10-Q
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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, 2023

OR

 

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

 

For the transition period from _________________ to _________________

Commission File Number: 001-38233

 

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)

(617) 354-0068

(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

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 May 4, 2023, the registrant had 97,319,091 shares of Class A common stock, $0.001 par value per share, and 15,999,173 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 Redeemable Noncontrolling Interest and 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

20

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

 

Controls and Procedures

39

 

 

 

 

PART II.

 

OTHER INFORMATION

41

Item 1.

 

Legal Proceedings

41

Item 1A.

 

Risk Factors

41

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,” “goal,” “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;
the value proposition of our product offerings for dealers and consumers, and the return on investment that our dealers realize from our products;
our evolution to becoming a transaction-enabled platform where consumers can shop, buy, seek financing, and sell their cars and dealers can source, market, and sell their vehicles;
our ability to realize benefits from our acquisitions and successfully implement the integration strategies in connection therewith;
our expectations regarding future share issuances and the exercise of put and call rights in connection with potentially acquiring additional equity interests in CarOffer, LLC, or CarOffer, as well as the associated valuation of redeemable noncontrolling interests;
the value proposition of the CarOffer online wholesale platform, including our belief that as dealer enrollments increase, dealers will see a corresponding increase in inventory on the platform, further enabling liquidity, selection, choice and business efficiencies;
our expectations for CarGurus Instant Max Cash Offer, as well as our digital retail offerings and continued investments;
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, and effectively comply with, new or modified laws and regulations that currently apply or become applicable to our business and our beliefs regarding our compliance therewith;
domestic economic conditions;
global economic conditions affecting us or our customers;
our ability to overcome challenges facing the automotive industry ecosystem, including inventory supply problems, global supply chain challenges, changes to trade policies and other macroeconomic issues;
our expectations regarding cash generation and the sufficiency of our cash to fund our operations;
our expectation regarding the funding of our share repurchase program;
the future trading prices of our Class A common stock;
our expectation regarding deferred tax assets;
the material weakness in our internal control over financial reporting that we have identified, and our ability to remediate such weakness and enhance our internal control environment;
our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;
our revolving credit facility; and
our expected returns on investments.

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)

 

 

 

As of
March 31,
2023

 

 

As of
December 31,
2022

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

456,696

 

 

$

469,517

 

Accounts receivable, net of allowance for doubtful accounts of $1,054
   and $
1,809, respectively

 

 

42,395

 

 

 

46,817

 

Inventory

 

 

1,637

 

 

 

5,282

 

Prepaid expenses, prepaid income taxes and other current assets

 

 

18,114

 

 

 

21,972

 

Deferred contract costs

 

 

9,387

 

 

 

8,541

 

Restricted cash

 

 

14,985

 

 

 

5,237

 

Total current assets

 

 

543,214

 

 

 

557,366

 

Property and equipment, net

 

 

42,748

 

 

 

40,128

 

Intangible assets, net

 

 

45,552

 

 

 

53,054

 

Goodwill

 

 

157,689

 

 

 

157,467

 

Operating lease right-of-use assets

 

 

196,413

 

 

 

56,869

 

Restricted cash

 

 

 

 

 

9,378

 

Deferred tax assets

 

 

47,385

 

 

 

35,488

 

Deferred contract costs, net of current portion

 

 

10,446

 

 

 

8,853

 

Other non-current assets

 

 

8,132

 

 

 

8,499

 

Total assets

 

$

1,051,579

 

 

$

927,102

 

Liabilities, redeemable noncontrolling interest and stockholders’ equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

42,701

 

 

$

32,529

 

Accrued expenses, accrued income taxes and other current liabilities

 

 

45,010

 

 

 

39,193

 

Deferred revenue

 

 

20,808

 

 

 

12,249

 

Operating lease liabilities

 

 

15,480

 

 

 

14,762

 

Total current liabilities

 

 

123,999

 

 

 

98,733

 

Operating lease liabilities

 

 

194,931

 

 

 

51,656

 

Deferred tax liabilities

 

 

30

 

 

 

54

 

Other non–current liabilities

 

 

4,336

 

 

 

5,301

 

Total liabilities

 

 

323,296

 

 

 

155,744

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

32,475

 

 

 

36,749

 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value per share; 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;
98,278,975 and 101,636,649 shares issued and outstanding
   at March 31, 2023 and December 31, 2022, respectively

 

 

98

 

 

 

102

 

Class B common stock, $0.001 par value per share; 100,000,000 shares
   authorized;
15,999,173 and 15,999,173 shares issued and outstanding
   at March 31, 2023 and December 31, 2022, respectively

 

 

16

 

 

 

16

 

Additional paid-in capital

 

 

357,748

 

 

 

413,092

 

Retained earnings

 

 

339,175

 

 

 

323,043

 

Accumulated other comprehensive loss

 

 

(1,229

)

 

 

(1,644

)

Total stockholders’ equity

 

 

695,808

 

 

 

734,609

 

Total liabilities, redeemable noncontrolling interest and stockholders’ equity

 

$

1,051,579

 

 

$

927,102

 

 

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,

 

 

 

2023

 

 

2022

 

Revenue

 

 

 

 

 

 

Marketplace

 

$

167,127

 

 

$

163,289

 

Wholesale

 

 

25,186

 

 

 

90,994

 

Product

 

 

39,650

 

 

 

176,325

 

Total revenue

 

 

231,963

 

 

 

430,608

 

Cost of revenue (1)

 

 

 

 

 

 

Marketplace

 

 

15,533

 

 

 

12,209

 

Wholesale

 

 

22,068

 

 

 

58,182

 

Product

 

 

39,382

 

 

 

178,342

 

Total cost of revenue

 

 

76,983

 

 

 

248,733

 

Gross profit

 

 

154,980

 

 

 

181,875

 

Operating expenses:

 

 

 

 

 

 

Sales and marketing

 

 

75,577

 

 

 

87,581

 

Product, technology, and development

 

 

36,607

 

 

 

30,653

 

General and administrative

 

 

24,919

 

 

 

33,121

 

Depreciation and amortization

 

 

3,818

 

 

 

3,861

 

Total operating expenses

 

 

140,921

 

 

 

155,216

 

Income from operations

 

 

14,059

 

 

 

26,659

 

Other income (expense), net:

 

 

 

 

 

 

Interest income

 

 

3,743

 

 

 

37

 

Other income (expense), net

 

 

595

 

 

 

(156

)

Total other income (expense), net

 

 

4,338

 

 

 

(119

)

Income before income taxes

 

 

18,397

 

 

 

26,540

 

Provision for income taxes

 

 

6,531

 

 

 

7,702

 

Consolidated net income

 

 

11,866

 

 

 

18,838

 

Net loss attributable to redeemable noncontrolling interest

 

 

(4,266

)

 

 

(1,072

)

Net income attributable to CarGurus, Inc.

 

 

16,132

 

 

 

19,910

 

Accretion of redeemable noncontrolling interest to redemption value

 

 

 

 

 

82,000

 

Net income (loss) attributable to common stockholders

 

$

16,132

 

 

$

(62,090

)

Net income (loss) per share attributable to common stockholders: (Note 10)

 

 

 

 

 

 

Basic

 

$

0.14

 

 

$

(0.53

)

Diluted

 

$

0.10

 

 

$

(0.53

)

Weighted-average number of shares of common stock used in
   computing net income (loss) per share attributable to common stockholders:

 

 

 

 

 

 

Basic

 

 

115,358,475

 

 

 

118,031,325

 

Diluted

 

 

115,915,737

 

 

 

118,031,325

 

(1)
Includes depreciation and amortization expense for the three months ended March 31, 2023 and 2022 of $7,758 and $7,324, 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,

 

 

 

2023

 

 

2022

 

Consolidated net income

 

$

11,866

 

 

$

18,838

 

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

415

 

 

 

(489

)

Consolidated comprehensive income

 

 

12,281

 

 

 

18,349

 

Comprehensive loss attributable to redeemable noncontrolling interests

 

 

(4,266

)

 

 

(1,072

)

Comprehensive income attributable to CarGurus, Inc.

 

$

16,547

 

 

$

19,421

 

 

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)

 

 

 

Redeemable
Noncontrolling

 

 

Class A
Common Stock

 

 

Class B
Common Stock

 

 

Additional
Paid–in

 

 

Retained

 

 

Accumulated
Other
Comprehensive

 

 

Total
Stockholders’

 

 

 

Interest

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance as of December 31, 2022

 

$

36,749

 

 

 

101,636,649

 

 

$

102

 

 

 

15,999,173

 

 

$

16

 

 

$

413,092

 

 

$

323,043

 

 

$

(1,644

)

 

 

734,609

 

Net (loss) income

 

 

(4,266

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,132

 

 

 

 

 

 

16,132

 

Stock–based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,049

 

 

 

 

 

 

 

 

 

16,049

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

7,700

 

 

 

 

 

 

 

 

 

 

 

 

19

 

 

 

 

 

 

 

 

 

19

 

Issuance of common stock upon vesting of restricted stock units

 

 

 

 

 

959,935

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of withholding taxes on net share settlements of restricted stock units

 

 

 

 

 

(335,448

)

 

 

 

 

 

 

 

 

 

 

 

(5,652

)

 

 

 

 

 

 

 

 

(5,652

)

Repurchase of common stock

 

 

 

 

 

(3,989,861

)

 

 

(4

)

 

 

 

 

 

 

 

 

(65,760

)

 

 

 

 

 

 

 

 

(65,764

)

Accretion of redeemable noncontrolling interest to redemption value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax distributions to redeemable noncontrolling interest holders

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

415

 

 

 

415

 

Balance as of March 31, 2023

 

$

32,475

 

 

 

98,278,975

 

 

$

98

 

 

 

15,999,173

 

 

$

16

 

 

$

357,748

 

 

$

339,175

 

 

$

(1,229

)

 

$

695,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2021

 

$

162,808

 

 

 

101,773,034

 

 

$

102

 

 

 

15,999,173

 

 

$

16

 

 

$

387,868

 

 

$

129,258

 

 

$

(403

)

 

 

516,841

 

Net (loss) income

 

 

(1,072

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,910

 

 

 

 

 

 

19,910

 

Stock–based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,353

 

 

 

 

 

 

 

 

 

15,353

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

74,163

 

 

 

 

 

 

 

 

 

 

 

 

680

 

 

 

 

 

 

 

 

 

680

 

Issuance of common stock upon vesting of restricted stock units

 

 

 

 

 

451,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of withholding taxes on net share settlements of restricted stock units

 

 

 

 

 

(155,736

)

 

 

 

 

 

 

 

 

 

 

 

(5,430

)

 

 

 

 

 

 

 

 

(5,430

)

Accretion of redeemable noncontrolling interest to redemption value

 

 

82,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82,000

)

 

 

 

 

 

(82,000

)

Tax distributions to redeemable noncontrolling interest holders

 

 

(3,986

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(489

)

 

 

(489

)

Balance as of March 31, 2022

 

$

239,750

 

 

 

102,142,545

 

 

$

102

 

 

 

15,999,173

 

 

$

16

 

 

$

398,471

 

 

$

67,168

 

 

$

(892

)

 

$

464,865

 

 

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,

 

 

 

2023

 

 

2022

 

Operating Activities

 

 

 

 

 

 

Consolidated net income

 

$

11,866

 

 

$

18,838

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

11,576

 

 

 

11,185

 

Gain on sale of property and equipment

 

 

(460

)

 

 

 

Currency (gain) loss on foreign denominated transactions

 

 

(198

)

 

 

84

 

Deferred taxes

 

 

(11,921

)

 

 

(13,091

)

Provision for doubtful accounts

 

 

(300

)

 

 

150

 

Stock-based compe