What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-05-06 · 204 added, 117 removed, 197 unchanged (62% of the section changed)

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(in thousands, except percentages)

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Retail revenue as % of total revenue

Wholesale revenue as % of total revenue

The net loss for the three months ended March 31, 2020 was primarily attributed to the goodwill and intangible asset impairment, of $905.9 million or $757.1 million, net of tax.

The decrease in revenue for the three and six months ended June 30, 2020 was primarily attributed to the COVID-19 pandemic and related restrictions, including the impact of the discounts we provided to our dealer customers.

The net loss for the three months ended June 30, 2020 was primarily attributed to the decline in revenue, partially offset by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.

The net loss for the six months ended June 30, 2020 was primarily attributed to the goodwill and intangible asset impairment of $905.9 million, or $757.1 million net of tax, as well as the impact of the COVID-19 pandemic and related restrictions.

The net loss in each period was impacted by the following costs (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

Severance, transformation and other exit costs

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Coronavirus disease 2019 (“COVID-19”).

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it continues to spread throughout the United States and the rest of the world with different geographical locations impacted more than others.

The rapid spread of COVID-19 has resulted in governmental authorities around the country implementing numerous measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns.

This has had, and is expected to continue to have, a negative impact on regional and national economies and the automotive industry for an uncertain duration.

The COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and are expected to result in reduced consumer spending and an economic slowdown or recession.

Dealers operate in a highly competitive market and are vulnerable to both decreased demand for new and used vehicles and periods of an economic slowdown or recession.

Furthermore, dealerships have temporarily or permanently closed and more may close in the near future in light of the COVID-19 pandemic and related restrictions.

As a result of negative changes in the financial condition of dealers, in the second half of March 2020, our customers began to adjust, reduce or suspend their operating activities.

This has resulted and may continue to result in decreased subscription revenue and reduced demand for our services.

In an effort to assist our dealer customers impacted by the COVID-19 pandemic and related restrictions, we have announced, among other measures, financial relief in the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020.

We expect the COVID-19 pandemic and related restrictions will have a greater impact on our results in the second quarter of 2020 and beyond, particularly in light of these discounts.

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it has spread throughout the United States and the rest of the world with different geographical locations impacted more than others.

The COVID-19 pandemic has resulted in governmental authorities around the country implementing numerous measures to

contain the virus, such as quarantines, shelter-in-place orders and business shutdowns (the “related restrictions”).

These restrictions have had, and we expect they will continue to have, a negative impact on regional and national economies and the automotive industry for an uncertain duration.

While certain jurisdictions have relaxed some of these related restrictions, any resurgences of the pandemic may slow the reopening process.

The COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and have resulted in reduced consumer spending and an economic slowdown or recession.

OEMs and automobile dealers operate in a highly competitive market and are vulnerable to both decreased supply and demand for new and used vehicles, as well as corresponding changes in vehicle pricing.

Furthermore, certain OEMs have temporarily ceased production and certain dealerships have temporarily or permanently closed and more may close in the future in light of the COVID-19 pandemic and related restrictions.

As a result of negative changes in the financial condition of dealers and overall uncertainty related to the automotive industry, in the second half of March 2020, our customers began to adjust, reduce or suspend their operating activities.

This resulted and may continue to result in decreased subscription revenue and reduced demand for our services.

Moreover, depending upon the progress of the pandemic and the government and societal responses thereto, our customers may implement further cost-savings measures, including additional reductions of their advertising spend.

With respect to managing our expenses, we have multiple initiatives underway to adjust our expenses with changes in revenue.

These steps have included an employee furlough and reduction in force, salary reductions, freezes on hiring and temporary labor, deferral of merit and promotion increases;

a reduction of our marketing expense by aligning our variable marketing spend with shopper demand, while carefully maintaining consumer engagement as evidenced by our strong organic traffic;

In an effort to assist our dealer customers impacted by the COVID-19 pandemic and related restrictions, we provided, among other measures, financial relief in the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020.

With respect to managing our expenses, we implemented multiple initiatives including both permanent and temporary measures, to adjust expenses with changes in revenue.

These initiatives included an employee furlough and reduction in force, salary reductions, freezes on hiring and temporary labor, deferral of merit and promotion increases;

a reduction of our marketing expense, while carefully maintaining consumer engagement as evidenced by our strong organic traffic;

partnering with our vendors to reduce cost;

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We remain committed to and have intensified our efforts around cash flow discipline, including the identification of significant capital expenditures that can be deferred, and working capital management.

The effects of the COVID-19 pandemic and the related restrictions, particularly reduced consumer spending and the discounts that we provided our dealer customers for the second quarter of 2020, have negatively impacted our results of operations, cash flows and financial position.

In addition, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of the COVID-19 pandemic and related restrictions.

Therefore, the results for the six months ended June 30, 2020, may not be indicative of the results for the year ending December 31, 2020.

We have taken steps to strengthen our financial position during this period of heightened uncertainty.

In March 2020, we drew down $165.0 million on our Revolving Loan for additional liquidity and flexibility due to the uncertainty of the COVID-19 pandemic and related restrictions.

As of March 31, 2020, we had $187.3 million in available cash and $30.0 million was available to borrow under the Revolving Loan.

As of April 30, 2020, Cash and cash equivalents were approximately $190.0 million.

In June 2020, we entered into an amendment to our Credit Agreement (the “Second Amendment”) that provides for a waiver with respect to the Total Net Leverage Ratio and Consolidated Interest Coverage Ratio (each as defined in the Credit Agreement) financial covenants for the covenant testing periods through December 31, 2020 (the “Covenant Adjustment Period”).

As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility.

For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers will assist us as we navigate a rapidly changing marketplace.

Additionally, we are focused on equipping our customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying customers are shopping from home.

Additionally, we are focused on equipping our dealer customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying consumers are shopping from home.

These solutions include virtual showrooms, home delivery badging, online chat and our FUEL TM In-Market Video (“FUEL IMV”) pro duct that allows dealers to target in-market buyers on streaming platforms .

Prior to the impact of the COVID-19 pandemic and related restrictions, we believe that we were in a position to deliver a robust second half of the year and to exit the year with revenue growth.

The effects of the COVID-19 pandemic and related restrictions, particularly in light of the discounts that we have provided our dealer customers for the second quarter of 2020, will negatively impact our results of operations, cash flows and financial position.

However, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of the COVID-19 pandemic and related restrictions.

Therefore, the results for the three months ended March 31, 2020, may not be indicative of the results for the year ending December 31, 2020.

Reduction in Force .

On April 29, 2020, we announced the permanent reduction in force of approximately 170 people, the majority of whom had been placed on furlough in early April 2020.

We estimate the pre-tax costs for this action to be in the range of approximately $4.0 to 4.75 million, substantially all of which are related to employee severance and is expected to be recorded during the three months ending June 30, 2020.

Q1 2020 Traffic and Dealer Customer Growth.

We estimate the pre-tax costs for this action to be in the range of approximately $4.0 to $4.75 million, substantially all of which are related to employee severance and were recorded during the three months ended June 30, 2020.

Traffic provides an indication of our consumer reach.

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We have been diligently focused on growing our audience, the fundamental deliverable of any marketplace business.

Driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels , we have experienced year-over-year Traffic growth since January 2018, and in January 2020, we recorded the highest level of Traffic in our history.

In the first quarter of 2020, we maintained strong organic Traffic growth and achieved 20% growth in Traffic and 11% growth in Average Monthly Unique Visitors.

However, due to the impact of the COVID-19 pandemic and related restrictions, our Traffic in the second half of March 2020 was negatively impacted and we only experienced slight year-over-year growth in March.

Although we experienced strong traffic growth in the first quarter of 2020, the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our traffic in 2020 and beyond.

Driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping , we have experienced consistent year-over-year quarterly traffic growth.

In the second quarter of 2020, we maintained strong organic Traffic growth, at rates that accelerated throughout the quarter, and achieved 10% growth in Traffic and 6% growth in Average Monthly Unique Visitors, compared to the prior year.

Although we experienced strong traffic in the first two quarters of 2020, given the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions, competitive spending, and reduced consumer spending, among other factors, we are uncertain as to how this may impact our traffic for the rest of 2020 and beyond.

Dealer Customers.

In the first quarter of 2020, Dealer Customers grew by 104, or 1%, to 18,938 as of March 31, 2020, as compared with 18,834 as of December 31, 2019.

This increase was a result of growth in new solutions-only dealer customers, improved retention rates in local marketplace customers and strong sales in the local marketplace through the first half of March.

Due to the impact of the COVID-19 pandemic and related restrictions, sales slowed in mid-March and overall local dealer customers declined slightly in the month of March.

Although we experienced dealer customer growth in the first quarter of 2020, the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our dealer customers in 2020 and beyond.

In the second quarter of 2020, Dealer Customers declined by 905, or 5%, to 18,033 as of June 30, 2020, as compared with 18,938 as of March 31, 2020.

This decrease was a result of lower sales and elevated cancellations as a result of the COVID-19 pandemic and related restrictions, partially offset by growth in digital solutions customers.

Given the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending, we are uncertain as to how this may impact our dealer customers for the rest of 2020 and beyond.

Credit Agreement Amendment.

In June 2020, the Company entered into the Second Amendment to address the uncertainty around the impact of the COVID-19 pandemic that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter.

During the covenant holiday period there is a minimum liquidity requirement of $75.0 million.

For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

FUEL IMV Launch.

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We began generating FUEL IMV revenue in the first quarter of 2020.

OEM Agreement.

Digital Solutions OEM Agreement.

In 2019, we were selected as one of four preferred website providers to General Motors (“GM”).

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This program is semi-exclusive and provides GM dealers a choice in provider for the first time in 15 years.

GM remains on track to launch over 800 additional websites with revenue expected to begin in the second half of 2020.

This new agreement provides us with the opportunity to substantially increase our current website customer base, which was approximately 3,600 as of March 31, 2020.

We remain on track to launch the majority of our 800+ GM websites by the end of the year.

This new agreement provides us with the opportunity to substantially increase our current website customer base, which was approximately 3,800 as of June 30, 2020.

Technology Transformation.

In February 2019, we announced a restructuring of the product and technology teams, which primarily focused on shifting our technology spend towards innovation to improve our speed of product delivery, to enable integration across current and future systems, and to migrate our systems to the cloud (the “Technology Transformation”).

In connection with the Technology Transformation, we have aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace.

As part of this process, we have streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth.

Although we have elected to defer the completion of the Technology Transformation due to the impact of the COVID-19 pandemic and related restrictions, we have achieved cost efficiencies and expect to achieve further cost efficiencies upon completion of the Technology Transformation.

In connection with the Technology Transformation, we aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace.

As part of this process, we streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth.

Although the impact of the COVID-19 pandemic and related restrictions has elongated our timeline for the completion of the Technology Transformation, we have achieved cost efficiencies and expect to achieve further cost efficiencies upon completion of the Technology Transformation.

Key Operating Metrics

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Three Months Ended

Six Months Ended

Traffic (Visits)

Average Monthly Unique Visitors

Direct Monthly Average Revenue Per Dealer

Information regarding Dealer Customers is as follows:

March 31, 2020

Information regarding Dealer Customers and Direct Monthly Average Revenue Per Dealer is as follows:

June 30, 2020

June 30, 2019

March 31, 2020

December 31, 2019

Dealer Customers

Direct Monthly Average Revenue Per Dealer

Traffic (Visits).

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Traffic does not include traffic to Dealer Inspire websites.

Visits refers to the number of times visitors accessed CARS properties during the period,

no matter how many visitors make up those visits.

Visits refers to the number of times visitors accessed CARS properties during the period, no matter how many visitors make up those visits.

Traffic provides an indication of our consumer reach.

Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealer customers and national advertisers.

The growth in Traffic was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels .

For the three months ended March 31, 2020 and March 31, 2019, mobile traffic accounted for 76% and 71% of total Traffic, respectively.

We believe the growth in Traffic was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping accelerated by the COVID-19 pandemic and related restrictions .

For the three and six months ended June 30, 2020, mobile traffic accounted for 75% of total Traffic.

For the three and six months ended June 30, 2019, mobile traffic accounted for 71% of total Traffic.

Although we experienced strong traffic in the first two quarters of 2020, the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our traffic in 2020 and beyond.

Average Monthly Unique Visitors (“UVs”).

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We measure UVs using Adobe Analytics.

The growth in UVs was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels .

Average Revenue Per Dealer (“ARPD”).

We believe our ability to grow ARPD is an indicator of the value proposition of our products.

We define ARPD as Direct retail revenue during the period divided by the average number of direct dealer customers during the same period.

ARPD declined 2% from the ARPD of $2,136 for the three months ended December 31, 2019, primarily due to upsell cancellations and selected discounts given in the second half of March as a result of the COVID-19 pandemic and related restrictions.

ARPD declined 6% from March 31, 2019, primarily due to upsell cancellations and dealer churn and discounts given in the second half of March 2020 as a result of the COVID-19 pandemic and related restrictions

The growth in UVs was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping accelerated by the COVID-19 pandemic and related restrictions .

Dealer Customers .

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Multi-franchise dealerships at a single location are counted as one dealer.

Total Dealer Customers increased 1% from December 31, 2019.

This increase was a result of growth in new solutions-only dealer customers, improved retention rates in local marketplace and dealer solutions customers and strong sales in the local marketplace through the first half of March.

Due to the impact of the COVID-19 pandemic and related restrictions, sales slowed in mid-March and overall local dealer customers declined slightly in the month of March.

Total Dealer Customers declined 5% from March 31, 2020.

Dealer Customers declined, primarily due to cancellations of marketplace customers, partially offset by growth in digital solutions customers.

This decrease was primarily driven by cancellations of marketplace customers and lower new dealer customer sales, principally due to the COVID-19 pandemic and related restrictions .

This decrease was partially offset by growth in digital solutions customers.

Total Dealer Customers declined 5% from June 30, 2019.

This decrease was primarily driven by cancellations of marketplace customers and lower new dealer customer sales, principally due to the COVID-19 pandemic and related restrictions .

This decrease was partially offset by growth in digital solutions customers.

The unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our dealer customers in 2020 and beyond.

Average Revenue Per Dealer (“ARPD”).

We believe our ability to grow ARPD is an indicator of the value proposition of our products.

We define ARPD as Direct retail revenue during the period divided by the monthly average number of direct dealer customers during the same period.

ARPD declined 31% from the ARPD of $2,092 for the three months ended March 31, 2020, primarily due to the impact of the invoice credits we provided to our marketplace customers during the second quarter of 2020 and in response to the COVID-19 pandemic and related restrictions.

ARPD declined 33% from June 30, 2019, primarily due to the impact of the invoice credits we provided to our marketplace customers during the second quarter of 2020 and in response to the COVID-19 pandemic and related restrictions.

Factors Affecting Our Performance.

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Changes in car sales volumes in the United States and reduced dealer profitability also influence OEMs’ and dealerships’ willingness to increase spend with automotive marketplaces like Cars.com.

In the later part of March 2020, we observed increased softness in car sales and dealer profitability.

Due to the impact of the COVID-19 pandemic and the related restrictions, this softness has become more acute and expected to continue in the near-term.

Beginning in the later part of March 2020, we observed decreased car sales and dealer profitability.

Due to the impact of the COVID-19 pandemic and the related restrictions, these decreases are expected to continue in the near-term.

Our long-term success will depend in part on our ability to continue to transform our business toward a multi-faceted suite of digital solutions that complement our online marketplace offerings.

We believe our core strategic strengths, including our powerful family of

brands, growing high-quality audience and suite of digital solutions for advertisers will assist us as we navigate a rapidly changing marketplace.

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Results of Operations

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Three Months Ended March 31,

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

Three Months Ended June 30,

(In thousands, except percentages)

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Depreciation and amortization

Goodwill and intangible asset impairment

Total operating expenses

Operating loss

Operating (loss) income

Nonoperating expense:

Interest expense, net

Other (expense) income, net

Other income, net

Total nonoperating expense, net

Loss before income taxes

Income tax benefit

Income tax expense (benefit)

*** Not meaningful

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Direct revenue consists of marketplace and digital solutions sold to dealer customers.

Direct revenue is our largest revenue stream, representing 84.6% and 74.6% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

Direct revenue is our largest revenue stream, representing 81.6% and 75.0% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

As of October 1, 2019, we have successfully converted all affiliates to our direct control, and no longer have Wholesale revenue.

We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss.

During the three months ended March 31, 2020, the affiliate market conversions contributed an incremental $17.4 million to Direct revenue.

During the three months ended June 30, 2020, the affiliate market conversions contributed an incremental $10.8 million to Direct revenue.

For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

These increases were partially offset by a 2% decline in Dealer Customers and a 6% decline in ARPD from March 31, 2019.

The overall decrease was primarily due to a 33% decline in ARPD from June 30, 2019 primarily due to the impact of the invoice credits we provided to our dealer customers during the second quarter of 2020 in response to the COVID-19 pandemic and related restrictions, as well as a 5% decline in Dealer Customers.

Retail Revenue—National Advertising .

National advertising revenue consists of display advertising and other solutions sold to OEMs, advertising agencies and automotive dealer customers.

National advertising revenue represents 13.1% and 13.2% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

National advertising revenue declined 4%, representing a stabilization of the business driven by OEMs 2020 upfront commitments in line with prior year.

National advertising revenue represents 15.7% and 13.0% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

National advertising revenue declined 17%, primarily due to higher cancellations, principally due to the COVID-19 pandemic and related restrictions .

Wholesale Revenue .

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The fees represented approximately 60% of the retail value for the same online subscription products sold by our direct sales team.

Wholesale revenue represented 9.6% of total revenue for the three months ended March 31, 2019.

Wholesale revenue represented 9.5% of total revenue for the three months ended June 30, 2019.

As of October 1, 2019, we successfully converted all affiliates to our direct control, and no longer have Wholesale revenue.

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Cost of revenue and operations expense primarily consists of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment, customer service and compensation costs.

Cost of revenue and operations expense represents 17.6% and 16.6% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

Cost of revenue and operations expense increased $0.5 million, primarily due to higher compensation costs, partially offset by lower third party costs.

Cost of revenue and operations expense represents 22.5% and 16.4% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

Cost of revenue and operations expense decreased $1.4 million, primarily due to lower third party costs and lower compensation costs, driven by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions, partially offset by growth in dealer websites and related digital solutions, which have an inherently higher cost of revenue.

Product and technology.

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Product and technology expense includes compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs.

Product and technology expense represents 10.0% and 11.6% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

Product and technology expense decreased primarily due to cost efficiencies as a result of the Technology Transformation.

Product and technology expense represents 11.8% and 10.3% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

Product and technology expense decreased primarily due to cost efficiencies and lower compensation costs as a result of the Technology Transformation and by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.

Marketing and sales .

Marketing and sales expense primarily consists of traffic and lead acquisition costs (including search engine and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs for the marketing, sales and sales support teams.

Marketing and sales expenses represent 37.1% and 39.1% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

Marketing and sales expense decreased due to a reduction of our marketing expense by aligning our variable marketing spend with shopper demand, while carefully maintaining consumer engagement as evidenced by our strong organic traffic.

Marketing and sales expenses represent 31.4% and 36.3% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

Marketing and sales expense decreased due to a reduction of our marketing expense which was achieved by focusing on customer acquisition and leveraging efficiencies gained, while carefully maintaining consumer engagement as evidenced by our strong organic traffic, and a shift from in-person to virtual automobile research and shopping.

General and administrative .

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In addition, general and administrative expense includes office space rent, legal and accounting services, other professional services, transaction-related costs and costs related to the write-off and loss on assets, excluding the goodwill and intangible asset impairment discussed below.

General and administrative expense represents 9.5% and 15.5% of total revenue for the three months ended March 31, 2020 and 2019, respectively.

During the three months ended March 31, 2020 and 2019, General and administrative expense included the following costs (in thousands):

Three Months Ended March 31,

General and administrative expense represents 16.1% and 14.8% of total revenue for the three months ended June 30, 2020 and 2019, respectively.

During the three months ended June 30, 2020 and 2019, General and administrative expense included the following costs (in thousands):

Three Months Ended June 30,

Severance, transformation and other exit costs

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Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects.

Excluding these costs, general and administrative expense was flat compared to the prior year.

Excluding these costs, general and administrative expense decreased 10.9% for the three months ended June 30, 2020, compared to the prior year.

General and administrative expenses decreased primarily due to our management of expenses, primarily related to compensation, to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.

Depreciation and amortization .

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Affiliate revenue share expense represents payments made to affiliates pursuant to our affiliate agreements and amortization of the Unfavorable contracts liability related to converted markets.

Affiliate revenue share expense increased, primarily due to the additional markets converted during the last twelve months, partially offset by the expiration of certain affiliate agreements and no amortization of the unfavorable contracts liability.

A summary of Affiliate revenue share expense is as follows (in thousands):

Three Months Ended June 30,

Affiliate revenue share expense, gross

Amortization of the Unfavorable contracts liability

Affiliate revenue share expense, as reported

For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Interest expense, net .

Interest expense, net increased by $0.2 million compared to the prior year.

For information related to our interest rate swap, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Other income, net .

Other income, net increased, primarily due to the unrealized gain on the mark-to-market adjustment related to the interest rate swap.

For information related to the impairment, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Income tax benefit .

The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income taxes, was 0% for the three months ended June 30, 2020 and differed from the U.S.

federal statutory rate of 21%, due to the full valuation allowance on the U.S.

company’s net deferred tax asset position.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Six Months Ended June 30,

(In thousands, except percentages)

National advertising

Total revenue

Operating expenses:

Cost of revenue and operations

Product and technology

Marketing and sales

General and administrative

Affiliate revenue share

Depreciation and amortization

Goodwill and intangible asset impairment

Total operating expenses

Operating loss

Nonoperating (expense) income:

Interest expense, net

Other (expense) income, net

Total nonoperating expense, net

Loss before income taxes

Income tax benefit

*** Not meaningful

Retail Revenue—Direct .

Direct revenue is our largest revenue stream, representing 83.4% and 74.8% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

As of October 1, 2019, we have successfully converted all affiliates to our direct control, and no longer have Wholesale revenue.

During the six months ended June 30, 2020, the affiliate market conversions contributed an incremental $28.3 million to Direct revenue.

Retail Revenue—National Advertising .

National advertising revenue represents 14.2% and 13.1% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

National advertising revenue declined 11%, primarily due to higher cancellations, principally due to the COVID-19 pandemic and related restrictions .

Wholesale Revenue .

The fees represented approximately 60% of the retail value for the same online subscription products sold by our direct sales team.

Wholesale revenue represented 9.6% of total revenue for the six months ended June 30, 2019.

As of October 1, 2019, we successfully converted all affiliates to our direct control, and no longer have Wholesale revenue.

Cost of revenue and operations .

Cost of revenue and operations expense represents 19.6% and 16.5% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

Cost of revenue and operations expense decreased primarily due to lower third party costs, driven by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related

restrictions, partially offset by an increase in compensation costs and growth in dealer websites and related digital solutions, which have an inherently higher cost of revenue .

Product and technology.

Product and technology expense represents 10.8% and 11.0% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

Product and technology expense decreased primarily due to lower compensation costs and cost efficiencies as a result of the Technology Transformation by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.

Marketing and sales .

Marketing and sales expenses represent 34.8% and 37.7% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

General and administrative .

General and administrative expense represents 12.2% and 15.2% of total revenue for the six months ended June 30, 2020 and 2019, respectively.

During the six months ended June 30, 2020 and 2019, General and administrative expense included the following costs (in thousands):

Six Months Ended June 30,

Severance, transformation and other exit costs

Transaction-related costs (1)

Costs associated with stockholder activist campaign

Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms.

Excluding these costs, general and administrative expense decreased 5.8% for the six months ended June 30, 2020, compared to the prior year.

Depreciation and amortization .

Depreciation and amortization expense increased primarily due to depreciation and amortization on additional assets acquired.

Affiliate revenue share.

Affiliate revenue share expense increased, primarily due to the additional markets converted during the last twelve months, partially offset by the expiration of certain affiliate agreements.

A summary of Affiliate revenue share expense is as follows (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Affiliate revenue share expense, gross

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Interest expense, net .

Interest expense, net was flat compared to the prior year.

For information related to our interest rate swap, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Interest expense, net increased by $0.2 million compared to the prior year.

Other (expense) income, net .

Other income, net decreased, primarily due to an impairment of $9.4 million of non-marketable investment, triggered by the COVID-19 pandemic and the related restrictions.

Other (expense) income, net decreased, primarily due to an impairment of a $9.4 million of non-marketable investment, triggered by the COVID-19 pandemic and the related restrictions.

This investment had been recorded within Investments and other assets on the Consolidated Balance Sheets.

Income tax benefit .

The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income tax, was 15% for the three months ended March 31, 2020 and differed from the U.S.

The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income taxes, was 14% for the six months ended June 30, 2020 and differed from the U.S.

federal statutory rate of 21%, primarily due to the tax impact of the goodwill and intangible asset impairments and a full valuation allowance on the U.S.

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We are subject to certain financial and other covenants contained in our Credit Agreement.

In June 2020, we entered into an amendment to our Credit Agreement that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter.

In addition, the Second Amendment also includes a minimum liquidity requirement of $75.0 million and adds an anti-cash hoarding covenant, which requires, during the Covenant Adjustment Period, mandatory prepayments of the revolving credit loans with the amount of any unrestricted cash located in the Company’s deposit accounts in excess of $75.0 million.

The impact of the COVID-19 pandemic and related restrictions may affect our ability to comply with such covenants.

We will continue to monitor our liquidity position and covenant obligations and are in active conversations with our Lenders.

We may seek to amend our Credit Agreement to provide greater comfort that we will be able to remain in compliance with our obligations but we may not be able to do so on terms that are acceptable or to the extent necessary to avoid a default, depending upon conditions in the credit markets, the length and depth of the market reaction to the pandemic and our ability to compete in this environment.

We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy.

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See Part II, Item 1A., “Risk Factors” of this Quarterly Report on Form 10-Q.

As of March 31, 2020, Cash and cash equivalents were $187.3 million.

As of June 30, 2020, Cash and cash equivalents were $56.9 million.

Term Loan and Revolving Loan.

As of March 31, 2020, the outstanding principal amount under the Term Loan was $379.7 million, with an interest rate of 4.3%, including the impact of the interest rate swap.

As of June 30, 2020, the outstanding principal amount under the Term Loan was $371.3 million, with an interest rate of 5.5%, including the impact of the interest rate swap.

The outstanding borrowings under the Revolving Loan were $275.0 million, with an interest rate of 3.3%.

During the three months ended March 31, 2020, we made $8.4 million in mandatory Term Loan payments and $5.0 million in voluntary Revolving Loan payments.

In March 2020, we drew down $165.0 million on our Revolving Loan for additional liquidity and flexibility due to the uncertainty related to the COVID-19 pandemic and related restrictions, ending the quarter with $187.3 million in available cash.

As of March 31, 2020, $30.0 million was available to borrow under the Revolving Loan.

As of April 30, 2020, Cash and cash equivalents were approximately $190.0 million.

Our borrowings are limited by our total net leverage ratio, which is calculated in accordance with our Credit Agreement, and was 4.1 to 1.0

as of March 31, 2020.

During the six months ended June 30, 2020, we made $16.9 million in mandatory Term Loan payments and $150.0 million in Revolving Loan payments.

The debt repayments were primarily associated with the $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020.

As of June 30, 2020, $175.0 million was available to borrow under the Revolving Loan.

In October 2019, we entered into an amendment to our Credit Agreement to increase the total net leverage covenant during the remaining term of the Credit Agreement while preserving the favorable pricing structure from the original agreement.

The amendment increased our maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through the maturities of the Term Loan and the Revolving Loan on May 31, 2022.

In June 2020, we entered into an amendment to our Credit Agreement that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios that addresses the impact of COVID-19 through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter.

During the covenant holiday period there is a minimum liquidity requirement of $75.0 million.

As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility.

Interest Rate Swap.

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Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in our Credit Agreement, on a notional amount of $300 million.

As of March 31, 2020, the fair value of the Swap was an unrealized loss of $17.0 million.

The Swap is designated as a cash flow hedge of interest rate risk and recorded at fair value in Other accrued liabilities and Other noncurrent liabilities on the Consolidated Balance Sheets.

Any gains or losses on the Swap will be reported as a component of Accumulated other comprehensive (loss) income until reclassed to Interest expense, net in the same period the hedge transaction impacts earnings.

The Second Amendment triggered a quantitative hedge effectiveness test, which resulted in the loss of hedge accounting.

As a result, as of the date of the amendment, the unrealized loss included within Accumulated other comprehensive loss will be ratably reclassified into Net loss over the remaining term of the Swap.

A portion of the unrealized loss shall be recorded to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Loss.

Subsequent to the Second Amendment, any changes in the fair value of the Swap are recorded within Other income (expense), net on the Consolidated Statements of Loss.

As of June 30, 2020, the fair value of the Swap was an unrealized loss of $16.1 million, of which $8.4 million and $7.7 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets.

During the six months ended June 30, 2020 and June 30, 2019, $3.1 million and $0.7 million in Interest expense, net of which $0.3 million and zero was reclassified from Accumulated other comprehensive loss, respectively.

During the six months ended June 30, 2020, $0.1 million was reclassified from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Loss.

Additionally, $0.6 million was included within Other income (expense), net on the Consolidated Statements of Loss related to the change in the fair value of the Interest rate swap from the date of the Second Amendment to June 30, 2020.

Share Repurchase Program.

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The repurchase program did not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice.

The Company repurchased and subsequently retired 0.9 million shares for $20.0 million for the three months ended March 31, 2019 and did not repurchase any shares for the three months ended March 31, 2020.

As of March 31, 2020, the repurchase program is expired.

In March 2020, the repurchase program expired and there were no share repurchases during 2020.

The Company repurchased and subsequently retired 1.7 million shares for $40.0 million during the six months ended June 30, 2019.

Details of our cash flows are as follows (in thousands):

Three Months Ended March 31,

Six Months Ended June 30,

Net cash provided by (used in):

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Operating Activities.

The decrease in cash provided by operating activities was primarily related to changes in operating assets and liabilities, partially offset by the reduction of net loss, excluding the impact of non-cash items.

In addition, the net loss for the three months ended March 31, 2020 and 2019 was impacted by the following costs (in thousands):

Three Months Ended March 31,

The increase in cash provided by operating activities was primarily related to reduction of net loss, excluding the impact of non-cash items, as well as changes in operating assets and liabilities.

In addition, the net loss for the six months ended June 30, 2020 and 2019 was impacted by the following costs (in thousands):

Six Months Ended June 30,

Severance, transformation and other exit costs

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Investing Activities.

The increase in cash used in investing activities is primarily due to an increase in purchases of property and equipment.

The decrease in cash used in investing activities is primarily due to a decrease in purchases of property and equipment.

Financing Activities.

During the three months ended March 31, 2020, cash used in financing activities is primarily related to $165.0 million in proceeds related to the draw on our revolver, partially offset by $13.4 million in debt repayments, of which $5.0 million was voluntarily paid.

During the six months ended June 30, 2020, cash used in financing activities is primarily related to $166.9 million in debt repayments and $3.3 million of debt issuance costs related to the Second Amendment.

The debt repayments were primarily associated with the $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020.

For information related to our Term and Revolving Loans, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

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For information related to critical accounting policies, see “Critical Accounting Policies and Estimates” in Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on February 26, 2020 and see Note 1 (Description of Business, Company History and Summary of Significant Accounting Policies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

During the three months ended March 31, 2020, there have been no changes to our critical accounting policies.

During the six months ended June 30, 2020, there have been no changes to our critical accounting policies.

Recent Accounting Pronouncements.

For information related to recent accounting pronouncements, see Note 2 (New Accounting Pronouncements) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.

Quantitative and Qualitat ive Disclosures about Market Risk

For quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risk,” in Part II, Item 7A., of the Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020.

Our exposures to market risk have not changed materially since December 31, 2019.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis