TRUECAR, INC. 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. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those discussed in the section titled "Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q. See "Special Note Regarding Forward-Looking Statements."
Overview
TrueCar is a leading automotive digital marketplace that enables car buyers to connect to our network of Certified Dealers. We are building the industry's most personalized and efficient car buying experience as we seek to bring more of the purchasing process online. We have established a diverse software ecosystem on a common technology infrastructure, powered by proprietary data and analytics. Our company-branded platform is available on ourTrueCar website and mobile applications. In addition, we customize and operate our platform on a co-branded basis for our many affinity group marketing partners, including financial institutions like Navy Federal, PenFed and American Express; membership-based organizations like Consumer Reports,AARP ,Sam's Club , andAAA ; and employee buying programs for large enterprises such as IBM and Walmart. 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 also allow automobile manufacturers, known in the industry as OEMs, to connect withTrueCar users during the purchase process and efficiently deliver targeted incentives to consumers. We benefit consumers by providing information related to what others have paid for a make, model and trim of car in their area and price offers on actual vehicle inventory, which we refer to as VIN-based offers, from our network of TrueCar Certified Dealers. VIN-based offers provide consumers with price offers for specific vehicles from specific dealers. We benefit our network ofTrueCar 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 profitably. We benefit OEMs by allowing them to more effectively target their incentive spending at deep-in-market consumers during their purchase process. Our network of TrueCar Certified Dealers consists primarily of new car franchises, representing all major makes of cars, as well as independent dealers selling used vehicles. TrueCar Certified Dealers operate in all 50 states and theDistrict of Columbia . Our subsidiary, TCDS, provides our TrueCar Trade and Payments products. Our Trade solution gives consumers information on the value of their trade-in vehicles and enables them to obtain a guaranteed trade-in price before setting foot in the dealership. This valuation is, in turn, backed by a third-party guarantee to dealers that the vehicles will be repurchased at the indicated price if the dealer does not want to keep them. Our Payments solution leverages the digital retailing technology of our DealerScience subsidiary to help consumers calculate accurate monthly payments. During the three months endedSeptember 30, 2022 , we generated revenues of$39.1 million and recorded a loss from continuing operations of$77.1 million . During the three months endedSeptember 30, 2021 , we generated revenues of$55.0 million and recorded a loss from continuing operations of$7.0 million . During the nine months endedSeptember 30, 2022 , we generated revenues of$124.9 million and recorded a loss from continuing operations of$100.5 million . During the nine months endedSeptember 30, 2021 , we generated revenues of$185.8 million and recorded a loss from continuing operations of$22.6 million . 23 --------------------------------------------------------------------------------
Market Environment
Events surrounding the ongoing COVID-19 pandemic have resulted and will continue to result in significant economic disruptions. We continue to experience the negative effects of COVID-19 on our business, operations and financial results as reflected in the year over year decline in revenues, and we expect to experience further negative effects on our results of operations, financial condition and cash flows due to numerous uncertainties. In addition to vehicle inventory shortages caused by closures in OEM production facilities in the early days of the COVID-19 induced lockdown, OEMs have also been forced to cut production as supply-chain disruptions due to the pandemic resulted in a global automotive semiconductor chip shortage. The ensuing automobile inventory shortage has resulted in significant unmet demand, with automotive dealers seeing some incoming new car shipments presold. At the same time, wider economic inflation has led to theFederal Reserve raising interest rates, which along with the expectation for future rate hikes are starting to have their intended impact on theU.S. economy. Domestically, consumers are concerned about inflation and while employment remains strong, a possible recession stemming from tighter monetary policy is also weighing on consumer sentiment. Higher interest rates could also reduce consumer demand by making vehicle financing more expensive and reducing the amount of inventory purchased by dealers due to higher financing costs. The inventory shortage along with pressure on consumer demand may impact the decision of our current network of Certified Dealers and OEMs to cancel or pause on our services and product offerings and could discourage new dealers and OEMs from joining our network. Refer to Part II, Item 1A, Risk Factors, for additional disclosures of risks related to COVID-19, the global automotive semiconductor chip shortage, and rising interest rates. 24 --------------------------------------------------------------------------------
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 Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Average Monthly Unique Visitors 7,600,847 8,341,954 7,358,008 9,044,962
Units (1) 82,206 145,582 263,918 506,231
Monetization $ 473 $ 376 $ 471 $ 365
Franchise Dealer Count 7,776 8,973 7,776 8,973
Independent Dealer Count 4,196 3,933 4,196 3,933
(1)We issued full credits of the amount originally invoiced with respect to 1702
and 4,242 units during the three months ended September 30, 2022 and 2021,
respectively. We issued full credits of the amount originally invoiced with
respect to 6,309 and 12,329 units during the nine months ended September 30,
2022 and 2021, 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 the 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 decreased 8.9% to approximately 7.6 million in the three months endedSeptember 30, 2022 from approximately 8.3 million in the same period of 2021. The number of average monthly unique visitors decreased 18.7% to approximately 7.4 million in the nine months endedSeptember 30, 2022 from approximately 9.0 million in the same period of 2021. The decrease was due to our lower marketing spend deployed as a result of constrained dealer inventory during the three months and nine months endedSeptember 30, 2022 .
Units
We define units as the number of automobiles purchased from TrueCar Certified Dealers that are matched to users of TrueCar.com, ourTrueCar -branded mobile applications or the car-buying sites and mobile applications we maintain for our affinity group marketing partners. A unit is counted after we have matched the sale to aTrueCar user with one of TrueCar Certified Dealers. We view units as a key indicator of the health 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 most 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 decreased 43.5% to 82,206 units in the three months endedSeptember 30, 2022 from 145,582 units in the three months endedSeptember 30, 2021 . The number of units decreased 47.9% to 263,918 units in the nine months endedSeptember 30, 2022 from 506,231 units in the nine months endedSeptember 30, 2021 . The unit decrease for the three and nine months endedSeptember 30, 2022 was primarily due to lower automobile inventory levels resulting from the global automotive 25
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semiconductor chip shortage. The impact of the chip shortage on units will be dependent on the duration of the chip-related production cuts by OEMs.
Monetization
We define monetization as the average transaction revenue per unit, which we calculate by dividing all of our transaction revenue (dealer revenue and OEM incentives revenue) in a given period by the number of units in that period. Our monetization increased to$473 for the three months endedSeptember 30, 2022 as compared to$376 for the three months endedSeptember 30, 2021 . Our monetization increased to$471 for nine months endedSeptember 30, 2022 as compared to$365 for the nine months endedSeptember 30, 2021 . The increase for the three months and nine months endedSeptember 30, 2022 was primarily due to a higher unit mix shift to used cars that provide higher monetization than new cars and a higher monetization associated with franchise and independent dealer subscription arrangements as subscription revenue tend to lag a downturn in units. We expect our monetization to be affected in the future by changes in our pricing structure, unit volume, and the unit mix between new and used cars.
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 at each individual location, or rooftop, regardless of the size of the dealership that owns the rooftop. The network is comprised of dealers with a range of unit sales volume per dealer, with dealers representing certain brands consistently achieving higher than average unit sales volume. We view our ability to increase our franchise dealer count, particularly dealers representing high volume brands, 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 independent non-franchised dealers that primarily sell used cars and are not included in franchise dealer count. Our franchise dealer count was 7,776 atSeptember 30, 2022 , a decrease from 8,973 atSeptember 30, 2021 , and a decrease from 8,482 atDecember 31, 2021 . The decline in franchise dealer count was primarily due to the impact of the COVID-19 pandemic. As a result of automobile inventory shortages and high consumer demand, certain franchise dealers have less of a need for marketing services and products. We expect our franchise dealer count to continue to be impacted by these inventory shortages.
Independent Dealer Count
We define independent dealer count as the number of dealers in the network of TrueCar Certified Dealers at the end of a given period that exclusively sell used vehicles. This number is calculated by counting each location, or rooftop, individually, regardless of the size of the dealership that owns the rooftop. Our independent dealer count was 4,196 atSeptember 30, 2022 , an increase from 3,933 atSeptember 30, 2021 , and an increase from 4,013 atDecember 31, 2021 . We expect our independent dealer count to be impacted by new car shortages that increase demand for used cars, but which have also resulted in inventory constraints in the used car market. 26 --------------------------------------------------------------------------------
Non-GAAP Financial Measure
Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles inthe United States , or GAAP. We define Adjusted EBITDA as net income (loss) adjusted to exclude interest income, depreciation and amortization, stock-based compensation, gain (loss) from equity method investment, changes in the fair value of contingent consideration, other income, lease exit costs, impairment of lease of right-of-use, or ROU, assets, transaction costs, goodwill impairment, and income taxes. We have provided below a reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. In addition, our Adjusted EBITDA measure may not be comparable to similarly titled measures of other organizations as they may not calculate Adjusted EBITDA in the same manner as we calculate this measure. We use Adjusted EBITDA as an operating performance measure as it is (i) an integral part of our reporting and planning processes; (ii) used by our management and board of directors to assess our operational performance, and together with operational objectives, as a measure in evaluating employee compensation and bonuses; and (iii) used by our management to make financial and strategic planning decisions regarding future operating investments. We believe that using Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis because it excludes variations primarily caused by changes in the excluded items noted above. In addition, we believe that Adjusted EBITDA and similar measures are widely used by investors, securities analysts, rating agencies and other parties in evaluating companies as measures of financial performance and debt service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: •Adjusted EBITDA does not reflect the receipt of interest or the payment of income taxes; •Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; •although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or any other contractual commitments; •Adjusted EBITDA does not reflect the lease exit costs and impairment charges associated with subleasing; •Adjusted EBITDA does not consider the dilutive impact of shares issued or to be issued in connection with stock-based compensation; and •other companies, including companies in our own industry, may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including our net loss, our other GAAP results, and various cash flow metrics. In addition, in evaluating Adjusted EBITDA you should be aware that in the future we will incur expenses such as those that are the subject of adjustments in deriving Adjusted EBITDA, and you should not infer from our presentation of Adjusted EBITDA that our future results will not be affected by these expenses or any unusual or non-recurring items. 27
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The following table presents a reconciliation of net (loss) income to Adjusted EBITDA for each of the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss $ (77,113) $ (6,836) $ (100,546) $ (22,537)
Income from discontinued operations, net of taxes - (208) - (40)
Loss from continuing operations (77,113) (7,044) (100,546) (22,577)
Non-GAAP adjustments:
Interest income (879) (12) (1,185) (40)
Depreciation and amortization 4,284 3,828 11,729 12,731
Stock-based compensation 5,189 4,450 13,174 15,992
(Gain) loss from equity method investment (1) - 267 (1,845) 953
Change in fair value of contingent consideration 179 - 179 41
Other income - - - (667)
Lease exit costs (2) - - 214 -
Impairment of ROU assets (3) - - - 1,652
Transaction costs (4) 29 - 1,200 -
Goodwill impairment (5) 59,775 - 59,775 -
Provision for (benefit from) income taxes (131) (38) (2,648) 189
Adjusted EBITDA $ (8,667) $ 1,451 $ (19,953) $ 8,274
(1)For the nine months ended September 30, 2022 , the excluded amount includes a
$1.8 million gain from changes in fair value of a derivative asset recognized
from the sale of our equity method investment in Accu-Trade in the first quarter
of 2022.
(2)Represents lease exit costs and early termination gains associated with one
of our existing office locations. We consider these charges to be unrelated to
our underlying results of operations and believe that their exclusion is
appropriate to facilitate period-to-period operating performance comparisons.
(3)The excluded amounts represent impairment charges on our ROU assets associated with certain of our existing office locations. We consider these charges to be unrelated to our underlying results of operations and believe that their exclusion is appropriate to facilitate period-to-period operating performance comparisons.
(4)The excluded amounts represent external legal, accounting, consulting and other third-party fees and costs we incurred in connection with theDigital Motors acquisition. For the nine months endedSeptember 30, 2022 , the excluded amounts also included$0.25 million associated with acceleration of unvested options to purchase shares ofDigital Motors stock held byDigital Motors employees at the time of the acquisition that are accounted for as post-combination compensation expense. These expenses are included in general and administrative expenses in our consolidated statements of comprehensive loss. We consider these fees and costs, which are associated with merger and acquisition transactions outside the normal course of our operations, to be unrelated to our underlying results of operations and believe that their exclusion provides investors with a more complete understanding of the factors and trends affecting our business operations.
(5)The excluded amounts represent a non-cash impairment charge we recognized on our goodwill during the third quarter of 2022.
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--------------------------------------------------------------------------------Components of Operating Results
Revenues
Our revenues are comprised primarily of dealer revenue and OEM incentives revenue. We recognize transaction revenue for certain of our Auto Buying Program and OEM incentives arrangements at the time introductions and incentives are delivered based upon expected subsequent vehicle sales between the Auto Buying Program user and the dealer.
Costs and Operating Expenses
Cost of Revenue (exclusive of depreciation and amortization). Cost of revenue includes expenses related to the fulfillment of our services, consisting primarily of data costs and licensing fees paid to third-party service providers and expenses related to operating our website and mobile applications, including those associated with hosting fees, data processing costs required to deliver introductions to our network of TrueCar Certified Dealers, employee costs related to certain dealer operations, sales matching, and facilities costs. Cost of revenue excludes depreciation and amortization of software costs and other hosting and data infrastructure equipment used to operate our platforms, which are included in the depreciation and amortization line item on our condensed consolidated statements of comprehensive loss. Sales and Marketing. Sales and marketing expenses consist primarily of: television, digital, and radio advertising; media production costs; affinity group partner marketing fees, which also include loan subvention costs where we pay certain affinity group marketing partners a portion of consumers' borrowing costs for car loan products offered by these affinity group marketing partners; marketing sponsorship programs; and digital customer acquisition. In addition, sales and marketing expenses include employee-related expenses for sales, customer support, marketing and public relations employees, including salaries, bonuses, benefits, severance, and stock-based compensation expenses; third-party contractor fees; and facilities costs. Marketing and advertising costs promote our services and are expensed as incurred, except for media production costs, which are expensed the first time the advertisement is aired. Technology and Development. Technology and development expenses consist primarily of employee-related expenses including salaries, bonuses, benefits, severance, and stock-based compensation expenses; third-party contractor fees; facilities costs; software costs; and costs associated with our product development, product management, research and analytics, and internal IT functions. General and Administrative. General and administrative expenses consist primarily of employee-related expenses, including salaries, bonuses, benefits, severance, and stock-based compensation expenses for executive, finance, accounting, legal, and human resources functions. General and administrative expenses also include legal, accounting, and other third-party professional service fees, bad debt, and facilities costs. Depreciation and Amortization. Depreciation consists primarily of depreciation expense recorded on property and equipment. Amortization expense consists primarily of amortization recorded on intangible assets, capitalized software costs and leasehold improvements.
Interest Income. Interest income consists of interest earned on our cash and cash equivalents.
Other Income. Other income consists of fees earned associated with the
transition services agreement we entered into with
Provision for (Benefit from) Income Taxes. We are subject to federal and state income taxes inthe United States . We provided a full valuation allowance against our net deferred tax assets atSeptember 30, 2022 andDecember 31, 2021 , as it is more likely than not that some or all of our deferred tax assets will not be realized. As a result of the valuation allowance, our income tax benefit is significantly less than the federal statutory rate of 21%. For the nine months endedSeptember 30, 2022 , our benefit from income taxes primarily reflects the release of valuation allowance resulting from net deferred tax liabilities recorded inDigital Motors acquisition accounting providing a source of income in assessing realization of our consolidated net deferred tax assets. Our provision for income taxes for the nine months endedSeptember 30, 2021 primarily reflects tax expense associated with state income taxes and the amortization of tax-deductible goodwill that is not an available source of income to realize deferred tax assets. 29 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our selected consolidated statements of operations data for each of the periods indicated.
Three Months Ended
September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(in thousands)
Consolidated Statements of Operations Data:
Revenues $ 39,052 $ 54,966 $ 124,860 $ 185,837
Costs and operating expenses:
Cost of revenue (exclusive of depreciation and
amortization presented separately below) 3,880 5,715 12,643 16,919
Sales and marketing 25,130 31,239 78,535 108,814
Technology and development 12,742 9,890 34,377 31,863
General and administrative 11,364 11,121 34,025 37,652
Depreciation and amortization 4,284 3,828 11,729 12,731
Goodwill impairment 59,775 - 59,775 -
Total costs and operating expenses 117,175 61,793 231,084 207,979
Loss from operations (78,123) (6,827) (106,224) (22,142)
Interest income 879 12 1,185 40
Other income - - - 667
Gain (loss) from equity method investment - (267) 1,845 (953)
Loss before income taxes (77,244) (7,082) (103,194) (22,388)
Provision for (benefit from) income taxes (131) (38) (2,648) 189
Loss from continuing operations (77,113) $ (7,044) $ (100,546) $ (22,577)
Income from discontinued operations, net of taxes - 208 - 40
Net loss $ (77,113) $
(6,836)
Other Non-GAAP Financial Information: Adjusted EBITDA$ (8,667) $ 1,451 $ (19,953) $ 8,274 30
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Comparison of the Three and Nine Months Ended
Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Dealer revenue $ 37,722 $ 52,966 $ 120,713 $ 177,693
OEM incentives revenue 1,189 1,736 3,613 7,301
Other revenue 141 264 534 843
Total revenues $ 39,052 $ 54,966 $ 124,860 $ 185,837
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . The decrease in our total revenues of $15.9 million , or 29.0%, for the
three months ended September 30, 2022 as compared to the three months ended
September 30, 2021 was mainly due to pressure on our close rates brought on by
high vehicle prices and limited new vehicle inventories associated with the
global automobile semiconductor chip shortage. Dealer revenue, OEM incentives
revenue, and Other revenue comprised 96.6%, 3.0%, and 0.4%, respectively, of
revenues for the three months ended September 30, 2022 as compared to 96.4%,
3.2%, and 0.5%, respectively, for the same period in 2021. The decrease of $15.2
million in Dealer revenue for the three months ended September 30, 2022 was
primarily a result of low inventory associated with the global automobile
semiconductor chip shortage. The decrease of $0.5 million in OEM incentives
revenue for the three months ended September 30, 2022 was driven by lower
vehicle incentive volumes and by certain OEMs pausing their programs as a result
of low inventory associated with the global automobile semiconductor chip
shortage. Other revenue was relatively flat for the three months ended September
30, 2022 . We expect our revenues to continue to be impacted by the inventory
constraints caused by the global automobile semiconductor chip shortage as well
as by higher interest rates, which could reduce consumer demand by making
vehicle financing more expensive and reducing the amount of inventory purchased
by dealers due to higher financing costs. These market conditions may influence
dealers on our Certified Dealers network to cancel or pause our services or
product offerings and could discourage new dealers from joining our network, and
may also influence OEMs to pause their incentive programs.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . The decrease in total revenues of $61.0 million , or 32.8%, for the nine
months ended September 30, 2022 as compared to the nine months ended September
30, 2021 was mainly due to pressure on our close rates brought on by higher
vehicle prices and limited new vehicle inventories associated with the global
automobile semiconductor chip shortage. Dealer revenue, OEM incentives revenue,
and Other revenue comprised 96.7%, 2.9%, and 0.4%, respectively, of revenues for
the nine months ended September 30, 2022 as compared to 95.6%, 3.9%, and 0.5%,
respectively, for the same period in 2021. The decrease of $57.0 million in
Dealer revenue for the nine months ended September 30, 2022 was primarily a
result of lower inventory associated with the global automobile semiconductor
chip shortage. The decrease of $3.7 million in OEM incentives revenue for the
nine months ended September 30, 2022 was driven by lower vehicle incentive
volumes and by certain OEMs pausing their programs as a result of lower
inventory associated with the global automobile semiconductor chip shortage.
Other revenue was relatively flat for the nine months ended September 30, 2022 .
Costs and Operating Expenses
Cost of Revenue (exclusive of depreciation and amortization)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Cost of revenue (exclusive of depreciation and
amortization) $ 3,880 $ 5,715 $ 12,643 $ 16,919
Cost of revenue (exclusive of depreciation and
amortization) as a percentage of revenues 9.9 % 10.4 % 10.1 % 9.1 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Cost of revenue decreased $1.8 million , or 32.1%, for the three months
ended September 30, 2022 as compared to the three months ended September 30,
2021 due to a $1.8 million decrease in data and licensing expenses due to a
lower dealer count and a decrease in
31
--------------------------------------------------------------------------------fees paid to Accu-Trade related to a software and data licensing agreement that was terminated as part of the sale of our equity method investment in Accu-Trade.
Nine months endedSeptember 30, 2022 compared to nine months endedSeptember 30, 2021 . Cost of revenue decreased$4.3 million , or 25.3%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 primarily due to a$3.9 million decrease in data and licensing expenses due to a lower dealer count and a decrease in fees paid to Accu-Trade related to a software and data licensing agreement that was terminated as part of the sale of our equity method investment in Accu-Trade.
Sales and Marketing Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Sales and marketing expenses $ 25,130 $ 31,239 $ 78,535 $ 108,814
Sales and marketing expenses as a percentage
of revenues 64.4 % 56.8 % 62.9 % 58.6 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Sales and marketing expenses decreased $6.1 million , or 19.6%, for the
three months ended September 30, 2022 as compared to the three months ended
September 30, 2021 . The decrease primarily reflects a $3.9 million decrease in
our branded media spend and a $2.6 million decrease in revenue share paid to our
affinity marketing partners. We expect sales and marketing expenses to vary over
the course of the year depending on the state of the automobile inventory and
semiconductor chip shortages that will impact our branded media spend and
revenue share that we pay to our affinity marketing partners. Additionally, we
expect to incur incremental branded media expenses to support the rollout of our
TrueCar+ initiatives.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . Sales and marketing expenses decreased $30.3 million , or 27.8%, for the
nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 . The decrease primarily reflects a $20.7 million decrease in
our branded media spend, a $6.9 million decrease in revenue share paid to our
affinity marketing partners, and a $2.1 million decrease in stock-based
compensation expenses.
Technology and Development Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Technology and development expenses $ 12,742 $ 9,890 $ 34,377 $ 31,863
Technology and development expenses as a
percentage of revenues 32.6 % 18.0 % 27.5 % 17.1 %
Capitalized software costs $ 2,936 $ 2,936 $ 8,732 $ 8,894
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . Technology and development expenses increased $2.9 million , or 28.8%,
for the three months ended September 30, 2022 as compared to the three months
ended September 30, 2021 . The increase primarily reflects a $2.6 million
increase in employee-related expenses associated with increased headcount as we
continue to invest in TrueCar+, expand our product portfolio, and enhance our
existing core offering. Capitalized software costs were relatively flat. We
expect technology and development expenses to continue to be affected by
variations in headcount.
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . Technology and development expenses increased $2.5 million , or 7.9%, for
the nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 . The increase primarily reflects a $3.1 million increase in
employee-related expenses associated with increased headcount as we continue to
invest in TrueCar+, expand our product portfolio, and enhance our existing core
offering, partially offset by a $0.6 million decrease in facilities costs.
Capitalized software costs were relatively flat.
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--------------------------------------------------------------------------------General and Administrative Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
General and administrative expenses $ 11,364 $ 11,121 $ 34,025 $ 37,652
General and administrative expenses as a
percentage of revenues 29.1 % 20.2 % 27.3 % 20.3 %
Three months ended September 30, 2022 compared to three months ended September
30, 2021 . General and administrative expenses were relatively flat and
increased $0.2 million , or 2.2%, for the three months ended September 30, 2022
as compared to the three months ended September 30, 2021 .
Nine months ended September 30, 2022 compared to nine months ended September 30,
2021 . General and administrative expenses decreased $3.6 million , or 9.6%, for
the nine months ended September 30, 2022 as compared to the nine months ended
September 30, 2021 . The decrease primarily reflects a $1.7 million impairment
charge on our right-of-use asset associated with an office lease recognized in
the second quarter of 2021, a $0.8 million gain related to an early lease
termination recognized in the second quarter of 2022, and a $0.9 million
decrease in professional services fees.
Depreciation and Amortization Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Depreciation and amortization expenses
11,729
Three months endedSeptember 30, 2022 compared to three months endedSeptember 30, 2021 . Depreciation and amortization expenses increased$0.5 million , or 11.9%, for the three months endedSeptember 30, 2022 as compared to the three months endedSeptember 30, 2021 . We expect our depreciation and amortization expenses to continue to be affected by the amount of capitalized internally developed software costs and the timing of placing projects in service. Nine months endedSeptember 30, 2022 compared to nine months endedSeptember 30, 2021 . Depreciation and amortization expenses decreased$1.0 million , or 7.9%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 .
Other Income
For the nine months endedSeptember 30, 2021 , other income consists primarily of fees earned from the transition services agreement we entered into withJ.D. Power in connection with our ALG divestiture.
Gain (Loss) from
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Gain (loss) from equity method investment $ -
$ (953) For the nine months endedSeptember 30, 2022 , we recognized a gain of$1.8 million from changes in fair value of a derivative asset recognized from the sale of our equity method investment in Accu-Trade. No gain or loss was recognized at the time of the sale as the fair value of the sales proceeds received including the initial fair value of the derivative asset was equal to the then carrying value of the investment. 33 --------------------------------------------------------------------------------
Goodwill Impairment
For the three months endedSeptember 30, 2022 , we recognized a non- cash goodwill impairment charge in the amount of$59.8 million , which represents the amount that the carrying value of our single reporting unit was in excess of its estimated fair value atSeptember 30, 2022 . For further details, see Note 6 to our condensed consolidated financial statements included herein.
Provision for (Benefit from) Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in thousands)
Provision for (benefit from) income taxes
For the three months endedSeptember 30, 2022 , our benefit from income taxes primarily reflects the discrete impact for reduction of indefinite-lived deferred tax liabilities resulting from the impairment of book goodwill. For the three months endedSeptember 30, 2021 , our benefit from incomes taxes primarily reflects the reversal of a tax accrual related to the ALG divestiture. Our benefit from income taxes for the nine months endedSeptember 30, 2022 primarily reflects the release of valuation allowance resulting from net deferred tax liabilities recorded inDigital Motors acquisition accounting providing a source of income in assessing realization of consolidated net deferred tax assets. Our provision for income taxes for the nine months endedSeptember 30, 2021 primarily reflects tax expense associated with state income taxes and the amortization of tax-deductible goodwill that is not an available source of income to realize deferred tax assets. 34 --------------------------------------------------------------------------------
Liquidity and Capital Resources
At
We have incurred cumulative losses of$494.4 million from our operations throughSeptember 30, 2022 , and expect to incur additional losses in the future. We generate cash inflows from operations primarily from selling services to dealers participating in our network of TrueCar Certified Dealers, and cash outflows to enable our business operations, develop new services and core technologies that further enhance our online automotive marketplace, and fund repurchases of our common stock based on our evaluation of market conditions and other factors. We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months. However, our future capital requirements will depend on many factors, including our revenue levels, the timing and extent of our spending to support our technology and development efforts, costs related to potential acquisitions to further expand our business and product offerings, collection of accounts receivable, macroeconomic activity, and the length and severity of business disruptions resulting from the COVID-19 pandemic and inventory constraints caused by the global automobile semiconductor chip shortage. To the extent that existing cash and cash equivalents, and cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.
Credit Facility
We are party to a credit facility withSilicon Valley Bank that provides for advances of up to$35.0 million . This credit facility provides a$10.0 million sub-facility for the issuance of letters of credit and contains an increase option permitting us, subject to the lender's consent, to increase the revolving credit facility by up to$15.0 million , to an aggregate maximum of$50.0 million . The credit facility's previous three-year term matured onApril 19, 2021 . InApril 2021 , we entered into an amendment to extend the maturity date of our credit facility for another three years to expire onApril 12, 2024 . No amounts were outstanding atSeptember 30, 2022 . The amount available under the amended credit facility atSeptember 30, 2022 was$32.6 million , reduced for the letters of credit issued and outstanding under the sub-facility of$2.4 million . See Note 8 of our condensed consolidated financial statements herein for more information about our amended credit facility.
Share Repurchase Program
In the third quarter of 2020, our board of directors authorized an open market stock repurchase program (the "Program") of up to$75 million to allow for the repurchase of shares of our common stock throughSeptember 30, 2022 . In the second quarter of 2021, our board of directors increased the authorization of the Program by an additional$75 million , bringing the total authorization to$150 million . In the third quarter of 2022, our board of directors extended the Program's expiration toSeptember 30, 2024 . The timing and amount of any repurchases is determined by us based on our evaluation of market conditions and other factors. Repurchases of our common stock may be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when we might otherwise be precluded from doing so under insider trading laws, open market purchases, privately-negotiated transactions, block purchases or otherwise in accordance with applicable federal securities laws. The Program may be suspended or discontinued at any time and does not obligate us to purchase any minimum number of shares. During the nine months endedSeptember 30, 2022 the Company repurchased and retired a total of 6.8 million shares under the Program for$25.0 million . As ofSeptember 30, 2022 , the Company had a remaining authorization of$50.5 million for future share repurchases. 35 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes net cash derived from operating, investing, and
financing activities from continuing operations, as well as net cash from
discontinued operations:
Nine Months Ended September 30,
2022 2021
Consolidated Cash Flow Data: (in thousands)
Net cash (used in) provided by operating activities $ (20,212) $ 16,177
Net cash used in investing activities (4,680) (8,056)
Net cash used in financing activities (27,346) (37,074)
Net cash used in continuing operations (52,238) (28,953)
Net cash provided by discontinued operations - 6,304
Net decrease in cash and cash equivalents $
(52,238)
Operating Activities of Continuing Operations
Our net loss and cash flows provided by or used in operating activities are significantly influenced by our investments in headcount and infrastructure to support our growth and marketing, advertising, and sponsorship expenses. Our net loss has been significantly greater than cash provided by or used in operating activities due to the inclusion of non-cash expenses and charges. Cash used in operating activities for the nine months endedSeptember 30, 2022 was$20.2 million . This was primarily due to our net loss of$100.5 million , adjusted for non-cash items, including goodwill impairment of$59.8 million , depreciation and amortization expense of$11.7 million , stock-based compensation expense of$13.2 million , amortization of lease right-of-use assets of$3.0 million , and a gain from equity method investment of$1.8 million . Net cash used in operations also reflected a decrease of$3.5 million from changes in operating assets and liabilities, which primarily reflected a decrease in operating lease liabilities of$4.0 million , an increase in prepaid expenses and other assets of$1.7 million , and a decrease in accounts payable of$2.5 million . These decreases were offset by a decrease in accounts receivable of$3.3 million and an increase in accrued employee expenses of$2.0 million . Cash provided by operating activities from continuing operations for the nine months endedSeptember 30, 2021 was$16.2 million . This was primarily due to our loss from continuing operations of$22.6 million , adjusted for non-cash items, including stock-based compensation expense of$16.0 million , depreciation and amortization expense of$12.7 million , amortization of lease right-of-use assets of$3.2 million , an impairment charge associated with certain of our existing office locations of$1.7 million , bad debt expense of$0.3 million , and loss from equity method investment of$1.0 million . Net cash provided by operations also reflected an increase of$3.5 million from changes in operating assets and liabilities, which primarily reflected a decrease in accounts receivable of$12.7 million primarily due to improved collections efforts and an increase in accounts payable of$1.0 million , offset by a decrease in accrued employee expenses of$1.1 million , a decrease in operating lease liabilities of$3.9 million , and a decrease in accrued expenses and other current liabilities of$5.4 million primarily related to decreased accrued marketing spend and marketing fees payable to our affinity group partners and advertisers.
Investing Activities of Continuing Operations
Cash used in investing activities of$4.7 million for the nine months endedSeptember 30, 2022 consisted of$12.1 million paid for our acquisition ofDigital Motors and$8.3 million investments in software and computer hardware, offset by$15.7 million received from the sale of our equity method investment in Accu-Trade.
Cash used in investing activities of
Financing Activities of Continuing Operations
Cash used in financing activities of$27.3 million for the nine months endedSeptember 30, 2022 represented payments of$25.1 million for the repurchase of shares of our common stock under our open market stock repurchase program and taxes paid of$2.4 million for the net share settlement of certain equity awards. These decreases were offset by proceeds received of$0.2 million from the exercise of employee stock options. Cash used in financing activities of$37.1 million for the nine months endedSeptember 30, 2021 primarily represented payments of$31.9 million for the repurchase and retirement of our common stock, taxes paid of$4.3 million for the net share settlement of certain equity awards, and the portion of the payment associated with an acquisition date fair value of a contingent 36 --------------------------------------------------------------------------------
consideration of
Net Cash Provided by Discontinued Operations
Net cash provided by discontinued operations for the nine months endedSeptember 30, 2021 mainly consisted of the$7.5 million cash earnout received fromJ.D. Power based upon ALG's achievement of certain revenue metrics in 2020 net of a cash payment of$1.0 million related to final net working capital adjustments associated with the Divestiture.
Contractual Obligations and Known Future Cash Requirements
Information related to the Company's contractual obligations, commercial commitments and expected cash requirements can be found in Note 3 and Note 9 in our Annual Report on Form 10-K, filed with theSEC onFebruary 24, 2022 . There have been no material changes in our contractual obligations and known future cash requirements sinceDecember 31, 2021 . 37 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted inthe United States of America requires management to make judgements, assumptions and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Note 2 in our Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of the condensed consolidated financial statements. SinceDecember 31, 2021 , there have been no material changes in our accounting policies that are impacted by judgements, assumptions and estimates.
Recent Accounting Pronouncements
There are no new accounting pronouncements not yet adopted or effective that are expected to have a material impact on our Condensed Consolidated Financial Statements.
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