CARVANA CO. Unless the context requires otherwise, references in this report to "Carvana," the "Company," "we," "us," and "our" refer toCarvana 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 Item 1 of this Form 10-Q. Overview Carvana is a 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 ofSeptember 30, 2020 , we listed approximately 26,800 vehicles for sale on our website, where customers can select and purchase a vehicle, including arranging financing and signing contracts, directly from their desktop or mobile device. Selling used vehicles to retail customers is the primary driver of our business. Selling used vehicles generates revenue equal to the selling price of the vehicle, less an allowance for returns, and also enables multiple additional revenue streams, including vehicle service contracts ("VSCs"), 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. Customerswho 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 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 sourcing and acquisition. We primarily acquire our used vehicle
inventory through the large and liquid national used-car auction market and
directly from customers when they trade in or sell us their vehicles. 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
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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 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 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
In March 2020 , the World Health Organization declared the novel coronavirus
("COVID-19") outbreak to be a global pandemic. In mid-March, a number of state
and local government authorities issued shelter in place and stay at home orders
which negatively impacted demand for used vehicles. Near the end of April 2020 ,
the industry began to see a recovery in general market conditions, and demand
for used vehicles picked up as the second quarter progressed resulting in a 25%
increase in our used vehicle unit sales during the second quarter of 2020
compared to 2019 and a 39% increase in our used vehicle unit sales in the third
quarter of 2020 compared to 2019.
For many customers, buying or selling a car is an important component of their
transportation and financial planning needs. Based on the CarGurus U.S. COVID-19
Sentiment Study in June 2020 of potential car buyers, 37% of respondents agreed
COVID-19 will impact how they shop long-term. Prior to the COVID-19 pandemic,
32% of car shoppers were open to buying a vehicle online, now 60% are open to
it. In addition, there was a shift in June 2020 with a decrease in respondents
planning to purchase a new vehicle and an increase in those planning to purchase
a used vehicle. We believe our online sales model, which allows customers to buy
a car without ever coming into physical contact with another person, is the
safest way to buy a car. Our touchless delivery process allows customers to shop
for a car from the comfort of their home, complete their transaction on their
phone or laptop, and take delivery of their new car without coming into physical
contact with our delivery personnel. At delivery, we sanitize the car and
communicate with the customer over the phone as they feel out the car and
complete
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paperwork. Our employees and customers have given us positive feedback on this
approach, and we believe it represents a significant step forward in the safety
of retail auto sales in the current environment.
We continue to take steps to position the business to be lean and flexible with
a focus on our discretionary expenditures including new hiring, travel,
facilities, and information technology investments. We also closely monitor key
metrics to determine when and how quickly to adjust our marketing, staffing, and
purchasing levels to align with demand. We believe our business model makes us
well-positioned to scale up and down to meet expected customer demand during and
after the current COVID-19 pandemic. We demonstrated our flexibility throughout
the second and third quarters of 2020, which began with low demand that
increased over the course of the second quarter and overall high demand
throughout the third quarter, allowing us to increase our operations, launch new
markets, and resume hiring to meet the increasing customer demands.
Our most important priority is the well-being of our employees and customers. We
have taken several steps to provide a safe and healthy working environment,
including implementing work from home policies for employees who are able to
work remotely, pausing most non-essential travel and in-person group meetings,
performing deep cleaning and sanitization in all of our facilities, and
implementing social distancing and mask policies.
Our financial statements reflect estimates and assumptions made by management
that affect the carrying values of the Company's assets and liabilities,
disclosures of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting period. 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, including as a result of the COVID-19 pandemic, which could have
a material impact on the carrying values of the Company's assets and liabilities
and the results of operations. We will 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.
Our operational and financial performance will depend on future developments
related to the continuously evolving COVID-19 pandemic. Future developments
include the duration, scope and severity of the pandemic, the actions taken to
contain or mitigate its impact, the development of treatments or vaccines, the
resumption and continuation of widespread economic activity, and changes in
consumer sentiment. Due to the inherent uncertainty of the unprecedented and
rapidly evolving situation, we are unable to predict the impact of the COVID-19
pandemic on our future operations.
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 nine months ended September 30, 2020 , the number of vehicles we sold to
retail customers grew by 35.2% to 171,939 compared to 127,179 in the nine months
ended September 30, 2019 . Our used vehicle sales were negatively impacted at the
onset of COVID-19 in the United States but have rebounded since then. We expect
our used vehicle sales could be negatively impacted in future periods as a
result of the continued economic impacts of the COVID-19 pandemic.
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.
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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 offer free
home delivery to customers with a Carvana employee in a branded delivery truck.
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 in
each of the past seven years. After opening Atlanta, Georgia in 2013, we opened
two markets in 2014, six in 2015, 12 in 2016, 23 in 2017, 41 in 2018, 61 in
2019, and 115 in the first nine months of 2020, bringing our total number of
markets to 261 as of September 30, 2020 . Our 115 market openings since
December 31, 2019 increased the total percentage of the U.S. population serviced
in our markets to 73.2% as of September 30, 2020 from 66.9% as of December 31,
2019 . Over time, we have continually improved our market expansion playbook,
which we believe provides us with the capability to efficiently execute our
growth plan. In light of the ongoing COVID-19 pandemic, we plan to 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. With our growth
into new markets, national television advertising has become more economically
efficient compared to purchasing several local television advertising campaigns.
Revenue and Gross Profit
Our increased penetration in existing markets and expansion into new markets has
led to growth in retail units sold. We generate revenue on retail units sold
from four primary sources: the sale of the vehicles, gains on the sales of loans
originated to finance the vehicles, wholesale sales of vehicles we acquire from
customers, and sales of ancillary products such as VSCs and GAP waiver coverage.
Our largest source of revenue, used vehicle sales, totaled $1.3 billion and $0.9
billion during the three months ended September 30, 2020 and 2019, respectively,
and $3.2 billion and $2.5 billion during the nine months ended September 30,
2020 and 2019, 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, which includes sales of trade-ins and other vehicles acquired
from customers that do not meet the requirements for our retail inventory,
totaled $129.9 million and $92.4 million during the three months ended
September 30, 2020 and 2019, respectively, and $259.0 million and $188.5 million
during the nine months ended September 30, 2020 and 2019, 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.
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 $124.6 million and $71.4 million during the three
months ended September 30, 2020 and 2019, respectively, and $256.0 million and
$177.2 million during the nine months ended September 30, 2020 and 2019,
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. Other sales and revenues are 100% gross margin
products for which gross profit equals revenue.
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The COVID-19 pandemic impacted all three sources of revenue and gross profit
during the nine months ended September 30, 2020 . Given the uncertainty and
continuously evolving aspects of COVID-19, it may continue to impact our revenue
and gross profit in future periods. First, the pandemic negatively impacted
retail units sold, which directly impacted retail, wholesale, and other revenue
and gross profit. However, since the drastic drop in demand in mid-March through
mid-April, demand for retail units has rebounded, including 39% year-over-year
growth in the third quarter. Second, the pandemic initially negatively impacted
wholesale units sold and purchased for sale due to the unstable condition of the
wholesale market, which directly impacted wholesale and retail revenue. However,
the wholesale market has since stabilized as of September 30, 2020 . We believe
the pandemic negatively impacted retail and wholesale gross profit per unit due
to the impact of lower demand on average days to sale and industry-wide used
vehicle pricing through June 30, 2020 . However, during the three months ended
September 30, 2020 , our average days to sale decreased and average retail and
wholesale selling prices increased as dealers and wholesale suppliers saw high
industry-wide market prices. Finally, the pandemic had a slight negative impact
to gain on loan sale revenue due to higher required yields from loan investors
during this period of uncertainty, which resulted in not completing a
securitization transaction during either the three months ended June 30, 2020 or
September 30, 2020 . While these impacts could potentially reoccur or continue in
the future and could be significant, we believe they are transitory, and we plan
to stay lean during this period and maintain strength and flexibility.
During our growth phase, our highest priority, outside of safety, will continue
to be providing exceptional customer experiences, increasing our brand awareness
and building an infrastructure to support growth in retail units sold.
Secondarily, we plan to pursue several strategies designed to increase our total
gross profit per unit. These strategies include the following:
•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. In
light of the COVID-19 pandemic, we temporarily paused purchasing vehicles from
customers independent of a retail sale, but have subsequently resumed these
purchases.
•Reduce average days to sale. Our goal is generally to increase both our number
of markets and 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 ten existing IRCs, which collectively have capacity
to inspect and recondition approximately 550,000 vehicles per year at full
utilization.
•Increase utilization on logistics network. As we scale, we intend to more fully utilize our in-house logistics network to transport cars to our IRCs after acquisition from wholesale auctions or customers.
•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 partnerswho 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. 39 -------------------------------------------------------------------------------- Seasonality Absent the impact of COVID-19, used vehicle sales exhibit seasonality with sales peaking late in the first calendar quarter and diminishing through the rest of the year, with the lowest relative level of vehicle sales expected to occur in the fourth calendar quarter. Due to our rapid growth, our overall sales patterns to date have not reflected the general seasonality of the used vehicle industry, but we expect this to change once our business and markets mature. Absent the impact of COVID-19, 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, which may not fully reflect the underlying performance of our business. The impact of COVID-19 on seasonality is uncertain. Investment in Growth Absent the impact of COVID-19, 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 open new markets, expand our logistics network and increase our advertising spending. There is no guarantee that we will be able to realize the return on our investments. The worldwide spread of COVID-19 is expected to result in a continued global slowdown of economic activity which is likely to continue to decrease demand for a broad variety of goods and services, including from our customers, while also disrupting sales channels, marketing activities and supply chains for an unknown period of time until the pandemic is contained. Due to the COVID-19 pandemic, we have continued to monitor discretionary growth expenditures on hiring, travel, IRC and vending machine construction, and information technology investments. We also continue to closely monitor key metrics to determine when and how quickly to adjust our marketing, staffing, and purchasing levels to align with demand. We believe our business model makes us well-positioned to scale up or down to meet customer demand during and after the current COVID-19 pandemic. Relationship with Related Parties For discussion about our relationship with related parties, refer to Note 6 - 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, opening new markets, and enhancing the selection of vehicles we make available to our customers. Our key operating metrics also demonstrate our ability to translate these drivers into retail sales and to monetize these retail sales through a variety of product offerings. Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Retail units sold 64,414 46,413 171,939 127,179 Number of markets 261 146 261 146 Average monthly unique visitors 9,183,469 6,271,686 8,004,536 4,941,883 Inventory units available on website 26,897 21,376 26,897 21,376 Average days to sale 58 63 71 63 Total gross profit per unit (1) $ 4,056
(1) Includes
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
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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.
Number of Markets
We define a market as a metropolitan area in which we have commenced local advertising and offer free home delivery to customers by a Carvana employee in a branded delivery truck. We view the number of markets we serve as a key driver of our growth. As we increase our number of markets, the population of consumerswho have access to our fully integrated customer experience increases, which in turn helps to increase the number of vehicles we sell.
Average Monthly Unique Visitors
We define a monthly unique visitor as an individualwho 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. Inventory Units Available We define inventory units available as the number of vehicles listed for sale on our website on the last day of a given reporting period. We view inventory units available as a key measure of our growth. Growth in inventory units available increases the selection of vehicles available to consumers in all of our markets simultaneously, which we believe will allow us to increase the number of vehicles we sell. Moreover, growth in inventory units available 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 inventory units available while continuing to grow sales, thereby improving other key operating metrics of the business.
Average Days to Sale
We define average days to sale as the average number of days between when we acquire the vehicle and when we deliver it to a customer for all retail units sold in a period. However, this metric does not include any retail units that remain unsold at period end. We view average days to sale as a useful metric due to its impact on used vehicle average selling price.
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.
In the second half of 2018, we announced a commitment by our Chief Executive
Officer, Ernest Garcia III ("Mr. Garcia"), to contribute 165 shares of Class A
common stock to us from his personal shareholdings for every one of our
then-existing employees upon their satisfying certain employment tenure
requirements. In connection with such contributions, we made corresponding
grants of 165 restricted stock units under our 2017 Omnibus Incentive Plan to
each employee who satisfied the requirements (the "100k Milestone Gift" or
"Gift"). Under GAAP, the 100k Milestone Gift was treated as compensation
expense, a portion of which related to the production of our used vehicle
inventory and was therefore capitalized to inventory and subsequently recognized
within costs of sales when the related inventory was sold. As of December 31,
2019 , Mr. Garcia's commitment related to the 100k Milestone Gift has been
fulfilled and as of March 31, 2020 , all of the compensation expense related to
the 100k Milestone Gift had been recognized. Total gross profit per unit
includes $0 and $33 per unit during the three months ended September 30, 2020
and 2019, respectively, and $3 and $33 per unit during the nine months ended
September 30, 2020 and 2019, respectively, related to the 100k Milestone Gift.
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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 number of markets, 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 on seasonality is
uncertain.
Our retail average selling price depends on the mix of vehicles we acquire,
retail prices in our markets, our average days to sale and our pricing strategy.
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 Vehicle Sales
Wholesale vehicle sales is equal to the aggregate proceeds we receive on vehicles sold to wholesalers. Beginning in 2020, wholesale vehicle sales includes aggregate proceeds we receive on vehicles sold to DriveTime through competitive online auctions that are managed by an independent third party. The vehicles we sell to wholesalers are primarily acquired from customerswho sell a vehicle to us without purchasing a retail vehicle and from our customerswho trade-in their existing vehicles when making a purchase from us. Factors affecting wholesale vehicle sales include the number of wholesale units sold and the average wholesale selling price of these vehicles. The average selling price of our wholesale units is 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.
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, 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. 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 a committed forward-flow arrangement with financing partnerswho 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 42 --------------------------------------------------------------------------------
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. Vehicle acquisition costs are driven by the mix of vehicles we acquire, the source of those vehicles, and supply-and-demand dynamics in the wholesale vehicle market. Reconditioning costs consist of direct costs, including parts, labor, and third-party repair expenses directly attributable to specific vehicles, as well as indirect costs, such as IRC overhead. Transportation costs consist of costs incurred to transport the vehicles from the point of acquisition to the IRC. Cost of sales also includes any necessary adjustments to reflect vehicle inventory at the lower of cost or net realizable value. Used Vehicle Gross Profit
Used vehicle gross profit 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 Vehicle Gross Profit
Wholesale vehicle gross profit is the vehicle sales price minus our cost of sales associated with vehicles we sell to wholesalers. Factors affecting wholesale gross profit include the number of wholesale units sold, the average wholesale selling price of these vehicles, and the average acquisition price associated with these vehicles.
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 and hubs, 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 (including amounts due to Verde), our Floor Plan Facility, and our Finance Receivable Facilities (each as defined in Note 9 - 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 (Income) Expense
Other (income) expense, net includes changes in fair value on our beneficial interests in securitizations and purchase price adjustment receivables, as discussed in Note 17 - Fair Value of Financial Instruments of our financial statements included in
43
--------------------------------------------------------------------------------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 ofCarvana Group, LLC ("Carvana Group "),Carvana Co. consolidates the financial results ofCarvana Group .Carvana Group is treated as a partnership and therefore not subject toU.S. federal and most applicable state and local income tax purposes. Any taxable income or loss generated byCarvana Group is passed through to and included in the taxable income or loss of its members, includingCarvana Co. , based on its economic interest held inCarvana Group .Carvana Co. is taxed as a corporation and is subject toU.S. federal, state and local income taxes with respect to its allocable share of any taxable income or loss ofCarvana Group , as well as any stand-alone income or loss generated byCarvana Co. As ofSeptember 30, 2020 , the Company's income tax benefit is generated at Car360, a wholly-owned subsidiary, acquired inApril 2018 . 44 --------------------------------------------------------------------------------
Results of Operations
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 Change 2020 2019 Change
(dollars in thousands, except per (dollars in thousands, except per
unit amounts) unit amounts)
Net sales and operating revenues:
Used vehicle sales, net $ 1,289,128 $ 931,016 38.5 % $ 3,245,209 $ 2,470,630 31.4 %
Wholesale vehicle sales (1) 129,925 92,430 40.6 % 258,965 188,474 37.4 %
Other sales and revenues (2) 124,556 71,408 74.4 % 255,985 177,205 44.5 %
Total net sales and operating
revenues $ 1,543,609 $ 1,094,854 41.0 % $ 3,760,159 $ 2,836,309 32.6 %
Gross profit:
Used vehicle gross profit (3) $ 119,607 $ 60,563 97.5 % $ 268,035 $ 171,063 56.7 %
Wholesale vehicle gross
profit (1)(4) 17,110 5,572 207.1 % 25,881 15,600 65.9 %
Other gross profit (2) 124,556 71,408 74.4 % 255,985 177,205 44.5 %
Total gross profit $ 261,273 $ 137,543 90.0 % $ 549,901 $ 363,868 51.1 %
Market information:
Markets, beginning of period 261 137 90.5 % 146 85 71.8 %
Market launches - 9 (100.0) % 115 61 88.5 %
Markets, end of period 261 146 78.8 % 261 146 78.8 %
Unit sales information:
Used vehicle unit sales 64,414 46,413 38.8 % 171,939 127,179 35.2 %
Wholesale vehicle unit sales 15,375 11,698 31.4 % 33,406 29,155 14.6 %
Per unit selling prices:
Used vehicles $ 20,013 $ 20,059 (0.2) % $ 18,874 $ 19,426 (2.8) %
Wholesale vehicles $ 8,450 $ 7,901 6.9 % $ 7,752 $ 6,465 19.9 %
Per unit gross profit: (5)
Used vehicle gross profit (3) $ 1,857 $ 1,305 42.3 % $ 1,559 $ 1,345 15.9 %
Wholesale vehicle gross
profit (4) $ 1,113 $ 476 133.8 % $ 775 $ 535 44.9 %
Other gross profit $ 1,934 $ 1,539 25.7 % $ 1,489 $ 1,393 6.9 %
Total gross profit $ 4,056 $ 2,963 36.9 % $ 3,198 $ 2,861 11.8 %
(1) Includes $1,323 and $0 for the three months ended September 30, 2020 and
2019, respectively, and $1,365 and $0 for the nine months ended September 30,
2020 and 2019, respectively, of wholesale revenue from related parties.
(2) Includes $26,141 and $15,824 for the three months ended September 30, 2020
and 2019, respectively, and $69,423 and $40,386 for the nine months ended
September 30, 2020 and 2019, respectively, of other sales and revenues from
related parties.
(3) Includes $0 , $1,381 , $510 , and $3,953 , or $0 , $30 , $3 , and $31 per unit,
related to the 100k Milestone Gift.
(4) Includes $0 , $142 , $17 , and $267 , or $0 , $12 , $0 , and $9 per wholesale unit,
related to the 100k Milestone Gift.
(5) All gross profit per unit amounts are per used vehicle sold, except
wholesale vehicle gross profit, which is per wholesale vehicle sold.
Used Vehicle Sales
Three months endedSeptember 30, 2020 Versus 2019. Used vehicle sales increased by$358.1 million to$1.3 billion during the three months endedSeptember 30, 2020 , compared to$931.0 million during the three months endedSeptember 30, 2019 . The increase in revenue was primarily due to an increase in the number of used vehicles sold to 64,414 from 46,413 during the three months endedSeptember 30, 2020 and 2019, respectively. The increase in unit sales was driven by growth in existing markets due to enhanced marketing efforts, expanded inventory selection, and increased brand awareness. The increase in unit sales was also driven by growth to 261 markets as ofSeptember 30, 2020 from 146 markets as ofSeptember 30, 2019 . The average selling price of our retail units sold decreased slightly to$20,013 from$20,059 due primarily to vehicle mix 45 -------------------------------------------------------------------------------- despite a decrease in our average days to sale to 58 days from 63 days during the three months endedSeptember 30, 2020 and 2019, respectively, partially offsetting the increase in used vehicle revenue resulting from the increase in unit sales. Nine months endedSeptember 30, 2020 Versus 2019. Used vehicle sales increased by$774.6 million to$3.2 billion during the nine months endedSeptember 30, 2020 compared to$2.5 billion during the nine months endedSeptember 30, 2019 . The increase in revenue was primarily due to an increase in the number of used vehicles sold to 171,939 from 127,179 during the nine months endedSeptember 30, 2020 and 2019, respectively. The increase in units sold was driven in part by enhanced marketing efforts, expanded inventory selection, and increased brand awareness. The increase in unit sales was also driven by growth to 261 markets as ofSeptember 30, 2020 from 146 markets as ofSeptember 30, 2019 . Although we experienced a negative impact on retail units sold due to the COVID-19 pandemic primarily in March and April, we started to see a rebound in sales later in the period with the reopening of the markets. The average selling price of our retail units sold decreased to$18,874 from$19,426 due primarily to vehicle mix and to a lesser extent to an increase in average days to sale to 71 days from 63 days during the nine months endedSeptember 30, 2020 and 2019, respectively, partially offsetting the increase in used vehicle revenue resulting from the increase in unit sales. Wholesale Vehicle Sales Three months endedSeptember 30, 2020 Versus 2019. Wholesale vehicle sales increased by$37.5 million to$129.9 million during the three months endedSeptember 30, 2020 , compared to$92.4 million during the three months endedSeptember 30, 2019 . The increase in revenue was primarily driven by an increase in wholesale units sold to 15,375 from 11,698 during the three months endedSeptember 30, 2020 and 2019, respectively. In addition to the increase in wholesale vehicle units sold, the average selling price of our wholesale units sold increased to$8,450 during the three months endedSeptember 30, 2020 from$7,901 during the three months endedSeptember 30, 2019 due to the mix of units acquired from customers and strong wholesale market prices. Nine months endedSeptember 30, 2020 Versus 2019. Wholesale vehicle sales increased by$70.5 million to$259.0 million during the nine months endedSeptember 30, 2020 , compared to$188.5 million during the nine months endedSeptember 30, 2019 . As our retail unit sales increased over the nine-month period despite the effect of COVID-19, so did the trade-ins we received, providing more vehicles available for wholesale. Moreover, during the nine months endedSeptember 30, 2020 , we also acquired more vehicles from customerswho did not purchase a retail unit from us. Therefore, we had more units available for sale to wholesalers, driving an increase in our revenues attributed to wholesale vehicle sales. In addition, the average selling price of our wholesale units sold increased to$7,752 during the nine months endedSeptember 30, 2020 from$6,465 during the nine months endedSeptember 30, 2019 due to the mix of units acquired from customers and strong wholesale market prices toward the end of the 2020 period.
Other Sales and Revenues
Three months endedSeptember 30, 2020 Versus 2019. Other sales and revenues increased by$53.1 million to$124.6 million during the three months endedSeptember 30, 2020 , compared to$71.4 million during the three months endedSeptember 30, 2019 . This increase was primarily driven by originating and selling more finance receivables, resulting in an increase in gain on loan sale. Additionally, the increase was due to an increase in retail units sold, which led to an increase in VSC sales and GAP waiver coverage sales. Nine months endedSeptember 30, 2020 Versus 2019. Other sales and revenues increased by$78.8 million to$256.0 million during the nine months endedSeptember 30, 2020 , compared to$177.2 million during the nine months endedSeptember 30, 2019 . The increase is primarily driven by originating and selling more finance receivables, resulting in an increase in gain on loan sale. In addition, the increase in retail units sold led to an increase in VSC sales and GAP waiver coverage sales. Used Vehicle Gross Profit Three months endedSeptember 30, 2020 Versus 2019. Used vehicle gross profit increased by$59.0 million to$119.6 million during the three months endedSeptember 30, 2020 , compared to$60.6 million during the three months endedSeptember 30, 2019 . This increase was driven primarily by an increase in retail units sold, along with an increase in used 46 -------------------------------------------------------------------------------- vehicle gross profit per unit to$1,857 for the three months endedSeptember 30, 2020 compared to$1,305 for the three months endedSeptember 30, 2019 . The per unit increase was primarily due to acquiring more vehicles from customers. Nine months endedSeptember 30, 2020 Versus 2019. Used vehicle gross profit increased by$97.0 million to$268.0 million during the nine months endedSeptember 30, 2020 , compared to$171.1 million during the nine months endedSeptember 30, 2019 . This increase was driven primarily by an increase in retail units sold, as well as an increase in used vehicle gross profit per unit to$1,559 for the nine months endedSeptember 30, 2020 compared to$1,345 for the nine months endedSeptember 30, 2019 . The per unit increase was primarily driven by acquiring more vehicles from customers.
Wholesale Vehicle Gross Profit
Three months endedSeptember 30, 2020 Versus 2019. Wholesale vehicle gross profit increased by$11.5 million to$17.1 million during the three months endedSeptember 30, 2020 , compared to$5.6 million during the three months endedSeptember 30, 2019 . This was primarily due to an increase in wholesale units sold to 15,375 during the three months endedSeptember 30, 2020 from 11,698 during the three months endedSeptember 30, 2019 and an increase in wholesale vehicle gross profit per wholesale unit to$1,113 in the three months endedSeptember 30, 2020 compared to$476 in the three months endedSeptember 30, 2019 primarily driven by acquiring more vehicles from customers and strong wholesale market prices. Nine months endedSeptember 30, 2020 Versus 2019. Wholesale vehicle gross profit increased by$10.3 million to$25.9 million during the nine months endedSeptember 30, 2020 , compared to$15.6 million during the nine months endedSeptember 30, 2019 . This increase was driven primarily by an increase in wholesale vehicle gross profit per wholesale unit to$775 from$535 , along with an increase in wholesale units sold to 33,406 from 29,155 in the nine months endedSeptember 30, 2020 , and 2019, respectively. The increase in number of wholesale vehicles sold and the improved gross profit per wholesale unit were primarily due to acquiring more vehicles from customers and strong wholesale market prices in the latter part of the 2020 period.
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.
47
--------------------------------------------------------------------------------Components of SG&A
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(in thousands)
Compensation and benefits (1) $ 80,248 $ 60,655 $ 238,700 $ 163,643
100k Milestone Gift - 2,903 - 6,506
Advertising 65,148 55,264 202,266 145,153
Market occupancy (2) 9,733 5,517 25,855 14,607
Logistics (3) 18,073 14,068 53,686 39,960
Other (4) 94,640 69,563 262,980 175,185
Total $ 267,842 $ 207,970 $ 783,487 $ 545,054
(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, 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, and those related to the 100k Milestone Gift.
(2) 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.
(3) 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.
(4) 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 $59.9 million to
$267.8 million , compared to $208.0 million during the three months ended
September 30, 2020 and 2019, respectively. Selling, general, and administrative
expenses increased by $238.4 million to $783.5 million , compared to $545.1
million during the nine months ended September 30, 2020 and 2019, respectively.
The increase was partially due to an increase in compensation and benefits by
$19.6 million and $75.1 million during the three and nine months ended
September 30, 2020 , respectively, which was primarily driven by expansion of our
teams to support our growth. The increase in selling, general and administrative
expenses was also due to an increase in advertising expense of $9.9 million and
$57.1 million during the three and nine months ended September 30, 2020 ,
respectively, primarily due to an increase in number of markets. Market
occupancy, logistics, and other expenses also increased during the three and
nine months ended September 30, 2020 compared to the respective prior periods
primarily due to an increase in number of markets and units sold. These
increases were partially offset by efforts to decrease and balance discretionary
spend as a result of the uncertain economic environment surrounding the COVID-19
pandemic.
Interest Expense
Interest expense decreased slightly by $0.7 million to $20.3 million , compared
to $21.0 million during the three months ended September 30, 2020 and 2019,
respectively, but increased $13.1 million to $69.1 million , compared to $56.0
million during the nine months ended September 30, 2020 and 2019, respectively.
The increase over the nine month period is primarily due to the increase in the
outstanding balance of the Senior Notes as a result of the issuance in May 2019
which incurred interest expense of $39.9 million and $31.0 million during the
nine months ended September 30, 2020 and 2019, respectively. Both the three and
nine month periods increased due to increased interest expense incurred on
additional sale leaseback financing, which was offset by decreased interest
expense on the Floor Plan Facility as a result of a lower outstanding balance.
Other (Income) Expense, Net
Other (income) expense, net changed by$10.0 million to income of$9.2 million compared to expense of$0.8 million during the three months endedSeptember 30, 2020 and 2019, respectively. Other expense, net increased by$3.4 million to$5.1 million compared to$1.8 million during the nine months endedSeptember 30, 2020 and 2019, respectively. The changes in the three and nine months endedSeptember 30, 2020 compared toSeptember 30, 2019 are primarily due to fair value adjustments on our retained beneficial interests in securitizations. During the first half of the nine-month period endedSeptember 30, 2020 , the fair value of these assets carried at fair value declined as a result of the uncertainty in the capital markets. During the second 48 -------------------------------------------------------------------------------- half of the period, the fair value on our beneficial interests in securitizations increased as the economy appeared to rebound. This increase was partially offset by a$5.7 million loss on disposal of fixed assets during the nine months endedSeptember 30, 2020 as a result of terminated construction projects due to the uncertain future economic environment surrounding COVID-19.
Income Tax Provision
We recognized an income tax benefit of approximately$0.2 million during the nine months endedSeptember 30, 2020 related to our wholly owned subsidiary, Car360. The benefit was recognized as a result of decreased subscription revenue from third parties, resulting in a net loss for the period. Non-GAAP Financial Measures To supplement the consolidated financial statements, which are prepared and presented in accordance with GAAP, we also present the following non-GAAP measures: EBITDA and EBITDA margin. We believe the presentation of both GAAP and non-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 GAAP financial measures. In prior periods we calculated non-GAAP measures including Gross Profit ex-Gift, Gross Profit per Unit ex-Gift, EBITDA ex-Gift, EBITDA Margin ex-Gift, Adjusted Net Loss and Adjusted Net Loss per Share, to exclude the impact of the 100k Milestone Gift program. As this program has concluded it is not material to current or future years and the adjustment is no longer included within similar calculations. For the three and nine months endedSeptember 30, 2020 , there was approximately$0.0 million and$0.5 million , respectively, of stock based compensation related to the 100k Milestone Gift program within cost of sales, which would impact all measures. For the three and nine months endedSeptember 30, 2019 , there was approximately$4.4 million and$10.7 million , respectively, of stock based compensation related to the 100k Milestone Gift program impacting the calculation of EBITDA ex-Gift, EBITDA Margin ex-Gift, Adjusted Net Loss, and Adjusted Net Loss per Share, including approximately$1.5 million and$4.2 million , respectively, within cost of sales impacting the calculation of Gross Profit ex-Gift and Gross Profit per Unit ex-Gift.
EBITDA and EBITDA Margin
EBITDA and EBITDA Margin are supplemental measures of operating performance that
do not represent and should not be considered an alternative to net loss or cash
flow from operations, as determined by GAAP. EBITDA is defined as net loss
before interest expense, income tax expense, and depreciation and amortization
expense. EBITDA Margin is EBITDA as a percentage of total revenues. We use
EBITDA to measure the operating performance of our business and EBITDA Margin to
measure our operating performance relative to our total revenues. We believe
that EBITDA and EBITDA Margin 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. EBITDA and
EBITDA Margin may not be comparable to similarly titled measures provided by
other companies due to potential differences
49
--------------------------------------------------------------------------------
in methods of calculations. A reconciliation of EBITDA to net loss is the most
directly comparable GAAP measure, and calculation of EBITDA Margin is as
follows:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(dollars in thousands)
Net loss(1) $ (17,720) $ (92,244) $ (307,603) $ (238,899)
Depreciation and amortization
expense 18,636 10,675 52,176 27,505
Interest expense 20,276 20,990 69,053 55,953
Income tax provision 76 - (162) -
EBITDA $ 21,268 $ (60,579) $ (186,536) $ (155,441)
Total revenues $ 1,543,609 $ 1,094,854 $ 3,760,159 $ 2,836,309
EBITDA Margin(2) 1.4 % (5.5) % (5.0) % (5.5) %
(1) Includes
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
the impact of COVID-19, our rate of revenue growth, our expansion into new
markets, construction of IRCs and vending machines, and the timing and extent of
our spending to support our technology and software development efforts.
50
--------------------------------------------------------------------------------
We had the following liquidity resources available as of September 30, 2020 and
December 31, 2019 :
September 30, 2020 December 31, 2019
(in thousands)
Cash and cash equivalents $ 173,704 $ 76,016
Availability under short-term revolving facilities (1) 975,264 279,080
Availability under sale-leaseback agreements (2)(3) 101,233 104,680
Committed liquidity resources available $ 1,250,201 $ 459,776
(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) We have$75.0 million available for sale and leaseback transactions under the Master Sale-Leaseback Agreement with VMRE, and an additional$26.2 million and$29.7 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, available under sale-leaseback agreements with other parties. (3) We have$197.7 million and$158.7 million of total unfunded gross real estate assets as ofSeptember 30, 2020 andDecember 31, 2019 , respectively.
As of
We also had
In addition, we had
OnOctober 2, 2020 , we issued$500.0 million principal amount of 5.625% Senior Notes due 2025 and$600.0 million principal amount of 5.875% Senior Notes due 2028 and used approximately$626.8 million of the proceeds to redeem in full the outstanding$600.0 million principal amount of our 8.875% Senior Notes due 2023 resulting in net proceeds of approximately$455.9 million . As ofSeptember 30, 2020 andDecember 31, 2019 , our outstanding principal amount of indebtedness, including finance leases, was$1.3 billion and$1.5 billion , respectively, summarized in the table below. See Note 9 - Debt Instruments and Note 51 --------------------------------------------------------------------------------
15 - 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.
September 30, 2020 December 31, 2019
(in thousands)
Asset-Based Financing:
Inventory $ 109,981 $ 515,487
Finance receivables and beneficial interests 93,349 138,335
Transportation fleet(1) 91,309 73,369
Real estate(2) 379,374 187,082
Total asset-based financing 674,013 914,273
Senior unsecured notes(3) 600,000 600,000
Total debt 1,274,013 1,514,273
Less: unamortized premium and debt issuance costs(4) (11,790) (13,642)
Total debt, net $ 1,262,223 $ 1,500,631
(1) Amount includes notes payable and finance leases.
(2) Amount includes real estate financing and notes payable.
(3) As of both September 30, 2020 and December 31, 2019 , Verde held $15.0
million of the Senior Notes.
(4) The unamortized debt issuance costs related to long-term debt are presented
as a reduction of the carrying amount of the corresponding liabilities on our
consolidated balance sheets. Unamortized debt issuance costs related to
revolving debt arrangements are presented within other current assets and other
assets on our consolidated balance sheets and not included here. The unamortized
premium is presented as an increase to the carrying amount of the senior
unsecured notes on our consolidated balance sheets.
Cash Flows
The following table presents a summary of our consolidated cash flows from operating, investing and financing activities for the nine months endedSeptember 30, 2020 and 2019: Nine Months Ended September 30, 2020 2019 (in thousands) Net cash used in operating activities$ (446,704) $ (434,675) Net cash used in investing activities (261,704) (148,803) Net cash provided by financing activities 786,272 603,243 Net increase in cash, cash equivalents and restricted cash 77,864 19,765
Cash, cash equivalents and restricted cash at beginning of period
118,459 88,709
Cash, cash equivalents and restricted cash at end of period
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. For the nine months endedSeptember 30, 2020 , net cash used in operating activities was$446.7 million , an increase of$12.0 million compared to net cash used in operating activities of$434.7 million for the nine months endedSeptember 30, 2019 . The increase in our net cash used in operating activities was primarily due to increased net loss partially offset by changes in working capital.
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$261.7 million and$148.8 million during the nine months endedSeptember 30, 2020 and 2019, 52 -------------------------------------------------------------------------------- respectively, an increase of$112.9 million . The increase primarily relates to the increase in purchases of property and equipment, specifically related to the construction of new IRCs and vending machines. Constructing new IRCs and vending machines allows us to recondition more vehicles and reach additional customers. To finance these investments we have entered into various financing transactions, such as sale-leasebacks.
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$786.3 million and$603.2 million during the nine months endedSeptember 30, 2020 and 2019, respectively, an increase of$183.0 million . The change primarily relates to increased proceeds from the issuances of Class A common stock, offset by decreased net proceeds from short-term revolving facilities and long-term debt. Contractual Obligations and Commitments OnOctober 2, 2020 , we issued$500.0 million in aggregate principal amount of 5.625% senior unsecured notes dueOctober 1, 2025 (the "2025 Notes") and$600.0 million aggregate principal amount of 5.875% senior unsecured notes dueOctober 1, 2028 (the "2028 Notes" and, collectively, the "Notes"). The interest on the Notes is payable semi-annually onApril 1 andOctober 1 of each year, beginning onApril 1, 2021 . We used approximately$626.8 million of the proceeds from issuance to redeem in full the$600.0 million aggregate principal amount of our Senior Notes due 2023. Other than as noted above, we have not entered into any material contractual obligations or commitments outside of the ordinary course of business since the most recently ended fiscal year as disclosed in the header "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. Fair Value Measurements We report money market securities, certain receivables, and beneficial interests in securitizations at fair value. See Note 17 - 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. Off-Balance Sheet Arrangements 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 receivables 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 8 - 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.
Except as discussed above, we did not have any off-balance sheet arrangements as
of
Critical Accounting Policies
Refer to Note 2 - Summary of Significant Accounting Policies, included in Part
I, Item 1, Financial Statements, of this Quarterly Report on Form 10-Q for
accounting pronouncements and material changes to our critical accounting
policies since December 31, 2019 . There have been no other material changes to
our critical accounting policies and use of 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.
53
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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: •the effect and consequences of the COVID-19 public health crisis on matters includingU.S. and local economies; our business operations and continuity; the availability of corporate and consumer financing; the health and productivity of our employees; the ability of third-party providers to continue uninterrupted service; and the regulatory environment in which we operate;
•our history of losses and ability to 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;
•our relationship with DriveTime and its affiliates;
•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;
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--------------------------------------------------------------------------------•our ability to sell and generate gains on the sale of automotive finance receivables;
•our dependence on the sale of automotive finance receivables for a substantial portion of our gross profits;
•our 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;
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--------------------------------------------------------------------------------•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 indenture governing our senior unsecured 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 theSecurities 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.
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