SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-38073

Delaware

81-4549921

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

1930 W. Rio Salado Parkway

Tempe

Arizona

85281

(Address of principal executive offices)

(Zip Code)

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). ☒ý Yes ☐¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

¨☒

Accelerated filer

~~Accelerated filer~~ ☐¨

Non-accelerated filer

ý☐ (Do not check if a smaller reporting company)

Smaller reporting company

☐¨

Emerging growth company

☐ý

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý¨

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

As of August ~~3, 2018,~~2, 2019, the registrant had ~~34,256,765~~49,772,795 shares of Class A common stock outstanding and ~~105,816,629~~101,380,607 shares of Class B common stock outstanding.

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

INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018	31
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	42
	Unaudited Condensed Consolidated Statements of Stockholders' Equity ~~/ Members' Deficit~~ for the Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	53
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018	75
	Notes to Unaudited Condensed Consolidated Financial Statements	86
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2934
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4757
Item 4.	Controls and Procedures	4857

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	4958
Item 1A.	Risk Factors	4958
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4958
Item 3.	Defaults Upon Senior Securities	4958
Item 4.	Mine Safety Disclosures	4958
Item 5.	Other Information	4958
Item 6.	Exhibits	5059

PART I. FINANCIAL INFORMATION

ITEM 1.I. FINANCIAL STATEMENTS

CARVANA CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2018 December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 199,192 $ 172,680
Restricted cash 18,356 14,443
Accounts receivable, net 23,573 14,105
Finance receivables held for sale, net 77,128 45,564
Vehicle inventory 302,989 227,446
Other current assets 22,255 15,480
Total current assets 643,493 489,718
Property and equipment, net 217,414 148,681
Intangible assets, net 9,616 —
Goodwill 6,868 —
Other assets 4,372 2,738
Total assets $ 881,763 $ 641,137
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 81,880 $ 50,306
Accounts payable due to related party 3,193 1,802
Floor plan facility 347,087 248,792
Current portion of long-term debt 6,664 5,131
Total current liabilities 438,824 306,031
Long-term debt, excluding current portion 76,873 48,469
Other liabilities 6,957 7,093
Total liabilities 522,654 361,593
Commitments and contingencies (Note 14)
Stockholders' equity:
Class A Convertible Preferred Stock, $0.01 par value, $1,000 liquidation value per share - 100 shares authorized, issued and outstanding as of June 30, 2018 and December 31, 2017 98,507 97,127
Preferred stock, $0.01 par value - 50,000 shares authorized; none issued and outstanding as of June 30, 2018 and December 31, 2017 — —
Class A common stock, $0.001 par value - 500,000 shares authorized; 34,242 and 18,096 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively 34 18
Class B common stock, $0.001 par value - 125,000 shares authorized; 105,817 and 114,664 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively 106 115
Additional paid in capital 95,008 41,375
Accumulated deficit (29,907) (12,899)
Total stockholders' equity attributable to Carvana Co. 163,748 125,736
Non-controlling interests 195,361 153,808
Total stockholders' equity 359,109 279,544
Total liabilities & stockholders' equity $ 881,763 $ 641,137

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

CARVANA CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Sales and operating revenues:
Used vehicle sales, net $ 437,922 $ 193,947 $ 771,978 $ 342,329
Wholesale vehicle sales 16,622 7,818 26,755 13,544
Other sales and revenues, including $5,544, $1,898, $9,655 and $3,656, respectively, from related parties 20,742 7,600 36,975 12,565
Net sales and operating revenues 475,286 209,365 835,708 368,438
Cost of sales 426,251 193,326 752,439 342,653
Gross profit 49,035 16,039 83,269 25,785
Selling, general and administrative expenses 95,652 52,011 178,838 97,919
Interest expense, including $0, $1,241, $0 and $1,382, respectively, to related parties 4,165 2,507 7,706 4,566
Other expense, net 468 391 647 609
Net loss before income taxes (51,250) (38,870) (103,922) (77,309)
Income tax provision — — — —
Net loss (51,250) (38,870) (103,922) (77,309)
Net loss attributable to non-controlling interests (41,285) (24,328) (86,914) (24,328)
Net loss attributable to Carvana Co. $ (9,965) $ (14,542) $ (17,008) $ (52,981)
Dividends on Class A convertible preferred stock (1,375) — (2,720) —
Accretion of beneficial conversion feature on Class A convertible preferred stock — — (1,380) —
Net loss attributable to Class A common stockholders $ (11,340) $ (14,542) $ (21,108) $ (52,981)
Net loss per share of Class A common stock, basic and diluted ⁽¹⁾
$ (0.41) $ (0.28) $ (0.92) $ (0.56)
Weighted-average shares of Class A common stock, basic and diluted ⁽¹⁾⁽²⁾
27,780 15,026 23,063 15,013


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Sales and operating revenues:
Used vehicle sales, net	$	855,785	$	437,922	$	1,539,614	$	771,978
Wholesale vehicle sales	63,014		16,622		96,044		26,755
Other sales and revenues, including $13,989, $5,544, $24,562, and $9,655, respectively, from related parties	67,422		20,742		105,797		36,975
Net sales and operating revenues	986,221		475,286		1,741,455		835,708
Cost of sales, including $1,217 and $1,210, $2,490 and $2,257 respectively, to related parties	848,428		426,251		1,515,130		752,439
Gross profit	137,793		49,035		226,325		83,269
Selling, general and administrative expenses, including $2,885, $2,115, $5,620 and $3,934 respectively, to related parties	181,843		95,652		337,084		178,838
Interest expense, including $333, $0, $666 and $0, respectively, to related parties	19,315		4,165		34,963		7,706
Other expense, net	694		468		933		647
Net loss before income taxes	(64,059)		(51,250)		(146,655)		(103,922)
Income tax provision	—		—		—		—
Net loss	(64,059)		(51,250)		(146,655)		(103,922)
Net loss attributable to non-controlling interests	(37,449)		(41,285)		(91,496)		(86,914)
Net loss attributable to Carvana Co.	(26,610)		(9,965)		(55,159)		(17,008)
Dividends on Class A convertible preferred stock	—		(1,375)		—		(2,720)
Accretion of beneficial conversion feature on Class A convertible preferred stock	—		—		—		(1,380)
Net loss attributable to Class A common stockholders	$	(26,610)	$	(11,340)	$	(55,159)	$	(21,108)
Net loss per share of Class A common stock, basic and diluted	$	(0.58)	$	(0.41)	$	(1.26)	$	(0.92)
Weighted-average shares of Class A common stock, basic and diluted⁽¹⁾	46,038		27,780		43,695		23,063

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

~~(2)~~ Weighted-average shares of Class A common stock outstanding have been adjusted for unvested restricted stock awards.

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

CARVANA CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ~~/ MEMBERS' DEFICIT~~

Class A Convertible Preferred Stock Class A Common Stock Class B Common Stock
Members' Deficit Shares Amount Shares Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Non-controlling Interests Total Stockholders' Equity
Balance, December 31, 2016 $ (115,961) — $ — — $ — — $ — $ — $ — $ — $ —
Equity-based compensation expense prior to Organizational Transactions 158 — — — — — — — — — —
Accrued return on Class C Redeemable Preferred Units (9,439) — — — — — — — — — —
Net loss prior to Organizational Transactions (49,942) — — — — — — — — — —
Conversion of Class C Redeemable Preferred Units for Class A Units 260,411 — — — — — — — — — —
Effect of Organizational Transactions (85,227) — — — — 117,236 117 (174,255) — 259,365 85,227
Issuance of Class A common stock sold in initial public offering, net of underwriters' discounts and commissions and offering expenses — — — 15,000 15 — — 205,910 — — 205,925
Net loss subsequent to Organizational Transactions — — — — — — — — (3,039) (24,328) (27,367)
Adjustments to the non-controlling interests — — — — — — — 846 — (846) —
Issuance of restricted stock awards, net of forfeitures — — — 544 1 — — (1) — — —
Restricted stock surrendered in lieu of withholding taxes — — — (21) — — — (299) — — (299)
Equity-based compensation expense subsequent to Organizational Transactions — — — — — — — 1,944 — — 1,944
Balance, June 30, 2017 $ — — $ — 15,523 $ 16 117,236 $ 117 $ 34,145 $ (3,039) $ 234,191 $ 265,430


	Class A Convertible Preferred Stock				Class A Common Stock					Class B Common Stock
	Shares	Amount		Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit		Non-controlling Interests		Total Stockholders' Equity
Balance, December 31, 2017	100	$	97,127	18,096	$	18	114,664	$	115	$	41,375	$	(12,899)	$	153,808	$	279,544


Net loss	—	—		—	—		—	—		—		(7,043)		(45,629)		(52,672)


Accretion of beneficial conversion feature on Class A convertible Preferred Stock	—	1,380		—	—		—	—		(1,380)		—		—		—
Dividends on Class A Convertible Preferred Stock	—	—		—	—		—	—		(1,345)		—		—		(1,345)
Exchanges of LLC Units	—	—		1,436	2		(1,341)	(2)		1,540		—		(1,540)		—
Establishment of deferred tax assets related to increases in tax basis in Carvana Group	—	—		—	—		—	—		7,484		—		—		7,484
Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group	—	—		—	—		—	—		(7,484)		—		—		(7,484)

Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes	—	—		(20)	—		—	—		(160)		—		—		(160)
Options exercised	—	—		4	—		—	—		63		—		—		63
Equity-based compensation	—	—		—	—		—	—		1,510		—		—		1,510
Balance, March 31, 2018	100	98,507		19,516	20		113,323	113		41,603		(19,942)		106,639		226,940

Net Loss	—	—		—	—		—	—		—		(9,965)		(41,285)		(51,250)
Issuance of Class A common stock sold in follow-on offering, net of underwriters' discounts and commissions and offering expenses	—	—		6,600	7		—	—		172,280		—		—		172,287
Adjustments to non-controlling interests related to follow-on offering	—	—		—	—		—	—		(132,375)		—		132,375		—
Issuance of LLC Units related to business acquisitions	—	—		—	—		—	—		—		—		9,981		9,981
Adjustments to the non-controlling interests related to business acquisitions	—	—		—	—		—	—		1,297		—		(1,297)		—
Dividends on Class A Convertible Preferred Stock	—	—		—	—		—	—		(1,375)		—		—		(1,375)
Exchanges of LLC Units	—	—		8,133	7		(7,506)	(7)		11,052		—		(11,052)		—
Establishment of deferred tax assets related to increases in tax basis in Carvana Group	—	—		—	—		—	—		63,748		—		—		63,748
Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group	—	—		—	—		—	—		(63,748)		—		—		(63,748)
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes	—	—		(16)	—		—	—		(163)		—		—		(163)
Options exercised	—	—		9	—		—	—		106		—		—		106
Equity-based compensation	—	—		—	—		—	—		2,583		—		—		2,583
Balance, June 30, 2018	100	$	98,507	34,242	$	34	105,817	$	106	$	95,008	$	(29,907)	$	195,361	$	359,109

CARVANA CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ~~/ MEMBERS' DEFICIT~~ - (Continued)

Class A Convertible Preferred Stock Class A Common Stock Class B Common Stock
Members' Deficit Shares Amount Shares Amount Shares Amount Additional Paid-in Capital Accumulated Deficit Non-controlling Interests Total Stockholders' Equity
Balance, December 31, 2017 $ — 100,000 $ 97,127 18,096 $ 18 114,664 $ 115 $ 41,375 $ (12,899) $ 153,808 $ 279,544
Net loss — — — — — — — — (17,008) (86,914) (103,922)
Issuance of Class A common stock sold in follow-on offering, net of underwriters' discounts and commissions and offering expenses — — — 6,600 7 — — 172,280 — — 172,287
Adjustment to non-controlling interests related to follow-on offering — — — — — — — (132,375) — 132,375 —
Issuance of LLC Units related to business acquisitions — — — — — — — — — 9,981 9,981
Adjustment to non-controlling interests related to business acquisitions — — — — — — — 1,297 — (1,297) —
Accretion of beneficial conversion feature on Class A Convertible Preferred Stock — — 1,380 — — — — (1,380) — — —
Dividends on Class A Convertible Preferred Stock — — — — — — — (2,720) — — (2,720)
Exchanges of LLC Units — — — 9,569 9 (8,847) (9) 12,592 — (12,592) —
Establishment of deferred tax assets related to increases in tax basis in Carvana Group — — — — — — — 71,232 — — 71,232
Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group — — — — — — — (71,232) — — (71,232)
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes — — — (36) — — — (323) — — (323)
Options exercised — — — 13 — — — 169 169
Equity-based compensation expense — — — — — — — 4,093 — — 4,093
Balance, June 30, 2018 $ — 100,000 $ 98,507 34,242 $ 34 105,817 $ 106 $ 95,008 $ (29,907) $ 195,361 $ 359,109


	Class A Convertible Preferred Stock				Class A Common Stock					Class B Common Stock
	Shares	Amount		Shares	Amount		Shares	Amount		Additional Paid-in Capital		Accumulated Deficit		Non-controlling Interests		Total Stockholders' Equity
Balance, December 31, 2018	—	$	—	41,208	$	41	104,336	$	104	$	147,916	$	(74,653)	$	154,020	$	227,428
Net loss	—	—		—	—		—	—		—		(28,549)		(54,047)		(82,596)
Exchanges of LLC Units	—	—		2,020	2		(1,984)	(2)		1,899		—		(1,899)		—
Establishment of deferred tax assets related to increases in tax basis in Carvana Group	—	—		—	—		—	—		25,582		—		—		25,582
Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group	—	—		—	—		—	—		(25,582)		—		—		(25,582)
Contribution of Class A common stock from related party	—	—		(72)	—		—	—		—		—		—		—
Issuance of Class A common stock to settle vested restricted stock units	—	—		74	—		—	—		—		—		—		—
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes	—	—		(14)	—		—	—		(433)		—		—		(433)
Options exercised	—	—		27	—		—	—		426		—		—		426
Equity-based compensation	—	—		—	—		—	—		8,022		—		—		8,022
Balance, March 31, 2019	—	—		43,243	43		102,352	102		157,830		(103,202)		98,074		152,847
Net Loss	—	—		—	—		—	—		—		(26,610)		(37,449)		(64,059)
Issuance of Class A common stock, net of underwriters' discounts and commissions and offering expenses	—	—		4,830	5		—	—		297,606		—		—		297,611
Adjustment to non-controlling interests related to equity offering	—	—		—	—		—	—		(201,015)		—		201,015		—






Exchanges of LLC Units	—	—		1,612	2		(971)	(1)		1,571		—		(1,571)		1
Establishment of deferred tax assets related to increases in tax basis in Carvana Group	—	—		—	—		—	—		33,573		—		—		33,573
Establishment of valuation allowance related to deferred tax assets associated with increases in tax basis in Carvana Group	—	—		—	—		—	—		(33,573)		—		—		(33,573)
Contribution of Class A common stock from related party	—	—		(43)	—		—	—		—		—		—		—
Issuance of Class A common stock to settle vested restricted stock units	—	—		78	—		—	—		—		—		—		—
Forfeitures of restricted stock and restricted stock surrendered in lieu of withholding taxes	—	—		(13)	—		—	—		(1,557)		—		—		(1,557)
Options exercised	—	—		25	—		—	—		372						372
Equity-based compensation	—	—		—	—		—	—		8,602		—		—		8,602
Balance, June 30, 2019	—	$	—	49,732	$	50	101,381	$	101	$	263,409	$	(129,812)	$	260,069	$	393,817

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

CARVANA CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,
2018 2017
Cash Flows from Operating Activities:
Net loss $ (103,922) $ (77,309)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense 9,862 4,645
Loss on disposal of property and equipment 267 565
Provision for bad debt and finance receivable allowance 1,131 494
Gain on loan sales (22,313) (8,390)
Equity-based compensation expense 4,093 2,102
Amortization and write-off of debt issuance costs 649 1,250
Originations of finance receivables (525,885) (223,843)
Proceeds from sale of finance receivables 513,820 231,942
Changes in assets and liabilities:
Accounts receivable (9,500) (8,293)
Vehicle inventory (74,817) 11,668
Other current assets (7,397) (1,538)
Other assets 270 (1,148)
Accounts payable and accrued liabilities 33,002 942
Accounts payable to related party 1,391 285
Other liabilities (136) 5,337
Net cash used in operating activities (179,485) (61,291)
Cash Flows from Investing Activities:
Purchases of property and equipment (73,425) (42,576)
Business acquisitions, net of cash acquired (6,670) —
Net cash used in investing activities (80,095) (42,576)
Cash Flows from Financing Activities:
Proceeds from floor plan facility 837,673 397,082
Payments on floor plan facility (739,378) (395,555)
Proceeds from Verde Credit Facility — 35,000
Payments on Verde Credit Facility — (35,000)
Proceeds from long-term debt 25,670 2,980
Payments on long-term debt (2,852) (641)
Payments of debt issuance costs, including $0 and $1,000 to related parties, respectively (325) (1,000)
Net proceeds from issuance of Class A common stock 172,287 206,323
Proceeds from exercise of stock options 169 —
Tax withholdings related to restricted stock awards (323) —
Dividends paid on Class A Convertible Preferred Stock (2,904) —
Payments of costs related to issuance of Class A Convertible Preferred Stock (12) —
Net cash provided by financing activities 290,005 209,189
Net increase in cash, cash equivalents and restricted cash 30,425 105,322
Cash, cash equivalents and restricted cash at beginning of period 187,123 49,450
Cash, cash equivalents and restricted cash at end of period $ 217,548 $ 154,772

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 (collectively, "Carvana Co.") together with its consolidated subsidiaries (the “Company”) is a leading e-commerce platform for buying and selling used cars. The Company is transforming the used car ~~buying~~sales experience by giving consumers what they want — a wide selection, great value and quality, transparent pricing and a simple, no pressure transaction. Using the website, customers can complete all phases of a used vehicle purchase transaction including financing their purchase, trading in their current vehicle and purchasing complementary products such as vehicle service contracts ("VSC") and GAP waiver coverage. Each element of the Company's business, from inventory procurement to fulfillment and overall ease of the online transaction, has been built for this singular purpose.

Organization ~~and Initial Public Offering~~

Carvana Co. is a holding company that was formed as a Delaware corporation on November 29, 2016 for the purpose of completing anits 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.~~

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

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

• Carvana Group amended and restated its limited liability company operating agreement (the "LLC Agreement") to, among other things, (i) eliminate a class of preferred membership interests, (ii) provide for two classes of common ownership interests in Carvana Group held by the then-existing holders of LLC units (the "Original LLC Unitholders" and together with any holders of LLC units issued subsequent to the IPO, the "LLC Unitholders") consisting of Class B common units (the “Class B Units”) and Class A common units (the “Class A Units”), and (iii) appoint Carvana Co. as the sole manager of Carvana Group;

• Carvana Co. amended and restated its certificate of incorporation to authorize (i) 50.0 million shares of Preferred Stock, par value $0.01 per share, (ii) 500.0 million shares of Class A common stock, par value $0.001 per share, and (iii) 125.0 million shares of Class B common stock, par value $0.001 per share. Each share of Class A common stock generally entitles its holder to one vote on all matters to be voted on by stockholders. Each share of Class B common stock held by Ernest Garcia, II, Ernie Garcia, III and entities controlled by one or both of them (collectively, the "Garcia Parties") generally entitles its holder to ten votes on all matters to be voted on by stockholders. All other shares of Class B common stock generally entitle their holders to one vote per share on all matters to be voted on by stockholders;

~~• Carvana Group converted its outstanding Class C Redeemable Preferred Units into approximately 43.1 million Class A Units;~~

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

• Carvana Co. issued approximately 117.2 million shares of Class B common stock to holders of Class A Units, on a four-to-five basis with the number of Class A Units they owned, for nominal consideration; and,

~~• Carvana Co. transferred approximately 0.2 million Class A Units to Ernest Garcia, II in exchange for his 0.1% ownership interest in Carvana, LLC, a majority-owned subsidiary of Carvana Group.~~Group's existing domestic restricted subsidiaries.

In accordance with ~~the LLC Agreement,~~Carvana Group LLC's amended and restated limited liability company agreement (the "LLC Agreement"), Carvana Co. ~~has all management powers over~~is the ~~business and affairs~~sole manager of Carvana Group, LLC and conducts, directs and exercises full control over the activities of Carvana Group. There are two classes of common ownership interests in Carvana Group, LLC, Class A common units (the "Class A Units") and Class B common units (the "Class B Units"). As further discussed in Note 10 — Stockholders' Equity, the Class A Units and Class B Units ~~(the~~(collectively, the "LLC Units") do not hold voting rights, which results in Carvana Group, LLC being considered a variable interest entity ("VIE"). Due to Carvana Co.'s power to control and its significant economic interest in Carvana Group, it is considered the primary beneficiary of the VIE and the Company consolidates the financial results of Carvana Group. As of June 30, ~~2018,~~2019, Carvana Co. owned approximately ~~23.4%~~31.8% of Carvana Group and the LLC Unitholders owned the remaining ~~76.6%~~68.2%.

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

~~Follow-On Public Offering~~

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

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

~~Convertible Preferred Stock~~

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. All intercompany balances and transactions have been eliminated. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The Company believes the disclosures made are adequate to prevent the information presented from being misleading. However, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included within ~~our~~the Company's most recent Annual Report on Form 10-K.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary to present fairly the Company’s financial position as of June 30, ~~2018,~~2019, results of operations for the three and six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, and cash flows and changes in ~~stockholders'~~stockholder's equity for

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

the six months ended June 30, ~~2018~~2019 and ~~2017.~~2018. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

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

The accompanying interim unaudited condensed consolidated financial statements of the Company have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. The Company has incurred

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

losses from inception through June 30, ~~2018,~~2019, and expects to incur additional losses in the future. As the Company continues to ~~fund growth~~grow into new markets, ~~fund construction of~~build vending machines and inspection and reconditioning centers ("IRCs") and enhance technology and software development efforts, it needs access to substantial capital. From inception, the Company has primarily funded operations through the sale of Class A Units, the sale of Class C Redeemable Preferred Units, capital contributions from DriveTime, its IPO completed on May 3, 2017 for net proceeds of approximately $205.8 million, its follow-on offering completed on April 30, 2018 for net proceeds of approximately $172.3 million, its issuance of ~~Class A Convertible Preferred Stock on December 5, 2017 for net proceeds~~equity instruments and the issuance of ~~approximately $98.5 million, and short-term funding from the Company’s majority owner.~~senior unsecured notes. The Company has historically funded vehicle inventory purchases through its Floor Plan Facility, ~~described in further detail in Note 8 — Debt Instruments,~~ and as of June 30, 2019 had approximately ~~$2.9~~$626.2 million available under ~~the~~its $650.0 million Floor Plan Facility that matures in October 2020 to fund future vehicle inventory purchases, as described in further detail in Note 9 — Debt Instruments. As of June 30, ~~2018. The~~2019, the Company ~~plans to increase the amount and extend the maturity date of financing~~also has approximately $634.1 million available to ~~purchase vehicle inventory by amending its existing Floor Plan Facility or by entering into a~~fund finance receivables under new ~~agreement prior to the maturity date of the Floor Plan Facility.~~revolving facilities, as further discussed in Note 9 — Debt Instruments. The Company has also funded ~~certain~~a portion of its capital expenditures through long-term financing with ~~third parties~~lenders and other investors as described in further detail in Note 89 — Debt ~~Instruments.~~Instruments and Note 15 — Leases. The Company has ~~historically~~ entered into securitization transactions and various agreements under which it sells the finance receivables it originates to ~~third parties. As of June 30, 2018,~~financing partners, subject to each party's rights under the ~~Company sells finance receivables under multiple~~respective agreements, ~~all of which expire~~as further discussed in ~~November 2018. The Company plans to extend or enter into new agreements to sell its finance receivables to third parties prior to the expiration of the agreements.~~Note 7 — Finance Receivable Sale Agreements and Note 8 — Securitizations and Variable Interest Entities. Management believes that ~~its~~ current working capital and expected continued inventory, ~~and~~ capital expenditure, and receivables financing are sufficient to fund operations for at least one year from the financial statement issuance date.

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

During the three and six months ended June 30, 2019 and 2018, the Company had no other components of comprehensive loss and, therefore, the net loss and comprehensive loss were the same for all periods presented.

As of June 30, 2019 and December 31, 2018, restricted cash includes the deposit required under the Company's Floor Plan Facility, which is 5% of the outstanding floor plan facility principal balance. As of June 30, 2019, the balance also includes the deposits required under the Company's Finance Receivable Facilities, which is 2% of the pledged outstanding finance receivable principal balance and any undistributed amounts collected on the pledged finance receivables. Refer to Note 9 — Debt Instruments for further explanation.

As discussed below, the Company adopted ASC 842 on January 1, 2019. Under ASC 842, the Company determines if an arrangement is a lease at inception by evaluating if the asset is explicitly or implicitly identified or distinct, if the Company will receive substantially all of the economic benefit or if the lessor has an economic benefit and the ability to substitute the asset. Right-of-use ("ROU") assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The Company assesses whether the lease is an operating or finance lease at its inception. Operating lease liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. To calculate the present value, the Company uses the implicit rate in the lease when readily determinable. However, most of the Company's leases do not provide an implicit rate and it uses its incremental borrowing rate. The incremental borrowing rate is based on collateralized borrowings of similar assets with terms that approximate the lease term when available and when collateralized rates are not available, it uses uncollateralized rates with similar terms adjusted for the fact that it is an unsecured rate. The operating lease ROU asset is the initial lease liability adjusted for any prepayments, initial indirect costs incurred by the Company, and lease incentives. The Company's operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities in its

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

accompanying unaudited condensed consolidated balance sheets. The Company's finance leases are included in property and equipment, and other debt in its accompanying unaudited condensed consolidated balance sheets.

Securitizations and Variable Interest Entities

The Company reviews subsidiaries and affiliates, as well as other entities, to determine if they should be considered variable interest entities, and whether it should change the consolidation determinations based on changes in their characteristics. The Company considers an entity a VIE if its equity investors own an interest therein that lacks the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or if the entity is structured with non-substantive voting interests. A VIE is consolidated by its primary beneficiary, the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company evaluates whether it has variable interests in the VIE and if so, if it is the primary beneficiary of the VIE on an ongoing basis. The Company consolidates VIEs when it is deemed to be the primary beneficiary.

The Company sponsors asset-backed securitization transactions. These transactions often result in the creation of securitization trusts, which are VIEs. To comply with Regulation RR of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Risk Retention Rules") the Company retains at least 5% interest in the credit risk of the underlying finance receivables, which it accomplishes by retaining at least a 5% interest in each security issued by the securitization trusts. Typically, this includes notes and certificates, which are presented as beneficial interests in securitizations in the accompanying unaudited condensed consolidated balance sheets.

Fair Value Measurements

The fair value of financial instruments is based on estimates using quoted market prices, discounted cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated timing and amount of future cash flows. Therefore, the estimates of fair value may differ substantially from amounts that ultimately may be realized or paid at settlement or maturity of the financial instruments, and those differences may be material. Accordingly, the aggregate fair value amounts presented may not represent the Company’s underlying institutional value.

The Company uses the three-tier hierarchy established by U.S. GAAP, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value to determine the fair value of its financial instruments. This hierarchy indicates to what extent the inputs used in the Company’s calculations are observable in the market. The different levels of the hierarchy are defined as follows:


Level 1:						Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2:						Other than quoted prices that are observable in the market for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3:						Inputs are unobservable and reflect management's estimates of assumptions that market participants would use in pricing the asset or liability.

The Company has elected the fair value option for its beneficial interests in securitization trusts, which primarily include notes and certificates of the securitization trust. Electing the fair value option allows the Company to recognize changes in the fair value of these assets in the period the fair value changes. The changes in fair value are recorded within other expense, net and amounts attributable to interest income are reported in interest expense, net on the accompanying unaudited condensed consolidated statement of operations.

See Note 17 — Fair Value of Financial Instruments for additional information.

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

processes to sell those products and services to similar classes of customers throughout the United States (“U.S.”). Substantially all revenue is generated and all assets are held in the U.S. for all periods presented.

~~Comprehensive Loss~~

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

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

~~Revenue Recognition~~

~~Used Vehicle Sales~~

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

~~Wholesale Vehicle Sales~~

~~The Company sells vehicles to wholesalers. These vehicles sold to wholesalers are primarily acquired from customers~~

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

~~Other Sales and Revenues~~

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

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

for estimated contract cancellations. The reserve for cancellations is estimated based upon historical experience and recent trends and is reflected as a reduction of other sales and revenues. Changes in these estimates are reflected as an adjustment to revenue in the period identified.

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

Adoption of New Accounting Standards

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

~~Accounting Standards Issued But Not Yet Adopted~~

The Company adopted ASC 842 ~~is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018 and should be applied~~on January 1, 2019 using athe modified retrospective approach, the practical expedient package and the transition relief option, which allowed the Company to, among other things, avoid reassessing lease classification for existing leases, forego the balance sheet recognition requirements with ~~the option~~respect to ~~elect various practical expedients. The Company plans to adopt ASC 842 for its fiscal year beginning January 1, 2019.~~short-term leases and avoid restating comparative periods presented. The adoption of ASC 842 ~~will require the~~resulted in initial recognition of a right-of-use asset and a lease obligation for the Company’s leases (see Note 14 — Commitments and Contingencies). While the Company is still evaluating the full effect this guidance will have on its consolidated financial statements and related disclosures, the Company anticipates recognizing right-of-useROU assets and operating lease liabilities ~~which will~~of approximately $80.3 million and $86.8 million, respectively, as of January 1, 2019, and did not have ~~a material~~an impact ~~upon adoption primarily on its consolidated balance sheets and related disclosures, and will increase total assets and liabilities.~~

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

In June 2018, the FASB issued ASU 2018-07, Compensation — Stock Compensation (Topic 718) ("ASU 2018-07") related to the accounting for share-based payment transactions for acquiring goods and services from nonemployees. Under ASU 2018-07, the intent is to simplify and align most requirements for share-based payments to nonemployees with the requirements for share-based payments granted to employees under ASC 718, including measuring the equity instruments at the grant-date fair value. The Company adopted ASU 2018-07 on January 1, 2019 using the modified retrospective approach. The adoption of ASU 2018-07 did not have a material effect on the Company’s consolidated financial statements.

Accounting Standards Issued But Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, ~~2018,~~2019, and ~~will be applied on a modified retrospective basis through a cumulative-effect adjustment to accumulated deficit.~~earlier adoption is permitted beginning in the first quarter of fiscal 2019. Debt securities available for sale are excluded from the scope of ASU 2016-13. The Company plans to adopt ASU ~~2018-07~~2016-13 for its fiscal year beginning January 1, 2020. Finance receivables originated in connection with the Company’s vehicle sales are held for sale and are subsequently sold. The Company does not presently hold any finance receivables until maturity. Therefore, the Company does not expect adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

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

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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

In October 2018, the ~~Company's~~FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). ASU 2018-17 requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety for determining whether a decision-making fee is a variable interest. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the amendments in ASU 2018-17 retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. The Company plans to adopt ASU 2018-15 for its fiscal year beginning January 1, 2020 and is currently assessing the impact, if any, the guidance will have on its consolidated financial statements.

NOTE 3 — PROPERTY AND EQUIPMENT, NET

The following table summarizes property and equipment, net as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):

Depreciation and amortization expense on property and equipment was approximately ~~$4.9~~$8.4 million and ~~$2.6~~$4.9 million for the three months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and approximately ~~$9.5~~$16.1 million and ~~$4.6~~$9.5 million for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. These amounts primarily relate to selling, general and administrative activities and are included as a component of selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS, NET

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

The purchase price was allocated to net tangible assets of approximately $0.2 million and intangible assets of approximately $9.9 million based on their fair values on the acquisition ~~date.~~date and a related deferred tax liability of

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

approximately $2.5 million. The deferred tax liability will amortize over 3 years to 7 years, and approximately $0.0 million and $0.4 million was amortized during the three and six months ended June 30, 2019, respectively, and $0.0 million was amortized during the three and six months ended June 30, 2018. The excess of the purchase price over the amounts allocated to assets acquired, ~~and~~ liabilities assumed and the deferred tax liability was ~~$6.9~~approximately $9.4 million, which has been recorded as goodwill.

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

The following table summarizes intangible assets and goodwill related to the Car360 acquisition as of June 30, 2019 and December 31, 2018 (in thousands):

~~Useful Life~~

~~June 30, 2018~~

~~Intangible assets:~~

~~Developed technology~~

~~7 years~~

~~8,642~~

~~Customer relationships~~

~~5 years~~

~~523~~

~~Non-compete agreements~~

~~5 years~~

~~774~~

~~Intangible assets, acquired cost~~

~~9,939~~

~~Less: accumulated amortization on intangible assets~~

~~(323)~~

~~Intangible assets, net~~

~~9,616~~

~~Goodwill~~

~~N/A~~

~~6,868~~


	Useful Life	June 30, 2019		December 31, 2018
Intangible assets:
Developed technology	7 years	$	8,642	$	8,642
Customer relationships	3 years	523		523
Non-compete agreements	5 years	774		774
Intangible assets, acquired cost		9,939		9,939
Less: accumulated amortization		(1,843)		(1,070)
Intangible assets, net		$	8,096	$	8,869

Goodwill	N/A	$	9,353	$	9,353

Amortization expense was approximately $0.4 million and $0.8 million during the three and six months ended June 30, ~~2018 was~~2019, respectively, and approximately $0.3 ~~million.~~million during both the three and six months ended June 30, 2018. As of June 30, ~~2018,~~2019, the remaining weighted-average amortization period for definite-lived intangible assets was approximately ~~6.5~~5.4 years. The anticipated annual amortization expense to be recognized in future years as of June 30, ~~2018~~2019 is as follows (in thousands):

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

NOTE 5 — ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES

The following table summarizes accounts payable and other accrued liabilities as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):

NOTE 6 — RELATED PARTY TRANSACTIONS

In November 2014, the Company and DriveTime Automotive Group ("DriveTime") entered into a lease agreement that governs the Company’s access to and utilization of temporary storage, reconditioning, offices and parking space at various DriveTime inspection and reconditioning centers ~~("IRCs")~~ and retail facilities (the "DriveTime Lease Agreement"). The DriveTime Lease Agreement was most recently amended in ~~March~~December 2018. Lease duration varies by location, with ~~initial~~cancellable terms, provided 60 days' prior written notice is given, expiring between ~~2018~~2021 and 2024. Most of the retail facilities ~~have two-year terms and~~allow the Company ~~is entitled~~ to exercise up to two consecutive ~~one-year~~one-year renewal options at up to ten of these ~~locations.~~locations, less the number of locations renewed under the DriveTime Hub Lease Agreement described below.

~~Under~~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 retail facilities (the "DriveTime Hub Lease Agreement"). The DriveTime Hub Lease Agreement was most recently amended in December 2018. Lease expiration varies by location with most having cancellable terms, provided 60 days' prior written notice is given, expiring in 2021 and the Company having the right to exercise up to two consecutive one-year renewal options at up to ten of these locations, less the number of locations renewed under the DriveTime Lease Agreement described above.

The DriveTime Lease Agreement and the DriveTime Hub Lease Agreement both have non-cancellable lease terms of less than twelve months with rights to terminate at the Company's election with 60 days prior written notice and extension options as described above. It is not reasonably certain that the Company ~~pays~~will exercise its options to extend the leases or abstain from exercising its termination rights at the hub locations within these lease agreements to create a lease term greater than one year and therefore the Company accounts for them as short-term leases. The Company expects to extend the lease terms of the locations where it reconditions vehicles beyond twelve months, therefore those locations are not considered short-term leases. Under these lease agreements the Company makes variable monthly ~~rental fee related to~~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. The Company pays actual insurance costs and real estate taxes directly at locations where it occupies all of the space, including the Blue Mound and Delanco inspection and reconditioning centers. The Company is additionally responsible for paying for any tenant improvements it requires to conduct its operations and its share of estimated costs incurred by DriveTime related to preparing these sites for use. As it relates to locations where the Company reconditions vehicles, the Company’s share of facility and shared reconditioning supplies expenses are ~~calculated based on~~related to the actual costs for operating the inspection and reconditioning centers and the Company’s pro rata share of total reconditioned vehicles and parking spaces at such inspection and reconditioning

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centers in a given month. Management has determined that the costs allocated to the Company are based on a reasonable methodology.

~~Separate from the DriveTime Lease Agreement, in~~In December 2016, the Company entered into a lease agreement related to a vehicle inspection and reconditioning center in Tolleson, Arizona, with Verde Investments, Inc., an affiliate of DriveTime ("Verde"), with an initial term of approximately 15 years. In August 2018, the Company entered into an additional lease agreement with a coterminous initial term with Verde for contiguous space to that inspection and reconditioning center. The lease ~~agreement requires~~agreements require monthly rental payments and can each be extended for four additional ~~five-year~~five-year periods.

In February 2017, the Company ~~also~~ entered into a lease agreement with DriveTime for sole occupancy of a ~~fully-operational~~fully operational inspection and reconditioning center in Winder, Georgia, where the Company previously maintained partial occupancy. The lease has an initial term of eight years, subject to the Company's ability to exercise three renewal options of five years each.

In November 2018, the Company entered into a lease agreement with DriveTime for access to and utilization of a fully operational inspection and reconditioning center near Cleveland, Ohio. DriveTime vacated the facility in February 2019, at which point the Company became the sole occupant and purchased certain leasehold improvements and equipment at the facility from DriveTime for DriveTime's net book value of approximately $4.3 million and began leasing the full facility from DriveTime. The lease has an initial term of three years, subject to the Company's ability to exercise three renewal options of five years each. Before DriveTime vacated the facility, the Company paid a monthly rental fee for facility and shared reconditioning costs, calculated based on the Company’s pro rata utilization of space at the inspection and reconditioning center in a given month, along with a pro rata share of the facility’s actual insurance costs and real estate taxes. Management has determined that the costs allocated to the Company are based on a reasonable methodology.

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. During the three months ended June 30, 2019, total costs related to these operating lease agreements, including those noted above, were approximately $2.0 million with approximately $0.9 million and $1.1 million allocated to inventory and selling, general and administrative expenses, respectively. During the six months ended June 30, 2019, total costs related to these lease agreements were approximately $4.0 million with approximately $1.7 million and $2.3 million allocated to inventory and selling, general and administrative expenses, respectively. During the three months ended June 30, 2018, total costs related to these lease agreements were approximately $2.3 million with approximately $1.1 million and $1.2 million allocated to inventory and selling, general and administrative expenses, respectively. During the six months ended June 30, 2018, total costs related to these lease agreements were approximately $4.5 million with approximately $2.1 million and $2.4 million allocated to inventory and selling, general and administrative expenses, respectively. During the three months ended June 30, 2017, total costs related to these lease agreements were approximately $1.8 million with approximately $0.6 million and $1.2 million allocated to inventory and selling, general and administrative expenses, respectively. During the six months ended June 30, 2017, total costs related to these lease agreements were approximately $3.4 million with approximately $1.2 million and $2.2 million allocated to inventory and selling, general and administrative expenses, respectively.

~~CARVANA CO. AND SUBSIDIARIES~~Lease Assumption from DriveTime

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~In February 2019, the Company entered into an agreement to assume a lease of an inspection and reconditioning center near Nashville, Tennessee that DriveTime leased from an unrelated landlord. As part of the agreement, the Company purchased from DriveTime certain leasehold improvements and equipment at the facility for DriveTime's net book value of approximately $2.0 million when the Company became the sole occupant in April 2019. The lease expires in four years, subject to the ability to exercise three renewal options of five years each. DriveTime remained an occupant of the facility through April 1, 2019 but is not fully released from lease obligations by the landlord.

Corporate Office Leases

During the first quarter of 2017, the Company subleased additional office space at DriveTime’s corporate headquarters in Tempe, Arizona. Pursuant to this arrangement, the Company incurred rent expense of approximately $0.1 million during the three months ended March 31, 2017, after which this arrangement was terminated.

In September 2016, the Company entered into a lease ~~with a third party~~ for the second floor of its corporate headquarters in Tempe, Arizona. DriveTime guarantees up to $0.5 million of the Company's rent payments under that lease through September 2019. In connection with that lease, the Company entered into a sublease with DriveTime for the use of the first floor of the same building. The lease and sublease each have a term of 83 months, subject to the right to exercise three ~~five-year~~five-year extension options. Pursuant to the sublease, ~~which is co-terminus with DriveTime's master lease,~~ the Company will pay DriveTime rent equal to the amounts due under DriveTime's master lease. During the three and six months ended June 30, 2019, the rent expense incurred related to this first floor sublease was approximately $0.3 million and $0.5 million, respectively. During the three and six months ended June 30, 2018, the rent expense incurred related to this first floor sublease was approximately $0.2 million and $0.4 million, respectively. ~~During the three and six months ended June 30, 2017, the rent expense incurred related to this first floor sublease was approximately $0.2 million and $0.3 million, respectively.~~

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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 ~~vehicle service contracts ("VSCs") and GAP waiver coverage~~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. The Company recognized approximately $13.1 million and $23.2 million during the three and six months ended June 30, 2019, respectively, and approximately $5.5 million and $9.7 million during the three and six months ended June 30, 2018, respectively, ~~and approximately $1.9 million and $3.7 million during the three and six months ended June 30, 2017, respectively,~~ of commissions earned on VSCs sold to its customers and administered by ~~DriveTime.~~DriveTime, net of a reserve for estimated contract cancellations. The commission earned on the sale of these VSCs is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations. In November 2018, the Company amended the Master Dealer Agreement to allow the Company to receive payments for excess reserves based on the performance of the VSCs versus the reserves held by the VSC administrator, once a required claims period for such VSCs has passed. The Company recognized approximately $0.9 million and $1.4 million, respectively, during the three and six months ended June 30, 2019, and $0.0 million during both the three and six months ended June 30, 2018 related to payments for excess reserves to which it expects to be entitled, which is included in other sales and revenues in the accompanying unaudited condensed consolidated statement of operations.

Beginning in 2017, DriveTime also administers a portion of the Company's GAP waiver coverage and the limited warranty provided to all customers under the Master Dealer Agreement. The Company pays a per-contract fee to DriveTime to administer a portion of the GAP waiver coverage it sells to its ~~customers.~~customers and a per-vehicle fee to DriveTime to administer the limited warranty included with every purchase. The Company incurred approximately ~~$0.0~~$1.1 million and ~~$0.1~~$1.9 million during the three and six months ended June 30, 2019, respectively, and $0.5 million and $0.8 million during the three and six months ended June 30, 2018, respectively, related to the administration of GAP waiver coverage and ~~$0.0~~limited warranty.

GAP Waiver Insurance Policy

In March 2019 and June 2019, the Company purchased insurance policies from BlueShore Insurance Company ("BlueShore"), an affiliate of DriveTime, for approximately $1.0 million and $0.6 million, respectively, that reimburses the lienholder of finance receivables with GAP waiver coverage for any GAP waiver claims on a defined set of finance receivables that the Company sold in its securitization transactions. This insurance is transferred with the underlying finance receivable. Simultaneously with the March 2019 policy, the Company entered into a retrospective profit sharing agreement with BlueShore under which the Company will share in the profits generated from the insurance policies by receiving a portion of the excess of the premium it paid to BlueShore, net of a fee, compared to the amount BlueShore pays out related to the GAP waiver claims. As of June 30, 2019, the Company held a receivable of approximately $0.2 million, which is included in other assets on the accompanying unaudited condensed consolidated balance sheets, related to this retrospective profit sharing agreement.

Servicing and Administrative Fees

DriveTime provides servicing and administrative functions associated with the Company's finance receivables. The Company incurred expenses of approximately $0.5 million and $1.0 million during ~~the both~~ the three and six months ended June 30, ~~2017~~2019, respectively, and $0.2 million and $0.4 million during the three and six months ended June 30, 2018, respectively, related to ~~the administration of GAP waiver coverage.~~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 on May 15, 2017. Pursuant to the agreement, the Company agreed to reimburse DriveTime for actual expenses for each of ~~the flights in which the Company uses the aircrafts.~~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 approximately $0.2 million ~~and $0.3 million, respectively,~~ under this agreement during each of the three months ended June 30, 2019 and 2018, and ~~2017, respectively, and~~ approximately ~~$0.2~~$0.3 million and ~~$0.4~~$0.2 million under this agreement during the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

~~Credit Facility with~~

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Senior Unsecured Notes Held by Verde

As of both June 30, 2019 and December 31, 2018, Verde held $15.0 million of principal of the Company's outstanding senior unsecured notes, which are described further in Note 9 — Debt Instruments.

Accounts Payable Due to Related Party

As of June 30, 2019 and December 31, 2018, approximately $5.7 million and $3.9 million, respectively, was due to related parties primarily related to the agreements mentioned above, and is included in accounts payable to related party in the accompanying unaudited condensed consolidated balance sheets.

Contribution Agreements

On ~~February 27, 2017,~~September 10, 2018, the Company announced a commitment by its Chief Executive Officer, Ernest Garcia III, to contribute shares of the Company's Class A common stock, for each then-current employee from his personal shareholdings to the Company at no charge (the “Share Contributions”). His contributions are intended to fund equity awards of 165 restricted stock units to each of the Company's then-current employees upon their satisfying certain employment tenure requirements (the "100k Milestone Gift"). The Company entered into certain contribution agreements related to his commitment in order to effect the transfer of shares from Mr. Garcia to the Company. The Company does not expect Mr. Garcia to incur any tax obligations related to the Share Contributions, but pursuant to a ~~credit facility with Verde~~series of contribution agreements, it has indemnified Mr. Garcia from any such obligations that may arise. See Note 10 — Stockholders' Equity and Note 12 — Equity-Based Compensation for an amount up to $50.0 million (the "Verde Credit Facility"). Amounts outstanding accrued interest at a rate of 12.0% per annum. Upon execution of the agreement, the Company paid Verde a commitment fee of $1.0 million. In connection with the IPO, the Company repaid the outstanding principal balance of $35.0 million and accrued interest of approximately $0.4 million in full and the Verde Credit Facility agreement terminated.further discussion.

IP License Agreement

In February 2017, the Company entered into a license agreement that governs the rights of certain intellectual property owned by the Company and the rights of certain intellectual property owned by DriveTime. The license agreement, which was amended and restated in April 2017, generally provides that each party grants to the other certain limited exclusive (other than with respect to the licensor party and its

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

affiliates) and non-exclusive licenses to use certain of its intellectual property, and each party agrees to certain covenants not to sue the other party, its affiliates and certain of its service providers in connection with various patent claims. The exclusive license to DriveTime is limited to the business that is primarily of subprime used car sales to retail customers. However, upon a change of control of either party, both parties’ license rights as to certain future improvements to licensed intellectual property and all limited exclusivity rights are terminated. The agreement does not provide a license to any of the Company's patents, trademarks, logos, customers’ personally identifiable information or any intellectual property related to the Company's vending machines, automated vehicle photography or certain other elements of the Company's brand.

~~Accounts Payable Due to Related Party~~

Amounts payable to DriveTime and Verde under the agreements explained above, as well as invoices DriveTime initially paid on behalf of the Company for vehicle reconditioning costs and general and administrative expenses, are included in accounts payable to related party in the accompanying unaudited condensed consolidated balance sheets. As of June 30, 2018 and December 31, 2017, approximately $3.2 million and $1.8 million, respectively, was due to related parties primarily related to lease agreements, shared service fees, net VSC fees collected from customers and repayments to DriveTime for invoices paid on behalf of the Company.

NOTE 7 — FINANCE RECEIVABLE SALE AGREEMENTS

In December 2016, the Company entered into a master purchase and sale agreement (the ~~"Purchase~~"Master Purchase and Sale Agreement" or "MPSA") and a master transfer agreement (the "2016 Master Transfer Agreement") pursuant to which it sells finance receivables meeting certain underwriting criteria to certain ~~third party purchasers,~~financing partners, including Ally Bank and Ally Financial (the "Ally Parties"). Through November 2017 under the ~~Purchase and Sale Agreement~~MPSA and the 2016 Master Transfer Agreement, the Company could sell up to an aggregate of $375.0 million, and $292.2 million, respectively, in principal balances of finance receivables subject to adjustment as described in the respective agreements.

On November 3, 2017, the Company amended its ~~Purchase and Sale Agreement~~MPSA to increase the aggregate amount of principal balances of finance receivables it can sell from $375.0 million to $1.5 billion. ~~Also~~On November 2, 2018, the Company amended the MPSA to, among other things and subject to the terms of the agreement, commit the purchaser to purchase up to a maximum of $1.25 billion of principal balances of finance receivables after the amendment date. Subsequently, on April 19, 2019, the Company amended the MPSA to, among other things and subject to the terms of the agreement, commit the purchaser to purchase up to a maximum of $1.0 billion of principal balances of finance receivables after the amendment date.

During the six months ended June 30, 2019 and 2018, the Company sold approximately $257.0 million and $308.8 million, respectively, in principal balances of finance receivables under the MPSA and had approximately $820.2 million of unused capacity as of June 30, 2019.

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(Unaudited)

On November 3, 2017, the Company terminated the remaining capacity under the 2016 Master Transfer Agreement and replaced this facility by entering into a new master transfer agreement (the "2017 Master Transfer Agreement") with a ~~third party~~purchaser trust under which the ~~third party has~~trust committed to purchase up to an aggregate of approximately $357.1 million in principal balances of finance receivables. On November 2, 2018, the Company amended the 2017 Master Transfer Agreement to, among other things and subject to the terms of the agreement, increase and extend the trust's commitment to purchase finance receivables from the Company. The trust's available financing permits up to $454.5 million in principal balances of finance receivables to be purchased after the amendment date, and the trust's purchase commitment contemplates it securing up to three times the currently available financing in the aggregate.

On May 7, 2019, the Company purchased the certificate of the trust for $34.0 million, net of cash acquired. At the time of acquisition the trust assets included $139.7 million of finance receivables that the Company had previously sold to the trust under the 2017 Master Transfer Agreement, and its liabilities included $105.7 million in associated debt and other liabilities. In connection with the certificate purchase, the Company and Ally Bank entered into an Amended and Restated Loan and Security Agreement (the "A&R Loan and Security Agreement") pursuant to which Ally Bank agreed to provide a $350.0 million revolving credit facility (the "SART 2017-1 Credit Facility") to fund certain automotive finance receivables originated by the Company, as further described in Note 9 — Debt Instruments.

During the six months ended June 30, ~~2018,~~2019, prior to the acquisition of the certificate in the trust, the Company sold approximately ~~$308.8~~$139.3 million in principal balances of finance receivables under the ~~Purchase and Sale Agreement, and~~2017 Master Transfer Agreement. During the six months ended June 30, 2018, the Company sold approximately $184.4 million in principal balances of finance receivables under the 2017 Master Transfer Agreement. ~~As of June 30, 2018, there was approximately $847.6 million and $140.5 million of unused capacity under the Purchase and Sale Agreement and the 2017 Master Transfer Agreement, respectively.~~

During the six months ended June 30, ~~2017,~~2019, prior to the certificate purchase, the Company ~~sold approximately $157.7 million in principal balances of~~also purchased finance receivables that it previously sold to the purchaser trust under the ~~Purchase~~2017 Master Transfer Agreement for a total price of approximately $127.7 million and ~~Sale Agreement, and approximately $66.6 million in principal balances of~~immediately resold such finance receivables ~~under~~into a securitization transaction, which is described further in Note 8 — Securitizations and Variable Interest Entities. This transaction was entered into in connection with the ~~2016~~securitization transaction and was entered into independently from the terms of the 2017 Master Transfer Agreement.

The total gain ~~on loan sales~~ related to finance receivables sold to financing partners under ~~these agreements~~the MPSA, the 2017 Master Transfer Agreement and to investors in securitization transactions discussed in Note 8 — Securitizations and Variable Interest Entities was approximately $40.4 million and $12.4 million during the three months ended June 30, 2019 and 2018, respectively, and $59.6 million and $22.3 million during the ~~three and~~ six months ended June 30, ~~2018, respectively,~~2019 and ~~approximately $5.4 million and $8.4 million during the three and six months ended June 30, 2017,~~2018, respectively, which is included in other sales and revenues in the accompanying unaudited condensed consolidated statements of operations.

NOTE 8 — SECURITIZATIONS AND VARIABLE INTEREST ENTITIES

Beginning in 2019, 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 transfer 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 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.

As described in Note 2 — Summary of Significant Accounting Policies, the securitization trusts established in connection with asset-backed securitization transactions are VIEs. For each VIE that the Company establishes in its role as sponsor of securitization transactions, it performs an analysis to determine whether or not it is the primary beneficiary of the VIE. The .Company’s continuing involvement with the VIEs consists of retaining a portion of the securities issued by the VIEs and performing ministerial duties as the trust administrator. As of June 30, 2019, the Company is not the primary beneficiary of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

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. The Company does not consolidate the securitization trusts.

The assets the Company retains in the unconsolidated VIEs are presented as beneficial interests in securitizations on the accompanying unaudited condensed consolidated balance sheets, which as of June 30, 2019 were approximately $45.2 million. The Company held no other assets or liabilities related to its involvement with unconsolidated VIEs as of June 30, 2019.

The following table summarizes the carrying value and total exposure to losses of its assets related to unconsolidated VIEs with which the Company has continuing involvement, but is not the primary beneficiary at June 30, 2019. 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.


	Carrying Value		Total Exposure

	(in thousands)
Rated notes	$	38,893	$	38,893
Certificates and other assets	6,299		6,299
Total unconsolidated VIEs	$	45,192	$	45,192

The beneficial interests in securitizations are considered securities available for sale subject to restrictions on transfer pursuant to the Company’s obligations as a sponsor under Risk Retention Rules. These securities are interests in securitization trusts, thus there are no contractual maturities. The amortized cost and fair value of securities available for sale as of June 30, 2019 were as follows (in thousands):


	Amortized Cost		Fair Value
Rated notes	$	38,684	$	38,893
Certificates and other assets	6,331		6,299
Total securities available for sale	$	45,015	$	45,192

NOTE 9 — DEBT INSTRUMENTS

Short-Term Revolving Facilities

Floor Plan Facility

The Company has a floor plan facility with a ~~third party~~lender to finance its used vehicle inventory, which is secured by substantially all of its assets, other than the Company's interests in real property (the "Floor Plan Facility"). The Company most recently amended the Floor Plan Facility in ~~August 2017~~November 2018 to, among other things, extend the maturity date to ~~December~~October 31, ~~2018, and~~2020, increase the available ~~credit~~capacity to ~~$275.0~~$650.0 million ~~through December 31, 2017 and to~~from $350.0 million, ~~from January 1, 2018 through December 31, 2018. The Company is required to make monthly~~and lower the annual interest ~~payments at a~~ rate ~~per annum equal~~ to one-month LIBOR plus ~~3.65%~~3.40%, ~~effective August 1, 2017.~~a decrease from the previous rate of one-month LIBOR plus 3.65%. The Floor Plan Facility requires monthly interest payments on borrowings under the Floor Plan Facility and that at least 5% of the total principal amount owed to the lender is held as restricted cash.

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~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

Repayment in an amount equal to the amount of the advance or loan must be made within five business days of selling or otherwise disposing of the underlying vehicle inventory, unless customers financed the purchase by originating an automotive finance receivable. For used vehicle sales involving financing originated by the Company and sold under either the ~~Purchase and Sale Agreement~~MPSA or the ~~2017 Master Transfer Agreement as mentioned in Note 7 —~~ Finance Receivable ~~Sale Agreements,~~Facilities (as defined below), the lender has extended repayment to the earlier of fifteen business days after the sale of the used vehicle or one day following the sale of the related finance receivable. ~~In November 2017, the Company also entered into a letter agreement~~With respect to ~~extend repayment of amounts due under the Floor Plan Facility for~~such used vehicle sales involving financing that are not sold under either the ~~Purchase and Sale Agreement~~MPSA or the ~~2017 Master Transfer Agreement. With respect to such vehicles,~~Finance Receivables Facilities, the lender agreed to extend repayment of the advance or the loan for such vehicles to the earlier of fifteen business days after the sale of the vehicle or two business days following the funding of the related finance receivable. Outstanding balances related to vehicles held in inventory for more than 180 days require monthly principal payments equal to 10% of the original principal

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

amount of that vehicle until the remaining outstanding balance is the lesser of (i) 50% of the original principal amount or (ii) 50% of the wholesale value. Prepayments may be made without incurring a premium or penalty. Additionally, the Company is permitted to make prepayments to the lender to be held as principal payments under the Floor Plan Facility and subsequently ~~re-borrow~~reborrow such amounts.

As of June 30, ~~2018,~~2019, the interest rate on the Floor Plan Facility was approximately ~~5.74%~~5.80%, the Company had an outstanding balance under this facility of approximately ~~$347.1~~$23.8 million, ~~borrowing~~unused capacity ~~available~~ of approximately ~~$2.9~~$626.2 million, and held approximately ~~$17.4~~$1.2 million in restricted cash related to this facility. As of December 31, ~~2017,~~2018, the interest rate on the Floor Plan Facility was approximately 5.90%, the Company had an outstanding balance of approximately $197.0 million and held approximately ~~$12.4~~$9.8 million in restricted cash related to this facility.

Finance Receivable Facilities

In April 2019, the Company and Ally Bank entered in a Loan and Security Agreement pursuant to which Ally Bank agreed to provide a $300.0 million revolving credit facility (the "DART I Credit Facility") to fund certain automotive finance receivables originated by the Company. The Company can draw upon the DART I Credit Facility until April 17, 2020, and it has an annual interest rate of one-month LIBOR plus a spread ranging from 1.00% to 1.80%.

In May 2019, the Company and Ally Bank entered into the A&R Loan and Security Agreement in connection with the $350.0 million SART 2017-1 Credit Facility to fund certain automotive finance receivables originated by the Company. The Company can draw upon the SART 2017-1 Credit Facility until November 1, 2019, and it has an annual interest rate of one-month LIBOR plus 1.95%.

The DART I Credit Facility and the SART 2017-1 Credit Facility (collectively, the "Finance Receivable Facilities") each require that at least 2% of the outstanding pledged finance receivables principal balances, plus any undistributed amounts collected on the pledged finance receivables amount, is held as restricted cash.

Interest payments on the Finance Receivable Facilities are payable monthly on each draw date. Principal repayments will occur on the fifteenth day of each calendar month in an amount equal to the undistributed receivables collected. The lender will receive repayment in accordance with its respective commitment. Prepayment of the entire aggregate outstanding principal and any accrued unpaid interest through the next draw date is permitted twice per calendar quarter.

As of June 30, 2019, the DART I Credit Facility had an interest rate ranging between approximately 3.40% and 4.20%, and the SART 2017-1 Credit Facility had an interest rate of approximately 4.35%. The Company had an outstanding balance under the Finance Receivable Facilities of approximately $15.9 million, unused capacity of $634.1 million, and held approximately $1.0 million in restricted cash related to these facilities.

Long-Term Debt

Senior Unsecured Notes

On September 21, 2018, the Company issued an aggregate of $350.0 million in senior unsecured notes due 2023 (the "Existing Notes") under an indenture entered into by and among the Company, each of the guarantors party thereto and U.S. Bank National Association, as trustee (the “Indenture”). On May 24, 2019, the Company issued $250.0 million in aggregate principal amount of additional notes (the "New Notes") under the Indenture, at a 100.5% premium. The Existing Notes and New Notes (together the "Senior Notes") are treated as a single class for all purposes and have the same terms. The Senior Notes accrue interest at a rate of 8.875% per annum, which is payable semi-annually in arrears on April 1 and October 1 of each year beginning April 1, 2019. The Senior Notes mature on October 1, 2023, unless earlier repurchased or redeemed, and are guaranteed by the Company's existing domestic restricted subsidiaries (other than the subsidiaries formed solely for the purpose of facilitating the Company's sales of its finance receivables, if any). The Company may redeem some or all of the Senior Notes on or after October 1, 2020 at redemption prices set forth in the Indenture, plus any accrued and unpaid interest to the redemption date. Prior to October 1, 2020, the Company may redeem up to 35.0% of the aggregate principal amount of the Senior Notes at a redemption price equal to 108.875%, together with accrued and unpaid interest to, but not including, the date of redemption, with the net cash proceeds of certain equity offerings. In addition, the Company may, at its option, redeem some or all of the Senior Notes prior to October 1, 2020, by paying a make-whole premium plus any accrued and unpaid interest, to, but not including, the redemption date. If the Company experiences certain change of control events, it must make an offer to

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

purchase all of the Senior Notes at 101.0% of the principal amount thereof, plus any accrued and unpaid interest, to the repurchase date.

The Indenture governing the Senior Notes contains restrictive covenants that limit the ability of the Company to, among other things, incur additional debt or issue preferred stock, create liens, create restrictions on the Company’s ability to make intercompany payments, pay dividends and make other distributions in respect of the Company's capital stock, redeem or repurchase the Company’s capital stock or prepay subordinated indebtedness, make certain investments or certain other restricted payments, guarantee indebtedness, designate unrestricted subsidiaries, sell certain kinds of assets, enter into certain types of transactions with affiliates, and effect mergers or consolidations. Certain of these covenants will be suspended if the Senior Notes are assigned an investment grade rating from any two of Moody’s Investors Service, Inc., Standard & Poor’s Rating Services, and Fitch Ratings, Inc., and there is no continuing default. As of June 30, 2019, the Company was in compliance with all covenants.

In connection with the issuance of these Senior Notes, Carvana Group amended its LLC agreement to create a class of non-convertible preferred units, which Carvana Co. purchased with its net proceeds from the issuance of these Senior Notes, as further discussed in Note 10 — Stockholders' Equity.

The outstanding principal of the Senior Notes, net of debt issuance costs and including the premium, was approximately $589.9 million and $342.9 million as of June 30, 2019 and December 31, 2018, respectively, of which $15.0 million of principal was held by Verde, and is included in long-term debt in the accompanying unaudited condensed consolidated balance sheets.

Notes Payable

The Company has entered into promissory note and disbursement agreements to finance certain equipment for its transportation fleet and building improvements. The assets financed with the proceeds from these notes serve as the collateral for each note and certain security agreements related to these assets have cross collateralization and cross default provisions with respect to one another. Each note has a fixed annual interest rate, a two to ~~five-year~~five-year term and requires monthly payments. As of June 30, ~~2018,~~2019, the outstanding principal of these notes had a weighted-average interest rate of ~~5.6%~~6.1% and totaled approximately ~~$31.3~~$30.7 million, of which approximately ~~$6.7~~$8.2 million is due within the next twelve months and is included asin current portion of long-term debt in the accompanying unaudited condensed consolidated balance ~~sheets.~~sheet.

~~Finance Leases~~Other Real Estate Financing Transactions

~~Beginning in 2017, the~~The Company ~~has financed~~finances certain purchases and construction of its property and equipment through various sale and leaseback transactions. As of June 30, ~~2018,~~2019, none of these transactions have qualified for sale accounting due to meeting the criteria for finance leases, or forms of continuing involvement, such as repurchase options or renewal periods that extend the lease for substantially all of the asset's remaining useful life, and are therefore accounted for as financing transactions. These arrangements require monthly payments and have initial terms that expire in fifteen to twenty years. Some of the agreements are subject to renewal options of up to twenty years and base rent increases throughout the term. As of June 30, ~~2018,~~2019, the outstanding liability associated with these sale and leaseback arrangements, net of unamortized debt issuance costs, is approximately ~~$52.3~~$90.9 million and is included in long-term debt in the accompanying unaudited condensed consolidated balance sheet.

In November 2017, the Company entered into a master sale-leaseback agreement (the "Master Sale-Leaseback Agreement" or "MSLA"), which was amended in November 2018, pursuant to which it may sell and lease back certain of its owned or leased properties and construction improvements. A portion of the Company's finance leases described above is through the MSLA. A portion of the fixed rental payments set forth in the respective lease agreements is payable annually beginning in November 2019. Under the MSLA, at any time the Company may elect to, and beginning in November ~~2019~~2020 or until a property owner of a leased site consents to the sale-leaseback, the purchaser has the right to demand that the Company repurchase one or more of the properties sold and leased back pursuant to the MSLA for an amount equal to the repurchase price. Repurchase prices are defined in each of the applicable leases and are generally the original purchase prices plus any accrued and unpaid rent. ~~As of June 30, 2018, the repurchase prices for all properties under the MSLA excluding unpaid rent totaled approximately $28.8 million.~~ Under the MSLA, the total sales price of properties the Company has sold and is leasing back at any point in time is limited to $75.0 million. By December 31, 2018, the Company repurchased all properties it had previously sold under the MSLA for a price of approximately $28.8 million. As of June 30, 2019 and December 31, 2018, the Company may sell and lease back ~~an additional~~ approximately ~~$46.2~~$75.0 million of its property and equipment under the MSLA.

1819

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

~~NOTE 9 — STOCKHOLDERS' EQUITY~~ Financing of Beneficial Interests in Securitizations

~~Organizational Transactions~~In June 2019, the Company financed certain retained beneficial interests in securitizations through a secured borrowing facility whereby the Company sold such interests and agreed to repurchase them at the expiration of the facility for their fair value at that time. As discussed in Note 8 — Securitizations and Variable Interest Entities, the Company has retained certain Beneficial Interests in Securitizations pursuant to the Company’s obligations as a sponsor under Risk Retention Rules.

As of June 30, 2019, the Company has pledged $15.2 million of its beneficial interests in securitizations as collateral under the repurchase agreement with an expected repurchase in February 2026. Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transaction. In the event of a decline in the fair value of the pledged collateral, the repurchase price of the pledged collateral will be increased by the amount of the decline.

As of June 30, 2019, the Company has recorded approximately $10.7 million in long-term debt, net of a current portion of approximately $4.5 million, in the accompanying unaudited condensed consolidated balance sheet.

NOTE 10 — STOCKHOLDERS' EQUITY

Immediately prior to the IPO, Carvana Co. amended and restated its certificate of incorporation to, among other things authorize (i) 50.0 million shares of Preferred Stock, par value $0.01 per share, (ii) 500.0 million shares of Class A common stock, par value $0.001 per share, and (iii) 125.0 million shares of Class B common stock, par value $0.001 per share. On December 5, 2017, Carvana Co. amended and restated its certificate of incorporation to authorize 100,000 shares of Convertible Preferred Stock, with an initial stated value of $1,000 per share and a par value of $0.01 per share. Each share of Class A common stock generally entitles its holder to one vote on all matters to be voted on by stockholders. Each share of Class B common stock held by the Garcia Parties generally entitles its holder to ten votes on all matters to be voted on by stockholders, for so long as the Garcia Parties maintain direct or indirect beneficial ownership of at least 25% of the outstanding shares of Carvana Co.'s Class A common stock determined on an as-exchanged basis assuming that all of the Class A Units and Class B Units were exchanged for Class A common stock. All other shares of Class B common stock generally entitle their holders to one vote per share on all matters to be voted on by stockholders. Holders of Class B common stock are not entitled to receive dividends and would not be entitled to receive any distributions upon the liquidation, dissolution or winding down of the Company. Holders of Class A and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by applicable law.

~~As described in Note 1 — Business Organization,~~ Carvana ~~Group~~Group's amended and restated ~~its~~ LLC Agreement ~~to, among other things, provide~~provides for two classes of common ownership interests in Carvana Group. Carvana Group’s two classes of common ownership interests are Class A Units and Class B ~~Units.~~Units (the "LLC Units"). Carvana Co. is required to, at all times, maintain (i) a four-to-five ratio between the number of shares of Class A common stock issued and outstanding by Carvana Co. and the number of Class A Units owned by Carvana Co. (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities and subject to adjustment as set forth in the exchange agreement (the "Exchange Agreement") further discussed below, and taking into account Carvana Sub’s 0.1% ownership interest in Carvana, LLC) and (ii) a four-to-five ratio between the number of shares of Class B common stock owned by the ~~Original~~original holders of LLC ~~Unitholders~~units prior to the IPO (the "Original LLC Unitholders") and the number of Class A Units owned by the Original LLC Unitholders. The Company may issue shares of Class B common stock only to the extent necessary to maintain these ratios. Shares of Class B common stock are transferable only together with ~~a corresponding~~an equal number of LLC Units if Carvana Co., at the election of an ~~Existing~~Original LLC Unitholder, exchanges LLC Units for shares of Class A common stock.

As of June 30, ~~2018,~~2019, there were approximately ~~175.6~~189.1 million and ~~6.0~~5.7 million Class A Units and Class B Units (as adjusted for the participation thresholds), respectively, issued and outstanding. As discussed in Note 1112 — Equity-Based Compensation, Class B Units were issued under the Company’s LLC Equity Incentive Plan (the “LLC Equity Incentive Plan”) and are subject to a participation threshold and are earned over the requisite service period.

~~Initial~~ Public ~~Offering~~

As described in Note 1 — Business Organization, on May 3, 2017, Carvana Co. completed its IPO of 15.0 million shares of Class A common stock at a public offering price of $15.00 per share. Carvana Co. received approximately $205.8 million in proceeds, net of underwriting discounts and commissions and offering expenses. Carvana Co. used the proceeds to purchase approximately 18.8 million newly-issued LLC Units of Carvana Group at a price per unit equal to 0.8 times the initial public offering price less underwriting discounts and commissions. In connection with the IPO, Carvana Co. transferred approximately 0.2 million Class A Units to Ernest Garcia, II in exchange for his 0.1% ownership interest in Carvana, LLC, a majority-owned subsidiary of Carvana Group.

~~Follow-On Public Offering~~Equity Offerings

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

underwriting discounts and commissions and offering expenses. The Company used the net proceeds to purchase approximately 8.3 million newly-issued LLC Units in Carvana ~~Group, which used the net proceeds primarily for general corporate purposes.~~Group.

~~The Selling Stockholder~~A holder of Class A common stock (the "Selling Stockholder") and ~~the Selling~~certain LLC Unitholders (the "Selling LLC Unitholders") sold a total of approximately 6.1 million shares of Class A common stock as part of the offering. The Selling LLC Unitholders exchanged approximately 6.9 million LLC Units for approximately 5.6 million shares of Class A common stock to be sold in the offering, and to the extent such Selling LLC

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

Unitholder held Class B common stock, the corresponding shares of Class B common stock were immediately retired by the Company. The Company did not receive any proceeds from the sale of the approximately 6.1 million shares of Class A common stock by the Selling Stockholder and the Selling LLC Unitholders.

On May 24, 2019, the Company completed a public equity offering of 4.2 million shares of the Company's Class A common stock at a public offering price of $65.00 per share and received net proceeds from the offering of approximately $258.8 million after underwriting discounts and commissions and offering expenses. As part of the offering, the Company granted the underwriters a 30-day option to purchase all or part of approximately 0.6 million additional shares of Class A common stock. On June 20, 2019, the underwriters exercised their option in full for an additional $38.9 million in proceeds after offering expenses. The Company used the net proceeds to purchase approximately 6.0 million newly-issued LLC Units in Carvana Group, and Carvana Group intends to use the proceeds primarily for general corporate purposes, including paying down the Floor Plan Facility.

Exchange Agreement

Carvana Co. and the LLC Unitholders entered into an Exchange Agreement under which each LLC Unitholder (and certain permitted transferees thereof) may receive shares of the Company's Class A common stock in exchange for their LLC Units on a four-to-five conversion ratio, or cash at the option of the Company, subject to conversion ratio adjustments for stock splits, stock dividends, reclassifications and similar transactions and subject to vesting for certain Class A Units and subject to vesting and the respective participation threshold for Class B Units. To the extent such owners also hold Class B common stock, they will be required to deliver to Carvana Co. a number of shares of Class B common stock equal to the number of shares of Class A common stock being exchanged for. Any shares of Class B common stock so delivered will be canceled. The number of exchangeable Class B Units is determined based on the value of Carvana Co.'s Class A common stock and the applicable participation threshold.

During the six months ended June 30, ~~2018,~~2019, certain LLC Unitholders exchanged ~~approximately 12.0~~4.5 million LLC Units and ~~approximately 8.8~~3.0 million shares of Class B common stock for ~~approximately 9.6~~3.6 million newly-issued shares of Class A common stock. Simultaneously, and in connection with these exchanges, Carvana Co. received approximately ~~12.0~~4.5 million LLC Units, increasing its total ownership interest in Carvana Group, and canceled the exchanged shares of Class B common stock.

Convertible Preferred Stock

On December 5, 2017, Carvana Co. sold 100,000 shares of Convertible Preferred Stock for a purchase price of $100.0 million and net proceeds of approximately $98.5 million, which it used to purchase 100,000 Convertible Preferred Units of Carvana Group at a price per unit equal to the initial stated value of the Convertible Preferred Stock less issuance costs. The Convertible Preferred Stock has a par value of $0.01 per share and a liquidation value of $1,000 per share.

At the holder's request beginning on January 29, 2018, any or all shares of the Convertible Preferred Stock ~~are~~were convertible into shares of Class A common stock at an initial conversion rate of 50.78 shares of Class A common stock per share of Convertible Preferred Stock. On or after December 5, 2018, the Company ~~will have~~had the option to cause all shares of Convertible Preferred Stock to be converted into shares of Class A common stock or cash, at the Company's election, if the 10-day volume-weighted average price ~~equals~~equaled or ~~exceeds~~exceeded 150% of the conversion price as set forth in the agreement. In the event Carvana Co. ~~issues~~issued any shares of Class A common stock upon conversion of any shares of Convertible Preferred Stock or in connection with any change of control repurchase of shares of Convertible Preferred Stock, a corresponding number of Convertible Preferred Units ~~shall~~would be canceled and cease to be outstanding, and Carvana Group ~~will~~would issue Class A Units to Carvana Co. on a four-to-five ratio between the number of shares of Class A common stock issued by Carvana Co. to the holders of the Convertible Preferred Stock and the number of Class A Units issued. ~~As of June 30, 2018, the holder has not converted any shares of Convertible Preferred Stock.~~

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The initial conversion price was $19.6945, which was calculated based on a 20.0% premium to the volume weighted average price for Class A common stock during the 5 trading days immediately preceding December 4, 2017. Following announcement of the transaction, the share price of Class A common stock increased and exceeded the conversion price on the commitment date and resulted in a beneficial conversion feature ("BCF") of approximately $2.6 million. The BCF was originally recorded as a reduction of the Convertible Preferred Stock with an offset to additional paid-in capital. The BCF accreted as a deemed dividend through January 29, 2018, the first available conversion date, increasing the carrying value of the Convertible Preferred Stock with an offsetting charge to additional paid-in capital. During the six months ended June 30, 2018, the Company recorded ~~the remaining approximately~~ $1.4 million in accretion related to the BCF. ~~The carrying value of the Convertible Preferred Stock was approximately $98.5 million and $97.1 million as of June 30, 2018 and December 31, 2017, respectively.~~

Upon a change of control, as defined in the agreement, any holder of Convertible Preferred Stock has the option to require the Company (or its successor) to purchase, any or all of its Convertible Preferred Stock at a purchase price per share, payable at the Company’s option in any combination of cash or shares of Class A common stock, of 101% of the liquidation preference, plus all accumulated dividends.

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

Holders of the Convertible Preferred Stock have no voting rights. The Convertible Preferred Stock ranks senior, as to payment of dividends and distributions of assets upon the liquidation, dissolution or winding up of Company, to the Company’s common stock and any shares of capital stock of the Company not expressly ranking senior to or pari passu with the Convertible Preferred Stock, and junior to all shares of capital stock of the Company issued in the future, if the terms of which expressly provide that such shares will rank senior to the Convertible Preferred Stock.

The Convertible Preferred Stock accrues dividends at 5.5% of the liquidation preference of $1,000 per share. The dividends are payable in cash quarterly commencing March 15, 2018 so long as the Company has funds legally available and the Board declares a cash dividend payable. The Company may not declare dividends on shares of its common stock or purchase or redeem shares of its common stock, unless all accumulated and unpaid dividends on the Convertible Preferred Stock have been paid in full or a sum for such amounts has been set aside for payment. As the Company declares and pays dividends on the Convertible Preferred Stock, Carvana Group will make distributions to Carvana Co. with respect to the Convertible Preferred Units in an amount equal to the related Convertible Preferred Stock dividend amount and any corresponding tax payments. During the six months ended June 30, 2018, the Company paid approximately $2.9 million of dividends to the holders of the Convertible Preferred Stock and Carvana Group distributed approximately $2.9 million to Carvana Co. with respect to the Convertible Preferred Units.

During the year ended December 31, 2018, at the holder's request 75,000 shares of Convertible Preferred Stock, and at the Company's election 25,000 shares of Convertible Preferred Stock, were converted into a total of approximately 5.1 million shares of Class A common stock. Simultaneously with each conversion, an equal number of Convertible Preferred Units were canceled and Carvana Group issued approximately 6.3 million Class A Units to Carvana Co. As of June 30, 2019 and December 31, 2018, ~~dividends accrued related to the Convertible Preferred Stock~~there were ~~approximately $0.2 million, or $2.29 per share~~no outstanding shares of Convertible Preferred Stock ~~outstanding.~~and no related accrued dividends.

Class ~~C Redeemable~~A Non-Convertible Preferred Units

~~Prior~~On October 2, 2018, Carvana Group amended its LLC Agreement to ~~2017, the Company authorized the~~create a class of non-convertible preferred units (the "Class A Non-Convertible Preferred Units"), effective September 21, 2018. The Class A Non-Convertible Preferred Units were created in connection with Carvana Co.'s issuance of the Senior Notes in September 2018 and ~~sold approximately 43.1 million Class C Redeemable Preferred Units to various third parties and related parties for~~May 2019, as discussed further in Note 9 — Debt Instruments. Carvana Co. used its net proceeds from the Senior Notes to purchase a total of ~~approximately $226.9 million. The Company recorded~~600,000 Class A Non-Convertible Preferred Units. In the issuance and sale of Class C Redeemable Preferred Units at fair value, net of issuance costs. In accordance with the Company’s Operating Agreement, the Class C Redeemable Preferred Units accrued a return (the “Class C Return”) at a coupon rate of 12.5% compounding annuallyevent Carvana Co. makes payments on the ~~aggregate amount of capital contributions made with respect~~Senior Notes, Carvana Group will make an equal cash distribution to the Class ~~C Redeemable~~A Non-Convertible Preferred Units. ~~On May 3, 2017,~~For each $1,000 principal amount of Senior Notes that Carvana Co. repays or otherwise retires one Class A Non-Convertible Preferred Unit shall be canceled and retired.

Contribution of Class A Common Shares From Ernest Garcia III

During the three and six months ended June 30, 2019, the Company ~~closed~~and its ~~IPO at~~Chief Executive Officer, Ernest Garcia III, entered into a ~~price such that~~contribution agreement (the "Contribution Agreement") in connection with the 100k Milestone Gift, as defined in Note 6 — Related Party Transactions, pursuant to which Mr. Garcia contributed approximately 0.0 million and 0.1 million shares, respectively, of the Company's Class A common stock to the Company, ~~was~~at no ~~longer liable~~charge. The Company subsequently granted approximately 0.0 million and 0.1 million restricted stock units during the three and six months ended June 30, 2019, respectively, to employees. Refer to Note 12 — Equity-Based Compensation for further discussion. Although the ~~accrued Class C Return, and~~Company does not expect Mr. Garcia to incur any tax obligations related to the ~~outstanding Class C Redeemable Preferred Units converted to Class A Units on a one-to-one basis and the related balance became a component of permanent equity.~~share contribution, it has indemnified Mr. Garcia from any such obligations that may arise.

NOTE 1011 — NON-CONTROLLING INTERESTS

As discussed in Note 1 — Business Organization, Carvana Co. consolidates the financial results of Carvana Group and reports a non-controlling interest related to the portion of Carvana Group owned by the LLC Unitholders. Changes in the ownership interest in Carvana Group while Carvana Co. retains its controlling interest will be accounted for as equity transactions. Exchanges of LLC Units result in a change in ownership and reduce the amount recorded as non-controlling interests and increase additional paid-in capital.

Upon the issuance of shares of Class A common stock by Carvana Co. related to the Company’s equity compensation plans such as the exercise of options, issuance of restricted or non-restricted stock, payment of bonuses in stock or settlement of stock appreciation rights in stock, Carvana Group is required to issue to Carvana Co. a number of Class A Units equal to 1.25 times the number of shares of Class A common stock being issued in connection with the exercise of such options or issuance of other types of equity compensation, subject to adjustment for stock splits, stock dividends, reclassifications and similar transactions. Activity related to the Company's equity compensation plans may result in a change in ownership which will impact the amount recorded as non-controlling interest and additional paid-in capital.

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The non-controlling interest related to the Class B Units is determined based on the respective participation thresholds and the share price of Class A common stock on an as-converted basis. To the extent that the number of as-converted Class B Units change or Class B Units are forfeited, the resulting difference in ownership will be accounted for as equity transactions adjusting the non-controlling interest and additional paid-in capital.

During the six months ended June 30, ~~2018,~~2019, the total adjustments related to exchanges of LLC Units ~~was~~were a decrease in non-controlling interests and a corresponding increase in additional paid-in capital of approximately ~~$12.6~~$3.5 million, which has been included in exchanges of LLC Units in the accompanying unaudited condensed consolidated statement of stockholders' equity. During the six months ended June 30, ~~2018,~~2019, Carvana Co. utilized its net proceeds from its ~~follow-on~~equity offering to purchase LLC Units, which ~~together with the follow-on offering~~ resulted in an adjustment to increase non-controlling interests and to decrease additional paid-in capital by approximately ~~$132.4~~$201.0 million ~~which has been included in adjustment to non-controlling interests related to follow-on offering in the accompanying unaudited condensed consolidated statement of stockholders' equity. During~~

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

the six months ended June 30, 2018, Carvana Group issued approximately 0.5 million Class A Units with a fair value of approximately $10.0 million as part of the purchase price consideration for Car360, which is reflected as an increase in non-controlling interests in the accompanying unaudited condensed consolidated statement of stockholders' equity. The adjustment related to the issuance of Class A Units to acquire Car360 was a decrease in non-controlling interests and a corresponding increase in additional paid-in capital of approximately $1.3 million, which has been included in adjustment to non-controlling interests related to business acquisitions in the accompanying unaudited condensed consolidated statement of stockholders' equity.

As of June 30, ~~2018,~~2019, Carvana Co. owned approximately ~~23.4%~~31.8% of Carvana Group with the LLC Unitholders owning the remaining ~~76.6%~~68.2%. The net loss attributable to the non-controlling interests on the accompanying unaudited condensed consolidated statements of operations represents the portion of the net loss attributable to the economic interest in Carvana Group held by the non-controlling LLC Unitholders calculated based on the weighted average non-controlling interests' ownership during the periods presented.

The following table summarizes the effects of the changes in ownership in Carvana Group on the Company's additional paid-in capital during the six months ended June 30, 2019 and 2018 (in thousands):

Six Months Ended
6/30/2018 6/30/2017
Transfers (to) from non-controlling interests:
Decrease as a result of issuances of Class A common stock $ (132,375) $ (174,255)
Increase as a result of Carvana Group's issuance of Class A Units in connection with business acquisitions 1,297 —
Increase as a result of exchanges of LLC Units 12,592 —
Increase as a result of adjustments to non-controlling interests — 846
Total transfers to non-controlling interests $ (118,486) $ (173,409)


	Six Months Ended
	June 30, 2019		June 30, 2018
Transfers (to) from non-controlling interests:
Decrease as a result of issuances of Class A common stock	$	(201,015)	$	(132,375)
Increase as a result of Carvana Group's issuance of Class A Units in connection with business acquisitions	—		1,297
Increase as a result of exchanges of LLC Units	3,470		12,592


Total transfers to non-controlling interests	$	(197,545)	$	(118,486)

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

NOTE 1112 — EQUITY-BASED COMPENSATION

Equity-based compensation expense is recognized based on amortizing the grant-date fair value on a straight-line basis over the requisite service period, which is generally the vesting period of the award, less actual forfeitures. A summary of equity-based compensation expense recognized during the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 is as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 2017
Class B Units $ 605 $ 482 $ 1,040 $ 640
Restricted Stock Units and Awards 978 1,150 1,645 1,150
Options 425 368 833 368
Class A Units 575 — 575 —
Total equity-based compensation expense $ 2,583 $ 2,000 $ 4,093 $ 2,158


	Three Months Ended June 30,						Six Months Ended June 30,
	2019		2018		2019		2018
Class B Units	$	578	$	605	$	1,156	$	1,040
Restricted Stock Units and Awards excluding those granted in relation to Mr. Garcia's 100k Milestone Gift contributions	3,214		978		5,681		1,645
Restricted Stock Units granted in relation to Mr. Garcia's 100k Milestone Gift contributions	2,809		—		5,933		—
Options	1,457		425		2,664		833
Class A Units	544		575		1,190		575
Total equity-based compensation expense	$	8,602	$	2,583	$	16,624	$	4,093
Equity-based compensation capitalized to property and equipment	(577)		—		(879)		—
Equity-based compensation capitalized to inventory	(958)		—		(1,835)		—
Equity-based compensation, net of capitalized amounts	$	7,067	$	2,583	$	13,910	$	4,093

As of June 30, ~~2018,~~2019, the total unrecognized compensation expense related to outstanding equity awards was approximately ~~$27.8~~$57.2 million, which the Company expects to recognize over a weighted-average period of approximately ~~3.0~~3.1 years. Total unrecognized equity-based compensation expense will be adjusted for actual forfeitures.

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

2017 Omnibus Incentive Plan

In connection with the IPO, the Company adopted the 2017 Omnibus Incentive Plan (the "2017 Incentive Plan"). Under the 2017 Incentive Plan, 14.0 million shares of Class A common stock are available for issuance, which the Company may grant as stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs") and other stock-based awards to employees, directors, officers and consultants. As discussed in Note 10 — Stockholders' Equity, during the three and six months ended June 30, 2019, the Company granted approximately 42,240 and 113,850 RSUs, respectively, with a vesting period of one day following receipt of Class A common stock from its Chief Executive Officer, Ernest Garcia III, and recognized approximately $2.8 million and $5.9 million, respectively, of equity-based compensation, a portion of which related to the production of the Company's used vehicle inventory and was therefore capitalized to inventory. The majority of the Company's equity awards, other than those granted in relation to Mr. Garcia's 100k Milestone Gift, vest over two- to five- year periods based on continued employment with the Company. As of June 30, ~~2018,~~2019, approximately ~~12.5~~10.9 million shares remain available for future equity award grants under this plan.

Class A Units

During ~~the three and six months ended June 30,~~ 2018, the Company granted certain employees ~~approximately 0.4 million~~ Class A Units with service-based vesting over two- to four- year periods and a grant-date fair value of $18.58 per Class A Unit. The grantees entered into the Exchange Agreement under which each LLC Unitholder (and certain permitted transferees thereof) may receive shares of the Company's Class A common stock in exchange for their LLC Units on a four-to-five conversion ratio, or cash at the option of the Company, subject to conversion ratio adjustments for stock splits, stock dividends, reclassifications and similar transactions and subject to vesting.

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Class B Units

In March 2015, Carvana Group adopted the LLC Equity Incentive Plan. Under the LLC Equity Incentive Plan, Carvana Group could grant Class B Units to eligible employees, non-employee officers, consultants and directors with service vesting conditions. Following completion of the IPO, ~~there are no B Units authorized for~~Carvana Group discontinued the ~~Company to~~ grant of new awards under the LLC Equity Incentive ~~Plan.~~Plan, however the LLC Equity Incentive Plan will continue in connection with administration of existing awards that remain outstanding. There were no Class B Units issued during the three and six months ended June 30, ~~2018. During the three and six months ended~~2019 or June 30, ~~2017, the Company issued an aggregate of approximately 0.8 million Class B Units to executive officers and certain other employees.~~ 2018.

NOTE 1213 — LOSS PER SHARE

Basic and diluted net loss per share is computed by dividing the net loss attributable to Class A common stockholders by the weighted-average shares of Class A common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potentially dilutive shares. For all periods presented, potentially dilutive shares are excluded from diluted net loss per share because they have an anti-dilutive impact. Therefore, basic and diluted net loss per share attributable to Class A common stockholders are the same for all periods presented.

As discussed in Note 1 — Business Organization, the Organizational Transactions are considered transactions between entities under common control and the financial statements for periods prior to the IPO and Organizational Transactions have been adjusted to combine the previously separate entities for presentation purposes. For purposes of calculating both the numerator and denominator of net loss per share for periods prior to the IPO, the Company has retroactively reflected the 15.0 million shares issued in the IPO and the LLC Units outstanding as of the Organizational Transactions as if they had been issued and outstanding as of the beginning of each period presented. These calculations for periods prior to the IPO do not consider the options or shares of Class A common stock issued on the IPO date under the 2017 Incentive Plan.

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

The following table presents the calculation of basic and diluted net loss per share during the three and six months ended June 30, 2019 and 2018 (in thousands, except per share data):


		Three Months Ended June 30,						Six Months Ended June 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2018		2017		2018		2017			2019		2018		2019		2018
Numerator:	Numerator:									Numerator:
Net loss	Net loss	$	(51,250)	$	(38,870)	$	(103,922)	$	(77,309)	Net loss	$	(64,059)	$	(51,250)	$	(146,655)	$	(103,922)
Net loss attributable to non-controlling interests	Net loss attributable to non-controlling interests	41,285		34,594		86,914		68,843		Net loss attributable to non-controlling interests	37,449		41,285		91,496		86,914
Dividends on Class A convertible preferred stock	Dividends on Class A convertible preferred stock	(1,375)		—		(2,720)		—		Dividends on Class A convertible preferred stock	—		(1,375)		—		(2,720)
Accretion of beneficial conversion feature on Class A convertible preferred stock	Accretion of beneficial conversion feature on Class A convertible preferred stock	—		—		(1,380)		—		Accretion of beneficial conversion feature on Class A convertible preferred stock	—		—		—		(1,380)
Net loss attributable to Carvana Co. Class A common stockholders, basic and diluted	Net loss attributable to Carvana Co. Class A common stockholders, basic and diluted	$	(11,340)	$	(4,276)	$	(21,108)	$	(8,466)	Net loss attributable to Carvana Co. Class A common stockholders, basic and diluted	$	(26,610)	$	(11,340)	$	(55,159)	$	(21,108)
Denominator:	Denominator:									Denominator:
Weighted-average shares of Class A common stock outstanding	Weighted-average shares of Class A common stock outstanding	28,124		15,242		23,425		15,121		Weighted-average shares of Class A common stock outstanding	46,284		28,124		43,958		23,425
Nonvested weighted-average restricted stock awards	Nonvested weighted-average restricted stock awards	(344)		(216)		(362)		(108)		Nonvested weighted-average restricted stock awards	(246)		(344)		(263)		(362)
Weighted-average shares of Class A common stock to compute basic and diluted net loss per Class A common share	Weighted-average shares of Class A common stock to compute basic and diluted net loss per Class A common share	27,780		15,026		23,063		15,013		Weighted-average shares of Class A common stock to compute basic and diluted net loss per Class A common share	46,038		27,780		43,695		23,063
Net loss per share of Class A common stock, basic and diluted	Net loss per share of Class A common stock, basic and diluted	$	(0.41)	$	(0.28)	$	(0.92)	$	(0.56)	Net loss per share of Class A common stock, basic and diluted	$	(0.58)	$	(0.41)	$	(1.26)	$	(0.92)

Shares of Class B common stock do not share in the losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted net loss per share of Class B common stock under the two-class method has not been presented. LLC Units (adjusted for the Exchange Ratio and participation thresholds) are considered potentially dilutive shares of Class A common stock because they are exchangeable into shares of Class A common stock.

Weighted-average as-converted shares of Convertible Preferred Stock of approximately 5.1 million for each of the three and six months ended June 30, 2018, were evaluated under the if-converted method for potentially dilutive effects and were determined to be anti-dilutive. Weighted-average as-converted Class A Units together with the related Class B common stock of approximately ~~110.2~~101.9 million and ~~117.2~~110.2 million during the three months ended June 30, ~~2018~~2019 and ~~June 30, 2017,~~2018, respectively, and of approximately ~~112.1~~103.1 million and ~~117.2~~112.1 million during the six months ended June 30, ~~2018~~2019 and June 30, ~~2017,~~2018, respectively, were evaluated under the if-converted method for potentially dilutive effects and were determined to be anti-dilutive. Outstanding Class B Units of approximately ~~6.6~~5.7 million and ~~7.5~~6.6 million at June 30, ~~2018~~2019 and ~~June 30, 2017,~~2018, respectively, were evaluated for potentially dilutive effects and were determined to be anti-dilutive. ~~Potentially~~Weighted-average potentially dilutive restricted stock awards and units of approximately 0.6 million and 0.4 million ~~and~~ for ~~each of~~ the three months ended June 30, 2019 and 2018, respectively,

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

and approximately 0.7 million and 0.4 million for the six months ended June 30, ~~2018~~2019 and ~~of approximately 0.2 million and 0.1 million for the three and six months ended June 30, 2017,~~2018, respectively, were evaluated under the treasury stock method for potentially dilutive effects and were determined to be anti-dilutive. As of June 30, 2019 and 2018, 1.2 million and 0.8 million options, respectively, were outstanding and evaluated under the treasury stock method for potentially dilutive effects and were determined to be anti-dilutive. During the three and six months ended June 30, 2017, the exercise price of all outstanding options exceeded the average share price of Class A common stock, thus, options were not contemplated in diluted net loss per share computations.

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

NOTE 1314 — INCOME TAXES

As described in Note 1 — Business Organization, as a result of the IPO, ~~and Organizational Transactions,~~ Carvana Co. began consolidating the financial results of Carvana Group. Carvana Group is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Carvana Group is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by Carvana Group is passed through to and included in the taxable income or loss of its members, including Carvana Co., based on its economic interest held in Carvana Group. Carvana Co. was formed on November 29, 2016 and did not engage in any operations prior to the IPO. Carvana Co. is taxed as a corporation and is subject to U.S. federal, state and local income taxes with respect to ~~the~~its allocable share of any taxable income or loss of Carvana Group, as well as any stand-alone income or loss generated by Carvana Co.

As described in Note 910 — Stockholders' Equity, ~~the Company acquired approximately 12.0 million LLC Units~~ during the three and six months ended June 30, ~~2018~~2019, the Company acquired approximately 2.0 million and 4.5 million LLC Units, respectively, in connection with exchanges with Existing LLC Unitholders. During the three and six months ended June 30, ~~2018,~~2019, the Company recorded a gross deferred tax asset of approximately ~~$68.7~~$26.1 million and $51.7 million associated with the basis difference in its investment in Carvana Group related to the acquisition of these LLC Units which is reflected as an increase to additional paid-in capital in the accompanying unaudited condensed consolidated statement of stockholders' equity.

As described in Note ~~1 — Business Organization and Note 9~~10 — Stockholders' Equity, Carvana Co. purchased approximately ~~8.3~~6.0 million newly-issued LLC Units of Carvana Group in connection with the ~~follow-on offering.~~equity offering on May 24, 2019 and subsequent option exercised by the underwriters. The Company recognized a gross deferred tax asset of approximately ~~$2.5~~$7.5 million associated with a portion of the basis difference resulting from this purchase of LLC Units which is reflected as an increase to additional paid-in capital in the accompanying unaudited condensed consolidated statements of stockholders' equity.

As described in Note 4 — Goodwill and Intangible Assets, Net, Carvana Group acquired Car360 on April 12, 2018. The acquisition included various intangible assets, and as a result the Company ~~recognizes~~recognized a deferred tax ~~assets~~liability of approximately $2.5 million which is reflected within other liabilities in the accompanying unaudited condensed consolidated balance sheet. The deferred tax liability will be amortized over three to seven years and approximately $0.4 million and $0.0 million was amortized during the ~~extent it believes these assets are more-likely-than-not to be realized.~~ six months ended June 30, 2019 and June 30, 2018.

During the six months ended June 30, ~~2018,~~2019, management performed an assessment of the recoverability of deferred tax assets. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. Management determined, based on the accounting standards applicable to such assessment, that there was sufficient negative evidence as a result of the Company’s cumulative losses to conclude it was more likely than not that its deferred tax assets would not be realized and has recorded a full valuation allowance against its deferred tax assets. In the event that management was to determine that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be made which would reduce the provision for income taxes.

The Company recognizes uncertain income tax positions when it is more-likely-than-not the position will be sustained upon examination. As of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company has not identified any uncertain tax positions and has not recognized any related reserves.

Tax Receivable Agreement

Carvana Co. expects to obtain an increase in its share of the tax basis in the net assets of Carvana Group when LLC Units are exchanged by the ~~Original~~Existing LLC Unitholders and other qualifying transactions. As described in Note 910 — Stockholders' Equity, each change in outstanding shares of Class A common stock results in a corresponding increase or decrease in Carvana Co.'s ownership of LLC Units. The Company intends to treat any exchanges of LLC Units as direct purchases of LLC interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that Carvana Co. would otherwise

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

pay in the future to various taxing authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

In connection with the IPO, the Company entered into a Tax Receivable Agreement (“TRA”). Under the TRA, the Company generally will be required to pay to the Original LLC Unitholders 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes directly or indirectly (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes created as a result of any sales or exchanges (as determined for U.S. federal income tax purposes) to or with the Company of their interests in Carvana Group for shares of Carvana Co.'s Class A common stock or cash, including any basis adjustment relating to the assets of Carvana Group and (ii) tax benefits attributable to payments made under the TRA (including imputed interest). The Company expects to benefit from the remaining 15% of any tax benefits that it may actually realize. To the extent that the Company is unable to timely make payments under the TRA for any reason, such payments generally will be deferred and will accrue interest until paid.

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

If the Internal Revenue Service or a state or local taxing authority challenges the tax basis adjustments that give rise to payments under the TRA and the tax basis adjustments are subsequently disallowed, the recipients of payments under the agreement will not reimburse the Company for any payments the Company previously made to them. Any such disallowance would be taken into account in determining future payments under the TRA and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from the tax basis adjustments are disallowed, the Company’s payments under the TRA could exceed its actual tax savings, and the Company may not be able to recoup payments under the TRA that were calculated on the assumption that the disallowed tax savings were available.

The TRA provides that if (i) certain mergers, asset sales, other forms of business combinations, or other changes of control were to occur, (ii) there is a material breach of any material obligations under the TRA; or (iii) the Company elects an early termination of the TRA, then the TRA will terminate and the Company's obligations, or the Company's successor’s obligations, under the TRA will accelerate and become due and payable, based on certain assumptions, including an assumption that the Company would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the TRA and that any LLC Units that have not been exchanged are deemed exchanged for the fair market value of the Company's Class A common stock at the time of termination.

As of June 30, ~~2018,~~2019, the Company has concluded based on applicable accounting standards, that it was more likely than not that its deferred tax assets subject to the TRA would not be realized; therefore, the Company has not recorded a liability related to the tax savings it may realize from utilization of such deferred tax assets. As of June 30, ~~2018,~~2019, the total unrecorded TRA liability is approximately ~~$67.9~~$166.4 million. If utilization of the deferred tax assets subject to the TRA becomes more likely than not in the future, the Company will record a liability related to the TRA which will be recognized as expense within its consolidated statements of operations.

NOTE 1415 — ~~COMMITMENTS AND CONTINGENCIES~~ LEASES

~~Lease Commitments~~

~~As of June 30, 2018,~~The Company is party to various lease agreements for real estate and transportation equipment. For each lease agreement, the Company determines its lease term as the non-cancellable period of the lease and includes options to extend or terminate the lease when it is ~~a tenant under various~~reasonably certain that it will exercise that option. The Company also assesses whether each lease is an operating or finance lease at the lease commencement date. Rent expense of operating leases with third parties related to certain of its market hubs, vending machines and offices. The initial terms expire at various dates between 2018 and 2027. Many of the leases include one or more renewal options ranging from two to twenty years. Rent is recognized on a straight-line basis over the lease term and includes scheduled rent increases as well as amortization of tenant improvement allowances.

As of June 30, 2019, the Company is a tenant under various operating leases related to certain of its hubs, vending machines and corporate offices. The initial terms expire at various dates between 2019 and 2029. Many of the leases include one or more renewal options ranging from one to twenty years and some contain purchase options. The Company also had operating leases for certain of its transportation fleet. In March 2019, the Company reassessed the lease terms of the transportation equipment leases based on the likelihood of exercising its extension options and reclassified them to finance leases. Rent expense for ~~these~~the Company's operating leases was approximately ~~$1.3~~$1.7 million and ~~$2.6~~$3.3 million for the three and six months ended June 30, 2018, respectively.

Refer to Note 6 — Related Party Transactions for further discussion of operating leases with related parties.

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

The Company has finance leases for certain equipment in its transportation fleet. The leases have initial terms of two to five years, some of which include extension options for up to four additional years, and ~~$1.2~~require monthly payments. As of June 30, 2019, the outstanding amount of the finance leases is approximately $37.2 million, of which approximately $8.0 million is due within the next twelve months and ~~$1.8 million for~~is included as current portion of long-term debt in the accompanying unaudited condensed consolidated balance sheet.

Lease Costs and Activity

The Company's lease costs and activity during the three and six months ended June 30, ~~2017, respectively.~~2019 were as follows (in thousands):

~~Beginning in December 2017, the Company has operating leases with third parties for certain~~


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Lease costs:
Finance leases:
Amortization of finance lease assets	$	1,988	$	3,255
Interest on obligations under finance leases	514		845
Total finance lease costs	$	2,502	$	4,100

Operating leases:
Fixed lease costs	$	2,943	$	5,271
Fixed lease costs to related parties	1,922		3,728
Variable short-term lease costs to related parties	333		787
Total operating lease costs	$	5,198	$	9,786

Cash payments related to lease liabilities included in operating cash flows:
Operating lease liabilities to third parties	$	1,453	$	3,270
Operating lease liabilities to related parties	$	2,172	$	4,309
Interest payments on finance lease liabilities	$	514	$	845

Cash payments related to lease liabilities included in financing cash flows:
Principal payments on finance lease liabilities	$	2,067	$	3,275

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

Maturity Analysis of ~~its transportation fleet.~~ Lease Liabilities

The ~~initial~~following table summarizes maturities of lease ~~terms~~liabilities as of June 30, 2019 (in thousands):


			Operating Leases ⁽¹⁾
	Finance Leases		Related Party⁽²⁾		Non-Related Party		Total Operating		Total
Remainder of 2019	$	5,037	$	4,047	$	5,590	$	9,637	$	14,674
2020	9,381		7,692		11,337		19,029		28,410
2021	9,040		7,154		10,354		17,508		26,548
2022	8,666		7,179		8,825		16,004		24,670
2023	8,064		7,212		6,981		14,193		22,257
Thereafter	1,785		31,660		46,719		78,379		80,164
Total minimum lease payments	41,973		64,944		89,806		154,750		196,723
Less: amount representing interest	(4,809)		(20,612)		(36,972)		(57,584)		(62,393)

Total lease liabilities	$	37,164	$	44,332	$	52,834	$	97,166	$	134,330

(1) Leases that are ~~for two years from the delivery date of each individual vehicle to the Company, at which time each lease will extend~~ on a month-to-month basis, short-term leases, and lease extensions that the Company does not expect to exercise are not included.

(2) Related party lease payments exclude rent payments due under the DriveTime Lease Agreement and the DriveTime Hub Lease Agreement for locations where the Company shares space with DriveTime, as those are variable lease payments contingent upon the Company's utilization of the leased assets.

As described in Note 2 — Summary of Significant Accounting Policies, the Company adopted ASC 842 using the modified retrospective approach and various practical expedients and relief packages, which permitted the Company to refrain from restating comparative periods. Therefore, the following future minimum lease payments as of December 31, 2018 prepared under previous lease accounting guidance has been included from the Company's 2018 Annual Report on Form 10-K filed on February 27, 2019 (in thousands):


					Operating Leases ⁽¹⁾
	Capital Leases		Other Real Estate Financing Transactions ⁽³⁾		Related Party ⁽²⁾		Non-Related Party		Total
2019	$	3,779	$	3,566	$	6,461	$	8,306	$	14,767
2020	3,779		3,575		6,716		8,202		14,918
2021	3,779		3,583		6,869		7,387		14,256
2022	3,779		3,609		7,020		6,580		13,600
2023	3,275		3,837		7,140		5,330		12,470
Thereafter	—		62,081		36,770		38,402		75,172
Total minimum lease payments	$	18,391	$	80,251	$	70,976	$	74,207	$	145,183
Less amounts representing interest	(2,237)
	$	16,154

(1) Leases that are on a ~~potential total~~month-to-month basis and lease ~~term~~extensions that the Company does not expect to take are not included.

(2) Related party lease payments exclude rent payments due under the DriveTime Lease Agreement and the DriveTime Hub Lease Agreement for locations where the Company shares space with DriveTime, as those are contingent upon the Company's utilization of ~~six years unless both parties agree to earlier termination or replacement. Rent expense~~the leased assets.

(3) These were previously presented as finance leases and represent the Company's sale and leaseback transactions that are accounted for ~~these operating leases was approximately $0.4 million and $0.7 million for the three and six months ended~~as other real estate financing transactions, as further discussed in Note 9 — Debt Instruments.

CARVANA CO. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

(Unaudited)

As of June 30, ~~2018, respectively.~~2019, none of the Company's lease agreements contain material residual value guarantees or material restrictive covenants.

Lease Terms and Discount Rates

The weighted-average remaining lease terms and discount rates as of June 30, 2019 were as follows, excluding short-term operating leases:


Weighted-average remaining lease terms (years)
Operating leases	10.9
Finance leases	4.7
Weighted-average discount rate
Operating leases	8.8	%
Finance leases	5.6	%

NOTE 16 — COMMITMENTS AND CONTINGENCIES

Accrued Limited Warranty

As part of its retail strategy, the Company provides a 100-day or 4,189-mile limited warranty to customers to repair certain broken or defective components of each used vehicle sold. As such, the Company accrues for such repairs based on actual claims incurred to-date and repair reserves based on historical trends. The liability was approximately ~~$1.0~~$2.0 million and ~~$0.8~~$1.4 million as of June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and is included in accounts payable and other accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

~~Letters of Credit~~

In October 2016, the Company obtained an unconditional, irrevocable, stand-by letter of credit for $1.9 million to satisfy a condition of a new lease agreement. The Company was required to maintain a cash deposit of $1.9 million with the financial institution that issued the stand-by letter of credit until February 2018, at which point the cash deposit requirement was reduced by approximately $1.0 million until November 30, 2018, at which time the letter of credit shall expire. The Company has earned interest on this letter of credit, and as of June 30, 2018 and December 31, 2017, the balance with the financial institution

~~CARVANA CO. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)~~

~~(Unaudited)~~

~~was approximately $1.0 million and $2.0 million, respectively. This balance is classified as restricted cash in the accompanying unaudited condensed consolidated balance sheets.~~

InFrom time to time, the Company is involved in various claims and legal actions that arise in the ordinary course of ~~business,~~business. Although the results of litigation and claims cannot be predicted with certainty, as of June 30, 2019 the Company ~~may become subject to litigation or claims. The Company is~~does not ~~aware~~believe that the ultimate resolution of any ~~pending~~ legal ~~proceedings of which~~actions, either individually or in the ~~outcome is reasonably possible to~~aggregate, will have a material adverse effect on its financial position, results of operations, ~~financial condition~~liquidity and capital resources.

Future litigation may be necessary to defend the Company and its partners by determining the scope, enforceability and validity of third party proprietary rights or ~~cash flows.~~to establish its own proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

NOTE 1517 — FAIR VALUE OF FINANCIAL INSTRUMENTS


	June 30, 2019		December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	40,200	$	78,861
Restricted cash	2,196		9,848
Accounts receivable, net	42,128		33,120
Finance receivables held for sale, net	177,705		105,200


Vehicle inventory	606,534		412,243
Beneficial interests in securitizations	45,192		—
Other current assets	43,587		23,582
Total current assets	957,542		662,854
Property and equipment, net	392,240		296,839
Operating lease right-of-use assets, including $42,019 and $0, respectively, from leases with related parties	91,607		—
Intangible assets, net	8,096		8,869
Goodwill	9,353		9,353
Other assets, including $3,470 and $1,895, respectively, due from related parties	15,566		13,098
Total assets	$	1,474,404	$	991,013
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities including $5,665 and $3,891, respectively, due to related parties	$	178,032	$	121,415
Short-term revolving facilities	39,697		196,963
Current portion of long-term debt	20,716		11,133
Other current liabilities, including $4,416 and $0, respectively, from leases with related parties	11,390		—
Total current liabilities	249,835		329,511
Long-term debt, excluding current portion, including $15,000 held by a related party	743,132		425,349
Operating lease liabilities, including $39,916 and $0, respectively, from leases with related parties, excluding current portion	85,776		—
Other liabilities	1,844		8,725
Total liabilities	1,080,587		763,585
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock, $0.01 par value - 50,000 shares authorized; none issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	—		—
Class A common stock, $0.001 par value - 500,000 shares authorized; 49,732 and 41,208 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	50		41
Class B common stock, $0.001 par value - 125,000 shares authorized; 101,381 and 104,336 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	101		104
Additional paid-in capital	263,409		147,916
Accumulated deficit	(129,812)		(74,653)
Total stockholders' equity attributable to Carvana Co.	133,748		73,408
Non-controlling interests	260,069		154,020
Total stockholders' equity	393,817		227,428
Total liabilities & stockholders' equity	$	1,474,404	$	991,013


		June 30, 2018		December 31, 2017			June 30, 2019		December 31, 2018
Land and site improvements		$	40,705	$	11,656
Buildings and improvements	Buildings and improvements	91,775		60,804		Buildings and improvements	$	165,330	$	123,705
Transportation fleet	Transportation fleet	46,846		39,153		Transportation fleet	90,601		65,760
Land and site improvements						Land and site improvements	60,545		45,702
Software	Software	28,006		21,009		Software	47,276		36,452
Furniture, fixtures and equipment	Furniture, fixtures and equipment	15,451		12,239		Furniture, fixtures and equipment	27,887		20,675
Total property and equipment excluding construction in progress	Total property and equipment excluding construction in progress	222,783		144,861		Total property and equipment excluding construction in progress	391,639		292,294
Less: accumulated depreciation and amortization on property and equipment	Less: accumulated depreciation and amortization on property and equipment	(30,539)		(20,453)		Less: accumulated depreciation and amortization on property and equipment	(62,278)		(44,050)
Property and equipment excluding construction in progress, net	Property and equipment excluding construction in progress, net	192,244		124,408		Property and equipment excluding construction in progress, net	329,361		248,244
Construction in progress	Construction in progress	25,170		24,273		Construction in progress	62,879		48,595
Property and equipment, net	Property and equipment, net	$	217,414	$	148,681	Property and equipment, net	$	392,240	$	296,839


		June 30, 2018		December 31, 2017			June 30, 2019		December 31, 2018
Accounts payable		$	23,996	$	10,546
Accounts payable, including $5,665 and $3,891, respectively, due to related parties						Accounts payable, including $5,665 and $3,891, respectively, due to related parties	$	55,849	$	33,032
Sales taxes and vehicle licenses and fees	Sales taxes and vehicle licenses and fees	18,539		9,034		Sales taxes and vehicle licenses and fees	38,764		27,651
Reserve for returns and cancellations						Reserve for returns and cancellations	18,249		11,284
Accrued compensation and benefits	Accrued compensation and benefits	9,141		5,054		Accrued compensation and benefits	14,036		13,477
Accrued interest expense						Accrued interest expense	13,193		9,206
Accrued advertising costs						Accrued advertising costs	9,564		4,398
Accrued property and equipment	Accrued property and equipment	6,374		8,325		Accrued property and equipment	6,265		7,414
Customer deposits						Customer deposits	4,476		2,890
Other accrued liabilities						Other accrued liabilities	17,636		12,063
Total accounts payable and accrued liabilities						Total accounts payable and accrued liabilities	$	178,032	$	121,415

Accrued advertising costs		3,752		4,265

Other accrued liabilities		20,078		13,082
Total accounts payable and other accrued liabilities		$	81,880	$	50,306


	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Opening Balance	$	—	$	—
Transfers into Level 3	19,531		19,531
Cash receipts	(1,108)		(1,108)
Change in fair value	177		177
Ending Balance	$	18,600	$	18,600


	June 30, 2019		December 31, 2018
Carrying value, net of unamortized debt issuance costs	$	589,912	$	342,869
Fair value	594,336		319,375


		Expected Future Amortization			Expected Future Amortization
Remainder of 2018		$	747
2019		1,494
Remainder of 2019				Remainder of 2019	$	800
2020	2020	1,494		2020	1,600
2021	2021	1,494		2021	1,442
2022	2022	1,494		2022	1,389
2023				2023	1,279

Thereafter	Thereafter	2,893		Thereafter	1,586
Total	Total	$	9,616	Total	$	8,096


	Six Months Ended
	6/30/2018		6/30/2017
Transfers (to) from non-controlling interests:
Decrease as a result of issuances of Class A common stock	$	(132,375)	$	(174,255)
Increase as a result of Carvana Group's issuance of Class A Units in connection with business acquisitions	1,297		—
Increase as a result of exchanges of LLC Units	12,592		—
Increase as a result of adjustments to non-controlling interests	—		846
Total transfers to non-controlling interests	$	(118,486)	$	(173,409)


	Carrying Value		Level 1		Level 2		Level 3
Assets:
Money market funds ⁽¹⁾	$	187,083	$	187,083	$	—	$	—


	June 30, 2018		December 31, 2017		June 30, 2017		December 31, 2016
Cash and cash equivalents	$	199,192	$	172,680	$	144,433	$	39,184
Restricted cash ⁽¹⁾	18,356		14,443		10,339		10,266
Total cash, cash equivalents and restricted cash	$	217,548	$	187,123	$	154,772	$	49,450


Exhibit No.			Description
~~Description~~4.1			Supplemental Indenture, dated as of May 2 4 , 2019 (incorporated by reference to Exhibit 4.1 to Carvana's Current Report on Form 8-K filed with the SEC on May 24, 2019).
10.1			~~Transfer~~Contribution Agreement, filed herewith.
10.2			Transfer Agreement, dated June 27, 2019 (incorporated by reference to Exhibit 99.1 to Carvana's Current Report on Form 8-K filed with the SEC on July 3, 2019).
10.3			Loan and Security Agreement, dated April 19, 2019 (incorporated by reference to Exhibit 99.1 to Carvana's Current Report on Form 8-K filed with the SEC on April 25, 2019).

10.4 *W			Amended and Restated Loan and Security Agreement, dated May 7, 2019 (incorporated by reference to Exhibit 10.2 to Carvana's Quarterly Report on Form 10-Q filed with the SEC on May 8, 2019).

10.5 A *			Fifth Amendment to the Amended and Restated Master Purchase and Sale Agreement (incorporated by reference to Exhibit 99.2 to Carvana's Current Report on Form 8-K filed with the SEC on April 25, 2019).
10.5 B *			Sixth Amendment to the Amended and Restated Master Purchase and Sale Agreement (incorporated by reference to Exhibit 99.3 to Carvana's Current Report on Form 8-K filed with the SEC on April 25, 2019).
31.1			Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed herewith.
31.2			Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed herewith.
32.1			Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
32.2			Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed herewith.
101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			XBRL Taxonomy Extension Schema Document.
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB			XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.