What changed in this filing

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Item 1. Financial Statements

2020-11-09 compared with 2020-07-30 · 150 added, 111 removed, 367 unchanged (42% of the section changed)

3 unchanged sentences

(In thousands, except per share data)

June 30, 2020

September 30, 2020

December 31, 2019

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5,000 shares authorized;

issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

Common Stock at par, $ 0.01 par value;

300,000 shares authorized;

66,764 shares issued and outstanding as of June 30, 2020 and

66,764 shares issued and outstanding as of September 30, 2020 and

December 31, 2019, respectively

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(In thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Total revenue

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Total operating expenses

Operating (loss) income

Operating income (loss)

Nonoperating expense:

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Total nonoperating expense, net

Loss before income taxes

Income (loss) before income taxes

Income tax expense (benefit)

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(In thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Other comprehensive (loss) income, net of tax:

Three Months Ended September 30,

Nine Months Ended September 30,

Other comprehensive income (loss), net of tax:

Interest rate swap

Amortization of interest rate swap into Net loss

Total other comprehensive (loss) income

Total other comprehensive income (loss)

Comprehensive loss

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Balance at June 30, 2020

Other comprehensive income, net of tax

Shares issued in connection with

stock-based compensation plans, net

Stock-based compensation

Balance at September 30, 2020

Cars.com Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands)

Preferred Stock

(Accumulated Deficit)

Comprehensive

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Balance at June 30, 2019

Other comprehensive loss, net of tax

Repurchases of common stock

Shares issued in connection with

stock-based compensation plans, net

Stock-based compensation

Balance at September 30, 2019

The accompanying notes are an integral part of the Consolidated Financial Statements.

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(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

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Description of Business.

Cars.com Inc., (the “Company” or CARS) is a leading digital marketplace and solutions provider for the automotive industry that connects car shoppers with sellers and original equipment manufacturers (“OEM”s).

The Company’s marketplace empowers shoppers with the resources and information to make confident car buying decisions while our digital solutions and technology platform help sellers improve operational efficiency, profitability and sales.

The Company’s portfolio of brands includes Cars.com, Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and NewCars.com.

Cars.com Inc., (the “Company” or CARS) is a leading digital marketplace, media and solutions provider for the automotive industry, connecting car shoppers with sellers.

Through the Company’s marketplace, dealer websites and other digital solutions, the Company showcases dealer inventory, elevates and amplifies dealer and automobile original equipment manufacturer (“OEM”) brands, connects with its ready-to-buy audience and empowers shoppers and sellers with the resources and information needed to make confident car-buying and selling decisions.

The Company’s digital solutions strategy builds on the rich data and audience of its digital marketplace to offer solutions to drive growth and efficiency for the automotive industry.

The Company’s portfolio of brands now includes Cars.com, Dealer Inspire, DealerRater, FUEL, Auto.com, PickupTrucks.com and NewCars.com.

Company History.

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(“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”).

On May 31, 2017 , the Company made a $ 650.0 million cash transfer to TEGNA and TEGNA completed the Separation through a pro rata distribution to its stockholders of all outstanding shares of the Company’s common stock.

The Company’s common stock began trading “regular way” on the New York Stock Exchange on June 1, 2017.

In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire Inc., an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of Launch Digital Marketing LLC, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “DI Acquisition”).

In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire, Inc.

and substantially all of the net assets of Launch Digital Marketing LLC (the “DI Acquisition”).

The post-DI Acquisition business related to Dealer Inspire, Inc.

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These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2019, which are included in the Company's Annual Report on Form 10-K dated February 26, 2020 (the “December 31, 2019 Financial Statements”).

The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2019 Financial Statements.

The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2019 Financial Statements, except for those disclosed in Note 2 (New Accounting Pronouncements).

In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, cash flows and changes in stockholders' equity as of the dates and for the periods indicated.

The unaudited results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020.

The unaudited results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020.

Use of Estimates.

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GAAP, credit losses on trade accounts receivable are recognized once it is probable that such losses will occur.

Under this new guidance, the Company is required to

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts.

Under this new guidance, the Company is required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts.

The Company adopted this new guidance as of January 1, 2020.

The adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Reference Rate Reform.

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therefore, further disaggregation is not applicable at this time.

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Sales channel

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December 31, 2019

June 30, 2020

September 30, 2020

Indefinite-lived intangible asset

Triggering Event.

In March 2020, the Company determined there was a triggering event, caused by the economic impacts of the novel coronavirus disease 2019 (“COVID-19”) pandemic and related restrictions.

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.

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 (the “restrictions”).

Although certain jurisdictions have relaxed some of these restrictions, these restrictions have had, and the Company expects they will 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 of unknown duration.

Automobile 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 as a result of the

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

COVID-19 pandemic and related restrictions.

Due to negative changes in the financial condition of dealers, in the second half of March 2020, the Company’s 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 the Company’s services.

In an effort to assist its dealer customers impacted by the COVID-19 pandemic and related restrictions, the Company 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 its expenses, the Company implemented multiple initiatives to adjust its expenses to mitigate these changes in revenue.

The effects of the COVID-19 pandemic and the related restrictions, particularly reduced consumer spending and the discounts that the Company has provided its dealer customers for the second quarter of 2020, have negatively impacted the Company’s 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.

Thus, the amount and timing of future cash flows, used in the valuation models to estimate the fair value of the Company’s assets, has been significantly and negatively impacted by the COVID-19 pandemic and related restrictions.

Impairment Assessment.

The Company performed interim quantitative impairment tests as of March 31, 2020.

The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, the Company recorded an impairment of $ 505.9 million and $ 400.0 million related to its goodwill and indefinite-lived intangible asset, respectively.

Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed.

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The level at which the Company tests goodwill for impairment requires us to determine whether the operations below the business segment level constitute a business for which discrete financial information is available and segment management regularly reviews the operating results.

The Company has determined that CARS operates as a single reporting unit.

The Company has determined that it operates as a single reporting unit.

The process of estimating the fair value of goodwill is subjective and requires us to make estimates that may significantly impact the outcome of the analysis.

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If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

The Company estimated the fair value of the reporting unit with an income approach using the discounted cash flow (“DCF”) analysis and the Company also considered a market-based valuation methodology using comparable public company trading values.

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Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions could have a material effect on the estimated fair values.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Indefinite-lived Intangible Asset.

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The discount rate assumption is based on an assessment of the risk inherent in the projected future cash flows generated by the trade name intangible asset.

As of June 30, 2020, the Company was in compliance with the covenants under its Credit Agreement.

As of June 30, 2020, the outstanding principal amount under the Term Loan was $ 371.3 million and the interest rate in effect was 5.5 %, including the impact of the interest rate swap discussed below.

During the six months ended June 30, 2020, the Company made $ 16.9 million in mandatory quarterly Term Loan payments.

First Quarter 2020 Triggering Event and Impairment Assessment.

In March 2020, the Company determined there was a triggering event, caused by the economic impacts of the novel coronavirus disease 2019 (“COVID-19”) pandemic and related restrictions.

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

The 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”).

The related restrictions have had, and the Company expects 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 lead to a reimplementation of such restrictions.

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.

As a result of overall uncertainty related to the automotive industry, in the second half of March 2020, the Company’s customers began to adjust, reduce or suspend their operating and marketing activities.

This resulted and may continue to result in decreased subscription revenue and reduced demand for the Company’s services.

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

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

The effects of the COVID-19 pandemic and related restrictions, particularly reduced consumer spending and the discounts that the Company provided our dealer customers in 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 pandemic and related restrictions.

The Company performed interim quantitative impairment tests as of March 31, 2020.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Third Quarter 2019 Triggering Event and Impairment Assessment.

As of September 1, 2019, the Company determined there was a triggering event, primarily caused by a sustained decrease in its stock price after the completion of the strategic alternatives review process, and performed an interim quantitative impairment test.

The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, the Company recorded an impairment of $ 379.2 million and $ 82.3 million related to its goodwill and indefinite-lived intangible asset, respectively in the third quarter of 2019.

As of September 30, 2020, the Company was in compliance with the covenants under its Credit Agreement.

As of September 30, 2020, the outstanding principal amount under the Term Loan was $ 362.8 million and the interest rate in effect was 5.5 %, including the impact of the interest rate swap discussed below.

During the nine months ended September 30, 2020, the Company made $ 25.3 million in mandatory quarterly Term Loan payments.

Revolving Loan.

As of June 30, 2020, the outstanding borrowings under the Revolving Loan were $ 275.0 million and the interest rate in effect was 3.3 %.

During the six months ended June 30, 2020, the Company borrowed $ 165.0 million and made $ 150.0 million in Revolving Loan payments.

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

As of September 30, 2020, the outstanding borrowings under the Revolving Loan were $ 235.0 million and the interest rate in effect was 3.3 %.

During the nine months ended September 30, 2020, the Company borrowed $ 165.0 million and made $ 190.0 million in Revolving Loan payments.

As of September 30, 2020, $ 215.0 million was available to borrow under the Revolving Loan.

The Company's debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments.

As of June 30, 2020, the fair value of the outstanding indebtedness was approximately $ 627.8 million, compared to the carrying value of $ 646.3 million.

As of September 30, 2020, the fair value of the outstanding indebtedness was approximately $ 581.2 million, compared to the carrying value of $ 597.8 million.

As of December 31, 2019, the fair value approximated the carrying value.

Credit Agreement.

In October 2019, the Company entered into an amendment to its 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 the Company’s maximum total net leverage ratio from 3.75 x to 4.50 x with incremental step downs through the maturities of the Term Loan and the Revolving Loan on May 31, 2022 .

In October 2019, the Company entered into an amendment to its Credit Agreement (the “First Amendment”) 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 First Amendment increased the Company’s maximum total net leverage ratio from 3.75 x to 4.50 x with incremental step downs through the maturities of the Term Loan and the Revolving Loan on May 31, 2022 .

In June 2020, the Company entered into the second amendment to its 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”).

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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 .

Subsequent Event - Bond Offering.

On October 30, 2020, the Company issued $ 400.0 million aggregate principal amount of 6.375% senior unsecured notes due 2028.

The Company used the net proceeds from the offering, together with cash on hand, to repay $ 235.0 million of borrowings under its revolving facility, repay $ 162.8 million of borrowings under its term loan and pay fees associated with the offering.

Subsequent Event - Credit Agreement Amendment.

On October 30, 2020, the Company entered into an amendment (the “Third Amendment”) to its Credit Agreement, in which the Company refinanced an aggregate principal amount of $ 430.0 million, comprised of a $ 230.0 million senior secured revolving credit facility and a $ 200.0 million senior secured term loan facility, with a revised maturity date of May 31, 2025 .

The Third Amendment also includes the following:

A maximum senior secured leverage ratio of 3.50 x, with a step up for material permitted acquisitions;

A minimum interest coverage ratio of 2.75 x, with a step up to 3.00 x on June 30, 2023;

A revised interest rate grid updated to reflect a maximum alternate base rate margin of 1.75 % and a maximum Eurodollar margin of 2.75 %.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Certain modifications to negative covenants restricting additional indebtedness, investments, acquisitions, debt repayments and certain dividends and distribution;

Provisions to accommodate the replacement of the existing LIBOR Rate with a successor benchmark interest rate;

Ended the Covenant Adjustment Period that was implemented pursuant to the Second Amendment and removed the related minimum liquidity requirement and anti-cash hoarding covenant.

Interest Rate Swap

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

The Swap is designated as a cash flow hedge of interest rate risk.

The Swap was designated as a cash flow hedge of interest rate risk.

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 Second 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 will be recorded to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Loss.

As a result, as of the date of the Second Amendment, the unrealized loss included within Accumulated other comprehensive loss is ratably reclassified into Net loss over the remaining life of the Term Loan.

Each period, a portion of the unrealized loss is 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.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

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 was recorded 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.

As of September 30, 2020, the fair value of the Swap was an unrealized loss of $ 14.2 million, of which $ 8.5 million and $ 5.7 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets.

During the nine months ended September 30, 2020 and September 30, 2019, $ 7.4 million and $ 1.2 million was recorded in Interest expense, net, of which $ 2.5 million and zero was reclassified from Accumulated other comprehensive loss, respectively.

During the nine months ended September 30, 2020, $ 0.4 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Loss.

Additionally, $ 2.5 million of income was included within Other income (expense), net on the Consolidated Statements of Loss related to the change in the fair value of the Swap from the date of the Second Amendment to September 30, 2020.

Unfavorable Contracts Liability

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The fees the Company incurred associated with the amended affiliate agreements were recorded as Affiliate revenue share expense within Operating expenses in the Consolidated Statements of Loss.

Therefore, during the six months ended June 30, 2020 and June 30, 2019, the Company recorded zero and $ 11.7 million of unfavorable contracts liability amortization as a reduction to Affiliate revenue share expense, rather than Wholesale revenue, in the Consolidated Statements of Loss, respective ly.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Therefore, during the nine months ended September 30, 2020 and September 30, 2019, the Company recorded zero and $ 17.5 million of unfavorable contracts liability amortization as a reduction to Affiliate revenue share expense, rather than Wholesale revenue, in the Consolidated Statements of Loss, respective ly.

The Company now has direct relationships with all of its dealer customers and no longer is incurring affiliate revenue share expense, effective June 30, 2020.

Commitments and Contingencies

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The Company funded the share repurchase program principally with cash from operations.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

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.

In March 2020, the repurchase program expired and there were no share repurchases during the nine months ended September 30, 2020.

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

Stock-Based Compensation

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Restricted Stock is subject to vesting over one year and the fair value of the Restricted Stock is equal to the Company’s common stock price on the date of grant.

RSU and Restricted Stock activity for the six months ended June 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

RSU and Restricted Stock activity for the nine months ended September 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

of RSUs and Restricted Stock

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Vested and delivered

Outstanding as of June 30, 2020 (1)(2)

Included in “Granted” and “Outstanding as of June 30, 2020” are 108 shares of Restricted Stock that were delivered, but not yet vested.

Included in “Outstanding as of June 30, 2020” are 91 RSUs that were vested, but not yet delivered.

Outstanding as of September 30, 2020 (1)(2)

Included in “Granted” and “Outstanding as of September 30, 2020” are 108 shares of Restricted Stock that were delivered, but not yet vested.

Included in “Outstanding as of September 30, 2020” are 91 RSUs that were vested, but not yet delivered.

Performance Stock Units (“PSUs”).

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and/or share price over a one to three-year performance period.

These PSUs are subject to cliff vesting at the end of the respective performance period.

PSU activity for the six months ended June 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

These PSUs are subject to cliff vesting at the end of the respective

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

performance period.

PSU activity for the nine months ended September 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

Weighted-Average

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Forfeited or cancelled (1)

Outstanding as of June 30, 2020

Included in "Forfeited or cancelled" are 558 PSUs that were cancelled and replaced by new grants during the six months ended June 30, 2020.

Outstanding as of September 30, 2020

Included in "Forfeited or cancelled" are 558 PSUs that were cancelled and replaced by new grants during the nine months ended September 30, 2020.

Stock Options.

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Stock options are subject to three-year cliff vesting and expire 10 years from the grant date.

Stock option activity for the six months ended June 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Stock option activity for the nine months ended September 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

Number of Options

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Vested and delivered

Outstanding as of June 30, 2020

The fair value of the stock options granted during the six months ended June 30, 2020 are estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:

Outstanding as of September 30, 2020

The fair value of the stock options granted during the nine months ended September 30, 2020 are estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:

Risk-free interest rate

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The computation of Loss per share is as follows (in thousands, except per share data):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Basic weighted-average common shares outstanding

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Loss per share, diluted

There were 1,829 and 845 potential common shares excluded from diluted weighted-average shares outstanding for the three months ended June 30, 2020 and June 30, 2019, respectively, and 4,885 and 755 potential common shares for the six months ended June 30, 2020 and June 30, 2019, respectively, as their inclusion would have had an anti-dilutive effect.

Other (Expense) Income, net

Included in Other (expense) income, net in the six months ended June 30, 2020 was a full impairment of $ 9.4 million of a non-marketable investment, triggered by the COVID-19 pandemic and the related restrictions.

There were 2,776 and 875 potential common shares excluded from diluted weighted-average shares outstanding for the three months ended September 30, 2020 and September 30, 2019, respectively, and 2,195 and 795 potential common shares for the nine months ended September 30, 2020 and September 30, 2019, respectively, as their inclusion would have had an anti-dilutive effect.

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

Other Income (Expense), net

Included in Other income (expense), net in the nine months ended September 30, 2020 was a full impairment of $ 9.4 million of a non-marketable investment, triggered by the COVID-19 pandemic and the related restrictions and was recorded in the three months ended March 31, 2020.

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

Deferred Tax Asset and Valuation Allowance.

As a result of the goodwill and indefinite-lived intangible asset impairments recorded during the six months ended June 30, 2020, the Company had a $ 94.3 million deferred tax asset position.

The Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is required to reduce the net deferred tax assets to the amount that is more likely than not to be realized in future periods.

Based on future taxable income projections, the Company believes it is more likely than not that the net deferred tax assets will not be realized.

Therefore, the Company has recorded a full valuation allowance as of June 30, 2020.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

As a result of the goodwill and indefinite-lived intangible asset impairments recorded during the nine months ended September 30, 2020, the Company had a valuation allowance of $ 129.9 million against the deferred tax assets recorded as of September 30, 2020, which represents the balance of deferred tax assets that the Company has concluded that it is not more likely than not to realize.

In reaching this conclusion, in accordance with U.S.

GAAP, the Company has evaluated all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized in future periods.

As of September 30, 2020, the Company determined, based upon the evaluation of all available evidence, that there was sufficient significant negative evidence presented by the Company’s history of recent losses to conclude it was more likely than not that its deferred tax assets would not be realized.

Therefore, as of September 30, 2020, the Company has recorded a full valuation allowance against its deferred tax assets.

At each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.

Correction of an Error.

During the three months ended September 30, 2020, the Company recorded an additional $ 30.9 million valuation allowance related to the correction of an error from the calculation of the valuation allowance for income taxes established in connection with an impairment recorded at March 31, 2020.

The adjustment is not material in the context of the Company’s net loss of $ 787.4 million for the three months ended March 31, 2020, which was primarily attributed to the goodwill and intangible asset impairment, of $ 905.9 million or $ 757.1 million, net of tax .

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

As a result of the regulations issued in July 2020 by the Department of the Treasury and the Internal Revenue Service which provide additional guidance as to the carryback of federal net operating losses (“NOL”) generated in 2019 and 2020 to prior years under the CARES Act, the Company recorded a net $ 8.5 million tax benefit related to its ability to carryback 2019 and 2020 federal taxable losses to the applicable prior years to claim refunds of federal income taxes paid in those years.

Effective Tax Rate.

The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income tax, was 14 % for the six months ended June 30, 2020 and differed from the statutory federal income tax rate of 21 %, primarily due to the tax impact of the goodwill and intangible asset impairments and the full valuation allowance on the U.S.

company’s net

Cars.com Inc.

Notes to the Consolidated Financial Statements (continued)

deferred tax asset position recorded during the six months ended June 30, 2020.

The effective income tax rate was 0 % for the three months ended June 30, 2020 and differed from the statutory federal income tax rate of 21 %, primarily due to a full valuation allowance on the U.S.

company’s net deferred tax asset position .

New Tax Law .

On July 2, 2020, the Department of the Treasury issued temporary and proposed regulations addressing the carryback of net operating losses generated in 2019 and 2020 to prior years under the Coronavirus Aid, Relief, and Economic Security Act.

The Company is reviewing these rules and any impact will be reported during the nine months ending September 30, 2020.

The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income (loss) before income tax, was 12 % for the nine months ended September 30, 2020, which varied from the statutory federal income tax rate of 21 %, primarily due to the tax impact of the goodwill and intangible asset impairments and the recording of the full valuation allowance on the Company’s net deferred tax asset position recorded during the nine months ended September 30, 2020.

The effective income tax rate was 220 % for the three months ended September 30, 2020, and varied from the statutory federal income tax rate of 21 %, as follows (in thousands, except percentages):

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Income tax provision at statutory rate

State income taxes, net of federal income tax benefit

NOL carrybacks

Valuation allowance (1)

Income tax expense (benefit)

This item includes the recording of an additional $ 30.9 million related to the correction of an error, as discussed above .

Note About Forward-Looking Information

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All statements other than statements of historical facts are forward-looking statements.

Forward-looking statements include information concerning the impact of the COVID-19 pandemic and related restrictions on our industry, our dealer customers and our results of operations, our business strategies, strategic alternatives, plans and objectives, market potential, outlook, trends, future financial performance, planned operational and product improvements, potential strategic transactions, liquidity, including expense reduction and draws from our revolving credit facility, and other matters and involve known and unknown risks that are difficult to predict.

Forward-looking statements include information concerning the impact of the COVID-19 pandemic and related restrictions on our industry, our dealer customers and our results of operations, our business strategies, strategic alternatives, plans and objectives, market potential, outlook, trends, future financial performance, planned operational and product improvements, potential strategic transactions, liquidity, including draws from our revolving credit facility, expense management and other matters and involve known and unknown risks that are difficult to predict.

As a result, our actual financial results, performance, achievements, strategic actions or prospects may differ materially from those expressed or implied by these forward-looking statements.

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Forward-looking statements are based on our current expectations, beliefs, strategies, estimates, projections and assumptions, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, current developments regarding the COVID-19 pandemic and other factors we think are appropriate.

Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain.

Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by us and our management based on our knowledge and understanding of the business and industry, are inherently uncertain.

These statements are expressed in good faith and we believe these judgments are reasonable.

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Market acceptance of and influence over certain of our products and services is concentrated in a limited number of automobile OEMs and dealership associations, and we may not be able to maintain or grow these relationships.

We may face difficulties in transitioning to a full-service solutions provider that helps automotive brands and dealers create enduring customer relationships.

We may face difficulties in transitioning from a marketplace platform to a full-service solutions provider that helps automotive brands and dealers create enduring customer relationships.

We rely on third-party service providers for many aspects of our business, including automobile pricing and other data, and any failure to maintain these relationships could harm our business.

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Our business depends on strong brand recognition, and any failure to maintain, protect and enhance our brands could hurt our ability to retain or expand our base of consumers, customers and advertisers, and our ability to increase the frequency with which consumers, dealers and advertisers use our services.

We cannot assure you that we will be able to continue to successfully develop and launch new products or grow our complementary product offerings.

We cannot assure you that we will be able to continue to successfully modify, develop and launch new products or grow our complementary product offerings.

Our business is dependent on keeping pace with advances in technology.

If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenue will decrease.

If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected.

If we do not competitively adapt to automated buying strategies, our display advertising revenue could be adversely affected.

If our mobile applications do not continue to meet consumer demands or we are unable to successfully monetize our mobile advertising solutions, our business, results of operations or financial condition may be materially and adversely affected.

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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 1. Financial Statements