CarGurus, Inc. - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

OR

For the transition period from _________________ to _________________

Commission File Number: 001-38233

CARGURUS, INC.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (617) 354-0068

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 29, 2021, the registrant had 98,925,105 shares of Class A common stock, $0.001 par value per share, and 18,146,903 shares of Class B common stock, par value $0.001 per share, outstanding.

Table of Contents

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SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This report contains forward‑looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward‑looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward‑looking statements because they contain words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “likely,” “may,” “might,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” or similar expressions and the negatives of those terms. Forward-looking statements contained in this report include, but are not limited to, statements about:

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You should not rely upon forward‑looking statements as predictions of future events. We have based the forward‑looking statements contained in this report primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and growth prospects. The outcome of the events described in these forward‑looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward‑looking statements contained in this report. Further, our forward‑looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions or joint ventures in which we may be involved, or investments we may make. We cannot assure you that the results, events, and circumstances reflected in the forward‑looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward‑looking statements.

The forward‑looking statements made in this report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward‑looking statement made in this report to reflect events or circumstances after the date of this report or to reflect new information or the occurrence of unanticipated events, except as required by law.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CarGurus, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

1

CarGurus, Inc.

Unaudited Condensed Consolidated Income Statements

(in thousands, except share and per share data)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

2

CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

3

CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity

(in thousands, except share data)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4

CarGurus, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

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CarGurus, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except share and per share data, unless otherwise noted)

1. Organization and Business Description

CarGurus, Inc. (the “Company”), is a global, online automotive marketplace connecting buyers and sellers of new and used cars. Using proprietary technology, search algorithms, and innovative data analytics, the Company believes it is building the world’s most trusted and transparent automotive marketplace creating a differentiated automotive search experience for consumers. The Company’s trusted marketplace empowers consumers with unbiased third-party validation on pricing and dealer reputation, as well as other information that aids them in finding “Great Deals from Top-Rated Dealers.”

The Company is headquartered in Cambridge, Massachusetts and was incorporated in the State of Delaware on June 26, 2015.  

The Company operates principally in the United States. In the United States, it also operates the Autolist online marketplace, which it wholly owns, and the CarOffer, LLC (“CarOffer”) digital wholesale marketplace, in which it has a 51% interest, as independent brands. In addition to the United States, the Company operates online marketplaces under the CarGurus brand in Canada and the United Kingdom. In the United Kingdom, it also operates the PistonHeads online marketplace, which it wholly owns, as an independent brand. The Company also operated online marketplaces in Germany, Italy, and Spain until it ceased the operations of each of these marketplaces in the second quarter of 2020.

The Company has subsidiaries in the United States, Canada, Ireland, and the United Kingdom. Additionally, it has two reportable segments, United States and International. See Note 13 of the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim condensed consolidated financial statements (the “Unaudited Condensed Consolidated Financial Statements”) are unaudited. The Unaudited Condensed Consolidated Financial Statements and related disclosures have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The Unaudited Condensed Consolidated Financial Statements have also been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The Unaudited Condensed Consolidated Financial Statements reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2021 and December 31, 2020, results of operations, comprehensive income, changes in shareholders’ equity for the three months ended March 31, 2021 and 2020 and cash flows for the three months ended March 31, 2021 and 2020. These interim period results are not necessarily indicative of the results to be expected for any other interim period or the full year.

The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 12, 2021 (the “Annual Report”).

In the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020, the Company presented other non-current liabilities with accrued expenses, accrued income taxes and other current liabilities to conform to the current year presentation as it did not meet the disclosure threshold.

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Principles of Consolidation

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Subsequent Event Considerations

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence for certain estimates or to identify matters that require additional disclosure. The Company has evaluated all subsequent events and determined that there are no material recognized or unrecognized subsequent events requiring disclosure.

Use of Estimates

The preparation of the Unaudited Condensed 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 date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recorded in the period in which they become known.

Significant estimates relied upon in preparing the Unaudited Condensed Consolidated Financial Statements include the determination of sales allowance and variable consideration in the Company’s revenue recognition, allowance for doubtful accounts, the valuation of a redeemable noncontrolling interest, the valuation of equity and liability-classified compensation awards under ASC 718, the expensing and capitalization of product, technology, and development costs for website development and internal‑use software, the valuation and recoverability of goodwill and intangible assets and other long-lived assets, and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Accordingly, the Company considers these to be its critical accounting policies, and believes that of the Company’s significant accounting policies, these policies involve the greatest degree of judgment and complexity.

Concentration of Credit Risk

The Company has no significant off‑balance sheet risk, such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and trade accounts receivable.

The Company maintains its cash, cash equivalents, and investments principally with accredited financial institutions of high credit standing. Although the Company deposits its cash, cash equivalents, and investments with multiple financial institutions, its deposits may often exceed governmental insured limits.

Credit risk with respect to accounts receivable is dispersed due to the large number of customers. The Company routinely assesses the creditworthiness of its customers. The Company generally has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Due to these factors, no additional credit risk beyond amounts provided for collection losses is believed by management to be probable in the Company’s accounts receivable.   

For the three months ended March 31, 2021 and 2020, no individual customer accounted for more than 10% of total revenue.

As of March 31, 2021, one vendor of CarOffer accounted for approximately 49% of net accounts receivable. This receivable is attributable to a third-party vendor that manages customer payments on CarOffer's behalf. As of December 31, 2020, one customer accounted for approximately 10% of net accounts receivable.  

Included in net accounts receivable at March 31, 2021 and December 31, 2020, are $7,035 and $7,426, respectively, of unbilled accounts receivable relating primarily to advertising customers billed in a period subsequent to services rendered.

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Significant Accounting Policies

The Unaudited Condensed Consolidated Financial Statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the Unaudited Condensed Consolidated Financial Statements. As of March 31, 2021, the Company’s significant accounting policies and estimates, which are detailed in the Annual Report, have not changed, other than those impacted by the acquisition of a 51% interest in CarOffer and recently issued equity awards, as described below.

Redeemable Noncontrolling Interest

In connection with the Company’s acquisition of a 51% interest in CarOffer on January 14, 2021, the Company became a party with the noncontrolling equity holders of CarOffer to the CarOffer Operating Agreement (as defined in Note 4 of the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report), which, among other matters, sets forth certain put and call rights described in Note 4 of the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report. The CarOffer Operating Agreement provides the Company with the right to purchase, and the noncontrolling equity holders with the right to sell to the Company, the noncontrolling CarOffer equity holders’ equity interests in CarOffer at a contractually defined formulaic purchase price, which is based on a multiple of earnings. As the purchase is contingently redeemable at the option of the noncontrolling equity holders, the Company classifies the carrying amount of the redeemable noncontrolling interests in the mezzanine section on the Unaudited Condensed Consolidated Balance Sheet, which is presented above the equity section and below the liabilities section. As of the acquisition date the noncontrolling interest was recognized at fair value computed using the Least Square Monte Carlo Simulation approach. Significant inputs to the model include market price of risk, volatility, correlation and risk-free rate.

Subsequent to the Company’s acquisition of the 51% interest on January 14, 2021, the redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value and its carrying amount adjusted for net losses attributable to the noncontrolling interest. Adjustments to the carrying value of the redeemable noncontrolling interest resulting from changes in the purchase price are recorded through retained earnings in the Unaudited Condensed Consolidated Balance Sheet.

Revenue Recognition – Other Revenue

The Company generates other revenue primarily from revenue relating to the wholesale sale of automobiles, display advertising revenue from auto manufacturers and other auto-related brand advertisers and revenue from partnerships with financing services companies. CarOffer revenue is comprised entirely of wholesale revenue. 

Wholesale revenue includes transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers, where CarOffer collects fees from both the buyer and seller. CarOffer may also fulfill buy orders from dealers through the acquisition of vehicles at other marketplaces – in these instances, CarOffer collects a transaction fee from the buyer.  CarOffer also charges the buyer fees to perform inspection and transportation services for all wholesale transactions.

For wholesale transactions, CarOffer generally does not control the vehicle and therefore acts as an agent in the transaction. Revenue earned from the fees for facilitating these wholesale transactions is recognized at a point in time when the vehicle is sold and revenue is recognized on a net basis. 

For vehicles acquired to fulfill buy orders at other marketplaces, CarOffer recognizes the vehicles on its balance sheet in inventory for the short period of time it possesses the vehicle title and the fees received for the vehicle are typically recognized on a net basis. In limited circumstances, typically during an arbitration process, CarOffer acquires vehicles in transactions for which it is deemed to control the vehicle and therefore is deemed to be the principal. In these situations, the inventory is recorded on the balance sheet and valued at the lower of cost or net realizable value. The Company records inventory within prepaid expenses, prepaid income taxes and other current assets within the Unaudited Condensed Consolidated Balance Sheets. 

CarOffer is deemed to control both inspection and transportation services, as it is primarily responsible for fulfillment and therefore acts as a principal. CarOffer leverages a network of third-party inspection service providers and transportation carriers. Revenue from fees for inspection services is recognized at the point in time when the inspection is performed and revenue from fees for transportation services is recognized over time as delivery is completed. Unearned revenue related to unsatisfied performance obligations is recorded as deferred revenue.

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Stock‑Based Compensation

For stock‑based awards granted under the Company’s stock‑based compensation plans, the fair value of each award is determined on the date of grant.

For restricted stock units (“RSUs”) granted subject to service-based vesting conditions, the fair value is determined based on the closing price of the Company’s Class A common stock, par value $0.001 per share (the “Class A common stock”), as reported on the Nasdaq Global Select Market on the date of grant. RSUs granted subject to service-based vesting conditions generally vest over a four-year requisite service period.

For RSUs granted subject to market-based vesting conditions, the fair value is determined using the Monte Carlo simulation lattice model. The determination of the fair value using this model is affected by the Company’s stock price performance relative to the companies listed on the S&P 500 as of December 31, 2020 and a number of assumptions including volatility, correlation coefficient, risk-free interest rate and expected dividends. RSUs granted subject to market-based vesting conditions vest upon achievement of specified levels of market conditions.

For stock options granted, the fair value is determined on the date of grant using the Black‑Scholes option‑pricing model. The determination of the fair value is affected by the Company’s stock price and a number of assumptions including volatility, term, risk-free interest rate and dividend yield. Stock options granted generally have a term of ten years from the date of grant and generally vest over a four-year requisite service period.

In connection with the Company’s acquisition of a 51% interest in CarOffer, the unvested incentive units (“CO Incentive Units”) of CarOffer remained outstanding and will vest over the requisite service period. CO Incentive Units are liability-classified awards because the awards can be put to the Company at a formula price such that the holders do not bear the risks and rewards associated with equity ownership. For liability-classified awards, the fair value is determined on the date of issuance using a Least Square Monte Carlo simulation model. The determination of the fair value is affected by CarOffer’s equity value, EBITDA and revenue forecasts that drive the exercise price of future call/put rights, as well as a number of assumptions including market price of risk, volatility, correlation, and risk-free interest rate. Liability-classified awards are remeasured to fair value each period until settlement.

Grants are subject to the CarOffer 2020 Equity Incentive Plan, adopted effective November 24, 2020 (the “2020 CO Plan”), the applicable award agreement, and the CarOffer Operating Agreement. Following the Company’s acquisition of the 51% interest in CarOffer on January 14, 2021, remaining unvested incentive interests will vest over a period of three (3) years, one third each on the first, second, and third anniversaries of January 14, 2021, provided that a grantee’s continuous service to CarOffer has not terminated on the applicable vesting date. Under the terms of the grants, vesting of unvested incentive interests is accelerated in the event of (i) a change of control of CarOffer (which, for the avoidance of doubt, does not include the Company’s acquisition of the 51% interest on January 14, 2021), (ii) the death or disability of the grantee, (iii) termination of the grantee’s employment with CarOffer without cause, or (iv) termination of grantee’s employment by the grantee for good reason. Upon termination of a grantee’s continuous service to CarOffer voluntarily by the grantee (other than for good reason) or by CarOffer for cause, all of such grantee’s unvested incentive interests are forfeited. In addition, if a grantee’s continuous service terminates then CarOffer has the option to repurchase any outstanding incentive interests from the grantee.

The Company issues shares for RSUs and stock option exercises out of its shares available for issuance. The Company issues CO Incentive Units out of CarOffer’s units available for issuance. The Company accounts for forfeitures when they occur.

The Company recognizes compensation expense on a straight-line basis over the requisite service period for each separate vesting portion of the award, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.  

The tax effect of differences between tax deductions related to stock compensation and the corresponding financial statement expense compensation are recorded to tax expense. Excess tax benefits recognized on stock‑based compensation expense are classified as an operating activity in the Unaudited Condensed Consolidated Statements of Cash Flows.

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Recent Accounting Pronouncements Adopted

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing several exceptions in the current standard and adding guidance to reduce complexity in certain areas, such as requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted the guidance on January 1, 2021. The adoption did not have an impact on the Unaudited Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company on or prior to the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. As of March 31, 2021, there are no new accounting pronouncements that the Company is considering adopting.

3. Revenue Recognition

Revenue Recognition

The following table summarizes revenue from contracts with customers by geographical region and by revenue source for the three months ended March 31, 2021 and 2020.

The Company provides disaggregation of revenue based on the marketplace subscription versus other revenue classification and based on geographic region in the table above as it believes these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”) requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of the relevant quarter end.

For contracts with an original expected duration greater than one year, the aggregate amount of the transaction price allocated to the performance obligations that were unsatisfied as of March 31, 2021 was approximately $21.1 million, which the Company expects to recognize over the next 12 months.

For contracts with an original expected duration of one year or less, the Company has applied the practical expedient available under Topic 606 to not disclose the amount of transaction price allocated to unsatisfied performance obligations as of March 31, 2021. For performance obligations not satisfied as of March 31, 2021, and to which this expedient applies, the nature of the performance obligations, the variable consideration and any consideration from contracts with customers not included in the transaction price is consistent with performance obligations satisfied as of March 31, 2021.

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Revenue recognized during the three months ended March 31, 2021 and 2020, from amounts included in deferred revenue at the beginning of the period, was approximately $9,137 and $9,984, respectively.

In response to the COVID-19 pandemic, the Company reduced the subscription fees for paying dealers by at least 50% on all marketplace subscriptions for the April and May 2020 service periods, as well as provided a fee reduction on all June 2020 marketplace subscriptions of 20% for paying dealers in the United States and Canada and 50% for paying dealers in the United Kingdom. These fee reductions resulted in a modification to contracts with initial contractual periods greater than one month. For any contract modified, the Company calculated the remaining transaction price and allocated the consideration over the remaining performance obligations. The Company also waived subscription fees for paying dealers in the United Kingdom for the December 2020 and February 2021 service periods. These fee reductions are included in the Company’s variable consideration assessment. The fee reductions had an immaterial impact on the Company’s revenues for the three months ended March 31, 2021 and 2020.

4. Acquisitions

On January 14, 2021, the Company acquired a 51% interest in CarOffer, which provides an automated instant vehicle trade platform and is based in Addison, Texas, pursuant to the terms of a Membership Interest Purchase Agreement (the “Purchase Agreement”) dated as of December 9, 2020 (the “Agreement Date”), as amended, by and among the Company, CarOffer, CarOffer Investors Holding, LLC, a Delaware limited liability company (“TopCo”), each of the Members of TopCo (the “Members”), and Bruce T. Thompson, an individual residing in Texas (the “Members’ Representative”). This acquisition (the “CarOffer Acquisition”) is intended to add wholesale vehicle purchasing and selling capabilities to CarGurus’ portfolio of dealer offerings and create a complete and efficient digital solution for dealers to sell and acquire vehicles at both retail and wholesale.

Upon consummation of the transactions contemplated by the Purchase Agreement (the “Closing”), the Company acquired a 51% interest in CarOffer for an aggregate consideration of $174,400 (the “Total Consideration”), such Total Consideration consisting of (a) shares of Class A common stock in the aggregate amount of $103,645 (the “Stock Consideration”) and (b) $70,755 in cash (the “Cash Consideration”). The number of shares of Class A common stock issued following the Closing in connection with the Stock Consideration was 3,115,282, which was calculated by reference to a value of $22.51 per share, which equals the volume-weighted average closing price per share of Class A common stock on the Nasdaq Stock Market for the 28 consecutive trading days ending on the third Business Day (as defined in the Purchase Agreement) preceding the Agreement Date. Pursuant to the Purchase Agreement, the remaining equity in CarOffer (the “Remaining Equity”) is being retained by the then-current equity holders of CarOffer and subject to certain call and put arrangements discussed below.

Pursuant to the Purchase Agreement, the Company established a retention pool in an aggregate amount of $8,000 in the form of RSUs to be issued pursuant to the Company’s standard form of RSU agreement under the 2017 Plan, (i) $6,000 of which was granted to certain CarOffer employees following the Closing in accordance with the terms of the Purchase Agreement and (ii) $2,000 of which is available for issuance to future CarOffer employees in accordance with the terms of the Purchase Agreement. RSUs issued from the retention pool will be subject to vesting based on rendering of future services.

As of March 31, 2021, the Company incurred total acquisition-related costs of $2,582 related to the CarOffer Acquisition, of which $644 was incurred during the three months ended March 31, 2021 and recorded as general and administrative operating expense within the Unaudited Condensed Consolidated Income Statements. Acquisition-related costs were excluded from the purchase price allocation as they were primarily comprised of legal, professional and consulting expenses. 

The following table presents the total consideration transferred.

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The CarOffer Acquisition has been accounted for as a business combination under the acquisition method and, accordingly, the total consideration is allocated to the acquired assets and assumed liabilities. The Company’s 51% interest in CarOffer represents a controlling financial interest in the entity as the minority interest holders only have protective rights such that CarOffer is consolidated as of the acquisition date. The following table presents the preliminary purchase price allocation recorded in the Company’s Unaudited Condensed Consolidated Balance Sheet as of the acquisition date, which is subject to finalization for estimates of the fair value of assets acquired and liabilities assumed as of the acquisition date, including, but not limited to tangible assets, intangible assets and tax-related items, and the related tax effects of any changes made:

In addition, the Company, TopCo, each Member and CarOffer MidCo, LLC, a Delaware limited liability company, entered into the Second Amended and Restated Limited Liability Company Agreement, dated December 9, 2020 (the “CarOffer Operating Agreement”), pursuant to which, among other matters, the Company secured the right to appoint a majority of the members of the Board of Managers of CarOffer, other rights customary for a transaction of this nature and the put and call rights described below.

In the second half of 2022, the Company will have a call right (the “2022 Call Right”), exercisable in its sole discretion, to acquire a portion of the Remaining Equity representing up to twenty-five percent (25%) of the fully diluted capitalization of CarOffer (such acquired Remaining Equity, the “2022 Acquired Remaining Equity”) at an implied CarOffer value (the “2022 Call Right Value”) of seven (7) times CarOffer’s trailing twelve months gross profit as of June 30, 2022 (calculated in accordance with the defined terms and subject to the adjustments set forth in the CarOffer Operating Agreement). If the 2022 Call Right is exercised by the Company, the 2022 Acquired Remaining Equity will be purchased ratably across all of the holders of CarOffer equity securities other than the Company. The consideration to be paid by the Company in connection with the exercise of the 2022 Call Right will be in the form of cash and/or shares of Class A common stock, as determined by the Company in its sole discretion.  

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In the second half of 2024, (a) the Company will have a call right (the “2024 Call Right”), exercisable in its sole discretion, to acquire all, and not less than all, of the Remaining Equity that it has not acquired pursuant to the 2022 Call Right and the Closing, at the greater of (i) (x) one hundred million dollars ($100,000,000), and (y) the 2022 Call Right Value, whichever is less, and (ii) an implied CarOffer value of twelve (12) times CarOffer’s trailing twelve months EBITDA as of June 30, 2024 (in each case calculated in accordance with the defined terms and subject to the adjustments set forth in the CarOffer Operating Agreement), and (b) the representative of the holders of the Remaining Equity will have a put right (the “2024 Put Right”), exercisable in his, her or their sole discretion, to have the holders of the Remaining Equity sell to the Company, all, and not less than all, of the Remaining Equity at an implied CarOffer value of twelve (12) times CarOffer’s trailing twelve months EBITDA as of June 30, 2024 (calculated in accordance with the defined terms and subject to the adjustments set forth in the CarOffer Operating Agreement). The determination of whether the 2024 Call Right or the 2024 Put Right is ultimately exercised is as set forth in the CarOffer Operating Agreement. The consideration to be paid by the Company in connection with the exercise of either the 2024 Call Right or the 2024 Put Right, as applicable, will be in the form of cash and/or shares of Class A common stock, as determined by the Company in its sole discretion.

The foregoing summary of the Purchase Agreement, the CarOffer Operating Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Purchase Agreement and the CarOffer Operating Agreement, which are filed as exhibits to the Annual Report.

The following unaudited pro forma consolidated financial information combines the unaudited results of the Company for the three months ended March 31, 2021 and 2020 and the unaudited results of CarOffer for the three months ended March 31, 2021 and 2020, and assumes that the CarOffer Acquisition, which closed on January 14, 2021, was completed on January 1, 2020 (the first day of fiscal year 2020). The pro forma consolidated financial information has been calculated after applying the Company’s accounting policies and includes adjustments for amortization expense of acquired intangible assets, transaction-related costs, and compensation expense for ongoing share-based compensation arrangements replaced, together with the consequential tax effects. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the CarOffer Acquisition actually taken place on January 1, 2020. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after March 31, 2021, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the CarOffer Acquisition.

$15,566 of revenue and $7,567 of net loss attributable to CarOffer is included in our Unaudited Condensed Consolidated Income Statement from the acquisition date of January 14, 2021 to March 31, 2021.

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

The following tables present, for each of the fair value levels, the Company’s assets that are measured at fair value on a recurring basis at March 31, 2021 and at December 31, 2020:

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The Company measures eligible assets and liabilities at fair value with changes in value recognized in earnings. There were no liabilities that were measured at fair value as of March 31, 2021 and December 31, 2020. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to remeasure any of its existing financial assets and did not elect the fair value option for any financial assets transacted during the three months ended March 31, 2021 or the year ended December 31, 2020.

Cash and cash equivalents primarily consist of cash on deposit with banks and amounts held in interest-bearing money market accounts. Cash equivalents are carried at cost, which approximates their fair market value.

The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. Investments not classified as cash equivalents with maturities one year or less from the balance sheet date are classified as short-term investments, while investments with maturities in excess of one year from the balance sheet date are classified as long-term investments. Management determines the appropriate classification of investments at the time of purchase and re-evaluates such determination at each balance sheet date.

Certificates of deposit at March 31, 2021 and at December 31, 2020 had maturity dates of one year or less.

The following is a summary of investments as of March 31, 2021 and December 31, 2020, respectively:

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6. Property and Equipment, Net

Property and equipment, net consists of the following:

Depreciation and amortization expense, excluding amortization of intangible assets, was $2,020 and $2,558 for the three months ended March 31, 2021 and 2020, respectively.

7. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying value of goodwill were as follows:

The Company tests goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As of March 31, 2021, there have been no events or changes in circumstance that the carrying value may not be recoverable. As of December 31, 2020, the Company assessed its goodwill for impairment and concluded that there was no impairment.  

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Other Intangible Assets

Intangible assets as of March 31, 2021 and December 31, 2020 consist of the following:

The Company recorded amortization expense related to intangible assets of $6,646, and $432 for the three months ended March 31, 2021, and 2020, respectively.

The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. As of March 31, 2021, there have been no events or changes in circumstances occur that could impact the recoverability of these assets. As of December 31, 2020, the Company assessed its intangible assets for impairment and concluded that there was no impairment.

Estimated amortization expense of intangible assets for future periods as of March 31, 2021 is as follows:

8. Accrued Expenses, Accrued Income Taxes and Other Current Liabilities

Accrued expenses, accrued income taxes and other current liabilities consist of the following:

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The increase of $6,012 in accrued income taxes is primarily due to higher taxable income projected for 2021 in excess of tax attributes available to offset. The decrease of $7,128 in accrued bonus is primarily due to the payout of the fiscal year 2020 bonus in the first quarter of 2021. The decrease of $1,324 in accrued commissions is primarily due to payouts of the fiscal year 2020 commissions in the first quarter of 2021.

9. Commitments and Contingencies

Contractual Obligations and Commitments

All of the Company’s property, equipment, and internal-use software have been purchased with cash with the exception of amounts related to unpaid property and equipment and internal use software and amounts related to obligations under finance leases as disclosed in the Unaudited Condensed Consolidated Statements of Cash Flows as of March 31, 2021. The Company has no material long-term purchase obligations outstanding with any vendor or third party.

Leases

The Company’s primary operating lease obligations consist of various leases for office space in: Boston, Massachusetts; Cambridge, Massachusetts; San Francisco, California; Addison, Texas; Plano, Texas; and Dublin, Ireland. The Company also has an operating lease obligation for data center space in Needham, Massachusetts.

As of March 31, 2021, there were no material changes in the Company’s material leases from those disclosed in the Annual Report, other than as discussed below.

On January 25, 2021, CarOffer entered into a sublease in Addison, Texas at 15601 Dallas Parkway for approximately 61,826 square feet of office space with a non-cancellable lease term through 2030. The sublease commenced on March 1, 2021. CarOffer’s monthly base rent for the premises, which is payable from January 1, 2022, will initially be approximately $152, and will increase each year up to a maximum monthly base rent of approximately $185. In connection with the sublease, CarOffer entered into a financing lease arrangement for furniture and fixtures used in connection with its operations. The term of the financing lease is for the entire period of the sublease. The monthly rent for the furniture and fixtures is included in the sublease monthly rent, with ownership of the furniture and fixtures transferring to CarOffer at the expiration of the lease term. Monthly rent payments are allocated based upon the relative fair value of the office space and furniture of 95% and 5%, respectively.  Upon commencement, the right of use asset for the office space and furniture was $12,336 and $664, respectively.

On July 1, 2019, CarOffer entered into a sublease in Plano, Texas at 2701 East Plano Parkway, for the lease of approximately 26,971 square feet of office space with a non-cancellable lease term through 2023. The sublease commenced on July 1, 2019. CarOffer’s monthly base rent for the premises, which is payable from July 1, 2019, was initially approximately $21, and will increase each year up to maximum monthly base rent of $22. The Company acquired the lease as part of the CarOffer Acquisition. 

The Company’s leases in Boston, Massachusetts, Cambridge, Massachusetts and San Francisco, California have associated letters of credit, which are recorded as restricted cash within the Unaudited Condensed Consolidated Balance Sheet. At March 31, 2021 and December 31, 2020, restricted cash was $16,866 and $10,627, respectively, and primarily related to cash held at a financial institution in an interest‑bearing cash account as collateral for the letters of credit related to the contractual provisions for the Company’s building leases. Restricted cash at March 31, 2021 also includes pass-through payments from customers related to the Company’s wholesale business. At March 31, 2021 and December 31, 2020, portions of restricted cash were classified as a short-term asset and long‑term asset, as disclosed on the Unaudited Condensed Consolidated Balance Sheet.

Acquisitions

On January 14, 2021, the Company completed the CarOffer Acquisition, details of which are described in Note 4 of the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report.

Legal Matters

From time to time the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. The Company is not presently subject to any pending or threatened litigation that it believes, if determined adversely to the Company, individually, or taken together, would reasonably be expected to have a material adverse effect on its business or financial results.

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Guarantees and Indemnification Obligations

In the ordinary course of business, the Company enters into agreements with its customers, partners and service providers that include commercial provisions with respect to licensing, infringement, indemnification, and other common provisions. The Company does not, in the ordinary course, agree to guaranty or indemnification obligations for the Company under its contracts with customers. Based on historical experience and information known at March 31, 2021 and December 31, 2020, the Company has not incurred any costs for guarantees or indemnities.

10. Stock-based Compensation

Equity Incentive Plans

The 2020 CO Plan provides for the issuance of incentive interests to CarOffer’s employees, officers, managers, and consultants.  The 2020 CO Plan authorized up to an aggregate of 485,714 incentive interests for such issuances.

Stock-based Compensation Expense

The following two tables show stock compensation expense by award type and where the stock compensation expense is recorded in the Company’s Unaudited Condensed Consolidated Income Statements:

Excluded from stock-based compensation expense is $569 and $248 of capitalized website development and internal-use software costs for the three months ended March 31, 2021 and 2020, respectively.

During the three months ended March 31, 2021 and 2020, the Company withheld 162,950 and 106,934 shares of Class A common stock, respectively, to satisfy employee tax withholding requirements and for option exercise costs due to net share settlements and cashless exercises of options. The shares withheld return to the authorized, but unissued pool under the 2017 Plan and can be reissued by the Company. Total payments to satisfy employee tax withholding requirements and for option exercise costs due to net share settlements and cashless exercises of options were $5,041 and $3,397 for the three months ended March 31, 2021 and 2020, respectively, and are reflected as a financing activity within the Unaudited Condensed Consolidated Statements of Cash Flows.

11. Earnings Per Share

The Company has two classes of common stock authorized: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible into one share of Class A common stock at the option of the holder at any time or automatically upon certain events described in the Company’s amended and restated certificate of incorporation, including upon either the death or voluntary termination of the Company’s Executive Chairman. The Company allocates undistributed earnings attributable to common stock between the common stock classes on a one‑to‑one basis when computing net income per share. As a result, basic and diluted net income per share of Class A common stock and per share of Class B common stock are equivalent.

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During the three months ended March 31, 2021 and 2020, holders of Class B common stock converted 929,597 and 335,741 shares of Class B common stock to Class A common stock, respectively.  

Basic net income per share (“Basic EPS”) is computed by dividing net income attributable to common stockholders and adjusted to reflect changes in the redemption value of the redeemable noncontrolling interest, if applicable, by the weighted-average number of common shares outstanding during the reporting period. The Company computes the weighted-average number of common shares outstanding during the reporting period using the total number of shares of Class A common stock and Class B common stock outstanding as of the last day of the previous year plus the weighted-average of any additional shares issued and outstanding during the reporting period.    

Diluted net income per share (“Diluted EPS”) gives effect to all potentially dilutive securities. Diluted EPS is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding during the reporting period using (i) the number of shares of common stock used in the Basic EPS calculation as indicated above, (ii) if dilutive, the incremental weighted-average common stock that the Company would issue upon the exercise of stock options and the vesting of RSUs, (iii) if dilutive, market-based performance awards based on the number of shares that would be issuable as of the end of the reporting period assuming the end of the reporting period was also the end of the contingency period. The dilutive effect of these common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method. The if-converted method is used to calculate the number of shares issuable upon exercise of the 2024 Put Right, inclusive of CO Incentive Units, that would be issuable as of the end of the reporting period assuming the end of the reporting period was also the end of the contingency period.

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share:

The following potentially dilutive common stock equivalents have been excluded from the calculation of diluted weighted-average shares outstanding for the three months ended March 31, 2021 and 2020, as their effect would have been anti-dilutive for the periods presented:

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In addition, shares of Class A common stock potentially issuable under market-based performance awards of approximately 282,921 for the three months ended March 31, 2021 were excluded from the calculation of weighted average shares used to compute Diluted EPS as the market-based vesting conditions had not been achieved as of the reporting period end date and as such there were zero contingently issuable shares.

There were no shares included in diluted EPS for the number of shares issuable upon exercise of the 2024 Put Right, inclusive of CO Incentive Units, as no shares would be issuable as of the end of March 31, 2021 had that been the end of the contingency period.

12. Income Taxes

During the three months ended March 31, 2021, the Company recorded an income tax provision of $6,462, representing an effective tax rate of 22.4%. The effective tax rate for the three months ended March 31, 2021 was greater than the statutory tax rate of 21% principally due to state and local income taxes, partially offset by federal and state research and development tax credits.

During the three months ended March 31, 2020, the Company recorded an income tax provision of $51 representing an effective tax rate of 0.4%. The effective tax rate for the three months ended March 31, 2020 was lower than the statutory tax rate of 21% principally due to a discrete benefit recognized as a result of the enactment of the Coronavirus Aid, Relief, and Economic Security Act, excess stock deductions from the taxable compensation of share-based awards and federal and state research and development tax credits, partially offset by state and local income taxes.

The Company and its subsidiaries are subject to various U.S. federal, state, and foreign income tax examinations. The Company is currently not subject to income tax examination for the tax years of 2017 and prior as a result of applicable statute of limitations of the Internal Revenue Service (“IRS”) and state jurisdictions. The Company is currently open to examination in its foreign jurisdictions for tax years 2018 and after. In 2019, the IRS commenced a federal employment tax audit with respect to the 2018, 2017 and 2016 calendar years, which is still open. In 2020, the State of New York commenced a sales tax audit of the Company for the tax years 2014 to 2020, which is still open. In 2020, the IRS initiated a federal income tax audit associated with tax year 2017, which closed in January 2021. In 2020, the State of Ohio commenced a commercial activity tax audit for the tax years 2013 to 2019, which was settled in April 2021.

13. Segment and Geographic Information

The Company has two reportable segments, United States and International. Segment information is presented in the same manner as the Company’s chief operating decision maker (the “CODM”) reviews the Company’s operating results in assessing performance and allocating resources. The CODM reviews revenue and operating income (loss) for each reportable segment as a proxy for the operating performance of the Company’s United States and International operations. The Company’s Chief Executive Officer is the CODM on behalf of both reportable segments.

The United States segment derives revenues from marketplace subscriptions and other revenues from customers within the United States. The International segment derives revenues from marketplace subscriptions and other revenues from customers outside of the United States. A majority of the Company’s operational overhead expenses, including technology and personnel costs, and other general and administrative costs associated with running the Company’s business, are incurred in the United States and not allocated to the International segment. Revenue and costs discretely incurred by reportable segments, including depreciation and amortization, are included in the calculation of reportable segment income (loss) from operations. Segment operating income (loss) does not reflect the transfer pricing adjustments related to the Company’s foreign subsidiaries, which are recorded for statutory reporting purposes. Asset information is assessed and reviewed on a global basis.

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Information regarding the Company’s operations by segment and geographical area is presented as follows: