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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

 

 

 

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

 

For the quarterly period ended June 30, 2014

 

 

 

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

 

Commission File Number: 001-36449

 


TRUECAR, INC.

(Exact name of registrant as specified in its charter)


 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)



04‑3807511
(I.R.S. Employer
Identification Number)

 

120 Broadway, Suite 200

Santa Monica, California 90401

(800) 200‑2000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer

Accelerated filer

Non‑accelerated filer
(do not check if a
smaller reporting company)

Smaller reporting company

 

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 August 8, 2014, 76,854,837 shares of the registrant’s common stock were outstanding.

 

 

 


 

Table of Contents

TRUECAR, INC.

INDEX

 

 

 

 

 

 

Page

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013

4

 

 

 

 

Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013

5

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2014

6

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

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

35

 

 

 

 

PART II -  OTHER INFORMATION

 

 

 

 

Item 1. 

Legal Proceedings

36

 

 

 

Item 1A. 

Risk Factors

36

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 5. 

Other Information

55 

 

 

 

Item 6. 

Exhibits

56

 

 

 

 

Signatures 

58

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions.  Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

·

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

·

our ability to anticipate market needs and develop new and enhanced products and services to meet those needs, and our ability to successfully monetize them; 

·

maintaining and expanding our customer base; 

·

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

·

our ability to drive adoption of our services; 

·

our failure to anticipate or adapt to future changes in our industry; 

·

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; and 

·

our liquidity and working capital requirements; 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events.  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 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 Quarterly Report on Form 10-Q.  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. Nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in the forward-looking statements contained in this Quarterly Report on Form 10-Q. 

The forward-looking statements made in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

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TRUECAR, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

111,845 

 

$

43,819 

 

Restricted cash — current

 

 

2,000 

 

 

2,000 

 

Accounts receivable, net of allowances of $1,490 and $2,184 at June 30, 2014 and December 31, 2013, respectively (includes related party receivables of $812 and $431 at June 30, 2014 and December 31, 2013, respectively)

 

 

24,829 

 

 

18,803 

 

Notes receivable from related parties — current

 

 

296 

 

 

178 

 

Prepaid expenses (includes related party prepaid expenses of $1,864 at June 30, 2014)

 

 

6,866 

 

 

3,550 

 

Other current assets (includes related party receivables of $363 at December 31, 2013)

 

 

860 

 

 

1,226 

 

Total current assets

 

 

146,696 

 

 

69,576 

 

Property and equipment, net

 

 

17,104 

 

 

15,238 

 

Goodwill

 

 

53,270 

 

 

53,270 

 

Intangible assets, net

 

 

30,005 

 

 

31,834 

 

Notes receivable from related parties

 

 

 —

 

 

2,682 

 

Other assets

 

 

518 

 

 

2,150 

 

Total assets

 

$

247,593 

 

$

174,750 

 

 

 

 

 

 

 

 

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable (includes related party payables of $1,307 and $1,161 at June 30, 2014 and December 31, 2013, respectively)

 

$

9,229 

 

$

9,804 

 

Accrued employee expenses

 

 

10,028 

 

 

10,129 

 

Revolving line of credit

 

 

 —

 

 

4,764 

 

Other accrued expenses (includes related party payables of $150 and $259 at June 30, 2014 and December 31, 2013, respectively)

 

 

10,989 

 

 

6,242 

 

Total current liabilities

 

 

30,246 

 

 

30,939 

 

Deferred tax liabilities

 

 

2,104 

 

 

1,791 

 

Other liabilities

 

 

521 

 

 

616 

 

Total liabilities

 

 

32,871 

 

 

33,346 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Series A convertible preferred stock — $0.0001 par value; 4,500,000 shares authorized at December 31, 2013; no shares and 2,857,143 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

 

 —

 

 

29,224 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock — $0.0001 par value; 20,000,000 shares authorized at June 30, 2014; no shares issued and outstanding at June 30, 2014 and December 31, 2013

 

 

 —

 

 

 —

 

Common stock — $0.0001 par value; 1,000,000,000 shares authorized at June 30, 2014 and 150,000,000 shares authorized at December 31, 2013; 76,814,334 and 59,955,343 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

 

 

 

 

Additional paid-in capital

 

 

402,229 

 

 

275,803 

 

Notes receivable from related parties

 

 

 —

 

 

(1,069)

 

Accumulated deficit

 

 

(187,515)

 

 

(162,560)

 

Total stockholders’ equity

 

 

214,722 

 

 

112,180 

 

Total liabilities, convertible preferred stock and stockholders’ equity

 

$

247,593 

 

$

174,750 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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TRUECAR, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Revenues

 

$

50,497 

 

$

31,223 

 

$

94,427 

 

$

56,266 

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (exclusive of depreciation and amortization presented separately below; includes related party expenses of $634 for the three months ended June 30, 2013, and $405 and $1,162 for six months ended June 30, 2014 and 2013, respectively)

 

 

4,137 

 

 

3,673 

 

 

7,858 

 

 

7,435 

 

Sales and marketing (includes related party expenses of $6,789 and $2,040 for the three months ended June 30, 2014 and 2013, and $11,034 and $3,447 for six months ended June 30, 2014 and 2013, respectively)

 

 

33,292 

 

 

15,626 

 

 

61,059 

 

 

29,409 

 

Technology and development

 

 

8,513 

 

 

5,618 

 

 

15,843 

 

 

11,422 

 

General and administrative

 

 

16,439 

 

 

6,629 

 

 

27,955 

 

 

12,942 

 

Depreciation and amortization

 

 

2,972 

 

 

2,868 

 

 

6,086 

 

 

5,934 

 

Total costs and operating expenses

 

 

65,353 

 

 

34,414 

 

 

118,801 

 

 

67,142 

 

Loss from operations

 

 

(14,856)

 

 

(3,191)

 

 

(24,374)

 

 

(10,876)

 

Interest income

 

 

10 

 

 

29 

 

 

27 

 

 

61 

 

Interest expense

 

 

(131)

 

 

(510)

 

 

(301)

 

 

(1,751)

 

Other income

 

 

10 

 

 

 

 

10 

 

 

14 

 

Loss before provision for income taxes

 

 

(14,967)

 

 

(3,666)

 

 

(24,638)

 

 

(12,552)

 

Provision for income taxes

 

 

67 

 

 

136 

 

 

317 

 

 

273 

 

Net loss

 

$

(15,034)

 

$

(3,802)

 

$

(24,955)

 

$

(12,825)

 

Net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.22)

 

$

(0.07)

 

$

(0.39)

 

$

(0.22)

 

Weighted average common shares outstanding, basic and diluted

 

 

67,784 

 

 

58,313 

 

 

63,962 

 

 

57,231 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on marketable securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Comprehensive loss

 

$

(15,034)

 

$

(3,802)

 

$

(24,955)

 

$

(12,825)

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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TRUECAR, INC. 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands except share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

    

 

 

    

Notes

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

from

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

Related

 

Accumulated

 

Stockholders’

 

 

 

Shares

    

Amount

 

APIC

 

Parties

 

Deficit

 

Equity

 

Balance at December 31, 2013

 

59,955,343 

 

$

 

$

275,803 

 

$

(1,069)

 

$

(162,560)

 

$

112,180 

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(24,955)

 

 

(24,955)

 

Issuance of common stock in connection with initial public offering, net of underwriting discounts and offering costs

 

8,941,250 

 

 

 

 

69,150 

 

 

 —

 

 

 —

 

 

69,151 

 

Conversion of Series A convertible preferred stock in connection with initial public offering

 

2,857,143 

 

 

 —

 

 

29,224 

 

 

 —

 

 

 —

 

 

29,224 

 

Stock-based compensation

 

 —

 

 

 —

 

 

12,154 

 

 

 —

 

 

 —

 

 

12,154 

 

Issuance of warrants in connection with marketing agreements

 

 —

 

 

 —

 

 

4,668 

 

 

 —

 

 

 —

 

 

4,668 

 

Exercise of warrants to purchase common stock

 

3,319,540 

 

 

 

 

9,460 

 

 

 —

 

 

 —

 

 

9,461 

 

Exercise of options to purchase common stock

 

1,741,058 

 

 

 —

 

 

1,760 

 

 

 —

 

 

 —

 

 

1,760 

 

Imputed interest on notes receivable

 

 —

 

 

 —

 

 

10 

 

 

 —

 

 

 —

 

 

10 

 

Interest income on notes receivable

 

 —

 

 

 —

 

 

 —

 

 

(3)

 

 

 —

 

 

(3)

 

Repayment of notes receivable

 

 —

 

 

 —

 

 

 —

 

 

1,072 

 

 

 —

 

 

1,072 

 

Balance at June 30, 2014

 

76,814,334 

 

$

 

$

402,229 

 

$

 —

 

$

(187,515)

 

$

214,722 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

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TRUECAR, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended

 

 

 

June 30,

 

 

 

2014

    

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(24,955)

 

$

(12,825)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,875 

 

 

5,609 

 

Deferred income taxes

 

 

317 

 

 

271 

 

Bad debt expense and other reserves

 

 

109 

 

 

153 

 

Stock-based compensation

 

 

11,540 

 

 

3,616 

 

Increase in fair value of contingent consideration liability

 

 

 —

 

 

48 

 

Common stock warrant expense

 

 

4,668 

 

 

1,262 

 

Imputed interest on notes receivable

 

 

10 

 

 

62 

 

Interest income on notes receivable

 

 

(18)

 

 

(100)

 

Interest expense on note payable

 

 

 —

 

 

805 

 

Accretion of beneficial conversion feature on convertible notes payable and discount on revolving line of credit

 

 

236 

 

 

945 

 

Loss on disposal of fixed assets

 

 

211 

 

 

325 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,183)

 

 

(4,317)

 

Prepaid expenses

 

 

(3,319)

 

 

(2,953)

 

Other current assets

 

 

457 

 

 

(203)

 

Other assets

 

 

(62)

 

 

(30)

 

Accounts payable

 

 

491 

 

 

(1,315)

 

Accrued employee expenses

 

 

(410)

 

 

2,521 

 

Other accrued expenses

 

 

4,700 

 

 

178 

 

Other liabilities

 

 

(97)

 

 

(175)

 

Net cash used in operating activities

 

 

(6,430)

 

 

(6,123)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Change in restricted cash

 

 

 —

 

 

2,500 

 

Purchase of property and equipment

 

 

(4,790)

 

 

(3,320)

 

Purchase of intangible assets

 

 

(350)

 

 

 —

 

Notes receivable from related parties

 

 

(60)

 

 

 —

 

Repayment of notes receivable from related parties

 

 

3,761 

 

 

 —

 

Net cash used in investing activities

 

 

(1,439)

 

 

(820)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from initial public offering, net of underwriting discounts

 

 

69,674 

 

 

 —

 

Repayments under credit agreement

 

 

(5,000)

 

 

 —

 

Repurchase of vested common stock option awards

 

 

 —

 

 

(2,000)

 

Proceeds from exercise of common stock options

 

 

1,760 

 

 

185 

 

Exercise of warrants

 

 

9,461 

 

 

 —

 

Net cash provided by (used in) financing activities

 

 

75,895 

 

 

(1,815)

 

Net increase (decrease) in cash and cash equivalents

 

 

68,026 

 

 

(8,758)

 

Cash and cash equivalents at beginning of period

 

 

43,819 

 

 

22,062 

 

Cash and cash equivalents at end of period

 

$

111,845 

 

$

13,304 

 

Supplemental disclosures of non-cash activities

 

 

 

 

 

 

 

Stock-based compensation capitalized for software development

 

$

614 

 

$

251 

 

Capitalized assets included in accounts payable, accrued employee expenses and other accrued expenses

 

$

370 

 

$

53 

 

Conversion of convertible note payable and accrued interest to common stock

 

$

 —

 

$

25,447 

 

 

See accompanying notes to condensed consolidated financial statements.

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TRUECAR, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Organization and Nature of Business

TrueCar, Inc. is an Internet‑based information, technology, and communication services company. Hereinafter, TrueCar, Inc. and its wholly owned subsidiaries TrueCar.com, Inc. and ALG, Inc. are collectively referred to as “TrueCar” or the “Company”; TrueCar.com, Inc. is referred to as “TrueCar.com” and ALG, Inc. is referred to as “ALG”.

TrueCar has established an intelligent, data‑driven online platform operating on a common technology infrastructure, powered by proprietary data and analytics. TrueCar operates its platform on the TrueCar.com website and TrueCar mobile applications. In addition, TrueCar customizes and operates its platform for affinity group marketing partners (“Affinity Group Marketing Partners”). An affinity group is comprised of a network of members or employees that provide discounts to its members. The TrueCar.com website and the car‑buying websites TrueCar operates for its Affinity Group Marketing Partners (the “Auto Buying Programs”) allow users to obtain market‑based pricing data on new and used cars, and to connect with TrueCar’s network of Certified Dealers.

Initial Public Offering

In May 2014, the Company completed its initial public offering (“IPO”) in which the Company sold an aggregate of 8,941,250 shares of its common stock, including 1,166,250 shares sold pursuant to the exercise by the underwriters of their option to purchase such shares, at a public offering price of $9.00 per share.  The Company received net proceeds of $69.2 million, after deducting underwriting discounts and commissions and offering expenses payable by the Company, from sales of its shares in the IPO. Immediately prior to the completion of the IPO, all shares of the then-outstanding Series A convertible preferred stock automatically converted into 2,857,143 shares of common stock.

2.Summary of Significant Accounting Policies

Basis of Presentation

The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10–Q and Article 10-01 of Regulation S-X. Accordingly, some information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2013 and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods presented.

The condensed consolidated balance sheet at December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s prospectus filed with the SEC on May 16, 2014 pursuant to Rule 424(b) of the Securities Act of 1933, as amended. 

Reclassification

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications were not material to the financial statements.

Reverse Stock Split

The Company’s board of directors and stockholders approved a 2‑for‑3 reverse split of its common stock and its Series A convertible preferred stock, or preferred stock, which was effected on May 2, 2014. All share data and per share

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data, and related information presented in the consolidated financial statements and accompanying notes have been retroactively adjusted, where applicable, to reflect the reverse stock split of its common stock and preferred stock.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Assets and liabilities which are subject to judgment and use of estimates include sales allowances and allowances for doubtful accounts, the fair value of assets and liabilities assumed in business combinations, the recoverability of goodwill and long‑lived assets, valuation allowances with respect to deferred tax assets, useful lives associated with property and equipment and intangible assets, contingencies, and the valuation and assumptions underlying stock‑based compensation and other equity instruments. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Segments

The Company has one operating segment. The Company’s Chief Operating Decision Makers (“CODM”), the Chief Executive Officer, the President and the Chief Financial Officer, manage the Company’s operations based on consolidated financial information for purposes of evaluating financial performance and allocating resources.

All of the Company’s principal operations, decision‑making functions and assets are located in the United States.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In June 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace all existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.

In April 2014, the FASB issued an accounting standards update clarifying the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This standards update is effective for fiscal years beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of this guidance is not expected to have any impact on the Company’s consolidated financial statements.

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3.Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on the following three levels of inputs, of which the first two are considered observable and the last is considered unobservable:

·

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

·

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·

Level 3 — Unobservable inputs that are supported by little or no market activity, which requires the Company to develop its own assumptions.

The carrying amounts of cash equivalents, restricted cash, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 by level within the fair value hierarchy. Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2014

 

At December 31, 2013

 

 

    

 

 

    

 

 

    

 

 

    

Total Fair

    

 

 

    

 

 

    

 

 

    

Total Fair

 

 

 

Level 1

 

Level 2

 

Level 3

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Value

 

Cash equivalents

 

$

98,929 

 

$

 —

 

$

 —

 

$

98,929 

 

$

7,726 

 

$

 —

 

$

 —

 

$

7,726 

 

Total Assets

 

$

98,929 

 

$

 —

 

$

 —

 

$

98,929 

 

$

7,726 

 

$

 —

 

$

 —

 

$

7,726 

 

 

 

 

4.Property and Equipment, net

Property and equipment consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

 

2014

 

2013

 

Computer equipment and internally developed software

 

$

26,757 

 

$

22,517 

 

Furniture and fixtures

 

 

2,048 

 

 

1,654 

 

Leasehold improvements

 

 

3,050 

 

 

2,921 

 

 

 

 

31,855 

 

 

27,092 

 

Less: Accumulated depreciation

 

 

(14,751)

 

 

(11,854)

 

Total property and equipment, net

 

$

17,104 

 

$

15,238 

 

 

Total depreciation and amortization expense of property and equipment was $1.9 million and $1.7 million for the three months ended June 30, 2014 and 2013, respectively. Total depreciation and amortization expense of property and equipment was $3.9 million and $3.4 million for the six months ended June 30, 2014 and 2013, respectively.

Amortization of internal use capitalized software development costs was $1.2 million and $1.0 million for the three months ended June 30, 2014 and 2013, respectively.  Amortization of internal use capitalized software development costs

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was $2.3 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively. 

5.Intangible Assets

Intangible assets consisted of the following at June 30, 2014 and December 31, 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

At June 30, 2014

 

 

 

Gross Carrying

    

Accumulated

    

Net Carrying

 

 

 

Value

 

amortization

 

Value

 

Acquired technology and domain name

 

$

31,075 

 

$

(9,260)

 

$

21,815 

 

Customer relationships

 

 

6,300 

 

 

(2,112)

 

 

4,188 

 

Tradenames

 

 

4,900 

 

 

(898)

 

 

4,002 

 

Total

 

$

42,275 

 

$

(12,270)

 

$

30,005 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013

 

 

    

Gross Carrying

    

Accumulated

    

Net Carrying

 

 

 

Value

 

amortization

 

Value

 

Acquired technology and domain name

 

$

30,725 

 

$

(7,624)

 

$

23,101 

 

Customer relationships

 

 

6,300 

 

 

(1,732)

 

 

4,568 

 

Trade names

 

 

4,970 

 

 

(805)

 

 

4,165 

 

Total

 

$

41,995 

 

$

(10,161)

 

$

31,834 

 

 

For the six months ended June 30, 2014, the increase in the gross intangible assets balance was due to the purchase of the True.com domain name of $0.4 million.

Amortization expense for the three months ended June 30, 2014 and 2013 was $1.1 million and $1.1 million, respectively.  For the six months ended June 30, 2014 and 2013, amortization expense was $2.2 million and $2.2 million, respectively.

Amortization expense with respect to intangible assets at June 30, 2014 for each of the five years through December 31, 2018 and thereafter is as follows (in thousands):

 

 

 

 

 

 

Six months ending December 31, 2014

    

$

2,072 

 

2015

 

 

4,129 

 

2016

 

 

4,038 

 

2017

 

 

3,859 

 

2018

 

 

3,858 

 

Thereafter

 

 

12,049 

 

Total amortization expense

 

$

30,005 

 

 

 

6.Credit Facility

The Company had previously entered into a credit facility with a financial institution that provided for advances under a formula-based revolving line of credit that expired on June 13, 2014. The maximum amount available under the line of credit was $12.0 million, of which $4.8 million was outstanding at December 31, 2013. The Company repaid all amounts outstanding in May 2014.

In August 2014, the Company amended its credit facility (the “Credit Facility”), effective as of June 13, 2014, with the same financial institution that provides for advances of up to $25.0 million under a formula-based revolving line of credit that expires on June 13, 2016. The Credit Facility provides advances equal to 80% of eligible accounts receivable (the “Borrowing Base”), and is subject to sub‑limits, as defined, for letters of credit, foreign exchange, and cash management services provided by the financial institution.

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The Credit Facility bears interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus 2.25% if net cash, as defined, is greater than or equal to $1.00 (ii) LIBOR plus 3.75% if net cash, as defined, is less than $1.00, (iii) the bank’s prime rate if net cash is greater than or equal to $1.00, or (iv) the bank’s prime rate plus 1.5% if net cash is less than $1.00. The Company can select whether its borrowings will fall under a LIBOR or prime rate interest rate, and will also pay an annual commitment fee of $50,000 to the financial institution.  

The Credit Facility requires the Company to maintain an adjusted quick ratio of at least 1.5 to 1 on the last day of each month during periods when the Company has drawn down at least 75% of the lesser of the Borrowing Base or $25.0 million. The Credit Facility restricts the Company’s ability to pay dividends. In the event the Company is in default of the Credit Facility or other indebtedness with other third parties, or have judgments or liens that may have a material adverse effect on the Company’s business, the financial institution reserves the right to accelerate the maturity of all outstanding debt associated with the Credit Facility.

 

7.Commitments and Contingencies

Operating Leases

At June 30, 2014, the Company had various non‑cancellable operating leases related to the Company’s equipment and office facilities which expire through 2024. Additionally, in July 2014, the Company entered into a new facility lease in Santa Monica that will increase its total future minimum lease commitments over the next fifteen years, beginning in January 2015, by $36.3 million.

At June 30, 2014 and including the new facility lease executed in July 2014, future minimum payments for obligations under non‑cancellable operating leases are as follows (in thousands):

 

 

 

 

 

 

Six months ending December 31, 2014

    

$

1,337 

 

2015

 

 

5,149 

 

2016

 

 

5,922 

 

2017

 

 

5,201 

 

2018

 

 

5,530 

 

Thereafter

 

 

37,008 

 

Total minimum lease payments

 

$

60,147 

 

 

The Company recorded rent expense of $0.7 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, total rent expense was $1.3 million and $1.3 million, respectively.

In connection with the facility lease executed in July 2014, the Company was required to obtain an irrevocable standby letter of credit, in the amount of $3.5 million for the benefit of its landlord. Beginning October 1, 2019 through October 1, 2025, the letter of credit is subject to an annual reduction to as little as $1.2 million.

Automotive Website Program Partnership Agreement

As part of the Company’s prior partnership agreement with Yahoo!, Inc. or Yahoo! in June 2012, the Company was required to issue a stand‑by letter of credit in the amount of $10.0 million. The Company is required to maintain restricted cash equal to the amount of the stand‑by letter of credit. In April 2013, the stand‑by letter of credit was reduced to $2.0 million and will be reduced to zero on September 29, 2014, the expiration date of the stand-by letter of credit agreement.

Legal Proceedings

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

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Employment Contracts

The Company has entered into employment contracts with certain executives of the Company. Employment under these contracts is at‑will employment. However, under the provisions of the contracts, the Company would incur severance obligations up to twelve months of the executive’s annual base salary for certain events such as involuntary terminations. In addition, upon the consummation of the IPO, certain executives earned liquidity bonuses totaling $2.6 million, which were recorded in sales and marketing and general and administrative expenses in the Company’s consolidated statements of comprehensive loss during the three and six months ended June 30, 2014.

Indemnifications

In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third‑parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss provisions. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. To date, there has not been a material claim paid by the Company, nor has the Company been sued in connection with these indemnification arrangements. At June 30, 2014 and December 31, 2013, the Company has not accrued a liability for these guarantees, because the likelihood of incurring a payment obligation, if any, in connection with these guarantees is not probable or reasonably estimable.

Marketing Sponsorships

The Company has entered into marketing sponsorship agreements with professional sporting affiliations. At June 30, 2014, the sponsorship agreements require future commitments of $0.2 million payable during the remainder of 2014 and $0.8 million payable in 2015.

 

8.Stockholders’ Equity

In November 2013, the Company sold an aggregate of 2,857,143 shares of Series A preferred stock and warrants to purchase 666,666 shares of common stock at an exercise price of $15.00 per share to Vulcan Capital Growth Equity LLC (“Vulcan”), in a private placement at a price of $10.50 per share, for an aggregate purchase price of $30.0 million.

Immediately prior to the completion of the Company’s IPO, all of the outstanding shares of the Series A preferred stock automatically converted into 2,857,143 shares of common stock on a one-to-one basis.

Warrants Issued to USAA

Beginning in March 2009, the Company entered into various agreements with USAA, an affinity partner and significant stockholder of the Company, which agreements provided for the issuance of warrants to purchase shares of the Company’s common stock if minimum performance milestones, based on the level of vehicle sales, were achieved. The warrants issued to USAA were in exchange for marketing services performed by USAA under the Company’s affinity group marketing program. The purpose of the marketing services performed by USAA is to create awareness and to acquire traffic for, and drive users to, the Company’s auto buying platforms. Warrants issued to USAA are recorded as sales and marketing expenses in the Company’s consolidated statements of comprehensive loss.

In May 2014, the Company and USAA agreed to an extension of the affinity group marketing agreement with USAA. As part of the agreement, the Company issued to USAA a warrant to purchase 1,458,979 shares of the Company’s common stock, which will be exercisable in two tranches. The first tranche of 392,313 shares has an exercise price of $7.95 per share and the second tranche of 1,066,666 shares has an exercise price of $15.00 per share. The warrant becomes exercisable based on the achievement of performance milestones based on the level of vehicle sales of USAA members through the Company’s auto buying platforms. The warrant terminates on the earlier of the eighth anniversary of the date of issuance, the first anniversary of the termination of the USAA car-buying program or the date on which the Company no longer operates the USAA car-buying program. In addition, the agreement provides for the Company to spend marketing

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program funds with the actual level of marketing spend to be mutually agreed upon by USAA and the Company, subject to limits based on the number of actual vehicle sales generated through the affinity marketing program (Note 12).

Warrants to purchase 3,265,168 shares of the Company’s common stock earned from agreements entered into prior to May 2014 were exercised in connection with the Company’s IPO in May 2014 for an aggregate purchase price of $9.5 million.

For the three months ended June 30, 2014 and 2013, the Company recognized expense of $1.6 million and $0.3 million related to warrants to purchase 201,056 shares and 120,495 shares of common stock that have been earned and are vested, respectively. For the six months ended June 30, 2014 and 2013, the Company recognized expense of $1.9 million and $0.4 million related to warrants to purchase 340,558 shares and 154,294 shares of common stock that have been earned and are vested, respectively.

Warrants Issued to Third Party Marketing Firm

On February 25, 2011, the Company entered into a media and marketing services agreement with a direct marketing firm. Under the arrangement, the marketing firm will provide media purchasing, production, advertising, and marketing services in connection with the advertising and marketing of the Company’s services. In addition to cash consideration, the Company agreed to issue a warrant to the marketing firm to purchase up to 1,433,333 shares of the Company’s common stock at a price of $6.02 per share. All shares under the warrant agreement will become exercisable in accordance with the vesting schedule or termination by either party pursuant to the agreement in the event of a default, as defined. The warrant expires eight years from the issuance date and as of June 30, 2014, all warrants have been earned and issued to the marketing firm.

For the three months ended June 30, 2014 and 2013, the Company recognized expense of $0.4 million and $0.5 million related to 104,992 and 134,400 warrants earned, respectively. For the six months ended June 30, 2014 and 2013, the Company recognized expense of $2.3 million and $0.7 million related to 343,665 and 268,800 warrants earned, respectively. The expense has been reflected as sales and marketing expense on the accompanying consolidated statements of comprehensive loss.

Warrants Issued to Financial Institution

On June 13, 2012, in connection with the execution of the amended credit facility (Note 6), the Company entered into a warrant agreement with a financial institution to purchase 26,666 shares of the Company’s common stock, at an exercise price of $11.51 per share if the Company draws on the credit facility at any time after the issuance date. If at any time, the advances to the Company in aggregate principal amount are greater than $4.0 million, the number of shares increases to 66,666. The warrants are immediately vested upon drawing on the line and expire on the earlier of June 13, 2022, or an acquisition of the Company consisting solely of cash and or marketable securities. On June 13, 2013 the Company entered into a second amendment and restated loan and security agreement which reduced the exercise price of the warrants to $7.92. On August 29, 2013, the Company drew down $5.0 million on the credit facility, triggering the issuance of warrants to purchase 66,666 shares of TrueCar’s common stock at an exercise of $7.92 per share. In June 2014, warrants to purchase 66,666 shares of the Company’s common stock were exercised through a net settlement election. The Company issued 27,526 shares of its common stock to the financial institution.

Warrants Issued to Vulcan

In November 2013, in the Vulcan private placement, the Company issued to Vulcan a warrant to purchase 666,666 shares of its common stock at an exercise price of $15.00 per share. The warrant is immediately exercisable and expires in November 2015.

Warrants Issued to Service Provider

In May 2014, the Company entered into a consulting agreement with an individual to provide marketing services to the Company. The Company agreed to issue a warrant to the individual to purchase up to 333,333 shares of the Company’s common stock at a price of $12.81 per share. All shares under the warrant agreement will become exercisable in accordance with the vesting schedule over a four year period. The warrant expires five years from the issuance date or, if earlier, twelve months following the termination of the consulting agreement.

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For the three and six months ended June 30, 2014, the Company recognized expense of $0.4 million, which has been reflected as sales and marketing expense on the accompanying consolidated statements of comprehensive loss. At June 30, 2014, warrants earned under this agreement totaled 33,333 shares.

 

9.Stock‑based Awards

Stock Options

A summary of the Company’s stock option activity under the 2005 and 2008 plans for the six months ended June 30, 2014 is as follows (unaudited):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted-

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

Average

 

Remaining

 

 

 

Number of

 

Exercise

 

Contract Life

 

 

 

Options

 

Price

 

(in years)

 

Outstanding at December 31, 2013

 

18,363,144 

 

$

4.89 

 

7.17 

 

Granted

 

10,545,647 

 

$

15.86 

 

 

 

Exercised

 

(1,741,058)

 

$

1.01 

 

 

 

Canceled/forfeited

 

(502,943)

 

$

9.36 

 

 

 

Outstanding at June 30, 2014

 

26,664,790 

 

$

9.40 

 

7.98 

 

Vested and expected to vest at June 30, 2014

 

25,236,587 

 

$

9.32 

 

7.91 

 

Exercisable at June 30, 2014

 

18,884,427 

 

$

8.72 

 

7.39 

 

 

At June 30, 2014, total remaining stock‑based compensation expense for unvested stock option awards was $73.3 million, which is expected to be recognized over a weighted‑average period of 3.1 years.

Restricted Stock Units and Awards

Activity in connection with the restricted stock units is as follows for the six months ended June 30, 2014:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

Number of

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Non-vested — December 31, 2013

 

 —

 

$

 —

 

Granted

 

720,146 

 

$

10.04 

 

Vested

 

 —

 

$

 —

 

Canceled/forfeited

 

(6,607)

 

$

9.63 

 

Non-vested — June 30, 2014

 

713,539 

 

$

10.04 

 

 

At June 30, 2014, total remaining stock‑based compensation expense for non-vested restricted stock units amounted to $5.0 million, which is expected to be recognized over a weighted-average period of 2.6 years.

In addition, previously issued restricted stock awards of 27,778 shares with a weighted average grant date fair value of $3.56 were non-vested at June 30, 2014.

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Stock‑based Compensation Cost

The Company recorded stock‑based compensation cost relating to stock options and restricted stock awards in the following categories on the accompanying consolidated statements of comprehensive loss (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

113 

 

$

28 

 

$

163 

 

$

53 

 

Sales and marketing

 

 

1,307 

 

 

580 

 

 

2,344 

 

 

1,104 

 

Technology and development

 

 

1,156 

 

 

443 

 

 

1,865 

 

 

783 

 

General and administrative

 

 

4,819 

 

 

992 

 

 

7,168 

 

 

1,676 

 

Total stock-based compensation expense

 

 

7,395 

 

 

2,043 

 

 

11,540 

 

 

3,616 

 

Amount capitalized to internal software use

 

 

321 

 

 

145 

 

 

614 

 

 

251 

 

Total stock-based compensation cost

 

$

7,716 

 

$

2,188 

 

$

12,154 

 

$

3,867 

 

 

 

 

 

10.Income Taxes

In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year‑to‑date loss. The Company’s annual estimated effective tax rate differs from the statutory rate primarily as a result of state taxes, tax amortization of goodwill and changes in the Company’s valuation allowance. For the three months ended June 30, 2014 and 2013, the Company recorded $0.1 million and $0.1 million in income tax expense, respectively. For the six months ended June 30, 2014 and 2013, the Company recorded $0.3 million and $0.3 million in income tax expense, respectively.

There were no material changes to the Company’s unrecognized tax benefits in the three and six months ended June 30, 2014, and the Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. The Company is currently under audit examination by the Internal Revenue Service for the 2011 and 2012 tax years, and under a state audit for the 2010 through the 2012 tax years.

 

11.Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Net loss

 

$

(15,034)

 

$

(3,802)

 

$

(24,955)

 

$

(12,825)

 

Weighted-average common shares outstanding

 

 

67,784 

 

 

58,313 

 

 

63,962 

 

 

57,231 

 

Net loss per share - basic and diluted

 

$

(0.22)

 

$

(0.07)

 

$

(0.39)

 

$

(0.22)

 

 

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The following table presents the number of anti‑dilutive shares excluded from the calculation of diluted net loss per share at June 30, 2014 and 2013 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

    

2014

    

2013

 

 

 

 

 

Options to purchase common stock

 

26,665 

 

16,078 

Common stock warrants

 

3,981 

 

5,251 

Conversion of convertible preferred stock

 

 —

 

2,857 

Unvested restricted stock awards

 

741 

 

95 

Contingently redeemable shares

 

 —

 

189 

Total shares excluded from net loss per share

 

31,387 

 

24,470 

 

 

 

 

 

12.Related Party Transactions

Transactions with Stockholders

In October 2011, as part of the acquisition of ALG, the Company entered into various data licensing and transition services agreements with Dealertrack, a former significant stockholder of the Company. In the first quarter of 2014, Dealertrack divested its holdings in the Company and was no longer a related party. Costs under these agreements included in cost of revenue for the three months ended June 30, 2013 was $0.6 million. Costs under these agreements included in cost of revenue for the six months ended June 30, 2014 and 2013 were $0.4 million and $1.2 million, respectively. Costs under these agreements included in sales and marketing expense for the three and six months ended June 30, 2013 were $0.1 million and $0.2 million, respectively. There were no costs recorded in sales and marketing expense for the six months ended June 30, 2014. No amounts were due to Dealertrack at December 31, 2013.

Notes Receivable from Related Parties

From 2007 to 2011, the Company issued notes to executives of the Company totaling $4.1 million of which $2.9 million were exchanged for cash and $1.2 million were in consideration for the purchase of common stock. The notes bear interest at rates between 1.2% and 6.0%. Principal and interest payments are due at maturity. The loans have maturity dates ranging from 2011 to 2016, and were primarily repaid in full by February 2014, with the exception of $0.3 million which has been partially reserved for by the Company, and the Company is pursuing collection. 

In the three months ended June 30, 2014, the Company advanced $60,000 to an employee. The note is due on December 31, 2014 at an interest rate of 3.5%. At June 30, 2014, the note receivable of $60,000 remained outstanding.

Service Provider

Beginning in October 2013, an employee of the Company is an officer of a firm that provides marketing services to the Company. For the three and six months ended June 30, 2014, the Company recorded sales and marketing expense of $3.6 million and $4.8 million, respectively. At June 30, 2014, the Company recorded $1.9 million in prepaid expenses related to this marketing firm. There was no prepaid expense relating to this marketing firm at December 31, 2013. Additionally, the Company has amounts due to this marketing firm at June 30, 2014 and December 31, 2013 of $0.2 million and $0.3 million, respectively.

Transactions with USAA

USAA is the Company’s largest stockholder and most significant affinity marketing partner. The Company has entered into arrangements with USAA to operate their Auto Buying Program. The Company has amounts due from USAA at June 30, 2014 and December 31, 2013 of $0.8 million and $0.4 million, respectively. In addition, the Company has amounts due to USAA at June 30, 2014 and December 31, 2013 of $1.1 million and $1.2 million, respectively. The Company recorded sales and marketing expense of $3.2 million and $1.9 million for the three months ended June 30, 2014 and 2013, respectively, related to service arrangements entered into with USAA, including non-cash expense associated with warrants

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to purchase shares of common stock (Note 8). For the six months ended June 30, 2014 and 2013, the Company recorded sales and marketing expense of $6.2 million and $3.2 million, respectively.

13.Revenue Information

The CODM reviews separate revenue information for its Transaction and Data and Other service offerings. All other financial information is reviewed by the CODM on a consolidated basis. The following table presents the Company’s revenue categories during the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction revenue

 

$

46,127 

 

$

27,436 

 

$

86,119 

 

$

48,959 

 

Data and other revenue

 

 

4,370 

 

 

3,787 

 

 

8,308 

 

 

7,307 

 

Total revenues

 

$

50,497 

 

$

31,223 

 

$

94,427 

 

$

56,266 

 

 

 

14.     Subsequent Events

In July 2014, the Company entered into an office building lease (the “Lease”) for approximately 33,700 square feet commencing on January 1, 2015 (the “Lease Commencement Date”). Under the terms of the agreement, approximately 16,700 square feet will be leased for 15 years from the Lease Commencement Date. Additional expansion spaces totaling approximately 17,000 square feet will be leased for 10 years from the Lease Commencement Date. The Company has the option to extend the Lease for a total term of twenty years. Annual base rent for fiscal year 2015 will be approximately $2.2 million, and the cumulative base rent for the initial lease term will be approximately $36.3 million. In conjunction with the Lease, the Company was required to obtain an irrevocable standby letter of credit in the amount of $3.5 million for the benefit of the landlord. Beginning October 1, 2019 through October 1, 2025, the letter of credit is subject to an annual reduction to as little as $1.2 million.

In August 2014, the Company amended its credit facility. Refer to Note 6 herein for further details of the amended credit facility.

In August 2014, the Company entered into an agreement to purchase a perpetual software subscription license totaling $4.9 million, which is expected to be fully paid in the third quarter of 2014. In addition to the software license agreement, the Company purchased a support services package for a three year term totaling $2.4 million payable quarterly.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1 “Financial Statements” in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.

 

Overview

Our mission is to transform the car‑buying experience for consumers and the way that dealers attract customers and sell cars. We have established an intelligent, data‑driven online platform operating on a common technology infrastructure, powered by proprietary data and analytics. We operate our company‑branded platform via our TrueCar.com website and TrueCar mobile applications. In addition, we customize and operate our platform for affinity group marketing partners, such as USAA, financial institutions, and large enterprises such as Boeing and Verizon. We enable users to obtain market‑based pricing data on new and used cars, and to connect with our network of TrueCar Certified Dealers.

We benefit consumers by providing information related to what others have paid for a make and model of car in their area and, where available, estimated prices for that make and model of car, which we refer to as upfront pricing information, from our network of TrueCar Certified Dealers. This upfront pricing information generally includes guaranteed savings off MSRP which the consumer may then take to the dealer in the form of a Guaranteed Savings Certificate and apply toward the purchase of the specified make and model of car. We benefit our network of TrueCar Certified Dealers by enabling them to attract these informed, in‑market consumers in a cost‑effective, accountable manner, which we believe helps them to sell more cars.

During the three and six months ended June 30, 2014, we generated revenues of $50.5 million and $94.4 million and recorded a net loss of $15.0 million and $25.0 million, respectively. For the three months ended June 30, 2014, $46.1 million, or 91.3%, of revenues was derived from transaction revenues, and $4.4 million, or 8.7%, was derived primarily from the sale of data and consulting services to the automotive and financial services industries. For the six months ended June 30, 2014, $86.1 million, or 91.2%, of revenues was derived from transaction revenues, and $8.3 million, or 8.8%, was derived primarily from the sale of data and consulting services to the automotive and financial services industries. Transaction revenues primarily consist of fees paid to us by our network of TrueCar Certified Dealers under our pay‑for‑performance business model where we generally earn a fee only when a TrueCar user purchases a car from them.

We intend to grow traffic to TrueCar.com and our TrueCar branded mobile applications by building our brand through marketing campaigns that emphasize the value of trust and transparency in the car‑buying process and the benefits of transacting with TrueCar Certified Dealers. We will seek to increase the number of transactions on our platform by enhancing the user experience while expanding and improving the geographic coverage of our network of TrueCar Certified Dealers. Over time, we intend to increase monetization opportunities by introducing additional products and services to improve the car‑buying and car‑ownership experience.

In May 2014, we completed our initial public offering (“IPO”) in which we sold an aggregate of 8,941,250 shares of our common stock, including 1,166,250 shares sold pursuant to the exercise by the underwriters of their option to purchase such shares, at a public offering price of $9.00 per share. We received net proceeds of $69.2 million, after deducting underwriting discounts and commissions and offering expenses payable by us, from sales of our shares in the IPO. Immediately prior to the completion of the IPO, all shares of the then-outstanding Series A convertible preferred stock automatically converted into 2,857,143 shares of common stock.

Presentation of Financial Statements

Our consolidated financial statements include the accounts of our wholly owned subsidiaries in accordance with ASC 810 — Consolidation. Business acquisitions are included in our consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their

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estimated fair values on the acquisition dates. All intercompany balances and transactions have been eliminated in consolidation.

We report our financial results as one operating segment, with two distinct service offerings: transactions, and data and other. Our operating results are regularly reviewed by our chief operating decision makers on a consolidated basis, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. Our chief operating decision makers regularly review revenue for each of our transaction and data and other offerings in order to gain more depth and understanding of the factors driving our business.

Key Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make operating and strategic decisions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Average Monthly Unique Visitors

 

 

4,189,926 

 

 

2,441,493 

 

 

4,062,848 

 

 

2,313,075 

 

Units(1)

 

 

149,527 

 

 

96,614 

 

 

275,507 

 

 

169,485 

 

Monetization

 

$

308 

 

$

284 

 

$

313 

 

$

289 

 

Franchise Dealer Count

 

 

7,682 

 

 

6,176 

 

 

7,682 

 

 

6,176 

 

Transaction Revenue Per Franchise Dealer

 

$

6,195 

 

$

4,551 

 

$

12,017 

 

$

8,528 

 

 


(1)

We issued full credits of the amount originally invoiced with respect to 3,053 and 4,018 units during the three months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014 and 2013, we issued full credits of the amount originally invoiced with respect to 5,196 and 8,584 units, respectively. The number of units has not been adjusted downwards related to units credited as discussed in the description of the unit metric, below.

Average Monthly Unique Visitors

We define a monthly unique visitor as an individual who has visited our website, our landing page on our affinity group marketing partner sites, or our mobile applications within a calendar month. We identify unique visitors through cookies for browser‑based visits on either a desktop computer or mobile device and through device IDs for mobile application visits. In addition, if a TrueCar.com user logs‑in, we supplement their identification with their log‑in credentials to attempt to avoid double counting on TrueCar.com across devices, browsers and mobile applications. If an individual accesses our service using different devices or different browsers on the same device within a given month, the first access through each such device or browser is counted as a separate monthly unique visitor, except where adjusted based upon TrueCar.com log‑in information. We calculate average monthly unique visitors as the sum of the monthly unique visitors in a given period, divided by the number of months in that period. We view our average monthly unique visitors as a key indicator of the growth in our business and audience reach, the strength of our brand, and the visibility of car buying services to the member base of our affinity group marketing partners.

The number of average monthly unique visitors increased 71.6% to approximately 4.2 million in the three months ended June 30, 2014 from approximately 2.4 million in the same period of 2013. The number of average monthly unique visitors increased 75.6% to approximately 4.1 million in the six months ended June 30, 2014 from approximately 2.3 million in the six months ended June 30, 2013. We attribute the growth in our average monthly unique visitors principally to increased television, radio and digital marketing advertising campaigns that have led to increased brand awareness, as well as increased traffic from our affinity group marketing partners.

Units

We define units as the number of automobiles purchased by our users from TrueCar Certified Dealers through TrueCar.com, our TrueCar branded mobile applications or the car buying sites we maintain for our affinity group marketing

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partners. A unit is counted following such time as we have matched the sale to a TrueCar user with one of TrueCar Certified Dealers. We view units as a key indicator of the growth of our business, the effectiveness of our product and the size and geographic coverage of our network of TrueCar Certified Dealers.

On occasion we issue credits to our TrueCar Certified Dealers with respect to units sold. However, we do not adjust our unit metric for these credits as we believe that in substantially all cases a vehicle has in fact been purchased through our platform given the high degree of accuracy of our sales matching process. Credits are most frequently issued to a dealer that claims that it had a pre‑existing relationship with a purchaser of a vehicle, and we determine whether we will issue a credit based on a number of factors, including the facts and circumstances related to the dealer claim and the level of claim activity at the dealership. In most cases, we issue credits in order to maintain strong business relations with the dealer and not because we have made an erroneous sales match or billing error.

The number of units increased 54.8% to 149,527 in the three months ended June 30, 2014 from 96,614 in the three months ended June 30, 2013. The number of units increased 62.6% to 275,507 in the six months ended June 30, 2014 from 169,485 in the same period of prior year. We attribute this growth in units to the effectiveness of our increased marketing activities, product enhancements, the growing number and geographic coverage of TrueCar Certified Dealers in our network, and the overall growth in new car sales in the automotive industry.

Monetization

We define monetization as the average transaction revenue per unit, which we calculate by dividing all of our transaction revenue in a given period by the number of units in that period. Our monetization increased 8.5% to $308 during the three months ended June 30, 2014 from $284 for the same period in 2013 primarily as a result of increases in our pricing structure with our TrueCar Certified Dealers and lower sales credits during the three months ended June 30, 2014. For the six months ended June 30, 2014, our monetization increased 8.2% to $313 from $289 primarily as a result of increases in our pricing structure and lower sales credits. We expect our monetization to be affected in the future by changes in our pricing structure, the unit mix between new and used cars, with used cars providing higher monetization, and by the introduction of new products and services.

Franchise Dealer Count

We define franchise dealer count as the number of franchise dealers in the network of TrueCar Certified Dealers at the end of a given period. This number is calculated by counting the number of brands of new cars sold by dealers in the TrueCar Certified Dealer network at their locations, and includes both single‑location proprietorships as well as large consolidated dealer groups. We view our ability to increase our franchise dealer count as an indicator of our market penetration and the likelihood of converting users of our platform into unit sales. Our TrueCar Certified Dealer network includes non‑franchised dealers that primarily sell used cars and are not included in franchise dealer count. Our franchise dealer count increased to 7,682 at June 30, 2014 from 6,651 at December 31, 2013 and 6,176 at June 30, 2013. We attribute this growth in our franchise dealer count to the continued effectiveness of our dealer sales team, increased brand awareness, and product enhancements.

Transaction Revenue Per Franchise Dealer

We define transaction revenue per franchise dealer as transaction revenue in a given period divided by the average franchise dealer count in that period. Our transaction revenue per franchise dealer increased 36.1% to $6,195 during the three months ended June 30, 2014 from $4,551 for the same period in 2013. For the six months ended June 30, 2014, our transaction revenue per franchise dealer increased to $12,017 from $8,528 in the same period of the prior year, reflecting an increase of 40.9%. The increases in the current year periods over the prior year periods primarily reflect an increase in units which were attributable to an increase in marketing spend and an increase in the number of TrueCar Certified Dealers, platform and product enhancements, and the overall growth in sales of the automotive industry.

Non‑GAAP Financial Measures