CarGurus, Inc. (CARG) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this report. Some of the information contained in this discussion and analysis or elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and our performance and future success, includes forward‑looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward‑looking statements contained in the following discussion and analysis.

In this discussion, we use financial measures that are considered non‑GAAP financial measures under Securities and Exchange Commission rules. These rules regarding non-GAAP financial measures require supplemental explanation and reconciliation, which are included elsewhere in this Annual Report on Form 10-K. Investors should not consider non‑GAAP financial measures in isolation from or in substitution for, financial information presented in compliance with United States generally accepted accounting principles, or GAAP.

This section of this Annual Report on Form 10-K discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. The period‑to‑period comparison of financial results is not necessarily indicative of future results.

Company Overview

CarGurus is a multinational, online automotive platform for buying and selling vehicles that is building upon its industry-leading listings marketplace with both digital retail solutions and the CarOffer online wholesale platform. The CarGurus marketplace gives consumers the confidence to purchase or sell a vehicle either online or in-person, and it gives dealerships the power to accurately price, effectively market, instantly acquire and quickly sell vehicles, all with a nationwide reach. We use our proprietary technology, search algorithms and data analytics to bring trust, transparency and competitive pricing to the automotive shopping experience.

We are headquartered in Cambridge, Massachusetts and were incorporated in the State of Delaware on June 26, 2015.

We operate principally in the United States. In the United States, we also operate as independent brands the Autolist online marketplace, which we wholly own, and CarOffer digital wholesale marketplace, in which we own a 51% equity interest. In addition to the United States, we operate online marketplaces under the CarGurus brand in Canada and the United Kingdom. In the United Kingdom, we also operate as an independent brand the PistonHeads online marketplace, which we wholly own. We also operated online marketplaces in Germany, Italy, and Spain until we ceased the operations of each of these marketplaces in the second quarter of 2020.

We have subsidiaries in the United States, Canada, Ireland, and the United Kingdom. Additionally, we have two reportable segments, United States and International. See Note 13 and Note 15 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further segment reporting and geographical information.

We generate marketplace revenue primarily from (i) dealer subscriptions to our Listings packages and Real-time Performance Marketing, or RPM, digital advertising suite, (ii) advertising revenue from auto manufacturers and other auto‑related brand advertisers and (iii) revenue from partnerships with financing services companies. We generate wholesale revenue primarily from transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers. We generate product revenue primarily from aggregate proceeds received on the sale of vehicles.

For the year ended December 31, 2021, we generated revenue of $951.4 million, a 73% increase from $551.5 million of revenue in the year ended December 31, 2020.

For the year ended December 31, 2021, we generated consolidated net income of $110.4 million and Adjusted EBITDA of $249.5 million, compared to consolidated net income of $77.6 million and Adjusted EBITDA of $160.8 million for the year ended December 31, 2020.

See “Adjusted EBITDA and Adjusted EBITDA Margin” below for more information regarding our use of Adjusted EBITDA, a non-GAAP financial measure, and a reconciliation of Adjusted EBITDA to our consolidated net income.

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COVID-19 Update

The COVID-19 pandemic has caused an international health crisis and resulted in significant disruptions to the global economy as well as businesses and capital markets around the world.

Our operations have been materially adversely affected by a range of factors related to the COVID-19 pandemic. Since March 2020, all of our offices have been temporarily closed and, subject to limited exceptions, all of our employees have worked remotely, which has disrupted how we operate our business. In addition, in an effort to limit the spread of COVID-19, Canada and the United Kingdom, as well as states and localities in the United States, implemented or mandated significant restrictions on travel and commerce, shelter-in-place or stay-at-home orders, and business closures. Fluctuation in infection rates in the regions in which we operate has resulted in periodic changes in restrictions that vary from region to region and may require rapid response to new or reinstated orders. Many of these orders resulted in restrictions on the ability of consumers to buy and sell automobiles by restricting operations at dealerships and/or by closing or reducing the services provided by certain service providers upon which dealerships rely. In addition, these restrictions and continued concern about the spread of the disease have impacted car shopping by consumers and disrupted the operations of car dealerships, which has adversely affected the market for automobile purchases.

The automotive industry is also facing inventory supply problems, including for reasons attributable to the COVID-19 pandemic and other macroeconomic issues, such as the global semiconductor chip shortage, which have adversely affected the amount of inventory on our websites.

As a result of the travel and commerce restrictions and the impact on their businesses, a number of our dealer customers have, or are temporarily closed or are operating on a reduced capacity, and many dealerships have faced significant financial challenges, which caused us to experience increased customer cancellation rates and slowed paying dealer additions during the year ended December 31, 2020. However, since the second quarter of 2020, cancellations by paying dealers have begun to stabilize, which we believe resulted primarily from the resumption of consumer activity.

Further, in the past, we have taken measures to help our paying dealers maintain their business health during the COVID-19 pandemic, including by proactively reducing the subscription fees for paying dealers for certain service periods. As a result, the level of fees we received from paying dealers materially decreased during the year ended December 31, 2020 as compared to the prior year, resulting in a material decline in our revenue on a year-over-year basis and a material adverse effect to our business. These effects on our revenue caused us to implement a cost-savings initiative during the second quarter of 2020, or the Expense Reduction Plan, that included a reduction in our workforce, a limitation in discretionary spend across our business, reduced consumer marketing across both algorithmic traffic acquisition and brand spend, and ceasing certain international operations and expansion efforts. We have since increased our consumer marketing and other expenses, though remaining short of pre-pandemic levels, as consumer activity increased, and governments implemented re-opening policies. For the year ended December 31, 2021, we also returned to normal contractual billings in all markets except for our suspension of charging subscription fees to paying dealers in the United Kingdom during the February 2021 service period. Although the fee reductions had a material adverse effect on our revenue for the year ended December 31, 2020, they did not have a material adverse impact for the year ended December 31, 2021.

We continue to monitor and assess the effects of the COVID-19 pandemic on our commercial operations, including the impact on our revenue. Recently identified variants of COVID-19, Delta and Omicron, which appear to be more transmissible and contagious than previous COVID-19 variants, have caused an increase in the number of COVID-19 cases globally. The impact of COVID-19 and, in particular, the Delta and Omicron variants or other variants that may emerge, cannot be predicted at this time, and could depend on a number of factors, including the availability of vaccines in different parts of the world, vaccination rates among the population, and the effectiveness of COVID-19 vaccines against the Delta and Omicron variants and any other variants that may emerge. Accordingly, we cannot at this time accurately predict what effects these conditions will ultimately have on our future revenue and operations. See the “Risk Factors” section of this Annual Report on Form 10-K for further discussion of the impacts of the COVID-19 pandemic on our business.

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Key Business Metrics

We regularly review a number of metrics, including the key metrics listed below, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections, and make operating and strategic decisions. We believe it is important to evaluate these metrics for the United States and International segments. The International segment derives revenues from marketplace revenue from customers outside of the United States. International markets perform differently from the United States market due to a variety of factors, including our operating history in each market, our rate of investment, market size, market maturity, competition and other dynamics unique to each country. The metrics presented below exclude CarOffer as we believe such metrics are either not applicable for the CarOffer business or do not provide a meaningful way to evaluate the CarOffer business.

Monthly Unique Users

For each of our websites, we define a monthly unique user as an individual who has visited any such website within a calendar month, based on data as measured by Google Analytics. We calculate average monthly unique users as the sum of the monthly unique users of each of our websites in a given period, divided by the number of months in that period. We count a unique user the first time a computer or mobile device with a unique device identifier accesses any of our websites during a calendar month. If an individual accesses a website using a different device within a given month, the first access by each such device is counted as a separate unique user. If an individual uses multiple browsers on a single device and/or clears their cookies and returns to our site within a calendar month, each such visit is counted as a separate unique user. We view our average monthly unique users as a key indicator of the quality of our user experience, the effectiveness of our advertising and traffic acquisition, and the strength of our brand awareness. Measuring unique users is important to us and we believe it provides useful information to our investors because our marketplace revenue depends, in part, on our ability to provide dealers with connections to our users and exposure to our marketplace audience. We define connections as interactions between consumers and dealers on our marketplace through phone calls, email, managed text and chat, and clicks to access the dealer’s website or map directions to the dealership.

Monthly Sessions

We define monthly sessions as the number of distinct visits to our websites that take place each month within a given time frame, as measured and defined by Google Analytics. We calculate average monthly sessions as the sum of the monthly sessions in a given period, divided by the number of months in that period. A session is defined as beginning with the first page view from a computer or mobile device and ending at the earliest of when a user closes their browser window, after 30 minutes of inactivity, or each night at midnight (i) Eastern Time for our United States and Canada websites, other than the Autolist website, (ii) Pacific Time for the Autolist website, (iii) Greenwich Mean Time for our U.K. websites, and (iv) Central European Time (or Central European Summer Time when daylight savings is observed) for our Germany, Italy, and Spain websites, which ceased operations in the second quarter of 2020. A session can be made up of multiple page views and visitor actions, such as performing a search, visiting vehicle detail pages, and connecting with a dealer. We believe that measuring the volume of sessions in a time period, when considered in conjunction with the number of unique users in that time period, is an important indicator to us of consumer satisfaction and engagement with our marketplace, and we believe it provides useful information to our investors because the more satisfied and engaged consumers we have, the more valuable our service is to dealers.

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Number of Paying Dealers

We define a paying dealer as a dealer account with an active, paid marketplace subscription at the end of a defined period. The number of paying dealers we have is important to us and we believe it provides valuable information to investors because it is indicative of the value proposition of our marketplace products, as well as our sales and marketing success and opportunity, including our ability to retain paying dealers and develop new dealer relationships.

Quarterly Average Revenue per Subscribing Dealer (QARSD)

We define QARSD, which is measured at the end of a fiscal quarter, as the marketplace revenue primarily from subscriptions to our Listings packages and RPM digital advertising suite during that trailing quarter divided by the average number of paying dealers in that marketplace during the quarter. We calculate the average number of paying dealers for a period by adding the number of paying dealers at the end of such period and the end of the prior period and dividing by two. This information is important to us, and we believe it provides useful information to investors, because we believe that our ability to grow QARSD is an indicator of the value proposition of our products and the return on investment, or ROI, that our paying dealers realize from our products. In addition, increases in QARSD, which we believe reflect the value of exposure to our engaged audience in relation to subscription cost, are driven in part by our ability to grow the volume of connections to our users and the quality of those connections, which result in increased opportunity to upsell package levels and cross-sell additional products to our paying dealers.

Adjusted EBITDA and Adjusted EBITDA Margin

To provide investors with additional information regarding our financial results, we monitor and have presented within this Annual Report on Form 10-K, Adjusted EBITDA and Adjusted EBITDA margin, each of which are non‑GAAP financial measures. These non‑GAAP financial measures are not based on any standardized methodology prescribed by United States generally accepted accounting principles, or GAAP, and are not necessarily comparable to similarly titled measures presented by other companies.

We define Adjusted EBITDA as consolidated net income, adjusted to exclude: depreciation and amortization, impairment of long-lived assets, stock‑based compensation expense, acquisition-related expenses, restructuring expenses, other income, net, provision for income taxes, and net income attributable to redeemable noncontrolling interest. In addition, we evaluate our Adjusted EBITDA in relation to our revenue. We refer to this as Adjusted EBITDA margin and define it as Adjusted EBITDA divided by total revenue.

We have presented Adjusted EBITDA and Adjusted EBITDA margin within this Annual Report on Form 10-K because they are key measures used by our management and board of directors to understand and evaluate our operating performance, generate future operating plans, and make strategic decisions regarding the allocation of capital. In particular, we believe that the exclusion of certain items in calculating Adjusted EBITDA and Adjusted EBITDA margin can produce useful measures for period‑to‑period comparisons of our business.

We use Adjusted EBITDA and Adjusted EBITDA margin to evaluate our operating performance and trends and make planning decisions. We believe Adjusted EBITDA and Adjusted EBITDA margin help identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision‑making.

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Our Adjusted EBITDA and Adjusted EBITDA margin are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA and Adjusted EBITDA margin rather than consolidated net income and consolidated net income margin, respectively, which are the most directly comparable GAAP equivalents. Some of these limitations are:

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Adjusted EBITDA and Adjusted EBITDA margin exclude depreciation and amortization expense and, although these are non‑cash expenses, the assets being depreciated may have to be replaced in the future;

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Adjusted EBITDA and Adjusted EBITDA margin exclude impairment of long-lived assets and, although these are non‑cash adjustments, the assets being impaired may have to be replaced in the future;

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Adjusted EBITDA and Adjusted EBITDA margin exclude stock‑based compensation expense, which will be, for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy;

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Adjusted EBITDA and Adjusted EBITDA margin exclude transaction and one-time acquisition-related expenses incurred by us during a reporting period, which may not be reflective of our operational performance during such period, for acquisitions that have been completed as of the filing date of our annual or quarterly report (as applicable) relating to such period;

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Adjusted EBITDA and Adjusted EBITDA margin exclude restructuring expenses incurred by us during a reporting period, which may not be reflective of our operational performance during such period;

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Adjusted EBITDA and Adjusted EBITDA margin exclude other income, net which primarily includes interest income earned on our cash, cash equivalents, and investments, and net foreign exchange gains and losses;

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Adjusted EBITDA and Adjusted EBITDA margin exclude the provision for income taxes;

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Adjusted EBITDA and Adjusted EBITDA margin exclude the income attributable to redeemable noncontrolling interest, adjusted for all prior limitations to Adjusted EBITDA and Adjusted EBITDA margin as described above; and

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other companies, including companies in our industry, may calculate Adjusted EBITDA and Adjusted EBITDA margin differently, which reduce their usefulness as comparative measures.

Because of these limitations, we consider, and you should consider, Adjusted EBITDA and Adjusted EBITDA margin together with other operating and financial performance measures presented in accordance with GAAP.

For the years ended December 31, 2021 and 2020, the following table presents a reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to consolidated net income and consolidated net income margin, respectively, the most directly comparable measures calculated in accordance with GAAP, for each of the periods presented.

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(1)
Excludes stock-based compensation expense of $753 for the year ended December 31, 2020 related to the Expense Reduction Plan, as the amount is already included within the stock-based compensation line item in the Reconciliation of Adjusted EBITDA and Adjusted EBITDA margin.

Components of Consolidated Income Statements

Revenue

We derive revenue from three sources: (i) marketplace revenue, which consists primarily of dealer subscriptions to our Listings packages and RPM digital advertising suite, advertising revenue from auto manufacturers and other auto‑related brand advertisers, and revenue from partnerships with financing services companies; (ii) wholesale revenue, which consists primarily of transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers; and (iii) product revenue, which consists primarily of aggregate proceeds received on the sale of vehicles.

Marketplace Revenue

We offer multiple types of marketplace Listings packages to our dealers for our CarGurus U.S. platform (availability varies on our other marketplaces): Restricted Listings, which is free; and various levels of Listings packages, which each require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis.

Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice prior to the commencement of the applicable renewal term, although during the second quarter of 2020 we did not require 30 days’ advance notice of termination from dealers who cancelled as a result of the COVID-19 pandemic. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the connections and ROI the platform will provide them and is subject to discounts and/or fee reductions that we may offer from time to time. We also offer all dealers on our platform access to our Dealer Dashboard, which includes a performance summary, Dealer Insights tool, and user review management platform. Only dealers subscribing to a paid Listings package have access to the Pricing Tool, Market Analysis tool and our IMV Scan tool.

In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements marketed under our RPM digital advertising suite. Through RPM, dealers can buy advertising that appears in our marketplace, on other sites on the internet and/or on high-converting social media platforms. Such advertisements can be targeted by the user’s geography, search history, CarGurus website activity and a number of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for dealers.

We also offer paid Listings packages for the Autolist website and paid Listings and advertising products for the PistonHeads website.

Marketplace revenue also consists of non-dealer advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. An impression is an advertisement loaded on a web page. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost per click basis. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as Certified Pre-Owned, and segments such as hybrid vehicles.

Marketplace revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our CarGurus U.S. website to pre-qualify for financing on cars from dealerships that offer financing through such companies. We primarily generate revenue from these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through our site.

We also offer non-dealer advertising products for the Autolist and PistonHeads websites.

Wholesale Revenue

Wholesale revenue includes transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers, where CarOffer collects fees from both the buyer and seller. CarOffer also sells vehicles to dealers that CarOffer acquires at other marketplaces – in these instances, CarOffer collects a transaction fee from the buyer.

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Wholesale revenue also includes fees earned by CarOffer from performing inspection and transportation services, where CarOffer collects fees from the buyer. Inspection and transportation service revenue is inclusive of dealer to dealer transactions, other marketplace to dealer transactions, and customer to dealer transactions.

Wholesale revenue also includes fees earned by CarOffer from certain guarantees offered to dealers, where CarOffer collects fees from the buying dealer or selling dealer, as applicable.

Product Revenue

Product revenue includes the aggregate proceeds received on the sale of vehicles. This revenue relates to vehicles sold to dealers that CarOffer acquires directly from customers, inclusive of transaction fees collected from the buyer, and in limited situations across all CarOffer transactions, vehicles CarOffer resells after acquiring a vehicle via arbitration. Arbitration is the process by which CarOffer investigates and resolves claims from buying dealers.

Cost of Revenue

Marketplace Cost of Revenue

Marketplace cost of revenue includes expenses related to supporting and hosting digital product offerings. These expenses include personnel and related expenses for our customer support team, including salaries, benefits, incentive compensation, and stock-based compensation, third-party service provider expenses such as advertising, data center and networking expenses, depreciation expense associated with our property and equipment, amortization of developed technology, amortization of capitalized website development and allocated overhead expenses. The Company allocates overhead expenses, such as rent and facility expenses, information technology expense, and employee benefit expense, to all departments based on headcount. As such, general overhead expenses are reflected in cost of revenue and each operating expense category.

Wholesale Cost of Revenue

Wholesale cost of revenue includes expenses related to supporting the facilitation of the purchase and sale of vehicles between dealers, the sale by CarOffer to dealers of vehicles that it acquires at other marketplaces, and net losses on vehicles related to guarantees offered to dealers. These expenses include vehicle transportation and inspection expenses, personnel and related expenses for employees directly involved in the fulfillment and support of transactions, including salaries, benefits, incentive compensation and stock-based compensation, third-party service provider expenses, amortization of developed technology, amortization of capitalized website development and allocated overhead expenses.

Product Cost of Revenue

Product cost of revenue includes expenses related to vehicles sold to dealers that CarOffer acquires directly from consumers and in limited situations across all CarOffer transactions, in which CarOffer acquires the vehicle via arbitration. These expenses include expenses for vehicles in which CarOffer controls the vehicle and therefore acts as a principal in the transaction.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing team, including salaries, benefits, incentive compensation, commissions, and stock-based compensation; expenses associated with consumer marketing, such as traffic acquisition, brand building, and public relations activities; expenses associated with dealer marketing, such as content marketing, customer and promotional events, and industry events; amortization of hosting arrangements; and allocated overhead expenses. A portion of our commissions that are related to obtaining a new contract are capitalized and amortized over the estimated benefit period of customer relationships. All other sales and marketing expenses are expensed as incurred. We expect sales and marketing expenses to fluctuate from quarter to quarter as we respond to the COVID-19 pandemic and changes in the macroeconomic and competitive landscapes affecting our existing dealers, consumer audience and brand awareness, which will impact our annual results of operations.

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Product, Technology, and Development

Product, technology, and development expenses, consist primarily of personnel and related expenses for our research and development team, including salaries, benefits, incentive compensation, stock-based compensation and allocated overhead expense. Other than website development and internal-use software expenses, research and development expenses are expensed as incurred. We expect product, technology, and development expenses to increase as we invest in additional engineering resourcing to develop new solutions and make improvements to our existing platform.

General and Administrative

General and administrative expenses consist primarily of personnel and related expenses for our executive, finance, legal, people & talent, and administrative teams, including salaries, benefits, incentive compensation, and stock-based compensation, in addition to the expenses associated with professional fees for external legal, accounting and other consulting services, insurance premiums, payment processing and billing expenses, and allocated overhead expenses. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to increase as we continue to scale our business.

Depreciation and Amortization

Depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets and internal-use software.

Other Income, Net

Other income, net consists primarily of interest income earned on our cash, cash equivalents, and investments, and net foreign exchange gains and losses.

Provision for Income Taxes

We are subject to federal and state income taxes in the United States and taxes in foreign jurisdictions in which we operate. For the years ended December 31, 2021 and 2020, we have recognized a provision for income taxes as a result of our consolidated taxable income position. We recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. We regularly assess the need to record a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2021 and 2020, our valuation allowances against our net deferred tax assets were both immaterial.

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Results of Operations

For the years ended December 31, 2021 and 2020, our consolidated income statements are as follows:

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For the years ended December 31, 2021 and 2020, our consolidated income statements as a percentage of revenue are as follows (amounts may not sum due to rounding):

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Revenue

Revenue by Source

NM - Not Meaningful

Overall revenue increased $399.9 million, or 73%, in the year ended December 31, 2021 compared to the year ended December 31, 2020.

Marketplace revenue increased $85.5 million, or 16%, in the year ended December 31, 2021 compared to the year ended December 31, 2020 and represented 67% of total revenue for the year ended December 31, 2021 and 100% of total revenue for the year ended December 31, 2020. This increase was due primarily to the approximately $50 million impact of fee reductions that we provided to our paying dealers during the second quarter of 2020 in response to the COVID-19 pandemic, of which approximately $47 million resulted in revenue reductions during such quarter, with the remaining impact spread over the life of the contract term. The increase was also due in part to product upgrades for existing dealers and signing on new dealers with higher average monthly recurring revenue.

Wholesale revenue increased $195.1 million in the year ended December 31, 2021 compared to the year ended December 31, 2020 and represented 21% of total revenue for the year ended December 31, 2021 and 0% of total revenue for the year ended December 31, 2020. The increase was due to our acquisition of a 51% interest in CarOffer. The increase was primarily due to dealer to dealer transactions, inclusive of transaction, transportation and inspection fees.

Product revenue increased $119.3 million in the year ended December 31, 2021 compared to the year ended December 31, 2020 and represented 13% of the total revenue for the year ended December 31, 2021 and 0% of total revenue for the year ended December 31, 2020. The increase was due to our acquisition of a 51% interest in CarOffer and launch of our consumer-to-dealer offering. The increase was primarily due to a $84.2 million increase in proceeds received on the sale of vehicles acquired by CarOffer directly from customers and a $35.1 million increase in proceeds received from the sale of vehicles acquired via arbitration.

Revenue by Segment

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United States revenue increased $389.2 million, or 75%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily due to a $314.4 million increase in wholesale and product revenue due to our acquisition of a 51% interest in CarOffer and launch of our consumer-to-dealer offering. Additionally, the increase was due to approximately $44 million in revenue reductions during the second quarter of 2020 as a result of the impact of fee reductions that we provided to our United States paying dealers during such quarter in response to the COVID-19 pandemic. The increase was also due in part to product upgrades for existing dealers and signing on new dealers with higher average monthly recurring revenue.

International revenue increased $10.7 million, or 34%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was due primarily to approximately $3 million in revenue reductions during the second quarter of 2020 as a result of the impact of fee reductions that we provided to our international paying dealers during such quarter in response to the COVID-19 pandemic. The increase was also due in part to product upgrades for existing dealers and signing on new dealers with higher average monthly recurring revenue. The increase in international revenue was also attributable to a 1% increase in the number of international paying dealers.

Cost of Revenue

NM - Not Meaningful

Overall cost of revenue increased $251.3 million, or 588%, in the year ended December 31, 2021 compared to the year ended December 31, 2020.

Marketplace cost of revenue increased $5.0 million, or 12%, in the year ended December 31, 2021 compared to the year ended December 31, 2020 and represented 5% of total revenue for the year ended December 31, 2021 and 8% of total revenue for the year ended December 31, 2020. The increase was due primarily to a $5.3 million increase in fees related to provisioning advertising campaigns on our websites and a $0.9 million increase in data center and hosting costs, offset in part by a $1.2 million decrease in salaries and employee-related expense due primarily to a 29% decrease in average CarGurus customer support team headcount primarily in connection with the Expense Reduction Plan.

Wholesale cost of revenue increased $127.7 million, in the year ended December 31, 2021 compared to the year ended December 31, 2020 and represented 13% of total revenue for the year ended December 31, 2021 and 0% of total revenue for the year ended December 31, 2020. The increase was due to our acquisition of a 51% interest in CarOffer. The increase was primarily due to expenses for dealer to dealer transactions, inclusive of transportation expenses, amortization of developed technology, salaries and employee-related expenses, and inspection expenses.

Product cost of revenue increased $118.6 million, in the year ended December 31, 2021 compared to the year ended December 31, 2020 and represented 12% of the total revenue for the year ended December 31, 2021 and 0% of total revenue for the year ended December 31, 2020. The increase was due to our acquisition of a 51% interest in CarOffer and launch of our consumer-to-dealer offering. The increase was primarily due to a $78.4 million increase in expenses related to vehicles acquired by CarOffer directly from customers and a $40.2 million increase in expenses related to vehicles acquired via arbitration.

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Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses increased $33.6 million, or 13%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was due primarily to a $6.9 million increase in salaries and employee-related expense, exclusive of commissions expense, which increased $22.5 million. The increase in salaries and employee-related expense was due primarily to a 33% increase in headcount due primarily to our acquisition of a 51% interest in CarOffer and an increase in expected bonus attainment in comparison to the year ended December 31, 2020 due to improved performance since the outset of the COVID-19 pandemic. The increase in commissions expense was due to the increase in headcount, marketplace sales growth and a decrease in capitalizable costs to obtain contracts. The increase in sales and marketing expenses was also due in part to a $2.3 million increase in consulting expense and a $2.1 million increase in software subscription expense.

Product, Technology, and Development Expenses

Product, technology, and development expenses increased $20.7 million, or 24%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was due primarily to a $15.7 million increase in salaries and employee-related expense, exclusive of stock-based compensation expense, which increased $1.5 million. The increase in salaries and employee-related expense was due primarily to a 37% increase in headcount and an increase in expected bonus attainment in comparison to the year ended December 31, 2020 due to improved performance since the outset of the COVID-19 pandemic. The increase in stock-based compensation expense was due to the revaluation of certain liability-based stock awards and the increase in headcount. The increase in product, technology, and development expenses was also due in part to a $1.9 million increase in consulting expenses and a $1.0 million increase in rent expense.

General and Administrative Expenses

General and administrative expenses increased $35.5 million, or 57%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was due primarily to a $5.2 million increase in salaries and employee-related expense, exclusive of stock-based compensation expense, which increased $28.5 million. The increase in salaries and employee-related expense was due primarily to a 33% increase in headcount due primarily to our acquisition of a 51% interest in CarOffer and an increase in expected bonus attainment in comparison to the year ended December 31, 2020 due to improved performance since the outset of the COVID-19 pandemic. The increase in stock-based compensation expense was due primarily to the revaluation of certain liability-based stock awards and annual retention grant. The increase in general and administrative expenses was also due in part to a $1.3 million increase in insurance expenses.

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Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $8.3 million, or 136%, in the year ended December 31, 2021 compared to the year ended December 31, 2020, due primarily to an increase in amortization of intangible assets related to the acquired intangible assets from CarOffer.

Other Income, net

Other income, net decreased $0.3 million, or 19%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. The $1.0 million decrease in interest income was due primarily to decreases in investments in certificates of deposit as well as a decline in interest rates associated with our certificates of deposit investments during the year ended December 31, 2021. The $0.7 million increase in other income, net was primarily due to a $0.5 million increase in other income related to CarOffer during the year ended December 31, 2021.

Provision for Income Taxes

Provision for income taxes increased $17.4 million, or 81% in year ended December 31, 2021 compared to the year ended December 31, 2020. The increase in provision for income taxes recognized during the year ended December 31, 2021 was principally due to increased profitability in excess of tax attributes available to offset. Additionally, there was $0.4 million tax expense related to excess stock-based compensation deductions recognized during 2021, compared to the insignificant amount of tax benefit recognized during 2020. Furthermore, a $2.0 million tax expense was recognized during 2021 in connection with the Section 162(m) excess officer compensation limitation, which became applicable in May 2021 upon the expiration of the transition period permitted following our IPO.

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Income (Loss) from Operations by Segment

United States income from operations increased $37.7 million, or 31%, in the year ended December 31, 2021 compared to the year ended December 31, 2020. This increase was due to increases in revenue of $389.2 million, offset by increases in cost of revenue of $253.7 million and increases in operating expenses of $97.8 million.

International loss from operations decreased $12.8 million, or 56% in the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was due to increases in revenue of $10.7 million and decreases in cost of revenue of $2.4 million, offset by increases in operating expenses of $0.3 million.

Liquidity and Capital Resources

Cash, Cash Equivalents and Investments

As of December 31, 2021 and 2020, our principal sources of liquidity were cash and cash equivalents of $231.9 million and $190.3 million, respectively, and investments in certificates of deposit with terms of greater than 90 days but less than one year of $90.0 million and $100.0 million, respectively.

Sources and Uses of Cash

During the years ended December 31, 2021 and 2020, our cash flows from operating, investing, and financing activities, as reflected in the consolidated statements of cash flows, are as follows:

Our operations have been financed primarily from operating activities. During the years ended December 31, 2021 and 2020, we generated cash from operating activities of $98.3 million and $156.7 million, respectively.

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We believe that our existing sources of liquidity will be sufficient to fund our operations for at least the next 12 months from the date of the filing of this Annual Report on Form 10-K. Our future capital requirements will depend on many factors, including: the further impact of the COVID-19 pandemic; our revenue; expenses associated with our sales and marketing activities and the support of our product, technology, and development efforts; expenses associated with our facilities build out under our 1001 Boylston Street lease, other than those which qualify for landlord reimbursement; payments received in advance from a third-party payment processor; our investments in international markets; and the potential exercise of call rights in the second half of 2022, or the 2022 Call Right, exercisable in our sole discretion, to acquire up to twenty-five percent (25%) of the fully diluted outstanding capitalization of CarOffer at an implied value equal to seven (7) times CarOffer’s trailing twelve months gross profit as of June 30, 2022 (as calculated in accordance with the defined terms and subject to the adjustments set forth in the CarOffer Operating Agreement (as defined in Note 4 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K)). If the 2022 Call Right is exercised, the consideration to be paid will be in the form of cash and/or shares of our Class A common stock, as determined in our sole discretion. A cash payment made in connection with the 2022 Call Right is reasonably likely to reduce our net cash in future quarters. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in the “Risk Factors” section of this Annual Report on Form 10-K.

To the extent that existing cash, cash equivalents, and investments and cash from operations are insufficient to fund our future activities, we may need to raise additional funds through a public or private equity or debt financing. Additional funds may not be available on terms favorable to us, or at all.

Operating Activities

Cash provided by operating activities of $98.3 million during the year ended December 31, 2021 was due primarily to consolidated net income of $110.4 million, adjusted for $53.5 million of stock-based compensation expense, $40.5 million of depreciation and amortization, $12.7 million of amortization of deferred contract costs, $6.2 million of deferred taxes, $3.1 million of impairment of long-lived assets, and $1.0 million of provision for doubtful accounts. Cash provided by operating activities was also attributable to a $35.8 million increase in accrued expenses, accrued income taxes, and other liabilities, a $35.4 million increase in accounts payable, a $3.7 million increase in deferred revenue, and a $1.0 million increase in lease obligations. The increases in cash flow from operations were partially offset by a $174.8 million increase in accounts receivable, net due primarily to the acquisition of a 51% interest in CarOffer, a $17.3 million increase in inventory, a $7.7 million increase in gross deferred contract costs, and a $5.1 million increase in prepaid expenses, prepaid income taxes, and other assets.

Cash provided by operating activities of $156.7 million during the year ended December 31, 2020 was due primarily to consolidated net income of $77.6 million, adjusted for $45.1 million of stock-based compensation expense, $22.2 million of deferred taxes, $11.6 million of amortization of deferred contract costs, $10.2 million of depreciation and amortization, $1.9 million of provision for doubtful accounts, and $1.2 million of impairment of long-lived assets. Cash provided by operating activities was also attributable to a $7.5 million increase in accrued expenses, accrued income taxes, and other liabilities, a $3.9 million decrease in accounts receivable, and a $3.5 million decrease in prepaid expenses, prepaid income taxes, and other assets. The increases in cash flow from operations were partially offset by a $15.1 million decrease in accounts payable, and a $11.4 million increase in gross deferred contract costs.

Investing Activities

Cash used in investing activities of $68.1 million during the year ended December 31, 2021 was due to $64.3 million of acquisition cash payments, net of cash acquired, $7.7 million of purchases of property and equipment, and $6.2 million related to the capitalization of website development costs, offset in part by $130.0 million of maturities in certificates of deposit, net of investments in certificates of deposit of $120.0 million.

Cash used in investing activities of $16.9 million during the year ended December 31, 2020 was due to $21.1 million of acquisition cash payments, net of cash acquired, $4.6 million related to the capitalization of website development costs, and $3.0 million of purchases of property and equipment, offset in part by $111.7 million of maturities in certificates of deposit, net of investments in certificates of deposit of $100.0 million.

Financing Activities

Cash provided by financing activities of $17.8 million during the year ended December 31, 2021 was due primarily to $46.8 million related to payments received in advance from a third-party payment processor and $0.7 million related to the proceeds from the issuance of common stock related to the exercise of vested stock options, partially offset by payment of withholding taxes on net share settlements of restricted stock units, or RSUs, of $15.4 million and CarOffer's repayment of a line of credit of $14.3 million.

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Cash used in financing activities of $10.1 million during the year ended December 31, 2020 was due primarily to the payment of withholding taxes on net share settlements of RSUs of $11.2 million, partially offset by $1.1 million related to the proceeds from the issuance of common stock related to the exercise of vested stock options.

Contractual Obligations and Known Future Cash Requirements

Contractual Obligations and Commitments

As of December 31, 2021, all of our property, equipment, and internal-use software have been purchased with cash, with the exception of amounts related to unpaid property and equipment, capitalized website development, capitalized internal-use software and hosting arrangements and amounts related to obligations under finance leases as disclosed in the consolidated statements of cash flows. We have no material long‑term purchase obligations outstanding with any vendors or third parties.

Leases

Our primary operating lease obligations consist of various leases for office space in: Boston, Massachusetts; Cambridge, Massachusetts; San Francisco, California; Addison, Texas; and Dublin, Ireland. We also have an operating lease obligation for data center space in Needham, Massachusetts.

Our leases have various lease terms expected to continue through 2038. The terms of our Massachusetts, California, and Texas lease agreements provide for rental payments that increase on an annual basis. The leases in Boston, Massachusetts, Cambridge, Massachusetts and San Francisco, California have associated letters of credit, which are recognized as restricted cash within the consolidated balance sheets. As of December 31, 2021 and 2020, restricted cash was $16.3 million and $10.6 million, respectively, and primarily related to cash held at a financial institution in an interest-bearing cash account as collateral for the letters of credit related to the contractual provisions for our building leases and pass-through payments from customers related to the Company’s wholesale business. As of December 31, 2021 and 2020, portions of restricted cash were classified as short-term assets and long-term assets, as disclosed in the consolidated balance sheets.

As of December 31, 2021, known contractual obligations that are fixed and determinable are as follows:

The table above includes leases signed but not yet commenced as of December 31, 2021 and is based on expected contractual commencement dates.

Acquisitions

On January 14, 2021 we completed the acquisition of a 51% interest in CarOffer, LLC, an automated instant vehicle trade platform based in Addison, Texas, with the option to acquire portions of the remaining equity in the future. Details of this acquisition are more fully described in Note 4 of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Guarantees

CarOffer provides certain guarantees to dealers through its 45-Day Guaranteed Bid and OfferGuard product offerings, which are accounted for under Accounting Standards Codifications, or ASC, Topic 460, Guarantees, or ASC 460.

45-Day Guaranteed Bid is an arrangement through which a selling dealer lists a car on the CarOffer platform, and CarOffer provides an offer to purchase the vehicle listed at a specified price at any time over a 45-day period. This provides the seller with a put option, where they have the right, but not the obligation, to require CarOffer to purchase the vehicle during this window. OfferGuard is an arrangement through which a buying dealer purchases a car on the CarOffer platform, and CarOffer provides an offer to purchase the vehicle at a specified price between days 1 and 3, and days 42 and 45 if the dealer is not able to sell the vehicle after 42 days.

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As of December 31, 2021, the maximum potential amount of future payments that CarOffer could be required to make under these guarantees was $76.1 million. Of the maximum potential amount of future payments, none are considered probable. The exercise of guarantees has historically been infrequent and even when such exercises did occur the losses were immaterial. As such, as of December 31, 2021, CarOffer had no contingent loss liabilities.

As of December 31, 2020, we did not have any guarantees.

Off‑Balance Sheet Arrangements

As of December 31, 2021 and 2020, we did not have any off‑balance sheet arrangements or material leases that are less than twelve months in duration, other than leases signed but not commenced, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Critical Accounting Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

Although we regularly assess these estimates, actual results could differ materially from these estimates. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Changes in estimates are recognized in the period in which they become known.

Critical estimates relied upon in preparing the consolidated financial statements include the determination of sales allowance and variable consideration in our revenue recognition, allowance for doubtful accounts, the expensing and capitalization of product, technology, and development costs for website development and internal-use software, the valuation and recoverability of goodwill, intangible assets and other long-lived assets, the valuation of redeemable noncontrolling interest, the recoverability of our net deferred tax assets and related valuation allowance and the valuation of equity and liability-classified compensation awards under ASC Topic 718, Stock-based Compensation, or ASC 718. Accordingly, we consider these to be our critical accounting policies and believe that of our significant accounting policies, these policies involve the greatest degree of judgment and complexity.

Revenue Recognition

Sources of Revenue

We derive revenue from three sources: (i) marketplace revenue, which consists primarily of dealer subscriptions to our Listings packages and RPM digital advertising suite, advertising revenue from auto manufacturers and other auto‑related brand advertisers, and revenue from partnerships with financing services companies; (ii) wholesale revenue, which consists primarily of transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers; and (iii) product revenue, which consists primarily of aggregate proceeds received on the sale of vehicles.

Revenue Recognition

ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, outlines a comprehensive five-step revenue recognition model based on the principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, we apply the following five steps:

1) Identify the contract with a customer

2) Identify the performance obligations in the contract

3) Determine the transaction price

4) Allocate the transaction price to performance obligations in the contract

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5) Recognize revenue when or as we satisfy a performance obligation

Marketplace Revenue - Description

We offer multiple types of marketplace Listings packages to our dealers through our CarGurus U.S. platform (availability varies on our other marketplaces): Restricted Listings, which is free; and various levels of Listings packages, which each require a paid subscription under a monthly, quarterly, semiannual, or annual subscription basis.

Our subscriptions for customers generally auto-renew on a monthly basis and are cancellable by dealers with 30 days’ advance notice prior to the commencement of the applicable renewal term, although during the second quarter of 2020 we did not require 30 days’ advance notice of termination from dealers who cancelled as a result of the COVID-19 pandemic. Subscription pricing is determined based on a dealer’s inventory size, region, and our assessment of the connections and ROI the platform will provide them and is subject to discounts and/or fee reductions that we may offer from time to time. We also offer all dealers on our platform access to our Dealer Dashboard, which includes a performance summary, Dealer Insights tool, and user review management platform. Only dealers subscribing to a paid Listings package have access to the Pricing Tool, Market Analysis tool and our IMV Scan tool.

Dealer customers do not have the right to take possession of our software.

In addition to displaying inventory in our marketplace and providing access to the Dealer Dashboard, we offer dealers subscribing to certain of our Listings packages other subscription advertising and customer acquisition products and enhancements marketed under our RPM digital advertising suite. Through RPM, dealers can buy advertising that appears in our marketplace, on other sites on the internet and/or on high- converting social media platforms. Such advertisements can be targeted by the user’s geography, search history, CarGurus website activity and a number of other targeting factors, allowing dealers to increase their visibility with in-market consumers and drive qualified traffic for dealers.

Payment is typically due on the first day of each calendar month and is recognized as accounts receivable or short-term deferred revenue when payment is received in advance of services being delivered to the customers.

We also offer paid Listings packages for the Autolist website and paid Listings and advertising products for the PistonHeads website.

Marketplace revenue also consists of non-dealer advertising revenue from auto manufacturers and other auto-related brand advertisers sold on a cost per thousand impressions, or CPM, basis. An impression is an advertisement loaded on a web page. In addition to advertising sold on a CPM basis, we also have advertising sold on a cost per click basis. Auto manufacturers and other brand advertisers can execute advertising campaigns that are targeted across a wide variety of parameters, including demographic groups, behavioral characteristics, specific auto brands, categories such as Certified Pre-Owned, and segments such as hybrid vehicles. We do not provide minimum impression guarantees or other types of minimum guarantees in our contracts with customers. Pricing is primarily based on advertisement size and position on our websites and mobile applications, and fees are billed monthly in arrears. Unbilled accounts receivable generally relate to services rendered in the current period, but not invoiced until the subsequent period.

We sell advertising directly to auto manufacturers and other auto related brand advertisers, as well as indirectly through revenue sharing arrangements with advertising exchange partners. Company-sold advertising is not subject to revenue sharing arrangements. Company-sold advertising revenue is recognized based on the gross amount charged to the advertiser. Partner-sold advertising revenue is recognized based on the net amount of revenue received from the content partners.

Revenue from advertising sold directly by us is recognized on a gross basis because we are the principal in the arrangement, control the ad placement and timing of the campaign, and establish the selling price. We enter into contractual arrangements directly with advertisers and are directly responsible for the fulfillment of the contractual terms including any remedy for issues with such fulfillment.

Advertising revenue subject to revenue sharing agreements between us and advertising exchange partners is recognized based on the net amount of revenue received from the partner. The advertising partner is responsible for fulfillment, including the acceptability of the services delivered. In partner-sold advertising arrangements, the advertising partner has a direct contractual relationship with the advertiser. There is no contractual relationship between us and the advertiser for partner-sold transactions. When an advertising exchange partner sells advertisements, the partner is responsible for fulfilling the advertisements, and accordingly, we have determined the advertising partner is the principal in the arrangement. Additionally, for auction-based partner agreements, we have latitude in establishing the floor price, but the final price established by the exchange server is at market rates.

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Customers are billed monthly in arrears and payment terms are generally thirty to sixty days from the date invoiced.

Marketplace revenue also includes revenue from partnerships with certain financing services companies pursuant to which we enable eligible consumers on our CarGurus U.S. website to pre-qualify for financing on cars from dealerships that offer financing through such companies. We primarily generate revenue from these partnerships based on the number of funded loans from consumers who pre-qualify with our lending partners through our site.

We also offer non-dealer advertising products for the Autolist and PistonHeads websites.

Marketplace Revenue - Revenue Recognition

For dealer listings, we provide a single similar service each day for a period of time. Each time increment (i.e., one day), rather than the underlying activities, is distinct and substantially the same and therefore our performance obligation is to provide a series of daily activities over the contract term. Similar to the dealer listings, the dealer advertising is considered a promise to provide a single similar service each day. Each time increment is distinct and substantially the same and therefore our performance obligation is to provide a series of daily activities over the contract term.

Total consideration for marketplace revenue is stated within the contracts. There are no contractual cash refund rights, but credits may be issued to a customer at our sole discretion. At the portfolio level, there is also variable consideration, that needs to be included in the transaction price. Variable consideration consists of sales allowances, usage fees, and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a credit. Due to the known possibility of future credits, a monthly sales allowance review is performed to defer revenue at a portfolio level for such future adjustments in the period of incurrence. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the financial statements. Estimated sales adjustments, credits and losses may vary from actual results which could lead to material adjustments to the financial statements. Sales allowances are recognized as a reduction to revenue in the consolidated income statements.

Performance obligations are satisfied over time as the customer simultaneously receives and consumes the benefit of the service. Revenue is recognized ratably over the subscription period beginning on the date we start providing services to the customer under the contract. Revenue is presented net of any taxes collected from customers.

For advertising revenue, the performance obligation is to publish the agreed upon campaign on our websites and load the related impressions.

Advertising contracts state the transaction price within the agreement with payment generally being based on the number of clicks or impressions delivered on our websites. Total consideration is based on output and deemed variable consideration constrained by an agreed upon delivery schedule. Additionally, there are generally no contractual cash refund rights. Certain contracts do contain the right for credits in situations in which impressions are not displayed in compliance with contractual specifications. At an individual contract level, we may give a credit for a customer satisfaction issue or other circumstance. Due to the known possibility of future credits, a monthly review is performed to defer revenue at an individual contract level for such future adjustments in the period of incurrence.

As consideration is driven by the number of impressions delivered on our websites, the consideration for each period is allocated to the period in which the service was rendered.

Performance obligations for company-sold advertising revenue and partner-sold advertising revenue are satisfied over time as impressions are delivered. Revenue is recognized based on the total number of impressions delivered within the specified period. Revenue from advertising sold directly by us is recognized based on the gross amount charged to the advertiser and advertising revenue sold by partners is recognized based on the net amount of revenue received from the content partners. Revenue is presented net of any taxes collected from customers.

Marketplace revenue includes revenue from contracts for which the performance obligation is a series of distinct services with the same level of effort daily. For these contracts, we estimate the value of the variable consideration in determining the transaction price and allocate it to the performance obligation. Revenue is estimated and recognized on a ratable basis over the contractual term. We reassess the estimate of variable consideration at each reporting period.

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Wholesale Revenue - Description

Wholesale revenue includes transaction fees earned by CarOffer from facilitating the purchase and sale of vehicles between dealers, where CarOffer collects fees from both the buyer and seller. CarOffer also sells vehicles to dealers that CarOffer acquires at other marketplaces – in these instances, CarOffer collects a transaction fee from the buyer.

Wholesale revenue also includes fees earned by CarOffer from performing inspection and transportation services, where CarOffer collects fees from the buyer. Inspection and transportation service revenue is inclusive of dealer to dealer transactions, other marketplace to dealer transactions, and customer to dealer transactions.

Wholesale revenue also includes fees earned by CarOffer from certain guarantees offered to dealers, where CarOffer collects fees from the buying dealer or selling dealer, as applicable. Guarantee revenue is not accounted for under ASC 606 and is accounted for under ASC 460 as discussed further in Note 2 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Wholesale Revenue - Revenue Recognition

When facilitating the purchase and sale of vehicles between dealers and for vehicles sold to dealers that are acquired at other marketplaces, CarOffer does not control the vehicle and therefore acts as an agent in the transaction. Revenue earned from the fees for facilitating these transactions is recognized at a point in time when the vehicle is sold on a net basis.

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

Wholesale revenue also includes arbitration in which, in the majority of instances, the vehicle is rematched to a new buyer and not acquired by CarOffer. Arbitration is the process by which CarOffer investigates and resolves claims from buying dealers. In these situations, CarOffer does not control the vehicle and therefore acts as an agent in the transaction.

Within wholesale transactions, there are no contractual cash refund rights, but credits may be issued to a customer at our sole discretion. At the portfolio level, there is also variable consideration, that needs to be included in the transaction price. Variable consideration consists of sales allowances and concessions that change the transaction price of the unsatisfied or partially unsatisfied performance obligation. We recognize that there are times when there is a customer satisfaction issue or other circumstance that will lead to a credit or arbitration. Due to the known possibility of future credits, a monthly sales allowance review is performed to defer revenue at a portfolio level for such future adjustments in the period of incurrence. We establish sales allowances at the time of revenue recognition based on our history of adjustments and credits provided to our customers. In assessing the adequacy of the sales allowance, we evaluate our history of adjustments and credits made through the date of the issuance of the financial statements. Estimated sales adjustments, credits and losses may vary from actual results which could lead to material adjustments to the financial statements. Sales allowances are recognized as a reduction to revenue in the consolidated income statements.

Wholesale revenue is presented net of any taxes collected from customers.

Product Revenue - Description

Product revenue includes the aggregate proceeds received on the sale of vehicles. This revenue relates to vehicles sold to dealers that CarOffer acquires directly from customers, inclusive of transaction fees collected from the buyer, and in limited situations across all CarOffer transactions, vehicles CarOffer resells after acquiring a vehicle via arbitration.

Product - Revenue Recognition

For vehicles sold to dealers that are acquired directly from consumers, CarOffer controls the vehicle and therefore acts as a principal in the transaction. Revenue earned from the fees for facilitating these transactions is recognized at a point in time when the vehicle is sold on a gross basis.

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In limited situations across all CarOffer transactions, during an arbitration process, CarOffer acquires vehicles in transactions in which it controls the vehicle and therefore acts as a principal in the transaction. Revenue earned from the sale of the vehicle in these transactions is recognized at a point in time on a gross basis.

Contracts with Multiple Performance Obligations

We periodically enter into arrangements that include Listings and/or dealer advertising product subscriptions within marketplace revenue. These contracts include multiple promises that we evaluate to determine if the promises are separate performance obligations. Performance obligations are identified based on services to be transferred to a customer that are distinct within the context of the contractual terms. Once the performance obligations have been identified, we determine the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. If required, the transaction price is allocated to each performance obligation in the contract based on a relative standalone selling price method as the performance obligation is being satisfied. For our arrangements that include Listings and/or dealer advertising product subscriptions, the performance obligations were satisfied over a consistent period of time and therefore the allocations did not impact the revenue recognized.

For CarOffer's arrangements that include multiple performance obligations, we allocate revenue based on fair value. Vehicle and inspection revenues are recognized at a point in time and transportation revenue is recognized over time.

Costs to Obtain a Contract

Commissions paid to sales representatives and payroll taxes are considered costs to obtain a contract. Under ASC 606, the costs to obtain a contract require capitalization and amortization of those costs over the period of benefit. Although the guidance specifies the accounting for an individual contract with a customer, as a practical expedient, we have opted to apply the guidance to a portfolio of contracts with similar characteristics. We have opted to apply another practical expedient to immediately expense the incremental cost of obtaining a contract when the underlying related asset would have been amortized over one year or less. As such, we applied this practical expedient to advertising contracts as the term is one year or less and these contracts do not renew automatically. The practical expedient is not applicable to marketplace subscription contracts as the period of benefit including renewals is anticipated to be greater than one year. The assets are periodically assessed for impairment.

For marketplace subscription customers, the commissions paid on contracts with new customers, in addition to any commission amount related to incremental sales, are capitalized and amortized over the estimated benefit period of the customer relationship taking into account factors such as peer estimates of technology lives and customer lives as well as our own historical data. Commissions paid that are not directly related to obtaining a new contract are expensed as incurred.

Additionally, we allocate employer payroll tax expense to the commission expense in proportion to the overall payroll taxes paid during the respective period. As such, capitalized payroll taxes are amortized in the same manner as the underlying capitalized commissions.

As of December 31, 2021 and 2020, assets associated with costs to obtain a contract were $14.9 million and $20.0 million, respectively. This decrease in assets recognized for costs to obtain a contract was due to amortization from prior periods’ assets being greater than the capitalizable costs to obtain a contract in current period. For the years ended December 31, 2021 and 2020, amortization expense associated with costs to obtain a contract was $12.7 million and $11.6 million, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded based on the amount due from the customer and a third-party payment processor. Accounts receivable do not bear interest.

We are exposed to credit losses primarily through our trade accounts receivable, which includes receivables in transit from a third-party payment processor. The third-party payment processor collects customer payments on our behalf and remits them to us. Customer payments received, but not remitted as of period end are deemed to be receivables in transit. Additionally, the third-party payment processer provides payments in advance for certain customers to us. If the third-party payment processor does not receive customer payments related to the payments in advance, the balance is deducted from future remittances to us.

We offset gross trade accounts receivable with payments received in advance from a third-party payment processor as we have the right of offset. As of December 31, 2021, gross trade accounts receivable from receivables in transit from the third-party payment processor was $18.7 million, offset by payments received in advance of $46.8 million, which resulted in a net liability of $28.1 million recognized within accrued expenses, accrued income taxes, and other current liabilities in the consolidated balance sheets. Payments

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received in advance are deductible from future payments from the third-party payment processor if the third-party payment processor does not receive the payment from the customer. Payments received in advance are presented as cash flows from financing activities in the consolidated statements of cash flows. As of December 31, 2020, we did not have any gross trade accounts receivable from receivables in transit from the third-party payment processor.

We also are exposed to credit losses primarily through our trade accounts receivable. We offset gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable and is based upon historical loss trends, the number of days that billings are past due, an evaluation of the potential risk of loss associated with specific accounts, current conditions, and reasonable and supportable forecasts of economic conditions. We also consider current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If circumstances relating to specific customers change, or unanticipated changes occur in the general business environment, particularly as it affects auto dealers, our estimates of the recoverability of receivables could be further adjusted.

Provisions for allowances for doubtful accounts are recognized within general and administrative expense in the consolidated income statements. Amounts are charged against the allowance after all means of collection have been exhausted, the potential for recovery is considered remote and when it is determined that expected credit losses may occur. We do not have any off‑balance sheet credit exposure related to our customers. Unbilled accounts receivable generally relate to services rendered in the current period, but not invoiced until the subsequent period.

As of December 31, 2021 and 2020, changes in our allowance for doubtful accounts are as follows:

Impairment of Long‑Lived Assets

We evaluate the recoverability of long‑lived assets, such as property and equipment and intangible assets, for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During this review, we re‑evaluate the significant assumptions used in determining the original cost and estimated lives of long‑lived assets. Although the assumptions may vary from asset to asset, they generally include operating results, changes in the use of the asset, cash flows, and other indicators of value. Management then determines whether the remaining useful life continues to be appropriate, or whether there has been an impairment of long‑lived assets based primarily upon whether expected future undiscounted cash flows are sufficient to support the assets’ recovery. Recoverability of these assets is measured by comparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

For the year ended December 31, 2021, we wrote off $2.5 million of U.S. capitalized website development costs within operating expense in the consolidated income statements and $0.6 million in intangible assets within cost of revenue in the consolidated income statements related to certain developed technology in which we have decided to cease investment. For the year ended December 31, 2020, we wrote off $1.2 million in capitalized website development costs, of which $0.8 million related to the exit of certain international markets in connection with the Expense Reduction Plan.

Capitalized Website Development and Capitalized Internal-Use Software Costs

We capitalize certain costs associated with the development of our websites and internal‑use software after the preliminary project stage is complete and until the website development or software is ready for its intended use. Research and development costs incurred during the preliminary project stage or costs incurred for data conversion activities, training, maintenance, and general and administrative or overhead costs are expensed as incurred. Capitalization begins when the preliminary project stage is complete, management authorizes and commits to the funding of the project with the required authority, it is probable the project will be completed, the website development or software will be used to perform the functions intended and certain functional and quality standards have been met. Qualified costs incurred during the operating stage of our website development or software relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality, while costs that cannot be separated between maintenance of, and minor upgrades and enhancements to, websites and internal‑use software are expensed as incurred. Capitalized website development and capitalized internal-use software costs are recognized within property and equipment, net in the consolidated balance sheets.

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Capitalized website development and capitalized internal-use software costs are amortized on a straight‑line basis over their estimated useful life of three years beginning with the time when the product is ready for intended use. Capitalized website development costs related amortization expenses are recognized within cost of revenue in the consolidated income statements. Capitalized internal-use software costs related amortization expenses are recognized within depreciation and amortization in the consolidated income statements. We evaluate the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

During the year ended December 31, 2021 and 2020, capitalized website development costs were $8.2 million and $6.4 million, respectively. During the year ended December 31, 2021, capitalized internal-use software costs were $2.9 million. During the year ended December 31, 2020, no capitalized internal-use software costs were recognized.

For the years ended December 31, 2021 and 2020, amortization expense associated with capitalized website development costs was $3.7 million and $3.3 million, respectively. For the year ended December 31, 2021, amortization expense associated with capitalized internal-use software costs was $0.3 million. For the year ended December 31, 2020, no amortization expense associated with capitalized internal-use software costs was recognized.

Capitalized Hosting Arrangements

Hosting arrangement capitalized implementation costs are amortized on a straight‑line basis over an estimated useful life of the term of the hosting arrangement, taking into consideration several other factors such as, but not limited to, options to extend the hosting arrangement or options to terminate the hosting arrangement, beginning with the time when the software is ready for intended use.

Hosting arrangements costs are recognized within the same line item in the consolidated income statements as the expense for fees for the associated hosting arrangement. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

During the years ended December 31, 2021, 2020, and 2019 we launched separate initiatives designed to enhance our hosting arrangements related to our enterprise applications, each of which are ongoing. During the year ended December 31, 2021 and 2020, implementation costs were $3.8 million and $0.3 million, respectively, and recognized within other non-current assets and within prepaid expenses, prepaid income taxes and other current assets, respectively, in the consolidated balance sheets.

For the years ended December 31, 2021 and 2020, amortization expense associated with our hosting arrangements was $1.8 million and $0.7 million, respectively, and recognized within operating expense in the consolidated income statements.

Business Combinations

Valuation of Acquired Assets and Liabilities

We measure all consideration transferred in a business combination at its acquisition-date fair value. Consideration transferred is determined by the acquisition-date fair value of assets transferred, liabilities assumed, including contingent consideration obligations, as applicable. We measure goodwill as the excess of the consideration transferred over the net of the acquisition-date amounts of assets acquired less liabilities assumed.

We make significant assumptions and estimates in determining the fair value of the acquired assets and liabilities as of the acquisition date, especially the valuation of intangible assets and certain tax positions. We record estimates as of the acquisition date and reassess the estimates at each reporting period up to one year after the acquisition date. Changes in estimates made prior to finalization of purchase accounting are recognized within goodwill.

Intangible Assets

Intangible assets are recognized at their estimated fair value at the date of acquisition. We amortize intangible assets over their estimated useful lives on a straight-line basis. Amortization is recognized over the relevant estimated useful lives ranging from three to eleven years.

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We evaluate the useful lives of these assets on an annual basis. If the estimate of an intangible asset’s remaining useful life is changed, we amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. We monitor our long-lived assets for impairment indicators on an ongoing basis in accordance with GAAP, and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related net book values.

Goodwill

Goodwill is recognized when consideration paid in a purchase acquisition exceeds the fair value of the net assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review. Conditions that could trigger a more frequent impairment assessment include, but are not limited to, a significant adverse change in certain agreements, significant underperformance relative to historical or projected future operating results, an economic downturn affecting automotive marketplaces, increased competition, a significant reduction in our stock price for a sustained period or a reduction of our market capitalization relative to net book value.

As of and for the year ended December 31, 2021, we have determined that we have three reporting units, United States, International, and CarOffer. We elected to bypass the optional qualitative test for impairment and proceed to Step 1 which is a quantitative impairment test. We evaluate impairment annually on October 1 by comparing the estimated fair value of each reporting unit to its carrying value. We estimate fair value using a market approach, based on market multiples derived from public companies that we identify as peers. In 2021, we calculated the fair value of our reporting units using the market approach, which required us to estimate the forecasted revenue and estimate revenue market multiples using publicly available information for each of our reporting units. Developing these assumptions required the use of significant judgment and estimates. Actual results may differ from these forecasts.

For the years ended December 31, 2021 and 2020, we did not identify any impairment of our goodwill.

Redeemable Noncontrolling Interest

In connection with our acquisition of a 51% interest in CarOffer on January 14, 2021, we became a party with the noncontrolling equity holders of CarOffer to the CarOffer Operating Agreement, which, among other matters, sets forth certain put and call rights described in Note 4 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The CarOffer Operating Agreement provides us with the right to purchase, and the noncontrolling equity holders with the right to sell to us, the noncontrolling CarOffer equity holders’ equity interests in CarOffer at a contractually defined formulaic purchase price, which is based on a multiple of earnings. As the purchase is contingently redeemable at the option of the noncontrolling equity holders, we classify the carrying amount of the redeemable noncontrolling interests within the mezzanine section in the consolidated balance sheet, which is presented above the equity section and below the liabilities section. As of the date of Closing (as defined in Note 4 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K), the noncontrolling interest was recognized at fair value computed using the Least Square Monte Carlo Simulation approach. Significant inputs to the model include market price of risk, volatility, correlation and risk-free rate.

Subsequent to our acquisition of the 51% interest on January 14, 2021, the redeemable noncontrolling interest is measured at the greater of the amount that would be paid if settlement occurred as of the balance sheet date based on the contractually defined redemption value and its carrying amount adjusted for net income (loss) attributable to the noncontrolling interest. Adjustments to the carrying value of the redeemable noncontrolling interest resulting from changes in the redemption value are recognized within retained earnings in the consolidated balance sheets.

Income Taxes

We account for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, this method requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

We account for uncertain tax positions recognized in the consolidated financial statements by prescribing a more‑likely‑than‑not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interest and penalties, if applicable, related to uncertain tax positions would be recognized as a component of income tax expense. As of December 31, 2021 and 2020, we have no recognized liabilities for uncertain tax positions.

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The Tax Cuts and Jobs Act subjects a U.S. shareholder to tax on global intangible low-taxed income, or GILTI, earned by certain foreign subsidiaries. An entity can make an accounting policy election, per the FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, either to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We elected to account for GILTI as a period cost in the year the tax is incurred.

Stock‑Based Compensation

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

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

For RSUs granted subject to market-based vesting conditions, the fair value is determined on the date of grant using the Monte Carlo simulation lattice model. The determination of the fair value using this model is affected by our stock price performance relative to the companies listed on the S&P 500 as of December 31, 2021 and 2020 and a number of assumptions including volatility, correlation coefficient, risk-free interest rate and expected dividends. RSUs granted subject to market-based vesting conditions vest upon achievement of specified levels of market conditions.

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

The weighted average assumptions utilized to determine the fair value of options granted during the year ended December 31, 2021 are as follows:

During the years ended December 31, 2020 and 2019, no options were granted.

In connection with our acquisition of a 51% interest in CarOffer, the then-outstanding unvested incentive units, or CO Incentive Units, of CarOffer and unvested Class CO CarOffer units, or the Subject Units, remained outstanding and will vest over the requisite service periods as discussed below.

Grants of the CO Incentive Units are subject to the CarOffer 2020 Equity Incentive Plan, adopted effective November 24, 2020, or the 2020 CO Plan, the applicable award agreement, and the CarOffer Operating Agreement. Following the Company’s acquisition of the 51% interest in CarOffer on January 14, 2021, remaining unvested CO Incentive Units will vest over a period of three (3) years, with one third having vested on January 14, 2022 and one third vesting on each of January 14, 2023 and January 14, 2024, provided that a grantee’s continuous service to CarOffer has not terminated on the applicable vesting date. Under the terms of the grants, vesting of unvested CO Incentive Units is accelerated in the event of (i) a change of control of CarOffer (which, for the avoidance of doubt, does not include the Company’s acquisition of the 51% interest on January 14, 2021), (ii) the death or disability of the grantee, (iii) termination of the grantee’s employment with CarOffer without cause, or (iv) termination of grantee’s employment by the grantee for good reason. Upon termination of a grantee’s continuous service to CarOffer voluntarily by the grantee (other than for good reason) or by CarOffer for cause, all of such grantee’s unvested CO Incentive Units are forfeited. In addition, if a grantee’s continuous service terminates, then CarOffer has the option to repurchase any outstanding CO Incentive Units from the grantee.

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In addition to the 2020 CO Plan, on December 9, 2020 CarOffer entered into a Vesting Agreement, or the Vesting Agreement, regarding the vesting of Subject Units beneficially owned by Bruce Thompson, the founder and CEO of CarOffer, and certain affiliated persons, or, collectively, the T5 Holders, in connection with the our then-anticipated acquisition of a 51% interest in CarOffer. Pursuant to the Vesting Agreement, 432,592 Subject Units beneficially owned by the T5 Holders vest in three (3) approximately equal installments, with one third having vested on January 14, 2022 and one third vesting on each of January 14, 2023 and January 14, 2024, subject to the terms of the Vesting Agreement. As more particularly described in the Vesting Agreement, unvested Subject Units are subject to forfeiture in the event that Mr. Thompson’s relationship with CarOffer terminates other than in the event of a termination without cause (as defined in the Vesting Agreement) or due to Mr. Thompson’s death or disability. The Vesting Agreement also provides for acceleration of any unvested Subject Units in the event of the termination of Mr. Thompson’s employment with CarOffer without cause, Mr. Thompson’s death or disability, or the consummation of an eligible liquidity event (as defined in the Vesting Agreement).

In connection with the Closing, CarOffer reserved 228,571 incentive units, or the 2021 Incentive Units, for purposes of establishing an employee incentive equity plan. Thereafter, CarOffer formed CarOffer Incentive Equity, LLC, or CIE, a Delaware manager-managed limited liability company managed by us, and established the CIE 2021 Equity Incentive Plan, or the 2021 CO Plan. The 2021 CO Plan and related documentation, including the applicable award agreement, a vesting agreement between CarOffer and CIE, and the CarOffer Operating Agreement, provide for an incentive equity grant structure whereby 2021 Incentive Units will be granted to CIE and 2021 CO Plan grantees will receive an associated equity interest in CIE, or the CIE Interest, with back-to-back vesting between the 2021 Incentive Units and the associated CIE Interest. Subject to any modifications as may be approved by the CarOffer Board of Managers in its discretion, grants under the 2021 CO Plan will vest over a period of three (3) years from the grant date, one third each on the first, second, and third anniversaries of the applicable grant date, provided that a grantee’s continuous service to CarOffer has not terminated on the applicable grant date. Upon termination of a grantee’s continuous service to CarOffer, all of such grantee’s unvested 2021 Incentive Units are forfeited. As of December 31, 2021, there had not been any grants of 2021 Incentive Units under the 2021 CO Plan.

CO Incentive Units, Subject Units and 2021 Incentive Units are liability-classified awards because the awards can be put to us at a formula price such that the holders do not bear the risks and rewards associated with equity ownership. For liability-classified awards, the fair value is determined on the date of issuance using a Least Square Monte Carlo simulation model. The determination of the fair value is affected by CarOffer’s equity value, EBITDA, Excess Parent Capital (as defined in the CarOffer Operating Agreement), and revenue forecasts that drive the exercise price of future call/put rights, as well as a number of assumptions including market price of risk, volatility, correlation, and risk-free interest rate. Liability-classified awards are remeasured to fair value each period until settlement.

We issue shares of Class A common stock upon the vesting of RSUs and the exercise of stock options out of our shares available for issuance. We issue CO Incentive Units and Subject Units out of CarOffer’s units available for issuance. We account for forfeitures when they occur.

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

The tax effect of differences between tax deductions related to stock compensation and the corresponding financial statement expense compensation are recognized within tax expense. Excess tax benefits recognized on stock‑based compensation expense are classified as an operating activity in the consolidated statements of cash flows.

As of December 31, 2021, tax demerits related to stock-based compensation were $1.2 million. As of December 31, 2020, tax demerits related to stock-based compensation were immaterial.

Recently Issued Accounting Pronouncements

Information concerning recently issued accounting pronouncements may be found in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

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