CarGurus, Inc 10-Q for FY2022 Q1
CarGurus, Inc. (CARG)
About this 10-Q
CarGurus, Inc filed this 10-Q on May 9, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $430.61M
- up 151.3% from $171.37M a year earlier
- Net income
- $19.91M
- down 11.0% from net income of $22.36M a year earlier
- Diluted EPS
- -$0.53
- compared with $0.19 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _________________
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Trading Symbol |
Name of Exchange on Which Registered |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
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Accelerated filer |
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Non-accelerated filer |
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Small reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 5, 2022, the registrant had
Table of Contents
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Page |
PART I. |
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1 |
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Item 1. |
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1 |
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1 |
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2 |
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Unaudited Condensed Consolidated Statements of Comprehensive Income |
3 |
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4 |
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5 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
Item 3. |
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30 |
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Item 4. |
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31 |
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PART II. |
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32 |
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Item 1. |
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32 |
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Item 1A. |
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32 |
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Item 6. |
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48 |
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ii
SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This report contains forward‑looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward‑looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward‑looking statements because they contain words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “likely,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements contained in this report include, but are not limited to, statements about:
iii
You should not rely upon forward‑looking statements as predictions of future events. We have based the forward‑looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and growth prospects. The outcome of the events described in these forward‑looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward‑looking statements contained in this report. Further, our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions or joint ventures in which we may be involved, or investments we may make. We cannot assure you that the results, events, and circumstances reflected in the forward‑looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward‑looking statements.
The forward‑looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward‑looking statement made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law.
iv
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CarGurus, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
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At |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
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Investments |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Inventory |
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Prepaid expenses, prepaid income taxes and other current assets |
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Deferred contract costs |
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Restricted cash |
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Total current assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Operating lease right-of-use assets |
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Restricted cash |
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Deferred tax assets |
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Deferred contract costs, net of current portion |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities, redeemable noncontrolling interest and stockholders’ equity |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued expenses, accrued income taxes and other current liabilities |
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Deferred revenue |
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Operating lease liabilities |
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Total current liabilities |
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Operating lease liabilities |
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Deferred tax liabilities |
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Other non–current liabilities |
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Total liabilities |
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Redeemable noncontrolling interest |
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Stockholders’ equity: |
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Preferred stock, $ |
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Class A common stock, $ |
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Class B common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Total stockholders’ equity |
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Total liabilities, redeemable noncontrolling interest and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
1
CarGurus, Inc.
Unaudited Condensed Consolidated Income Statements
(in thousands, except share and per share data)
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Three Months Ended |
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2022 |
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2021 |
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Revenue |
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Marketplace |
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$ |
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$ |
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Wholesale |
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Product |
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Total revenue |
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Cost of revenue (1) |
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Marketplace |
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Wholesale |
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Product |
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Total cost of revenue |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Product, technology, and development |
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General and administrative |
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Depreciation and amortization |
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Total operating expenses |
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Income from operations |
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Other (expense) income, net |
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( |
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Income before income taxes |
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Provision for income taxes |
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Consolidated net income |
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Net loss attributable to redeemable noncontrolling interest |
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( |
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( |
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Net income attributable to CarGurus, Inc. |
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Accretion of redeemable noncontrolling interest to redemption value |
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— |
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Net (loss) income attributable to common stockholders |
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$ |
( |
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$ |
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Net (loss) income per share attributable to common stockholders: (Note 9) |
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Basic |
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$ |
( |
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$ |
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Diluted |
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$ |
( |
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$ |
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Weighted-average number of shares of common stock used in |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
2
CarGurus, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)
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Three Months Ended |
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2022 |
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2021 |
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Consolidated net income |
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$ |
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$ |
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Other comprehensive income: |
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Foreign currency translation adjustment |
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( |
) |
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( |
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Consolidated comprehensive income |
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Comprehensive loss attributable to redeemable noncontrolling |
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( |
) |
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( |
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Comprehensive income attributable to CarGurus, Inc. |
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$ |
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$ |
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The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
3
CarGurus, Inc.
Unaudited Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity
(in thousands, except share data)
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Redeemable |
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Class A |
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Class B |
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Additional |
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Retained |
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Accumulated |
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Total |
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Interest |
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Shares |
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Amount |
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Shares |
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Amount |
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Capital |
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Earnings |
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Loss (Income) |
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Equity |
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Balance as of December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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Net (loss) income |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock–based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock upon exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock upon vesting of restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Payment of withholding taxes on net share settlements of equity awards |
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— |
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( |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
) |
Accretion of redeemable noncontrolling interest to redemption value |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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Tax distributions to redeemable noncontrolling interest holders |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of March 31, 2022 |
|
$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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|||||||||
Balance as of December 31, 2020 |
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$ |
— |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net (loss) income |
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( |
) |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock–based compensation expense |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock upon exercise of stock options |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock upon vesting of restricted stock units |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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||
Payment of withholding taxes on net share settlements of equity awards |
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— |
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( |
) |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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( |
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Conversion of common stock |
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— |
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( |
) |
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( |
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— |
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— |
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— |
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— |
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Issuance of common stock upon for acquisition |
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— |
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— |
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— |
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— |
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— |
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Acquisition of a |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance as of March 31, 2021 |
|
$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
4
CarGurus, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
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Three Months Ended |
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2022 |
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2021 |
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Operating Activities |
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Consolidated net income |
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$ |
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$ |
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Adjustments to reconcile consolidated net income to net cash provided |
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Depreciation and amortization |
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Currency loss (gain) on foreign denominated transactions |
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( |
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Deferred taxes |
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( |
) |
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Provision for doubtful accounts |
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Stock-based compensation expense |
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Amortization of deferred contract costs |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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( |
) |
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Inventory |
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( |
) |
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( |
) |
Prepaid expenses, prepaid income taxes, and other assets |
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( |
) |
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( |
) |
Deferred contract costs |
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( |
) |
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( |
) |
Accounts payable |
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( |
) |
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Accrued expenses, accrued income taxes, and other liabilities |
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( |
) |
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Deferred revenue |
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( |
) |
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Lease obligations |
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( |
) |
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( |
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Net cash provided by operating activities |
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Investing Activities |
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Purchases of property and equipment |
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( |
) |
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( |
) |
Capitalization of website development costs |
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( |
) |
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( |
) |
Cash paid for acquisitions, net of cash acquired |
|
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— |
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( |
) |
Maturities of certificates of deposit |
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— |
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Net cash provided by (used in) investing activities |
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( |
) |
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Financing Activities |
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|
|
|
|
|
||
Proceeds from exercise of stock options |
|
|
|
|
|
|
||
Payment of finance lease obligations |
|
|
( |
) |
|
|
( |
) |
Payment of withholding taxes and option costs on net share settlement of |
|
|
( |
) |
|
|
( |
) |
Repayment of line of credit |
|
|
— |
|
|
|
( |
) |
Payment of tax distributions to redeemable noncontrolling interest holders |
|
|
( |
) |
|
|
— |
|
Payments received in advance from (payments made to) third party payment processor |
|
|
( |
) |
|
|
— |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Impact of foreign currency on cash, cash equivalents, and restricted cash |
|
|
( |
) |
|
|
( |
) |
Net increase (decrease) in cash, cash equivalents, and restricted cash |
|
|
|
|
|
( |
) |
|
Cash, cash equivalents, and restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
||
Cash paid for income taxes |
|
$ |
|
|
$ |
|
||
Cash paid for operating lease liabilities |
|
$ |
|
|
$ |
|
||
Supplemental noncash disclosure of cash flow information: |
|
|
|
|
|
|
||
Unpaid purchases of property and equipment, capitalized website |
|
$ |
|
|
$ |
|
||
Capitalized stock-based compensation expense in website development and |
|
$ |
|
|
$ |
|
||
Obtaining a right-of-use asset in exchange for a finance lease liability |
|
$ |
— |
|
|
$ |
|
|
Obtaining a right-of-use asset in exchange for an operating lease liability |
|
$ |
— |
|
|
$ |
|
|
Issuance of stock for acquisition |
|
$ |
— |
|
|
$ |
|
|
Accretion of redeemable noncontrolling interest to redemption value |
|
$ |
|
|
$ |
— |
|
|
Accrued tax distributions to redeemable noncontrolling interest holders |
|
$ |
|
|
$ |
— |
|
|
The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.
5
CarGurus, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(dollars in thousands, except share and per share data, unless otherwise noted)
1. Organization and Business Description
CarGurus, Inc. (the “Company”) is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer online wholesale platform. The CarGurus marketplace gives consumers the confidence to purchase or sell a vehicle either online or in-person, and it gives dealerships the power to accurately price, effectively market, instantly acquire and quickly sell vehicles, all with a nationwide reach. The Company uses proprietary technology, search algorithms and data analytics to bring trust, transparency and competitive pricing to the automotive shopping experience.
The Company is headquartered in Cambridge, Massachusetts and was incorporated in the State of
The Company operates principally in the United States. In the United States, it also operates as independent brands the Autolist online marketplace, which it wholly owns, and the CarOffer, LLC (“CarOffer”) digital wholesale marketplace, in which it has a
The Company has subsidiaries in the United States, Canada, Ireland, and the United Kingdom and, prior to the first quarter of 2022, had
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) are unaudited. The Unaudited Condensed Consolidated Financial Statements and related disclosures have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
The Unaudited Condensed Consolidated Financial Statements have also been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2022 and December 31, 2021, results of operations, comprehensive income, changes in shareholders’ equity for the three months ended March 31, 2022 and 2021 and cash flows for the three months ended March 31, 2022 and 2021. These interim period results are not necessarily indicative of the results to be expected for any other interim period or the full year.
The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022 (the “Annual Report”).
While the Company disclosed total revenue in the Unaudited Condensed Consolidated Income Statements in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 5, 2021, the accompanying Unaudited Condensed Consolidated Income Statements for the quarter ended March 31, 2021 presents revenues disaggregated into marketplace, wholesale, and product revenues to conform to the current year presentation, as a result of the acquisition of a
While the Company disclosed inventory within prepaid expenses, prepaid income taxes, and other assets in the Unaudited Condensed Consolidated Statements of Cash Flow in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, filed with the SEC on May 5, 2021, the accompanying Unaudited Condensed Consolidated Statements of Cash Flow for the quarter ended March 31, 2021 present inventory separately from prepaid expenses, prepaid income taxes, and other assets to conform to the current year presentation, as inventory met the threshold for separate disclosure.
6
Principles of Consolidation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Subsequent Event Considerations
The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, other than as disclosed in these Unaudited Condensed Consolidated Financial Statements.
Use of Estimates
The preparation of the Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recognized in the period in which they become known.
Critical estimates relied upon in preparing the Unaudited Condensed Consolidated Financial Statements include the determination of sales allowance and variable consideration in the Company’s revenue recognition, allowance for doubtful accounts, the expensing and capitalization of product, technology, and development costs for website development and internal‑use software, the valuation and recoverability of goodwill, intangible assets and other long-lived assets, the valuation of redeemable noncontrolling interest, the recoverability of the Company’s net deferred tax assets and related valuation allowance and the valuation of equity and liability-classified compensation awards under ASC Topic 718, Stock-based Compensation ("ASC 718"). Accordingly, the Company considers these to be its critical accounting policies, and believes that of the Company’s significant accounting policies, these policies involve the greatest degree of judgment and complexity.
Concentration of Credit Risk
The Company maintains its cash, cash equivalents, and investments principally with accredited financial institutions of high credit standing. Although the Company deposits its cash, cash equivalents, and investments with multiple financial institutions, its deposits may often exceed governmental insured limits.
The Company is exposed to credit losses primarily through its trade accounts receivable, which includes receivables in transit from a third-party payment processor. The third-party payment processor collects customer payments on the Company's behalf and remits them to the Company. Customer payments received, but not remitted as of period end are deemed to be receivables in transit. Additionally, the third-party payment processer provides payments in advance for certain customers to the Company. If the third-party payment processor does not receive customer payments related to the payments in advance, the balance is deducted from future remittances to the Company.
The Company offsets gross trade accounts receivable with payments received in advance from a third-party payment processer as it has the right of offset. As of March 31, 2022, gross trade accounts receivable from receivables in transit from the third-party payment processor was $
7
Credit risk with respect to accounts receivable is dispersed due to the large number of customers. The Company routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable.
The majority of the Company's accounts receivable results from the acquisition of a
As of March 31, 2022,
As of March 31, 2022 and December 31, 2021, $
For the three months ended March 31, 2022,
Significant Accounting Policies
The Unaudited Condensed Consolidated Financial Statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the Unaudited Condensed Consolidated Financial Statements. As of March 31, 2022, there have been no material changes in the Company’s significant accounting policies, which are detailed in the Annual Report.
Recent Accounting Pronouncements Not Yet Adopted
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company on or prior to the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. As of March 31, 2022, there are no new material accounting pronouncements that the Company is considering adopting.
3. Revenue Recognition
The Company provides disaggregation of revenue based on marketplace, wholesale and product revenue classification on the face of its Unaudited Condensed Consolidated Income Statements and based on geographic region (see Note 11). The Company believes these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”) requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of the relevant quarter end.
For contracts with an original expected duration greater than one year, the aggregate amount of the transaction price allocated to the performance obligations that were unsatisfied as of March 31, 2022 was approximately $
For contracts with an original expected duration of one year or less, the Company has applied the practical expedient available under ASC 606 to not disclose the amount of transaction price allocated to unsatisfied performance obligations as of March 31, 2022. For performance obligations not satisfied as of March 31, 2022, and to which this expedient applies, the nature of the performance obligations, the variable consideration and any consideration from contracts with customers not included in the transaction price is consistent with performance obligations satisfied as of March 31, 2022.
For the three months ended March 31, 2022 and 2021, revenue recognized from amounts included in deferred revenue at the beginning of the period, was $
8
4
As of March 31, 2022 and December 31, 2021,
|
|
As of March 31, 2022 |
|
|||||||||||||
|
|
Quoted Prices |
|
|
Significant Other |
|
|
Significant |
|
|
Total |
|
||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
|
|
As of December 31, 2021 |
|
|||||||||||||
|
|
Quoted Prices |
|
|
Significant Other |
|
|
Significant |
|
|
Total |
|
||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market funds |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|||
The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. As of March 31, 2022 and December 31, 2021, there were
Cash and cash equivalents primarily consist of cash on deposit with banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.
The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Investments not classified as cash equivalents with maturities one year or less from the balance sheet date are classified as short-term investments, while investments with maturities in excess of one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of investments at the time of purchase and re-evaluates such determination at each balance sheet date. Investments are carried at cost, which approximates their fair market value.
As
|
|
As of March 31, 2022 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit due in one year or less |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
|
|
As of December 31, 2021 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
||||
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit due in one year or less |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Total |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
9
5
As of March 31, 2022 and December 31, 2021, p
|
|
As of |
|
|
As of |
|
||
Server and computer equipment |
|
$ |
|
|
$ |
|
||
Capitalized internal-use software |
|
|
|
|
|
|
||
Capitalized website development |
|
|
|
|
|
|
||
Furniture and fixtures |
|
|
|
|
|
|
||
Leasehold improvements |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
Finance lease right-of-use assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less accumulated depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
$ |
|
|
$ |
|
||
During the three months ended March 31, 2022, capitalized website development costs increased $
6. Accrued Expenses, Accrued Income Taxes and Other Current Liabilities and Other Non-Current Liabilities
As of March 31, 2022 and December 31, 2021, accrued expenses, accrued income taxes and other current liabilities consist of the following:
|
|
As of |
|
|
As of |
|
||
Accrued bonus |
|
$ |
|
|
$ |
|
||
Accrued income taxes |
|
|
|
|
|
|
||
Accrued tax distributions to redeemable noncontrolling interest holders |
|
|
|
|
|
|
||
Payments received in advance from third-party payment processor |
|
|
— |
|
|
|
|
|
Other accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
O
The decrease of $
The increase of $
The decrease of $
The decrease of $
10
As of March 31, 2022 and December 31, 2021, other non-current liabilities consist of the following:
|
|
As of |
|
|
As of |
|
||
CO Incentive Unit and Subject Unit liability-classified awards |
|
$ |
|
|
$ |
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
In connection with the Company's acquisition of a
7
Contractual Obligations and Commitments
As of March 31, 2022, all of the Company’s property, equipment, and internal-use software have been purchased with cash with the exception of amounts related to unpaid property and equipment, capitalized website development, capitalized internal-use software and capitalized hosting arrangements and amounts related to obligations under finance leases as disclosed in the Unaudited Condensed Consolidated Statements of Cash Flows. The Company has no material long-term purchase obligations outstanding with any vendor or third party.
Leases
The Company’s primary operating lease obligations consist of various leases for office space in: Boston, Massachusetts; Cambridge, Massachusetts; San Francisco, California; Addison, Texas; and Dublin, Ireland. The Company also has an operating lease obligation for data center space in Needham, Massachusetts.
As of March 31, 2022, there were no material changes in the Company’s leases from those disclosed in the Annual Report.
The Company’s leases in Boston, Massachusetts, Cambridge, Massachusetts and San Francisco, California have associated letters of credit, which are recognized within restricted cash in the Unaudited Condensed Consolidated Balance Sheet. As of March 31, 2022 and December 31, 2021, restricted cash was $
Acquisitions
On January 14, 2021 the Company completed the acquisition of a
Legal Matters
From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. The Company is not presently subject to any pending or threatened litigation that it believes, if determined adversely to the Company, individually, or taken together, would reasonably be expected to have a material adverse effect on its business or financial results. However, litigation is inherently unpredictable and the future outcome of legal proceedings and other contingencies could be unexpected or differ from the Company’s estimated liabilities, which could have a material adverse effect on the Company’s future financial results.
11
Guarantees and Indemnification Obligations
In the ordinary course of business, the Company enters into agreements with its customers, partners and service providers that include commercial provisions with respect to licensing, infringement, guarantees, indemnification, and other common provisions.
45-Day Guaranteed Bid is an arrangement through which a selling dealer lists a car on the CarOffer platform, and CarOffer provides an offer to purchase the vehicle listed at a specified price at any time over a 45-day period. This provides the seller with a put option, where they have the right, but not the obligation, to require CarOffer to purchase the vehicle during this window. OfferGuard is an arrangement through which a buying dealer purchases a car on the CarOffer platform, and CarOffer provides an offer to purchase the vehicle at a specified price between days 1 and 3, and days 42 and 45 if the dealer is not able to sell the vehicle after 42 days.
A guarantee liability is initially measured using the amount of consideration received from the dealer for the purchase of the guarantee. The initial liability is released, and guarantee income is recognized, upon the earliest of the following: the vehicle sells during the guarantee period, the seller exercises it’s put option during the guarantee period, or the option expires unexercised at the end of the guarantee period. Guarantee income is recognized within wholesale revenue in the Unaudited Condensed Consolidated Income Statements. When it is probable and reasonably estimable that CarOffer will incur a loss on a vehicle that it is required to purchase, a liability, and a corresponding charge to cost of sales is recognized for the amount of the loss in the Unaudited Condensed Consolidated Balance Sheets. Gains and losses resulting from the dealers exercise of guarantees are recognized within cost of sales in the Unaudited Condensed Consolidated Balance Sheets.
For the three months ended March 31, 2022 and 2021, income for guarantees purchased by dealers was $
As of March 31, 2022, the maximum potential amount of future payments that CarOffer could be required to make under these guarantees was $
8
For the three months ended March 31, 2022 and 2021,
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Options |
|
$ |
|
|
$ |
|
||
Restricted stock units |
|
|
|
|
|
|
||
CO Incentive Units and Subject Units |
|
|
|
|
|
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cost of revenue |
|
$ |
|
|
$ |
|
||
Sales and marketing expense |
|
|
|
|
|
|
||
Product, technology, and development expense |
|
|
|
|
|
|
||
General and administrative expense |
|
|
|
|
|
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
||
For the three months ended March 31, 2022 and 2021, excluded from stock-based compensation expense is $
12
During the three months ended March 31, 2022 and 2021, the Company withheld
9
During the three months ended March 31, 2022,
Basic net income per share (“Basic EPS”) is computed by dividing net (loss) income attributable to common stockholders and adjusted to reflect changes in the redemption value of the redeemable noncontrolling interest, if applicable, by the weighted-average number of common shares outstanding during the reporting period. The Company computes the weighted-average number of common shares outstanding during the reporting period using the total number of shares of Class A common stock and Class B common stock outstanding as of the last day of the previous year plus the weighted-average of any additional shares issued and outstanding during the reporting period.
Diluted net income per share (“Diluted EPS”) gives effect to all potentially dilutive securities. Diluted EPS is computed by dividing net (loss) income attributable to common stockholders and adjusted to reflect adjustments for net income (loss) attributable to the noncontrolling interest and redemption adjustments to redeemable noncontrolling interest, if applicable and dilutive, by the weighted-average number of common shares outstanding during the reporting period using (i) the number of shares of common stock used in the Basic EPS calculation as indicated above, (ii) if dilutive, the incremental weighted-average common stock that the Company would issue upon the exercise of stock options and the vesting of RSUs, (iii) if dilutive, market-based performance awards based on the number of shares that would be issuable as of the end of the reporting period assuming the end of the reporting period was also the end of the contingency period. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method. The if-converted method is used to calculate the number of shares issuable upon exercise of the 2024 Put Right (as defined in Note 4 to the financial statements contained within the Annual Report), inclusive of CarOffer noncontrolling interest and incentive units, that would be issuable as of the end of the reporting period assuming the end of the reporting period was also the end of the contingency period.
13
For the three months ended March 31, 2022 and 2021, a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Numerator: |
|
|
|
|
|
|
||
Consolidated net income |
|
$ |
|
|
$ |
|
||
Net loss attributable to redeemable noncontrolling interest |
|
|
( |
) |
|
|
( |
) |
Accretion of redeemable noncontrolling interest to redemption value |
|
|
|
|
|
— |
|
|
Net (loss) income attributable to common stockholders |
|
$ |
( |
) |
|
$ |
|
|
Denominator: |
|
|
|
|
|
|
||
Weighted-average number of shares of common stock used |
|
|
|
|
|
|
||
Dilutive effect of share equivalents resulting from stock |
|
|
— |
|
|
|
|
|
Dilutive effect of share equivalents resulting from |
|
|
— |
|
|
|
|
|
Weighted-average number of shares of common stock |
|
|
|
|
|
|
||
Net (loss) income per share attributable to common stockholders: |
|
|
|
|
|
|
||
Basic |
|
$ |
( |
) |
|
$ |
|
|
Diluted |
|
$ |
( |
) |
|
$ |
|
|
For the three months ended March 31, 2022 and 2021, potentially dilutive common stock equivalents that have been excluded from the calculation of diluted weighted-average shares outstanding as their effect would have been anti-dilutive are as follows:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Stock options outstanding |
|
|
|
|
|
|
||
Restricted stock units outstanding |
|
|
|
|
|
|
||
CO Incentive Units, Subject Units and noncontrolling |
|
|
|
|
|
— |
|
|
For the three months ended March 31, 2021, shares of Class A common stock potentially issuable under market-based performance awards of approximately
For the three months ended March 31, 2021, there were
For the three months ended March 31, 2022, there was no effect of potentially dilutive shares as the numerator was negative. Additionally, during the three months ended March 31, 2022, the Company modified its market-based performance awards to contain only service-based vesting conditions in line with the Company's other restricted stock unit awards.
10. Income Taxes
During the three months ended March 31, 2022, the Company recorded an income tax provision of $
During the three months ended March 31, 2021, the Company recorded an income tax provision of $
14
The Company and its subsidiaries are subject to various U.S. federal, state, and foreign income tax examinations. The Company is currently not subject to income tax examination for the tax years of
11. Segment and Geographic Information
Effective the first quarter of 2022, the Company revised its segment reporting from
For the three months ended March 31, 2022 and 2021, information regarding the Company’s operations by segment is represented within the Unaudited Condensed Consolidated Income Statements.
For the three months ended March 31, 2022 and 2021, information regarding the Company’s revenue by geographical region is as follows:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue by Geographic Region: |
|
|
|
|
|
|
||
United States |
|
$ |
|
|
$ |
|
||
International |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
||
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our Unaudited Condensed Consolidated Financial Statements, and the related notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our consolidated financial statements and the related notes and other financial information included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission, or SEC, on February 25, 2022, or our Annual Report. Some of the information contained in this discussion and analysis or elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and our performance and future success, includes forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this Quarterly Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. In this discussion, we use financial measures that are considered non-GAAP financial measures under SEC rules. These rules regarding non-GAAP financial measures require supplemental explanation and reconciliation, which are included elsewhere in this Quarterly Report. Investors should not consider non-GAAP financial measures in isolation from or in substitution for, financial information presented in compliance with United States generally accepted accounting principles, or GAAP. The period-to-period comparison of financial results is not necessarily indicative of future results.
Company Overview
CarGurus is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer online wholesale platform. The CarGurus marketplace gives consumers the confidence to purchase or sell a vehicle either online or in-person, and it gives dealerships the power to accurately price, effectively market, instantly acquire and quickly sell vehicles, all with a nationwide reach. We use our proprietary technology, search algorithms and data analytics to bring trust, transparency and competitive pricing to the automotive shopping experience.
We are headquartered in Cambridge, Massachusetts and were incorporated in the State of Delaware on June 26, 2015.
We operate principally in the United States. In the United States, we also operate as independent brands the Autolist online marketplace, which we wholly own, and CarOffer digital wholesale marketplace, in which we have a 51% interest. In addition to the United States, we operate online marketplaces under the CarGurus brand in Canada and the United Kingdom. In the United Kingdom, we also operate as an independent brand the PistonHeads online marketplace, which we wholly own.
We have subsidiaries in the United States, Canada, Ireland, and the United Kingdom and, prior to the first quarter of 2022, we had two reportable segments – United States and International. Effective as of the first quarter of 2022, we revised our segment reporting from two reportable segments to one reportable segment. See Note 11 of the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report for further segment reporting and geographical information.
We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages and Real-time Performance Marketing, or RPM, digital advertising suite, (ii) advertising revenue from auto manufacturers and other auto‑related brand advertisers and (iii) partnerships with financing services companies. We generate wholesale revenue primarily from transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers. We generate product revenue primarily from aggregate proceeds received on the sale of vehicles.
For the three months ended March 31, 2022, we generated revenue of $430.6 million, a 151% increase from $171.4 million of revenue in the three months ended March 31, 2021.
For the three months ended March 31, 2022, we generated consolidated net income of $18.8 million and Adjusted EBITDA of $58.0 million, compared to consolidated net income of $19.6 million and Adjusted EBITDA of $50.6 million for the three months ended March 31, 2021.
See “Adjusted EBITDA” below for more information regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our consolidated net income.
COVID-19 Update
The COVID-19 pandemic resulted in significant disruptions to the global economy as well as businesses and capital markets around the world. The continued impact of COVID-19 and, in particular, existing and new variants that may emerge, cannot be predicted at this time, and could depend on a number of factors, including the availability of vaccines in different parts of the world, vaccination rates among the population, and the effectiveness of vaccines against any variants.
16
Our recent operations have been affected by a range of factors related to the COVID-19 pandemic, including continued temporary office closures and remote work for most employees. Fluctuation in infection rates in the regions in which we operate has resulted in periodic changes in restrictions that vary from region to region and may require rapid response to new or reinstated orders. Many of these orders at times have resulted in restrictions on the ability of consumers to buy and sell automobiles by restricting operations at dealerships and/or by closing or reducing the services provided by certain service providers upon which dealerships rely. In addition, these restrictions and continued concern about the spread of the disease have impacted car shopping by consumers and disrupted the operations of car dealerships, which has adversely affected the market for automobile purchases.
The automotive industry is also facing inventory supply problems, including for reasons attributable to the COVID-19 pandemic and other macroeconomic issues, such as the global semiconductor chip shortage, which have adversely affected the amount of inventory on our websites.
We continue to monitor and assess the effects of the COVID-19 pandemic, including the effects of variants, on our commercial operations, including the impact on our revenue. See the “Risk Factors” section of this Quarterly Report for further discussion of the impacts of the COVID-19 pandemic on our business.
Key Business Metrics
We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. We believe it is important to evaluate these metrics for the United States and International geographic regions. The International region derives revenues from marketplace revenue from customers outside of the United States. International markets perform differently from the United States market due to a variety of factors, including our operating history in each market, our rate of investment, market size, market maturity, competition and other dynamics unique to each country. The metrics presented below exclude CarOffer as we believe such metrics are either not applicable for the CarOffer business or do not provide a meaningful way to evaluate the CarOffer business.
Monthly Unique Users
For each of our websites, we define a monthly unique user as an individual who has visited any such website within a calendar month, based on data as measured by Google Analytics. We calculate average monthly unique users as the sum of the monthly unique users of each of our websites in a given period, divided by the number of months in that period. We count a unique user the first time a computer or mobile device with a unique device identifier accesses any of our websites during a calendar month. If an individual accesses a website using a different device within a given month, the first access by each such device is counted as a separate unique user. If an individual uses multiple browsers on a single device and/or clears their cookies and returns to our site within a calendar month, each such visit is counted as a separate unique user. We view our average monthly unique users as a key indicator of the quality of our user experience, the effectiveness of our advertising and traffic acquisition, and the strength of our brand awareness. Measuring unique users is important to us and we believe it provides useful information to our investors because our marketplace revenue depends, in part, on our ability to provide dealers with connections to our users and exposure to our marketplace audience. We define connections as interactions between consumers and dealers on our marketplace through phone calls, email, managed text and chat, and clicks to access the dealer’s website or map directions to the dealership.
|
|
Three Months Ended |
|
|
|||||
Average Monthly Unique Users |
|
2022 |
|
|
2021 |
|
|
||
|
|
(in thousands) |
|
|
|||||
United States |
|
|
31,051 |
|
|
|
36,324 |
|
|
International |
|
|
6,878 |
|
|
|
7,898 |
|
|
Total |
|
|
37,929 |
|
|
|
44,222 |
|
|
17
Monthly Sessions
We define monthly sessions as the number of distinct visits to our websites that take place each month within a given time frame, as measured and defined by Google Analytics. We calculate average monthly sessions as the sum of the monthly sessions in a given period, divided by the number of months in that period. A session is defined as beginning with the first page view from a computer or mobile device and ending at the earliest of when a user closes their browser window, after 30 minutes of inactivity, or each night at midnight (i) Eastern Time for our United States and Canada websites, other than the Autolist website, (ii) Pacific Time for the Autolist website, and (iii) Greenwich Mean Time for our U.K. websites. A session can be made up of multiple page views and visitor actions, such as performing a search, visiting vehicle detail pages, and connecting with a dealer. We believe that measuring the volume of sessions in a time period, when considered in conjunction with the number of unique users in that time period, is an important indicator to us of consumer satisfaction and engagement with our marketplace, and we believe it provides useful information to our investors because the more satisfied and engaged consumers we have, the more valuable our service is to dealers.
|
|
Three Months Ended |
|
|
|||||
Average Monthly Sessions |
|
2022 |
|
|
2021 |
|
|
||
|
|
(in thousands) |
|
|
|||||
United States |
|
|
84,851 |
|
|
|
90,668 |
|
|
International |
|
|
15,817 |
|
|
|
18,249 |
|
|
Total |
|
|
100,668 |
|
|
|
108,917 |
|
|
Number of Paying Dealers
We define a paying dealer as a dealer account with an active, paid marketplace subscription at the end of a defined period. The number of paying dealers we have is important to us and we believe it provides valuable information to investors because it is indicative of the value proposition of our marketplace products, as well as our sales and marketing success and opportunity, including our ability to retain paying dealers and develop new dealer relationships.
|
|
As of March 31 |
|
|
|||||
Number of Paying Dealers |
|
2022 |
|
|
2021 |
|
|
||
United States |
|
|
24,219 |
|
|
|
24,371 |
|
|
International |
|
|
6,648 |
|
|
|
6,842 |
|
|
Total |
|
|
30,867 |
|
|
|
31,213 |
|
|
Quarterly Average Revenue per Subscribing Dealer (QARSD)
We define QARSD, which is measured at the end of a fiscal quarter, as the marketplace revenue primarily from subscriptions to our Listings packages and RPM digital advertising suite during that trailing quarter divided by the average number of paying dealers in that marketplace during the quarter. We calculate the average number of paying dealers for a period by adding the number of paying dealers at the end of such period and the end of the prior period and dividing by two. This information is important to us, and we believe it provides useful information to investors, because we believe that our ability to grow QARSD is an indicator of the value proposition of our products and the return on investment, or ROI, that our paying dealers realize from our products. In addition, increases in QARSD, which we believe reflect the value of exposure to our engaged audience in relation to subscription cost, are driven in part by our ability to grow the volume of connections to our users and the quality of those connections, which result in increased opportunity to upsell package levels and cross-sell additional products to our paying dealers.
|
|
As of March 31 |
|
|||||
Quarterly Average Revenue per Subscribing Dealer (QARSD) |
|
2022 |
|
|
2021 |
|
||
United States |
|
$ |
5,713 |
|
|
$ |
5,466 |
|
International |
|
$ |
1,556 |
|
|
$ |
1,113 |
|
Consolidated |
|
$ |
4,806 |
|
|
$ |
4,513 |
|
18
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we monitor and have presented within this Quarterly Report, Adjusted EBITDA, which is a non‑GAAP financial measure. This non‑GAAP financial measure is not based on any standardized methodology prescribed by United States generally accepted accounting principles, or GAAP, and is not necessarily comparable to any similarly titled measures presented by other companies.
We define Adjusted EBITDA as consolidated net income, adjusted to exclude: depreciation and amortization, stock‑based compensation expense, acquisition-related expenses, other (expense) income, net, provision for income taxes, and net loss attributable to redeemable noncontrolling interest.
We have presented Adjusted EBITDA within this Quarterly Report, because it is a key measure used by our management and board of directors to understand and evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating Adjusted EBITDA can produce a useful measure for period‑to‑period comparisons of our business.
We use Adjusted EBITDA to evaluate our operating performance and trends and make planning decisions. We believe Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision‑making. In addition, we evaluate our Adjusted EBITDA in relation to our revenue. We refer to this as Adjusted EBITDA margin and define it as Adjusted EBITDA divided by total revenue.
Our Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than consolidated net income, which is the most directly comparable GAAP equivalent. Some of these limitations are:
Because of these limitations, we consider, and you should consider, Adjusted EBITDA together with other operating and financial performance measures presented in accordance with GAAP.
19
For the three months ended March 31, 2022, the following table presents a reconciliation of Adjusted EBITDA to consolidated net income, the most directly comparable measure calculated in accordance with GAAP, for each of the periods presented.
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Reconciliation of Adjusted EBITDA: |
|
(in thousands) |
|
|||||
Consolidated net income |
|
$ |
18,838 |
|
|
$ |
19,551 |
|
Depreciation and amortization |
|
|
11,185 |
|
|
|
8,666 |
|
Stock-based compensation expense |
|
|
27,842 |
|
|
|
15,393 |
|
Acquisition-related expenses |
|
|
— |
|
|
|
644 |
|
Other expense (income), net |
|
|
119 |
|
|
|
(222 |
) |
Provision for income taxes |
|
|
7,702 |
|
|
|
6,462 |
|
Consolidated Adjusted EBITDA |
|
|
65,686 |
|
|
|
50,494 |
|
Adjusted EBITDA attributable to redeemable noncontrolling interest |
|
|
(7,736 |
) |
|
|
68 |
|
Adjusted EBITDA |
|
$ |
57,950 |
|
|
$ |
50,562 |
|
Components of Unaudited Condensed Consolidated Income Statements
Revenue
We derive revenue from three sources: (i) marketplace revenue, which consists primarily of dealer subscriptions to our Listings packages and RPM digital advertising suite, advertising revenue from auto manufacturers and other auto‑related brand advertisers, and revenue from partnerships with financing services companies; (ii) wholesale revenue, which consists primarily of transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers; and (iii) product revenue, which consists primarily of aggregate proceeds received on the sale of vehicles.
Marketplace Revenue
We offer multiple types of marketplace Listings packages to our dealers for our CarGurus U.S. platform (availability varies on our other marketplaces): Restricted Listings, which is free; and various levels of Listings packages, which each require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis.
Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice prior to the commencement of the applicable renewal term. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the connections and ROI the platform will provide them and is subject to discounts and/or fee reductions that we may offer from time to time. We also offer all dealers on our platform access to our Dealer Dashboard, which includes a performance summary, Dealer Insights tool, and user review management platform. Only dealers subscribing to a paid Listings package have access to the Pricing Tool, Market Analysis tool and our IMV Scan tool.
In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements marketed under our RPM digital advertising suite. Through RPM, dealers can buy advertising that appears in our marketplace, on other sites on the internet and/or on high-converting social media platforms. Such advertisements can be targeted by the user’s geography, search history, CarGurus website activity and a number of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for dealers.
We also offer paid Listings packages for the Autolist website and paid Listings and advertising products for the PistonHeads website.
Marketplace revenue also consists of non-dealer advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. An impression is an advertisement loaded on a web page. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost per click basis. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as Certified Pre-Owned, and segments such as hybrid vehicles.
20
Marketplace revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our CarGurus U.S. website to pre-qualify for financing on cars from dealerships that offer financing through such companies. We primarily generate revenue from these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through our site.
We also offer non-dealer advertising products for the Autolist and PistonHeads websites.
Wholesale Revenue
Wholesale revenue includes transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers, where CarOffer collects fees from both the buyer and seller. CarOffer also sells vehicles to dealers that CarOffer acquires at other marketplaces – in these instances, CarOffer collects a transaction fee from the buyer.
Wholesale revenue also includes fees earned by CarOffer from performing inspection and transportation services, where CarOffer collects fees from the buyer. Inspection and transportation service revenue is inclusive of dealer to dealer transactions, other marketplace to dealer transactions, and customer to dealer transactions.
Wholesale revenue also includes fees earned by CarOffer from certain guarantees offered to dealers, where CarOffer collects fees from the buying dealer or selling dealer, as applicable.
Product Revenue
Product revenue includes the aggregate proceeds received on the sale of vehicles. This revenue relates to vehicles sold to dealers that CarOffer acquires directly from customers, inclusive of transaction fees collected from the buyer, and in limited situations across all CarOffer transactions, vehicles CarOffer resells after acquiring a vehicle via arbitration. Arbitration is the process by which CarOffer investigates and resolves claims from buying dealers.
Cost of Revenue
Marketplace Cost of Revenue
Marketplace cost of revenue includes expenses related to supporting and hosting digital product offerings. These expenses include personnel and related expenses for our customer support team, including salaries, benefits, incentive compensation, and stock-based compensation, third-party service provider expenses such as advertising, data center and networking expenses, depreciation expense associated with our property and equipment, amortization of developed technology, amortization of capitalized website development and allocated overhead expenses. We allocate overhead expenses, such as rent and facility expenses, information technology expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category.
Wholesale Cost of Revenue
Wholesale cost of revenue includes expenses related to supporting the facilitation of the purchase and sale of vehicles between dealers, the sale by CarOffer to dealers of vehicles that it acquires at other marketplaces, and net losses on vehicles related to guarantees offered to dealers. These expenses include vehicle transportation and inspection expenses, personnel and related expenses for employees directly involved in the fulfillment and support of transactions, including salaries, benefits, incentive compensation and stock-based compensation, third-party service provider expenses, amortization of developed technology, amortization of capitalized website development and allocated overhead expenses.
Product Cost of Revenue
Product cost of revenue includes expenses related to vehicles sold to dealers that CarOffer acquires directly from consumers, inclusive of transportation expenses, and in limited situations across all CarOffer transactions, in which CarOffer acquires the vehicle via arbitration. These expenses include expenses for vehicles in which CarOffer controls the vehicle and therefore acts as a principal in the transaction.
21
Operating Expenses
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing team, including salaries, benefits, incentive compensation, commissions, and stock-based compensation; expenses associated with consumer marketing, such as traffic acquisition, brand building, and public relations activities; expenses associated with dealer marketing, such as content marketing, customer and promotional events, and industry events; amortization of hosting arrangements; and allocated overhead expenses. A portion of our commissions that are related to obtaining a new contract are capitalized and amortized over the estimated benefit period of customer relationships. All other sales and marketing expenses are expensed as incurred. We expect sales and marketing expenses to fluctuate from quarter to quarter as we respond to the COVID-19 pandemic and changes in the macroeconomic and competitive landscapes affecting our existing dealers, consumer audience and brand awareness, which will impact our results of operations.
Product, Technology, and Development
Product, technology, and development expenses, consist primarily of personnel and related expenses for our research and development team, including salaries, benefits, incentive compensation, stock-based compensation and allocated overhead expense. Other than website development and internal-use software expenses, research and development expenses are expensed as incurred. We expect product, technology, and development expenses to increase as we invest in additional engineering resourcing to develop new solutions and make improvements to our existing platform.
General and Administrative
General and administrative expenses consist primarily of personnel and related expenses for our executive, finance, legal, people & talent, and administrative teams, including salaries, benefits, incentive compensation, and stock-based compensation, in addition to the expenses associated with professional fees for external legal, accounting and other consulting services, insurance premiums, payment processing and billing expenses, and allocated overhead expenses. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to increase as we continue to scale our business.
Depreciation and Amortization
Depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets and internal-use software.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of interest income earned on our cash, cash equivalents, and investments, and net foreign exchange gains and losses.
Provision for Income Taxes
We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we operate. For the three months ended March 31, 2022 and 2021, we have recognized a provision for income taxes as a result of our consolidated taxable income position. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of March 31, 2022 and December 31, 2021, our valuation allowance against our net deferred tax assets was immaterial.
22
Results of Operations
For the three months ended March 31, 2022 and 2021, our Unaudited Condensed Consolidated Income Statements are as follows:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
|
|
(dollars in thousands) |
|
|||||
Revenue: |
|
|
|
|
|
|
||
Marketplace |
|
$ |
163,289 |
|
|
$ |
155,800 |
|
Wholesale |
|
|
90,994 |
|
|
|
13,803 |
|
Product |
|
|
176,325 |
|
|
|
1,765 |
|
Total revenue |
|
|
430,608 |
|
|
|
171,368 |
|
Cost of revenue |
|
|
|
|
|
|
||
Marketplace |
|
|
12,209 |
|
|
|
10,988 |
|
Wholesale |
|
|
58,182 |
|
|
|
11,126 |
|
Product |
|
|
178,342 |
|
|
|
1,944 |
|
Total cost of revenue |
|
|
248,733 |
|
|
|
24,058 |
|
Gross profit |
|
|
181,875 |
|
|
|
147,310 |
|
Operating expenses: |
|
|
|
|
|
|
||
Sales and marketing |
|
|
87,581 |
|
|
|
68,174 |
|
Product, technology, and development |
|
|
30,653 |
|
|
|
25,164 |
|
General and administrative |
|
|
33,121 |
|
|
|
20,514 |
|
Depreciation and amortization |
|
|
3,861 |
|
|
|
7,667 |
|
Total operating expenses |
|
|
155,216 |
|
|
|
121,519 |
|
Income from operations |
|
|
26,659 |
|
|
|
25,791 |
|
Other (expense) income, net |
|
|
(119 |
) |
|
|
222 |
|
Income before income taxes |
|
|
26,540 |
|
|
|
26,013 |
|
Provision for income taxes |
|
|
7,702 |
|
|
|
6,462 |
|
Consolidated net income |
|
|
18,838 |
|
|
|
19,551 |
|
Net loss attributable to redeemable noncontrolling interest |
|
|
(1,072 |
) |
|
|
(2,810 |
) |
Net income attributable to CarGurus, Inc. |
|
$ |
19,910 |
|
|
$ |
22,361 |
|
23
For the three months ended March 31, 2022 and 2021, our Unaudited Condensed Consolidated Income Statements as a percentage of revenue are as follows (amounts in tables below may not sum due to rounding):
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Revenue: |
|
|
|
|
|
|
||
Marketplace |
|
|
38 |
% |
|
|
91 |
% |
Wholesale |
|
|
21 |
|
|
|
8 |
|
Product |
|
|
41 |
|
|
|
1 |
|
Total revenue |
|
|
100 |
|
|
|
100 |
|
Cost of Revenue |
|
|
|
|
|
|
||
Marketplace |
|
|
3 |
|
|
|
6 |
|
Wholesale |
|
|
14 |
|
|
|
6 |
|
Product |
|
|
41 |
|
|
|
1 |
|
Total cost of revenue |
|
|
58 |
|
|
|
14 |
|
Gross profit |
|
|
42 |
|
|
|
86 |
|
Operating expenses: |
|
|
|
|
|
|
||
Sales and marketing |
|
|
20 |
|
|
|
40 |
|
Product, technology, and development |
|
|
7 |
|
|
|
15 |
|
General and administrative |
|
|
8 |
|
|
|
12 |
|
Depreciation and amortization |
|
|
1 |
|
|
|
4 |
|
Total operating expenses |
|
|
36 |
|
|
|
71 |
|
Income from operations |
|
|
6 |
|
|
|
15 |
|
Other (expense) income, net |
|
|
(0 |
) |
|
|
0 |
|
Income before income taxes |
|
|
6 |
|
|
|
15 |
|
Provision for income taxes |
|
|
2 |
|
|
|
4 |
|
Consolidated net income |
|
|
4 |
|
|
|
11 |
|
Net loss attributable to redeemable noncontrolling interest |
|
|
(0 |
) |
|
|
(2 |
) |
Net income attributable to CarGurus, Inc. |
|
|
5 |
% |
|
|
13 |
% |
For the three months ended March 31, 2022 and 2021
Revenue
Revenue by Source
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketplace |
|
$ |
163,289 |
|
|
$ |
155,800 |
|
|
$ |
7,489 |
|
|
|
5 |
% |
Wholesale |
|
|
90,994 |
|
|
|
13,803 |
|
|
|
77,191 |
|
|
|
559 |
|
Product |
|
|
176,325 |
|
|
|
1,765 |
|
|
|
174,560 |
|
|
|
9,890 |
|
Total |
|
$ |
430,608 |
|
|
$ |
171,368 |
|
|
$ |
259,240 |
|
|
|
151 |
% |
Percentage of total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketplace |
|
|
38 |
% |
|
|
91 |
% |
|
|
|
|
|
|
||
Wholesale |
|
|
21 |
|
|
|
8 |
|
|
|
|
|
|
|
||
Product |
|
|
41 |
|
|
|
1 |
|
|
|
|
|
|
|
||
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
||
Overall revenue increased $259.2 million, or 151%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
24
Marketplace revenue increased $7.5 million, or 5%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and represented 38% of total revenue for the three months ended March 31, 2022 and 91% of total revenue for the three months ended March 31, 2021. The increase in marketplace revenue was due in part to a 6% growth in our QARSD for paying dealers to $4,806 at March 31, 2022 from $4,513 at March 31, 2021. The increase in QARSD was due primarily to signing on new dealers with higher average monthly recurring revenue and revenue expansion through product upgrades for existing dealers.
Wholesale revenue increased $77.2 million, or 559%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and represented 21% of total revenue for the three months ended March 31, 2022 and 8% of total revenue for the three months ended March 31, 2021. The increase was primarily due to an increase in dealer to dealer transactions, inclusive of transaction, transportation and inspection fees. The increase was also due in part to guarantee revenue.
Product revenue increased by $174.6 million, or 9,890%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and represented 41% of total revenue for the three months ended March 31, 2022 and 1% of total revenue for the three months ended March 31, 2021. The increase was primarily due to the launch of our consumer to dealer offering, CarGurus Instant Max Cash Offer, or IMCO, which resulted in a $151.7 million increase in proceeds and buy fees received on the sale of vehicles acquired by CarOffer directly from customers. The increase was also due, in part, to a $22.9 million increase in proceeds received from the sale of vehicles acquired via arbitration.
Cost of Revenue
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketplace |
|
$ |
12,209 |
|
|
$ |
10,988 |
|
|
$ |
1,221 |
|
|
|
11 |
% |
Wholesale |
|
|
58,182 |
|
|
|
11,126 |
|
|
|
47,056 |
|
|
|
423 |
|
Product |
|
|
178,342 |
|
|
|
1,944 |
|
|
|
176,398 |
|
|
|
9,074 |
|
Total |
|
$ |
248,733 |
|
|
$ |
24,058 |
|
|
$ |
224,675 |
|
|
|
934 |
% |
Percentage of total revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Marketplace |
|
|
3 |
% |
|
|
6 |
% |
|
|
|
|
|
|
||
Wholesale |
|
|
14 |
|
|
|
6 |
|
|
|
|
|
|
|
||
Product |
|
|
41 |
|
|
|
1 |
|
|
|
|
|
|
|
||
Total |
|
|
58 |
% |
|
|
14 |
% |
|
|
|
|
|
|
||
Overall cost of revenue increased $224.7 million, or 934%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Marketplace cost of revenue increased $1.2 million, or 11%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and represented 3% of total revenue for the three months ended March 31, 2022 and 6% of total revenue for the three months ended March 31, 2021. The increase was primarily due to a $0.5 million increase in amortization of capitalized website development and developed technology, a $0.4 million increase in data and hosting costs, and a $0.3 million increase in fees related to provisioning advertising campaigns on our websites.
Wholesale cost of revenue increased $47.1 million, or 423%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and represented 14% of total revenue for the three months ended March 31, 2022 and 6% of total revenue for the three months ended March 31, 2021. The increase was primarily due to expenses for dealer to dealer transactions, inclusive of transportation expenses, amortization of developed technology and capitalized website development, inspection expenses and salaries and employee-related expenses.
Product cost of revenue increased $176.4 million, or 9,074%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 and represented 41% of the total revenue for the three months ended March 31, 2022 and 1% of total revenue for the three months ended March 31, 2021. The increase was primarily due to the launch of IMCO, which resulted in a $145.7 million increase in expenses related to vehicles acquired by CarOffer directly from customers. The increase was also due, in part, to a $30.7 million increase in expenses related to vehicles acquired via arbitration.
25
Operating Expenses
Sales and Marketing Expenses
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Sales and marketing |
|
$ |
87,581 |
|
|
$ |
68,174 |
|
|
$ |
19,407 |
|
|
|
28 |
% |
Percentage of total revenue |
|
|
20 |
% |
|
|
40 |
% |
|
|
|
|
|
|
||
Sales and marketing expenses increased $19.4 million, or 28%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was due primarily to a $7.6 million increase in salaries and employee-related expense, exclusive of commissions expense, which increased $6.5 million. The increase in salaries and employee-related expense was due primarily a 31% increase in headcount. The increase in commissions expense was due to the increase in headcount and sales growth. The increase in sales and marketing expenses was also due in part to a $3.3 million increase in advertising and marketing expenses, primarily related to marketing of our consumer to dealer product, a $0.6 million increase in software subscription expense and a $0.6 million increase in consulting expense.
Product, Technology, and Development Expenses
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Product, technology, and development |
|
$ |
30,653 |
|
|
$ |
25,164 |
|
|
$ |
5,489 |
|
|
|
22 |
% |
Percentage of total revenue |
|
|
7 |
% |
|
|
15 |
% |
|
|
|
|
|
|
||
Product, technology, and development expenses increased $5.5 million, or 22%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was due primarily to a $6.6 million increase in salaries and employee-related expense. The increase in salaries and employee-related expense was due primarily to a 30% increase in headcount. The increase in product, technology, and development expenses was offset in part by a $2.1 million decrease resulting from increased capitalizable projects.
General and Administrative Expenses
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
General and administrative |
|
$ |
33,121 |
|
|
$ |
20,514 |
|
|
$ |
12,607 |
|
|
|
61 |
% |
Percentage of total revenue |
|
|
8 |
% |
|
|
12 |
% |
|
|
|
|
|
|
||
General and administrative expenses increased $12.6 million, or 61%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was due primarily to a $1.8 million increase in salaries and employee-related expense, exclusive of stock-based compensation expense, which increased $10.6 million. The increase in salaries and employee-related expense was due primarily to a 19% increase in headcount. The increase in stock-based compensation expense was due primarily to the revaluation of certain liability-based stock awards.
Depreciation and Amortization Expenses
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Depreciation and amortization |
|
$ |
3,861 |
|
|
$ |
7,667 |
|
|
$ |
(3,806 |
) |
|
|
(50 |
)% |
Percentage of total revenue |
|
|
1 |
% |
|
|
4 |
% |
|
|
|
|
|
|
||
26
Depreciation and amortization expenses decreased $3.8 million, or 50%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021, due primarily to a reclassification of amortization of acquired developed technology intangible assets to cost of revenue in the beginning of the fourth quarter of fiscal year 2021. We had previously recorded amortization expense as a component of operating expenses but given the underlying nature of the asset we believe the amortization more closely aligns with cost of goods sold. We assessed the materiality of this reclass on the historical financial statements, individually and in aggregate, and concluded the effect of the reclass was not material to our Unaudited Condensed Consolidated Financial Statements.
Other (Expense) Income, Net
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Other (expense) income, net |
|
$ |
(119 |
) |
|
$ |
222 |
|
|
$ |
(341 |
) |
|
|
(154 |
)% |
Percentage of total revenue |
|
|
(0 |
)% |
|
|
0 |
% |
|
|
|
|
|
|
||
Total other (expense) income, net remained relatively flat in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
Provision for Income Taxes
|
|
Three Months Ended |
|
|
Change |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
Amount |
|
|
% |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
Provision for income taxes |
|
$ |
7,702 |
|
|
$ |
6,462 |
|
|
$ |
1,240 |
|
|
|
19 |
% |
Percentage of total revenue |
|
|
2 |
% |
|
|
4 |
% |
|
|
|
|
|
|
||
Provision for income taxes increased $1.2 million, or 19% in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due primarily to increased profitability in excess of tax attributes available to offset. Additionally, there was an aggregated $1.2 million tax expense related to shortfalls on the taxable compensation of share-based awards and the Section 162(m) excess officer compensation limitation recorded during the three months ended March 31, 2022, compared to an immaterial amount of tax expense related to excess stock-based compensation recorded during the three months ended March 31, 2021. Section 162(m) excess officer compensation limitation was not applicable until May 2021, upon the expiration of the transition period permitted following our initial public offering.
Liquidity and Capital Resources
Cash, Cash Equivalents and Investments
As of March 31, 2022 and December 31, 2021, our principal sources of liquidity were cash and cash equivalents of $315.0 million and $231.9 million, respectively, and investments in certificates of deposit with terms of greater than 90 days but less than one year of $60.0 million and $90.0 million, respectively.
Sources and Uses of Cash
During the three months ended March 31, 2022 and 2021, our cash flows from operating, investing, and financing activities, as reflected in the Unaudited Condensed Consolidated Statements of Cash Flows, are as follows:
|
|
Three Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Net cash provided by operating activities |
|
$ |
93,060 |
|
|
$ |
43,862 |
|
Net cash provided by (used in) investing activities |
|
|
26,264 |
|
|
|
(68,092 |
) |
Net cash used in financing activities |
|
|
(36,894 |
) |
|
|
(19,043 |
) |
Impact of foreign currency on cash |
|
|
(212 |
) |
|
|
(119 |
) |
Net increase (decrease) in cash, cash equivalents, and restricted cash |
|
$ |
82,218 |
|
|
$ |
(43,392 |
) |
27
Our operations have been financed primarily from operating activities. During the three months ended March 31, 2022 and 2021, we generated cash from operating activities of $93.1 million and $43.9 million, respectively.
We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this Quarterly Report. Our future capital requirements will depend on many factors, including: the further impact of the COVID-19 pandemic; our revenue; expenses associated with our sales and marketing activities and the support of our product, technology, and development efforts; expenses associated with our facilities build out under our 1001 Boylston Street lease, other than those which qualify for landlord reimbursement; payments received in advance from a third-party payment processor; our investments in international markets; and the potential exercise of call rights in the second half of 2022, or the 2022 Call Right, exercisable in our sole discretion, to acquire up to twenty-five percent (25%) of the fully diluted outstanding capitalization of CarOffer at an implied value equal to seven (7) times CarOffer’s trailing twelve months gross profit as of June 30, 2022 (as calculated in accordance with the defined terms and subject to the adjustments set forth in the CarOffer Operating Agreement (as defined in Note 4 to the financial statements contained within our Annual Report)). If the 2022 Call Right is exercised, the consideration to be paid will be in the form of cash and/or shares of our Class A common stock, as determined in our sole discretion. A cash payment made in connection with the 2022 Call Right is reasonably likely to reduce our net cash in future quarters. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in the “Risk Factors” section of this Quarterly Report.
To the extent that existing cash, cash equivalents, and investments and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through a public or private equity or debt financing. Additional funds may not be available on terms favorable to us, or at all.
Operating Activities
Cash provided by operating activities of $93.1 million during the three months ended March 31, 2022 was due primarily to consolidated net income of $18.8 million, adjusted for $14.1 million of stock-based compensation expense for equity classified awards $11.2 million of depreciation and amortization, $2.8 million of amortization of deferred contract costs, and $0.2 million of provision for doubtful accounts, partially offset by $13.1 million of deferred taxes. Cash provided by operating activities was also attributable to a $40.0 million decrease in accounts receivable, net and a $30.1 million increase in accrued expenses, accrued income taxes, and other liabilities. The increases in cash flow from operations were partially offset by a $4.1 million decrease in accounts payable, a $3.0 million increase in deferred contract costs, a $2.1 million increase in prepaid expenses, prepaid income taxes, and other assets, a $1.3 million increase in inventory, and a $0.6 million decrease in lease obligations.
Cash provided by operating activities of $43.9 million during the three months ended March 31, 2021 was due primarily to consolidated net income of $19.6 million, adjusted for $14.4 million of stock-based compensation expense for equity classified awards, $8.7 million of depreciation and amortization, $3.2 million of amortization of deferred contract costs, and $0.4 million of provision for doubtful accounts. Cash provided by operating activities was also attributable to a $4.9 million increase in accounts payable and a $2.9 million increase in deferred revenue. The increases in cash flow from operations were partially offset by a $3.5 million increase in deferred contract costs, a $2.4 million increase in accounts receivable, net, a $1.7 million increase in prepaid expenses, prepaid income taxes, and other assets, a $1.6 million decrease in accrued expenses, accrued income taxes, and other liabilities, and a $0.6 million increase in inventory.
Investing Activities
Cash provided by investing activities of $26.3 million during the three months ended March 31, 2022 was due to $30.0 million in maturities of certificates of deposit, offset by $2.5 million of capitalization of website development costs and $1.2 million of purchases of property and equipment.
Cash used in investing activities of $68.1 million during the three months ended March 31, 2021 was due to $65.9 million of cash paid for acquisitions, net of cash acquired, $1.2 million of purchases of property and equipment and $1.0 million of capitalization of website development costs.
Financing Activities
Cash used in financing activities of $36.9 million during the three months ended March 31, 2022 was due primarily to $23.6 million of payments made to third-party payment processor, $8.5 million of payment of tax distributions to redeemable noncontrolling interest holders, and $5.4 million of payment of withholding taxes on net share settlements of restricted stock units, offset in part by $0.7 million of proceeds from the issuance of common stock related to the exercise of vested stock options.
28
Cash used in financing activities of $19.0 million during the three months ended March 31, 2021 was due primarily to $14.3 million of CarOffer's repayment of a line of credit and $5.0 million of payment of withholding taxes on net share settlements of restricted stock units, offset in part by $0.3 million of proceeds from the issuance of common stock related to the exercise of vested stock options.
Contractual Obligations and Known Future Cash Requirements
As of March 31, 2022, there were no material changes in our contractual obligations and commitments from those disclosed in our Annual Report, other than those appearing in the notes to the Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report, which are hereby incorporated by reference.
Seasonality
Across the retail automotive industry, consumer purchases are typically greatest in the first three quarters of each year, due in part to the introduction of new vehicle models from manufacturers and the seasonal nature of consumer spending. Additionally, the volume of vehicles sold through our CarOffer platform generally fluctuates from quarter to quarter. This seasonality is caused by several factors, including holidays, weather, the timing of used vehicles available for sale from selling customers, the seasonality of the retail market for used vehicles and/or inventory challenges in the automotive industry, which affect the demand side of the wholesale industry. Macroeconomic conditions, such as the global semiconductor chip shortage, can also effect the volume of wholesale vehicle sales. As a result, revenue and cost of revenue related to volume will fluctuate accordingly on a quarterly basis. Typical seasonality trends may not be observed in periods where other external factors more significantly impact the wholesale industry.
Off-Balance Sheet Arrangements
As of March 31, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements, or material leases that are less than twelve months in duration, other than leases signed but not commenced, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Estimates
The preparation of the Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.
Although we regularly assess these estimates, actual results could differ materially from these estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recognized in the period in which they become known.
Critical estimates relied upon in preparing the Unaudited Condensed Consolidated Financial Statements include the determination of sales allowance and variable consideration in our revenue recognition, allowance for doubtful accounts, the expensing and capitalization of product, technology, and development costs for website development and internal-use software, the valuation and recoverability of goodwill, intangible assets and other long-lived assets, the valuation of redeemable noncontrolling interest, the recoverability of our net deferred tax assets and related valuation allowance and the valuation of equity and liability-classified compensation awards under ASC Topic 718, Stock-based Compensation, or ASC 718. Accordingly, we consider these to be our critical accounting policies and believe that of our significant accounting policies, these policies involve the greatest degree of judgment and complexity.
For a detailed explanation of the judgments made in these areas, refer to Note 2 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report.
Recently Issued Accounting Pronouncements
Information concerning recently issued accounting pronouncements may be found in Note 2 to our Unaudited Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report.
29
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may affect our financial position due to adverse changes in financial market prices and rates. We are exposed to market risks as described below.
Interest Rate Risk
As of March 31, 2022 and December 31, 2021, we did not have any long-term borrowings.
As of March 31, 2022 and December 31, 2021, we had cash, cash equivalents, and investments of $375.0 million and $321.9 million, respectively, which consisted of bank deposits, money market funds and certificates of deposit with maturity dates of nine months.
Such interest-earning instruments carry a degree of interest rate risk. Given recent changes in the interest rate environment and in an effort to ensure liquidity, we expect lower returns from our investments for the foreseeable future. To date, fluctuations in interest income have not been material to the operations of the business.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or results of operations to date. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, operating results, and financial condition.
Foreign Currency Exchange Risk
Historically, because our operations and sales have been primarily in the United States, we have not faced any significant foreign currency risk. As of March 31, 2022 and December 31, 2021, we had foreign currency exposures in the British pound, the Euro and the Canadian dollar, although such exposure is not significant.
Our foreign subsidiaries have intercompany transactions that are eliminated upon consolidation, and these transactions expose us to foreign currency exchange rate fluctuations. Exchange rate fluctuations on short‑term intercompany transactions are recognized within other (expense) income, net in our Unaudited Condensed Consolidated Income Statements. Exchange rate fluctuations on long-term intercompany transactions are recognized within accumulated other comprehensive (loss) income in our Unaudited Condensed Consolidated Income Statements.
As we seek to grow our international operations in Canada and the United Kingdom, our risks associated with fluctuation in currency rates may become greater, and we will continue to reassess our approach to managing these risks.
30
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
31
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently subject to any pending or threatened litigation that we believe, if determined adversely to us, would individually, or taken together, reasonably be expected to have a material adverse effect on our business or financial results.
Item 1A. Risk Factors.
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes, before evaluating our business. Our business, financial condition, operating results, cash flow, and prospects could be materially and adversely affected by any of these risks or uncertainties. In that event, the trading price of our Class A common stock could decline. See “Special Note Regarding Forward‑Looking Statements.”
Risks Related to Our Business and Industry
Our business has been, and we expect it to continue to be, adversely affected by the COVID-19 pandemic.
The COVID-19 pandemic has caused an international health crisis and resulted, and may continue to result, in significant disruptions to the global economy as well as businesses and capital markets around the world. More transmissible and contagious variants have caused an increase in the number of COVID-19 cases globally. The continued impact of COVID-19 cannot be predicted at this time, and could depend on a number of factors, including the availability of vaccines in different parts of the world, vaccination rates among the population, and the effectiveness of vaccines against any variants.
Our operations have been and may continue to be materially adversely affected by a range of factors related to the COVID-19 pandemic. Fluctuation in infection rates in the regions in which we operate has resulted in periodic changes in restrictions that vary from region to region and may require rapid response to new or reinstated orders. Many of these orders resulted in, and may continue to result in, restrictions on the ability of consumers to buy and sell automobiles by restricting operations at dealerships and/or by closing or reducing the services provided by certain service providers upon which dealerships rely. In addition, these restrictions and continued concern about the spread of the disease have impacted car shopping by consumers and disrupted the operations of car dealerships, which has adversely affected and may continue to adversely affect the market for automobile purchases.
The automotive industry is also facing, and may continue to face, inventory supply problems, including for reasons attributable to the COVID-19 pandemic and other macroeconomic issues, such as the global semiconductor chip shortage, and the war in Ukraine and Russian sanctions. This decline in vehicle inventory has led to an increase in bids per vehicle at auction and corresponding increases to wholesale auction prices. As the price of replenishing inventory through wholesale auctions has increased, dealers have increased, and may continue to increase, the prices they charge consumers. A high volume of price increases on vehicle sales at a rapid rate could impact our proprietary IMV and distribution of Deal Ratings. In addition, if our paying dealers continue to operate at reduced inventory levels or with increased costs, they may reduce or be unwilling to increase their advertising spend with us and/or may terminate their subscriptions prior to the commencement of the applicable renewal term. Our ability to add new paying dealers or increase our fees with dealers may be impeded if dealers perceive they have less of a need for our products and services because of their limited inventory. Inventory challenges in the automotive industry have adversely impacted, and could continue to adversely impact, the amount of inventory on our websites and have contributed to higher prices and reduced lease options for new vehicles, which in turn has reduced, and may continue to reduce, consumer demand, which could contribute to a decline in the number of consumer visits to our websites and/or the number of connections between consumers and dealers through our marketplaces. These inventory-related issues and other macroeconomic issues may materially and adversely impact our business, financial condition and results of operations.
As a result of the travel and commerce restrictions that have been implemented or that may be implemented as a result of the COVID-19 pandemic and new variants, and the corresponding impact on their businesses, a number of our dealer customers have, or are, temporarily closed or are operating on a reduced capacity, and many dealerships are facing significant financial challenges. Such closures and circumstances led, and may in the future lead, some paying dealers to cancel their subscriptions and/or reduce their spending with us, which has had and may continue to have a material adverse effect on our revenues and on our business. Additionally, we reduced our spending on brand advertising and traffic acquisition at the beginning of the COVID-19 pandemic in response to increasing cancelations and reduced consumer demand, which contributed to a year-over-year decline in the number of consumers using our platform for each of the years ended December 31, 2021 and 2020, which in turn may continue to materially and adversely affect our
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business. While we have since restored a portion of that historical consumer spend, we may not in the future fully restore prior spending levels if we elect to redirect our investments elsewhere, including in favor of new product development. If such a strategy were not to result in the benefits that we expect, our business could be harmed. Our business relies on the ability of consumers to borrow funds to acquire automobiles and banks and other financing companies may limit or restrict lending to consumers as a result of the economic impacts of the COVID-19 pandemic, which may also materially and adversely affect our business.
Further, in the past, we have taken measures to help our paying dealers maintain their business health during the COVID-19 pandemic, including by proactively reducing the subscription fees for paying dealers for certain service periods, and we may decide to re-institute further billing relief as we continue to assess the effects of the COVID-19 pandemic on our paying dealers and business operations. Any further billing relief could result in a decline in our revenue and have a material adverse effect to our business. During the COVID-19 pandemic, we have also experienced, and may continue to experience, increased account delinquencies from dealer customers challenged by the COVID-19 pandemic that failed to pay us on time or at all.
These effects from the COVID-19 pandemic on our revenue caused us to implement certain cost-savings measures across our business, which previously disrupted our business and operations and, if we implement future similar cost saving measures, may affect our future business and operations and may yield unintended consequences, such as loss of key employees, increased costs in hiring new employees, undesired attrition, and the risk that we may not achieve the anticipated cost savings at the levels we expect, any of which may have a material adverse effect on our results of operations and/or financial condition.
We continue to monitor and assess the effects of the COVID-19 pandemic, including the effects of variants, on our commercial operations, including the impact on our revenue. However, we cannot at this time accurately predict what effects these conditions will ultimately have on our operations due to uncertainties relating to the duration of the pandemic, the extent and effectiveness of governmental responses and other preventative, treatment and containment actions or developments, including the distribution and acceptance of vaccines, shifts in behavior going forward, and the length or severity of the travel and commerce restrictions that are currently in effect and may be imposed in the future by relevant governmental authorities. Nor can we predict the adverse impact on the global economies and financial markets in which we operate, which may have a significant negative impact on our business, financial condition and results of operations.
Our business is substantially dependent on our relationships with dealers. If a significant number of dealers terminate their subscription agreements with us, our business and financial results would be materially and adversely affected.
A significant source of our revenue consists of subscription fees paid to us by dealers for access to enhanced features on our automotive marketplaces. Our subscription agreements with dealers generally may be terminated by us with 30 days’ notice and by dealers with 30 days’ notice prior to the commencement of the applicable renewal term. The majority of our contracts with dealers currently provide for one-month committed terms and do not contain contractual obligations requiring a dealer to maintain its relationship with us beyond the committed term. Accordingly, these dealers may cancel their subscriptions with us in accordance with the terms of their subscription agreements. A dealer’s decision to cancel its subscription with us may be influenced by several factors, including national and regional dealership associations, national and local regulators, automotive manufacturers, consumer groups, and consolidated dealer groups. If any of these influential groups indicate that dealers should not enter into or maintain subscription agreements with us, this belief could become shared by dealers and we may lose a number of our paying dealers. If a significant number of our paying dealers terminate their subscriptions with us, our business and financial results would be materially and adversely affected.
If we fail to maintain or increase the number of dealers that pay subscription fees to us, or fail to maintain or increase the fees paid to us for subscriptions, our business and financial results would be materially and adversely affected.
As a result of the effects of the COVID-19 pandemic, many paying dealers cancelled their subscriptions with us (including, in some cases, with our permission prior to the end of the applicable contract term and notice period), and it is possible that additional dealers will cancel their subscriptions in the future for a variety of reasons, including as a result of the continuing effects of the COVID-19 pandemic. If paying dealers do not receive the volume of consumer connections that they expect during their subscription period, do not experience the level of car sales they expect from those connections, or fail to attribute consumer connections or sales to our platform, they may terminate their subscriptions prior to the commencement of the applicable renewal term. If we fail to maintain or expand our base of paying dealers or fail to maintain or increase the level of fees that we receive from them, our business and financial results would be materially and adversely affected.
We allow dealers to list their inventory in CarGurus marketplaces for free; however, we impose certain limitations on such free listings, such as capping the number of leads that non-paying dealers in the U.S. may receive, not displaying non-paying dealer identity and contact information, and prohibiting access to the paid features of our marketplaces. We continue to adapt our free listings product, Restricted Listings, in our CarGurus marketplaces and in the future, we may decide to impose additional restrictions on Restricted Listings or modify the services available to non-paying dealers. These changes to our Restricted Listings product may result in less inventory being displayed to consumers, which may impair our efforts to attract consumers, and cause paying and non-paying dealers to receive fewer leads and connections, which may make it more difficult for us to convert non-paying dealers to paying dealers or
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maintain or expand our base of paying dealers. If dealers do not subscribe to our paid offerings at the rates we expect, our business and financial results would be materially and adversely affected.
If we fail to continue to realize transaction synergies from our acquisition of a 51% interest in CarOffer, or if the CarOffer business and/or our combined offerings such as IMCO fail to continue to grow at the rate we expect, our revenue and business would be significantly harmed.
In January 2021 we completed our acquisition of a 51% interest in CarOffer, which added wholesale vehicle acquisition and selling capabilities to our portfolio of dealer offerings. In 2021, this acquisition also helped facilitate our launch of a newer consumer offering, IMCO, which allows consumers in certain states to sell their vehicles to dealers entirely online through CarGurus. A significant amount of our revenue is now derived from the wholesale sale of automobiles and IMCO. Continued achievement of our transaction synergies and our ability to continue to grow the CarOffer business and the revenue associated with it depends on a number of factors, including, but not limited to, our ability to continue to: expand the number of dealers engaging on the CarOffer platform; retain existing customers and increase the share of wholesale transactions which they complete on the CarOffer platform; attract prospective customers who have historically purchased or sold vehicles through physical auctions and may choose not to transact online; and successfully compete with competitors, including other online vehicle auction companies and large, national offline vehicle auction companies that are expanding into the online channel and have launched online auctions in connection with their physical auctions. Additionally, our ability to continue to grow IMCO and the revenue associated with it also depends on a number of factors, including, but not limited to, our ability to continue to: effectively scale and market IMCO; attract prospective consumers to sell their vehicles online through IMCO; and successfully compete with competitors, including online dealerships. If our anticipated transaction synergies do not fully materialize or the CarOffer business and/or IMCO fail to continue to grow at the rate we expect, our revenue and business would be significantly harmed.
Industry conditions such as a significant change in vehicle retail prices or a decline in the used vehicle inventory supply coming to the wholesale market could also adversely impact CarOffer’s business and growth. For example, if retail prices for used vehicles rise relative to retail prices for new vehicles, it could make buying a new vehicle more attractive to consumers than buying a used vehicle, which could result in reduced used vehicle wholesale sales on the CarOffer platform. Used vehicle dealers may also decide to retail more of their vehicles on their own rather than selling them on the CarOffer platform, which could adversely impact the volume of vehicles offered for sale on the CarOffer platform and the demand for those used vehicles. Inventory challenges in the automotive industry, including for reasons attributable to the COVID-19 pandemic, has contributed and could continue to contribute to a decrease in the supply of vehicles coming to the wholesale market and reduce the number of vehicles sold on the CarOffer platform and/or transacted via IMCO. An inability by CarOffer to retain customers and/or increase or find alternative sources of vehicle supply would adversely impact our revenue and business.
If dealers or other advertisers reduce their advertising spending with us and we are unable to replace the reduced advertising spending, our advertising revenue and business would be harmed.
A portion of our revenue is derived from advertising revenues generated primarily through advertising sales, including on-site advertising and audience targeting services, to dealers, auto manufacturers, and other auto-related brand advertisers. We compete for this advertising revenue with other online automotive marketplaces and with television, print media, and other traditional advertising channels. Our ability to attract and retain advertisers and to generate advertising revenue depends on a number of factors, including our ability to: increase the number of consumers using our marketplaces; compete effectively for advertising spending with other online automotive marketplaces; continue to develop our advertising products; keep pace with changes in technology and the practices and offerings of our competitors; and offer an attractive ROI to our advertisers for their advertising spend with us.
Our agreements with dealers for advertising generally include terms ranging from one month to one year and may be terminated by us with 30 days’ notice and by dealers with 30 days’ notice prior to the commencement of the applicable renewal term. The contracts do not contain contractual obligations requiring an advertiser to maintain its relationship with us beyond the committed term. Certain of our other advertising contracts, including those with auto manufacturers, typically do not have ongoing commitments to advertise in our marketplaces beyond a committed term. As a result of the effects of the COVID-19 pandemic, some advertisers cancelled or reduced their advertising with us and it is possible that advertising customers will cancel or reduce their advertising with us in the future for a variety of reasons, including as a result of the continuing effects of the COVID-19 pandemic. In addition, the year-over-year decline in the number of consumer visits to our sites as a result of the COVID-19 pandemic resulted in the delivery of fewer impressions for our advertising customers than anticipated year-over-year for the years ended December 31, 2021 and 2020, which has caused, and may continue to cause, an adverse impact on our advertising revenues. We may not succeed in capturing a greater share of our advertisers’ spending if we are unable to convince advertisers of the effectiveness or superiority of our advertising offerings as compared to alternative channels. If current advertisers reduce their advertising spending with us and we are unable to replace such reduced advertising spending, our advertising revenue and business and financial results would be harmed.
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If we are unable to provide a compelling vehicle search experience to consumers through our platform, the number of connections between consumers and dealers using our marketplaces may decline and our business and financial results would be materially and adversely affected.
If we fail to continue to provide a compelling vehicle search experience to consumers, the number of connections between consumers and dealers through our marketplaces could decline, which in turn could lead dealers to suspend listing their inventory in our marketplaces, cancel their subscriptions, or reduce their spending with us. If dealers pause or cancel listing their inventory in our marketplaces, we may not be able to attract a large consumer audience, which may cause other dealers to pause or cancel their use of our marketplaces. This reduction in the number of dealers using our marketplaces would likely materially and adversely affect our marketplaces and our business and financial results. As consumers increasingly use their mobile devices to access the internet and our marketplaces, our success depends, in part, on our ability to provide consumers with a robust and user-friendly experience through their mobile devices. We believe that our ability to provide a compelling vehicle search experience, both on desktop computers and through mobile devices, is subject to a number of factors, including our ability to: maintain attractive marketplaces for consumers and dealers; continue to innovate and introduce products for our marketplaces; launch new products that are effective and have a high degree of consumer engagement; display a wide variety of automobile inventory to attract more consumers to our websites; provide mobile applications that engage consumers; maintain the compatibility of our mobile applications with operating systems, such as iOS and Android, and with popular mobile devices running such operating systems; and access and analyze a sufficient amount of data to enable us to provide relevant information to consumers, including pricing information and accurate vehicle details.
Any inability by us to develop new products, or achieve widespread consumer and dealer adoption of those products, could negatively impact our business and financial results.
Our success depends on our continued innovation to provide products that make our marketplaces, websites, and mobile applications useful for consumers and dealers or that otherwise provide value to consumers and dealers. For example, during 2021 we launched IMCO in furtherance of our evolution to a transaction-enabled marketplace. We also continue to develop digital retail offerings, including those that expand a dealer’s geographic footprint and others that bring additional elements of the car buying experience online through our websites. A failure by us to capture the benefits that we expect from our rollout of IMCO and these digital retail investments could have an adverse effect on our business and financial results.
In addition to introducing new offerings within our existing products, we anticipate that over time we may reach a point when investments in our current products are less productive and the growth of our revenue will require more focus on developing new products for consumers and dealers. These new products, in the aggregate, must be widely adopted by consumers and dealers in order for us to continue to attract consumers to our marketplaces and dealers to our products and services. Accordingly, we must continually invest resources in product, technology, and development in order to improve the attractiveness and comprehensiveness of our marketplaces and their related products and effectively incorporate new internet and mobile technologies into them. Our ability to engage in these activities may decline as a result of the continued impact of the COVID-19 pandemic and any cost-savings initiatives on our business. These product, technology, and development expenses may include costs of hiring additional personnel, engaging third-party service providers and conducting other research and development activities. There can be no assurance that innovations to our products like IMCO, or the development of future products, will increase consumer or dealer engagement, achieve market acceptance, create additional revenue or become profitable. In addition, revenue relating to new products is typically unpredictable and our new products may have lower gross margins, lower retention rates, and higher marketing and sales costs than our existing products. We are likely to continue to modify our pricing models for both existing and new products so that our prices for our offerings reflect the value those offerings are providing to consumers and dealers. Our pricing models may not effectively reflect the value of products to dealers, and, if we are unable to provide marketplaces and products that consumers and dealers want to use, they may reduce or cease the use of our marketplaces and products. Without innovative marketplaces and related products, we may be unable to attract additional, unique consumers or retain current consumers, which could affect the number of dealers that become paying dealers and the number of advertisers that want to advertise in our marketplaces, as well as the amounts that they are willing to pay for our products, which could, in turn, negatively impact our business and financial results.
We rely on internet search engines to drive traffic to our websites, and if we fail to appear prominently in the search results, our traffic would decline and our business would be adversely affected.
We rely, in part, on internet search engines such as Google, Bing, and Yahoo! to drive traffic to our websites. The number of consumers we attract to our marketplaces from search engines is due in part to how and where our websites rank in unpaid search results. These rankings can be affected by a number of factors, many of which are not under our direct control and may change frequently. For example, when a consumer searches for a vehicle in an internet search engine, we rely on a high organic search ranking of our webpages to refer the consumer to our websites. Our competitors’ internet search engine optimization efforts may result in their websites receiving higher search result rankings than ours, or internet search engines could change their methodologies in a way that would adversely affect our search result rankings. If internet search engines modify their methodologies in ways that are detrimental to us, if our efforts to improve our search engine optimization are unsuccessful or less successful than our competitors’ internet search engine optimization efforts, our ability to attract a large consumer audience could diminish and traffic to our marketplaces could decline. In addition, internet
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search engine providers could provide dealer and pricing information directly in search results, align with our competitors, or choose to develop competing products. Reductions in our own search advertising spend or more aggressive spending by our competitors could also cause us to incur higher advertising costs and/or reduce our market visibility to prospective users. Our websites have experienced fluctuations in organic and paid search result rankings in the past, and we anticipate fluctuations in the future. Any reduction in the number of consumers directed to our websites through internet search engines could harm our business and operating results.
We may be unable to maintain or grow relationships with data providers, or may experience interruptions in the data they provide, which may create a less valuable or transparent shopping experience and negatively affect our business and operating results.
We obtain data from many third-party data providers, including inventory management systems, automotive website providers, customer relationship management systems, dealer management systems, governmental entities, and third-party data licensors. Our business relies on our ability to obtain data for the benefit of consumers and dealers using our marketplaces. For example, our success in each market is dependent in part upon our ability to obtain and maintain inventory data and other vehicle information for those markets. The large amount of inventory and vehicle information available in our marketplaces is critical to the value we provide for consumers. The loss or interruption of such inventory data or other vehicle information could decrease the number of consumers using our marketplaces. We could experience interruptions in our data access for a number of reasons, including difficulties in renewing our agreements with data providers, changes to the software used by data providers, efforts by industry participants to restrict access to data, increased fees we may be charged by data providers and the continuing effects of the COVID-19 pandemic. Our marketplaces could be negatively affected if any current provider terminates its relationship with us or our service from any provider is interrupted. If there is a material disruption in the data provided to us, the information that we provide to consumers and dealers using our marketplaces may be limited. In addition, the quality, accuracy, and timeliness of this information may suffer, which may lead to a less valuable and less transparent shopping experience for consumers using our marketplaces and could negatively affect our business and operating results.
The failure to build, maintain and protect our brands would harm our ability to attract a large consumer audience and to expand the use of our marketplaces by consumers and dealers.
While we are focused on building our brand recognition, maintaining and enhancing our brands will depend largely on the success of our efforts to maintain the trust of consumers and dealers and to deliver value to each consumer and dealer using our marketplaces. Our ability to protect our brands is also impacted by the success of our efforts to optimize our significant brand spend and overcome the intense competition in brand marketing across our industry, including competitors that may imitate our messaging. In addition, we have reduced our brand spend in comparison to our pre-COVID-19 pandemic levels, and it is possible that we may in the future decide to further suppress such spend depending on the continued impact of the COVID-19 pandemic or other macro-economic effects. If consumers believe that we are not focused on providing them with a better automobile shopping experience, or if we fail to overcome brand marketing competition and maintain a differentiated value proposition in consumers’ minds, our reputation and the strength of our brands may be adversely affected.
Complaints or negative publicity about our business practices and culture, our management team and employees, our marketing and advertising campaigns, our compliance with applicable laws and regulations, the integrity of the data that we provide to consumers, data privacy and security issues, and other aspects of our business, irrespective of their validity, could diminish consumers’ and dealers’ confidence and participation in our marketplaces and could adversely affect our brands. There can be no assurance that we will be able to maintain or enhance our brands, and failure to do so would harm our business growth prospects and operating results.
Portions of our platform enable consumers and dealers using our marketplaces to communicate with one another and other persons seeking information or advice on the internet. Claims of defamation or other injury could be made against us for content posted on our websites. In addition, negative publicity and user sentiment generated as a result of fraudulent or deceptive conduct by users of our marketplaces could damage our reputation, reduce our ability to attract new users or retain our current users, and diminish the value of our brands.
Our recent, rapid growth is not indicative of our future growth, and our revenue growth rate in the future is uncertain, including due to the potential impact of the COVID-19 pandemic.
Our revenue increased to (i) $951.4 million for the year ended December 31, 2021 from $551.5 million for the year ended December 31, 2020, representing a 73% increase between such periods, and (ii) $430.6 million for the three months ended March 31, 2022 from $171.4 million for the three months ended March 31, 2021, representing a 151% increase between such periods. Our revenue for the remainder of 2022 and beyond may not grow at such a rate and could potentially be impacted by the COVID-19 pandemic, as it was for the year ended December 31, 2020. In addition, we will not be able to grow as expected, or at all, if we fail to: increase the number of consumers using our marketplaces; maintain and expand the number of dealers that subscribe to our marketplaces and maintain and increase the fees that they are paying; attract and retain advertisers placing advertisements in our marketplaces; further improve the quality of our marketplaces and introduce high quality new products; and increase the number of connections between consumers and dealers using our marketplaces and connections to paying dealers, in particular. If our revenue declines or fails to grow, investors’ perceptions of our business may be adversely affected, and the market price of our Class A common stock could decline.
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We may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances. If we are unable to generate sufficient cash flows or if capital is not available to us, our business, operating results, financial condition, and prospects could be adversely affected.
If we are unable to generate sufficient cash flows, we would require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances, including the effects of the COVID-19 pandemic, as well as to make marketing expenditures to improve our brand awareness, develop new products, further improve our platform and existing products, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable to us or at all. Volatility in the equity and credit markets, including due to the COVID-19 pandemic, may also have an adverse effect on our ability to obtain equity or debt financing. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to pursue our business objectives and to respond to business opportunities, challenges, or unforeseen circumstances could be significantly limited, and our business, operating results, financial condition, and prospects could be adversely affected.
Our international operations involve risks that may differ from, or are in addition to, our domestic operational risks.
In addition to the United States, we operate marketplaces in the United Kingdom and Canada, which are less familiar competitive environments and involve various risks, including the need to invest significant resources and the likelihood that returns on such investments will not be achieved for several years, or possibly at all. We have incurred losses in prior periods in the United Kingdom and Canada and may incur losses there again in the future. We also face various other challenges in those jurisdictions. For example, our competitors may be more established or otherwise better positioned than we are to succeed in the United Kingdom and Canada. Our competitors may offer services to dealers that make dealers dependent on them, such as hosting dealers’ websites and providing inventory feeds for dealers, which would make it difficult to attract dealers to our marketplaces. Dealers may also be parties to agreements with other dealers and syndicates that prevent them from being able to access our marketplaces. Any of these barriers could impede our operations in our international markets, which could affect our business and potential growth.
In addition to English, we have made portions of our marketplaces available in French and Spanish. We may have difficulty in modifying our technology and content for use in non-English-speaking market segments or gaining acceptance by users in non-English-speaking market segments. Our ability to manage our business and conduct our operations internationally requires considerable management attention and resources, and is subject to the particular challenges of supporting a business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute resolution systems, and commercial infrastructures. Operating internationally may subject us to different risks or increase our exposure in connection with current risks, including risks associated with: recruiting, managing and retaining qualified multilingual employees, including sales personnel; adapting our websites and mobile applications to conform to local consumer behavior; increased competition from local websites and mobile applications and potential preferences by local populations for local providers; compliance with applicable foreign laws and regulations, including different privacy, censorship, and liability standards and regulations, and different intellectual property laws; providing solutions in different languages and for different cultures, which may require that we modify our solutions and features so they are culturally relevant in different countries; the enforceability of our intellectual property rights; credit risk and higher levels of payment fraud; compliance with anti-bribery laws, including compliance with the Foreign Corrupt Practices Act and the United Kingdom Bribery Act; currency exchange rate fluctuations; adverse changes in trade relationships among foreign countries and/or between the United States and such countries, including as related to the United Kingdom’s exit from the European Union, or the EU, commonly referred to as “Brexit”; double taxation of our international earnings and potentially adverse tax consequences arising from the tax laws of the United States or the foreign jurisdictions in which we operate; and higher costs of doing business internationally.
Dealer closures or consolidations could reduce demand for our products, which may decrease our revenue.
In the past, the number of United States dealers has declined due to dealership closures and consolidations as a result of factors such as global economic downturns or other macroeconomic issues. When dealers consolidate, the services they previously purchased separately are often purchased by the combined entity in a lesser quantity or for a lower aggregate price than before, leading to volume compression and loss of revenue. Further dealership consolidations or closures could reduce the aggregate demand for our products and services. If dealership closures and consolidations occur in the future, our business, financial position and results of operations could be materially and adversely affected.
We depend on key personnel to operate our business, and if we are unable to retain, attract and integrate qualified personnel, or if we experience turnover of our key personnel, our ability to develop and successfully grow our business could be materially and adversely affected.
We believe our success has depended, and continues to depend, on the efforts and talents of our executives and employees. Our future success depends on our continuing ability to attract, develop, motivate, and retain highly qualified and skilled employees. Since the onset of the COVID-19 pandemic, we have encountered increased rates of turnover of our employee base and encountered intense competition for retaining and attracting qualified and skilled employees. Accordingly, we have incurred, and we may continue to incur,
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significant costs to attract new employees and retain existing ones, and we may in the future become less competitive in attracting and retaining employees as a result of any expense reduction efforts that we may initiate or our compliance with any COVID-19 healthcare standards to which we may become subject.
In addition, any unplanned turnover or our failure to develop an adequate succession plan for any of our executive officers or key employees, or the reduction in their involvement in the management of our business, could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. Our executive officers and other employees are at-will employees, which means they may terminate their employment relationships with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business could be materially and adversely affected. Additionally, we may face risks related to the transitions that occurred in our senior management team during 2021 and other future transitions in our leadership team, including the disruption of our operations and the depletion of our institutional knowledge base.
We may be subject to disputes regarding the accuracy of Instant Market Values, Deal Ratings, Dealer Ratings, New Car Price Guidance and other features of our marketplaces.
We provide consumers using our CarGurus marketplaces with our proprietary IMV, Deal Ratings, and Dealer Ratings, as well as other features to help them evaluate vehicle listings, including price guidance for new car listings, or New Car Price Guidance. Our valuation models depend on the inventory listed on our sites as well as public information regarding automotive sales. If the inventory on our site declines significantly, or if the number of automotive sales declines significantly or used car sales prices become volatile, whether as a result of the COVID-19 pandemic or otherwise, our valuation models may not perform as expected. Revisions to or errors in our automated valuation models, or the algorithms that underlie them, may cause the IMV, the Deal Rating, New Car Price Guidance, or other features to vary from our expectations regarding the accuracy of these tools. In addition, from time to time, regulators, consumers, dealers and other industry participants may question or disagree with our IMV, Deal Rating, Dealer Rating or New Car Price Guidance. Any such questions or disagreements could result in distraction from our business or potentially harm our reputation, could result in a decline in consumers’ confidence in, or use of, our marketplaces and could result in legal disputes.
We are subject to a complex framework of laws and regulations, many of which are unsettled, still developing and contradictory, which have in the past, and could in the future, subject us to claims, challenge our business model, or otherwise harm our business.
Various aspects of our business are, may become, or may be viewed by regulators from time to time as subject, directly or indirectly, to United States federal, state and local laws and regulations, and to foreign laws and regulations.
Local Motor Vehicle Sales, Advertising and Brokering, and Consumer Protection Laws
The advertising and sale of new and used motor vehicles is highly regulated by the jurisdictions in which we do business. Although we do not sell motor vehicles, and although we believe that vehicle listings on our sites are not themselves advertisements, regulatory authorities or third parties could take the position that some of the laws or regulations applicable to dealers or to the manner in which motor vehicles are advertised and sold generally are directly applicable to our business. These advertising laws and regulations are frequently subject to multiple interpretations and are not uniform from jurisdiction to jurisdiction, sometimes imposing inconsistent requirements with respect to new or used motor vehicles. If our marketplaces and related products are determined to not comply with relevant regulatory requirements, we or dealers could be subject to civil and criminal penalties, including fines, or the award of significant damages in class actions or other civil litigation, as well as orders interfering with our ability to continue providing our marketplaces and related products and services in certain jurisdictions. In addition, even absent such a determination, to the extent dealers are uncertain about the applicability of such laws and regulations to our business, we may lose, or have difficulty increasing the number of paying dealers, which would affect our future growth.
If regulators or other third parties take the position that our marketplaces or related products violate applicable brokering, bird-dog, consumer protection, consumer finance or advertising laws or regulations, responding to such allegations could be costly, could require us to pay significant sums in settlements, could require us to pay civil and criminal penalties, including fines, could interfere with our ability to continue providing our marketplaces and related products in certain jurisdictions, or could require us to make adjustments to our marketplaces and related products or the manner in which we derive revenue from dealers using our platform, any or all of which could result in substantial adverse publicity, termination of subscriptions by dealers, decreased revenues, distraction for our employees, increased expenses, and decreased profitability.
Federal Laws and Regulations
The United States Federal Trade Commission, or the FTC, has the authority to take actions to remedy or prevent acts or practices that it considers to be unfair or deceptive and that affect commerce in the United States. If the FTC takes the position in the future that any aspect of our business, including our advertising and privacy practices, constitutes an unfair or deceptive act or practice, responding to such allegations could require us to defend our practices and pay significant damages, settlements, and civil penalties, or could require
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us to make adjustments to our marketplaces and related products and services, any or all of which could result in substantial adverse publicity, distraction for our employees, loss of participating dealers, lost revenues, increased expenses, and decreased profitability.
Our platforms enable us, dealers, and users to send and receive text messages and other mobile phone communications. The Telephone Consumer Protection Act, or the TCPA, as interpreted and implemented by the United States Federal Communications Commission, or the FCC, and federal and state courts, impose significant restrictions on utilization of telephone calls and text messages to residential and mobile telephone numbers as a means of communication, particularly if the prior express consent of the person being contacted has not been obtained. Violations of the TCPA may be enforced by the FCC, by state attorneys general, or by others through litigation, including class actions. Furthermore, several provisions of the TCPA, as well as applicable rules and orders, are open to multiple interpretations, and compliance may involve fact-specific analyses.
Any failure by us, or the third parties on which we rely, to adhere to, or successfully implement, appropriate processes and procedures in response to existing or future laws and regulations could result in legal and monetary liability, fines and penalties, or damage to our reputation in the marketplace, any of which could have a material adverse effect on our business, financial condition, and results of operations. Even if the claims are meritless, we may be required to expend resources and pay costs to defend against regulatory actions or third-party claims. Additionally, any change to applicable laws or their interpretations that further restricts the way consumers and dealers interact through our platforms, or any governmental or private enforcement actions related thereto, could adversely affect our ability to attract customers and could harm our business, financial condition, results of operations, and cash flows.
Antitrust and Other Laws
Antitrust and competition laws prohibit, among other things, any joint conduct among competitors that would lessen competition in the marketplace. A governmental or private civil action alleging the improper exchange of information, or unlawful participation in price maintenance or other unlawful or anticompetitive activity, even if unfounded, could be costly to defend and could harm our business, results of operations, financial condition, and cash flows.
Claims could be made against us under both United States and foreign laws, including claims for defamation, libel, invasion of privacy, false advertising, intellectual property infringement, or claims based on other theories related to the nature and content of the materials disseminated by our marketplaces and on portions of our websites. Our defense against any of these actions could be costly and involve significant time and attention of our management and other resources. If we become liable for information transmitted in our marketplaces, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability.
The foregoing description of laws and regulations to which we are or may be subject is not exhaustive, and the regulatory framework governing our operations is subject to continuous change. We are, and we will continue to be, exposed to legal and regulatory risks including with respect to privacy, tax, law enforcement, content, intellectual property, competition, and other matters. The enactment of new laws and regulations or the interpretation of existing laws and regulations, both domestically and internationally, may affect the operation of our business, directly or indirectly, which could result in substantial regulatory compliance costs, civil or criminal penalties, including fines, adverse publicity, loss of subscribing dealers, lost revenues, increased expenses, and decreased profitability. Further, investigations by governmental agencies, including the FTC, into allegedly anticompetitive, unfair, deceptive or other business practices by us or dealers using our marketplaces, could cause us to incur additional expenses and, if adversely concluded, could result in substantial civil or criminal penalties and significant legal liability, or orders requiring us to make adjustments to our marketplaces and related products and services.
Our business is subject to risks related to the larger automotive industry ecosystem, which could have a material adverse effect on our business, revenue, results of operations, and financial condition.
Decreases in consumer demand could adversely affect the market for automobile purchases and, as a result, reduce the number of consumers using our platform. Consumer purchases of new and used automobiles generally decline during recessionary periods and other periods in which disposable income is adversely affected. Purchases of new and used automobiles are typically discretionary for consumers and have been, and may continue to be, affected by negative trends in the economy, including: the effects of the COVID-19 pandemic, the cost of energy and gasoline; the availability and cost of credit; rising interest rates; reductions in business and consumer confidence; stock market volatility; and increased unemployment.
Further, in recent years the market for motor vehicles has experienced rapid changes in technology and consumer demands. Self-driving technology, ride sharing, transportation networks, and other fundamental changes in transportation could impact consumer demand for the purchase of automobiles. A reduction in the number of automobiles purchased by consumers could adversely affect dealers and car manufacturers and lead to a reduction in other spending by these groups, including targeted incentive programs.
In addition, our business has been and may continue to be negatively affected by challenges to the larger automotive industry ecosystem, including global supply chain challenges, the global semiconductor chip shortage, changes to trade policies, including tariff rates and customs duties, trade relations between the United States and China and other macroeconomic issues, including the war in
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Ukraine and Russian sanctions, as well as the ongoing effects of the COVID-19 pandemic. These factors could have a material adverse effect on our business, revenue, results of operations, and financial condition.
We rely on third-party service providers and strategic partners for many aspects of our business, and any failure to maintain these relationships or to successfully integrate certain third-party platforms could harm our business.
Our success depends upon our relationships with third parties, including, among others: our payment processor; our data center hosts; our information technology providers; our data providers for inventory and vehicle information; and our partners for vehicle transportation, inspection and other logistics associated with our CarOffer business and IMCO. If these third parties experience difficulty meeting our requirements or standards, have adverse audit results, violate the terms of our agreements or applicable law, fail to obtain or maintain applicable licenses, or if the relationships we have established with such third parties expire or otherwise terminate, it could make it difficult for us to operate some aspects of our business, which could damage our business and reputation. In addition, if such third-party service providers or strategic partners were to cease operations, temporarily or permanently, face financial distress or other business disruptions, increase their fees, or if our relationships with these providers or partners deteriorate or terminate, whether as a result of the COVID-19 pandemic or otherwise, we could suffer increased costs and we may be unable to provide similar services until an equivalent provider could be found or we could develop replacement technology or operations. In addition, if we are unsuccessful in identifying or finding high-quality partners, if we fail to negotiate cost-effective relationships with them, or if we ineffectively manage these relationships, it could have an adverse impact on our business and financial results.
Our enterprise systems require that we integrate the platforms hosted by certain third-party service providers. We are responsible for integrating these platforms and updating them to maintain proper functionality. Issues with these integrations, our failure to properly update third-party platforms or any interruptions to our internal enterprise systems could harm our business by causing delays in our ability to quote, activate service and bill new and existing customers on our platform.
A significant disruption in service on our websites or mobile applications could damage our reputation and result in a loss of consumers, which could harm our business, brands, operating results, and financial condition.
Our brands, reputation, and ability to attract consumers, dealers, and advertisers depend on the reliable performance of our technology infrastructure and content delivery. We have experienced, and we may in the future experience, interruptions with our systems. Interruptions in these systems, whether due to system failures, computer viruses, ransomware, physical break-ins, electronic breaches, or otherwise, could affect the security or availability of our marketplaces on our websites and mobile applications, and prevent or inhibit the ability of dealers and consumers to access our marketplaces. For example, past disruptions have impacted our ability to activate customer accounts and manage our billing activities in a timely manner. Such interruptions have resulted, and may in the future result, in third parties accessing our confidential and proprietary information, including our intellectual property. Problems with the reliability or security of our systems could harm our reputation, harm our ability to protect our confidential and proprietary information, result in a loss of consumers and dealers, and result in additional costs.
Substantially all of the communications, network, and computer hardware used to operate our platforms is located in the Eastern region of the United States, and internationally near each of London, England and Frankfurt, Germany. Although we can host our U.S. CarGurus’ marketplace from two alternative locations and we believe our systems are redundant, there may be exceptions for certain hardware or software. In addition, we do not own or control the operation of these facilities. We also use third-party hosting services to back up some data but do not maintain redundant systems or facilities for some of the services. A disruption to one or more of these systems has caused, and may in the future cause, us to experience an extended period of system unavailability, which could negatively impact our relationship with consumers, customers and advertisers. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic breaches, physical break-ins, computer viruses, earthquakes, and similar events. The occurrence of any of these events could result in damage to our systems and hardware or could cause them to fail. In addition, we may not have sufficient protection or recovery plans in certain circumstances.
Problems faced by our third-party web hosting providers could adversely affect the experience consumers have while using our marketplaces. Our third-party web hosting providers could close their facilities without adequate notice. Any financial difficulties, up to and including bankruptcy, faced by our third-party web hosting providers or any of the service providers whose services they use, which may be exacerbated as a result of the COVID-19 pandemic, may have negative effects on our business, the nature and extent of which are difficult to predict. If our third-party web hosting providers are unable to keep up with our capacity needs, our business could be harmed.
Any errors, defects, disruptions, or other performance or reliability problems with our network operations could cause interruptions in access to our marketplaces as well as delays and additional expense in arranging new facilities and services and could harm our reputation, business, operating results, and financial condition. Although we carry insurance, it may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business, that may result from interruptions in our service as a result of system failures.
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We collect, process, store, transfer, share, disclose, and use consumer information and other data, and our actual or perceived failure to protect such information and data or respect users’ privacy could damage our reputation and brands and harm our business and operating results.
Some functions of our marketplaces involve the storage and transmission of consumers’ information, such as IP addresses, contact information of users who connect with dealers, credit applications and other financial data, and profile information of users who create accounts on our marketplaces, as well as dealers’ information. We also process and store personal and confidential information of our vendors, partners, and employees. Some of this information may be private, and security breaches could expose us to a risk of loss or exposure of this information, which could result in potential liability, litigation, and remediation costs. For example, hackers could steal our users’ profile passwords, names, email addresses, phone numbers, and other personal information. We rely on encryption and authentication technology licensed from third parties to effect secure transmission of such information. Like all information systems and technology, our websites, mobile applications, and information systems are subject to computer viruses, break-ins, phishing attacks, attempts to overload the systems with denial-of-service or other attacks, ransomware, and similar incidents or disruptions from unauthorized use of our computer systems, any of which could lead to interruptions, delays, or website shutdowns, and could cause loss of critical data and the unauthorized disclosure, access, acquisition, alteration, and use of personal or other confidential information. If we experience compromises to our security that result in website or mobile application performance or availability problems, the complete shutdown of our websites or mobile applications, or the loss or unauthorized disclosure, access, acquisition, alteration, or use of confidential information, consumers, customers, advertisers, partners, vendors, and employees may lose trust and confidence in us, and consumers may decrease the use of our websites or stop using our websites entirely, dealers may stop or decrease their subscriptions with us, and advertisers may decrease or stop advertising on our websites.
Further, outside parties have attempted and will likely continue to attempt to fraudulently induce employees, consumers, or advertisers to disclose sensitive information in order to gain access to our information or our consumers’, dealers’, advertisers’, and employees’ information. As cyber-attacks increase in frequency and sophistication, our cyber-security and disaster recovery plans may not be effective in anticipating, preventing and effectively responding to all potential cyber-risk exposures. In addition, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, often are not recognized until after having been launched against a target, and may originate from less regulated and remote areas around the world, we may be unable to proactively address these techniques or to implement adequate preventative measures.
Any or all of the issues above could adversely affect our brand reputation, negatively impact our ability to attract new consumers and increase engagement by existing consumers, cause existing consumers to reduce or stop the use of our marketplaces or close their accounts, cause existing dealers and advertisers to cancel their contracts, cause employees to terminate their employment, cause employment candidates to be unwilling to pursue employment opportunities or accept employment offers, and/or subject us to governmental or third-party lawsuits, investigations, regulatory fines, or other actions or liability, thereby harming our business, results of operations, and financial condition.
There are numerous federal, national, state, and local laws and regulations in the United States and around the world regarding privacy and the collection, processing, storage, sharing, disclosure, use, cross-border transfer, and protection of personal information and other data. These laws and regulations are evolving, are subject to differing interpretations, may be costly to comply with, may result in regulatory fines or penalties, may subject us to third-party lawsuits, may be inconsistent between countries and jurisdictions, and may conflict with other requirements.
We seek to comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties, as well as all applicable laws and regulations relating to privacy and data protection. However, it is possible that these obligations may be interpreted and applied in new ways or in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices and that new regulations could be enacted. Several proposals have recently become effective or are pending, as applicable, before federal, state, local, and foreign legislative and regulatory bodies that could significantly affect our business, including the General Data Protection Regulation in the EU, or the GDPR, which went into effect on May 25, 2018, the California Consumer Privacy Act, or the CCPA, which went into effect on January 1, 2020, and the California Privacy Rights Act, or the CPRA, the Virginia Consumer Data Protection Act, or the VCDPA, each of which goes into effect on January 1, 2023, the Colorado Privacy Act, or the CPA, which goes into effect on July 1, 2023, and the Utah Consumer Privacy Act, or the UCPA, which goes into effect on December 31, 2023. The GDPR and CCPA in particular have already required, and along with the CPRA, VCDPA, CPA, and UCPA, may further require, us to change our policies and procedures and may in the future require us to make changes to our marketplaces and other products. These and other requirements could reduce demand for our marketplaces and other offerings, require us to take on more onerous obligations in our contracts and restrict our ability to store, transfer, and process data, which may seriously harm our business. Similarly, Brexit and the Schrems II decision of the Court of Justice of the EU, which effectively invalided the EU-U.S. Privacy Shield Framework, may require us to change our policies and procedures and, if we are not in compliance, may also seriously harm our business. We may not be entirely successful in our efforts to comply with the evolving regulations to which we are subject due to various factors within our control, such as limited internal resource allocation, or outside our control, such as a lack of vendor cooperation, new regulatory interpretations, or lack of regulatory guidance in respect of certain GDPR, CCPA, CPA, CPRA, VCDPA, or UCPA requirements.
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Any failure or perceived failure by us to comply with United States and international data protection laws and regulations, our privacy policies, or our privacy-related obligations to consumers, customers, employees and other third parties, or any compromise of security that results in the unauthorized release or transfer of data, which could include personal information or other user data, may result in governmental investigations, enforcement actions, regulatory fines, litigation, criminal penalties, or public statements against us by consumer advocacy groups or others, and could cause consumers and dealers to lose trust in us, which could significantly impact our brand reputation and have an adverse effect on our business. Additionally, if any third party that we share information with experiences a security breach or fails to comply with its privacy-related legal obligations or commitments to us, such matters may put employee, consumer or dealer information at risk and could in turn expose us to claims for damages or regulatory fines or penalties and harm our reputation, business, and operating results.
Our ability to attract consumers to our own websites and to provide certain services to our customers depends on the collection of consumer data from various sources, which may be restricted by consumer choice, privacy restrictions, and developments in laws, regulations and industry standards.
The success of our consumer marketing and the delivery of internet advertisements for our customers depends on our ability to leverage data, including data that we collect from our customers, data we receive from our publisher partners and third parties, and data from our operations. Using cookies and non-cookie-based technologies, such as mobile advertising identifiers, we collect information about the interactions of users with our customers’ and publishers’ digital properties (including, for example, information about the placement of advertisements and users’ shopping or other interactions with our customers’ websites or advertisements). Our ability to successfully leverage such data depends on our continued ability to access and use such data, which could be restricted by a number of factors, including: increasing consumer adoption of “do not track” mechanisms as a result of legislation including GDPR, CCPA, CPA, CPRA, VCDPA, and UCPA; privacy restrictions imposed by web browser developers, advertising partners or other software developers that impair our ability to understand the preferences of consumers by limiting the use of third-party cookies or other tracking technologies or data indicating or predicting consumer preferences; and new developments in, or new interpretations of, privacy laws, regulations and industry standards.
Each of these developments could materially impact our ability to collect consumer data and deliver relevant internet advertisements to attract consumers to our websites or to deliver targeted advertising for our advertising customers. If we are unsuccessful in evolving our advertising and marketing strategies to adapt to and mitigate these evolving consumer data limitations, our business results could be materially impacted.
We have been, and may again be, subject to intellectual property disputes, which are costly to defend and could harm our business and operating results.
We have been, and expect in the future to be, subject to claims and litigation alleging that we infringe others’ intellectual property rights, including the trademarks, copyrights, patents, and other intellectual property rights of third parties, including from our competitors or non-practicing entities. We may also learn of possible infringement to our trademarks, copyrights, patents, and other intellectual property. In addition, we could be subject to lawsuits where consumers and dealers posting content on our websites disseminate materials that infringe the intellectual property rights of third parties.
Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may result in significant settlement costs or payment of substantial damages. Many potential litigants, including patent holding companies, have the ability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to stop offering some features or prevents us from conducting our business as we have historically done or may desire to do in the future. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms, or at all. Alternatively, we may be required to modify our marketplaces and features while we develop non-infringing substitutes, which could require significant effort and expense and may ultimately not be successful.
In addition, we use open source software in our platform and will use open source software in the future. From time to time, we may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software, or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional product, technology, and development resources to change our platforms or services, any of which would have a negative effect on our business and operating results. Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could harm our business, our operating results, and our reputation.
Failure to adequately protect our intellectual property could harm our business and operating results.
Our business depends on our intellectual property, the protection of which is crucial to the success of our business. We rely on a combination of patent, trademark, trade secret, and copyright law and contractual restrictions to protect our intellectual property. In
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addition, we attempt to protect our intellectual property, technology, and confidential information by requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into nondisclosure agreements as we deem appropriate. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our platform’s features, software, and functionality or obtain and use information that we consider proprietary.
Competitors may adopt trademarks or trade names similar to ours, thereby harming our ability to build brand identity and possibly leading to user confusion. In addition, there could be potential trade name or trademark infringement claims asserted against us by owners of other registered or unregistered trademarks logos or slogans, for our use of registered or unregistered trademarks, logos or slogans, or third party trademarks that incorporate variations of our trademarks. We have registered the CARGURUS and CG logos, as well as the word-mark CARGURUS, in the U.S., Canada, and the United Kingdom. Additionally, CarOffer has a number of registered and unregistered trademarks, including “CarOffer” and the CarOffer logo, and related marks, which CarOffer has registered as trademarks in the U.S.
We currently hold the “CarGurus.com” internet domain name and various other related domain names relating to our brands. The regulation of domain names is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain all domain names that use the names of our brands. In addition, third parties have created and may in the future create copycat or squatter domains to deceive consumers, which could harm our brands, interfere with our ability to register domain names, and result in additional costs.
We may be unable to halt the operations of websites that aggregate or misappropriate our data.
From time to time, third parties may misappropriate our data through website scraping, robots, or other means and aggregate this data with data from other sources. In addition, copycat websites may misappropriate data in our marketplaces and attempt to imitate our brands or the functionality of our websites. If we become aware of such activities, we intend to employ technological or legal measures in an attempt to halt their operations. However, we may be unable to detect and remedy all such activities in a timely manner. In some cases, our available remedies may not be adequate to protect us against the impact of such operations. Regardless of whether we can successfully enforce our rights against these third parties, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, results of operations, and financial condition. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brands and business could be harmed.
Seasonality and other factors may cause fluctuations in our operating results and our marketing spend.
Across the retail automotive industry, consumer purchases are typically greatest in the first three quarters of each year, due in part to the introduction of new vehicle models from manufacturers and the seasonal nature of consumer spending, and our consumer-marketing spend generally fluctuates accordingly. This seasonality has not been immediately apparent historically due to the overall growth of other operating expenses. In addition, any reduction of our marketing spend in response to COVID-19-related expense management or otherwise, and shifts in demand from dealers and consumers could impact the efficiency of our marketing spend. As our growth rates moderate or cease, the impact of these seasonality trends and other influences on our results of operations could become more pronounced. In addition, the volume of wholesale vehicle sales fluctuates from quarter to quarter as a result of macroeconomic issues, such as the global semiconductor chip shortage, which may have a corresponding impact on our results of operations. This variability is caused by several factors including the timing of used vehicles available for sale from selling customers, the seasonality of the retail market for used vehicles and/or inventory challenges in the automotive industry, which affect the demand side of the wholesale industry.
Failure to deal effectively with fraud or other illegal activity could lead to potential legal liability, harm our business, cause us to lose paying dealer customers and adversely affect our reputation, financial performance and prospects for growth.
Based on the nature of our business, we are exposed to potential fraudulent and illegal activity in our marketplaces, including: listings of automobiles that are not owned by the purported dealer or that the dealer has no intention of selling at the listed price; receipt of fraudulent leads that we may send to our dealers; and deceptive practices in our peer-to-peer marketplace. The measures we have in place to detect and limit the occurrence of such fraudulent and illegal activity in our marketplaces may not always be effective or account for all types of fraudulent or other illegal activity. Further, the measures that we use to detect and limit the occurrence of fraudulent and illegal activity must be dynamic, as technologies and ways to commit fraud and illegal activity are continually evolving. Failure to limit the impact of fraudulent and illegal activity on our websites could lead to potential legal liability, harm our business, cause us to lose paying dealer customers and adversely affect our reputation, financial performance and prospects for growth.
Risks Related to Our Class A Common Stock
Our founder controls a majority of the voting power of our outstanding capital stock, and, therefore, has control over key decision-making and could control our actions in a manner that conflicts with the interests of other stockholders.
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Primarily by virtue of his holdings in shares of our Class B common stock, which has a ten-to-one voting ratio compared to our Class A common stock, Langley Steinert, our founder, Chairman of the Board and Executive Chairman, is able to exercise voting rights with respect to a majority of the voting power of our outstanding capital stock and therefore has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. This concentrated control could delay, defer, or prevent a change of control, merger, consolidation, or sale of all or substantially all of our assets that our other stockholders support, or conversely this concentrated control could result in the consummation of such a transaction that our other stockholders do not support. This concentrated control could also discourage a potential investor from acquiring our Class A common stock, which might harm the trading price of our Class A common stock. In addition, Mr. Steinert has significant influence in the management and major strategic investments of our company as a result of his position as Executive Chairman, and his ability to control the election or replacement of our directors. As Chairman of the Board and our Executive Chairman, Mr. Steinert owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. If Mr. Steinert’s status as an officer and a director is terminated, his fiduciary duties to our stockholders will also terminate, but his voting power as a stockholder will not be reduced as a result of such termination unless such termination is either made voluntarily by Mr. Steinert or due to Mr. Steinert’s death, or if the sum of the number of shares of our capital stock held by Mr. Steinert, by any Family Member of Mr. Steinert, and by any Permitted Entity of Mr. Steinert (as such capitalized terms are defined in our amended and restated certificate of incorporation attached to our Annual Report as Exhibit 3.1), assuming the exercise and settlement in full of all outstanding options and convertible securities and calculated on an as-converted to Class A common stock basis, is less than 9,091,484 shares. As a stockholder, even a controlling stockholder, Mr. Steinert is entitled to vote his shares in his own interests, which may not always be aligned with the interests of our other stockholders.
We believe that Mr. Steinert’s continued control of a majority of the voting power of our outstanding capital stock is beneficial to us and is in the best interests of our stockholders. In the event that Mr. Steinert no longer controls a majority of the voting power, whether as a result of the disposition of some or all his shares of Class A or Class B common stock, the conversion of the Class B common stock into Class A common stock in accordance with its terms, or otherwise, our business or the trading price of our Class A common stock may be adversely affected.
The multiple class structure of our common stock has the effect of concentrating voting control with our founder and certain other holders of our Class B common stock, which will limit or preclude the ability of our stockholders to influence corporate matters.
Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Our founder and certain of his affiliates hold a substantial number of the outstanding shares of our Class B common stock and therefore hold a substantial majority of the voting power of our outstanding capital stock. Because of the ten-to-one voting ratio between our Class B and Class A common stock, the holders of our Class B common stock collectively control a majority of the combined voting power of our common stock and therefore are able to control all matters submitted to our stockholders for approval so long as the shares of Class B common stock represent at least 9.1% of all outstanding shares of our Class A and Class B common stock. This concentrated control will limit or preclude the ability of our other stockholders to influence corporate matters for the foreseeable future.
Transfers by holders of Class B common stock will generally result in those transferred shares converting into Class A common stock, subject to limited exceptions, such as certain transfers effected for estate planning or charitable purposes. The conversion of Class B common stock into Class A common stock has had and will continue to have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain such shares. If, for example, Mr. Steinert retains a significant portion of his holdings of Class B common stock, he could continue to control a majority of the combined voting power of our outstanding capital stock.
Our status as a “controlled company” could make our Class A common stock less attractive to some investors or otherwise harm the trading price of our Class A common stock.
More than 50% of our voting power is held by Mr. Steinert. As a result, we are a “controlled company” under the corporate governance rules for Nasdaq-listed companies and may elect not to comply with certain Nasdaq corporate governance requirements. We rely and have relied on certain or all of these exemptions. Accordingly, should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for Nasdaq-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
The trading price of our Class A common stock has been and may continue to be volatile and the value of our stockholders’ investment in our stock could decline.
The trading price of our Class A common stock has been and may continue to be volatile and fluctuate substantially. The trading price of our Class A common stock depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. Factors that could cause fluctuations in the trading price of our Class A common stock include the following: changes in the operating performance and stock market valuations of other technology companies generally, or those in our industry in particular; sales of shares of our Class A common stock by us or our
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stockholders; adverse changes to recommendations regarding our stock by securities analysts that cover us; failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors; announcements by us or our competitors of new products; the public’s reaction to our issuances of earnings guidance or other public announcements and filing; real or perceived inaccuracies in our key metrics; actions of an activist stockholder; actual or anticipated changes in our operating results or fluctuations in our operating results or developments in our business, our competitors’ businesses, or the competitive landscape generally; litigation involving us or investigations by regulators into our operations or those of our competitors; developments or disputes concerning our proprietary rights; announced or completed acquisitions of businesses or technologies by us or our competitors; new laws or regulations or new interpretations of existing laws or regulations applicable to our business; changes in accounting standards, policies, or guidelines; any significant change in our management; changes in the automobile industry; and general economic conditions, including as related to the continuing effects of the COVID-19 pandemic.
General Risk Factors
We participate in a highly competitive market, and pressure from existing and new companies may adversely affect our business and operating results.
We face significant competition from companies that provide listings, car-shopping information, lead generation, marketing, wholesale, and digital car-buying and -selling services designed to help consumers and dealers shop for cars and to enable dealers to reach these consumers. Our competitors include: online automotive marketplaces and websites; internet search engines; peer-to-peer marketplaces; social media marketplaces; sites operated by automobile dealers; online dealerships; and vehicle auction companies. We compete with these and other companies for a share of dealers’ overall marketing budget for online and offline media marketing spend and we compete with these and other companies in attracting consumers to our websites. To the extent that dealers view alternative marketing and media strategies to be superior to our marketplaces, we may not be able to maintain or grow the number of dealers subscribing to, and advertising on, our marketplaces, and our business and financial results may be adversely affected. We also expect that new competitors will continue to enter the online automotive retail and wholesale industries with competing marketplaces, products, and services, and that existing competitors will expand to offer competing products or services, which could have an adverse effect on our business and financial results.
Our competitors could significantly impede our ability to expand the number of dealers using our marketplaces or could offer discounts that could significantly impede our ability to maintain our pricing structure. Our competitors may also develop and market new technologies that render our existing or future platforms and associated products less competitive, unmarketable, or obsolete. In addition, if our competitors develop platforms with similar or superior functionality to ours, or if our web traffic declines, we may need to decrease our subscription and advertising fees. If we are unable to maintain our current pricing structure due to competitive pressures, our revenue would likely be reduced and our financial results would be negatively affected.
Our existing and potential competitors may have significantly more financial, technical, marketing, and other resources than we have, which may allow them to offer more competitive pricing and the ability to devote greater resources to the development, promotion, and support of their marketplaces, products, and services. They may also have more extensive automotive industry relationships than we have, longer operating histories, and greater name recognition. In addition, these competitors may be able to respond more quickly with technological advances and to undertake more extensive marketing or promotional campaigns than we can. To the extent that any competitor has existing relationships with dealers or auto manufacturers for marketing or data analytics solutions, those dealers and auto manufacturers may be unwilling to partner with us. If we are unable to compete with these competitors, the demand for our marketplaces and related products and services could substantially decline.
We must maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our Class A common stock.
We are required, pursuant to Section 404 and the related rules adopted by the SEC, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. During the evaluation and testing process, if we identify and fail to remediate one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.
In addition, our independent registered public accounting firm must attest to the effectiveness of our internal control over financial reporting under Section 404. Our independent registered public accounting firm may issue a report that is adverse to us in the event it is not satisfied with the level at which our controls are documented, designed or operating. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and required remediation in a timely fashion. We are also required to disclose significant changes made to our internal control procedures on a quarterly basis. Our compliance with Section 404 requires that we incur substantial accounting expense and expend significant management efforts.
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Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to assert that our internal control over financial reporting is effective or our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting when it is required to issue such opinion, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our Class A common stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities.
We expect our results of operations to fluctuate on a quarterly and annual basis.
Our revenue and results of operations could vary significantly from period to period and may fail to match expectations as a result of a variety of factors, some of which are outside of our control, including the continued effects of the COVID-19 pandemic and other macroeconomic issues, such as the global semiconductor chip shortage. Our results may vary as a result of fluctuations in the number of dealers subscribing to our marketplaces, the size and seasonal variability of our advertisers’ marketing budgets, and the impact of vehicle arbitrations in a given quarter in connection with our IMCO product and the wholesale sale of automobiles. As a result of the potential variations in our revenue and results of operations, period-to-period comparisons may not be meaningful and the results of any one period should not be relied on as an indication of future performance. In addition, our results of operations may not meet the expectations of investors or public market analysts who follow us, which may adversely affect the trading price of our Class A common stock.
We could be subject to adverse changes in tax laws, regulations and interpretations, plus challenges to our tax positions.
We are subject to taxation in the United States and certain other jurisdictions in which we operate. Changes in applicable tax laws or regulations may be proposed or enacted that could materially and adversely affect our effective tax rate, tax payments, results of operations, financial condition and cash flows. In addition, tax laws and regulations are complex and subject to varying interpretations. There is also uncertainty over sales tax liability as a result of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., which could precipitate reactions by legislators, regulators and courts that could adversely increase our tax administrative costs and tax risk, and negatively affect our overall business, results of operations, financial condition and cash flows. We are also regularly subject to audits by tax authorities. Any adverse development or outcome in connection with any such tax audits, and any other audits or litigation, could materially and adversely impact our effective tax rate, tax payments, results of operations, financial condition and cash flows.
Confidentiality agreements may not adequately prevent disclosure of our trade secrets and other proprietary information.
In order to protect our technologies and processes, we rely in part on confidentiality agreements with our employees, independent contractors, and other advisors. These agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. To the extent that our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights to related or resulting know-how and inventions. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results of operations, reputation, and competitive position.
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Item 6. Exhibits.
The exhibits listed below are filed or incorporated by reference into this Quarterly Report.
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Incorporated by Reference |
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Exhibit Description |
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Filed Herewith |
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10.1 |
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X |
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10.2# |
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Offer Letter, dated January 17, 2020, by and between the Registrant and Andrea Eldridge. |
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X |
10.3# |
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Offer Letter, dated November 15, 2021, by and between the Registrant and Dafna Sarnoff. |
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10.4# |
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Form of Amendment to Performance Restricted Stock Unit Agreement. |
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10-K |
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001-38233 |
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February 25, 2022 |
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10.31 |
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10.5 |
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31.1 |
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31.2 |
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32.1* |
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32.2* |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 |
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The cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL. |
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# Indicates a management contract or compensatory plan.
* The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Quarterly Report and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CarGurus, Inc. |
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Date: May 9, 2022 |
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By: |
/s/ Jason Trevisan |
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Jason Trevisan |
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Chief Executive Officer (Principal Executive Officer) |
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Date: May 9, 2022 |
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By: |
/s/ Scot Fredo |
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Scot Fredo |
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Chief Financial Officer (Principal Financial Officer) |
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Exhibit 10.1
FIRST Amendment to SUBlease
This FIRST AMENDMENT TO SUBLEASE (this “Amendment”), dated as of March 23, 2022, is entered into by and between CARGURUS, INC., a Delaware corporation (“Sublessor”), and AMYLYX PHARMACEUTICALS, INC., a Delaware corporation (“Sublessee”).
W I T N E S S E T H
WHEREAS, Sublessor and Sublessee are parties that certain Sublease dated as of December 23, 2021, as modified by that certain Sublease Commencement Letter dated January 10, 2022 (the “Sublease”), pursuant to which Sublessee subleases certain premises comprised of 24,393 rentable square feet of space on the entire second (2nd) and third (3rd) floors and a portion of the first (1st) floor (the “Subleased Premises”) of that certain building known and numbered as 121 First Street, Cambridge, Massachusetts (the “Building”), as more fully set forth in the Sublease; and
WHEREAS, Sublessor and Sublessee wish to enter into this Amendment to correct the Monthly Base Rent amounts set forth in the Lease.
NOW, THEREFORE, in consideration of the covenants herein reserved and contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Sublessor and Sublessee hereby agree as follows:
“Commencing on the date occurring one hundred eighty (180) days after the Commencement Date (the “Rent Commencement Date”), and continuing during the Sublease Term, Sublessee shall pay to Sublessor, base rent (“Base Rent”) at the annual rental rate of (i) $76.00 per rentable square foot in the Subleased Premises from the Rent Commencement Date through the date immediately preceding the first anniversary of the Rent Commencement Date, which is equal to $154,489.00 per month, (ii) $77.90 per rentable square foot in the Subleased Premises from the first anniversary of the Rent Commencement Date through the date immediately preceding the second anniversary of the Rent Commencement Date, which is equal to $158,351.23 per month, and (iii) $79.85 per rentable square foot in the Subleased Premises from the second anniversary of the Rent Commencement Date through the date immediately preceding the third anniversary of the Rent Commencement Date, which is equal to $162,310.01 per month.”
All other terms and conditions of said Section 4 shall continue to apply in all respects.
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[Remainder of page intentionally left blank; Signatures on next page]
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IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Amendment to be executed as of the date set forth above.
SUBLESSOR: |
CARGURUS, INC. |
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By: /s/ Jason Trevisan |
Name: Jason Trevisan |
Title: CEO |
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SUBLESSEE: |
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AMYLYX PHARMACEUTICALS, INC. |
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By: /s/ Jim Frates |
Name: Jim Frates |
Title: CFO |
EXHIBIT 10.2
January 16, 2020
Andrea Eldridge
[ADDRESS]
Dear Andrea:
I am very pleased to offer you the position of Chief People Officer at CarGurus, Inc. (“CarGurus” or the “Company”), reporting to Jason Trevisan, Chief Financial Officer. This letter will clarify the terms and conditions of your at-will employment with CarGurus, should you accept our offer.
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Andrea, we look forward to you joining our organization. In order to confirm your intention to commence employment with CarGurus on the Start Date on the terms set forth in this letter, please sign one copy of this letter and return it to me. The other copy is for your records. If you have any questions, please do not hesitate to speak with me.
Sincerely,
/s/ Jason Trevisan
Jason Trevisan
Chief Financial Officer
CarGurus, Inc.
ACKNOWLEDGEMENT AND AGREEMENT
I agree with the terms of this letter and will commence employment on the Start Date on the terms set forth in this letter.
/s/ Andrea Eldridge
Andrea Eldridge
1/17/2020
Date
4
EXHIBIT 10.3
November 15, 2021
Dafna Sarnoff
[ADDRESS]
Dear Dafna,
I am very pleased to offer you the position of Chief Marketing Officer at CarGurus, Inc. (“CarGurus” or the “Company”), reporting to Sam Zales, President and COO. This letter will clarify the terms and conditions of your at-will employment with CarGurus, should you accept our offer.
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your Start Date.
The amounts payable under this Section 8, to the extent taxable, will be paid out in substantially equal installments in accordance with the Company’s payroll practice over six (6) months commencing within 60 days after the Termination Date; provided, however, that if the 60-day period begins in one calendar year and ends in a second calendar year, the Severance Amount, to the extent it qualifies as “non-qualified deferred compensation” within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall begin to be paid in the second calendar year by the last day of such 60-day period; provided, further, that the initial payment
3
will include a catch-up payment to cover amounts retroactive to the day immediately following the Termination Date. Each payment pursuant to this Agreement is intended to constitute a separate payment for purposes of Treasury Regulation Section 1.409A-2(b)(2).
Your receipt of the Severance Pay and COBRA Subsidy will be conditional on your signing (and, if applicable, not revoking) a Separation Agreement and Release in a form acceptable to the Company, including a general release of claims against the Company and all related persons and entities, a reaffirmation of all of your post-employment obligations under the NDA, and, in the Company’s sole discretion, a one-year post-employment noncompetition agreement substantially similar to or the same as the noncompetition provision of the NDA. Further, the Separation Agreement and Release will provide that if you breach the NDA, all payments of the Severance Amount and COBRA Subsidy will immediately cease and be recoverable by the Company.
For purposes of this letter, “Good Reason” means you have complied with the Good Reason Process (as defined below) following the occurrence of any of the following events, without your consent: (i) a material diminution in the your title, responsibilities, authority or duties; (ii) a material diminution in your base salary or target bonus, except for across-the-board reductions based on the Company’s financial performance similarly affecting all or substantially all senior management employees of the Company; (iii) a material change in the principal geographic location at which you provide services to the Company (with the exception of travel related to your duties to the Company); or (iv) the material breach by the Company of the written employment agreement, offer letter or severance agreement between you and the Company; and “Good Reason Process” means (i) you reasonably determine in good faith that a “Good Reason” condition has occurred; (ii) you have notified the Company in writing of the first occurrence of the Good Reason condition within thirty (30) days of the first occurrence of such condition; (iii) you cooperate in good faith with the Company’s efforts, for a period not less than thirty (30) days following such notice (the “Cure Period”), to remedy the condition; (iv) notwithstanding such efforts, the Good Reason condition continues to exist; and (v) you terminate your employment within thirty (30) days after the end of the Cure Period. If the Company cures the Good Reason condition during the Cure Period, Good Reason shall be deemed not to have occurred.
If you will regularly perform your duties at any of the Company’s business locations in Massachusetts, then all aspects of your employment shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, excluding choice of law rules thereof. If you reside and you will regularly perform your duties for the Company outside of Massachusetts, then all aspects of your employment (except for the NDA, which in such case would be governed by Delaware law), shall be governed by and construed in accordance with the laws of state where you reside.
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Dafna, we look forward to you joining our organization. In order to confirm your intention to commence employment with CarGurus on the Start Date on the terms set forth in this letter, please sign one copy of this letter and the NDA and return them to me. The other copy is for your records. If you have any questions, please do not hesitate to speak with me.
Sincerely,
/s/ Andrea Eldridge
Andrea Eldridge Chief People Officer CarGurus, Inc.
ACKNOWLEDGEMENT AND AGREEMENT
I agree with the terms of this letter and will commence employment on the Start Date on the terms set forth in this letter.
/s/ Dafna Sarnoff
Dafna Sarnoff
11/15/2021
Date
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EXHIBIT 10.5
CORRECTIVE AMENDMENT
THIS CORRECTIVE AMENDMENT (this “Amendment”) to that certain Third Amended and Restated Limited liability Company Agreement of CarOffer, LLC, a Delaware limited liability company (the “Company”), dated as of November 23, 2021 (the “Existing Agreement”), is entered into as of the 6th day of May, 2022 with an effective date as of November 23, 2021 (the “Effective Date”).
WHEREAS, on the Effective Date, the Company, Parent, TopCo and MidCo, among other parties, entered into the Existing Agreement, which amended and restated the Prior Agreement;
WHEREAS, the parties hereto have become aware of certain drafting errors in the Existing Agreement that do not reflect the understandings and agreements of the parties that were intended to be reflected in the Existing Agreement;
WHEREAS, Parent, TopCo, and MidCo, which collectively with the Board represent the requisite parties whose consent or approval is required to amend the Existing Agreement under Section 13.2 thereof, desire to enter into this Amendment in order to correct such drafting errors;
WHEREAS, the Board has approved this Amendment by written consent dated May 6, 2022; and
WHEREAS, capitalized terms used but not defined herein have the respect meanings ascribed to such terms in the Existing Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Existing Agreement is hereby amended as follows:
““First Determination Date Company Value” means the difference of (i) the product of (A) First Determination Date TTM Gross Profit, multiplied by (B) seven (7), minus (ii) the sum of (X) the amount of any outstanding Third Party Indebtedness, plus (Y) the amount of any Extraordinary Losses, in each case, determined as of the First Determination Date.”
“First Determination Date Per Unit Price” means in the case of the Class CO-A Units, $10.00 per Unit, and in the case of the other First Call Units, the difference of (i) the quotient of (A) First Determination Date Company Value, divided by (B) the number of Fully Diluted Units as of the First Determination Date, minus (ii) the sum of (X) the Per Unit Reduction Amount, determined as of the First Determination Date, plus (Y) the quotient of (I) the aggregate First Determination Date Per Unit Price of Class CO-A Units being purchased by Parent at the First Call Closing divided by, (II) the number of First Call Units that are not Class CO-A Units; provided, however, in the case of each Incentive Unit that is a Vested Unit as of the
1
First Determination Date, the First Determination Date Per Unit Price will be reduced by the applicable Participation Threshold of such Vested Unit, if any, but not below $0.00.
““Second Determination Date Company Call Value” means the greater of (i) the Second Determination Date Company Floor Value and (ii) the difference of (A) the product of (1) Second Determination Date TTM EBITDA, multiplied by (2) twelve (12), minus (B) the sum of (1) the amount of any outstanding Third Party Indebtedness, plus (2) the amount of any Extraordinary Losses, in each case, determined as of the Second Determination Date.”
“Second Determination Date Per Unit Call Price” means in the case of the Class CO-A Units, $10.00 per Unit, and the case of the other Second Call/Put Units, the difference of (i) the quotient of (A) the Second Determination Date Company Call Value, divided by (B) the number of Fully Diluted Units as of the Second Determination Date, minus (ii) the sum of (X) the Per Unit Reduction Amount determined as of the Second Determination Date, plus (Y) the quotient of (I) the aggregate Second Determination Date Per Unit Call Price of Class CO-A Units being purchased by Parent at the Second Call Closing (if any) divided by (II) the number of Second Call/Put Units that are not Class CO-A Units; provided, however, in the case of each Incentive Unit that is a Vested Unit, the Second Determination Date Per Unit Call Price will be reduced by the applicable Participation Threshold of such Vested Unit, but not below $0.00.
““Second Determination Date Company Put Value” means the difference of (i) the product of (A) Second Determination Date TTM EBITDA, multiplied by (B) twelve (12), minus (ii) the sum of (A) the amount of any outstanding Third Party Indebtedness, plus (B) the amount of any Extraordinary Losses, in each case, determined as of the Second Determination Date.”
Second Determination Date Per Unit Put Price” means in the case of the Class CO-A Units, $10.00 per Unit, and the case of the other Second Call/Put Units, the difference of (i) the quotient of (A) the Second Determination Date Company Put Value, divided by (B) the number of Fully Diluted Units as of the Second Determination Date, minus (ii) the sum of (X) the Per Unit Reduction Amount determined as of the Second Determination Date, plus (Y) the quotient of (I) the aggregate Second Determination Date Per Unit Put Price of Class CO-A Units being purchased by Parent at the Put Closing (if any) divided by (II) the number of Second Call/Put Units that are not Class CO-A Units; provided, however, in the case of each Incentive Unit that is a Vested Unit, the Second Determination Date Per Unit Put Price will be reduced by the applicable Participation Threshold of such Vested Unit, but not below $0.00.
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[Signature pages to follow]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the Effective Date.
THE COMPANY:
CAROFFER LLC
By: /s/ Bruce Thompson
Name: Bruce Thompson
Title: Manager and Chief Executive Officer
PARENT:
CARGURUS, INC.
By: /s/ Jason Trevisan
Name: Jason Trevisan
Title: Chief Executive Officer
TOPCO:
CAROFFER INVESTORS HOLDING, LLC
By: /s/ Bruce Thompson
Name: Bruce Thompson
Title: Chief Executive Officer
MIDCO:
CAROFFER MIDCO, LLC
By: /s/ Bruce Thompson
Name: Bruce Thompson
Title: Chief Executive Officer
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jason Trevisan, certify that:
Date: May 9, 2022 |
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By: |
/s/ Jason Trevisan |
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Jason Trevisan |
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Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scot Fredo, certify that:
Date: May 9, 2022 |
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By: |
/s/ Scot Fredo |
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Scot Fredo |
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Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CarGurus, Inc. (the “Company”) for the period ending March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jason Trevisan, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
Date: May 9, 2022 |
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By: |
/s/ Jason Trevisan |
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Jason Trevisan |
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Chief Executive Officer (Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of CarGurus, Inc. (the “Company”) for the period ending March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scot Fredo, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:
Date: May 9, 2022 |
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By: |
/s/ Scot Fredo |
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Scot Fredo |
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Chief Financial Officer (Principal Financial Officer) |