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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2020

OR

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

For the transition period from _________________ to _________________

Commission File Number: 001-38233

 

CARGURUS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

04-3843478

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

2 Canal Park, 4th Floor

Cambridge, Massachusetts

02141

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617354-0068

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol

Name of Exchange on Which Registered

Class A Common Stock, par value $0.001 per share

CARG

 

     The Nasdaq Stock Market LLC (Nasdaq Global Select Market)

 

 

 

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

 

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Small reporting company

 

 

 

 

 

Emerging growth company

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of April 30, 2020, the registrant had 92,673,364 shares of Class A common stock, $0.001 par value per share, and 19,978,903 shares of Class B common stock, par value $0.001 per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

1

Item 1.

 

Financial Statements

1

 

 

Unaudited Condensed Consolidated Balance Sheets

1

 

 

Unaudited Condensed Consolidated Income Statements

2

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income

3

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

 

Controls and Procedures

34

 

 

 

 

PART II.

 

OTHER INFORMATION

35

Item 1.

 

Legal Proceedings

35

Item 1A.

 

Risk Factors

35

Item 6.

 

Exhibits

57

Signatures

58

 


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:

 

our future financial performance, including our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to generate cash flow, and ability to achieve, and maintain, future profitability;

 

our growth strategies and our ability to effectively manage any growth;

 

our ability to maintain and build our brand;

 

our ability to succeed internationally;

 

our ability to cease operations in certain international countries, and the timing of such processes;

 

our ability to realize benefits from our acquisitions and successfully implement the integration strategies in connection therewith;

 

the impact of competition in our industry and innovation by our competitors;

 

the impact of accounting pronouncements;

 

the impact of litigation;

 

our ability to hire and retain necessary qualified employees to expand our operations;

 

our ability to adequately protect our intellectual property;

 

our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;

 

our ability to overcome challenges facing the automotive industry ecosystem, including global supply chain challenges, changes to trade policies and other macroeconomic issues;

 

failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

 

our expectations regarding cash generation and the sufficiency of our cash to fund our operations;

 

the future trading prices of our Class A common stock;

 

our ability to realize cost savings and achieve other benefits for our business from our expense reduction efforts and the impact of such reductions on our business;

 

our expectations for our temporary suspended activity program, including after dealers restore their paid subscriptions or we reinstate Restricted Listings; and

 

the impact of the COVID-19 pandemic.

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.

 

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CarGurus, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

At

March 31,

2020

 

 

At

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,451

 

 

$

59,920

 

Investments

 

 

81,281

 

 

 

111,692

 

Accounts receivable, net of allowance for doubtful accounts of $1,247

   and $240, respectively

 

 

17,536

 

 

 

22,124

 

Prepaid expenses and prepaid income taxes

 

 

18,756

 

 

 

10,452

 

Deferred contract costs

 

 

10,078

 

 

 

9,544

 

Other current assets

 

 

7,887

 

 

 

4,972

 

Restricted cash

 

 

250

 

 

 

250

 

Total current assets

 

 

210,239

 

 

 

218,954

 

Property and equipment, net

 

 

27,904

 

 

 

27,950

 

Intangible assets

 

 

11,006

 

 

 

3,920

 

Goodwill

 

 

27,298

 

 

 

15,207

 

Operating lease right-of-use assets

 

 

68,662

 

 

 

59,986

 

Restricted cash

 

 

10,770

 

 

 

10,553

 

Deferred tax assets

 

 

36,459

 

 

 

42,713

 

Deferred contract costs, net of current portion

 

 

10,384

 

 

 

10,514

 

Other non-current assets

 

 

3,716

 

 

 

3,826

 

Total assets

 

$

406,438

 

 

$

393,623

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

29,839

 

 

$

36,731

 

Accrued expenses, accrued income taxes and other current liabilities

 

 

13,973

 

 

 

18,262

 

Deferred revenue

 

 

5,042

 

 

 

9,984

 

Operating lease liabilities

 

 

9,477

 

 

 

8,781

 

Total current liabilities

 

 

58,331

 

 

 

73,758

 

Operating lease liabilities

 

 

68,079

 

 

 

60,818

 

Deferred tax liabilities

 

 

329

 

 

 

284

 

Other non–current liabilities

 

 

1,731

 

 

 

1,908

 

Total liabilities

 

 

128,470

 

 

 

136,768

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

      Preferred stock, $0.001 par value; 10,000,000 shares authorized;

         no shares issued and outstanding

 

 

 

 

 

 

Class A common stock, $0.001 par value per share; 500,000,000 shares

   authorized; 92,517,427 and 91,819,649 shares issued and outstanding

   at March 31, 2020 and December 31, 2019, respectively

 

 

93

 

 

 

92

 

Class B common stock, $0.001 par value per share; 100,000,000 shares

   authorized; 19,978,903 and 20,314,644 shares issued and outstanding

   at March 31, 2020 and December 31, 2019, respectively

 

 

20

 

 

 

20

 

Additional paid-in capital

 

 

214,143

 

 

 

205,234

 

Retained earnings

 

 

64,555

 

 

 

51,859

 

Accumulated other comprehensive loss

 

 

(843

)

 

 

(350

)

Total stockholders’ equity

 

 

277,968

 

 

 

256,855

 

Total liabilities and stockholders’ equity

 

$

406,438

 

 

$

393,623

 

 

 

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)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

157,689

 

 

$

135,270

 

Cost of revenue(1)

 

 

11,610

 

 

 

7,720

 

Gross profit

 

 

146,079

 

 

 

127,550

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

93,595

 

 

 

91,316

 

Product, technology, and development

 

 

23,084

 

 

 

15,972

 

General and administrative

 

 

15,860

 

 

 

11,760

 

Depreciation and amortization

 

 

1,521

 

 

 

1,067

 

Total operating expenses

 

 

134,060

 

 

 

120,115

 

Income from operations

 

 

12,019

 

 

 

7,435

 

Other income, net:

 

 

 

 

 

 

 

 

Interest income

 

 

562

 

 

 

744

 

Other income, net

 

 

166

 

 

 

902

 

Total other income, net

 

 

728

 

 

 

1,646

 

Income before income taxes

 

 

12,747

 

 

 

9,081

 

Provision for (benefit from) income taxes

 

 

51

 

 

 

(3,503

)

Net income

 

$

12,696

 

 

$

12,584

 

Net income per share attributable to common stockholders:

   (Note 10)

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.11

 

Diluted

 

$

0.11

 

 

$

0.11

 

Weighted-average number of shares of common

   stock used in computing net income per share

   attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

112,355,093

 

 

 

110,800,037

 

Diluted

 

 

113,489,992

 

 

 

113,406,320

 

 

(1)

Includes depreciation and amortization expense for the three months ended March 31, 2020 and 2019 of $1,469 and $560, respectively.  

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)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Net income

 

$

12,696

 

 

$

12,584

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(493

)

 

 

(424

)

Comprehensive income

 

$

12,203

 

 

$

12,160

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

 

3


 

CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data)

 

 

 

Class A

Common Stock

 

 

Class B

Common Stock

 

 

Additional

Paid–in

 

 

Retained

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance at December 31, 2019

 

 

91,819,649

 

 

$

92

 

 

 

20,314,644

 

 

$

20

 

 

$

205,234

 

 

$

51,859

 

 

$

(350

)

 

$

256,855

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,696

 

 

 

 

 

 

12,696

 

Stock–based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,793

 

 

 

 

 

 

 

 

 

11,793

 

Issuance of common stock upon exercise of stock options

 

 

160,668

 

 

 

 

 

 

 

 

 

 

 

 

514

 

 

 

 

 

 

 

 

 

514

 

Issuance of common stock upon vesting

   of restricted stock units

 

 

308,303

 

 

 

1

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Payment of withholding taxes on net share settlements of equity awards

 

 

(106,934

)

 

 

 

 

 

 

 

 

 

 

 

(3,397

)

 

 

 

 

 

 

 

 

(3,397

)

Conversion of common stock

 

 

335,741

 

 

 

 

 

 

(335,741

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(493

)

 

 

(493

)

Balance at March 31, 2020

 

 

92,517,427

 

 

$

93

 

 

 

19,978,903

 

 

$

20

 

 

$

214,143

 

 

$

64,555

 

 

$

(843

)

 

$

277,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

 

89,728,223

 

 

$

90

 

 

 

20,702,084

 

 

$

21

 

 

$

184,216

 

 

$

9,713

 

 

$

71

 

 

$

194,111

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,584

 

 

 

 

 

 

12,584

 

Stock–based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,995

 

 

 

 

 

 

 

 

 

7,995

 

Issuance of common stock upon exercise of stock options

 

 

447,210

 

 

 

 

 

 

 

 

 

 

 

 

697

 

 

 

 

 

 

 

 

 

697

 

Issuance of common stock upon vesting

   of restricted stock units

 

 

297,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of withholding taxes on net share settlements of equity awards

 

 

(102,034

)

 

 

 

 

 

 

 

 

 

 

 

(3,954

)

 

 

 

 

 

 

 

 

(3,954

)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(424

)

 

 

(424

)

Balance at March 31, 2019

 

 

90,370,773

 

 

$

90

 

 

 

20,702,084

 

 

$

21

 

 

$

188,954

 

 

$

22,297

 

 

$

(353

)

 

$

211,009

 

 

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)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

12,696

 

 

$

12,584

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,990

 

 

 

1,627

 

Currency gain on foreign denominated transactions

 

 

(102

)

 

 

(833

)

Deferred taxes

 

 

5,464

 

 

 

(3,692

)

Provision for doubtful accounts

 

 

1,202

 

 

 

15

 

Stock-based compensation expense

 

 

11,606

 

 

 

7,686

 

Amortization of deferred contract costs

 

 

2,836

 

 

 

1,830

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5,401

 

 

 

(1,519

)

Prepaid expenses, prepaid income taxes, and other assets

 

 

(11,047

)

 

 

(1,760

)

Deferred contract costs

 

 

(3,296

)

 

 

(4,376

)

Accounts payable

 

 

(7,437

)

 

 

3,225

 

Accrued expenses, accrued income taxes, and other current liabilities

 

 

(4,350

)

 

 

(4,009

)

Deferred revenue

 

 

(4,938

)

 

 

132

 

Lease obligations

 

 

(721

)

 

 

(1,380

)

Other non-current liabilities

 

 

(163

)

 

 

155

 

Net cash provided by operating activities

 

 

10,141

 

 

 

9,685

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,214

)

 

 

(5,700

)

Capitalization of website development costs

 

 

(666

)

 

 

(811

)

Cash paid for acquisition, net of cash acquired

 

 

(21,004

)

 

 

(19,139

)

Investments in certificates of deposit

 

 

 

 

 

(25,700

)

Maturities of certificates of deposit

 

 

30,411

 

 

 

40,000

 

Net cash provided by (used in) investing activities

 

 

7,527

 

 

 

(11,350

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

514

 

 

 

697

 

Payment of finance lease obligations

 

 

(9

)

 

 

(6

)

Payment of withholding taxes on net share settlement of

   restricted stock units

 

 

(3,397

)

 

 

(3,954

)

Net cash used in financing activities

 

 

(2,892

)

 

 

(3,263

)

Impact of foreign currency on cash, cash equivalents, and restricted cash

 

 

(28

)

 

 

(23

)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

14,748

 

 

 

(4,951

)

Cash, cash equivalents, and restricted cash at beginning of period

 

 

70,723

 

 

 

37,558

 

Cash, cash equivalents, and restricted cash at end of period

 

$

85,471

 

 

$

32,607

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

20

 

 

$

14

 

Unpaid purchases of property and equipment

 

$

967

 

 

$

2,112

 

Capitalized stock-based compensation expense in website development and

   internal-use software costs

 

$

248

 

 

$

309

 

Cash paid for operating lease liabilities

 

$

4,024

 

 

$

3,005

 

 

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 global, online automotive marketplace connecting buyers and sellers of new and used cars. Using proprietary technology, search algorithms, and innovative data analytics, the Company provides information and analysis that create a differentiated automotive search experience for consumers. The Company’s marketplace empowers users worldwide with unbiased third-party validation on pricing and dealer reputation, as well as other useful information that aids them in finding “Great Deals from Top-Rated Dealers.”

The Company is headquartered in Cambridge, Massachusetts and was incorporated in the State of Delaware on June 26, 2015. The Company operates principally in the United States. In addition to the United States, it operates online marketplaces under the CarGurus brand in Canada and the United Kingdom. The Company also operates online marketplaces in Germany, Italy, and Spain; the Company intends to cease the operations of each of these marketplaces in the second quarter of 2020 (see Note 13). The Company has subsidiaries in the United States, Canada, Ireland, and the United Kingdom. In the United States and the United Kingdom, it also operates the Autolist and PistonHeads online marketplaces, respectively, as independent brands.             

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements (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 the authoritative U.S. generally accepted accounting principles 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 are unaudited. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 14, 2020 (the “2019 Annual Report”).

The Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the 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, 2020 and December 31, 2019, results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2020 and 2019. These interim period results are not necessarily indicative of the results to be expected for any other interim period or the full year.

The accompanying 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, 2020, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the 2019 Annual Report.

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.

6


 

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. Subsequent events have been evaluated as required. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure, other than those disclosed in Note 13 of these Unaudited Condensed Consolidated Financial Statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

Significant estimates relied upon in preparing these Unaudited Condensed Consolidated Financial Statements include revenue recognition, allowance for doubtful accounts and sales allowances, variable consideration, the recoverability of long-lived assets, the valuation and recoverability of goodwill and intangible assets, the expensing and capitalization of product, technology, and development costs for website development and internal‑use software, and the recoverability of the Company’s net deferred tax assets and related valuation allowance.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. 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.

Concentration of Credit Risk

The Company has no significant off‑balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and trade accounts receivable.

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.

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. In light of the novel strain of coronavirus that surfaced in Wuhan, China in December 2019 and was subsequently declared a Public Health Emergency of International Concern by the World Health Organization (“COVID-19”), the Company assessed the implications on accounts receivable and increased its allowance for doubtful accounts to $1,247 as of March 31, 2020 as compared to $240 as of December 31, 2019 due to increased risk of collectability of its outstanding trade receivables.

For the three months ended March 31, 2020 and 2019, no individual customer accounted for more than 10% of total revenue.

As of March 31, 2020, one customer accounted for 12% of net accounts receivable. As of December 31, 2019, one customer accounted for 18% of net accounts receivable. No other individual customer accounted for more than 10% of net accounts receivable at March 31, 2020 or December 31, 2019.

Included in net accounts receivable at March 31, 2020 and December 31, 2019, are $5,980 and $8,880, respectively, of unbilled accounts receivable primarily related to advertising customers that are generally billed within a quarter subsequent to services being rendered. The decrease in unbilled accounts receivable of $2,900 is due to a decrease in advertising revenues, a decrease in revenue from partnerships with certain financing services companies and the impact of price concessions offered to customers in response to the COVID-19 pandemic.

7


 

Allowance for Credit Losses

The Company is exposed to credit losses primarily through its trade accounts receivable. The Company determines the required allowance for expected credit losses using information such as historical loss trends, current conditions, and reasonable and supportable forecasts of economic conditions such as the impacts of the COVID-19 pandemic in the first quarter of 2020. Amounts are charged against the allowance when it is determined that expected credit losses may occur. At March 31, 2020, the Company reported allowances for doubtful accounts of $1,247 reflecting an increase of $1,007 primarily due to the impact of the COVID-19 pandemic and increased risk of collectability.

Revenue Recognition

The following table summarizes revenue from contracts with customers by revenue source for the three months ended March 31, 2020 and 2019.

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Revenue by Revenue Stream

 

 

 

 

 

 

 

 

Marketplace subscription revenue

 

$

141,866

 

 

$

120,843

 

Advertising and other revenue

 

 

15,823

 

 

 

14,427

 

Total

 

$

157,689

 

 

$

135,270

 

 

The Company provides disaggregation of revenue based on the marketplace subscription versus advertising and other revenue classification in the table above and based on geographic region (see Note 12) as it believes these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Company enters into contracts that include variable consideration, for which the Company estimates the value of the variable consideration in determining the transaction price and allocates it to the appropriate performance obligations. The Company reassesses any estimates of variable consideration at each reporting period.

ASC Topic 606, Revenue from Contracts with Customers (“Topic 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, 2020 was approximately $27.6 million, which the Company expects to recognize over the next twelve months.

For contracts with an original expected duration of one year or less, the Company has applied the practical expedient available under Topic 606 to not disclose the amount of transaction price allocated to unsatisfied performance obligations as of March 31, 2020. For performance obligations not satisfied as of March 31, 2020, 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, 2020. The remaining duration is less than one year.

Revenue recognized during the three months ended March 31, 2020 from amounts included in deferred revenue at the beginning of the period was approximately $9,984.        

On March 18, 2020, in response to the COVID-19 pandemic, the Company announced a 50% fee reduction on all marketplace subscriptions for the April service period for paying dealers in the United States, Canada and the United Kingdom as well as a 100% fee reduction for paying dealers in Italy as the Company intends to cease the operations of its Italian marketplace in the second quarter of 2020. This discount resulted in a modification to contracts with initial contractual periods greater than one month. For any contract modified, the Company calculated the remaining transaction price and allocated the consideration over the remaining performance obligations. In the Company’s calculation of the remaining transaction price it also included estimated discounts for future service periods beyond April. These modifications had an immaterial impact on the Company’s revenues for the first quarter of 2020. For additional discussion of fee reductions provided to customers announced subsequent to March 31, 2020, refer to Note 13.

                

      

8


 

Recent Accounting Pronouncements Adopted

 

Goodwill and Intangibles

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 of the goodwill impairment test. Under previous guidance, Step 2 of the goodwill impairment test required entities to calculate the implied fair value of goodwill in the same manner as the amount of goodwill recognized in a business combination by assigning the fair value of a reporting unit to all of the assets and liabilities of the reporting unit. The carrying value in excess of the implied fair value was recognized as goodwill impairment. Under ASU 2017-04, goodwill impairment is recognized based on Step 1 of the goodwill impairment test, which calculates the carrying value in excess of the reporting unit’s fair value. The standard was effective beginning in January 2020, with early adoption permitted. The Company adopted the guidance on January 1, 2020 and applied it on a prospective basis. The adoption did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.

 

Credit Losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 and its subsequent related updates establish a forward-looking “expected loss model” that requires entities to estimate current expected credit losses on accounts receivable and financial instruments by using all practical and relevant information. ASU 2016-13 and its subsequent related updates were effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2020 and applied it on a prospective basis. The adoption did not have a material impact on the Unaudited Condensed Consolidated Financial Statements.

 

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.

 

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by removing several exceptions in the current standard and adding guidance to reduce complexity in certain areas, such as requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact that adopting this guidance will have on its Unaudited Condensed Consolidated Financial Statements.

 

 

3. Acquisitions

 

        

On January 16, 2020, the Company acquired Autolist, an automotive shopping platform based in San Francisco, California, pursuant to an Agreement and Plan of Merger by and among the Company, Alpine Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“Merger Sub”), Auto List, Inc., a Delaware corporation (“Target”), and the securityholders’ representative therein, pursuant to which, among other things, the Company acquired Target through the merger of Merger Sub with and into Target (the “Merger”), with Target surviving as a wholly owned subsidiary of the Company. The Company paid an aggregate of $21.0 million, net of cash acquired, to consummate the Merger. The amount paid includes $2.2 million that is held in escrow to secure post-closing claims.  The Merger is intended to both expand the Company’s consumer audience in the United States and enhance its value proposition for subscribing dealers.

 

As of March 31, 2020, the Company incurred total acquisition-related costs of $1.4 million related to the Merger.  For the three months ended March 31, 2020 the Company incurred total acquisition-related costs of $0.9 million.  Acquisition-related costs were excluded from the purchase price allocation as they were primarily comprised of one-time severance and bonus related expenses. For the three months ended March 31, 2020, $0.5 million, $0.2 million and $0.2 million of acquisition-related costs were recorded as operating expense and allocated to product, technology, and development, general and administrative, and sales and marketing, respectively, within the Unaudited Condensed Consolidated Income Statement.

 

9


 

The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the acquired assets and assumed liabilities. The following table presents the preliminary purchase price allocation recorded in the Company’s Unaudited Condensed Consolidated Balance Sheet as of the acquisition date, which is subject to finalization for estimates of the  fair value of assets acquired and liabilities assumed as of the acquisition date, including, but not limited to tangible assets, intangible assets and tax-related items, and the related tax and effects of any changes made:

 

 

 

 

 

Estimated Fair

Value at Date

of Acquisition

 

Cash and cash equivalents

 

$

50

 

Restricted cash

 

 

220

 

Accounts receivable

 

 

2,034

 

Intangible assets (1)

 

 

7,600

 

Goodwill (2)

 

 

12,409

 

Operating lease right-of-use

 

 

2,169

 

Other assets, net

 

 

162

 

Accounts payable and accrued expenses

 

 

(358

)

Operating lease liabilities - current

 

 

(446

)

Operating lease liabilities - non-current

 

 

(1,723

)

Deferred tax liability (3)

 

 

(843

)

Total purchase price

 

$

21,274

 

 

 

(1)

Identifiable definite-lived intangible assets were comprised of brand, developed technology, and customer relationships of $5,600, $1,200 and $800, respectively, with estimated useful lives of 9 years, 3 years and 3 years, respectively, which will be amortized on a straight-line basis over their estimated useful lives. The fair value of the brand has been estimated using the multi-period excess earnings method which is a variation of the income approach. The fair value of the development technology and customer relationships has been estimated using a cost approach, which assesses the cost to redevelop the app and technology, and relationships, respectively.