchange for their LLC Units 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.
Class B Units
In March 2015, Carvana Group adopted the LLC Equity Incentive Plan. Under the LLC Equity Incentive Plan, Carvana Group could grant Class B Units to eligible employees, non-employee officers, consultants and directors with service-based vesting, typically four- to five-years. In connection with the completion of the IPO, Carvana Group discontinued the grant of new awards under the LLC Equity Incentive Plan, however the LLC Equity Incentive Plan will continue in connection with administration of existing awards that remain outstanding. Grantees may receive shares of the Company's Class A common stock in exchange for their Class B Units 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. Class B Units do not expire. There were no Class B Units issued during the three and six months ended June 30, 2022 or 2021. As of June 30, 2022, outstanding Class B Units had participation thresholds between $0.00 to $12.00. During the three and six months ended June 30, 2022 and 2021, the Company incurred less than $1 million of equity-based compensation expense related to the Class B Units.
NOTE 14 — NET (LOSS) EARNINGS PER SHARE
Basic and diluted net (loss) earnings per share is computed by dividing the net (loss) earnings attributable to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. Diluted net (loss) earnings per share is computed by giving effect to all potentially dilutive shares. For the three and six months ended June 30, 2022 and the six months ended June 30, 2021, potentially dilutive shares are excluded from diluted net (loss) earnings per share because they have an anti-dilutive impact. Net (loss) earnings for all periods presented is attributable only to Class A
common stockholders, due to no activity related to convertible preferred stock during those periods.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table presents the calculation of basic and diluted net (loss) earnings per share during the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in millions, except number of shares, which are reflected in thousands, and per share amounts) |
| Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net (loss) income attributable to Carvana Co. - basic | $ | (238) | | | $ | 22 | | | $ | (498) | | | $ | (14) | |
| Income impact of assumed conversions from LLC Units | — | | | 23 | | | — | | | — | |
| Net (loss) income attributable to Carvana Co. - diluted | $ | (238) | | | $ | 45 | | | $ | (498) | | | $ | (14) | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted-average shares of Class A common stock outstanding | 101,450 | | | 81,439 | | | 95,773 | | | 79,795 | |
| Nonvested weighted-average restricted stock awards | — | | | (41) | | | — | | | (44) | |
| Weighted-average shares of Class A common stock - basic | 101,450 | | | 81,398 | | | 95,773 | | | 79,751 | |
| Dilutive potential Class A common shares: | | | | | | | |
Options (1) | — | | | 835 | | | — | | | — | |
Restricted Stock Units and Awards (1) | — | | | 420 | | | — | | | — | |
Class A Units (2) | — | | | 91,078 | | | — | | | — | |
Class B Units (2) | — | | | 2,284 | | | — | | | — | |
| Weighted-average shares of Class A common stock outstanding - diluted | 101,450 | | | 176,015 | | | 95,773 | | | 79,751 | |
| | | | | | | |
| | | | | | | |
| Net (loss) earnings per share of Class A common stock - basic | $ | (2.35) | | | $ | 0.27 | | | $ | (5.20) | | | $ | (0.18) | |
| Net (loss) earnings per share of Class A common stock - diluted | $ | (2.35) | | | $ | 0.26 | | | $ | (5.20) | | | $ | (0.18) | |
(1) Calculated using the treasury stock method, if dilutive
(2) Calculated using the if-converted method, if dilutive
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) earnings per share of Class B common stock under the two-class method has not been presented.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table presents potentially dilutive securities, as of the end of the period, excluded from the computations of diluted net (loss) earnings per share of Class A common stock for the three and six months ended June 30, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in thousands) |
Options (1) | 1,281 | | | 97 | | | 1,281 | | | 1,124 | |
Restricted Stock Units and Awards (1) | 74 | | | 27 | | | 74 | | | 654 | |
Class A Units (2) | 82,963 | | | — | | | 82,963 | | | 89,483 | |
Class B Units (2) | 1,835 | | | — | | | 1,835 | | | 2,248 | |
_________________________
(1) Represents number of instruments outstanding at the end of the period that were evaluated under the treasury stock method for potentially dilutive effects and were determined to be anti-dilutive.
(2) Represents the weighted-average as-converted LLC units that were evaluated under the if-converted method for potentially dilutive effects and were determined to be anti-dilutive.
NOTE 15 — INCOME TAXES
As described in Note 1 — Business Organization and Note 11 — Stockholders' Equity, as a result of the IPO, Carvana Co. began consolidating the financial results of Carvana Group. Carvana Group 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., based on its economic interest held in Carvana Group. Carvana Co. was formed on November 29, 2016 and did not engage in any operations prior to the IPO. Carvana Co. is taxed as a corporation and is subject to U.S. federal, state, and local income taxes with respect to its allocable share of any taxable income or loss of Carvana Group, as well as any stand-alone income or loss generated by Carvana Co.
As described in Note 11 — Stockholders' Equity, the Company acquired less than 1 million and 4 million LLC Units during the three months ended June 30, 2022 and 2021, respectively, and 1 million and 8 million LLC Units during the six months ended June 30, 2022 and 2021, respectively, in connection with exchanges with LLC Unitholders. During the three months ended June 30, 2022 and 2021, the Company recorded a gross deferred tax asset of $1 million and $217 million, respectively, and during the six months ended June 30, 2022 and 2021, the Company recorded a gross deferred tax asset of $1 million and $442 million, respectively, associated with the basis difference in its investment in Carvana Group related to the acquisition of these LLC Units which is reflected as an increase to additional paid-in capital in the accompanying unaudited condensed consolidated statements of stockholders' equity.
As described in Note 11 — Stockholders' Equity, the Company issued 15.625 million shares of its Class A common stock and received net proceeds from the offering of $1.2 billion. The Company utilized the proceeds to purchase 19.5 million newly issued Class A units in Carvana Group. The Company recognized a gross deferred tax asset of $20 million from the offering, associated with a portion of the basis difference resulting from this purchase of Carvana Group units, which is reflected as an increase to addition paid-in capital in the accompanying unaudited condensed consolidated statements of stockholders’ equity.
As described in Note 5 — Goodwill and Intangible Assets, Net, the Company acquired various intangible assets in connection with the acquisition of Car360 in 2018. As a result, the Company recognized a deferred tax liability of $2 million which is reflected within other liabilities in the accompanying unaudited condensed consolidated balance sheets. The deferred tax liability will be amortized over five to seven years and less than $1 million was amortized during each of the six months ended June 30, 2022 and 2021.
During the six months ended June 30, 2022, management performed an assessment of the recoverability of deferred tax assets. Management determined, based on the accounting standards applicable to such assessment, that there was sufficient negative evidence as a result of the Company’s cumulative losses to conclude it was more likely than not that its deferred tax assets would not be realized and has recorded a full valuation allowance against its deferred tax assets. In the event that management was to determine that the Company would be able to realize its deferred tax assets in the future in excess of their
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
net recorded amount, an adjustment to the valuation allowance would be made which would reduce the provision for income taxes.
The Company recognizes uncertain income tax positions when it is more-likely-than-not the position will be sustained upon examination. As of June 30, 2022 and December 31, 2021, the Company has not identified any uncertain tax positions and has not recognized any related reserves.
The Company's effective tax rate for the three months ended June 30, 2022 and 2021 was an expense of 0.1% and an expense of 0.3%, respectively, and for the six months ended June 30, 2022 and 2021 was an expense of 0.2% and an expense of 0.1%, respectively, related to its wholly-owned subsidiaries.
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 LLC Unitholders and other qualifying transactions. As described in Note 11 — 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 Original 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) the Company 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 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 June 30, 2022, the Company has concluded based on applicable accounting standards, that it was more likely than not that its deferred tax assets subject to the TRA would not be realized; therefore, the Company has not recorded a liability related to the tax savings it may realize from utilization of such deferred tax assets. As of June 30, 2022, the total unrecorded TRA liability is $1.6 billion. If utilization of the deferred tax assets subject to the TRA becomes more likely than not in the future, the Company will record a liability related to the TRA which will be recognized as expense within its consolidated statements of operations.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 16 — LEASES
The Company is party to various lease agreements for real estate and transportation equipment. For each lease agreement, the Company determines its lease term as the non-cancellable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company also assesses whether each lease is an operating or finance lease at the lease commencement date. Rent expense of operating leases is recognized on a straight-line basis over the lease term and includes scheduled rent increases as well as amortization of tenant improvement allowances.
Operating Leases
As of June 30, 2022, the Company is a tenant under various operating leases related to certain of its hubs, vending machines, IRCs, storage, parking and corporate offices. The initial terms expire at various dates between 2022 and 2038. Many of the leases include one or more renewal options ranging from one to twenty years and some contain purchase options.
The Company's operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities on the accompanying unaudited condensed consolidated balance sheets.
Refer to Note 7 — Related Party Transactions for further discussion of operating leases with related parties.
Finance Leases
The Company has finance leases for certain equipment in its transportation fleet. The leases have initial terms of two to five years, some of which include extension options for up to four additional years, and require monthly payments. The Company's finance leases are included in long-term debt on the accompanying unaudited condensed consolidated balance sheets.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Lease Costs and Activity
The Company's lease costs and activity during the three and six months ended June 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in millions) |
| Lease costs: | | | | | | | |
| Finance leases: | | | | | | | |
| Amortization of finance lease assets | $ | 24 | | | $ | 8 | | | $ | 41 | | | $ | 15 | |
| Interest obligations under finance leases | 5 | | | 1 | | | 8 | | | 3 | |
| Total finance lease costs | $ | 29 | | | $ | 9 | | | $ | 49 | | | $ | 18 | |
| | | | | | | |
| Operating leases: | | | | | | | |
| Fixed lease costs to non-related parties | $ | 27 | | | $ | 11 | | | $ | 52 | | | $ | 21 | |
| Fixed lease costs to related parties | 1 | | | 2 | | | 2 | | | 3 | |
| | | | | | | |
| Total operating lease costs | $ | 28 | | | $ | 13 | | | $ | 54 | | | $ | 24 | |
| | | | | | | |
| Cash payments related to lease liabilities included in operating cash flows: | | | | | | | |
| Operating lease liabilities to non-related parties | | | | | $ | 32 | | | $ | 15 | |
| Operating lease liabilities to related parties | | | | | $ | 1 | | | $ | 2 | |
| Interest payments on finance lease liabilities | | | | | $ | 8 | | | $ | 3 | |
| | | | | | | |
| Cash payments related to lease liabilities included in financing cash flows: | | | | | | | |
| Principal payments on finance lease liabilities | | | | | $ | 65 | | | $ | 22 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Maturity Analysis of Lease Liabilities
The following table summarizes maturities of lease liabilities as of June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Operating Leases (1) | | |
| Finance Leases | | Related Party (2) | | Non-Related Party | | Total Operating | | Total |
| | | | | | | | | |
| (in millions) |
| Remainder of 2022 | $ | 58 | | | $ | 2 | | | $ | 45 | | | $ | 47 | | | $ | 105 | |
| 2023 | 104 | | | 5 | | | 95 | | | 100 | | | 204 | |
| 2024 | 93 | | | 3 | | | 103 | | | 106 | | | 199 | |
| 2025 | 79 | | | 2 | | | 107 | | | 109 | | | 188 | |
| 2026 | 60 | | | 2 | | | 105 | | | 107 | | | 167 | |
| Thereafter | 23 | | | 4 | | | 483 | | | 487 | | | 510 | |
| Total minimum lease payments | 417 | | | 18 | | | 938 | | | 956 | | | 1,373 | |
| Less: amount representing interest | (44) | | | (3) | | | (260) | | | (263) | | | (307) | |
| | | | | | | | | |
| Total lease liabilities | $ | 373 | | | $ | 15 | | | $ | 678 | | | $ | 693 | | | $ | 1,066 | |
_________________________
(1) Leases that are on a month-to-month basis, short-term leases, and lease extensions that the Company does not expect to exercise are not included.
(2) Related party lease payments exclude rent payments due under the DriveTime Lease Agreement and the DriveTime Hub Lease Agreement for locations where the Company shares space with DriveTime, as those are variable lease payments contingent upon the Company's utilization of the leased assets.
As of June 30, 2022 and December 31, 2021, none of the Company's lease agreements contain material residual value guarantees or material restrictive covenants.
Lease Terms and Discount Rates
The weighted-average remaining lease terms and discount rates as of June 30, 2022 and 2021 were as follows, excluding short-term operating leases:
| | | | | | | | | | | |
| As of June 30, |
| 2022 | | 2021 |
| Weighted-average remaining lease terms (years) | | | |
| Operating leases | 8.9 | | 9.2 |
| Finance leases | 4.5 | | 4.4 |
| Weighted-average discount rate | | | |
| Operating leases | 7.0 | % | | 8.2 | % |
| Finance leases | 5.5 | % | | 5.3 | % |
NOTE 17 — COMMITMENTS AND CONTINGENCIES
Accrued Limited Warranty
As part of its retail strategy, the Company provides a 100-day or 4,189-mile limited warranty to customers to repair certain broken or defective components of each used vehicle sold. As such, the Company accrues for such repairs based on actual claims incurred to-date and repair reserves based on historical trends. The liability was $27 million and $16 million as of June 30, 2022 and December 31, 2021, respectively, and is included in accounts payable and other accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Purchase Obligations
The Company has purchase obligations for certain customary services related to operating a wholesale auction business of $181 million in aggregate over the next seven years, as of June 30, 2022. These purchase obligations are recorded as liabilities when the services are rendered.
Legal Matters
From time to time, the Company is involved in various claims and legal actions that arise in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe that the ultimate resolution of these actions will have a material adverse effect on its financial position, results of operations, liquidity and capital resources.
Future litigation may be necessary to defend the Company and its partners by determining the scope, enforceability and validity of third party proprietary rights or to establish its proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
NOTE 18 — FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company holds certain assets that are required to be measured at fair value on a recurring basis, and beneficial interests in securitizations for which it elected the fair value option. A description of the fair value hierarchy and the Company's methodologies are included in Note 2 — Summary of Significant Accounting Policies in its most recent Annual Report on Form 10-K.
The following tables are a summary of fair value measurements and hierarchy level at June 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| (in millions) |
Assets: | | | | | | | |
Money market funds (1) | $ | 1,009 | | | $ | 1,009 | | | $ | — | | | $ | — | |
| | | | | | | |
Beneficial interests in securitizations | 401 | | | — | | | — | | | 401 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Carrying Value | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| (in millions) |
Assets: | | | | | | | |
Money market funds (1) | $ | 154 | | | $ | 154 | | | $ | — | | | $ | — | |
| | | | | | | |
Beneficial interests in securitizations | 382 | | | — | | | — | | | 382 | |
| | | | | | | |
_________________________
(1) Consists of highly liquid investments with original maturities of three months or less and classified in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets.
As of June 30, 2022 and December 31, 2021, the Company has purchase price adjustment receivables of $36 million and $34 million, respectively, which are carried at fair value and classified as other assets in the accompanying consolidated balance sheets. Under the MPSA, the purchaser will make future cash payments to the Company based on the performance of the finance receivables sold. The fair value of the purchase price adjustment receivables are determined based on the extent to which the Company’s estimated performance of the underlying finance receivables exceeds a mutually agreed upon performance threshold of the underlying finance receivables as of measurement dates specified in the MPSA. The Company
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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. Due to the lack of observable market data these receivables are classified as Level 3. The adjustments to the fair value of the purchase price adjustment receivables were a gain of $3 million and $6 million during the three months ended June 30, 2022 and 2021, respectively, and a gain of approximately $6 million and $14 million during the six months ended June 30, 2022 and 2021, respectively, and are reflected in other expense (income), net in the accompanying unaudited condensed consolidated statements of operations.
Beneficial Interests in Securitizations
Beneficial interests in securitizations include notes and certificates of the securitization trusts, the same securities as issued to other investors as described in Note 9 — Securitizations and Variable Interest Entities. Beneficial interests in securitizations are initially treated as Level 2 assets when the securitization transaction occurs in close proximity to the end of the period and there is a lack of observable changes in the economic inputs. When the securitization transaction does not occur in close proximity to the end of the period and there have been observable changes in the economic inputs, beneficial interests in securitizations are classified as Level 3.
The Company's beneficial interests in securitizations include rated notes and certificates and other assets, all of which are classified as Level 3 due to the lack of observable market data. The Company determines the fair value of its rated notes based on non-binding broker quotes. The non-binding broker quotes are based on models that consider the prevailing interest rates, recent market transactions, and current business conditions. The Company determines the fair value of its certificates and other assets using a combination of non-binding market quotes and internally developed discounted cash flow models. The discounted cash flow models use discount rates based on prevailing interest rates and the characteristics of the specific instruments. As of June 30, 2022 and December 31, 2021, the discount rates were 4.5% to 10.0% and 1.1% to 10.0%, respectively. Significant increases or decreases in the inputs to the models could result in a significantly higher or lower fair value measurement. The Company elected the fair value option on its beneficial interests in securitizations, which allows it to recognize changes in the fair value of these assets in the period the fair value changes. Changes in the fair value of the beneficial interests in securitizations are reflected in other expense (income), net in the accompanying unaudited condensed consolidated statements of operations.
For beneficial interests in securitizations measured at fair value on a recurring basis, the Company's transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis. There were no transfers into or out of Level 3 during the three and six months ended June 30, 2022 or 2021.
In December 2021, the Company began selling certain of its beneficial interests in securitizations that meet the criteria for sale set forth in the Risk Retention Rules. For the three and six months ended June 30, 2022, the Company sold beneficial interests in securitizations for a purchase price totaling $2 million and $3 million, respectively.
The following table presents additional information about Level 3 beneficial interests in securitizations measured at fair value on a recurring basis for the three and six months ended June 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
| (in millions) |
| Opening Balance | $ | 416 | | | $ | 177 | | | $ | 382 | | | $ | 131 | |
| | | | | | | |
| Received in securitization transactions | 37 | | | 80 | | | 124 | | | 137 | |
| Cash receipts | (50) | | | (20) | | | (92) | | | (33) | |
| Change in fair value | — | | | 2 | | | (10) | | | 4 | |
| Sales of beneficial interests | (2) | | | — | | | (3) | | | — | |
| Ending Balance | $ | 401 | | | $ | 239 | | | $ | 401 | | | $ | 239 | |
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Fair Value of Financial Instruments
The carrying amounts of restricted cash, accounts receivable, accounts payable and accrued liabilities, and accounts payable to related party approximate fair value due to their respective short-term maturities. The carrying value of the short-term revolving facilities were determined to approximate fair value due to their short-term duration and variable interest rates that approximate prevailing interest rates as of each reporting period. The carrying value of notes payable and sale leasebacks were determined to approximate fair value as each of the transactions were entered into at prevailing interest rates during each respective period and they have not materially changed as of or during the periods ended June 30, 2022 and December 31, 2021. The carrying value of the financing of beneficial interests in securitizations was determined to approximate fair value because in the event of a decline in the fair value of the pledged collateral of the financing, the repurchase price of the pledged collateral will be increased by the amount of the decline.
The fair value of the Senior Notes, which are not carried at fair value on the accompanying unaudited condensed consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices for the identical liability. The fair value of the Senior Notes as of June 30, 2022 and December 31, 2021 was as follows:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| (in millions) |
| Carrying value, net of unamortized debt issuance costs | $ | 5,643 | | | $ | 2,422 | |
| Fair value | 4,207 | | | 2,411 | |
The fair value of finance receivables, which are not carried at fair value on the accompanying unaudited condensed consolidated balance sheets, was determined 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. The carrying value and fair value of the finance receivables as of June 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| (in millions) |
| Carrying value | $ | 393 | | | $ | 356 | |
| Fair value | 419 | | | 392 | |
Investment in Equity Securities
During October 2021, the Company purchased Series A convertible preferred shares in Root, Inc. ("Root"), an equity security that does not have a readily determinable fair value. The Company elected to measure this investment using a measurement alternative pursuant to the accounting standards and recorded the investment at its cost of $126 million which will subsequently be adjusted for observable price changes. The Company considered all relevant transactions since the date of its investment and has not recorded any impairments or upward or downward adjustments to the carrying amount of its investment in Root, as there have not been changes in the observable price of its equity interest through June 30, 2022.
Also in October 2021, the Company entered into a commercial agreement with Root, under which the Root auto insurance products will be embedded into the Company's e-commerce platform. In accordance with the provisions of the commercial agreement, the Company received eight tranches of warrants to purchase shares of Root's Class A common stock (the "warrants"). One tranche consisting of 42 million warrants vests either upon the earlier of product integration or 18 months, and is considered a derivative instrument. The other tranches vest based on insurance product sales through the Company's e-commerce platform, which are expected to begin during the second half of 2022. The Company used a Monte Carlo simulation to estimate the fair value of these warrants, which are classified as Level 3. At contract inception the Company recognized an asset of $30 million for the warrants and deferred revenue, classified in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table presents changes in the Company's Level 3 warrants measured at fair value:
| | | | | |
| 2022 |
| (in millions) |
| Balance at December 31, 2021 | $ | 6 | |
Total unrealized loss (1) | (5) | |
| Balance at June 30, 2022 | $ | 1 | |
(1) The Company recognized the decrease in fair value in relation to the warrants to acquire Class A common stock through other expense (income), net in the accompanying consolidated statements of operations.
Derivative Instruments
As of June 30, 2022 and December 31, 2021, the Company had no other outstanding derivative instruments.
NOTE 19 — SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes supplemental cash flow information for the six months ended June 30, 2022 and 2021:
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | |
| (in millions) |
| Supplemental cash flow information: | | | |
| Cash payments for interest | $ | 129 | | | $ | 61 | |
| Non-cash investing and financing activities: | | | |
| Capital expenditures included in accounts payable and accrued liabilities | $ | 49 | | | $ | 37 | |
| Property and equipment acquired under finance leases | $ | 232 | | | $ | 53 | |
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | 321 | | | $ | 16 | |
| | | |
| | | |
| Equity-based compensation expense capitalized to property and equipment | $ | 4 | | | $ | 3 | |
| Fair value of beneficial interests received in securitization transactions | $ | 124 | | | $ | 137 | |
| Reductions of beneficial interests in securitizations and associated long-term debt | $ | 70 | | | $ | 13 | |
| | | |
| | | |
| | | |
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the accompanying unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the accompanying unaudited condensed consolidated statements of cash flows for all periods presented:
| | | | | | | | | | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 | | June 30,
2021 | | |
| | | | | | | |
| (in millions) |
| Cash and cash equivalents | $ | 1,047 | | | $ | 403 | | | $ | 201 | | | |
Restricted cash (1) | 150 | | | 233 | | | 109 | | | |
| Total cash, cash equivalents and restricted cash | $ | 1,197 | | | $ | 636 | | | $ | 310 | | | |
_________________________
(1) Amounts included in restricted cash primarily represent the deposits required under the Company's short-term revolving facilities. Refer to Note 10 — Debt Instruments for additional information. Remaining restricted cash represents certain cash held for corporate insurance purposes.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Unless the context requires otherwise, references in this report to "Carvana," the "Company," "we," "us," and "our" refer to Carvana Co. and its consolidated subsidiaries. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our most recent Annual Report filed on Form 10-K, as well as our consolidated financial statements and the accompanying notes included in Part I, Item 1 of this Form 10-Q.
Overview
Carvana is the leading e-commerce platform for buying and selling used cars. We are transforming the used car buying and selling experience by giving consumers what they want - a wide selection, great value and quality, transparent pricing, and a simple, no pressure transaction. Each element of our business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.
Our business combines a comprehensive online sales experience with a vertically integrated supply chain that allows us to sell high-quality vehicles to our customers transparently and efficiently at a low price. Using our website, customers can complete all phases of a used vehicle purchase transaction. Specifically, our online sales experience allows customers to:
•Purchase a used vehicle. As of June 30, 2022, we listed approximately 78,900 total units on our website, where customers can select and purchase a vehicle, including arranging financing and signing contracts, directly from their desktop or mobile device. Selling used vehicles to retail customers is the primary driver of our business. Selling used vehicles generates revenue equal to the selling price of the vehicle, less an allowance for returns, and also enables multiple additional revenue streams, including vehicle service contracts ("VSCs"), GAP waiver coverage, and trade-ins.
•Finance their purchase. Customers can pay for their Carvana vehicle using cash, financing from other parties such as banks or credit unions, or financing with us using our proprietary loan origination platform. Customers who choose to apply for our in-house financing fill out a short prequalification form, select from a range of financing terms we provide and, if approved, apply the financing to their purchase in our online checkout process. We generally seek to sell the loans we originate to financing partners or pursuant to a securitization transaction and, in each case, we generally earn a premium upon sale.
•Protect their purchase. Customers have the option to protect their vehicle with a VSC as part of our online checkout process. VSCs provide customers with insurance against certain mechanical repairs after the expiration of their vehicle’s original manufacturer warranty. We earn a fee for selling VSCs on behalf of DriveTime, who is the obligor under these VSCs. We generally have no contractual liability to customers for claims under these agreements. We also offer GAP waiver coverage to customers in most states in which we operate.
•Sell us their car. We allow our customers to trade-in a vehicle and apply the trade-in value to their purchase, or to sell us a vehicle independent of a purchase. Using our digital appraisal tool, customers can receive a firm offer for their vehicle nearly instantaneously from our site simply by answering a few questions about the vehicle condition and features. We generate trade-in offers using a proprietary valuation algorithm supported by extensive used vehicle market and customer-behavior data. When customers accept our offer, they can schedule a time to have the vehicle picked up at their home and receive payment, eliminating the need to visit a dealership or negotiate a private sale. We take their vehicles into inventory and sell them either at auction as a wholesale sale or through our website as a retail sale. Vehicles sold at auction typically do not meet the quality or condition standards required to be included in retail inventory displayed for sale on our website.
To enable a seamless customer experience, we have built a vertically-integrated used vehicle supply chain, supported by proprietary software systems and data.
•Vehicle acquisition. We primarily acquire our used vehicle inventory directly from customers when they trade in or sell us their vehicles and through the large and liquid national used-car auction market. Acquiring directly from customers eliminates auction fees and provides more diverse vehicles. The remainder of our inventory is acquired from vehicle finance and leasing companies, rental car companies, and other suppliers. We use proprietary algorithms to
determine which cars to bid on at auction and how much to bid. Our software sifts through over 100,000 vehicles per day and filters out vehicles with reported accidents, poor condition ratings, or other unacceptable attributes, and can evaluate the tens of thousands of potential vehicle purchases that remain per day, creating a competitive advantage versus in-person sourcing methods generally used by traditional dealerships. Once our algorithms have identified a suitable vehicle for purchase, bids are verified and executed by a centralized team of inventory-sourcing professionals. For vehicles sold to us through our website, we use proprietary algorithms to determine an appropriate offer. We assess vehicles on the basis of quality, inventory fit, consumer desirability, relative value, expected reconditioning costs, and vehicle location to identify what we believe represent the most in-demand and profitable vehicles to acquire for inventory. We utilize a broad range of data sources, including proprietary site data, and a variety of external data sources to support our assessments.
•Inspection and reconditioning. Once we acquire a vehicle, we leverage our in-house logistics or a vendor to transport the vehicle to an inspection and reconditioning center ("IRC"), at which point the vehicle is entered into our inventory management system. We then begin a 150-point inspection process covering controls, features, brakes, tires, and cosmetics. Each IRC includes trained technicians, vehicle lifts, paint-less dent repair, and paint capabilities and receives on-site support from vendors with whom we have integrated systems to ensure ready access to parts and materials. When an inspection is complete, we estimate the necessary reconditioning cost for the vehicle to be deemed "Carvana Certified" and expected timing for that vehicle to be made available for sale on our website.
•Photography and merchandising. To provide transparency to our customers, our patented, automated photo booths capture a 360-degree exterior and interior virtual tour of each vehicle in our website inventory. Our photo booths photograph the interior and exterior of the vehicle while technicians annotate material defects based on visibility-threshold category. We also feature integrations with various vehicle data providers for vehicle feature and option information. We have instituted a unified cosmetic standard across all IRCs to better ensure a consistent customer experience.
•Transportation and fulfillment. Third-party vehicle transportation is often slow, expensive, and unreliable. To address these challenges, we built an in-house auto logistics network backed by a proprietary transportation management system ("TMS") to transport our vehicles nationwide. The system is based on a "hub and spoke" model, which connects all IRCs to vending machines and hubs via our owned and leased fleet of multi-car and single car haulers. Our TMS allows us to efficiently manage locations, routes, route capacities, trucks, and drivers while also dynamically optimizing for speed and cost. We store inventory primarily at the IRCs, and when a vehicle is sold, it is delivered directly to the customer or transported to a vending machine or certain hubs for pick-up by the customer. Due to our robust and proprietary logistics infrastructure, we are able to offer our customers and operations team highly accurate predictions of vehicle availability, minimizing unanticipated delays and ensuring a seamless and reliable customer experience.
COVID-19 Update
We have experienced and may continue to experience ongoing effects from the novel coronavirus ("COVID-19") pandemic, including the Omicron variant, such as production or other operational constraints that may negatively impact our operations and costs. However, we believe we have been relatively successful in navigating the impact of COVID-19 on our business to date and believe our business model positions us well to scale up and down to meet expected customer demand during and after the COVID-19 pandemic. We continue to evaluate the nature and extent of the impact to our business and our results of operations and financial condition as conditions evolve as a result of the COVID-19 pandemic.
Used Vehicle Unit Sales
Since launching to customers in Atlanta, Georgia in January 2013, we have experienced rapid growth in sales through our website www.carvana.com. During the six months ended June 30, 2022, the number of vehicles we sold to retail customers
grew by 11.2% to 222,749 compared to 200,272 in the six months ended June 30, 2021. We expect our used vehicle sales to grow in future periods with increased penetration in our current markets and expansion into new markets.
We view the number of vehicles we sell to retail customers as the most important measure of our growth, and we expect to continue to focus on building a scalable platform to increase our retail units sold. This focus on retail units sold is motivated by several factors:
•Retail units sold enable multiple revenue streams, including the sale of the vehicle itself, the sale of automotive finance receivables originated to finance the vehicle, the sale of VSCs, the sale of GAP waiver coverage, and the sale of vehicles acquired from customers.
•Retail units sold are the primary driver of customer referrals and repeat sales. Each time we sell a vehicle to a new customer, that customer may refer future customers and can become a repeat buyer in the future.
•Retail units sold are an important driver of the average number of days between when we acquire the vehicle and when we sell it. Reducing average days to sale impacts gross profit on our vehicles because used vehicles depreciate over time.
•Retail units sold allow us to benefit from economies of scale due to our centralized online sales model. We believe our model provides meaningful operating leverage in acquisition, reconditioning, transport, customer service, and delivery.
We plan to invest in technology and infrastructure to support growth in retail units sold. This includes continued investment in our vehicle acquisition, reconditioning and logistics network, as well as continued investment in product development and engineering to deliver customers a best-in-class experience.
Markets and Population Coverage
Our growth in retail units sold is driven by increased penetration in our existing markets and expansion into new markets. We define a market as a metropolitan area in which we have commenced local advertising and generally offer free home delivery to customers with a Carvana employee in a branded delivery truck. We define our population coverage as the percentage of U.S. population that lives within those markets. Opening a new market involves hiring a team of customer advocates, connecting the market to our existing logistics network and initiating local advertising. As a market scales, we may elect to build a vending machine in the market to further increase customer awareness and enhance our fulfillment operations.
Our expansion model has enabled us to increase our rate of market openings, resulting in serving more of the U.S. population, in each of the past nine years. Our market openings increased the total percentage of the U.S. population served to 81.1% in 315 markets as of June 30, 2022 from 79.4% in 299 markets as of June 30, 2021. Over time, we have continually improved our market expansion playbook, which we believe provides us with the capability to efficiently execute our growth plan. We continually evaluate consumer demand and our operational capacity to determine our market opening and vending machine launch strategy.
When we open a market, we commence advertising using a blend of brand and direct advertising channels. Our advertising spend in each market is approximately proportionate to each market’s population, subject to adjustments based on specific characteristics of the market, used vehicle market seasonality, and special events such as vending machine openings. This historically has led to increased market penetration over time following the market opening. We also advertise on national television to increase brand awareness.
Revenue and Gross Profit
Our increased penetration in existing markets and expansion into new markets has led to growth in retail unit sales. We generate revenue on retail units sold from four primary sources: the sale of the vehicles, wholesale sales of vehicles we acquire from customers, gains on the sales of loans originated to finance the vehicles, and sales of ancillary products such as VSCs and GAP waiver coverage.
Our largest source of revenue, used vehicle sales, totaled $3.0 billion and $2.5 billion during the three months ended June 30, 2022 and 2021, respectively, and $5.7 billion and $4.3 billion during the six months ended June 30, 2022 and 2021, respectively. As we increase penetration in existing markets and expand to new ones, we expect used vehicle sales to increase
along with retail units sold. We generate gross profit on used vehicle sales from the difference between the retail selling price of the vehicle and our cost of sales associated with acquiring the vehicle and preparing it for sale.
Wholesale sales and revenues, which includes sales of trade-ins and other vehicles acquired from customers that do not meet the requirements for our retail inventory, totaled $704 million and $557 million during the three months ended June 30, 2022 and 2021, respectively, and $1.3 billion and $797 million during the six months ended June 30, 2022 and 2021, respectively. We expect wholesale sales to increase with retail units sold through trade-ins and as we expand our program of acquiring vehicles from customers who wish to sell us a car independent of a retail sale. We generate gross profit on wholesale vehicle sales from the difference between the wholesale selling price of the vehicle and our cost of sales associated with acquiring the vehicle and preparing it for sale.
On May 9, 2022, we completed our acquisition of the U.S. physical auction business of ADESA from KAR. We have included revenue earned from the sale of wholesale marketplace units by non-Carvana sellers through our wholesale marketplace platform, including auction fees and related services revenue, in wholesale sales and revenues from the date of acquisition. We generate a gross profit on wholesale marketplace units from the difference between the revenue earned from the sale of wholesale marketplace units through our wholesale marketplace platform less our cost of sales associated with operating the wholesale marketplace platform.
Other sales and revenues, which primarily includes gains on the sales of automotive finance receivables we originate, sales commission on VSCs and sales of GAP waiver coverage totaled $218 million and $275 million during the three months ended June 30, 2022 and 2021, respectively, and $408 million and $480 million during the six months ended June 30, 2022 and 2021, respectively. We expect other sales and revenues to increase with retail units sold. We also expect other sales and revenues to increase as we improve our ability to monetize loans we originate, including through securitization transactions, and sell and offer attractive financing solutions and ancillary products to our customers, including products customarily sold by automotive retailers or insurance products customarily sold by traditional insurance companies. Other sales and revenues are 100% gross margin products for which gross profit equals revenue.
During our growth phase, our highest priority outside of safety will continue to be providing exceptional customer experiences, increasing our brand awareness and efficiently building an infrastructure to support growth in retail units sold. Secondarily, we plan to pursue several strategies designed to increase our total gross profit per unit. These strategies include the following:
•Increase the purchase of vehicles from customers. We plan to grow the number of vehicles that we purchase from our customers either as trade-ins or independent of a retail sale. This in turn will grow our wholesale business, provide additional vehicles for our retail business, which are more profitable compared to the same vehicle acquired at auction, and expand our inventory selection.
•Reduce average days to sale. Our goal is generally to increase our sales at a faster rate than we increase our inventory size, which we believe would decrease average days to sale due to a relative increase in demand versus supply. Reductions in average days to sale lead to fewer vehicle price reductions, and therefore higher average selling prices, all other factors being equal. Higher average selling prices in turn lead to higher gross profit per unit sold, all other factors being equal.
•Leverage existing IRC infrastructure. As we scale, we intend to more fully utilize the capacity in our 17 existing IRCs, which collectively have capacity to inspect and recondition approximately 1 million vehicles per year at full utilization. We also intend to use capacity in the facilities acquired as part of the ADESA acquisition.
•Increase utilization of our logistics network. As we scale, we intend to more fully utilize our in-house logistics network to transport cars to our IRCs or other sites after acquisition from customers or wholesale auctions.
•Increase conversion on existing products. We plan to continue to improve our website to highlight the benefits of our complementary product offerings, including financing, VSCs, GAP waiver coverage, and trade-ins.
•Add new products and services. We plan to utilize our online sales platform to offer additional complementary products and services to our customers.
•Increase monetization of our finance receivables. We plan to continue selling finance receivables in securitization transactions and otherwise expand our base of financial partners who purchase the finance receivables originated on our platform to reduce our effective cost of funds.
•Optimize purchasing and pricing. We are constantly improving the ways in which we predict customer demand, value vehicles sight unseen and optimize what we pay to acquire those vehicles. We also regularly test different pricing of our products, including vehicle sticker prices, trade-in and independent vehicle offers, and ancillary product prices, and we believe we can improve by further optimizing prices over time.
Seasonality
Used vehicle sales generally exhibit seasonality with sales peaking late in the first calendar quarter and diminishing through the rest of the year, with the lowest relative level of vehicle sales expected to occur in the fourth calendar quarter. Due to our rapid growth, our overall sales patterns to date have not reflected the general seasonality of the used vehicle industry, but we expect this to change once our business and markets mature. Used vehicle prices also exhibit seasonality, with used vehicles depreciating at a faster rate in the last two quarters of each year and a slower rate in the first two quarters of each year, all other factors being equal. We expect to experience seasonal and other fluctuations in our quarterly operating results, including as a result of COVID-19, which may not fully reflect the underlying performance of our business.
Investment in Growth
We have aggressively invested in the growth of our business and we expect this investment to continue during normal conditions. We anticipate that our operating expenses will increase substantially as we continue to expand our logistics network, increase our advertising spending, and serve more of the U.S. population. There is no guarantee that we will be able to realize the desired return on our investments.
Relationship with Related Parties
For discussion about our relationship with related parties, refer to Note 7 — Related Party Transactions of our accompanying unaudited condensed consolidated financial statements included in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q.
Key Operating Metrics
We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our progress and make strategic decisions. Our key operating metrics reflect the key drivers of our growth, including increasing brand awareness, enhancing the selection of vehicles we make available to our customers, and serving more of the U.S.
population. Our key operating metrics also demonstrate our ability to translate these drivers into retail sales and to monetize these retail sales through a variety of product offerings.
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Retail units sold | 117,564 | | | 107,815 | | | 222,749 | | | 200,272 | |
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| Population coverage | 81.1 | % | | 79.4 | % | | 81.1 | % | | 79.4 | % |
| Average monthly unique visitors (in thousands) | 23,547 | | | 16,590 | | | 24,138 | | | 14,912 | |
Number of IRCs (1) | 17 | | | 13 | | | 17 | | | 13 | |
| Total website units | 78,910 | | | 45,822 | | | 78,910 | | | 45,822 | |
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Total gross profit per unit (2) | $ | 3,368 | | | $ | 5,120 | | | $ | 3,116 | | | $ | 4,444 | |
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(1) Excludes IRCs acquired through the acquisition of ADESA.
(2) Includes $51, $0, $63, and $0, respectively, related to the CEO Milestone Gift.
Retail Units Sold
We define retail units sold as the number of vehicles sold to customers in a given period, net of returns under our seven-day return policy. We view retail units sold as a key measure of our growth for several reasons. First, retail units sold is the primary driver of our revenues and, indirectly, gross profit, since retail unit sales enable multiple complementary revenue streams, including financing, VSCs, GAP waiver coverage, and trade-ins. Second, growth in retail units sold increases the base of available customers for referrals and repeat sales. Third, growth in retail units sold is an indicator of our ability to successfully scale our logistics, fulfillment, and customer service operations.
Population Coverage
We previously reported number of markets as a key operating metric. As we have continued to grow, the population covered by these markets is increasingly a more important driver of our growth than the number of markets we serve. We define a market as a metropolitan area in which we have commenced local advertising and generally offer free home delivery to customers with a Carvana employee in a branded delivery truck. We define our population coverage as the percentage of U.S. population that lives within those markets. We view the growth in population we serve as a key driver of our growth. As we increase our population coverage, the number of consumers who have access to our fully integrated customer experience increases, which in turn helps increase the number of vehicles we sell.
Average Monthly Unique Visitors
We define a monthly unique visitor as an individual who has visited our website within a calendar month, based on data provided by Google Analytics. We calculate average monthly unique visitors as the sum of monthly unique visitors in a given period, divided by the number of months in that period. We view average monthly unique visitors as a key indicator of the strength of our brand, the effectiveness of our advertising and merchandising campaigns, and consumer awareness of our brand.
Number of IRCs
As we continue to grow, our number of IRCs is a more important metric than average days to sale due to the impact of IRC capacity on retail units sold and the relative stability of average days to sale over the past three years. We define the number of IRCs as the number of owned or leased IRCs in which Carvana employees perform our 150-point inspection and recondition vehicles to “Carvana Certified” standards before sale to customers. As we scale, we intend to more fully utilize the capacity in our existing 17 IRCs, which, as of June 30, 2022, collectively have capacity to inspect and recondition approximately 1 million vehicles per year at full utilization. As we increase our number of IRCs, we increase this capacity to inspect and recondition vehicles, which in turn increases the number of vehicles we can sell. With the acquisition of ADESA, we have added 56 locations that currently have the physical capacity to produce an additional 0.2 million units per year when fully staffed with
limited real estate improvements. Number of IRCs excludes any IRCs or potential IRCs acquired through the acquisition of ADESA.
Total Website Units
We define total website units as the number of vehicles listed on our website on the last day of a given reporting period, including vehicles available for sale, vehicles currently engaged in a purchase or reserved by a customer, and vehicles that can be reserved that generally have not yet completed the inspection and reconditioning process. We view total website units as a key measure of our growth. Growth in total website units increases the selection of vehicles available to our consumers, which we believe will allow us to increase the number of vehicles we sell. Moreover, growth in total website units indicates our ability to scale our vehicle purchasing, inspection and reconditioning operations. As part of our inventory strategy, over time we may choose not to expand total website units while continuing to grow sales, thereby improving other key operating metrics of the business.
Total Gross Profit per Unit
We define total gross profit per unit as the aggregate gross profit in a given period, divided by retail units sold in that period including gross profit generated from the sale of the used vehicle, gains on the sales of loans originated to finance the vehicle, commissions on sales of VSCs, revenue from GAP waiver coverage, and gross profit generated from wholesale sales of vehicles.
Components of Results of Operations
Used Vehicle Sales
Used vehicle sales represent the aggregate sales of used vehicles to customers through our website. Revenue from used vehicles sales is recognized upon delivery to the customer or pick up of the vehicle by the customer, and is reported net of a reserve for expected returns. Factors affecting used vehicle sales revenue include the number of retail units sold and the average selling price of these vehicles. Changes in retail units sold are a much larger driver of changes in revenue than are changes in average selling price.
The number of used vehicles we sell depends on the volume of traffic to our website, our population coverage, our inventory selection, the effectiveness of our branding and marketing efforts, the quality of our customer's purchase experience, our volume of referrals and repeat customers, the competitiveness of our pricing, competition from other used car dealerships and general economic conditions. Absent the impact of COVID-19, on a quarterly basis, the number of used vehicles we sell is also affected by seasonality, with demand for used vehicles reaching a seasonal high point late in the first quarter of each year, commensurate with the timing of tax refunds, and diminishing through the rest of the year, with the lowest relative level of used vehicle sales expected to occur in the fourth calendar quarter. The impact of COVID-19 and related stimulus payments and labor impacts on seasonality is uncertain.
Our retail average selling price depends on the mix of vehicles we acquire, retail prices in our markets, our pricing strategy, and our average days to sale. We may choose to shift our inventory mix to higher or lower cost vehicles, or to raise or lower our prices relative to market to take advantage of supply or demand imbalances, which could temporarily lead to average selling prices increasing or decreasing. We also generally expect lower average days to sale to be associated with higher retail average selling prices due to decreased vehicle depreciation prior to sale, all other factors being equal.
Wholesale Sales and Revenues
Wholesale sales and revenues includes the aggregate proceeds we receive on vehicles we acquire and sell to wholesalers, and beginning in 2022, wholesale marketplace revenues. The vehicles we sell to wholesalers are primarily acquired from customers who sell a vehicle to us without purchasing a retail vehicle and from our customers who trade-in their existing vehicles when making a purchase from us. Factors affecting wholesale sales and revenues include the number of wholesale units sold and the average wholesale selling price of these vehicles. The average selling price of our wholesale units is primarily driven by the mix of vehicles we sell to wholesalers, as well as general supply and demand conditions in the applicable wholesale vehicle market, both of which have been impacted by COVID-19. Beginning in 2020, wholesale sales and revenues includes aggregate proceeds we receive on vehicles sold to DriveTime through competitive online auctions that are managed by
an unrelated third party. Wholesale marketplace revenues include revenue earned from the sale of wholesale marketplace units by third-party sellers through our wholesale marketplace platform, including auction fees and related services revenue.
Other Sales and Revenues
We generate other sales and revenues primarily through the sales of loans we originate and sell in securitization transactions or to financing partners, reported net of a reserve for expected repurchases, commissions we receive on VSCs and sales of GAP waiver coverage. In 2016, we entered into a master dealer agreement with DriveTime, pursuant to which we receive a commission for selling VSCs that DriveTime administers. The commission revenue we recognize on VSCs depends on the number of retail units we sell, the conversion rate of VSCs on these sales, commission rates we receive, VSC early cancellation frequency and product features. The GAP waiver coverage revenue we recognize depends on the number of retail units we sell, the number of customers that choose to finance their purchases with us, the frequency of GAP waiver coverage early cancellation, and the conversion rate of GAP waiver coverage on those sales.
We generally seek to sell the loans we originate to securitization trusts we sponsor and establish or to financing partners. The securitization trusts issue asset-backed securities, some of which are collateralized by the finance receivables that we sell to the securitization trusts. We also sell the loans we originate under committed forward-flow arrangements, including a master purchase and sale agreement, and through fixed pool loan sales, with financing partners who generally acquire them at premium prices without recourse to us for their post-sale performance. Factors affecting revenue from these sales include the number of loans we originate, the average principal balance of the loans, the credit quality of the portfolio, and the price at which we are able to sell them in securitization transactions or to financing partners.
The number of loans we originate is driven by the number of used vehicles sold and the percentage of our sales for which we provide financing, which is influenced by the financing terms we offer our customers relative to alternatives available to the customer. The average principal balance is driven primarily by the mix of vehicles we sell, since higher average selling prices typically mean higher average balances. The price at which we sell the loan is driven by the terms of our securitization transactions and forward-flow arrangement, applicable interest rates, and whether or not the loan includes GAP waiver coverage.
Cost of Sales
Cost of sales includes the cost to acquire, recondition, and transport vehicles associated with preparing them for resale, and beginning in 2022, wholesale marketplace cost of sales. Vehicle acquisition costs are driven by the mix of vehicles we acquire, the source of those vehicles, and supply-and-demand dynamics in the vehicle market. Reconditioning costs consist of direct costs, including parts, labor, and third-party repair expenses directly attributable to specific vehicles, as well as indirect costs, such as IRC overhead. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition to the IRC or other site. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value. Wholesale marketplace cost of sales include costs related to the sale of wholesale marketplace units by third-party sellers through our wholesale marketplace platform, including labor, rent, depreciation and amortization.
Used Vehicle Gross Profit
Used vehicle gross profit is the vehicle sales price minus our costs of sales associated with vehicles that we list and sell on our website. Used vehicle gross profit per unit is our aggregate used vehicle gross profit in any measurement period divided by the number of retail units sold in that period.
Wholesale Gross Profit
Wholesale gross profit is the vehicle sales price minus our cost of sales associated with vehicles we sell to wholesalers, and beginning in 2022, wholesale marketplace revenues less wholesale marketplace cost of sales. Factors affecting wholesale gross profit include the number of wholesale units sold, the average wholesale selling price of these vehicles, the average acquisition price associated with these vehicles, and the number of wholesale marketplace units sold.
Other Gross Profit
Other sales and revenues consist of 100% gross margin products for which gross profit equals revenue. Therefore, changes in gross profit and the associated drivers are identical to changes in revenues from these products and the associated drivers.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses include expenses associated with advertising and providing customer service to customers, operating our vending machines, hubs, and physical auctions, operating our logistics and fulfillment network and other corporate overhead expenses, including expenses associated with information technology, product development, engineering, legal, accounting, finance, and business development. We anticipate that these expenses will increase as we grow. SG&A expenses exclude the costs of inspecting and reconditioning vehicles and transporting vehicles from the point of acquisition to the IRC, which are included in cost of sales, and payroll costs for our employees related to the development of software products for internal use, which are capitalized to software and depreciated over the estimated useful lives of the related assets.
Interest Expense
Interest expense includes interest incurred on our Senior Notes, our Floor Plan Facility, and our Finance Receivable Facilities (each as defined in Note 10 — Debt Instruments of our financial statements included in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q), as well as our notes payable, finance leases, and long-term debt, which are used to fund general working capital, our inventory, our transportation fleet, and certain of our property and equipment. Interest expense excludes the interest incurred during various construction projects to build, upgrade or remodel certain facilities, which is capitalized to property and equipment and depreciated over the estimated useful lives of the related assets.
Other Expense (Income)
Other expense (income), net includes changes in fair value on our beneficial interests in securitizations, purchase price adjustment receivables, and fair value adjustments related to our warrants to acquire Root Class A common stock as discussed in Note 18 — Fair Value of Financial Instruments of our financial statements included in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q, along with other general expenses such as gains or losses from disposals of long-lived assets.
Income Tax Provision
Income taxes are recognized based upon our anticipated underlying annual blended federal and state income tax rates adjusted, as necessary, for any discrete tax matters occurring during the period. As the sole managing member of Carvana Group, LLC (“Carvana Group”), Carvana Co. consolidates the financial results of Carvana Group. Carvana Group is treated as a partnership and therefore not subject to U.S. federal and most applicable state and local income tax purposes. 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., based on its economic interest held in Carvana Group. Carvana Co. is taxed as a corporation and is subject to U.S. federal, state and local income taxes with respect to its allocable share of any taxable income or loss of Carvana Group, as well as any stand-alone income or loss generated by Carvana Co. During both the three and six months ended June 30, 2022, the Company generated income tax expense of $1 million, compared to less than $1 million during both the three and six months ended June 30, 2021.
Results of Operations
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| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
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| (in millions, except unit and per unit amounts) | | | | (in millions, except unit and per unit amounts) | | |
| Net sales and operating revenues: | | | | | | | | | | |
| Used vehicle sales, net | $ | 2,962 | | | $ | 2,504 | | | 18.3 | % | | $ | 5,694 | | | $ | 4,304 | | | 32.3 | % |
Wholesale sales and revenues (1) | 704 | | | 557 | | | 26.4 | % | | 1,279 | | | 797 | | | 60.5 | % |
Other sales and revenues (2) | 218 | | | 275 | | | (20.7) | % | | 408 | | | 480 | | | (15.0) | % |
| Total net sales and operating revenues | $ | 3,884 | | | $ | 3,336 | | | 16.4 | % | | $ | 7,381 | | | $ | 5,581 | | | 32.3 | % |
| Gross profit: | | | | | | | | | | | |
Used vehicle gross profit (3) | $ | 133 | | | $ | 218 | | | (39.0) | % | | $ | 218 | | | $ | 330 | | | (33.9) | % |
Wholesale gross profit (1) | 45 | | | 59 | | | (23.7) | % | | 68 | | | 80 | | | (15.0) | % |
Other gross profit (2) | 218 | | | 275 | | | (20.7) | % | | 408 | | | 480 | | | (15.0) | % |
| Total gross profit | $ | 396 | | | $ | 552 | | | (28.3) | % | | $ | 694 | | | $ | 890 | | | (22.0) | % |
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| Unit sales information: | | | | | | | | | | | |
| Used vehicle unit sales | 117,564 | | | 107,815 | | | 9.0 | % | | 222,749 | | | 200,272 | | | 11.2 | % |
| Wholesale vehicle unit sales | 55,299 | | | 47,052 | | | 17.5 | % | | 105,579 | | | 73,092 | | | 44.4 | % |
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| Per unit selling prices: | | | | | | | | | | | |
| Used vehicles | $ | 25,195 | | | $ | 23,225 | | | 8.5 | % | | $ | 25,562 | | | $ | 21,491 | | | 18.9 | % |
| Wholesale vehicles | $ | 12,731 | | | $ | 11,838 | | | 7.5 | % | | $ | 12,114 | | | $ | 10,904 | | | 11.1 | % |
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| Per retail unit gross profit: | | | | | | | | | | | |
Used vehicle gross profit (4) | $ | 1,131 | | | $ | 2,022 | | | (44.1) | % | | $ | 979 | | | $ | 1,648 | | | (40.6) | % |
| Wholesale gross profit | 383 | | | 547 | | | (30.0) | % | | 305 | | | 399 | | | (23.6) | % |
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| Other gross profit | 1,854 | | | 2,551 | | | (27.3) | % | | 1,832 | | | 2,397 | | | (23.6) | % |
| Total gross profit | $ | 3,368 | | | $ | 5,120 | | | (34.2) | % | | $ | 3,116 | | | $ | 4,444 | | | (29.9) | % |
| Per wholesale unit gross profit: | | | | | | | | | | | |
| Wholesale vehicle gross profit | $ | 814 | | | $ | 1,254 | | | (35.1) | % | | $ | 644 | | | $ | 1,095 | | | (41.2) | % |
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| Wholesale marketplace: | | | | | | | | | | | |
| Wholesale marketplace units sold | 111,883 | | | $ | — | | | NM | | 111,883 | | | $ | — | | | NM |
Wholesale marketplace revenues (5) | $ | 108 | | | $ | — | | | NM | | $ | 108 | | | $ | — | | | NM |
Wholesale marketplace gross profit (5) (6) | $ | 5 | | | $ | — | | | NM | | $ | 5 | | | $ | — | | | NM |
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_________________________
(1) Includes $7, $16, $21 and $22, respectively, of wholesale revenue from related parties.
(2) Includes $50, $49, $98 and $91, respectively, of other sales and revenues from related parties.
(3) For the three and six months ended June 30, 2022, used vehicle gross profit includes $6 and $14, respectively, of share-based compensation expense related to the CEO Milestone Gift.
(4) For the three and six months ended June 30, 2022, used vehicle per unit gross profit includes $51 and $63, respectively, of share-based compensation expense related to the CEO Milestone Gift.
(5) Wholesale marketplace revenues and wholesale marketplace gross profit are included in wholesale sales and revenues and wholesale gross profit, respectively.
(6) Wholesale marketplace gross profit includes $15 of depreciation and amortization expense.
NM = Not meaningful
Used Vehicle Sales
Three months ended June 30, 2022 Versus 2021. Used vehicle sales increased by $458 million to $3.0 billion during the three months ended June 30, 2022, compared to $2.5 billion during the three months ended June 30, 2021. The increase in revenue was primarily due to an increase in the number of used vehicles sold to 117,564 from 107,815 during the three months ended June 30, 2022 and 2021, respectively, which was driven by enhanced marketing efforts, expanded inventory selection, and increased brand awareness. The increase in unit sales was also driven by growth to 81.1% market population coverage as of June 30, 2022 from 79.4% as of June 30, 2021. The average selling price of our retail units sold also increased to $25,195 from $23,225 during the three months ended June 30, 2022 and 2021, respectively, due primarily to the overall appreciation in the used vehicle market compared to the three months ended June 30, 2021.
Six months ended June 30, 2022 Versus 2021. Used vehicle sales increased by $1.4 billion to $5.7 billion during the six months ended June 30, 2022 compared to $4.3 billion during the six months ended June 30, 2021. The increase in revenue was primarily due to an increase in the number of used vehicles sold to 222,749 from 200,272 during the six months ended June 30, 2022 and 2021, respectively, which was driven by enhanced marketing efforts, expanded inventory selection, and increased brand awareness. The increase in unit sales was also driven by growth to 81.1% market population coverage as of June 30, 2022 from 79.4% as of June 30, 2021. The average selling price of our retail units sold also increased to $25,562 from $21,491 during the six months ended June 30, 2022 and 2021, respectively, due primarily to the overall appreciation in the used vehicle market compared to the six months ended June 30, 2021.
Wholesale Sales and Revenues
Three months ended June 30, 2022 Versus 2021. Wholesale sales and revenues increased by $147 million to $704 million during the three months ended June 30, 2022, compared to $557 million during the three months ended June 30, 2021. The increase in revenue was primarily driven by the acquisition of ADESA, resulting in 111,883 wholesale marketplace units sold and $108 million in wholesale revenue. Additionally, wholesale units sold increased to 55,299 from 47,052 during the three months ended June 30, 2022 and 2021, respectively, and the average selling price of our wholesale units sold increased to $12,731 during the three months ended June 30, 2022 from $11,838 during the three months ended June 30, 2021. The increase in wholesale units sold was due to acquiring more vehicles from customers, and the higher average selling price was due primarily to overall appreciation in the used vehicle market compared to the three months ended June 30, 2021.
Six months ended June 30, 2022 Versus 2021. Wholesale vehicle sales increased by $0.5 billion to $1.3 billion during the six months ended June 30, 2022, compared to $0.8 billion during the six months ended June 30, 2021. The increase in revenue was primarily driven by the acquisition of ADESA, resulting in 111,883 wholesale marketplace units sold, for a total of $108 million in wholesale revenue. Additionally, wholesale units sold increased to 105,579 from 73,092 during the six months ended June 30, 2022 and 2021, respectively, and the average selling price of our wholesale units sold increased to $12,114 during the six months ended June 30, 2022 from $10,904 during the six months ended June 30, 2021. The increase in wholesale units sold was due to acquiring more vehicles from customers, and the higher average selling price was due primarily to overall appreciation in the used vehicle market compared to the six months ended June 30, 2021.
Other Sales and Revenues
Three months ended June 30, 2022 Versus 2021. Other sales and revenues decreased by $57 million to $218 million during the three months ended June 30, 2022, compared to $275 million during the three months ended June 30, 2021. This decrease was primarily due to the decrease in gain on loan sales driven by rapidly increasing benchmark interest rates, partially offset by the impact of the increase in retail units sold and the impact of higher industry-wide vehicle prices on average loan size during the three months ended June 30, 2022.
Six months ended June 30, 2022 Versus 2021. Other sales and revenues decreased by $72 million to $408 million during the six months ended June 30, 2022, compared to $480 million during the six months ended June 30, 2021. The decrease is primarily due to the decrease in gain on loan sales driven by rapidly increasing benchmark interest rates, partially offset by the impact of the increase in retail units sold, and the impact of higher industry-wide vehicle prices on average loan size during the six months ended June 30, 2022.
Used Vehicle Gross Profit
Three months ended June 30, 2022 Versus 2021. Used vehicle gross profit decreased by $85 million to $133 million during the three months ended June 30, 2022, compared to $218 million during the three months ended June 30, 2021. Increased retail units sold was offset by a decrease in used vehicle gross profit per unit to $1,131 for the three months ended June 30, 2022
compared to $2,022 for the three months ended June 30, 2021. The per unit decrease was primarily driven by higher reconditioning and inbound transport costs and higher retail depreciation rates, partially offset by a higher ratio of customer-sourced vehicles sold during the three months ended June 30, 2022.
Six months ended June 30, 2022 Versus 2021. Used vehicle gross profit decreased by $112 million to $218 million during the six months ended June 30, 2022, compared to $330 million during the six months ended June 30, 2021. This decrease was driven primarily by a decrease in used vehicle gross profit per unit to $979 for the six months ended June 30, 2022 compared to $1,648 for the six months ended June 30, 2021, partially offset by an increase in retail units sold. The per unit decrease was primarily driven by higher acquisition and reconditioning costs and higher retail depreciation rates, partially offset by a higher ratio of customer-sourced vehicles sold compared to the six months ended June 30, 2021.
Wholesale Gross Profit
Three months ended June 30, 2022 Versus 2021. Wholesale gross profit decreased by $14 million to $45 million during the three months ended June 30, 2022, compared to $59 million during the three months ended June 30, 2021. This was primarily due to a decrease in wholesale gross profit per wholesale unit to $814 in the three months ended June 30, 2022 compared to $1,254 in the three months ended June 30, 2021, partially offset by an increase in wholesale units sold to 55,299 during the three months ended June 30, 2022 from 47,052 during the three months ended June 30, 2021, as well as $5 million from the acquisition of ADESA. The increase in wholesale units sold was primarily driven by acquiring more vehicles from customers, while the decrease in gross profit per wholesale unit was primarily driven by the difference between our wholesale acquisition price and sales price compared to the three months ended June 30, 2021.
Six months ended June 30, 2022 Versus 2021. Wholesale gross profit decreased by $12 million to $68 million during the six months ended June 30, 2022, compared to $80 million during the six months ended June 30, 2021. This decrease was driven primarily by a decrease in wholesale vehicle gross profit per wholesale unit to $644 from $1,095 in the six months ended June 30, 2022, and 2021, respectively, partially offset by an increase in wholesale units sold to 105,579 from 73,092, respectively, as well as $5 million from the acquisition of ADESA. The increase in the number of wholesale units sold was primarily due to acquiring more vehicles from customers, while the decrease in gross profit per wholesale unit was driven by the difference between our wholesale acquisition price and sales price compared to the six months ended June 30, 2021.
Other Gross Profit
Other sales and revenues consist of 100% gross margin products for which gross profit equals revenue. Therefore, changes in other gross profit and the associated drivers are identical to changes in other sales and revenues and the associated drivers.
Components of SG&A
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
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| (in millions) |
Compensation and benefits (1) | $ | 248 | | | $ | 148 | | | $ | 484 | | | $ | 274 | |
CEO Milestone Gift (2) | 4 | | | — | | | 24 | | | — | |
| Advertising | 131 | | | 119 | | | 286 | | | 219 | |
Market occupancy (3) | 24 | | | 15 | | | 47 | | | 28 | |
Logistics (4) | 71 | | | 34 | | | 127 | | | 64 | |
Other (5) | 243 | | | 154 | | | 480 | | | 282 | |
| Total | $ | 721 | | | $ | 470 | | | $ | 1,448 | | | $ | 867 | |
| Depreciation and amortization | $ | 49 | | | $ | 24 | | | $ | 86 | | | $ | 46 | |
| Share-based compensation, excluding Gift | 9 | | | 9 | | | 19 | | | 17 | |
| Total, excluding depreciation and amortization and share-based compensation | $ | 659 | | | $ | 437 | | | $ | 1,319 | | | $ | 804 | |
_________________________
(1) Compensation and benefits includes all payroll and related costs, including benefits, payroll taxes, and equity-based compensation, except those related to preparing vehicles for sale, which are included in cost of sales, and those related to the development of software products for internal use, which are capitalized to software and depreciated over the estimated useful lives of the related assets.
(2) CEO Milestone Gift includes all equity-based compensation and payroll tax costs associated with the Gift, except those Gift costs related to preparing vehicles for sale, which are included in cost of sales.
(3) Market occupancy costs includes occupancy costs of our vending machine and hubs. It excludes occupancy costs related to reconditioning vehicles which are included in cost of sales and the portion related to corporate occupancy which are included in other costs.
(4) Logistics includes fuel, maintenance and depreciation related to operating our own transportation fleet, and third-party transportation fees, except the portion related to inbound transportation, which is included in cost of sales.
(5) Other costs include all other selling, general and administrative expenses such as IT expenses, corporate occupancy, professional services and insurance, limited warranty, and title and registration.
Selling, general and administrative expenses increased by $251 million to $721 million during the three months ended June 30, 2022, compared to $470 million during the three months ended June 30, 2021, and by $581 million to $1,448 million during the six months ended June 30, 2022, compared to $867 million during the six months ended June 30, 2021. The increase was partially due to an increase in compensation and benefits by $100 million and $210 million during the three and six months ended June 30, 2022, respectively, which was primarily driven by expansion of our teams to support our growth, as well as the acquisition of ADESA.
In addition, during the three and six months ended June 30, 2022, we incurred $4 million and $24 million, respectively, of compensation expense related to the CEO Milestone Gift within selling, general and administrative expense, which is presented separately above, compared to none in the three and six months ended June 30, 2021.
The increase in selling, general and administrative expenses was also due to an increase in advertising expense of $12 million and $67 million during the three and six months ended June 30, 2022, respectively, primarily due to an increase in advertising to drive growth in units sold and vehicles acquired from customers. Market occupancy, logistics, and other expenses also increased during the three and six months ended June 30, 2022 compared to the respective prior year period primarily due to building capacity for increases in the number of units sold and in population coverage, and in preparation for future growth.
Interest Expense
Interest expense increased by $73 million to $116 million during the three months ended June 30, 2022, compared to $43 million during the three months ended June 30, 2021, and increased by $107 million to $180 million during the six months ended June 30, 2022, compared to $73 million during the six months ended June 30, 2021. The increase is primarily due to
increased interest incurred on additional senior unsecured notes issued by the Company in March 2021, August 2021, and May 2022, along with increased interest expense incurred on sale leaseback financing since June 30, 2021.
Other Expense (Income), Net
Other expense (income), net changed by $3 million to income of $3 million during the three months ended June 30, 2022 compared to income of $6 million during the three months ended June 30, 2021. Other income, net changed by $23 million to expense of $10 million during the six months ended June 30, 2022 compared to income of $13 million during the six months ended June 30, 2021. The change is primarily due to fair value adjustments on our retained beneficial interests in securitizations and purchase price adjustment receivables and the fair value adjustments on our warrants to acquire Root Class A common stock.
Non-GAAP Financial Measures
To supplement the consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we also present the following non-GAAP measures: Adjusted EBITDA, Adjusted EBITDA, excluding non-Gift share-based compensation, Adjusted EBITDA Margin, and Adjusted EBITDA Margin, excluding non-Gift share-based compensation. We historically presented EBITDA and EBITDA Margin, however we believe the presentation of Adjusted EBITDA, Adjusted EBITDA, excluding non-Gift share-based compensation, Adjusted EBITDA Margin, and Adjusted EBITDA Margin, excluding non-Gift share-based compensation in conjunction with U.S. GAAP financial measures provides investors with increased transparency into financial measures used by our management team, and it also improves investors’ understanding of our underlying operating performance and their ability to analyze our ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable U.S. GAAP financial measures.
Adjusted EBITDA, Adjusted EBITDA, excluding non-Gift share-based compensation, Adjusted EBITDA Margin, and Adjusted EBITDA Margin, excluding non-Gift share-based compensation
Adjusted EBITDA, Adjusted EBITDA, excluding non-Gift share-based compensation, Adjusted EBITDA Margin, and Adjusted EBITDA Margin, excluding non-Gift share-based compensation are supplemental measures of operating performance that do not represent and should not be considered an alternative to net (loss) income or cash flow from operations, as determined by U.S. GAAP. Adjusted EBITDA is defined as net (loss) income plus income tax expense, interest expense, other (income) expense, net, depreciation and amortization, and share-based compensation related to the CEO Milestone Gift, Following our acquisition of ADESA, we are also excluding depreciation and amortization expense which is expensed as part of cost of sales which has historically been only a small component of cost of sales. Adjusted EBITDA, excluding non-Gift share-based compensation is defined as Adjusted EBITDA plus share-based compensation unrelated to the CEO Milestone Gift. Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of total revenues. Adjusted EBITDA Margin, excluding non-Gift share-based compensation is Adjusted EBITDA, excluding non-Gift share-based compensation as a percentage of total revenues. We use Adjusted EBITDA and Adjusted EBITDA, excluding non-Gift share-based compensation to measure the operating performance of our business and Adjusted EBITDA Margin and Adjusted EBITDA Margin, excluding non-Gift share-based compensation to measure our operating performance relative to our total revenues. We believe these metrics are useful measures to us and to our investors because they exclude certain financial and capital structure items that we do not believe directly reflect our core operations and may not be indicative of our recurring operations, in part because they may vary widely across time and within our industry independent of the performance of our core operations. We believe that excluding these items enables us to more effectively evaluate our performance period-over-period and relative to our competitors. Adjusted EBITDA, Adjusted EBITDA, excluding non-Gift share-based compensation, Adjusted EBITDA Margin, and Adjusted EBITDA Margin, excluding non-Gift share-based compensation may not be comparable to similarly titled measures provided by other companies due to potential differences in methods of calculations. A reconciliation of Adjusted EBITDA and Adjusted EBITDA, excluding non-Gift share-based compensation to net (loss) income, which is the most directly
comparable U.S. GAAP measure, and calculation of Adjusted EBITDA Margin and Adjusted EBITDA Margin, excluding non-Gift share-based compensation is as follows:
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
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| (dollars in millions) |
| Net (loss) income | $ | (439) | | | $ | 45 | | | $ | (945) | | | $ | (37) | |
| Income tax provision | 1 | | | — | | | 1 | | | — | |
| Interest expense | 116 | | | 43 | | | 180 | | | 73 | |
| Other (income) expense, net | (3) | | | (6) | | | 10 | | | (13) | |
| Depreciation and amortization expense in cost of sales | 27 | | | 6 | | | 35 | | | 11 | |
| Depreciation and amortization expense in SG&A | 49 | | | 24 | | | 86 | | | 46 | |
| CEO Milestone Gift in cost of sales | 6 | | | — | | | 14 | | | — | |
| CEO Milestone Gift in SG&A | 4 | | | — | | | 24 | | | — | |
Adjusted EBITDA (1) | $ | (239) | | | $ | 112 | | | $ | (595) | | | $ | 80 | |
| Share-based compensation, excluding Gift | 9 | | | 9 | | | 19 | | | 17 | |
Adjusted EBITDA, excluding non-Gift share-based compensation (1) | $ | (230) | | | $ | 121 | | | $ | (576) | | | $ | 97 | |
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| Total revenues | $ | 3,884 | | | $ | 3,336 | | | $ | 7,381 | | | $ | 5,581 | |
Adjusted EBITDA Margin (2) | (6.2) | % | | 3.4 | % | | (8.1) | % | | 1.4 | % |
Adjusted EBITDA Margin, excluding non-Gift share-based compensation (2) | (5.9) | % | | 3.6 | % | | (7.8) | % | | 1.7 | % |
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(1) For each of the three and six months ended June 30, 2022, includes $14 of expenses associated with the previously announced workforce reduction.
(2) For the three and six months ended June 30, 2022, includes 0.4% and 0.2%, respectively, of expenses associated with the previously announced workforce reduction.
Liquidity and Capital Resources
General
We generate cash from the sale of used retail vehicles, the sale of wholesale vehicles, and proceeds from the sale of finance receivables originated in connection with the sale of used vehicles. We generate additional cash flows through our financing activities including our short-term revolving inventory and finance receivable facilities, real estate and equipment financing, the issuance of long-term notes, and new issuances of equity. Historically, cash generated from financing activities has funded growth and expansion into new markets and strategic initiatives and we expect this to continue in the future.
Our ability to service our debt and fund working capital, capital expenditures, and business development efforts will depend on our ability to generate cash from operating and financing activities, which is subject to our future operating performance, as well as to general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our future capital requirements will depend on many factors, including our rate of revenue growth, our construction of IRCs and vending machines, the timing and extent of our spending to support our technology and software development efforts, and increased population coverage.
We had the following liquidity resources available as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| June 30,
2022 | | December 31,
2021 |
| | | |
| (in millions) |
| Cash and cash equivalents | $ | 1,047 | | | $ | 403 | |
Availability under short-term revolving facilities (1) | 1,603 | | | 438 | |
| | | |
| Committed liquidity resources available | $ | 2,650 | | | $ | 841 | |
| Unpledged vehicle inventory not included above | — | | | 665 | |
Unpledged real estate not included above (2) | 1,972 | | | 677 | |
| Unpledged beneficial interests in securitizations | 124 | | | 100 | |
| Total liquidity resources | $ | 4,746 | | | $ | 2,283 | |
_________________________
(1) Based on pledging all eligible vehicles and finance receivables under the available capacity in the Floor Plan Facility and Finance Receivable Facilities, excluding the impact to restricted cash requirements.
(2) Total unpledged gross real estate assets minus committed sale leasebacks. Includes $1.1 billion of ADESA unpledged real estate assets based on preliminary valuations.
Our total liquidity resources is composed of cash and equivalents, availability under existing credit facilities, and additional unpledged assets, including vehicle inventory, finance receivables, real estate, and securities, on our balance sheet that can be financed using traditional asset-based financing sources.
Cash and cash equivalents includes cash deposits and highly liquid investment instruments with original maturities of three months or less, such as money market funds.
Availability under short-term revolving facilities is the available amount we can borrow under our existing vehicle inventory floor plan and finance receivable facilities based on the pledgable value of vehicle inventory and finance receivables on our balance sheet on the period end date. Availability under short-term revolving facilities is distinct from the total commitment amount of these facilities because it represents the currently borrowable amount, rather than committed future amounts that could be borrowed to finance future additional assets.
As of June 30, 2022 and December 31, 2021, the short-term revolving facilities had a total commitment of $5.6 billion and $4.3 billion, an outstanding balance of $1.1 billion and $2.1 billion, and unused capacity of $4.5 billion and $2.2 billion, respectively.
Availability under real estate agreements is the available amount we can borrow under our existing real estate financing agreements based on the value of existing real estate on our balance sheet. From time to time, we may enter into committed real estate financing agreements that allow for future pledging of real estate assets on a flexible timeline. We began using committed real estate financing agreements in 2017 and may do so in the future.
Unpledged vehicle inventory and finance receivables is the value of vehicle inventory and finance receivables on our balance sheet on the period end date beyond that covered by committed financing agreements.
Unpledged real estate assets include real estate acquired as part of the acquisition of ADESA's U.S. physical auction business, IRC, vending machine, and hub real estate assets that have not been sold and are not pledged on the period end date. Since our first sale-leaseback transaction in 2017, we have historically had flexible access to real estate financing and expect to continue to use various forms of real estate financing in the future.
Unpledged beneficial interests in securitizations includes retained beneficial interests in securitizations that have not been previously pledged or sold. We historically have financed the majority of our retained beneficial interests in securitizations and expect to continue to do so in the future.
To optimize our cost of capital, in any given period we may choose not to maximize borrowings on our short-term revolving facilities, maximize revolving commitment size, or immediately sale-leaseback or pledge real estate and retained
beneficial interests in securitizations. This has the benefit of reducing interest expense and debt issuance costs and providing flexibility to minimize financing costs over time.
We consider our total liquidity resources as an input into our planning. In general, changes in total liquidity resources fall into two broad categories: changes due to current business operations and changes due to investments in automotive retail assets.
Changes in liquidity due to current business operations include Adjusted EBITDA, excluding non-Gift share-based compensation, non-real estate capital expenditures, including technology, furniture, fixtures, and equipment, and changes in traditional working capital, including accounts receivable, accounts payable, accrued expenses, and other miscellaneous assets and liabilities.
In the ordinary course of business, we sponsor and engage in securitization transactions to sell our finance receivables to a diverse pool of investors. These securitizations involve unconsolidated variable interest entities in which we retain at least 5% of the credit risk of the underlying finance receivable by holding at least 5% of the notes and certificates issued by these entities. We are exposed to market risk in the securitization market. See Note 9 — Securitizations and Variable Interest Entities, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, for further discussion regarding our transactions with unconsolidated variable interest entities.
In addition, as a growing automotive retailer, we also invest in and generate several types of automotive retail assets, including vehicle inventory, finance receivables, retained beneficial interests in securitizations, and real estate. To maximize capital efficiency, we generally seek to finance these assets with matched sources of asset-based financing, including short-term revolving facilities for vehicle inventory and finance receivables, beneficial interests financing for retained beneficial interests in securitizations, and sale-leaseback or other real estate financing for IRCs and vending machines. We have historically used these sources of financing to finance our investment in these assets and expect to continue to do so in the future.
As of June 30, 2022 and December 31, 2021, our outstanding principal amount of indebtedness, including finance leases, was $8.0 billion and $5.4 billion, respectively, summarized in the table below. See Note 10 — Debt Instruments and Note 16 — Leases included in Part I, Item 1, Financial Statements of this Quarterly Report on Form 10-Q for further information on our debt and finance leases.
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| June 30,
2022 | | December 31,
2021 |
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| (in millions) |
| Asset-Based Financing: | | | |
| Inventory | $ | 1,118 | | | $ | 1,877 | |
| Finance receivables and beneficial interests | 314 | | | 458 | |
Transportation fleet(1) | 376 | | | 212 | |
Real estate(2) | 490 | | | 450 | |
| Total asset-based financing | 2,298 | | | 2,997 | |
| Senior Notes | 5,725 | | | 2,450 | |
| Total debt | 8,023 | | | 5,447 | |
Less: unamortized debt issuance costs(3) | (88) | | | (34) | |
| Total debt, net | $ | 7,935 | | | $ | 5,413 | |
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(1) Amount includes notes payable and finance leases.
(2) Amount includes real estate financing and notes payable.
(3) The unamortized debt issuance costs related to long-term debt are presented as a reduction of the carrying amount of the corresponding liabilities on our consolidated balance sheets. Unamortized debt issuance costs related to revolving debt agreements are presented within other assets on our consolidated balance sheets and not included here.
On April 26, 2022, we completed an equity offering of 15.6 million shares of Class A common stock for net proceeds of $1.2 billion. Also, on May 6, 2022, we issued $3.275 billion in senior unsecured notes due 2030. We intend to use the net proceeds from the Class A common stock offering for general corporate purposes and to pay any costs, fees and expenses incurred by us in connection with the offering. We used the net proceeds from the issuance and sale of the 2030 Notes (a) to
finance the $2.2 billion ADESA acquisition and other ancillary transactions to occur in connection therewith, and to pay related fees and expenses in connection therewith and (b) for working capital, capital expenditures and other general corporate purposes.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the six months ended June 30, 2022 and 2021: | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| | | |
| (in millions) |
| Net cash used in operating activities | $ | (487) | | | $ | (1,139) | |
| Net cash used in investing activities | (2,525) | | | (174) | |
| Net cash provided by financing activities | 3,573 | | | 1,294 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 561 | | | (19) | |
| Cash, cash equivalents and restricted cash at beginning of period | 636 | | | 329 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 1,197 | | | $ | 310 | |
Operating Activities
Our primary sources of operating cash flows result from the sales of used retail vehicles, wholesale vehicles, loans we originate, and ancillary products. Our primary uses of cash from operating activities are purchases of inventory, cash used to acquire customers, and personnel-related expenses. Cash used in operating activities was $487 million and $1.1 billion during the six months ended June 30, 2022 and 2021, respectively, a decrease of $652 million, primarily due to decreases in cash used to acquire vehicle inventory, partially offset by increased net loss as a result of increased selling, general and administrative expenses and reconditioning costs.
Investing Activities
Our primary use of cash for investing activities is purchases of property and equipment to expand our operations. Cash used in investing activities was $2.5 billion and $174 million during the six months ended June 30, 2022 and 2021, respectively, an increase of $2.4 billion, primarily driven by our acquisition of the U.S. physical auction business of ADESA for approximately $2.2 billion, together with an increase in purchases of property and equipment partially offset by increases in principal payments received on, and proceeds from the sale of, beneficial interests in securitizations.
Financing Activities
Cash flows from financing activities primarily relate to our short and long-term debt activity and proceeds from equity issuances which have been used to provide working capital and for general corporate purposes, including paying down our short-term revolving facilities. Cash provided by financing activities was $3.6 billion and $1.3 billion during the six months ended June 30, 2022 and 2021, respectively, an increase of $2.3 billion. The change primarily relates to increased net proceeds from long-term debt primarily from the issuance of our $3.275 billion Senior Notes in May 2022 along with proceeds from the issuance of Class A common stock during the six months ended June 30, 2022, partially offset by decreased net proceeds from short-term revolving facilities.
Contractual Obligations and Commitments
As of June 30, 2022, there have been no material changes to the contractual obligations or commitments previously disclosed in our most recent Annual Report on Form 10-K, filed February 24, 2022 other than the issuance of $3.275 billion in Senior Notes in May 2022 and the purchase obligations for services of $181 million over the next seven years.
Fair Value Measurements
We report money market securities, certain receivables, warrants to acquire Root Class A common stock and beneficial interests in securitizations at fair value. See Note 18 — Fair Value of Financial Instruments, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q, which is incorporated into this item by reference.
Critical Accounting Estimates
Except for the following, there have been no material changes to our critical accounting estimates from those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K, filed on February 24, 2022.
Business Combination Purchase Price Allocation
The purchase price of an acquisition is allocated to the identifiable assets acquired and liabilities assumed based on their fair values at the date of acquisition, with the excess purchase price being recorded as goodwill. The purchase price allocation for ADESA is preliminary and will continue to be assessed during the measurement period, which may be up to one year from the acquisition date, with any adjustments being recorded against goodwill. See Note 3 — Business Combinations, included in Part I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for a description of the preliminary status of the accounting for the ADESA acquisition.
The allocation of purchase price to the tangible and identifiable intangible assets acquired is specifically complex because of the significant estimates and assumptions involved in determining their fair values. Due to this higher degree of complexity, we obtained the assistance of outside valuation experts in the allocation of purchase price to the tangible and identifiable intangible assets acquired. While outside valuation experts were used, management has the ultimate responsibility for the valuation methods, models and inputs used and the resulting purchase price allocation. Critical estimates used in valuing tangible assets associated with the ADESA acquisition include, but are not limited to, the similarity of the acquired real property to market comparable transactions, costs of similar personal property in new condition, and economic obsolescence rates. Critical estimates used in valuing identifiable intangible assets associated with the ADESA acquisition include, but are not limited to, revenues and attrition rate.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as "anticipate," "believe," "envision," "estimate," "expect," "intend," "may," "plan," "predict," "project," "target," "potential," "will," "would," "could," "should," "continue," "ongoing," "contemplate," and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:
•future financial position;
•business strategy;
•budgets, projected costs, and plans;
•future industry growth;
•financing sources;
•the impact of litigation, government inquiries, and investigations; and
•all other statements regarding our intent, plans, beliefs, or expectations or those of our directors or officers.
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:
•our acquisition of ADESA from KAR Auction Services, Inc., including the ability to successfully integrate the operations of the acquired businesses;
•our history of losses and ability to achieve or maintain profitability in the future;
•our ability to effectively manage our rapid growth;
•our ability to maintain customer service quality and reputational integrity and enhance our brand;
•our limited operating history;
•the seasonal and other fluctuations in our quarterly operating results, including as a result of COVID-19 and other future epidemics and public health crises;
•our relationship with DriveTime and its affiliates;
•our minority equity investment in Root, Inc.;
•our management’s accounting judgments and estimates, as well as changes to accounting policies;
•our ability to compete in the highly competitive industry in which we participate;
•the changes in prices of new and used vehicles;
•our ability to acquire desirable inventory;
•our ability to sell our inventory expeditiously;
•our access to structured finance, securitization, or derivative markets at competitive rates and in sufficient amounts;
•our dependence on the sale of automotive finance receivables for a substantial portion of our gross profits;
•our exposure to credit losses and prepayments on our interests in automotive finance receivables;
•our reliance on credit data for the automotive finance receivables we sell;
•our ability to successfully market and brand our business;
•our reliance on internet searches to drive traffic to our website;
•our ability to comply with the laws and regulations to which we are subject;
•the changes in the laws and regulations to which we are subject;
•our ability to comply with the Telephone Consumer Protection Act of 1991;
•the evolution of regulation of the internet and e-commerce;
•our ability to grow complementary product and service offerings;
•our ability to address the shift to mobile device technology by our customers;
•risks related to the larger automotive ecosystem;
•the geographic concentration where we provide services and recondition and store vehicle inventory;
•our ability to obtain affordable inventory insurance;
•our ability to raise additional capital;
•our ability to maintain adequate relationships with the lenders that finance our vehicle inventory purchases;
•the representations we make with regard to our finance receivables we sell;
•our reliance on our proprietary credit scoring model in the forecasting of loss rates;
•our reliance on internal and external logistics to transport our vehicle inventory;
•the risks associated with the construction and operation of our IRCs, hubs and vending machines, including our dependence on one supplier for construction and maintenance for our vending machines;
•our ability to finance IRCs and vending machines;
•our ability to protect the personal information and other data that we collect, process, and store;
•disruptions in availability and functionality of our website;
•our ability to protect our intellectual property, technology, and confidential information;
•our ability to defend against claims that our employees, consultants or advisors have wrongfully used or disclosed trade secrets or intellectual property;
•our ability to defend against intellectual property disputes;
•our ability to comply with the terms of open source licenses;
•conditions affecting automotive manufacturers, including manufacturer recalls;
•our reliance on third party technology to complete critical business functions;
•our dependence on key personnel to operate our business;
•the resources required to comply with public company obligations;
•the diversion of management’s attention and other disruptions associated with potential future acquisitions;
•the restrictions that could limit the flexibility in operating our business imposed by the covenants contained in the indentures governing our Senior Notes;
•the legal proceedings to which we may be subject in the ordinary course of business;
•risks relating to our corporate structure and tax receivable agreements; and
•other factors disclosed in the section titled "Risk Factors" in our most recent Annual Report on Form 10-K and other filings we make with the Securities and Exchange Commission.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Report. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.