carg-10q_20190331.htm

 

 

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, 2019

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: (617) 354-0068

 

 

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  

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)

As of May 3, 2019, the registrant had 90,537,641 shares of Class A common stock, $0.001 par value per share, and 20,702,084 shares of Class B common stock, par value $0.001 per share, outstanding.

 

 

 

 


 

Table of Contents

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

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

18

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

 

Controls and Procedures

30

 

PART II.

 

 

OTHER INFORMATION

31

Item 1.

 

Legal Proceedings

31

Item 1A.

 

Risk Factors

31

Item 6.

 

Exhibits

50

Signatures

51

 


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 anticipated growth and growth strategies and our ability to effectively manage that growth;

 

our ability to maintain and build our brand;

 

our ability to continue to expand internationally;

 

our ability to realize benefits from our acquisition of PistonHeads 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;

 

the migration of some of our data-hosting to a different third-party data-hosting facility;

 

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; and

 

the future trading prices of our Class A common stock.

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, joint ventures, 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 statements 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,

2019

 

 

At

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,939

 

 

$

34,887

 

Investments

 

 

108,500

 

 

 

122,800

 

Accounts receivable, net of allowance for doubtful accounts of $223

   and $479, respectively

 

 

15,111

 

 

 

13,614

 

Prepaid expenses and prepaid income taxes

 

 

9,680

 

 

 

10,144

 

Deferred contract costs

 

 

6,591

 

 

 

5,253

 

Other current assets

 

 

8,835

 

 

 

7,410

 

Restricted cash

 

 

750

 

 

 

750

 

Total current assets

 

 

179,406

 

 

 

194,858

 

Property and equipment, net

 

 

26,550

 

 

 

24,269

 

Intangible assets

 

 

4,407

 

 

 

 

Goodwill

 

 

15,852

 

 

 

 

Operating lease right-of-use assets

 

 

50,742

 

 

 

 

Restricted cash

 

 

1,918

 

 

 

1,921

 

Deferred tax assets

 

 

42,714

 

 

 

38,886

 

Deferred contract costs, net of current portion

 

 

8,446

 

 

 

7,252

 

Other long–term assets

 

 

1,892

 

 

 

1,104

 

Total assets

 

$

331,927

 

 

$

268,290

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

35,253

 

 

$

34,345

 

Accrued expenses, accrued income taxes and other current liabilities

 

 

13,793

 

 

 

18,654

 

Deferred revenue

 

 

8,942

 

 

 

8,811

 

Operating lease liabilities

 

 

7,486

 

 

 

1,693

 

Total current liabilities

 

 

65,474

 

 

 

63,503

 

Operating lease liability non-current

 

 

52,956

 

 

 

9,395

 

Deferred tax liabilities

 

 

1,002

 

 

 

 

Other non–current liabilities

 

 

1,486

 

 

 

1,281

 

Total liabilities

 

 

120,918

 

 

 

74,179

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   authorized; 90,370,773 and 89,728,223 shares issued and outstanding

   at March 31, 2019 and December 31, 2018, respectively

 

 

90

 

 

 

90

 

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

   authorized; 20,702,084 and 20,702,084 shares issued and outstanding

   at March 31, 2019 and December 31, 2018, respectively

 

 

21

 

 

 

21

 

Additional paid-in capital

 

 

188,954

 

 

 

184,216

 

Retained earnings

 

 

22,297

 

 

 

9,713

 

Accumulated other comprehensive (loss) income

 

 

(353

)

 

 

71

 

Total stockholders’ equity

 

 

211,009

 

 

 

194,111

 

Total liabilities and stockholders’ equity

 

$

331,927

 

 

$

268,290

 

 

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,

 

 

 

2019

 

 

2018

 

Revenue

 

$

135,270

 

 

$

98,575

 

Cost of revenue(1)

 

 

7,720

 

 

 

5,569

 

Gross profit

 

 

127,550

 

 

 

93,006

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

91,316

 

 

 

68,845

 

Product, technology, and development

 

 

15,972

 

 

 

9,098

 

General and administrative

 

 

11,760

 

 

 

7,871

 

Depreciation and amortization

 

 

1,067

 

 

 

733

 

Total operating expenses

 

 

120,115

 

 

 

86,547

 

Income from operations

 

 

7,435

 

 

 

6,459

 

Other income, net:

 

 

 

 

 

 

 

 

Interest income

 

 

744

 

 

 

291

 

Other income (expense)

 

 

902

 

 

 

(9

)

Total other income, net

 

 

1,646

 

 

 

282

 

Income before income taxes

 

 

9,081

 

 

 

6,741

 

(Benefit from) provision for income taxes

 

 

(3,503

)

 

 

1,246

 

Net income

 

$

12,584

 

 

$

5,495

 

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

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.05

 

Diluted

 

$

0.11

 

 

$

0.05

 

Weighted-average number of shares of common stock used in computing

   net income per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

110,800,037

 

 

 

106,942,799

 

Diluted

 

 

113,406,320

 

 

 

113,341,308

 

 

(1)

Includes depreciation and amortization expense for the three months ended March 31, 2019 and 2018 of $560 and $504, 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,

 

 

 

2019

 

 

2018

 

Net income

 

$

12,584

 

 

$

5,495

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(424

)

 

 

72

 

Comprehensive income

 

$

12,160

 

 

$

5,567

 

 

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

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

Total

Stockholders’

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income (Loss)

 

 

Earnings

 

 

Equity

 

Balance at December 31, 2018

 

89,728,223

 

 

$

90

 

 

 

20,702,084

 

 

$

21

 

 

$

184,216

 

 

$

71

 

 

$

9,713

 

 

$

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

 

 

$

(353

)

 

$

22,297

 

 

$

211,009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A

Common Stock

 

 

Class B

Common Stock

 

 

Additional

Paid–in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2017

 

77,884,754

 

 

$

78

 

 

 

28,226,104

 

 

$

28

 

 

$

185,190

 

 

$

228

 

 

$

(58,499

)

 

$

127,025

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,495

 

 

 

5,495

 

Stock–based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

3,967

 

 

 

 

 

 

 

 

 

3,967

 

Issuance of common stock upon exercise

   of stock options

 

6,574

 

 

 

 

 

 

10,690

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

80

 

Cumulative adjustment from adoption of

   revenue recognition model

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,042

 

 

 

3,042

 

Conversion of common stock

 

7,534,710

 

 

 

7

 

 

 

(7,534,710

)

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72

 

 

 

 

 

 

72

 

Balance at March 31, 2018

 

85,426,038

 

 

$

85

 

 

 

20,702,084

 

 

$

21

 

 

$

189,237

 

 

$

300

 

 

$

(49,962

)

 

$

139,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2019

 

 

2018

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

12,584

 

 

$

5,495

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,627

 

 

 

1,237

 

Unrealized currency (gain) loss on foreign denominated transactions

 

 

(833

)

 

 

53

 

Deferred taxes

 

 

(3,692

)

 

 

(1,317

)

Provision for doubtful accounts

 

 

15

 

 

 

377

 

Stock-based compensation expense

 

 

7,686

 

 

 

3,818

 

Amortization of deferred contract costs

 

 

1,830

 

 

 

513

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,519

)

 

 

133

 

Prepaid expenses, prepaid income taxes, and other assets

 

 

(1,760

)

 

 

(507

)

Deferred contract costs

 

 

(4,376

)

 

 

(3,176

)

Accounts payable

 

 

3,225

 

 

 

649

 

Accrued expenses, accrued income taxes, and other current liabilities

 

 

(4,009

)

 

 

(3,651

)

Deferred revenue

 

 

132

 

 

 

2,811

 

Lease obligations

 

 

(1,380

)

 

 

(215

)

Other non-current liabilities

 

 

155

 

 

 

154

 

Net cash provided by operating activities

 

 

9,685

 

 

 

6,374

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,700

)

 

 

(434

)

Capitalization of website development costs

 

 

(811

)

 

 

(581

)

Cash paid for acquisition

 

 

(19,139

)

 

 

 

Investments in certificates of deposit

 

 

(25,700

)

 

 

(60,000

)

Maturities of certificates of deposit

 

 

40,000

 

 

 

30,000

 

Net cash used in investing activities

 

 

(11,350

)

 

 

(31,015

)

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

697

 

 

 

80

 

Financing cash flows from finance leases

 

 

(6

)

 

 

 

Payment of initial public offering costs

 

 

 

 

 

(1,142

)

Payment of withholding taxes on net share settlements of equity awards

 

 

(3,954

)

 

 

 

Net cash used in financing activities

 

 

(3,263

)

 

 

(1,062

)

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

 

 

(23

)

 

 

24

 

Net decrease in cash, cash equivalents, and restricted cash

 

 

(4,951

)

 

 

(25,679

)

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

 

 

37,558

 

 

 

89,552

 

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

 

$

32,607

 

 

$

63,873

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

14

 

 

$

5

 

Cash paid for interest

 

$

1

 

 

$

5

 

Unpaid purchases of property and equipment

 

$

2,112

 

 

$

188

 

Capitalized stock-based compensation expense in website development costs

 

$

309

 

 

$

149

 

Cash paid for operating lease liabilities

 

$

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 and has also launched online marketplaces in Canada, the United Kingdom, Germany, Italy, and Spain. The Company has subsidiaries in the United States, Canada, Ireland, and the United Kingdom.

                    

The Company is subject to a number of risks and uncertainties common to companies in its and similar industries and stages of development including, but not limited to, rapid technological changes, competition from substitute products and services from larger companies, management of international activities, protection of proprietary rights, patent litigation, and dependence on key individuals. 

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements (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, 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2019 (the “2018 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 generally accepted accounting principles in the United States (“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, 2019 and December 31, 2018, results of operations, comprehensive income, changes in shareholders’ equity and cash flows for the three months ended March 31, 2019 and 2018. These interim period results are not necessarily indicative of the results to be expected for any other interim period or the full year.

In the results of operations for the three months ended March 31, 2019 and 2018, the Company has separately presented interest income from other income, net due to the increase in amount during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.  Additionally, the results of operations and statement of cash flows for the three months ended March 31, 2018, were adjusted due to the impact of the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”).

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, 2019, there have been no material changes in the Company's significant accounting policies from those that were disclosed in the 2018 Annual Report, other than those resulting from the adoption of ASC 842, which is described below.

Principles of Consolidation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of CarGurus, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company prepares its Unaudited Condensed Consolidated Financial Statements and related disclosures in conformity with GAAP.

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.

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 and revenue reserve, the valuation of goodwill and intangible assets, the 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 and investments with multiple financial institutions, its deposits, at times, may exceed federally 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.

For the three months ended March 31, 2019 and the year ended December 31, 2018, no individual customer accounted for more than 10% of total revenue.

As of March 31, 2019, one customer accounted for 13% of net accounts receivable. As of December 31, 2018, two customers accounted for 21% and 14% of net accounts receivable, respectively. No other individual customer accounted for more than 10% of net accounts receivable at March 31, 2019 or December 31, 2018.

Included in net accounts receivable at March 31, 2019 and December 31, 2018, is $7,329 and $5,815, respectively, of unbilled accounts receivable related to advertising customers billed within a quarter subsequent to services rendered.

Revenue Recognition

The following table summarizes revenue from contracts with customers by revenue source for the three months ended March 31, 2019 and 2018.

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Revenue by Revenue Stream

 

 

 

 

 

 

 

 

 

 

Marketplace subscription revenue

 

$

 

120,843

 

 

$

 

89,159

 

Advertising and other revenue

 

 

 

14,427

 

 

 

 

9,416

 

Total

 

$

 

135,270

 

 

$

 

98,575

 

7


 

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.

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. However, the Company has applied the practical expedient available under Topic 606 to not disclose the amount of transaction price allocated to unsatisfied performance obligations when any such performance obligation was part of a contract having an original expected duration of one year or less.

The Company does not have future obligations associated with marketplace revenue subscriptions or advertising and other services that extend beyond one year. For performance obligations not satisfied as of March 31, 2019, 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, 2019. The remaining duration is less than one year.

Revenue recognized during the three months ended March 31, 2019 from amounts included in deferred revenue at the beginning of the period was approximately $8,792.

Recent Accounting Pronouncements Adopted

Lease Accounting

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (as amended, “ASC 842”). ASC 842 requires a lessee to recognize most leases on the Unaudited Condensed Consolidated Balance Sheet but recognize expenses on the Unaudited Condensed Consolidated Income Statement in a manner similar to current practice. The update states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying assets for the lease term. The Company adopted ASC 842 as of January 1, 2019, using the additional transition method offered through ASU No. 2018-11. This approach provides a method for recording existing leases at the adoption date and recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Lease Overview

The Company’s operating lease obligations consist of various leases for office space in: Cambridge, Massachusetts; Detroit, Michigan; Los Angeles, California; Dublin, Ireland; and London, United Kingdom.  The Detroit, Los Angeles and London leases are immaterial to the Company.

On June 19, 2018, the Company entered into an operating lease in Cambridge, Massachusetts at 121 First St. for the lease of 48,393 square feet of office space with a non-cancellable lease term through 2033 with an option to extend the lease term for two additional periods of five years each. The Company subleases the fifth floor and records the sublease income in other income, net within the Unaudited Condensed Consolidated Income Statement.  The sublease income is immaterial.

On March 11, 2016, the Company entered into an operating lease in Cambridge, Massachusetts at 55 Cambridge Parkway for the lease of 51,923 square feet of office space with a non-cancellable lease term through 2024 with an option to extend the lease term for one additional period of five years.

On October 8, 2014, the Company entered into an operating lease in Cambridge, Massachusetts at 2 Canal Park for the lease of 48,059 square feet of office space with a non-cancellable lease term through 2022 with an option to extend the lease term for one additional period of five years.

Each of the three leases described above provides for leasehold improvement incentives and annual rent increases through the term of the lease.  Each of the three leases above also has an associated letter of credit, which is recorded as restricted cash within the Unaudited Condensed Consolidated Balance Sheet. At March 31, 2019 and December 31, 2018, restricted cash was $2,668 and $2,671, respectively, and primarily related to cash held at a financial institution in an interest‑bearing cash account as collateral for the three letters of credit related to the contractual provisions for the Company’s building lease security deposits. At March 31, 2019 and December 31, 2018, portions of restricted cash were classified as a short-term asset and long‑term asset. Additionally, 121 First St. has an associated security deposit, which was recorded in other assets, net within the Unaudited Condensed Consolidated Balance Sheet.  

On August 12, 2013, the Company entered into an operating lease in Dublin, Ireland at Styne House, Upper Hatch St. for the lease of 13,345 square feet of office space with a non-cancellable term through 2023. The lease provided for a rent increase at the end of year five.

The Company’s financing lease obligations consists of a lease for office equipment and is immaterial.

8


 

Prior to adoption of ASC 842

The Company categorized leases at their inception as either operating or capital leases. On certain lease arrangements, the Company may have received rent holidays or other incentives. The Company recognized lease costs on a straight‑line basis once it achieved control of the space, without regard to deferred payment terms, such as rent holidays, that deferred the commencement date of required payments or escalating payment amounts. The Company recorded the difference between required lease payments and rent expense as deferred rent. Additionally, incentives received were treated as a reduction of costs over the term of the agreement, as they were considered an inseparable part of the lease agreement.

Post adoption of ASC 842

Upon adoption, the Company elected the transition relief package, permitted within the standard, pursuant to which the Company did not reassess the classification of existing leases, whether any expired or existing contracts contain a lease, and whether existing leases have any initial direct costs. The Company also elected the practical expedient on not separating lease components from non-lease components for all leases.  

The Company reviews all material contacts for embedded leases to determine if they have a right-of-use asset.  

The Company recognizes rent expense on a straight-line basis over the lease period. The depreciable life of assets and leasehold improvement are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company also made an accounting policy election to not recognize a lease liability or right-of-use asset on its Unaudited Condensed Consolidated Balance Sheet for leases with an initial term of twelve months or less, and instead recognize lease payments on the Unaudited Condensed Consolidated Income Statement on a straight-line basis over the lease term and variable lease payments that do not depend on an index or rate as expense in the period in which the achievement of the specified target that triggers the variable lease payments becomes probable.

Adoption of the new standard resulted in the recording of net lease assets and lease liabilities of approximately $52,334 and $63,280, respectively, as of January 1, 2019. The standard did not materially impact the Unaudited Condensed Consolidated Statement of Cash Flows and had no impact on the Unaudited Condensed Consolidated Income Statement.

During the three months ended March 31, 2019 and 2018, the Company recognized $2,448 and $1,672, respectively, of rent expense. The Company allocates lease costs across all departments based on headcount in the respective location.

As of March 31, 2019, the weighted average remaining lease term was 9.9 years and the weighted average discount rate was 5.9%. As most of the Company’s leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The Company estimated the incremental borrowing rate based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term. The Company has no historical debt transactions and a collateralized rate is estimated based on a group of peer companies. The Company uses the incremental borrowing rate on January 1, 2019 for leases that commenced prior to that date.

Future minimum lease payments as of March 31, 2019 are as follows:

 

Year Ending December 31,

 

Operating

Lease

Commitments

 

2019 (excluding the three months ended March 31, 2019)

 

$

7,351

 

2020

 

 

11,020

 

2021

 

 

11,169

 

2022

 

 

10,862

 

2023

 

 

5,672

 

Thereafter

 

 

37,645

 

Total lease payments

 

 

83,719

 

Less imputed interest

 

 

(23,277

)

Total

 

$

60,442

 

 

Options to extend lease terms are not included in the chart above as they are not reasonably certain of being exercised.

9


 

Stock-Based Compensation

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) (“ASU 2018-07”).  ASU 2018-07 expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. The amendments in this update state that an entity should apply the requirements of Topic 718 to non-employee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.  The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company has assessed the impact of this guidance on its Unaudited Condensed Consolidated Financial Statements and does not deem it to be material. The Company adopted the guidance on January 1, 2019.

Internal-Use Software

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard requires companies to expense the capitalized implementation costs over the term of the hosting arrangement. Amounts expensed would be presented through operating expense, rather than depreciation or amortization. Accounting for the service component of a hosting arrangement remains unchanged. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted and an entity can elect to apply the new guidance on a prospective or retrospective basis. The Company adopted this standard effective January 1, 2019 and applied the guidance using a prospective transition method for each period presented. In Q1 2019, the Company launched an initiative designed to evaluate and enhance its enterprise applications. As a result, $876 of implementation costs associated with service contracts have been classified in other long-term assets in the Unaudited Condensed Balance Sheet as of March 31, 2019. The implementation costs relate to assets that had not been placed in service as of March 31, 2019.

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.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance simplifies the accounting for goodwill impairment by eliminating Step 2 of the goodwill impairment test. Under current guidance, Step 2 of the goodwill impairment test requires 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 is recognized as goodwill impairment. Under the new standard, goodwill impairment is recognized based on Step 1 of the current guidance, which calculates the carrying value in excess of the reporting unit’s fair value. The new standard is effective beginning in January 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 8, 2019, the Company, through CarGurus UK Limited, a company incorporated in England & Wales and a wholly owned subsidiary of CarGurus Ireland Limited (a company incorporated in Ireland and a wholly owned subsidiary of the Company) (the “Purchaser”), completed its acquisition of PistonHeads, a UK-based automotive website (“PistonHeads”), by acquiring the entire issued share capital of Haymarket New4 Ltd. (a company incorporated in England & Wales and now known as PistonHeads Holdco Limited, “NewCo”) from Haymarket Media Group Ltd., a company incorporated in England & Wales (the “Seller”), on the terms and subject to the conditions set forth in the Put and Call Option Agreement dated December 3, 2018, by and among the Purchaser, the Seller and Haymarket Group Limited, a company incorporated in England & Wales. The PistonHeads website hosts used car classifieds, articles and forums.  The Purchaser paid an aggregate of 15,000 GBP, or approximately $19,139, to acquire the business, inclusive of 1,000 GBP, or approximately $1,276, being held in escrow to secure post-closing claims, subject to the terms and conditions of an escrow agreement between the Purchaser and the Seller. Upon completion of the acquisition, NewCo became a wholly owned subsidiary of the Purchaser. The business combination is intended to expand the Company’s consumer audience in the UK. As of March 31, 2019, the Company has incurred total acquisition-related costs of $649 related to the transaction.

10


 

 

The acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total purchase price is allocated to the intangible assets and goodwill. Acquired tangible assets and assumed liabilities are immaterial. The following table presents the preliminary purchase price allocation recorded in the Company's Unaudited Condensed Consolidated Balance Sheet as of the acquisition date:

 

 

 

Estimated Fair Value

at Date of Acquisition

 

Intangible assets (1)

 

$

4,466

 

Goodwill (2)

 

 

15,521

 

Deferred tax liabilities (3)

 

 

(848

)

Total purchase price

 

$

19,139

 

 

 

(1)

Identifiable definite-lived intangible assets were comprised of brand and customer relationships of $3,445 and $1,021, respectively, with estimated useful lives of 11 years and 3 years, respectively, which will be amortized on a straight-line basis over their estimated useful lives.

 

 

(2)

The goodwill represents the excess value of the purchase price over intangible assets acquired. The goodwill in this transaction is primarily attributable to future customer growth in the UK market as a result of acquiring an established platform and applying the Company’s technology to help improve the website experience on such platform; thus, helping to drive additional traffic to the PistonHeads website in the future. All goodwill is assigned to the International segment. The acquisition of PistonHeads was a stock acquisition and goodwill is not deductible for tax purposes.

 

 

(3)

The deferred tax liability corresponds to the acquired intangible assets which do not have tax basis. As a result of the deferred tax liability, an adjustment was recorded to goodwill to account for the tax effect of the deferred tax liability.

 

Actual and pro forma results for these acquisitions have not been presented as the financial impact to the Company’s Unaudited Condensed Consolidated Financial Statements is not material.

 

4. Fair Value of Financial Instruments Including Cash, Cash Equivalents and Investments

 

 

The following tables present, for each of the fair value levels, the Company’s assets that are measured at fair value on a recurring basis at March 31, 2019 and at December 31, 2018:

 

 

 

At March 31, 2019

 

 

 

Quoted Prices

in Active Markets

for Identical Assets

(Level 1 Inputs)

 

 

Significant Other

Observable Inputs

(Level 2 Inputs)

 

 

Significant

Unobservable Inputs

(Level 3 Inputs)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

19

 

 

$

 

 

$

 

 

$

19

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

108,500

 

 

 

 

 

 

108,500

 

Total

 

$

19

 

 

$

108,500

 

 

$

 

 

$

108,519

 

 

 

 

At December 31, 2018

 

 

 

Quoted Prices

in Active Markets

for Identical Assets

(Level 1 Inputs)

 

 

Significant Other

Observable Inputs

(Level 2 Inputs)

 

 

Significant

Unobservable Inputs

(Level 3 Inputs)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

24

 

 

$

 

 

$

 

 

$

24

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

 

 

 

122,800

 

 

 

 

 

 

122,800

 

Total

 

$

24

 

 

$

122,800

 

 

$

 

 

$

122,824

 

 

11


 

Certificates of deposit at March 31, 2019 and December 31, 2018 had maturity dates of one year or less.

 

The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. There were no liabilities that were measured at fair value for the three months ended March 31, 2019. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets or liabilities, and did not elect the fair value option for any financial assets and liabilities transacted in the three months ended March 31, 2019 or the year ended December 31, 2018.

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.

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 following is a summary of cash, cash equivalents, and investments as of March 31, 2019 and December 31, 2018.

 

 

 

At March 31, 2019

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents due in 90 days or less

 

$

29,939

 

 

$

 

 

$

 

 

$

29,939

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit due in one year or less

 

 

108,500

 

 

 

 

 

 

 

 

 

108,500

 

Total cash, cash equivalents, and investments

 

$

138,439

 

 

$

 

 

$

 

 

$

138,439

 

 

 

 

At December 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents due in 90 days or less

 

$

34,887

 

 

$

 

 

$

 

 

$

34,887

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit due in one year or less

 

 

122,800

 

 

 

 

 

 

 

 

 

122,800

 

Total cash, cash equivalents, and investments

 

$

157,687

 

 

$