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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File Number: 001-38073
CARVANA CO.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | 81-4549921 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
300 E. Rio Salado Parkway | Tempe | Arizona | 85281 |
(Address of principal executive offices) | (Zip Code) |
(602) 852-6604
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Stock, Par Value $0.001 Per Share | CVNA | New York Stock Exchange |
Preferred Stock Purchase Rights | — | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of October 30, 2023, the registrant had 114,030,364 shares of Class A common stock outstanding and 85,619,471 shares of Class B common stock outstanding.
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | |
| | Page |
PART I. | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
| Unaudited Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 | |
| Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 | |
| Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) for the Three and Nine Months Ended September 30, 2023 and 2022 | |
| Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |
Item 4. | Controls and Procedures | |
| | |
PART II. | OTHER INFORMATION | |
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | Exhibits | |
| | |
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except number of shares, which are reflected in thousands, and par values)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 544 | | | $ | 434 | |
Restricted cash | 72 | | | 194 | |
Accounts receivable, net | 318 | | | 253 | |
Finance receivables held for sale, net | 650 | | | 1,334 | |
| | | |
Vehicle inventory | 1,085 | | | 1,876 | |
Beneficial interests in securitizations | 371 | | | 321 | |
Other current assets, including $0 and $6, respectively, due from related parties | 146 | | | 182 | |
Total current assets | 3,186 | | | 4,594 | |
Property and equipment, net | 3,051 | | | 3,244 | |
Operating lease right-of-use assets, including $11 and $14, respectively, from leases with related parties | 473 | | | 536 | |
Intangible assets, net | 56 | | | 70 | |
| | | |
Other assets, including $0 and $1, respectively, due from related parties | 259 | | | 254 | |
Total assets | $ | 7,025 | | | $ | 8,698 | |
LIABILITIES & STOCKHOLDERS' DEFICIT | | | |
Current liabilities: | | | |
Accounts payable and accrued liabilities, including $1 and $16, respectively, due to related parties | $ | 681 | | | $ | 777 | |
Short-term revolving facilities | 429 | | | 1,534 | |
Current portion of long-term debt | 200 | | | 201 | |
Other current liabilities, including $3 and $4, respectively, from leases with related parties | 85 | | | 80 | |
Total current liabilities | 1,395 | | | 2,592 | |
Long-term debt, excluding current portion | 5,305 | | | 6,574 | |
Operating lease liabilities, excluding current portion, including $7 and $9, respectively, from leases with related parties | 450 | | | 507 | |
Other liabilities, including $11 and $0, respectively, due to related parties | 77 | | | 78 | |
Total liabilities | 7,227 | | | 9,751 | |
Commitments and contingencies (Note 17) | | | |
Stockholders' deficit: | | | |
Preferred stock, $0.01 par value - 50,000 shares authorized; none issued and outstanding as of September 30, 2023 and December 31, 2022 | — | | | — | |
Class A common stock, $0.001 par value - 500,000 shares authorized; 113,975 and 106,037 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | — | | | — | |
Class B common stock, $0.001 par value - 125,000 shares authorized; 85,619 and 82,900 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | — | | | — | |
Additional paid-in capital | 1,851 | | | 1,558 | |
| | | |
Accumulated deficit | (1,512) | | | (2,076) | |
Total stockholders' equity (deficit) attributable to Carvana Co. | 339 | | | (518) | |
Non-controlling interests | (541) | | | (535) | |
Total stockholders' deficit | (202) | | | (1,053) | |
Total liabilities & stockholders' deficit | $ | 7,025 | | | $ | 8,698 | |
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)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Sales and operating revenues: | | | | | | | |
Retail vehicle sales, net | $ | 1,949 | | | $ | 2,492 | | | $ | 5,737 | | | $ | 8,186 | |
Wholesale sales and revenues, including $4, $6, $14 and $27, respectively, from related parties | 610 | | | 697 | | | 2,005 | | | 1,976 | |
Other sales and revenues, including $35, $39, $104 and $137, respectively, from related parties | 214 | | | 197 | | | 605 | | | 605 | |
Net sales and operating revenues | 2,773 | | | 3,386 | | | 8,347 | | | 10,767 | |
Cost of sales, including $1, $2, $3 and $20, respectively, to related parties | 2,291 | | | 3,027 | | | 7,025 | | | 9,714 | |
Gross profit | 482 | | | 359 | | | 1,322 | | | 1,053 | |
Selling, general and administrative expenses, including $8, $7, $26 and $20, respectively, to related parties | 433 | | | 656 | | | 1,357 | | | 2,104 | |
Interest expense | 153 | | | 153 | | | 467 | | | 333 | |
Gain on debt extinguishment | (878) | | | — | | | (878) | | | — | |
Other (income) expense, net | 4 | | | 58 | | | (1) | | | 68 | |
Net income (loss) before income taxes | 770 | | | (508) | | | 377 | | | (1,452) | |
Income tax provision | 29 | | | — | | | 27 | | | 1 | |
Net income (loss) | 741 | | | (508) | | | 350 | | | (1,453) | |
Net loss attributable to non-controlling interests | (41) | | | (225) | | | (214) | | | (672) | |
Net income (loss) attributable to Carvana Co. | $ | 782 | | | $ | (283) | | | $ | 564 | | | $ | (781) | |
| | | | | | | |
Net earnings (loss) per share of Class A common stock - basic | $ | 7.05 | | | $ | (2.67) | | | $ | 5.24 | | | $ | (7.88) | |
Net earnings (loss) per share of Class A common stock - diluted | $ | 3.60 | | | $ | (2.67) | | | $ | 1.78 | | | $ | (7.88) | |
| | | | | | | |
Weighted-average shares of Class A common stock outstanding - basic (1) | 110,844 | | | 105,857 | | | 107,692 | | | 99,134 | |
Weighted-average shares of Class A common stock outstanding - diluted | 205,958 | | | 105,857 | | | 197,124 | | | 99,134 | |
(1) Weighted-average shares of Class A common stock outstanding - basic, 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 (DEFICIT)
(Unaudited)
(In millions, except number of shares, which are reflected in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
Issuance of Class A common stock, net of underwriters' discounts and commissions and offering expenses | 15,625 | | | — | | | — | | | — | | | 1,227 | | | — | | | — | | | 1,227 | |
Adjustments to the non-controlling interests related to equity offering | — | | | — | | | — | | | — | | | (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 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (283) | | | (225) | | | (508) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Contribution of Class A common stock from related party | (14) | | | — | | | — | | | — | | | — | | | — | | | — | | | |
Issuance of Class A common stock to settle vested restricted stock units | 142 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
Options exercised | 15 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
Equity-based compensation | — | | | — | | | — | | | — | | | 18 | | | — | | | — | | | 18 | |
Balance, September 30, 2022 | 105,932 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 1,544 | | | $ | (1,270) | | | $ | 100 | | | $ | 374 | |
CARVANA CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (Continued)
(Unaudited)
(In millions, except number of shares, which are reflected in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | | | | | | | |
| Shares | | Amount | | Shares | | Amount | | Additional Paid-in Capital | | Accumulated Deficit | | Non-controlling Interests | | Total Stockholders' Deficit |
Balance, December 31, 2022 | 106,037 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 1,558 | | | $ | (2,076) | | | $ | (535) | | | $ | (1,053) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (160) | | | (126) | | | (286) | |
Exchanges of LLC Units | 14 | | | — | | | — | | | — | | | 1 | | | — | | | (1) | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Contribution of Class A common stock from related party | (16) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of Class A common stock to settle vested restricted stock units | 39 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | (30) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Options exercised | 3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Equity-based compensation | — | | | — | | | — | | | — | | | 17 | | | — | | | — | | | 17 | |
Balance, March 31, 2023 | 106,047 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 1,576 | | | $ | (2,236) | | | $ | (662) | | | $ | (1,322) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (58) | | | (47) | | | (105) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Contribution of Class A common stock from related party | (16) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of Class A common stock to settle vested restricted stock units | 415 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Issuance of Class A common stock under ESPP | 20 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | |
Options exercised | 3 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Equity-based compensation | — | | | — | | | — | | | — | | | 23 | | | — | | | — | | | 23 | |
Balance, June 30, 2023 | 106,469 | | | $ | — | | | 82,900 | | | $ | — | | | $ | 1,597 | | | $ | (2,294) | | | $ | (709) | | | $ | (1,406) | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 782 | | | (41) | | | 741 | |
Issuance of Class A common stock, net of underwriters' discounts and commissions and offering expenses | 7,157 | | | — | | | — | | | — | | | 327 | | | — | | | — | | | 327 | |
Issuance of Class B common stock and LLC Units | — | | | — | | | 2,721 | | | — | | | — | | | — | | | 126 | | | 126 | |
Adjustment to non-controlling interests related to equity offerings | — | | | — | | | — | | | — | | | (83) | | | — | | | 83 | | | — | |
Exchanges of LLC Units | 17 | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | |
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 | (17) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Class A common stock as restricted stock awards and to settle vested restricted stock units | 344 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes | — | | | — | | | — | | | — | | | (10) | | | — | | | — | | | (10) | |
Options exercised | 5 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Equity-based compensation | — | | | — | | | — | | | — | | | 20 | | | — | | | — | | | 20 | |
Balance, September 30, 2023 | 113,975 | | | $ | — | | | 85,619 | | | $ | — | | | $ | 1,851 | | | $ | (1,512) | | | $ | (541) | | | $ | (202) | |
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)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Cash Flows from Operating Activities: | | | |
Net income (loss) | $ | 350 | | | $ | (1,453) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization expense | 270 | | | 179 | |
Equity-based compensation expense | 52 | | | 57 | |
Loss on disposal of property and equipment | 8 | | | 3 | |
Gain on debt extinguishment | (878) | | | — | |
Payment-in-kind interest expense | 46 | | | — | |
Provision for bad debt and valuation allowance | 34 | | | 11 | |
Amortization and write-off of debt issuance costs and debt premium | 20 | | | 20 | |
Unrealized (gain) loss on warrants to acquire Root's Class A common stock | (3) | | | 77 | |
Unrealized (gain) loss on beneficial interests in securitization | (12) | | | 1 | |
| | | |
Changes in finance receivable related assets: | | | |
Originations of finance receivables | (4,509) | | | (5,690) | |
Proceeds from sale of finance receivables, net | 5,207 | | | 5,628 | |
Gain on loan sales | (360) | | | (361) | |
| | | |
Principal payments received on finance receivables held for sale | 160 | | | 146 | |
Other changes in assets and liabilities: | | | |
Vehicle inventory | 777 | | | 638 | |
Accounts receivable | (73) | | | 40 | |
Other assets | 27 | | | (75) | |
Accounts payable and accrued liabilities | (84) | | | 155 | |
Operating lease right-of-use assets | 63 | | | (132) | |
Operating lease liabilities | (52) | | | 178 | |
Other liabilities | (1) | | | (7) | |
Net cash provided by (used in) operating activities | 1,042 | | | (585) | |
Cash Flows from Investing Activities: | | | |
Purchases of property and equipment | (69) | | | (451) | |
Proceeds from disposal of property and equipment | 58 | | | — | |
Payments for acquisitions, net of cash acquired | (7) | | | (2,189) | |
Principal payments received on and proceeds from sale of beneficial interests | 40 | | | 72 | |
Net cash provided by (used in) investing activities | 22 | | | (2,568) | |
Cash Flows from Financing Activities: | | | |
Proceeds from short-term revolving facilities | 5,756 | | | 10,596 | |
Payments on short-term revolving facilities | (6,861) | | | (12,074) | |
Proceeds from issuance of long-term debt | 110 | | | 3,435 | |
Payments on long-term debt | (470) | | | (111) | |
| | | |
Payments of debt issuance costs | (52) | | | (75) | |
Net proceeds from issuance of Class A common stock and LLC Units | 453 | | | 1,227 | |
Proceeds from equity-based compensation plans | — | | | 4 | |
Tax withholdings related to restricted stock units and awards | (12) | | | (8) | |
Net cash (used in) provided by financing activities | (1,076) | | | 2,994 | |
Net decrease in cash, cash equivalents and restricted cash | (12) | | | (159) | |
Cash, cash equivalents and restricted cash at beginning of period | 628 | | | 636 | |
Cash, cash equivalents and restricted cash at end of period | $ | 616 | | | $ | 477 | |
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.", and, 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 transaction, including financing their purchase, trading in their current vehicle, and purchasing complementary products such as vehicle service contracts ("VSC"), auto insurance, 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 Secured Notes and Senior Unsecured Notes (each as defined in Note 10 — Debt Instruments) which were issued by Carvana Co. and are guaranteed by its and Carvana Group's existing domestic restricted subsidiaries, excluding, in the case of the Senior Unsecured Notes, ADESA US Auction, LLC ("ADESA"), and its 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 (Deficit), 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 September 30, 2023, Carvana Co. owned approximately 56.6% of Carvana Group and the LLC Unitholders (as defined in Note 11 — Stockholders' Equity (Deficit)) owned the remaining 43.4%.
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 23, 2023.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of September 30, 2023, results of operations and changes in stockholder's equity (deficit) for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. 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
The Company has incurred losses in prior periods and expects to incur additional losses in the future as it continues to shift priorities to focus on driving profitability through operating efficiency and reducing expenses. Historically, the Company's capital and liquidity needs were primarily satisfied through its debt and equity financings, operating cash flows, Floor Plan Facility, and Finance Receivable Facilities (each as defined below). During the three months ended September 30, 2023, the Company (i) received net cash proceeds of $327 million from its "at-the-market offering" program and $126 million from its private placement of Class A Units and Class B common stock to the Garcia Parties; (ii) launched and closed an offer to exchange its Senior Unsecured Notes for new Senior Secured Notes that significantly reduced near-term cash interest expense and total debt outstanding; and (iii) amended two revolving credit facilities to fund certain finance receivables originated by the Company to increase the line of credit of one facility from $300 million to $500 million and extend the maturity date of the other facility to September 18, 2024. On November 1, 2023, the Company resized the Floor Plan Facility to $1.5 billion and extended its maturity date to April 30, 2025. Management believes that current working capital, cash flows from operations, and expected continued or new financing arrangements will be 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.
Recently Issued But Not Yet Adopted Accounting Standards
The Company assessed all Accounting Standards Updates issued but not yet adopted and determined they are not relevant to the Company or are not expected to have a material impact upon adoption.
NOTE 3 — BUSINESS COMBINATIONS
Acquisition of ADESA U.S. Physical Auction Business
On May 9, 2022, the Company completed its acquisition of 100% of the equity interests in the U.S. physical auction business of ADESA from KAR Auction Services, Inc. for approximately $2.2 billion in cash (the "ADESA Acquisition"). Proceeds from the issuance and sale of the 2030 Senior Unsecured Notes (as defined below) were used to fund the acquisition. The acquisition included 56 auction 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.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The following table summarizes the allocation of the purchase price consideration to identifiable assets acquired and liabilities assumed as of December 31, 2022:
| | | | | |
| Purchase Price Allocation |
| (in millions) |
Assets Acquired | |
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 | |
| |
Liabilities Assumed | |
Current liabilities | 233 | |
Operating lease liabilities | 167 | |
| |
Total Liabilities Assumed | 400 | |
| |
Net Assets Acquired | 1,357 | |
Purchase price consideration | 2,195 | |
Goodwill | $ | 838 | |
Identifiable intangible assets acquired consist of the following:
| | | | | | | | | | | |
| Fair Value | | Useful Life |
Customer relationships | $ | 50 | | | 10 years |
Developed technology | $ | 29 | | | 3 years |
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 forecasted 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. As of September 30, 2023, the remaining weighted-average amortization period for the intangible assets acquired was approximately 5.8 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 and nine months ended September 30, 2023, the Company recognized $217 million and $651 million, respectively, of wholesale sales and revenues, $195 million and $577 million, respectively, of cost of sales, and a net loss of $21 million and $56 million, respectively, from ADESA operations, which includes $30 million and $92 million, respectively, of depreciation and amortization, including acquired intangible assets amortization expense of $3 million and $11 million, respectively.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
For the three and nine months ended September 30, 2022, the Company recognized $193 million and $301 million of wholesale sales and revenues, respectively, $180 million and $283 million of cost of sales, respectively, and a net loss of $36 million and $57 million, respectively, from ADESA operations, which includes $31 million and $51 million, respectively, of depreciation and amortization, including acquired intangible assets amortization expense of $6 million and $10 million, respectively.
The following unaudited pro forma combined results of operations information for the three and nine months ended September 30, 2022 have been prepared as if the ADESA Acquisition occurred on January 1, 2021:
| | | | | | | | | | | |
| Unaudited |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | | |
| (in millions) |
Revenues | $ | 3,386 | | | $ | 11,066 | |
Net loss | (508) | | | (1,583) | |
Net loss attributable to non-controlling interests | (225) | | | (703) | |
Net loss attributable to Carvana Co. | $ | (283) | | | $ | (880) | |
| | | |
Net loss per share of Class A common stock - basic and diluted | $ | (2.67) | | | $ | (8.32) | |
Weighted-average shares of Class A common stock - basic and diluted | 105,857 | | | 105,774 | |
The unaudited pro forma combined results of operations information reflect the following pro forma adjustments:
| | | | | | | | | | | |
| Unaudited |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | | |
| (in millions) |
Interest expense | $ | — | | | $ | 123 | |
Lease expense | — | | | 5 | |
Depreciation and amortization expense | — | | | 13 | |
Intercompany revenues and cost of sales | — | | | (7) | |
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.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
NOTE 4 — PROPERTY AND EQUIPMENT, NET
The following table summarizes property and equipment, net as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| | | |
| (in millions) |
Land and site improvements | $ | 1,331 | | | $ | 1,331 | |
Buildings and improvements | 1,339 | | | 1,267 | |
Transportation fleet | 587 | | | 673 | |
Software | 281 | | | 245 | |
Furniture, fixtures and equipment | 140 | | | 158 | |
Total property and equipment excluding construction in progress | 3,678 | | | 3,674 | |
Less: accumulated depreciation and amortization on property and equipment | (707) | | | (564) | |
Property and equipment excluding construction in progress, net | 2,971 | | | 3,110 | |
Construction in progress | 80 | | | 134 | |
Property and equipment, net | $ | 3,051 | | | $ | 3,244 | |
Depreciation and amortization expense on property and equipment was $95 million and $100 million for the three months ended September 30, 2023 and 2022, respectively, of which $40 million and $51 million were recorded to selling, general and administrative expense, respectively, $13 million were capitalized to vehicle inventory during each of the three months ended September 30, 2023 and 2022, and $42 million and $36 million were recorded to cost of sales, respectively, including $16 million and $13 million previously capitalized to vehicle inventory, respectively.
Depreciation and amortization expense on property and equipment was $294 million and $238 million for the nine months ended September 30, 2023 and 2022, respectively, of which $126 million and $132 million were recorded to selling, general and administrative expense, respectively, $38 million and $34 million were capitalized to vehicle inventory, respectively, and $130 million and $72 million were recorded to cost of sales, respectively, including $53 million and $31 million previously capitalized to vehicle inventory, respectively.
NOTE 5 — INTANGIBLE ASSETS
The following table summarizes intangible assets, net as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | |
| | September 30, 2023 | | December 31, 2022 |
| | | | |
| | (in millions) |
Intangible assets: | | | | |
Customer relationships | | $ | 50 | | | $ | 50 | |
Developed technology | | 41 | | | 41 | |
Non-compete agreements | | — | | | 1 | |
Intangible assets, acquired cost | | 91 | | | 92 | |
Less: accumulated amortization | | (35) | | | (22) | |
Intangible assets, net | | $ | 56 | | | $ | 70 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Amortization expense was $5 million and $6 million during the three months ended September 30, 2023 and 2022, respectively, and $13 million and $10 million during the nine months ended September 30, 2023 and 2022, respectively. As of
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
September 30, 2023, the remaining weighted-average amortization period for definite-lived intangible assets was approximately 5.3 years. The anticipated annual amortization expense to be recognized in future years as of September 30, 2023, is as follows:
| | | | | |
| Expected Future Amortization |
| (in millions) |
Remainder of 2023 | $ | 4 | |
2024 | 18 | |
2025 | 14 | |
2026 | 7 | |
2027 | 5 | |
| |
Thereafter | 8 | |
Total | $ | 56 | |
NOTE 6 — ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES
The following table summarizes accounts payable and other accrued liabilities as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| | | |
| (in millions) |
Accounts payable, including $1 and $16, respectively, due to related parties | $ | 251 | | | $ | 232 | |
Sales taxes and vehicle licenses and fees | 91 | | | 76 | |
Accrued compensation and benefits | 64 | | | 65 | |
Reserve for returns and cancellations | 60 | | | 60 | |
Customer deposits | 31 | | | 23 | |
Income tax liability | 27 | | | — | |
Accrued interest expense (1) | 10 | | | 99 | |
Accrued advertising costs | 3 | | | 7 | |
Accrued property and equipment | 2 | | | 10 | |
Other accrued liabilities | 142 | | | 205 | |
Total accounts payable and other accrued liabilities | $ | 681 | | | $ | 777 | |
| | | |
(1) As discussed in Note 10 — Debt Instruments, accrued payment-in-kind ("PIK") interest is included in long-term debt within the condensed consolidated balance sheets.
NOTE 7 — RELATED PARTY TRANSACTIONS
Lease Agreements
In November 2014, the Company and DriveTime Automotive Group, Inc. (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 (the "DriveTime Lease Agreement") that governs the Company’s access to and utilization of temporary storage, reconditioning, offices and parking space at various DriveTime facilities, including hubs and inspection and reconditioning centers. The DriveTime Lease Agreement was most recently amended in December 2018. The last hub facility
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
lease remaining under the DriveTime Lease Agreement expired in April 2023, and the leases for the inspection and reconditioning centers expire between 2024 and 2026.
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. The last facility remaining under the DriveTime Hub Lease Agreement expired in April 2023 and was not renewed.
Prior to expiration, the hub locations under the DriveTime Lease Agreement and the DriveTime Hub Lease Agreement both had cancellable lease terms of less than twelve months with rights to terminate at the Company's election with 60 days' prior written notice and certain one-year renewal options provided. At non-reconditioning locations, because it was not reasonably certain that the Company would 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, the Company accounted for them as short-term leases. For these locations, the Company made 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 had determined that the costs allocated to the Company were based on a reasonable methodology. The DriveTime Lease Agreement also includes the Blue Mound and Delanco inspection and reconditioning centers. At both of these locations, the Company expects the lease to continue beyond twelve months, therefore, those locations are not considered short-term leases. The Company occupies all of the space at these inspection and reconditioning centers 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 inspection and reconditioning centers locations.
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 inspection and reconditioning center in Winder, Georgia. The lease has an initial term of eight years, subject to the Company's ability to exercise three renewal options of five years each.
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 September 30, 2023 and 2022, and $2 million and $3 million during the nine months ended September 30, 2023 and 2022, respectively, allocated between inventory and selling, general and administrative expenses.
Office Leases
In September 2016, the Company entered into a lease for office space in Tempe, Arizona. In connection with that lease, the Company entered into a sublease with DriveTime for the use of another floor in 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 pays 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 nine months ended September 30, 2023 and 2022.
In December 2019, Verde Investments, Inc., an affiliate of DriveTime ("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 nine months ended September 30, 2023 and 2022.
Wholesale Sales and Revenues
DriveTime purchases and sells wholesale vehicles from and to the Company through competitive online auctions that are managed by an unrelated third party, and through the Company's wholesale marketplace platform. Beginning in September 2023, the Company also provides DriveTime with certain reconditioning services through its wholesale marketplace platform.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
The Company recognized $4 million and $6 million of wholesale sales and revenues from DriveTime, including for reconditioning services, during the three months ended September 30, 2023 and 2022, respectively, and $14 million and $27 million during the nine months ended September 30, 2023 and 2022, 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 September 30, 2023 and 2022, less than $1 million and $2 million, respectively, related to vehicles and reconditioning services were included in vehicle inventory in the accompanying unaudited condensed consolidated balance sheets. The Company also recognized $1 million of cost of goods sold during each of the three months ended September 30, 2023 and 2022, and $3 million and $19 million during the nine months ended September 30, 2023 and 2022, 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. 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. During the three months ended September 30, 2023 and 2022, the Company recognized $32 million and $42 million, respectively, and during the nine months ended September 30, 2023 and 2022, the Company recognized $100 million and $138 million, respectively, of commissions earned on VSCs sold to its customers and administered by DriveTime, net of a reserve for estimated contract cancellations, and payments for excess reserves to which it expects to be entitled. The commission earned on the sale of these VSCs and expected payments for excess reserves 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 administered a portion of the Company's GAP waiver coverage under the Master Dealer Agreement. Since the first quarter of 2020, the Company's GAP waiver coverage sales have been administered by an unrelated third party. 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. The Company incurred $4 million and $5 million during the three months ended September 30, 2023 and 2022, respectively, and $13 million and $14 million during the nine months ended September 30, 2023 and 2022, respectively, related to the administration of limited warranty.
Profit Sharing Agreement
In June 2018, the Company entered into an agreement with an unaffiliated third party, pursuant to which the Company would sell certain Road Hazard ("RH") and Pre-Paid Maintenance ("PPM") contracts. Under this agreement, third parties would administer the RH and PPM contracts, including providing customer and administrative services, and pay a profit sharing component to the Company. In 2022, the Company began selling equivalent offerings from DriveTime, pursuant to the Master Dealer Agreement discussed above, and all rights and obligations in connection with existing RH and PPM contracts were transferred to DriveTime (the "Transferred Contracts"). Finally, in December 2022, the Company entered into a profit sharing agreement with DriveTime with regard to the Transferred Contracts (the "Profit Sharing Agreement"). The Company recognized $3 million and $4 million in revenue during the three and nine months ended September 30, 2023, respectively, under the Profit Sharing Agreement.
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 $3 million during the three months ended September 30, 2023 and 2022, respectively, and $10 million and $7 million during the nine months ended September 30, 2023 and 2022, 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 nine months ended September 30, 2023 and 2022.
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 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 nine months ended September 30, 2023 and 2022.
Accounts Payable Due to Related Party
As of September 30, 2023 and December 31, 2022, $1 million and $16 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 Stock From Ernest Garcia III
On January 5, 2022, in recognition of the Company selling its 1 millionth vehicle in the fourth quarter of 2021, the Company's CEO, Ernest Garcia III ("Mr. Garcia"), committed to giving then-current employees 23 shares of Class A common stock each from his personal shareholdings once employees 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 contributes to the Company, at the end of each fiscal quarter, the number of shares of 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 RSU awards to certain employees of the Company upon their satisfying the applicable employment tenure requirements. During the three months ended September 30, 2023 and 2022, 16,859 and 14,099 RSUs, respectively, and during the nine months ended September 30, 2023 and 2022, 48,484 and 113,206 RSUs, respectively, vested and an equal number of shares of Class A common stock 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 agreed to indemnify Mr. Garcia from any such obligations that may arise.
Private Placement
On July 17, 2023, the Company entered into a Transaction Support Agreement pursuant to which, among other things, and subject to certain conditions, the Garcia Parties committed to purchase up to $126 million of equity in the Company. In satisfaction of that commitment, on August 18, 2023, the Company entered into a Securities Purchase Agreement with the
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
Garcia Parties providing for the purchase of an aggregate of 3.4 million Class A Units, together with 2.7 million shares of Class B common stock, at a price equivalent to $46.31 per share of Class A common stock, or $37.048 per Class A Unit on an as-exchanged basis. The Company used the proceeds therefrom to partially fund the cash tender offer to purchase a portion of the 2025 Senior Unsecured Notes (as defined below).
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 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 Inc. (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. The Company and the Ally Parties amended the MPSA at various times throughout 2021 and 2022, and on January 13, 2023 and January 20, 2023 the MPSA was further amended to extend the scheduled commitment termination date to January 12, 2024, and establish a commitment by the Ally Parties to purchase up to a maximum of $4.0 billion of principal balances of finance receivables between January 13, 2023 and the scheduled commitment termination date. Finally, the Company and the Ally Parties entered into additional amendments to the MPSA on March 24, 2023 and April 17, 2023 to broaden the scope of finance receivables eligible for sale to the Ally Parties and update account information.
During the three months ended September 30, 2023 and 2022, the Company sold $1.0 billion and $1.3 billion, respectively, in principal balances of finance receivables under the MPSA. During the nine months ended September 30, 2023 and 2022, the Company sold $2.7 billion and $3.1 billion, respectively, in principal balances of finance receivables under the MPSA and had $1.3 billion of unused capacity as of September 30, 2023.
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 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 the Risk Retention Rules (as defined below), as further discussed in Note 9 — Securitizations and Variable Interest Entities.
During the three months ended September 30, 2023 and 2022, the Company sold $1.0 billion and $364 million, respectively, in principal balances of finance receivables through securitization transactions. During the nine months ended September 30, 2023 and 2022, the Company sold $2.3 billion and $2.4 billion, respectively, 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 $146 million and $126 million during the three months ended September 30, 2023 and 2022, respectively, and $360 million and $361 million during the nine months ended September 30, 2023 and 2022, 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
CARVANA CO. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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, providing industry standard representations and warranties regarding the underlying finance receivables, and performing ministerial duties as the trust administrator. As of September 30, 2023, 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 September 30, 2023 and December 31, 2022 were $371 million and $321 million, respectively. The Company held no other assets or liabilities related to its involvement with unconsolidated VIEs as of September 30, 2023 and December 31, 2022.
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 September 30, 2023 and December 31, 2022. Total exposure represents the estimated loss the Company would incur under severe, hypothetical circumstances, such as 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Carrying Value | | Total Exposure | | Carrying Value | | Total Exposure |
| | | | | | | |
| (in millions) |
Rated notes | $ | 289 | | | $ | 289 | | | $ | 252 | | | $ | 252 | |
Certificates and other assets | 82 | | | 82 | | | |