10-Q 1 carg-20220930.htm 10-Q 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 September 30, 2022

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

 

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 November 3, 2022, the registrant had 102,936,206 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

19

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

 

Controls and Procedures

43

 

 

 

 

PART II.

 

OTHER INFORMATION

44

Item 1.

 

Legal Proceedings

44

Item 1A.

 

Risk Factors

44

Item 5.

 

Other Information

59

Item 6.

 

Exhibits

60

Signatures

61

 

 

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;
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 marketplace 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;
our ability to overcome challenges facing the automotive industry ecosystem, including inventory supply problems, global supply chain challenges, the global semiconductor chip shortage, changes to trade policies and other macroeconomic issues;
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 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 revolving credit facility;
our expected returns on investments; and
the impacts of the COVID-19 pandemic.

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)

 

 

 

At
September 30,
2022

 

 

At
December 31,
2021

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

404,429

 

 

$

231,944

 

Investments

 

 

 

 

 

90,000

 

Accounts receivable, net of allowance for doubtful accounts of $1,122
   and $
420, respectively

 

 

120,059

 

 

 

189,324

 

Inventory

 

 

28,166

 

 

 

19,656

 

Prepaid expenses, prepaid income taxes and other current assets

 

 

29,647

 

 

 

16,430

 

Deferred contract costs

 

 

8,039

 

 

 

9,045

 

Restricted cash

 

 

13,506

 

 

 

6,709

 

Total current assets

 

 

603,846

 

 

 

563,108

 

Property and equipment, net

 

 

36,833

 

 

 

32,210

 

Intangible assets, net

 

 

60,535

 

 

 

83,915

 

Goodwill

 

 

156,216

 

 

 

158,287

 

Operating lease right-of-use assets

 

 

55,793

 

 

 

60,609

 

Restricted cash

 

 

9,376

 

 

 

9,627

 

Deferred tax assets

 

 

44,008

 

 

 

13,378

 

Deferred contract costs, net of current portion

 

 

7,298

 

 

 

5,867

 

Other non-current assets

 

 

8,950

 

 

 

4,573

 

Total assets

 

$

982,855

 

 

$

931,574

 

Liabilities, redeemable noncontrolling interest and stockholders’ equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

67,149

 

 

$

66,153

 

Accrued expenses, accrued income taxes and other current liabilities

 

 

56,970

 

 

 

78,586

 

Deferred revenue

 

 

12,737

 

 

 

12,784

 

Operating lease liabilities

 

 

12,025

 

 

 

13,186

 

Total current liabilities

 

 

148,881

 

 

 

170,709

 

Operating lease liabilities

 

 

52,942

 

 

 

57,519

 

Deferred tax liabilities

 

 

23

 

 

 

58

 

Other non–current liabilities

 

 

30,466

 

 

 

23,639

 

Total liabilities

 

 

232,312

 

 

 

251,925

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

172,612

 

 

 

162,808

 

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;
102,903,347 and 101,773,034 shares issued and outstanding
   at September 30, 2022 and December 31, 2021, respectively

 

 

103

 

 

 

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 September 30, 2022 and December 31, 2021, respectively

 

 

16

 

 

 

16

 

Additional paid-in capital

 

 

418,013

 

 

 

387,868

 

Retained earnings

 

 

163,796

 

 

 

129,258

 

Accumulated other comprehensive loss

 

 

(3,997

)

 

 

(403

)

Total stockholders’ equity

 

 

577,931

 

 

 

516,841

 

Total liabilities, redeemable noncontrolling interest and stockholders’ equity

 

$

982,855

 

 

$

931,574

 

 

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
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

Marketplace

 

$

165,309

 

 

$

159,925

 

 

$

492,524

 

 

$

476,183

 

Wholesale

 

 

47,045

 

 

 

45,215

 

 

 

213,976

 

 

 

112,532

 

Product

 

 

214,100

 

 

 

17,775

 

 

 

661,791

 

 

 

23,316

 

Total revenue

 

 

426,454

 

 

 

222,915

 

 

 

1,368,291

 

 

 

612,031

 

Cost of revenue (1)

 

 

 

 

 

 

 

 

 

 

 

 

Marketplace

 

 

14,956

 

 

 

11,687

 

 

 

40,422

 

 

 

33,986

 

Wholesale

 

 

41,789

 

 

 

28,992

 

 

 

146,489

 

 

 

75,344

 

Product

 

 

218,924

 

 

 

19,354

 

 

 

660,869

 

 

 

25,078

 

Total cost of revenue

 

 

275,669

 

 

 

60,033

 

 

 

847,780

 

 

 

134,408

 

Gross profit

 

 

150,785

 

 

 

162,882

 

 

 

520,511

 

 

 

477,623

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

83,319

 

 

 

66,626

 

 

 

266,505

 

 

 

200,935

 

Product, technology, and development

 

 

30,208

 

 

 

26,539

 

 

 

92,215

 

 

 

79,333

 

General and administrative

 

 

4,760

 

 

 

20,414

 

 

 

71,395

 

 

 

67,095

 

Depreciation and amortization

 

 

3,842

 

 

 

9,227

 

 

 

11,539

 

 

 

25,916

 

Total operating expenses

 

 

122,129

 

 

 

122,806

 

 

 

441,654

 

 

 

373,279

 

Income from operations

 

 

28,656

 

 

 

40,076

 

 

 

78,857

 

 

 

104,344

 

Other income (expense), net

 

 

200

 

 

 

143

 

 

 

(75

)

 

 

426

 

Income before income taxes

 

 

28,856

 

 

 

40,219

 

 

 

78,782

 

 

 

104,770

 

Provision for income taxes

 

 

10,032

 

 

 

10,952

 

 

 

23,059

 

 

 

28,556

 

Consolidated net income

 

 

18,824

 

 

 

29,267

 

 

 

55,723

 

 

 

76,214

 

Net (loss) income attributable to redeemable noncontrolling interest

 

 

(1,576

)

 

 

68

 

 

 

(3,871

)

 

 

(3,398

)

Net income attributable to CarGurus, Inc.

 

 

20,400

 

 

 

29,199

 

 

 

59,594

 

 

 

79,612

 

Accretion of redeemable noncontrolling interest to redemption value

 

 

(86,564

)

 

 

 

 

 

25,056

 

 

 

 

Net income attributable to common stockholders

 

$

106,964

 

 

$

29,199

 

 

$

34,538

 

 

$

79,612

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.90

 

 

$

0.25

 

 

$

0.29

 

 

$

0.68

 

Diluted

 

$

0.14

 

 

$

0.24

 

 

$

0.28

 

 

$

0.66

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

118,683,642

 

 

 

117,412,164

 

 

 

118,370,925

 

 

 

116,955,188

 

Diluted

 

 

132,243,636

 

 

 

120,438,373

 

 

 

122,159,270

 

 

 

119,051,228

 

 

(1)
Includes depreciation and amortization expense for the three months ended September 30, 2022 and 2021 and for the nine months ended September 30, 2022 and 2021 of $7,341, $1,429, $22,063 and $3,571, 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
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Consolidated net income

 

$

18,824

 

 

$

29,267

 

 

$

55,723

 

 

$

76,214

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,519

)

 

 

(738

)

 

 

(3,594

)

 

 

(1,573

)

Consolidated comprehensive income

 

 

17,305

 

 

 

28,529

 

 

 

52,129

 

 

 

74,641

 

Comprehensive (loss) income attributable to redeemable
  noncontrolling interests

 

 

(1,576

)

 

 

68

 

 

 

(3,871

)

 

 

(3,398

)

Comprehensive income attributable to CarGurus, Inc.

 

$

18,881

 

 

$

28,461

 

 

$

56,000

 

 

$

78,039

 

 

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 (Income)

 

 

Equity

 

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 equity awards

 

 

 

 

 

(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

 

Net (loss) income

 

 

(1,223

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,284

 

 

 

 

 

 

19,284

 

Stock–based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,697

 

 

 

 

 

 

 

 

 

14,697

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

23,240

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Issuance of common stock upon vesting of restricted stock units