|Shares Out. (in M):||107||P/E||0||0|
|Market Cap (in $M):||480||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
|Borrow Cost:||General Collateral|
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Truecar = Falsecar?
To begin our thesis as clear as possible, we believe that Truecar (“TRUE” or the “Company”) will be forced to file for bankruptcy inside of a year and possibly as soon as 4Q 2019. We find TRUE to be completely uninvestable due to insurmountable legal and business risks that are likely already underway, including most significantly, the recent verdict by the United States District Court who ruled that Truecar was guilty of false advertising and violations of the Lanham Act from 2009-2015. Not only were they found guilty, damning evidence was uncovered during trial that they blatantly ignored their own attorneys explicit advice and warnings and knowingly and willfully Falsely Advertised, which under the statute elevates the amount of damages to not only disgorging all profits during this 6 year time frame, but then triples that amount to discourage such behavior when it’s willfully done. Given this is when they were considered a hot and disruptive startup in the online marketplace, TRUE grew their dealer count based on false advertising >60% during this time period. Even a conservative estimate of damages would completely erase TRUE’s market cap more than 3 times over. With this guilty verdict already in hand, and the Judge specifically stating that ANY (or ALL) of over a dozen of its competitors in business during 2009-2015 (which includes much larger companies such as Autotrader, Cars.com, Edmunds, etc.) could be awarded the damages upon filing the lawsuit, Truecar may be forced into bankruptcy at any moment a lawsuit or settlement becomes public.
We begin by describing this enormous potential liability that has gone overlooked over the past summer weeks amidst the rash of sudden executive resignations, Truecar’s drastic cut in guidance, and a number of other shareholder lawsuits for unrelated fraudulent statements Truecar has been sued for.
Additionally, we proceed to list a pattern of further highly suspect documents and filings that we encourage investors to examine and ask the company. These include their sudden removal of a potentially fraudulent press release from the Company’s website that occurred immediately after we began asking questions, as public information directly contradicted the Company’s statements in this release. We then end with deteriorating business fundamentals that should put to bed any remaining questions that the Company’s stock is worthless. We believe investors will be left asking the Company a number of questions (and indeed, encourage them to do so) including:
1) Overlooked Legal Liability
In July 2019, United States District Court Judge Castel made the aforementioned ruling, akin to an anvil hanging over Truecar’s head that likely drops in the coming weeks as one or more competitors prepare their filings. With the Judge already finding Truecar guilty and stating that Truecar’s competitors are in a position to be awarded damages for lost profits, we believe investors need go no further than simply asking the Company’s competitors from 2009-2015 whether they are considering a lawsuit against Truecar for their lost profits. Unless a competitor has since reached a stage where they must “no comment” this question, we believe investors will find answers as interesting as we did. Though even without asking the question, to believe that no competitor will take advantage of an already rendered verdict seems unlikely, irrational and is indeed likely already in process. And just in case there is any doubt left in an investor’s mind, they need to look no further than the Company’s latest earnings release in August where they admitted as much:
· Buried in footnote 9 attached to their 2019 guidance, the Company notes in fine print that they are “[unable to reconcile their guidance…due to unquantifiable potential legal liabilities]”. Given the Company cut their guidance from 2019 EBITDA of $32mm just months prior down to $12mm for the year, we encourage investors to ask even after taking this ~65% write-down, and with just 4 months left in the year, why they still cannot reconcile or quantify their guidance? What remains uncertain over the next four months? To be blunt: Is it not the most likely reason they cannot quantify their guidance because they do not yet know how many competitors will join the lawsuit and how much they will have to pay out in damages, interest and attorneys fees?
2) Potentially fraudulent Press Release issued and suddenly and mysteriously removed from the Company’s website
On June 28th, the Company issued a press release announcing the acquisition of a Company named Priceflow while also describing Priceflow’s founders as “thought leaders” in the industry and hiring them to senior positions with flashy Silicon Valley titles in a hyperbolic press release: https://www.marketscreener.com/TRUECAR-INC-16490241/news/TrueCar-Aquires-Priceflow-Technology-and-Talent-28831861/
a. We encourage you to ask yourself, any research analyst, competitor, car dealership, OEM or other investor if they have ever heard of this company.
b. Fortunately, since nobody has ever heard of this company, Truecar is kind enough to glowingly describe them for us, touting Priceflow as a company that uses “machine-learned powered used car pricing assets” which utilizes a “proprietary algorithm analyzing millions of used car vehicle prices” while simultaneously describing its founders as “thought leaders” in their field, and hiring them to previously unexisting positions with buzz-word titles as “Director of Data Science, Product Analytics” and “Director of Data Science, Machine Learning”. This acquisition occurred just one week after the Company terminated its Chief Technology Officer (CTO) without disclosing the rationale (might it be because he was against a potentially fraudulent press release?), leaving us scratching our heads as to who these newly appointed directors even report to, let alone what any of this means. Indeed, after the sudden resignation of the CEO just 3 weeks earlier (which was followed by the aforementioned CTO termination) caused the stock price to decline >10%, the Company likely was anxious to display continuity and innovation. The press release worked, as it prompted a well-respected bulge bracket bank to issue a positive Research Report. Citi's Research analyst released a research note titled, “Truecar Acquires Tech and Talent”. Based on the information in the Company’s press release, Citi stated “We view this announcement as positive and believes it provides some indication that the recent management shakeup hasn’t necessarily impacted TRUE’s ongoing strategic initiatives”. However, as we began researching the acquisition and asking questions, all traces of the press release were suddenly erased completely from the Company’s website. Further, despite the Company’s description of the acquisition, neither the “thought leaders” and new directors, nor the acquisition, have been mentioned since. We encourage investors to ask why Truecar announced the acquisition, but then suddenly removed it from their website upon our questioning its authenticity in light of public information that was inconsistent with their press release? And to consider what this would ordinarily signify? Specifically, we encourage investors to ask the Company about:
i. their description of the founders as thought leaders and their years of experience in the industry;
1. We note that even the most cursory of research reveals that one of the “thought leaders” hired as a director graduated college in 2008, followed by being “self-employed” in the “comfort of his own home” as an “online poker player”, and in 2012 got his first job in the auto industry at ALG where his responsibilities included such arduous tasks as “managing an intern”, a company that Truecar also acquired, spending 25% of is current enterprise value that contributed 5% (less than $20mm) of revenue last year (and indeed, even that declined from 2017, nor ever contributed even $20mm of revenue). How many investors who received their first investing job in 2012 are “thought leaders” in the industry?
ii. the company itself;
1. We note that when acquiring ALG, the Company’s press release stated the acquisition will “enhance” and “generate exceptional growth”. Compare this to the numbers above.
iii. if the company had even a single dealership customer in 2018 when a review of public information indicates it did not;
iv. how many dealership customers it had “analyzing millions of used car prices with its “proprietary algorithm”, and most suspiciously – why did they remove the press release surreptitiously from their website? Is it possible that their press release was removed because of its inaccurate and misleading statements?
3) Sudden CEO Resignation and multi-million dollar payout in Exchange for not suing the Company for “[knowledge about the Company he possesses]”
On June 3rd the Company announced that the CEO had already suddenly resigned in a one-page press release (upon researching subsequent filings, we discovered the CEO had actually resigned the week before, though the Company did not say this). We encourage investors to ask why the Company’s CEO suddenly resigned, without notice, without the typical announcement of a search committee for a new CEO, and with no transition period as is usually done to ensure continuity, unless the sudden resignation implies more going on than the press release indicates, which we believe it does:
· Relatedly, making this even more incredulous, upon the company’s CFO and Chief Accounting Officer already having left the Company, the company announced on Tuesday May 28th they hired a new CFO that “will report directly to Chip Perry, President and Chief Executive Officer”. While the Company waited until Monday, June 3rd to inform the market that their CEO resigned, he actually resigned on May 31st. We encourage investors to ask the Company what so drastically changed between Tuesday May 28th and Friday May 31? We believe upon questioning, investors will find the Company’s response to this question wanting.
· Taking this set of facts, a reasonable person might believe that the reason the CEO retired immediately, and allowed a CFO to be hired before promptly retiring, is because the Company voluntarily agreed to fully accelerate ALL Options and Restricted Stock that hadn’t vested (said another way, turning restricted shares that cannot be sold and were to be awarded in the future in exchange for continued employment with the Company into 2020, into unearned unrestricted shares that can be immediately sold), granting him over 3.3mm shares in total, and by immediately retiring it would allow him to sell those shares (worth over $18mm) quickly before the Company could go bankrupt (and indeed based on public information he did indeed sell atleast a portion of these shares despite the stock price dropping post the CEO’s sudden resignation), and without having to inform the market the current reigning CEO was selling his shares as he would have to do otherwise. Indeed, the CEO’s employment contract specifically stated that if he resigned he would NOT receive unvested shares, and when the previous CEO resigned, he was not similarly generously rewarded. The hastiness of his resignation certainly implies how quickly the Company’s troubles may become public.
· Following the CEO’s sudden resignation, the Company buried in a Friday night press release less than 2 weeks later that the Company terminated both their Chief Technology Officer and Chief Marketing officer “in connection with a reorganization that it implemented on June 20th”. We urge investors to ask when was this plan of reorganization was designed when the CEO just resigned, the CFO just joined, and why the Company has never spoken about this reorganization before or afterwards. Additionally, we return to the Priceflow acquisition which was made just a week after the termination of the Company’s Chief Technology Officer, yet they hired two Directors of Data Science for Machine Learning and Analytics. With an interim CEO, a CFO on the job less than a month, numerous roles unfilled, who is making decisions regarding major reorganization plans and technology acquisitions?
· Noticeably, this means that the Company’s CEO (May 31), CFO (April 1), Chief Accounting Officer (April 1), Chief Technology Officer (June 20) and Chief Marketing Officer (June 20) all resigned or were terminated in a span of less than 3 months; and in cases where the Company terminated the C-suite executive, the cause of termination was not disclosed or in the CEO’s case of resignation, with a voluntary multi-million dollar payout in exchange for not suing the company for the knowledge he possesses (occasionally a different term is used for this arrangement: “Hush Money”). We encourage investors to query why in June were the CTO and CMO terminated and why did the CEO resign suddenly and paid off? Further, we note that it has been over 3 months since these events and the Company has not announced a replacement CEO, a replacement Chief Technology Officer or a replacement Chief Marketing Officer. Who fills these roles? Finally, and importantly, we urge investors to ask themselves: Is this all a coincidence? Or is it a signal?
· Another red flag we question is, despite the CEO reigning over a decline in over $1.5b of shareholder value over the past two years, and then resigning without notice, the Company voluntarily paid him millions of dollars in both cash and stock in exchange for agreeing “to “not sue [the Company]…relating to any matters….that the Executive may possess against [the Company].” What information does he possess? Why is a resigning CEO with no notice voluntarily given millions of dollars when the Company lost 75% of its value from just two years ago? Why does the company need the CEO, who was not fired, to agree not to sue the Company for information he possesses about the Company? What concerns them?
· We encourage investors to ask one further question as it relates to the CEO’s resignation: The company in the press release, surely in an effort to make it appear less suspicious, stated that “Truecar was planning for” the resigning CEO “to continue to support the company in an advisory capacity”. Yet, in something we have never seen before, the CEO’s separation agreement states that he may advise the company “in his sole discretion” – i.e. he can “advise” any way he wants (or doesn’t want). So we ask: what advisory capacity is he serving? And if he is an advisor, why would there be concern that he be suing the Company about information he possesses?
4) Business Risks, including upcoming 1/3 of revenue Contract Expiration Risk
In addition to sharply deteriorating fundamentals and being cyclically levered to new cars with SAAR peaking last year, the China tariff war and beginning a cyclical decline in 2019 that will have drastic effects on Truecar’s business, 2/3’s of TRUE’s business is concentrated among “partner affiliates”. 1/3 of their revenue is from one partner, USAA, in a contract that expires in just ~4 months. However, though the contract expires in February, the publicly filed contract requires that if it is to be renewed that USAA give 120 day notice of its intention to renew, putting the actual date of renewal less than one month away on ~October 16, 2019. This is a common Notice period (e.g., even a standard one year apartment lease require 30 day notice to vacate; and this is a 5 year contract involving 1/3 of the Company’s revenues and a co-branded website making this a common contractual notice period, a fact that appears to have gone unnoticed by investors). We encourage investors to ask that for a company in dire need of an external show of support, why their biggest customer still has not re-signed their contract less than a month before its due? We also ask whether True’s changing business model (as described below, due to multiple states suing TRUE for illegal business practices forcing them to change what was one thought of a disruptive model to a me-too subscription model used by current competitors) makes it incompatible with USAA’s model? There is indeed pronounced evidence of this, as the USAA contract has been amended 27 times since it was originally signed to accommodate forced changes to Truecar’s business model since inception (for example, in 2013 amendment #23 was enacted to adjust Truecar’s “Low Price Guarantee” to fit with laws it had previously been violating and excludes it from certain states). With 27 amendments inside of the expiring term and with renewal due in less than a month with no indication of USAA’s intention to renew, why do investors assign ~$500mm of market cap to this company? And if any subscription model works, why can’t any competitor with more traffic, more brand awareness, an intact management team, more dealer customers and less legal violations be a better USAA partner, which would also end TRUE’s business for good even ignoring all legal overhangs and other factors? To simplify the question: Is it a reasonable explanation that the reason USAA won’t renew its contract because it also does not see TRUE existing beyond a year for the same reasons we do and does not intend to renew? We also note that USAA takes 1/3 of all revenue it brings; even if a contract were renewed, is there any chance they wouldn’t force the company to worse economic terms driving the Company’s $12mm of EBITDA even lower?
Further, for those unfamiliar with the USAA organization, it is an organization exclusively for our US military and family members. Its chairman is esteemed General Lester Lyles and CEO is former U.S. Navy officer Carl Leibert. The organization is one renowned for providing benefits to our military by creating group buying power and serving its members for discounts for serving our Country. While USAA cannot be blamed for originally partnering with Truecar, as their numerous legal violations have come to light, is it likely that they continue a partnership with a company that has been already found guilty of defrauding investors, falsely advertising to customers, and violating numerous state laws? In fact, we encourage investors to simply ask USAA’s PR contact about their intentions to renew with such an organization, and make their own conclusions of a likely continuation of the current contract.
5) Miscellaneous Risks
We note a number of other tangential risks are involved in owning Company shares, including delisting by Nasdaq as their delisting rules begin to kick in as a Company’s stock price or financials decline below certain levels creating a downward spiral of forced selling as certain investors cannot hold delisted stocks; ISS taking note of the number of egregious violations and publicly noting the lack of governance; various other ongoing lawsuits related to fraudulent statements made in 2018 and insider sales (and secondary offering) when the stock was inflated at its highs. Note that while we don’t detail the liability related to the 2018 fraudulent lawsuits as they are more widely known than the factors we describe, it is a major risk factor as the Company made fraudulent representations inflating the stock price while simultaneously Company insiders sold over 1.2mm shares of stock realizing ~$22mm in gross proceeds and USAA sold over 25% of its stock for $51.7mm.
Below we provide details on the points above and source materials to support the analysis.
1) Overlooked Legal Risk
In 2015, TRUE was sued by 108 dealerships across 23 states in a class action lawsuit for false advertising under the Lanham act. TRUE, from 2009-2015 when this was lawsuit was brought, advertised a “no-negotiation” and “hassle-free” business model where one could enter their personal information onto the website and receive a definitive price for their chosen vehicle without haggling at multiple dealerships. This was in fact false, as the dealerships didn’t agree to the price, and in reality, the price of a car is based on a number of factors including credit quality of the customer which TRUE never had access to, features and upgrades, financing and inventory levels. Truecar was and is merely a referral service and contrary to Truecar’s advertising claims, the consumer still must “negotiate” or “haggle” with the dealership as in any other instance. The dealers sued Truecar as Truecar’s false advertising led customers to go to those Truecar-affiliated dealers under the false pretense that they would walk in and get a guaranteed price that the dealership couldn’t provide. This past July 2019, after trial and 4 years of discovery through emails and testimony that found crippling evidence against Truecar – including their own counsel advising them not to advertise in this illegal manner that they ignored - the Judge found that TRUE unequivocally and willfully falsely advertised and violated the Lanham Act. Indeed, the evidence of false advertising was so overwhelming Truecar did not even argue the point. Indeed, the Judge stated in his Opinion, “Because plaintiffs have come forward with evidence that TrueCar acted against the advice of counsel and willfully ran false advertisements, [this willfull violation warrants disgorgement of Truecar’s profits under the statute] “in the interest of deterrence” (See page 3 of Opinion from March 27, 2019). However, due to how the False Advertising claim is structured under the Lanham Act statute, the injury for Truecar’s willful false advertising and damages must go to TRUE’s competitors who lost business due to their false claims rather than car dealerships (i.e. other lead-generating advertisers as listed above but also including other companies whose growth rate was likely hindered such as Carsdirect.com, Autobytel, Offset and numerous other auto lead generators and websites that advertise on behalf of dealers). Incredulously, TRUE did not dispute their blatant legal violations in avoiding judgment; but centered on this technicality that despite their guilty behavior, these dealers were not the right plaintiffs to sue, as their false advertising harmed TRUE’s competitors that lost business, but did not harm customers, actually stating in their argument to the Court, “Defendant Truecar has moved for partial reconsideration…Because the plaintiffs were not direct competitors of Truecar”. Therefore, on this technicality, the Judge found that while the dealerships as potential customers weren’t in a position to sue, but their competitors who lost customers due to false advertising could.
Therefore, under the statute, this technicality was correct, though easily correctible – indeed, in addition to explicitly finding that Truecar willfully falsely advertised, the Judge took the time in his Opinion to specifically state that “a differently situated set of plaintiffs” [read: TRUE’s competitors] would have been awarded damages under the statute. The judge took care to note that any, or all, of its competitors could bring exactly the same lawsuit and the Company could be liable leaving the Company widely exposed to any one or multiple competitors copying and pasting the same lawsuit, with a guilty verdict having already been established. In fact, the Judge was particularly disturbed by Truecar’s willful behavior stating, “that the negotiation-free advertisement "describes a bait-and-switch transaction wherein a consumer is enticed to a dealership based on the prospect of a negotiation-free buying experience and guaranteed savings, only to be faced with negotiation and a different price than promised." (See Opinion Dated July 15, 2019).
TRUE narrowly escaped liability on a technicality framing the lawsuit as a win when a closer read reveals the exact opposite conclusion: The Judge found overwhelming evidence that Truecar willfully violated the law by falsely advertising for 6 years and paved a direct path for their competitors to sue. Making matters worse for Truecar, the statute automatically presumes for disgorging all profits even for a small competitor (i.e. if the competitor was in a different state than Truecar in, say, 2009, it would matter less than if Truecar had merely been negligent) after the violation, and even further, awards the tripling of damages for bad behavior as well as awarding attorney costs. Indeed, the evidence found during trial was blatant, as “John Stephenson, TrueCar's outside legal counsel at the time, advised the company against using phrases such as "negotiation-free" or "no-haggle," but TrueCar did not follow his advice, according to court documents.” (https://www.autonews.com/retail/dealers-lawsuit-against-truecar-could-head-trial).
Judges do not take kindly to this kind of willful false advertising, with numerous examples of Companies being forced to disgorge all profits. Just to list one such example, in 2014, Merck sued competitor Gnosis for false advertising under the Lanham Act. There, the judge “entered judgment for Merck and awarded damages in the amount of Gnosis’ profits, trebled those damages, prejudgment interest and attorney’s fees, as well as a corrective advertising injunction. The court found that “Merck had demonstrated literal falsity based on Gnosis’ use of the common name and abbreviation for pure folate on its product specification sheets, brochures…In essence, Gnosis was describing a product that it was not selling.” [Sound familiar?]. Further, on appeal, the Second Circuit definitively confirmed this analysis: “The Court held that when the parties are direct competitors and where literal falsity and willful deception have been proven, the presumptions of injury and consumer confusion can be used for the purposes of awarding injunctive relief as well as monetary damages to a successful plaintiff.” Finally, as further clarification, the Second Circuit stated, “Finally, the case should not be limited to two-player markets: the same logic that supported the presumption of injury here also applies in other cases where the parties are direct competitors.”
Truecar’s competitors are likely already preparing or have already approached Truecar about this, and with the violation in hand, 6 years of damages having to be paid (and potentially tripled, with interest, in addition to attorneys fees) would permanently put Truecar out of business. To put this into context, TRUE grew from 2009 to 2015 to in excess of 9k dealer customers (representing approximately 20-25% of the total number of US dealerships), a growth rate of over 60% during this period.
Further, understanding this verdict single-handedly provides an explanation for a number of the quandaries listed above. The Judge’s finding of an egregious violation disguised as a Truecar win on a technicality likely caused most investors to miss the looming risk, but explains why Truecar’s entire management team hastily left the Company, why the Company was forced to disclose that it has “unquantifiable” legal liabilities making their guidance “irreconcilable”, and why despite having multiple partner affiliates comprising 2/3rds of their business, no partner has re-signed contracts with Truecar.
This is one of the easiest examples we have ever seen of a competitor being able to file a lawsuit with a violation being found, being awarded damages, and having TRUE pay out these damages costing them potentially hundreds of millions and find it implausible that this is not currently being contemplated or already being negotiated.
To put the Judge’s disgust for Truecar’s corporate behavior into context, the company has a broad history of consistently being found guilty of violating numerous state laws, causing significant settlements to be paid out and changes to its business practices. This history of being a bad actor does not bode well for a judge to be sympathetic in assessing the damages number, or for an investor to trust a management team.
Below is a brief recap of Truecar’s extensive history of violating laws egregiously in an effort to grow its business and dupe investors:
· In December 2017, Truecar settled with the state of Callifornia who sued them for violating state laws, forcing Truecar to change its business practices: (https://www.autonews.com/article/20171214/RETAIL07/171219814/truecar-california-dealers-association-settle-lawsuit)
· Just one month ago, Truecar was forced to settle for an amount in excess of $28mm with shareholders for violating the Securities Act of 1934 and providing false and misleading information to investors by falsely stating that it’s business was operating on track when indeed its over-reliance on affinity partners and their drop in website traffic caused a significant decline in business. Notably; this time period covered less than 9 months as opposed to the 7 year period in the case above. As a result of Truecar’s actions, its CFO and Chief Accounting officer terminated.
· Numerous states have independently found illegal advertising and business practices at Truecar (leading to the aforementioned 27 amendments to the USAA contract):
a. Virgina found that dealers were paying Truecar kickbacks for certain leads
b. Nebraska, Oklahoma and Colorado all suspended Truecar operations for regulatory violations regarding its advertising and business practices.
c. The Texas Department of Motor Vehicles sent notice to the Company asserting that it’s advertising was “false, deceptive, unfair or misleading advertising”.
d. The company is currently under suit for operating an unlicensed automobile business.
e. The Missippi Motor Vehicle Commission asserted that the company’s advertising practices were not in compliance with the law.
f. Further, the California Department of Motor Vehicles had investigators inform Truecar that their advertising practices are under review.
g. In 2017, the Ohio Attorney General launched an investigation into potential violations of the Consumer Protection Office, subpoenaing certain records relating to certain business practices of the Company.
· The company as was sued again later in 2017, alleging false and misleading advertising.
Further, as noted above, the Company’s latest guidance dropped from 2019 EBITDA of $32mm to $12mm. More specifically, they guided to a revenue range of $345-$350mm for the year with an EBITDA range of $10-$14mm. This implies that at the bottom end of the range, the Company has 2.9% margin at $345mm of revenue, yet at the top end of the range an incremental $5mm of revenue from $345mm to $350mm comes at 80% incremental margins producing $4mm of extra EBITDA on that $5mm of revenue. Given this is impossible, astute investors noted that this new guidance came with a footnote attached which reads:
“ (1)We are unable to provide reconciliations of forward-looking Adjusted EBITDA without unreasonable effort because of the uncertainty and potential variability in amount and timing of stock-based compensation, certain transaction expenses and certain litigation costs, which are reconciling items between GAAP net (loss) income and Adjusted EBITDA and could significantly impact GAAP results”. Given TRUE excluded their stock-based compensation from adjusted EBITDA (an issue we return to later), and they made no material transactions (but possible a fraudulent one), we are left with only “uncertainty and potential variability in amount and timing…of litigation costs.” This uncertainty is likely because they don’t know how many competitors will sue and how much they have to pay. Given the Company itself “is unable to provide reconciliations of forward-looking [Guidance]” we question how any shareholder knows what they own as the Company cannot be more clear that they are aware of a large, unquantifiable liability hanging over their head. If the company doesn’t know what the next 3 months hold…how can shareholders?
The company has not described this to investors despite the Judge’s determination of guilt: With over a dozen competitors including much larger companies such as Autotrader (owned by Cox), Cars.com, Edmunds, EBay, Cargurus, KBB and others, it is clear the uncertainty relates to how many competitors either have already approached the company or will approach the company and sue for an already rendered guilty verdict. When framed this way versus the Company’s presentation, we believe it answers a number of these questions, including why there is still no replacement CEO over 3 months after the CEO resigned, any description of who is on the CEO search committee, the type of candidates they are interviewing, whether an external executive search firm was hired; why their largest customer representing 1/3 of their revenues, who sits on their Board, has not renewed their contract that requires renewal notice in less than a month, and why so many executives have left the company in recent months.
Potentially fraudulent Press Release issued and suddenly and mysteriously removed from the Company’s website
As previously described, likely in an effort to show stability after its entire C-suite exited in a three month period, Company put out a press release that they had purchased a company called Priceflow ((press release here: https://www.marketscreener.com/TRUECAR-INC-16490241/news/TrueCar-Aquires-Priceflow-Technology-and-Talent-28838073/ ). They also hired the two founders, described as “thought leaders” in the press release, of this nascient company to senior positions of the company and based on their misleading description of the company as one that has years of experience and a “proprietary algorithm analyzing millions of used car vehicle prices” caused Citi’s Research analyst to release a positive research note indicating Company stability.
However, based on publicly available information that we invite investors to discover through cached websites, forums and other publicly available sources the company was actually founded not by “thought leaders”, but by inexperienced founders, was not even incorporated as a company less than two years after Truecar’s purchase, was still in beta mode at end of 2018/early 2019 with what appears as no customers. We will refrain from sharing some of the publicly available information as it is easily searchable and may involve other legal violations unrelated to the Truecar short thesis and are unnecessary to publicize (though perhaps related to the company’s description of the founders as “thought leaders”), in some cases via cached websites as the Company may have attempted to have them removed, we can share the company’s incorporation document:
THIS IS NOT A STATEMENT OF GOOD STANDING
But what should strike investors as most disturbing is that TRUE has removed all traces of this press release from from their website– the only press release they have ever removed from their website as displayed below:
As displayed above, the June 28th press release has been removed as has any mention of the Priceflow acquisition. For those investors who receive Citi research reports, they can read the report when the press release was made.
Sudden CEO Resignation and multi-million dollar payout in Exchange for not suing the Company for “[knowledge about the Company he possesses]”
In the two years prior to the CEO’s sudden resignation, the company’s stock price declined from ~$20 to ~$6.50, a loss of ~$1.5b of value. On Monday June 3rd the Company announced the CEO suddenly resigned, without notice or a transition period, without noting that he had actually sent his resignation letter to the Board the previous week. Further, despite losing 75% of the company’s value, the Company’s severance agreement states, “Consideration. Notwithstanding that Executive resigned from employment…(a) The Company will pay to Executive a cash lump sum of Three Million Two Hundred Thousand Dollars ($3,200,000.00), which is equivalent to 200% of the sum of Executive’s base salary and target bonus…(b) Acceleration of Options and RSU Awards. On the Resignation Date, but subject to the effectiveness of this Agreement as provided herein, Executive’s vesting in each of the Options and each of the RSU Awards shall fully accelerate (the “Severance Acceleration”).
This is highly unusual, especially for a CEO who has destroyed so much shareholder value. Indeed, the CEO’s employment contract specifically states the opposite:
· “If Executive’s employment with the Company terminates (i) voluntarily by Executive…then Executive will receive the Accrued Amounts but will not be entitled to receive severance or other benefits (including continued vesting)
· “No shares will be earned until such time vesting occurs, nor does the Initial RSU Grant, Initial Option Grant or any other grant confer any right to continue vesting or employment”
· Beginning on March 1, 2016, the Initial Option Grant will vest monthly over forty-eight (48) months in approximately equal monthly installments, subject to Executive’s continued service with the Company through each vesting date.
o Note the CEO served less than 80% of this vesting period; leaving in excess of 1mm shares that the company voluntarily gave him. Why are shareholders voluntarily paying more after such egregious losses?
Just to put a final stamp on this, this is in stark contrast to when the Company’s prior CEO was replaced by Chip Perry. In that instance, the Company was not so generous, cancelling a number of his equity awards and requiring him to remain in a transition advisory role for a year in exchange for $100k. (https://www.sec.gov/Archives/edgar/data/1327318/000132731816000026/trueq42015ex1031.htm)
We also note that less than 2 weeks after the June 3rd announcement, the Company terminated its Chief Technology Officer and Chief Marketing officer. The Company has not told investors why. If it was for poor performance, it would seem odd that the CFO, CTO and CMO were terminated, but the CEO was rewarded. When we connect these facts with the Company voluntarily paying the CEO millions of dollars in exchange for agreeing “to “not sue [the Company]…relating to any matters of any kind , whether presently known or unknown, suspected or unsuspected, that Executive may possess… arising from any omissions, acts, facts, or damages that have occurred…” it brings to mind a number of questions. What information does he possess? Why is a resigning CEO with no notice voluntarily given millions of dollars when the Company lost 75% of its value from just two years ago? Why does the company need the CEO, who was not fired, to agree not to sue the Company for information he possesses about the Company? What concerns them? Given the company’s history of fraudulent behavior, might one explanation be the CEO “knows information about the company” and was paid off to stay quiet while others were terminated? While we should note that releases with agreements not to sue like these are common, it is not often in conjunction with extraordinary voluntary payouts following multiple lawsuits, a 75% loss of shareholder value and when the rest of the C-suite was terminated without voluntary payouts and the increasing list of questionable behavior by the Company.
Finally, the Company stated that its expected its CEO to stay on in an advisory capacity. We invite investors to read the sum total of his responsibilities as an advisor:
“Engagement of Services. Consultant agrees to provide the following consulting services to the Client: transitioning his prior employment duties to other Client employees and other advisory services upon reasonable request of the Chief Executive Officer or Chair of the Board of Directors of the Client.”
We are unclear what this means, except that it is followed by this:
“Consultant’s Responsibilities. As an independent contractor, the mode, manner, method and means used by Consultant in the performance of services shall be of Consultant’s selection and under the sole control and direction of Consultant.”
Source: Perry Consulting Agreement: https://www.sec.gov/Archives/edgar/data/1327318/000132731819000040/ex107perryconsultingag.htm
This is as illusory an advisory agreement as we have ever seen; and appears done as a means to dress up the resignation press release. Indeed, when the previous CEO resigned, not only were his equity awards cancelled, but he was required to transition in a much more customary way requiring him to make himself available as frequently as the CEO or Company reasonably asks him to be, and to also respond to all reasonable requests by the CEO or Company to assist in transition.
Source: Painter Separation Agreement:
Business Risks, including upcoming 1/3 of revenue Contract Expiration Risk
The company currently trades at an unbelievable >25x EV/EBITDA. This valuation exists despite the company’s EBITDA declining from $33mm in 2018 to $12mm in 2019; its Revenue declining, its traffic declining y/y, EBITDA margins cut in more than half, the Company stating that it “[cannot reconcile its guidance or quantify its potential legal liabilities], being exposed to a cyclical new cars cycle that has peaked and declined this year (as opposed to other players in its space with a more balanced mix of new and used cars), exposure to increased costs from a tariff war with China, declining OEM incentives, and its largest customer representing 1/3 of its revenues failing to renew its contract or publicly affirm it intends to do so ~4 months prior to contract expiry. The company is also missing half its management team as it does not have a permanent CEO, or replaced their CTO or CMO. The Company’s business model has been found to be illegal in multiple states as outlined above. The company has not grown traffic in 3 years: In mid 2016 the Company had ~7mm monthly active users, the same number it last reported in mid 2019. The company has not grown revenue in 2 years, hovering around the same $340-$350mm revenue number. The company has the second lowest user engagement in the industry at 4 minutes per user against over 5 minutes for CARS, CARG and Autotrader with the second highest bounce rate in the industry at 42.6% of users leaving their page vs. the aforementioned main competitors in the 30s%. Finally, the company’s market share is among the lowest in the industry at 7% vs. CARS and Autotrader ~20% and CARG higher. We find it unnecessary to say may much more, but will.
· The company’s traffic has declined significantly (in excess of 10% y/y) and it was forced to adopt a freemium model to keep dealer customers. Indeed, while the company claims to have increased dealer count, they noted that independent monthly revenue per dealer declined 12%, indicating that dealer increase may just be freemium dealers. Indeed, the company does not break out freemium dealers vs. paying dealers, as opposed to the only other competitor with a freemium model (Cargurus) which does break this out. We encourage investors to ask this question.
· The company has sold the same number of units for the past two years despite SAAR increasing with peak SAAR consensus having been reached and beginning to decline this year.
· The Company’s EBITDA not only guided for a decline of ~65% y/y, but indeed nearly ever operating metric declined: Gross margin declined y/y, Sales & Marketing expense increased by over 10% to >62% or revenue y/y, their cost per unit sold (despite selling the same number of units and claiming an increased dealer count) increased >12% per unit and finally EBITDA margins were more than cut in half from ~10% ebitda margins a year ago to ~4% this past quarter. Further, acute investors will note that even these numbers are inflated as the Company makes a number of adjustments, one of which should sound familiar as their claimed “adjusted EBITDA” excludes “stock-based compensation of $15.6 million, of which $7.2 million was associated with termination benefits related to the departures of certain executives, including our former CEO and $4.7 million in severance costs related to these same departures.” They continue to guide that next quarter revenue will decline another 6% y/y with EBITDA margins half of 3Q to 2% despite the “adjustments”.
· Amazingly, despite providing no 2020 guidance except that they expect TV marketing to INCREASE, analysts forecast >50% ebitda growth, appearing to base this on little more than taking the approximate midpoint of the last two years. We are unclear why.
· 2/3 of the Company’s revenue is concentrated among partner affiliates, leaving the rest of the business as more comparable to its competitors as it competes on equal footing. Yet, when isolating the Company’s branded channel, the Company spent more money per unit sold than revenue received, losing $6 per unit sold. We have yet to see a model be successful where the company will lose more money by selling more units, especially as its margins and spend increases (See Needham Initiation: pg 16 noting they spend $339 per unit sold while monetizing at a rate of $333).
· 1/3 of the company’s revenues are subject to expiration in February 2020 with option renewal required 120 days prior. If the contract is to be terminated, notice is due 90 days prior (~November 15th 2019).
Source: USAA contract https://www.sec.gov/Archives/edgar/data/1327318/000104746914004566/a2219764zex-10_21.htm
(Note Truecar’s former name was Zag, which may be why investors may have missed the Notice period and this contract).
· We find it notable that the contract still has not been renewed despite the stock price drop and USAA being one of their largest shareholders and losing tens of millions on their investment which they can single-handedly correct with a renewal on favorable terms, yet have not done so nor made any public commentary that they intend to. Bullish investors we have spoken to solely rely on the fact that USAA has a director on its board, but that is a merely a layover due to the initial signing of the contract; there was no director prior to the contract’s initiation and nothing that stops the director stepping down upon contract expiration in February. Indeed, a contract renewal would surely increase certainty in the viability of the business, encourage other partners and customers to renew, increase the value of their now negative investment in the Company, yet we have seen no indication of any such renewal nor any public vote of confidence despite their being the Company’s largest customer, among its largest shareholders and being on the Board. Additionally, with the Company in disarray, USAA has maximum leverage, meaning even a renewal would be done on even more favorable economics than the 33% of revenues it takes today – so what is the delay? Does the USAA want to be associated with this given the disparity in their reputation and Truecar’s? Don’t competitors with larger resources such as CARG, autotrader, CARS have the ability to offer better terms? The most likely scenario is undoubtedly that the contract hasn’t been renewed because the company has no CEO, cannot even provide guidance for the current year, faces enormous legal liability in amounts potentially multiples of its market cap and declining business prospects.
· Further, is it not somewhat odd that despite TRUE’s declining business, they are the only company that continues to pursue these arrangements? We encourage investors to ask TRUE’s competitors why they chose not to have these same affiliate arrangements. We have. They will find that terms are worse when one customer represents 1/3 of a company’s revenues and has the negotiating power of several dealerships versus individual negotiations that Autotrader, Cargurus, CARS and others pursue, leading to their revenue per dealer increasing versus TRUE’s declining revenue per dealer.
· The company was sued by over 100 dealers spanning 23 different states for $250 million. Given its partnership contracts represent 2/3 of its business, and these dealers were not customers of the company and their suing makes clear they will never be customers of the Company, this further displays the lackadaisical dependence on a 2020 turnaround is illusory. How does the company continue to express optimism in a turnaround when it has lost numerous executives, traffic has declined, its sued by >100 potential customers for false claims (and found guilty for these false claims), and has no CEO?
We have asked the aforementioned questions to the Company, its competitors, customers, former employees, lawyers and are short TRUE shares, with a base case of a delisting from Nasdaq and filing for bankruptcy. After much diligence, we find the evidence overwhelming that the Company cannot continue to as a sustainable business. We welcome investors to do the same as consensus EBITDA increasing >50% in 2020 appears absurd on its face. A number of large legal liabilities worth multiples of the company’s current market cap, combined with its fundamental business trajectory, make the risk/reward short extremely compelling. We have diligenced this carefully as we have shorted and covered the stock before (too early), and a look at the chart will cause the artificial investor to believe the short money has been made. But a look at the road ahead will make clear the business is untenable leaving the Company’s ~$500mm mkt cap as $500mm of disappearing value. We note that in addition to the notional value of the legal liabilities the company faces, it also hinders the ability for their affiliate partners representing 2/3rd of their revenue to re-sign contracts, nor do we see why they would when they are performing more poorly than their competitors and has no CEO, creating an intertwined vortex that leaves the company not only uninvestable as a shareholder but also untrustworthy as a viable business partner, destroying the Company’s business. As TRUE’s stock price declines and it’s cash flow and other Nasdaq requirements begin to be at risk, forced selling will spiral the stock downwards and the forced disclosure of the aforementioned legal liabilities will force the company to be unable to meet it’s liabilities. Yet consensus estimates forecast a sharp increase in EBITDA next year for no justifiable reason. The Company has deftly followed a strategy of “violate first, and apologize after” that has made its executives rich but unfortunately leaves existing shareholders holding the bag for its past sins.
Therefore, despite the stock having already declined, we encourage investors to look at the current value of the company versus its intrinsic value, as well ask risk/reward and near-term catalysts, and after investors have done their research, we welcome questions and welcome both independent feedback and the Company’s response to other investors to the numerous questions we raise.
Finally, we will end with how Nasdaq described TRUE’s business prospects:
Legal and Business Overhangs
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