TrueCar(US:TRUE)2019-08-09 20:44PART I - FINANCIAL INFORMATION This section provides the unaudited condensed financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Condensed Consolidated Financial Statements (unaudited) The unaudited condensed consolidated financial statements for Q2 2019 reflect increased assets and liabilities due to new lease accounting, alongside a widened net loss and decreased operating cash flow Consolidated Balance Sheets Total assets increased to $461.5 million and liabilities to $130.1 million by June 30, 2019, primarily due to new lease accounting and an equity investment, while stockholders' equity decreased Consolidated Balance Sheets ($ thousands) | Balance Sheet Items | June 30, 2019 ($ thousands) | December 31, 2018 ($ thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 176,565 | 196,128 | | Total current assets | 268,859 | 255,459 | | Operating lease right-of-use assets | 39,066 | — | | Equity method investment | 22,901 | — | | Total assets | 461,510 | 420,960 | | Liabilities | | | | Total current liabilities | 87,081 | 41,562 | | Operating lease liabilities, non-current | 39,851 | — | | Total liabilities | 130,111 | 74,407 | | Total stockholders' equity | 331,399 | 346,553 | Consolidated Statements of Comprehensive Loss Q2 2019 revenues remained flat at $88.1 million, but a significant increase in operating expenses led to a widened net loss of $24.1 million for the quarter and $38.4 million for the six-month period Consolidated Statements of Comprehensive Loss ($ thousands) | Income Statement Items | Q2 2019 ($ thousands) | Q2 2018 ($ thousands) | H1 2019 ($ thousands) | H1 2018 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenues | 88,075 | 87,850 | 173,657 | 168,911 | | Total costs and operating expenses | 112,759 | 94,595 | 213,606 | 184,715 | | Loss from operations | (24,684) | (6,745) | (39,949) | (15,804) | | Net loss | (24,060) | (6,622) | (38,425) | (15,677) | | Net loss per share, basic and diluted | (0.23) | (0.07) | (0.37) | (0.16) | Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $7.2 million for H1 2019, while investing activities significantly increased cash usage to $28.6 million, resulting in a $19.6 million net decrease in cash Consolidated Statements of Cash Flows ($ thousands) | Cash Flow Items (Six Months Ended June 30) | 2019 ($ thousands) | 2018 ($ thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | 7,224 | 8,567 | | Net cash used in investing activities | (28,579) | (9,615) | | Net cash provided by financing activities | 1,792 | 1,773 | | Net (decrease) increase in cash | (19,563) | 725 | | Cash and cash equivalents at end of period | 176,565 | 198,487 | Notes to Consolidated Financial Statements Significant notes include the adoption of a new lease accounting standard, a $22.9 million equity investment, a $28.25 million litigation settlement covered by insurance, and $7.9 million in H1 2019 severance costs - The company adopted a new lease accounting standard on January 1, 2019, using the modified retrospective method, resulting in the recognition of $42.0 million in operating lease right-of-use assets and a corresponding increase in lease liabilities3843 - In February 2019, the company acquired a 20% equity interest in Accu-Trade, LLC for $17.9 million in cash and a $5 million capital contribution, resulting in a $22.9 million equity method investment33 - The company reached an agreement in principle to settle the Milbeck Federal Securities Litigation for $28.25 million, which will be covered by directors' and officers' liability insurance, recorded as both an accrued liability and an insurance receivable on the balance sheet76 - In H1 2019, the company incurred severance costs of $7.9 million, including $3.3 million from a Q1 restructuring plan and $4.6 million in Q2 related to executive-level departures, including the former CEO6970 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights flat Q2 2019 revenue, sharply rising operating expenses leading to a wider net loss, and a decline in key visitor metrics, resulting in significantly decreased Adjusted EBITDA Key Metrics Q2 2019 saw a 6.9% decrease in Average Monthly Unique Visitors to 7.2 million due to search algorithm changes, while units sold remained flat and dealer counts increased Key Metrics | Metric | Q2 2019 | Q2 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Average Monthly Unique Visitors | 7,229,910 | 7,763,112 | -6.9% | | Units | 249,856 | 250,269 | -0.2% | | Monetization | $333 | $332 | +0.3% | | Franchise Dealer Count | 12,681 | 12,368 | +2.5% | | Independent Dealer Count | 4,014 | 3,166 | +26.8% | - The decrease in average monthly unique visitors was primarily attributed to changes in the algorithms of popular search engines, which reduced organic traffic starting in Q4 2018 and continuing into 2019107 Non-GAAP Financial Measures Adjusted EBITDA significantly decreased to $3.7 million in Q2 2019 and $8.7 million for H1 2019, resulting in a Non-GAAP net loss, primarily due to stock-based compensation and executive departure costs Non-GAAP Financial Measures ($ thousands) | Non-GAAP Measure ($ thousands) | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | Net loss | (24,060) | (6,622) | (38,425) | (15,677) | | Adjusted EBITDA | 3,653 | 8,730 | 8,740 | 14,742 | | Non-GAAP net (loss) income | (2,217) | 3,212 | (2,645) | 4,053 | - Key adjustments to reconcile Net Loss to Adjusted EBITDA and Non-GAAP Net Income include stock-based compensation ($15.6 million in Q2'19), executive departure costs ($4.7 million in Q2'19), and restructuring charges ($3.3 million in H1'19)119121122 Results of Operations Q2 2019 revenues remained flat at $88.1 million due to offsetting changes in dealer and OEM incentives revenue, while total operating expenses increased 19.2% to $112.8 million, driven by higher sales and marketing and G&A costs Revenue Stream ($ thousands) | Revenue Stream ($ thousands) | Q2 2019 | Q2 2018 | Change (YoY) | | :--- | :--- | :--- | :--- | | Dealer revenue | 78,977 | 75,271 | +4.9% | | OEM incentives revenue | 4,143 | 7,927 | -47.7% | | Forecasts, consulting and other | 4,955 | 4,652 | +6.5% | | Total revenues | 88,075 | 87,850 | +0.3% | - Sales and marketing expenses increased by $8.2 million (15.8%) in Q2 2019, driven by higher branded media spend, employee-related expenses, and partner marketing fees142 - General and administrative expenses increased by $7.9 million (58.5%) in Q2 2019, primarily due to a $4.5 million increase in stock-based compensation and a $3.2 million increase in severance costs, largely related to the departure of the former CEO148149 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material exposure to market risks, with interest rate risk on its $176.6 million cash and cash equivalents, inflation, and foreign currency risk deemed insignificant - The company's primary market risk exposure is interest rate risk on its cash and cash equivalents of $176.6 million, but fluctuations in interest income have not been significant174 - The company does not believe that inflation or foreign currency exchange risk has had a material effect on its business, financial condition, or results of operations176177 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, following the implementation of a new ERP system on April 1, 2019, which necessitated control modifications - As of June 30, 2019, the company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective178 - On April 1, 2019, the company implemented a new ERP system, leading to modifications in its internal control infrastructure180 PART II - OTHER INFORMATION This section details legal proceedings, significant risk factors, unregistered equity sales, and filed exhibits Item 1. Legal Proceedings This section refers to Note 7 of the financial statements for detailed disclosures on legal proceedings, including the Milbeck Federal Securities Litigation with a proposed settlement - For details on legal proceedings, the report refers to Note 7, "Commitments and Contingencies," in the financial statements182 Item 1A. Risk Factors The company faces significant risks including reliance on dealer networks, key partner relationships, executive turnover, intense competition, and a complex legal and regulatory environment for auto sales and advertising - A significant risk is the company's relationship with its largest affinity partner, USAA, which accounted for 29% of all units in the first six months of 2019, with no assurance its agreement extending through February 13, 2020, will be renewed222223 - The company experienced significant turnover in its top executives in the first half of 2019, including the departures of the CEO, CTO, and CMO, which could disrupt business and strategy execution201202 - The business is subject to a complex framework of federal and state laws concerning vehicle sales, advertising, and brokering, which have led to litigation and could challenge the business model233235 - The company faces intense competition from internet search engines (Google), online automotive sites (Autotrader, CarGurus, Cars.com), and offline services (Costco Auto Program), which could impede growth and pressure pricing262263264 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no material change in the planned use of proceeds from prior public offerings - There were no sales of unregistered securities in the period359 - The planned use of proceeds from prior public offerings has not materially changed359 Item 6. Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including executive separation and employment agreements, certifications, and XBRL data files - The exhibits filed with this report include several separation, consulting, and employment agreements for key executives, such as John Pierantoni, Noel B. Watson, and Chip Perry362