Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 9, 2017)
  • 10-Q (Aug 9, 2017)
  • 10-Q (May 10, 2017)
  • 10-Q (Nov 9, 2016)
  • 10-Q (Aug 9, 2016)
  • 10-Q (May 10, 2016)

 
8-K

 
Other

TrueCar, Inc. 10-Q 2017

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
TrueCar Q2 2017 10Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2017
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-36449
 
 
TRUECAR, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
04-3807511
(I.R.S. Employer
Identification Number)
 
120 Broadway, Suite 200
Santa Monica, California 90401
(800) 200-2000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x     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. (Check one):
Large accelerated filer ¨
 
Accelerated filer x
Non-accelerated filer ¨
(do not check if a smaller reporting company)
 
Smaller reporting company ¨

 
 
Emerging growth company x
 
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x
As of August 3, 2017, 98,497,058 shares of the registrant’s common stock were outstanding.
 



TRUECAR, INC.
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which statements involve substantial risks and uncertainties.  Forward-looking statements generally relate to future events or our future financial or operating performance.  In some cases, you can identify forward-looking statements because they contain words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “likely,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
our future financial performance and our expectations regarding our revenue, cost of revenue, gross profit or gross margin, operating expenses, ability to grow revenue, scale our business, generate cash flow, our mission and ability to achieve, and maintain, future profitability; 
our relationship with key industry participants, including car dealers and automobile manufacturers;
anticipated trends, growth rates and challenges in our business and in the markets in which we operate;
our expectations regarding the automotive trade-in pilot with a large vehicle wholesaler;
our ability to anticipate market needs and develop new and enhanced products and services to meet those needs, including an automotive trade-in product offering, and our ability to successfully monetize them; 
maintaining and expanding our customer base in key geographies, including our ability to increase the number of high volume brand dealers in our network generally and in key geographies; 
our reliance on our third-party service providers; 
the impact of competition in our industry and innovation by our competitors; 
our anticipated growth and growth strategies, including our ability to increase close rates and the rate at which site visitors prospect with a TrueCar certified dealer;  
our ability to anticipate or adapt to future changes in our industry; 
the impact of seasonality on our business; 
our ability to hire and retain necessary qualified employees, including anticipated additions to our dealer, product and technology teams;  
our ability to integrate recent additions to our management team; 
our continuing ability to provide customers access to our products and services and the impact of any failure of our solution innovations; 
the evolution of technology affecting our products, services and markets; 
our ability to adequately protect our intellectual property; 
the anticipated effect on our business of litigation to which we are a party; 
our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business; 
the expense and administrative workload associated with being a public company; 
failure to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;
our liquidity and working capital requirements;
the estimates and estimate methodologies used in preparing our consolidated financial statements;
the future trading prices of our common stock and the impact of securities analysts’ reports on these prices;
our expectations regarding the period during which we qualify as an emerging growth company under the JOBS Act;
the preceding and other factors discussed in Part II, Item 1A, “Risk Factors,” and in other reports we may file with the Securities and Exchange Commission from time to time; and
the factors set forth in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.  Given these uncertainties, you should not place undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or

3


changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

4




TRUECAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
(Unaudited)
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
181,722

 
$
107,721

Accounts receivable, net of allowances of $2,761 and $2,600 at June 30, 2017 and December 31, 2016, respectively (includes related party receivables of $240 and $393 at June 30, 2017 and December 31, 2016, respectively)
37,056

 
36,867

Prepaid expenses
7,050

 
6,044

Other current assets
1,043

 
2,278

Total current assets
226,871

 
152,910

Property and equipment, net
68,397

 
66,941

Goodwill
53,270

 
53,270

Intangible assets, net
17,843

 
19,774

Other assets
1,659

 
1,553

Total assets
$
368,040

 
$
294,448

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities
 
 
 
Accounts payable (includes related party payables of $4,002 and $2,925 at June 30, 2017 and December 31, 2016, respectively)
$
18,018

 
$
13,827

Accrued employee expenses
7,399

 
8,951

Accrued expenses and other current liabilities (includes related party accrued expenses of $660 and $992 at June 30, 2017 and December 31, 2016, respectively)
11,994

 
12,583

Total current liabilities
37,411

 
35,361

Deferred tax liabilities
3,282

 
2,994

Lease financing obligations, net of current portion
29,031

 
28,833

Other liabilities
3,782

 
2,679

Total liabilities
73,506

 
69,867

Commitments and contingencies (Note 6)

 

Stockholders’ Equity
 
 
 
Preferred stock — $0.0001 par value; 20,000,000 shares authorized at June 30, 2017 and December 31, 2016, respectively; no shares issued and outstanding at June 30, 2017 and December 31, 2016

 

Common stock — $0.0001 par value; 1,000,000,000 shares authorized at June 30, 2017 and December 31, 2016; 97,575,225 and 86,159,527 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
10

 
9

Additional paid-in capital
627,614

 
542,807

Accumulated deficit
(333,090
)
 
(318,235
)
Total stockholders’ equity
294,534

 
224,581

Total liabilities and stockholders’ equity
$
368,040

 
$
294,448

See accompanying notes to condensed consolidated financial statements.

5


TRUECAR, INC. 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands except per share data)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
81,819

 
$
66,427

 
$
157,576

 
$
128,287

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization presented separately below)
7,130

 
6,365

 
13,522

 
12,590

Sales and marketing (includes related party expenses of $4,487 and $3,359 for the three months ended June 30, 2017 and 2016, and $8,543 and $6,660 for the six months ended June 30, 2017 and 2016, respectively)
46,933

 
38,129

 
89,115

 
70,240

Technology and development
14,131

 
14,022

 
27,760

 
27,162

General and administrative
15,413

 
15,998

 
29,041

 
31,494

Depreciation and amortization
5,668

 
5,868

 
11,752

 
11,772

Total costs and operating expenses
89,275

 
80,382

 
171,190

 
153,258

Loss from operations
(7,456
)
 
(13,955
)
 
(13,614
)
 
(24,971
)
Interest income
249

 
102

 
382

 
195

Interest expense
(652
)
 
(632
)
 
(1,301
)
 
(1,240
)
Loss before provision for income taxes
(7,859
)
 
(14,485
)
 
(14,533
)
 
(26,016
)
Provision for income taxes
201

 
170

 
322

 
306

Net loss
$
(8,060
)
 
$
(14,655
)
 
$
(14,855
)
 
$
(26,322
)
 
 
 
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.09
)
 
$
(0.17
)
 
$
(0.16
)
 
$
(0.31
)
Weighted average common shares outstanding, basic and diluted
93,745

 
83,931

 
90,283

 
83,697

Other comprehensive loss:
 
 
 
 
 
 
 
Comprehensive loss
$
(8,060
)
 
$
(14,655
)
 
$
(14,855
)
 
$
(26,322
)
See accompanying notes to condensed consolidated financial statements.


6


TRUECAR, INC. 
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands except share data)
(Unaudited) 
 
Common Stock
 
 
 
Accumulated
Deficit
 
Stockholders’
Equity
 
Shares
 
Amount
 
APIC
 
 
Balance at December 31, 2016
86,159,527

 
$
9

 
$
542,807

 
$
(318,235
)
 
$
224,581

Net loss

 

 

 
(14,855
)
 
(14,855
)
Issuance of common stock in follow-on offering, net of underwriting discounts and offering costs
1,150,000

 

 
17,398

 

 
17,398

Stock-based compensation

 

 
13,303

 

 
13,303

Shares issued in connection with employee stock plans, net of shares withheld for employee taxes
10,265,698

 
1

 
54,106

 

 
54,107

Balance at June 30, 2017
97,575,225

 
$
10

 
$
627,614

 
$
(333,090
)
 
$
294,534

See accompanying notes to condensed consolidated financial statements.


7


TRUECAR, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Months Ended 
 June 30,
 
2017
 
2016
Cash flows from operating activities
 
 
 
Net loss
$
(14,855
)
 
$
(26,322
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
11,747

 
11,677

Deferred income taxes
288

 
281

Bad debt expense and other reserves
789

 
590

Stock-based compensation
12,753

 
11,792

Non-cash interest expense on lease financing obligation
233

 
411

Write-off and loss on disposal of fixed assets
36

 
392

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(978
)
 
463

Prepaid expenses
(1,006
)
 
(1,304
)
Other current assets
730

 
(196
)
Other assets
(106
)
 
(316
)
Accounts payable
4,248

 
(4,364
)
Accrued employee expenses
(2,148
)
 
1,156

Accrued expenses and other liabilities
(115
)
 
2,372

Other liabilities
1,103

 
1,301

Net cash provided by (used in) operating activities
12,719

 
(2,067
)
Cash flows from investing activities
 
 
 
Purchase of property and equipment
(10,340
)
 
(9,785
)
Net cash used in investing activities
(10,340
)
 
(9,785
)
Cash flows from financing activities
 

 
 

Proceeds from public offering, net of underwriting discounts and offering costs
17,398

 

Repurchase of common stock option awards

 
(100
)
Proceeds from exercise of common stock options
55,534

 
1,571

Taxes paid related to net share settlement of equity awards
(1,310
)
 
(391
)
Proceeds from financing obligation drawdown

 
1,521

Net cash provided by financing activities
71,622

 
2,601

Net increase (decrease) in cash and cash equivalents
74,001

 
(9,251
)
Cash and cash equivalents at beginning of period
107,721

 
112,371

Cash and cash equivalents at end of period
$
181,722

 
$
103,120

Supplemental disclosures of non-cash activities
 

 
 

Stock-based compensation capitalized for software development
550

 
468

Capitalized assets included in accounts payable, accrued employee expenses and other accrued expenses
842

 
61

Proceeds receivable from exercise of stock options included in other current assets
149

 

Taxes payable related to net share settlement of equity awards included in accrued employee expenses
266

 

 See accompanying notes to condensed consolidated financial statements.

8


TRUECAR, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Organization and Nature of Business
TrueCar, Inc. (“TrueCar”) is an Internet-based information, technology, and communication services company. Hereinafter, TrueCar, Inc. and its wholly owned subsidiaries TrueCar.com, Inc. and ALG, Inc. are collectively referred to as “TrueCar” or the “Company”; TrueCar.com, Inc. is referred to as “TrueCar.com” and ALG, Inc. is referred to as “ALG”. TrueCar was incorporated in the state of Delaware in February 2005 and began business operations in April 2005. Its principal corporate offices are located in Santa Monica, California.
TrueCar is a digital automotive marketplace that (i) provides pricing transparency about what other people paid for their cars and enables consumers to engage with TrueCar Certified Dealers who are committed to providing a superior purchase experience; (ii) empowers Certified Dealers to attract these informed, in-market consumers in a cost-effective, accountable manner; and (iii) allows automobile manufacturers (“OEMs”) to more effectively target their incentive spending at deep-in-market consumers during their purchase process. TrueCar has established a diverse software ecosystem on a common technology infrastructure, powered by proprietary data and analytics. Consumers access TrueCar’s platform through the TrueCar.com website and TrueCar mobile applications or through the car-buying websites and mobile applications that TrueCar operates for its affinity group marketing partners (“Auto Buying Programs”). An affinity group is comprised of a network of members or employees that provides discounts to its members.
ALG provides forecasts, consulting, and other services regarding determination of the residual value of an automobile at future given points in time, which are used to underwrite automotive loans and leases and by financial institutions to measure exposure and risk across loan, lease, and fleet portfolios. ALG also obtains automobile purchase data from a variety of sources and uses this data to provide consumers and dealers with highly accurate, geographically specific, real-time pricing information.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Article 10-1 of Regulation S-X. Accordingly, some information and footnote disclosures required by GAAP for complete financial statements have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2016 and include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods presented.
The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Form 10-K filed with the SEC on March 1, 2017. 
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Assets and liabilities which are subject to judgment and use of estimates include sales allowances and allowances for doubtful accounts, the fair value of assets and liabilities assumed in business combinations, fair value of the capitalized facility leases, the recoverability of goodwill and long-lived assets, valuation allowances with respect to deferred tax assets, useful lives associated with property and equipment and intangible assets, lease exit liabilities, contingencies, and the valuation and assumptions underlying stock-based compensation and other equity instruments. On an ongoing basis, the Company evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. In addition, the Company engaged valuation specialists to assist with management’s determination of the valuation of its capitalized facility leases, fair values of assets and liabilities assumed in business combinations, the fair value of reporting units in connection with annual goodwill impairment testing, and in periods prior to the Company’s initial public offering, valuation of common stock.

9


Segments
The Company has one operating segment. The Company’s chief operating decision maker (“CODM”) is the President and Chief Executive Officer and the Chief Financial Officer, who manage the Company’s operations based on consolidated financial information for purposes of evaluating financial performance and allocating resources.
The CODM review financial information on a consolidated basis, accompanied by information about transaction revenue and forecasts, consulting and other revenue (Note 12). All of the Company’s principal operations, decision-making functions and assets are located in the United States.
Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.
In May 2017, the Financial Accounting Standards Board (“FASB”) issued guidance amending the existing accounting standard for stock-based awards in order to provide clarity and to reduce both diversity in practice and the cost and complexity of applying the existing guidance as it relates to modifications of stock-based payment awards. The new guidance will be effective for all entities for annual periods beginning after December 15, 2017 and interim periods therein, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued guidance simplifying the test for goodwill impairment. This standard eliminates Step 2 from the goodwill impairment test, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit's fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In October 2016, the FASB issued new guidance which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. It is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued guidance amending the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance will be effective for public entities for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is evaluating the methods and impact of adopting this guidance on its consolidated financial statements.
In May 2014, the FASB issued guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace all existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the full retrospective or cumulative effect transition method. In August 2015, the FASB deferred the effective date to January 1, 2018, with early adoption beginning January 1, 2017. In 2016, the FASB issued additional guidance to clarify the implementation guidance. The Company plans to adopt this guidance beginning January 1, 2018 using the cumulative effect or “modified retrospective” transition method. The Company continues to evaluate the impact of adopting this guidance on its consolidated financial statements.
3.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Accounting standards describe a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

10


Level 1 — Quoted prices in active markets for identical assets or liabilities or funds.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of cash equivalents, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses and other current liabilities approximate fair value because of the short maturity of these items.
 The following table summarizes the Company’s financial assets measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016 by level within the fair value hierarchy. Financial assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (in thousands):
 
At June 30, 2017
 
At December 31, 2016
 
Level 1
 
Total Fair
Value
 
Level 1
 
Total Fair
Value
Cash equivalents
$
181,697

 
$
181,697

 
$
107,721

 
$
107,721

Total Assets
$
181,697

 
$
181,697

 
$
107,721

 
$
107,721


4.
Property and Equipment, net
Property and equipment consisted of the following at June 30, 2017 and December 31, 2016 (in thousands):
 
June 30,
2017
 
December 31,
2016
 
 
Computer equipment, software, and internally developed software
$
74,853

 
$
65,973

Furniture and fixtures
4,654

 
3,705

Leasehold improvements
6,854

 
6,067

Capitalized facility leases
39,302

 
39,302

 
125,663

 
115,047

Less: Accumulated depreciation
(57,266
)
 
(48,106
)
Total property and equipment, net
$
68,397

 
$
66,941

The Company is considered the owner, for accounting purposes only, of one of its Santa Monica, California leased office spaces and of its San Francisco, California leased office space (collectively, the “Premises”) as it had taken on certain risks of construction build cost overages above normal tenant improvement allowances. Accordingly, at June 30, 2017 and December 31, 2016, the Company has capitalized $39.3 million related to the Premises, which represents the estimated fair value of the leased properties, additions for capitalized interest incurred during the construction periods, and capitalized costs related to improvements to the building. At June 30, 2017 and December 31, 2016, the Company recorded accumulated amortization of $1.7 million and $1.2 million, respectively. Additionally, at June 30, 2017 and December 31, 2016, the Company recognized a corresponding lease financing obligation of approximately $31.1 million and $30.9 million, respectively.
Included in the table above are property and equipment of $4.5 million and $4.3 million at June 30, 2017 and December 31, 2016, respectively, which are capitalizable, but had not yet been placed in service. The $4.5 million and $4.3 million balances at June 30, 2017 and December 31, 2016, respectively, were comprised primarily of capitalized software not ready for its intended use.
Total depreciation and amortization expense of property and equipment was $4.7 million and $4.8 million for the three months ended June 30, 2017 and 2016, respectively. Total depreciation and amortization expense of property and equipment was $9.8 million and $9.7 million for the six months ended June 30, 2017 and 2016, respectively.

11


Amortization of internal use capitalized software development costs was $3.4 million and $3.7 million for the three months ended June 30, 2017 and 2016, respectively. Amortization of internal use capitalized software development costs was $7.4 million for the six months ended June 30, 2017 and 2016.
5.
Credit Facility
In February 2015, the Company entered into a third amended and restated loan and security agreement (“Third Amended Credit Facility”) with a financial institution for a $35.0 million secured revolving credit facility that expires on February 18, 2018. The Third Amended Credit Facility provides a $10.0 million subfacility for the issuance of letters of credit and contains an increase option permitting the Company, 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 Third Amended Credit Facility bears interest, at the Company’s option, at either (i) the prime rate published by The Wall Street Journal, plus a spread of -0.25% to 0.50%, or (ii) a LIBOR rate determined in accordance with the terms of the Third Amended Credit Facility, plus a spread of 1.75% to 2.50%. In each case, the spread is based on the Company’s adjusted quick ratio, which is a ratio of the Company’s cash and cash equivalents plus net billed accounts receivable to current liabilities plus all borrowings under the credit facility.
Interest is due and payable quarterly in arrears for prime rate loans and on the earlier of the last day of each quarter or the end of an interest period, as defined in the Third Amended Credit Facility, for LIBOR rate loans. The Company is also obligated to pay an unused revolving line facility fee of 0.00% to 0.20% per annum based on the Company’s adjusted quick ratio.
The Third Amended Credit Facility requires the Company to maintain an adjusted quick ratio of at least 1.50 to 1.00 on the last day of each quarter. If this adjusted quick ratio is not maintained, then the facility requires the Company to maintain, as measured at each quarter end, a maximum consolidated leverage ratio of 3.00 or 2.50 to 1.00, and a fixed charge coverage ratio of at least 1.25 to 1.00.
Consolidated leverage ratio is a ratio of all funded indebtedness, including all capital lease obligations, plus all letters of credit under the facility to the Company’s Adjusted EBITDA for the trailing twelve months. Fixed charge coverage ratio is the ratio of our Adjusted EBITDA less cash paid for income taxes to our cash paid for interest plus capital expenditures for the trailing twelve months. This credit facility also limits the Company’s ability to pay dividends. At June 30, 2017, the Company was in compliance with all financial covenants.
The Company’s future material domestic subsidiaries are required, upon the lender’s request, to become co-borrowers under the credit facility. The credit facility contains acceleration clauses that accelerate any borrowings in the event of default. The obligations of the Company and its future material domestic subsidiaries are collateralized by substantially all of their respective assets, subject to certain exceptions and limitations.
At June 30, 2017 and December 31, 2016, the Company had no outstanding amounts under the Third Amended Credit Facility. The amount available was $30.7 million, reduced for the letters of credit issued and outstanding under the subfacility of $4.3 million at June 30, 2017.
6.
Commitments and Contingencies
Lease Exit Costs
In December 2015, the Company consolidated its Santa Monica, California office locations. In accordance with accounting for exit and disposal activities, the Company recognized a liability for lease exit costs incurred once the Company no longer derived economic benefit from the related leases. The liability was recognized and measured based on a discounted cash flow model when the cease use date occurred. The liability was determined based on the remaining lease rental due, reduced by estimated sublease rental income that could be reasonably obtained for the properties. In 2016, due to a deterioration in the local commercial real estate market, the Company updated its estimates of sublease rental income for these spaces and recorded additional lease exit costs. In the first quarter of 2017, the Company completed the execution of subleases for its properties and recorded a benefit of $0.1 million in lease exit costs. The benefit is recorded in general and administrative expense in the consolidated statement of comprehensive loss for the six months ended June 30, 2017. The remaining liability is recorded in accrued expenses and other current liabilities (current portion) and other liabilities (non-current portion) within the consolidated balance sheets.

12


The following table presents a roll forward of the lease exit liability for the six months ended June 30, 2017:
 
Lease Exit Costs
Accrual at December 31, 2016
$
2,657

Benefit
(133
)
Cash Payments
(856
)
Accrual at June 30, 2017
$
1,668

Legal Proceedings
From time to time, the Company may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business. When the Company becomes aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. The Company continuously assesses the potential liability related to the Company’s pending litigation and revises its estimates when additional information becomes available. The Company is not currently a party to any material legal proceedings, other than as described below.

On March 9, 2015, the Company was named as a defendant in a lawsuit filed in the U.S. District Court for the Southern District of New York (the “NY Lanham Act Litigation”). The complaint in the NY Lanham Act Litigation, purportedly filed on behalf of numerous automotive dealers who are not participating on the TrueCar platform, alleges that the Company has violated the Lanham Act as well as various state laws prohibiting unfair competition and deceptive acts or practices related to the Company’s advertising and promotional activities. The complaint seeks injunctive relief in addition to over $250 million in damages as a result of the alleged diversion of customers from the plaintiffs’ dealerships to TrueCar Certified Dealers. On April 7, 2015, the Company filed an answer to the complaint. Thereafter, the plaintiffs amended their complaint, and on July 13, 2015, the Company filed a motion to dismiss the amended complaint. On January 6, 2016, the Court granted in part and denied in part the Company’s motion to dismiss with respect to some, but not all, of the advertising and promotional activities challenged in the amended complaint. The litigation is currently in the discovery phase. The Company believes that the portions of the amended complaint that survived the Company’s motion to dismiss are without merit, and it intends to vigorously defend itself in this matter. We have not recorded an accrual related to this matter as of June 30, 2017, as we do not believe a loss is probable or reasonably estimable.

On May 20, 2015, the Company was named as a defendant in a lawsuit filed by the California New Car Dealers Association in the Superior Court for the County of Los Angeles (the “CNCDA Litigation”). The complaint in the CNCDA Litigation seeks declaratory and injunctive relief based on allegations that the Company is operating in the State of California as an unlicensed automobile dealer and autobroker. The complaint does not seek monetary relief. On July 20, 2015, the Company filed a “demurrer” to the complaint, which is a pleading that requests the court to dismiss the case. Thereafter, the plaintiffs amended their complaint, and on September 11, 2015, the Company filed a demurrer to the amended complaint. On December 7, 2015, the Court granted the Company’s demurrer in its entirety, but afforded the CNCDA the opportunity to file a second amended complaint. The CNCDA filed a second amended complaint on January 4, 2016. The second amended complaint reiterates the claims in the prior complaints and adds claims under theories based on the federal Lanham Act and California unfair competition law. On February 3, 2016, the Company filed a demurrer to the second amended complaint. On March 30, 2016, the Court granted in part and denied in part the Company’s demurrer to the second amended complaint, dismissing the Lanham Act claim but declining to dismiss the balance of the claims at the demurrer stage of the litigation. On May 31, 2016, based on certain intervening developments in state law, the Court announced that it would reconsider its March 30, 2016 order, and it invited the parties to file new briefs on the demurrer issues. On July 15, 2016, the Court heard oral argument on reconsideration of the demurrer issues. On July 25, 2016, the Court granted in part and denied in part the Company’s demurrer to the second amended complaint, just as it had done in its March 30, 2016 order. The litigation is currently in the discovery phase and was previously scheduled for trial in August 2017. On April 3, 2017, the Court indicated that the trial date would be postponed to a future date. On May 17, 2017, the Court scheduled trial to begin on December 11, 2017. The Company believes that the portions of the second amended complaint that survived the Court’s reconsideration of the Company’s demurrer are without merit, and it intends to vigorously defend itself in this matter. The Company has not recorded an accrual related to this matter as of June 30, 2017, as the Company does not believe a loss is probable or reasonably estimable.


13


On December 23, 2015, the Company was named as a defendant in a putative class action lawsuit filed by Gordon Rose in the California Superior Court for the County of Los Angeles (the “California Consumer Class Action”). The complaint asserted claims for unjust enrichment, violation of the California Consumer Legal Remedies Act, and violation of the California Business and Professions Code, based principally on factual allegations similar to those asserted in the NY Lanham Act Litigation and the CNCDA Litigation. The complaint sought an award of unspecified damages, interest, disgorgement, injunctive relief, and attorneys’ fees. In the complaint, the plaintiff sought to represent a class of California consumers defined as “[a]ll California consumers who purchased an automobile by using TrueCar, Inc.’s price certificate during the applicable statute of limitations.” On January 12, 2016, the Court entered an order staying all proceedings in the case pending an initial status conference, which was previously scheduled for April 13, 2016. On March 16, 2016, the case was reassigned to a different judge. As a result of that reassignment, the initial status conference was rescheduled for and held on May 26, 2016. By stipulation, the stay of discovery was continued until a second status conference, which was scheduled for October 12, 2016. On July 13, 2016, the plaintiff amended his complaint. The amended complaint continues to assert claims for unjust enrichment, violation of the California Consumer Legal Remedies Act, and violation of the California Business and Professions Code. The amended complaint retains the same proposed class definition as the initial complaint. Like the initial complaint, the amended complaint seeks an award of unspecified damages, punitive and exemplary damages, interest, disgorgement, injunctive relief, and attorneys’ fees. On September 12, 2016, the Company filed a demurrer to the amended complaint. On October 12, 2016, the Court heard oral argument on the demurrer. On October 13, 2016, the Court granted in part and denied in part the Company’s demurrer to the amended complaint, dismissing the unjust enrichment claim but declining to dismiss the balance of the claims at the demurrer stage of the litigation. At a status conference held on January 26, 2017, the Court ruled that discovery could then proceed regarding matters related to class certification only. At a status conference held on July 25, 2017, the Court set a deadline of January 8, 2018 for the filing of the plaintiff’s motion for class certification and provided that discovery may continue to proceed regarding matters related to class certification only at this time. An additional status conference has been scheduled for January 12, 2018. The Company believes that the amended complaint is without merit, and it intends to vigorously defend itself in this matter. The Company has not recorded an accrual related to this matter as of June 30, 2017, as the Company does not believe a loss is probable or reasonably estimable.
On June 30, 2017, the Company was named as a defendant in a putative class action lawsuit filed by Kip Haas in the U.S. District Court for the Central District of California (the “Federal Consumer Class Action”). The complaint asserts claims for violation of the California Business and Professions Code, based principally on allegations of false and misleading advertising and unfair business practices. The complaint seeks an award of unspecified damages, interest, injunctive relief, and attorneys’ fees. In the complaint, the plaintiff seeks to represent a class of consumers defined as “[a]ll consumers who, between the applicable statute of limitations and the present, obtained a TrueCar ‘guaranteed’ price” and “[a]ll consumers, who, between the applicable statute of limitations and the present, obtained a TrueCar ‘guaranteed’ price pertaining to a vehicle located at Riverside Mazda.” The Company believes that the complaint is without merit, and it intends to vigorously defend itself in this matter. The Company has not recorded an accrual related to this matter as of June 30, 2017, as the Company does not believe a loss is probable or reasonably estimable.
Employment Contracts
The Company has entered into employment contracts with certain executives of the Company. Employment under these contracts is at-will employment. However, under the provisions of the contracts, the Company would incur severance obligations up to twelve months of the executive’s annual base salary for certain events such as involuntary terminations.
Indemnifications
In the ordinary course of business, the Company may provide indemnities of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third-parties. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future payments the Company could be required to make under these indemnification provisions may not be subject to maximum loss provisions. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is indeterminable. To date, there has not been a material claim paid by the Company, nor has the Company been sued in connection with these indemnification arrangements. At June 30, 2017 and December 31, 2016, the Company has not accrued a liability for these guarantees, because the likelihood of incurring a payment obligation, if any, in connection with these guarantees is not probable or reasonably estimable. 


14


7.    Stockholders’ Equity
On January 19, 2017, the Company filed a shelf registration statement on Form S-3 under which the Company may, from time to time, sell securities up to a total dollar amount of $100 million, and selling stockholders may sell, from time to time, up to 20 million of shares of common stock (“2017 Shelf Registration”). The 2017 Shelf Registration was declared effective by the SEC on February 6, 2017. 

On April 26, 2017, the Company entered into an underwriting agreement to sell up to 1,150,000 shares of its common stock at $16.50 per share in a public offering (including shares subject to the underwriters’ option to purchase additional shares). The Company sold 1,150,000 shares in the offering with aggregate net proceeds to the Company of $17.4 million, net of underwriting discounts and commissions and offering costs of $1.6 million. Selling stockholders party to the underwriting agreement also sold an aggregate of 9,200,000 shares of common stock in the offering (including shares subject to the underwriters' option to purchase additional shares). The Company did not receive any proceeds from the shares sold by the selling stockholders. The offering closed on May 2, 2017.

8.
Stock-based Awards
Stock Options
A summary of the Company’s stock option activity for the six months ended June 30, 2017 is as follows:
 
Number of
Options
 
Weighted-Average Exercise Price
 
Weighted-Average
Remaining
Contractual Life
 
 
 
 
 
(in years)
Outstanding at December 31, 2016
24,541,512

 
$
8.29

 
5.49
Granted
4,661,639

 
18.47

 
 
Exercised
(9,596,374
)
 
5.80

 
 
Canceled/forfeited
(620,931
)
 
8.13

 
 
Outstanding at June 30, 2017
18,985,846

 
$
12.06

 
7.74
At June 30, 2017, total remaining stock-based compensation expense for unvested stock option awards was $65.0 million, which is expected to be recognized over a weighted-average period of 3.4 years. For each of the three months ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense for stock option awards of $3.7 million. For the six months ended June 30, 2017 and 2016, the Company recorded stock-based compensation expense for stock option awards of $7.0 million and $7.5 million, respectively.

15


Restricted Stock Units
Activity in connection with restricted stock units is as follows for the six months ended June 30, 2017:
 
Number of
Shares
 
Weighted- Average Grant Date Fair Value
Non-vested — December 31, 2016
4,339,320

 
$
7.85

Granted
1,974,776

 
18.33

Vested
(764,642
)
 
8.10

Canceled/forfeited
(230,545
)
 
7.46

Non-vested — June 30, 2017
5,318,909

 
$
11.72

At June 30, 2017, total remaining stock-based compensation expense for non-vested restricted stock units is $59.2 million, which is expected to be recognized over a weighted-average period of 3.3 years. The Company recorded $3.2 million and $2.2 million in stock-based compensation expense for restricted stock units for the three months ended June 30, 2017 and 2016, respectively. The Company recorded $5.8 million and $4.3 million in stock-based compensation expense for restricted stock units for the six months ended June 30, 2017 and 2016, respectively.
Stock-based Compensation Cost
The Company recorded stock-based compensation cost relating to stock options and restricted stock awards in the following categories on the accompanying consolidated statements of comprehensive loss (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Cost of revenue
$
233

 
$
233

 
$
436

 
$
455

Sales and marketing
2,160

 
1,736

 
3,905

 
2,499

Technology and development
1,600

 
746

 
2,898

 
1,825

General and administrative
2,853

 
3,185

 
5,514

 
7,013

Total stock-based compensation expense
6,846

 
5,900

 
12,753

 
11,792

Amount capitalized to internal software use
332

 
223

 
550

 
468

Total stock-based compensation cost
$
7,178

 
$
6,123

 
$
13,303

 
$
12,260

 

9.
Income Taxes
In determining quarterly provisions for income taxes, the Company uses the annual estimated effective tax rate applied to the actual year-to-date loss. The Company’s annual estimated effective tax rate differs from the statutory rate primarily as a result of state taxes, tax amortization of goodwill and changes in the Company’s valuation allowance. The Company recorded $0.2 million in income tax expense for the three months ended June 30, 2017 and 2016. The Company recorded $0.3 million in income tax expense for each of the six months ended June 30, 2017 and 2016.
There were no material changes to the Company’s unrecognized tax benefits in the three and six months ended June 30, 2017, and the Company does not expect to have any significant changes to unrecognized tax benefits through the end of the fiscal year. Due to the presence of net operating loss carryforwards, all income tax years remain open for examination by the Internal Revenue Service (“IRS”) and various state taxing authorities.

16


10.
Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data): 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net loss
$
(8,060
)
 
$
(14,655
)
 
$
(14,855
)
 
$
(26,322
)
Weighted-average common shares outstanding
93,745

 
83,931

 
90,283

 
83,697

Net loss per share - basic and diluted
$
(0.09
)
 
$
(0.17
)
 
$
(0.16
)
 
$
(0.31
)
The following table presents the number of anti-dilutive shares excluded from the calculation of diluted net loss per share at June 30, 2017 and 2016 (in thousands):
 
June 30,
 
2017
 
2016
 
 
 
 
Options to purchase common stock
18,986

 
23,785

Common stock warrants
1,459

 
1,605

Non-vested restricted stock unit awards
5,319

 
4,923

Total shares excluded from net loss per share
25,764

 
30,313

 
11.
Related Party Transactions
Transactions with USAA
USAA is the Company's largest stockholder and most significant affinity marketing partner. The Company has entered into arrangements with USAA to operate its Auto Buying Program. The Company has amounts due from USAA at June 30, 2017 and December 31, 2016 of $0.2 million and $0.4 million, respectively. In addition, the Company has amounts due to USAA at June 30, 2017 and December 31, 2016 of $4.7 million and $3.9 million, respectively. The Company recorded sales and marketing expense of $4.5 million and $3.4 million for the three months ended June 30, 2017 and 2016, respectively, related to service arrangements entered into with USAA. The Company recorded sales and marketing expenses of $8.5 million and $6.7 million for the six months ended June 30, 2017 and 2016, respectively.
12.
Revenue Information
The CODM reviews separate revenue information for its Transaction and Forecasts, Consulting and Other service offerings. All other financial information is reviewed by the CODM on a consolidated basis.
The following table presents the Company’s revenue categories during the periods presented (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Transaction revenue
$
77,203

 
$
61,841

 
$
147,635

 
$
119,250

Forecasts, consulting and other revenue
4,616

 
4,586

 
9,941

 
9,037

Total revenues
$
81,819

 
$
66,427

 
$
157,576

 
$
128,287




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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto included in Item 1 “Financial Statements” in this Quarterly Report on Form 10-Q. 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
Our Mission: We exist to be the most transparent brand in automotive, to serve as a catalyst that dramatically improves the way people discover, buy and sell cars.
We have established an intelligent, data-driven online marketplace powered by proprietary market data and analytics. Our company-branded marketplace is available on our TrueCar website and mobile applications. In addition, we customize and operate our marketplace on a co-branded basis for our many affinity group marketing partners, including financial institutions like USAA, Chase and American Express, membership-based organizations like Consumer Reports, AARP, Sam's Club, and AAA, 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 with TrueCar 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 guaranteed savings off the manufacturer's suggested retail price, or MSRP, for that make, model and trim, as well as, in most instances, price offers on actual vehicle inventory, which we refer to as VIN-based offers, from our network of TrueCar Certified Dealers. Guaranteed savings off MSRP are reflected in a Guaranteed Savings Certificate which the consumer may then take to the dealer and apply toward the purchase of the specified make, model and trim of car. VIN-based offers provide consumers with price offers for specific vehicles from specific dealers. We benefit our network of TrueCar Certified Dealers by enabling them to attract these informed, in-market consumers in a cost-effective, accountable manner, which we believe helps them to sell more cars 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 over 15,000 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 the District of Columbia.
Our subsidiary, ALG, Inc., provides forecasts and consulting services regarding determination of the residual value of an automobile at given future points in time. These residual values are used to underwrite automotive loans and leases to determine payments by consumers. In addition, financial institutions use this information to measure exposure and risk across loan, lease, and fleet portfolios. We also obtain automobile purchase data from a variety of sources and use this data to provide consumers and dealers with highly accurate, geographically specific, real-time pricing information.
During the three months ended June 30, 2017, we generated revenues of $81.8 million and recorded a net loss of $8.1 million. Of the $81.8 million in revenues, $77.2 million or 94.4%, consisted of transaction revenues with the remaining $4.6 million, or 5.6%, derived primarily from the sale of forecasts, consulting and other revenue to the automotive and financial services industries. Revenues from the sale of forecasts, consulting and other services are derived primarily from the operations of our ALG subsidiary. Transaction revenues primarily consist of fees paid to us by our network of TrueCar Certified Dealers under our pay-for-performance business model.
Over the past year, we have made multiple product enhancements that have improved the consumer experience resulting in improved revenue growth rates in the first and second quarters of 2017 as compared to the same periods last year. Over time, we intend to increase the number of transactions on our platform, and thereby revenue, by continuing to:
(i)
increase the rate at which visitors to our website and our affinity group marketing partner sites, and users of our mobile applications, prospect with a TrueCar certified dealer by investing in delivering a more engaging experience to consumers and dealers;
(ii)
improve close rates by investing in additional dealer support personnel to improve and expand our dealer relationships; and

18


(iii) better communicate the benefits of fully registering on TrueCar to consumers using different and stronger messaging.
We plan to continue to focus on cost containments in areas outside of our dealer, product, technology, and research efforts in order to invest in the changes that will continue to improve the consumer and dealer experiences and drive revenue growth in the future. We expect our quarter-over-quarter revenue growth to modestly improve as we continue to implement these changes.
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Average Monthly Unique Visitors
7,215,456

 
6,683,027

 
7,280,084

 
6,686,243

Units(1)
242,130

 
192,531

 
459,786

 
367,513

Monetization
$
319

 
$
321

 
$
321

 
$
324

Franchise Dealer Count
12,204

 
10,135

 
12,204

 
10,135

Independent Dealer Count
2,860

 
2,534

 
2,860

 
2,534

 
(1)
We issued full credits of the amount originally invoiced with respect to 5,571 and 4,546 units during the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, we issued full credits of the amount originally invoiced with respect to 11,276 and 8,738 units, respectively. The number of units has not been adjusted downwards related to units credited as discussed in the description of the unit metric below.
Average Monthly Unique Visitors
We define a monthly unique visitor as an individual who has visited our website, our landing page on our affinity group marketing partner sites, or our mobile applications within a calendar month. We identify unique visitors through cookies for browser-based visits on either a desktop computer or mobile device and through device IDs for mobile application visits. In addition, if a TrueCar.com user logs-in, we supplement their identification with their log-in credentials to attempt to avoid double counting on TrueCar.com across devices, browsers and mobile applications. If an individual accesses our service using different devices or different browsers on the same device within a given month, the first access through each such device or browser is counted as a separate monthly unique visitor, except where adjusted based upon TrueCar.com log-in information. We calculate average monthly unique visitors as the sum of the monthly unique visitors in a given period, divided by the number of months in that period. We view our average monthly unique visitors as a key indicator of the growth in our business and audience reach, the strength of our brand, and the visibility of car-buying services to the member base of our affinity group marketing partners.
The number of average monthly unique visitors increased 8.0% to approximately 7.2 million in the three months ended June 30, 2017 from approximately 6.7 million in the same period of 2016. The number of average monthly unique visitors increased 8.9% to approximately 7.3 million in the six months ended June 30, 2017 from 6.7 million in the same period of 2016. We attribute the growth in our average monthly unique visitors principally to television and digital marketing advertising campaigns that have led to improved brand awareness and also to increased efforts from our affinity group marketing partners to drive greater member awareness and traffic to our platform.
Units
We define units as the number of automobiles purchased by our users from TrueCar Certified Dealers through TrueCar.com, our TrueCar branded mobile applications or the car-buying sites we maintain for our affinity group marketing partners. A unit is counted following such time as we have matched the sale to a TrueCar user with one of TrueCar Certified Dealers. We view units as a key indicator of the growth of our business, the effectiveness of our product and the size and geographic coverage of our network of TrueCar Certified Dealers.
On occasion we issue credits to our TrueCar Certified Dealers with respect to units sold. However, we do not adjust our unit metric for these credits as we believe that in substantially all cases a vehicle has in fact been purchased through our platform given the high degree of accuracy of our sales matching process. Credits are most frequently issued to a dealer that claims that it had a pre-existing relationship with a purchaser of a vehicle, and we determine whether we will issue a credit

19


based on a number of factors, including the facts and circumstances related to the dealer claim and the level of claim activity at the dealership. In most cases, we issue credits in order to maintain strong business relations with the dealer and not because we have made an erroneous sales match or billing error.
The number of units increased 25.8% to 242,130 in the three months ended June 30, 2017 from 192,531 in the three months ended June 30, 2016. The number of units increased 25.1% to 459,786 in the six months ended June 30, 2017 from 367,513 in the same period of 2016. We attribute this growth in units to the effectiveness of our marketing activities, product enhancements, and the growing number and geographic coverage of TrueCar Certified Dealers in our network.
Monetization
We define monetization as the average transaction revenue per unit, which we calculate by dividing all of our transaction revenue in a given period by the number of units in that period. Our monetization decreased 0.6% to $319 during the three months ended June 30, 2017 from $321 for the same period in 2016. Our monetization decreased 0.9% to $321 during the six months ended June 30, 2017 from $324 for the same period in 2016. We expect our monetization to be affected in the future by changes in our pricing structure, the unit mix between new and used cars, with used cars providing higher monetization, and by the introduction of new products and services.
Franchise Dealer Count
We define franchise dealer count as the number of franchise dealers in the network of TrueCar Certified Dealers at the end of a given period. This number is calculated by counting the number of brands of new cars sold by dealers in the TrueCar Certified Dealer network at their locations, and includes both single-location proprietorships as well as large consolidated dealer groups. The network comprises 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 12,204 at June 30, 2017, an increase from 10,135 at June 30, 2016, an increase from 11,151 at December 31, 2016, and an increase from 11,734 at March 31, 2017.  Note that our franchise dealer count excludes Genesis franchises on our program due to Hyundai’s recent transition of Genesis to a stand-alone brand. In order to facilitate period over period comparisons, we have continued to count each Hyundai franchise that also has a Genesis franchise as one franchise dealer rather than two. We intend to increase the number of dealers representing high volume brands in our dealer network, generally, and in key geographies, by investing to improve the dealer experience and increasing dealer satisfaction.
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 and are not directly affiliated with a new car manufacturer. This number is calculated by counting each location individually, and includes both single-location proprietorships as well as large consolidated dealer groups. Our independent dealer count was 2,860 at June 30, 2017, an increase from 2,534 at June 30, 2016, an increase from 2,597 at December 31, 2016, and an increase from 2,716 at March 31, 2017.

Non-GAAP Financial Measures
Adjusted EBITDA and Non-GAAP net income (loss) are financial measures that are not calculated in accordance with generally accepted accounting principles in the United States, or GAAP. We define Adjusted EBITDA as net loss adjusted to exclude interest income, interest expense, depreciation and amortization, stock-based compensation, certain litigation costs, severance charges, lease exit costs, and income taxes. We define Non-GAAP net income (loss) as net loss adjusted to exclude stock-based compensation, certain litigation costs, severance charges, and lease exit costs. We have provided below a reconciliation of each of Adjusted EBITDA and Non-GAAP net income (loss) to net loss, the most directly comparable GAAP financial measure. Neither Adjusted EBITDA nor Non-GAAP net income (loss) should 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 and Non-GAAP net income (loss) measures may not be comparable to similarly titled measures of other organizations as they may not calculate Adjusted EBITDA or Non-GAAP net income (loss) in the same manner as we calculate these measures. 
We use Adjusted EBITDA and Non-GAAP net income (loss) as operating performance measures as each 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

20


bonuses; and (iii) used by our management to make financial and strategic planning decisions regarding future operating investments. We believe that using Adjusted EBITDA and Non-GAAP net income (loss) facilitates operating performance comparisons on a period-to-period basis because these measures exclude variations primarily caused by changes in the excluded items noted above. In addition, we believe that Adjusted EBITDA, Non-GAAP net income (loss) 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 each of Adjusted EBITDA and Non-GAAP net income (loss) has limitations as an analytical tool, and you should not consider them 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 payment or receipt of interest or the payment of income taxes; 
neither Adjusted EBITDA nor Non-GAAP net income (loss) reflects 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;
neither Adjusted EBITDA nor Non-GAAP net income (loss) reflects the costs to advance our claims in respect of certain litigation or the costs to defend ourselves in various complaints filed against us, which we expect to continue to be significant;
neither Adjusted EBITDA nor Non-GAAP net income (loss) reflects the cash severance costs due to certain former executives and former members of our product and technology teams affected by a reorganization;
neither Adjusted EBITDA nor Non-GAAP net income (loss) reflects the lease exit costs associated with consolidation of the Company's office locations in Santa Monica, California;
neither Adjusted EBITDA nor Non-GAAP net income (loss) consider the potentially 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 and Non-GAAP net income (loss) differently than we do, limiting their usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA and Non-GAAP net income (loss) alongside other financial performance measures, including our net loss, our other GAAP results, and various cash flow metrics. In addition, in evaluating Adjusted EBITDA and Non-GAAP net income (loss) 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 Non-GAAP net income (loss), and you should not infer from our presentation of Adjusted EBITDA and Non-GAAP net income (loss) that our future results will not be affected by these expenses or any unusual or non-recurring items.
The following table presents a reconciliation of net loss to Adjusted EBITDA for each of the periods presented:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Reconciliation of Net Loss to Adjusted EBITDA:
 
 
 
 
 
 
 
Net loss
$
(8,060
)
 
$
(14,655
)
 
$
(14,855
)
 
$
(26,322
)
Non-GAAP adjustments:
 
 
 
 
 
 
 
Interest income
(249
)
 
(102
)
 
(382
)
 
(195
)
Interest expense
652

 
632

 
1,301

 
1,240

Depreciation and amortization
5,668

 
5,868

 
11,752

 
11,772

Stock-based compensation
6,846

 
5,900

 
12,753

 
11,792

Certain litigation costs (1)
2,299

 
150

 
2,649

 
422

Severance charges (2)

 
1,783

 

 
1,783

Lease exit costs (3)

 
2,684

 
(133
)
 
2,684

Provision for income taxes
201

 
170

 
322

 
306

Adjusted EBITDA
$
7,357

 
$
2,430

 
$
13,407

 
$
3,482

 
 
 
 
 
(1)
The excluded amounts relate to legal costs incurred in connection with complaints filed by non-TrueCar dealers and the California New Car Dealers Association against TrueCar, and securities and consumer class action lawsuits. We believe the

21


exclusion of these costs is appropriate to facilitate comparisons of our core operating performance on a period-to-period basis. Based on the nature of the specific claims underlying the excluded litigation matters, once these matters are resolved, we do not believe our operations are likely to entail defending against the types of claims raised by these matters. We expect the cost of defending these claims to continue to be significant pending resolution.
(2)
We incurred $1.3 million in severance costs in the second quarter of 2016 related to a reorganization of our product and technology teams to better align our resources with business objectives as we transition from multiple software platforms to a unified architecture. In addition, we incurred severance costs of $0.5 million related to an executive who terminated during the second quarter of 2016. We believe excluding the impacts of these terminations is consistent with our use of Adjusted EBITDA and Non-GAAP net income (loss) as we do not believe they are useful indicators of ongoing operating results.
(3)
Represents updated estimates to our lease termination costs associated with the consolidation of the Company's office locations in Santa Monica, California in December 2015. We believe that their exclusion is appropriate to facilitate period-to-period operating performance comparisons.

The following table presents a reconciliation of net loss to Non-GAAP net income (loss) for each of the periods presented:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Reconciliation of Net Loss to Non-GAAP Net Income (Loss):
 
 
 
 
 
 
 
Net loss
$
(8,060
)
 
$
(14,655
)
 
$
(14,855
)
 
$
(26,322
)
Non-GAAP adjustments:
 
 
 
 
 
 
 
Stock-based compensation
6,846

 
5,900

 
12,753

 
11,792

Certain litigation costs (1)
2,299

 
150

 
2,649

 
422

Severance charges (2)

 
1,783

 

 
1,783

Lease exit costs (3)

 
2,684

 
(133
)
 
2,684

Non-GAAP net income (loss) (4)
$
1,085

 
$
(4,138
)
 
$
414

 
$
(9,641
)
 
 
 
 
 
(1)
The excluded amounts relate to legal costs incurred in connection with complaints filed by non-TrueCar dealers and the California New Car Dealers Association against TrueCar, and securities and consumer class action lawsuits. We believe the exclusion of these costs is appropriate to facilitate comparisons of our core operating performance on a period-to-period basis. Based on the nature of the specific claims underlying the excluded litigation matters, once these matters are resolved, we do not believe our operations are likely to entail defending against the types of claims raised by these matters. We expect the cost of defending these claims to continue to be significant pending resolution.
(2)
We incurred $1.3 million in severance costs in the second quarter of 2016 related to a reorganization of our product and technology teams to better align our resources with business objectives as we transition from multiple software platforms to a unified architecture. In addition, we incurred severance costs of $0.5 million related to an executive who terminated during the second quarter of 2016. We believe excluding the impacts of these terminations is consistent with our use of Adjusted EBITDA and Non-GAAP net income (loss) as we do not believe they are useful indicators of ongoing operating results.
(3)
Represents updated estimates to our lease termination costs associated with the consolidation of the Company's office locations in Santa Monica, California in December 2015. We believe that their exclusion is appropriate to facilitate period-to-period operating performance comparisons.
(4)
There is no income tax impact related to the adjustments made to calculate Non-GAAP net income (loss) because of our available net operating loss carryforwards and the full valuation allowance recorded against our net deferred tax assets at June 30, 2017 and June 30, 2016.
Components of Operating Results 

22


Revenues
Our revenues are comprised of transaction revenues, and forecasts, consulting and other revenue.
Transaction Revenue. Revenue consists of fees paid by dealers participating in our network of TrueCar Certified Dealers. Dealers pay us these fees either on a per vehicle basis for sales to our users or in the form of a subscription arrangement. Subscription arrangements fall into several types: flat rate subscriptions, subscriptions subject to downward adjustment based on a minimum number of vehicle sales (“guaranteed sales”) and subscriptions based on introduction volume, including those subject to downward adjustment based on a minimum number of introductions (“guaranteed introductions”).
Under flat rate subscription arrangements, fees are charged at a monthly flat rate regardless of the number of sales made to users of our platform by the dealer. For flat rate subscription arrangements, we recognize the fees as revenue over the subscription period on a straight line basis which corresponds to the period that we are providing the dealer with access to our platform.
Under guaranteed sales subscription arrangements, fees are charged based on the number of guaranteed sales multiplied by a fixed amount per vehicle. To the extent that the actual number of vehicles sold by the dealers to users of our platform is less than the number of guaranteed sales, we provide a credit to the dealer. To the extent that the actual number of vehicles sold exceeds the number of guaranteed sales, we are not entitled to any additional fees.
Certain of our subscription arrangements are charged based on volume of introductions provided while other introduction based subscription arrangements operate under a guaranteed introduction model. Under guaranteed introductions subscription arrangements, fees are charged based on a periodically-updated formula that considers, among other things, the introductions anticipated to be provided to the dealer. To the extent that the number of actual introductions is less than the number of guaranteed introductions, we provide a credit to the dealer. To the extent that the actual number of introductions provided exceeds the number guaranteed, we are not entitled to any additional fees.
For guaranteed sales and guaranteed introductions subscription arrangements, we recognize revenue based on the lesser of (i) the actual number of sales generated or introductions delivered through our platform during the subscription period multiplied by the contracted price per sale/introduction or (ii) the guaranteed number of sales or introductions multiplied by the contracted price per sale/introduction.
In addition, we enter into arrangements with automobile manufacturers to promote the sale of their vehicles through the offering of additional consumer incentives to our consumers. These manufacturers pay us a per-vehicle fee for promotion of the incentive and we recognize the per-vehicle incentive fee when the vehicle sale has occurred between the consumer and the dealer.
 Forecasts, Consulting and Other Revenue. We derive this type of revenue primarily from the provision of forecasts and consulting services to the automotive and financial services industries through our ALG subsidiary. The forecasts and consulting services that ALG provides typically relate to the determination of the residual value of an automobile at given future points in time. These residual values are used to underwrite automotive loans and leases to determine payments by consumers. In addition, financial institutions use this information to measure exposure and risk across loan, lease and fleet portfolios. Our customers generally pay us for these services as information is delivered to them.
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 our data centers, 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, employee and consulting costs related to delivering data and consulting services to our customers, 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 statement 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 includes 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, and common stock warrants issued to USAA; 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.

23


 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, as well as 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. General and administrative expenses also include legal, accounting, and other third-party professional service fees, bad debt, lease exit costs, 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.
 Interest Expense. Interest expense consists primarily of interest on our built-to-suit lease financing obligations.  
Provision for Income Taxes. We are subject to federal and state income taxes in the United States. We provided a full valuation allowance against our net deferred tax assets at June 30, 2017 and December 31, 2016 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 (or expense) is significantly less than the federal statutory rate of 34%. Our provision for income taxes in the three and six months ended June 30, 2017 and 2016 primarily reflects a tax expense associated with the amortization of tax deductible goodwill that is not an available source of income to realize deferred tax assets.
Results of Operations
The following table sets forth our selected consolidated statements of operations data for each of the periods indicated.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(in thousands)
 
(in thousands)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Revenues
$
81,819

 
$
66,427

 
$
157,576

 
$
128,287

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of revenue (exclusive of depreciation and amortization presented separately below)
7,130

 
6,365

 
13,522

 
12,590

Sales and marketing
46,933

 
38,129

 
89,115

 
70,240

Technology and development
14,131

 
14,022

 
27,760

 
27,162

General and administrative
15,413

 
15,998

 
29,041

 
31,494

Depreciation and amortization
5,668

 
5,868

 
11,752

 
11,772

Total costs and operating expenses
89,275

 
80,382

 
171,190

 
153,258

Loss from operations
(7,456
)
 
(13,955
)
 
(13,614
)
 
(24,971
)
Interest income
249

 
102

 
382

 
195

Interest expense
(652
)
 
(632
)
 
(1,301
)
 
(1,240
)
Loss before provision for income taxes
(7,859
)
 
(14,485
)
 
(14,533
)
 
(26,016
)
Provision for income taxes
201

 
170

 
322

 
306

Net loss
$
(8,060
)
 
$
(14,655
)
 
$
(14,855
)
 
$
(26,322
)
Other Non-GAAP Financial Information:
 

 
 

 
 

 
 

Adjusted EBITDA
$
7,357

 
$
2,430

 
$
13,407

 
$
3,482

Non-GAAP net income (loss)
$
1,085

 
$
(4,138
)
 
$
414

 
$
(9,641
)

24


Comparison of the Three and Six Months Ended June 30, 2017 and 2016
Revenues
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(in thousands)
Transaction revenue
$
77,203

 
$
61,841

 
$
147,635

 
$
119,250

Forecasts, consulting and other revenue
4,616

 
4,586

 
9,941

 
9,037

Revenues
$
81,819

 
$
66,427

 
$
157,576

 
$
128,287

Three months ended June 30, 2017 compared to three months ended June 30, 2016. The increase in our revenues of $15.4 million or 23.2% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016 primarily reflected the increase in our transaction revenue. Transaction revenue and forecasts, consulting and other revenue comprised 94.4% and 5.6%, respectively, of revenues for the three months ended June 30, 2017 as compared to 93.1% and 6.9%, respectively, for the same period in 2016. The increase in transaction revenue for the three months ended June 30, 2017 primarily reflected a 25.8% increase in units partially offset by a 0.6% decrease in monetization. Forecasts, consulting and other revenue for the three months ended June 30, 2017 remained materially consistent with the three months ended June 30, 2016. In the second half of 2017, we anticipate that our year-over-year revenue growth will increase as a result of our investments in dealer relationships, in consumer messaging and in our technology platform, which we believe will enable our business to continue to scale.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. The increase in our revenues of $29.3 million or 22.8% for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016 primarily reflected the increase in our transaction revenue. Transaction revenue and forecasts, consulting and other revenue comprised 93.7% and 6.3%, respectively, of revenues for the six months ended June 30, 2017 as compared to 93.0% and 7.0%, respectively, for the same period in 2016. The increase in transaction revenue for the six months ended June 30, 2017 primarily reflected a 25.1% increase in units partially offset by a 0.9% decrease in monetization. The increase in forecasts, consulting and other revenue for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016 of $0.9 million or 10.0% was primarily due to revenue from the delivery of a large project in our ALG business in the first quarter of 2017. We do not expect similar sized projects to reoccur for the remainder of the year.

Costs and Operating Expenses
Cost of Revenue (exclusive of depreciation and amortization)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Cost of revenue (exclusive of depreciation and amortization)
$
7,130

 
$
6,365

 
$
13,522

 
$
12,590

Cost of revenue (exclusive of depreciation and amortization) as a percentage of revenues
8.7
%
 
9.6
%
 
8.6
%
 
9.8
%
Three months ended June 30, 2017 compared to three months ended June 30, 2016. Cost of revenue increased $0.8 million or 12.0% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016 primarily due to costs for an automotive trade-in pilot program with a large vehicle wholesaler that commenced in the second quarter of 2017. We expect to incur these costs during the pilot program during which we do not anticipate material revenue.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. Cost of revenue increased $0.9 million or 7.4% for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016 primarily due to costs for an automotive trade-in pilot program with a large vehicle wholesaler that commenced in the second quarter of 2017.

25


Sales and Marketing Expenses
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Sales and marketing expenses
$
46,933

 
$
38,129

 
$
89,115

 
$
70,240

Sales and marketing expenses as a percentage of revenues
57.4
%
 
57.4
%
 
56.6
%
 
54.8
%
Three months ended June 30, 2017 compared to three months ended June 30, 2016. Sales and marketing expenses increased $8.8 million or 23.1% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. The increase primarily reflected a $3.7 million increase in salaries and employee related expenses primarily due to increased headcount, a $3.0 million increase in advertising costs, and a $2.1 million increase in revenue share paid to affinity marketing partners. We expect sales and marketing expenses to continue to increase in total due to increased headcount to better serve dealers, as well as increased media production costs, television and radio advertising, digital customer acquisition costs, affinity group marketing partner fees, and marketing programs as we grow our business.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. Sales and marketing expenses increased $18.9 million or 26.9% for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. The increase primarily reflected a $8.5 million increase in salaries and employee related expenses primarily due to increased headcount, a $3.8 million increase in revenue share paid to affinity marketing partners, a $3.8 million increase in advertising costs, a $2.3 million increase in conference and travel related expenses, and a $1.4 million increase in stock-based compensation. These increases were partially offset by a decrease of $0.8 million in professional fees for outsourced services.
Technology and Development Expenses
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Technology and development expenses
$
14,131

 
$
14,022

 
$
27,760

 
$
27,162

Technology and development expenses as a percentage of revenues
17.3
%
 
21.1
%
 
17.6
%
 
21.2
%
Capitalized software costs
$
4,028

 
$
3,077

 
$
7,275

 
$
6,341

Three months ended June 30, 2017 compared to three months ended June 30, 2016. Technology and development expenses increased $0.1 million or 0.8% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. The net increase of $0.1 million was primarily due to an increase in stock-based compensation of $1.0 million partially offset by a decrease in severance costs of $1.4 million primarily related to a reorganization in our product and technology teams in the second quarter of 2016.
Capitalized software costs increased $1.0 million primarily due to an increase in the amount of salaries capitalized for the development of internal use software.
We expect our technology and development expenses to increase in dollar amount as we continue to increase our developer headcount to upgrade and enhance our technology infrastructure, invest in our products, expand the functionality of our platform and provide new product offerings. We also expect technology and development expenses to continue to be affected by variations in the amount of capitalized internally developed software.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. Technology and development expenses increased $0.6 million or 2.2% for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. The net increase of $0.6 million was primarily due to increases in stock-based compensation of $1.1 million and hosting costs of $0.7 million offset by a decrease in severance costs of $1.5 million primarily related to a reorganization in our product and technology teams in the second quarter of 2016.

26


Capitalized software costs increased $0.9 million primarily due to an increase in the amount of salaries capitalized for the development of internal use software.
General and Administrative Expenses
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
General and administrative expenses
$
15,413

 
$
15,998

 
$
29,041

 
$
31,494

General and administrative expenses as a percentage of revenues
18.8
%
 
24.1
%
 
18.4
%
 
24.5
%
Three months ended June 30, 2017 compared to three months ended June 30, 2016. General and administrative expenses decreased $0.6 million or 3.7% for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016. The decrease primarily reflected a $2.7 million lease exit charge in the second quarter of 2016 that did not recur in the second quarter of 2017. This decrease was partially offset by a $2.0 million increase in legal fees. Due to ongoing litigation matters, we expect general and administrative expenses to increase as significant legal fees are incurred.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. General and administrative expenses decreased $2.5 million or 7.8% for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016. The decrease primarily reflected a $2.7 million lease exit charge in the first half of 2016 and a $1.5 million decrease in stock-based compensation partially offset by a $2.0 million increase in legal fees.
Depreciation and Amortization Expenses
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Depreciation and amortization expenses
$
5,668

 
$
5,868

 
$
11,752

 
$
11,772

Three months ended June 30, 2017 compared to three months ended June 30, 2016. Depreciation and amortization expenses decreased $0.2 million or 3.4% for the three months ended June 30, 2017 compared to the three months ended June 30, 2016. We expect our depreciation and amortization expenses to continue to be affected by the amount of capitalized internally developed software costs, property and equipment, and the timing of placing projects in service.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. Depreciation and amortization expenses remained materially consistent for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.
Interest Expense
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Interest expense
$
652

 
$
632

 
$
1,301

 
$
1,240

Three months ended June 30, 2017 compared to three months ended June 30, 2016. Interest expense was $0.7 million for the three months ended June 30, 2017 and $0.6 million for the three months ended June 30, 2016, and primarily consists of interest expense incurred on our lease financing obligation for our Santa Monica leased office space and our San

27


Francisco leased office space. We expect to incur a consistent level of interest expense on our lease financing obligation in future periods.
Six months ended June 30, 2017 compared to six months ended June 30, 2016. Interest expense was $1.3 million for the six months ended June 30, 2017 and $1.2 million for the six months ended June 30, 2016, and primarily consists of interest expense incurred on our lease financing obligation for our Santa Monica leased office space and our San Francisco leased office space.
Provision for Income Taxes
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Provision for income taxes
$
201

 
$
170

 
$
322

 
$
306

Our provision for income taxes for the three and six months ended June 30, 2017 and 2016 primarily reflected tax expense due to amortization of tax deductible goodwill that is not an available source of income to realize our deferred tax assets.
Liquidity and Capital Resources
At June 30, 2017, our principal sources of liquidity were cash and cash equivalents totaling $181.7 million.
We have incurred cumulative losses of $333.1 million from our operations through June 30, 2017, and expect to incur additional losses in the future. 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 rate of revenue growth, the expansion of our sales and marketing activities, and the timing and extent of our spending to support our technology and development efforts. 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
On February 18, 2015, we amended our credit facility to provide advances of up to $35.0 million. This credit facility provides a $10.0 million subfacility 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 has a three-year term and matures on February 18, 2018. No amounts were outstanding at June 30, 2017. The amount available under the amended credit facility at June 30, 2017 was $30.7 million, reduced for the letters of credit issued and outstanding under the subfacility of $4.3 million. See Note 5 of our condensed consolidated financial statements herein for more information about our amended credit facility.
Cash Flows
The following table summarizes our cash flows:
 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
Consolidated Cash Flow Data:
(in thousands)
Net cash provided by (used in) operating activities
$
12,719

 
$
(2,067
)
Net cash used in investing activities
(10,340
)
 
(9,785
)
Net cash provided by financing activities
71,622

 
2,601

Net increase (decrease) in cash and cash equivalents
$
74,001

 
$
(9,251
)

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Operating Activities
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, 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 provided by operating activities for the six months ended June 30, 2017 was $12.7 million. This was primarily due to our net loss of $14.9 million, which, adjusted for non-cash items, including depreciation and amortization expense of $11.7 million and stock-based compensation expense of $12.8 million, resulted in $11.0 million in cash provided by operations. Net cash provided by operations was also impacted by an increase of $1.7 million related to changes in operating assets and liabilities.
The $1.7 million increase related to changes in operating assets and liabilities primarily reflected an increase in accounts payable of $4.2 million primarily due to an increase in marketing fees payable, and an increase in other liabilities of $1.1 million primarily due to increased deferred rent. These sources of cash were partially offset by a decrease in accrued employee expenses of $2.1 million due to a decrease in accrued bonus, an increase in accounts receivable of $1.0 million primarily related to increased revenues, and an increase in prepaid expenses of $1.0 million primarily due to an increase in prepaid insurance.
Cash used in operating activities for the six months ended June 30, 2016 was $2.1 million. This was primarily due to our net loss of $26.3 million, which, adjusted for non-cash items, including depreciation and amortization expense of $11.7 million and stock-based compensation expense of $11.8 million, resulted in $1.2 million in cash used in operations. Net cash used in operations was also impacted by a decrease of $0.9 million related to changes in operating assets and liabilities, which primarily reflected a decrease of $4.4 million in accounts payable primarily due to decreased affinity group marketing fees and in increase of $1.3 million in prepaid expenses primarily due to an increase in prepaid insurance. These uses of cash were partially offset by a $2.4 million increase in accrued expenses and other liabilities primarily due to increased accrued marketing fees, a $1.3 million increase in other liabilities primarily due to an increase in lease exit costs, and a $1.2 million increase in accrued employee expenses.
Investing Activities
Our investing activities consist primarily of capital expenditures for capitalized software development costs and property and equipment.
Cash used in investing activities of $10.3 million for the six months ended June 30, 2017 resulted from $6.2 million of investments in software, $2.4 million of investments in furniture, leasehold, and facility improvements, and $1.7 million of investments in computer hardware.
Cash used in investing activities of $9.8 million for the six months ended June 30, 2016 resulted from $6.4 million of investments in software, $2.7 million of investments in furniture, leasehold, and facility improvements, and $0.7 million of investments in computer hardware.
Financing Activities
Cash provided by financing activities of $71.6 million for the six months ended June 30, 2017 reflects $54.2 million of proceeds from the exercise of stock options, net of taxes paid for the net share settlement of certain equity awards, and $17.4 million of proceeds from our public offering of common stock that closed in May 2017, net of underwriting discounts and commissions and offering costs.
Cash provided by financing activities of $2.6 million for the six months ended June 30, 2016 primarily reflects a $1.5 million tenant improvement reimbursement related to our Santa Monica capitalized facility lease, $1.2 million of proceeds from the exercise of stock options, net of taxes paid for the net share settlement of certain equity awards, partially offset by $0.1 million paid for the repurchase of common stock option awards.
Contractual Obligations and Known Future Cash Requirements
In April 2017, we signed a memorandum of understanding for a six-month automotive trade-in pilot program with a large vehicle wholesaler. The pilot program is expected to enable consumers to use our TrueCar branded website or mobile application to view real-time vehicle valuation information based on specific vehicle characteristics and receive offers for the vehicle from participating dealers in the TrueCar network. We anticipate incurring additional cash costs of approximately $1.0 million per quarter during the pilot program.


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Off-Balance Sheet Arrangements
We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, as part of our ongoing business. Accordingly, our operating results, financial condition and cash flows are not subject to off-balance sheet risks.

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Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to, those related to revenue recognition, allowance for doubtful accounts and sales allowances, stock-based compensation, income taxes, goodwill and other intangible assets, internal use capitalized software development costs, and contingencies and litigation. We base our estimates on historical experience and on various other estimates and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates and assumptions.
There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K, filed with the SEC on March 1, 2017.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included herein.
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may affect our financial position due to adverse changes in financial market prices and rates. We are exposed to market risks related to changes in interest rates.
Interest Rate Risk
We had cash and cash equivalents of $181.7 million at June 30, 2017, which consists entirely of bank deposits and short-term money market funds. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant.
We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.
To the extent we borrow funds under our credit facility, we would be subject to fluctuations in interest rates. See Note 5 to the condensed consolidated financial statements herein. As of June 30, 2017, we had no borrowings under the credit facility. We believe that we do not have a material exposure to changes in the fair value as a result of changes in interest rates.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.
Foreign Currency Exchange Risk
Historically, as our operations and sales have been primarily in the United States, we have not faced any significant foreign currency risk. If we plan for international expansion, our risks associated with fluctuation in currency rates will become greater, and we will continue to reassess our approach to managing this risk. 

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Item 4.   Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2017, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. 
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Refer to the disclosure under the heading “Legal Proceedings” in Note 6 “Commitments and Contingencies” to our condensed consolidated financial statements included in this report for legal proceedings. From time to time, we may be involved in various legal proceedings arising from the normal course of our business activities.
Item 1A.    Risk Factors
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including our consolidated financial statements and related notes, and Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations” before making an investment in our common stock. If any of the following risks is realized, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose part or all of your investment. Additional risks and uncertainties not presently known to us or not believed by us to be material could also impact us.
Risks Related to Our Business and Industry

The growth of our business relies significantly on our ability to grow and optimize the geographic coverage of dealers in our network of TrueCar Certified Dealers and increase the representation of high volume brands in our network, such that we are able to increase the number of transactions between our users and TrueCar Certified Dealers. Failure to do so would limit our growth.

Some automotive brands consistently achieve higher than average sales volume per dealer. As a consequence, dealers representing those brands make a disproportionately greater contribution to our unit volume. Our ability to grow and to optimize the geographic coverage of dealers in our network of TrueCar Certified Dealers, increase the number of dealers representing high volume brands and grow the overall number of dealers in our network is an important factor in growing our business.

As described elsewhere in this “Risk Factors” section, we are a relatively new participant in the automobile retail industry and our business has sometimes been viewed in a negative light by car dealerships. Although we have taken steps intended to improve our relationships with, and image among, car dealerships, including the commitments made in our pledge to dealers, there can be no assurance that our efforts will be successful. We may be unable to maintain or grow the number of car dealers in our network, in a geographically optimized manner or at all, or increase the proportion of dealers in our network representing high volume brands. During the second half of 2015, we experienced both a decline in the proportion of such high volume dealers in our network and slowed quarter-over-quarter revenue growth. There can be no assurance we will be successful in sustainably reversing these declines. Failure to do so could have a material adverse effect on our business, growth, financial condition, results of operations and cash flows.

In addition, our ability to increase the number of TrueCar Certified Dealers in an optimized manner depends on strong relationships with other constituents, including car manufacturers and state dealership associations. From time to time, car manufacturers have communicated concerns about our business to the dealers in our network. For example, some car manufacturers maintain guidelines that prohibit dealers from advertising a car at a price that is below an established floor. If a TrueCar Certified Dealer submits pricing information to our users that falls below pricing guidelines established by the applicable manufacturer, the manufacturer may discourage that dealer from remaining in the network and may discourage other dealers within its brand from joining the network. For example, in late 2011, Honda publicly announced that it would not provide advertising allowances to dealers that remained in our network of TrueCar Certified Dealers. While we subsequently addressed Honda’s concerns and it ceased withholding advertising allowances from our TrueCar Certified Dealers, discord with specific car manufacturers impedes our ability to grow our dealer network. More recently, Toyota and Nissan modified their marketing covenants to include guidelines on minimum allowable advertised pricing in January 2016 and January 2017, respectively. We have implemented certain changes designed to accommodate these guidelines; however it is unclear whether we will ultimately be able to do so without making material, unfavorable adjustments to our business practices or user experience. If we are unable to successfully accommodate these guidelines without making material, unfavorable adjustments to our business practices or user experience, it could have a material adverse effect on our business, growth, financial condition, results of operations and cash flows.


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In addition, state dealership associations maintain significant influence over the dealerships in their state as lobbying groups and as thought leaders. To the extent that these associations view us in a negative light, our reputation with car dealers in the corresponding state may be negatively affected. If our relationships with car manufacturers or state dealership associations suffer, our ability to maintain and grow the number of car dealers in our network will be harmed.

We cannot assure you that we will expand our network of TrueCar Certified Dealers in a manner that provides a sufficient number of dealers by brand and geography for our unique visitors and failure to do so would limit our growth.

If key industry participants, including car dealers and automobile manufacturers, perceive us in a negative light or our relationships with them suffer harm, our ability to grow and our financial performance may be damaged.
Our primary source of revenue consists of fees paid by TrueCar Certified Dealers to us in connection with the sales of automobiles to our users. In addition, our value proposition to consumers depends on our ability to provide pricing information on automobiles from a sufficient number of automobile dealers by brand and in a given consumer’s geographic area. If our relationships with our network of TrueCar Certified Dealers suffer harm in a manner that leads to the departure of these dealers from our network, then our revenue and ability to maintain and grow unique visitor traffic will be adversely affected.
At the end of 2011 and the beginning of 2012, due to certain regulatory and publicity-related challenges, many dealers canceled their agreements with us and our franchise dealer count fell from 5,571 at November 30, 2011 to 3,599 at February 28, 2012. More recently, 279 franchise dealers became inactive as the result of a contractual dispute with a large dealer group, and our franchise dealer count decreased from 9,300 at June 30, 2015 to 8,702 at September 30, 2015. At June 30, 2017 our franchise dealer count was 12,204.

TrueCar Certified Dealers have no contractual obligation to maintain their relationship with us. Accordingly, these dealers may leave our network at any time or may develop or use other products or services in lieu of ours. Further, while we believe that our service provides a lower cost, accountable customer acquisition channel, dealers may have difficulty rationalizing their marketing spend across TrueCar and other channels, which potentially has the effect of diluting our dealer value proposition. If we are unable to create and maintain a compelling value proposition for dealers to become and remain TrueCar Certified Dealers, our dealer network would not grow and could decline.

In addition, although the automobile dealership industry is fragmented, a small number of groups have significant influence over the industry. These groups include state and national dealership associations, state regulators, car manufacturers, consumer groups, individual dealers and consolidated dealer groups. To the extent that these groups believe that automobile dealerships should not do business with us, this belief may become quickly and widely shared by automobile dealerships and we may lose a significant number of dealers in our network. In May 2015, the California New Car Dealers Association filed a lawsuit alleging that we are operating in the State of California as an unlicensed automobile dealer and autobroker. For more information concerning this lawsuit, refer to the risk factor below, “We face litigation and are party to legal proceedings that could have a material adverse effect on our business, financial condition, results of operations and cash flows.” A significant number of automobile dealerships are also members of larger dealer groups, and to the extent that a group decides to leave our network, this decision would typically apply to all dealerships within the group.

Furthermore, automobile manufacturers may provide their franchise dealers with financial or other marketing support, provided that such dealers adhere to certain marketing guidelines. Automobile manufacturers may determine that the manner in which certain of their franchise dealers use our platform is inconsistent with the terms of such marketing guidelines, which determination could result in potential or actual loss of the manufacturers’ financial or other marketing support to the dealers whose use of the platform is deemed objectionable. The potential or actual loss of such marketing support may cause such dealers to cease being members of our TrueCar Certified Dealer network, which may adversely affect our ability to maintain or grow the number and productivity of dealers in our network or the revenue derived from those dealers.

We cannot assure you that we will maintain strong relationships with the dealers in our network of TrueCar Certified Dealers or that we will not suffer dealer attrition in the future. We may also have disputes with dealers from time to time, including relating to the collection of fees from them and other matters. We may need to modify our products, change pricing or take other actions to address dealer concerns in the future. If a significant number of these automobile dealerships decided to leave our network or change their financial or business relationship with us, then our business, growth, operating results, financial condition and prospects would suffer.


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If we are unable to provide a compelling car-buying experience to our users, the number of transactions between our users and TrueCar Certified Dealers will decline and our revenue and results of operations will suffer harm.

The user experience on our company‑branded platform on the TrueCar website has evolved since its launch in 2010, but has not changed dramatically. We cannot assure you that we are able to provide a compelling car‑buying experience to our users, and our failure to do so could mean that the number of transactions between our users and TrueCar Certified Dealers may decline and we would be unable to effectively monetize our user traffic. We believe that our ability to provide a compelling car‑buying experience is subject to a number of factors, including:

our ability to launch new products that are effective and have a high degree of consumer engagement;
our ability to constantly innovate and improve our existing products;
compliance of the dealers within our network of TrueCar Certified Dealers with applicable laws, regulations and the rules of our platform, including honoring the TrueCar certificates submitted by our users; and
our access to a sufficient amount of data to enable us to provide relevant pricing information to consumers.

If we suffer a significant interruption in our ability to gain access to third-party data, we may be unable to maintain key aspects of our user experience, including the TrueCar Curve, and our business and operating results will suffer.
 
Our business relies on our ability to analyze data for the benefit of our users and the TrueCar Certified Dealers in our network. We use data obtained pursuant to agreements with third parties to power certain aspects of the user experience on our platform, including the TrueCar Curve, a graphical distribution of what others paid for the same make and model of car. In addition, the effectiveness of our user acquisition efforts depends in part on the availability of data relating to existing and potential users of our platform. If we are unable to renew data agreements, or utilize alternative data sources, as certain agreements expire, and we experience a material disruption in the data provided to us, the information that we provide to our users and TrueCar Certified Dealers may be limited, the quality of this information may suffer, the user experience may be negatively affected and certain functionality on our platform may be disabled, and our business, financial condition, results of operations and cash flows could be materially and adversely affected.

Changes to management, including turnover of our top executives, or an inability to retain, attract and integrate qualified personnel, could harm our ability to develop and successfully grow our business.

We believe our success has depended, and continues to depend, on the efforts and talents of our executives and employees. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide competitive compensation packages, including cash and stock‑based compensation. Our primary forms of stock‑based incentive awards are stock options and restricted stock units. If the anticipated value of such stock‑based incentive awards does not materialize, if our stock‑based compensation otherwise ceases to be viewed as a valuable benefit, or if our total compensation package is not viewed as being competitive, our ability to attract, retain and motivate executives and key employees could be weakened.

The loss of any of our senior management or key employees could materially adversely affect our ability to execute our business plan and strategy, and we may not be able to find adequate replacements on a timely basis, or at all. Our executive officers and other employees are at‑will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. In the second half of 2015, we experienced increased turnover in key executive positions, including our chief executive officer and president. Our current executives may view the business differently than prior members of management, and over time may make changes to our strategic focus, operations or business plans with corresponding changes in how we report our results of operations. We can make no assurances that our current executives will be able to properly manage any such shift in focus or that any changes to our business would ultimately prove successful. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well‑qualified employees, retaining and motivating existing employees or integrating new executives and employees, our business could be materially and adversely affected.


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