Cars.com Inc. 10-Q

Item 1. Financial Statements. Cars.com Inc. Consolidated Balance Sheets (In thousands, except per share data) September 30, 2020 December 31, 2019 (unaudited) Assets: Current assets: Cash and cash equivalents $ 43,769 $ 13,549 Accounts receivable, net 89,094 101,762 Prepaid expenses 10,615 6,526 Other current assets 10,571 603 Total current assets 154,049 122,440 Property and equipment, net 41,072 43,696 Goodwill — 505,885 Intangible assets, net 857,055 1,329,499 Investments and other assets 16,274 26,471 Total assets $ 1,068,450 $ 2,027,991 Liabilities and stockholders' equity: Current liabilities: Accounts payable $ 19,896 $ 12,431 Accrued compensation 16,949 16,738 Current portion of long-term debt 32,654 31,391 Other accrued liabilities 43,377 38,246 Total current liabilities 112,876 98,806 Noncurrent liabilities: Long-term debt 558,720 611,277 Deferred tax liability 30,865 132,996 Other noncurrent liabilities 43,616 43,844 Total noncurrent liabilities 633,201 788,117 Total liabilities 746,077 886,923 Commitments and contingencies Stockholders' equity: Preferred Stock at par, $ 0.01 par value; 5,000 shares authorized; no shares 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; 67,206 and 66,764 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively 672 668 Additional paid-in capital 1,525,114 1,515,109 Accumulated deficit ( 1,191,406 ) ( 367,067 ) Accumulated other comprehensive loss ( 12,007 ) ( 7,642 ) Total stockholders' equity 322,373 1,141,068 Total liabilities and stockholders' equity $ 1,068,450 $ 2,027,991 The accompanying notes are an integral part of the Consolidated Financial Statements. 2 Cars.com Inc. Consolidated Statements of Loss (In thousands, except per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue: Retail $ 144,392 $ 146,681 $ 394,495 $ 420,129 Wholesale — 5,409 — 34,366 Total revenue 144,392 152,090 394,495 454,495 Operating expenses: Cost of revenue and operations 25,434 25,089 74,376 74,987 Product and technology 15,455 14,923 42,359 48,125 Marketing and sales 45,776 50,789 132,734 164,872 General and administrative 13,289 13,414 43,866 59,265 Affiliate revenue share — 5,158 10,970 9,788 Depreciation and amortization 25,375 28,970 87,529 86,761 Goodwill and intangible asset impairment — 461,463 905,885 461,463 Total operating expenses 125,329 599,806 1,297,719 905,261 Operating income (loss) 19,063 ( 447,716 ) ( 903,224 ) ( 450,766 ) Nonoperating expense: Interest expense, net ( 10,779 ) ( 7,712 ) ( 26,229 ) ( 22,989 ) Other income (expense), net 1,957 1,402 ( 6,987 ) 1,530 Total nonoperating expense, net ( 8,822 ) ( 6,310 ) ( 33,216 ) ( 21,459 ) Income (loss) before income taxes 10,241 ( 454,026 ) ( 936,440 ) ( 472,225 ) Income tax expense (benefit) 22,502 ( 27,869 ) ( 112,101 ) ( 31,011 ) Net loss $ ( 12,261 ) $ ( 426,157 ) $ ( 824,339 ) $ ( 441,214 ) Weighted-average common shares outstanding: Basic 67,295 66,769 67,163 67,043 Diluted 67,295 66,769 67,163 67,043 Loss per share: Basic $ ( 0.18 ) $ ( 6.38 ) $ ( 12.27 ) $ ( 6.58 ) Diluted ( 0.18 ) ( 6.38 ) ( 12.27 ) ( 6.58 ) The accompanying notes are an integral part of the Consolidated Financial Statements. 3 Cars.com Inc. Consolidated Statements of Comprehensive Loss (In thousands) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net loss $ ( 12,261 ) $ ( 426,157 ) $ ( 824,339 ) $ ( 441,214 ) Other comprehensive income (loss), net of tax: Interest rate swap 690 ( 367 ) ( 6,466 ) ( 8,938 ) Amortization of interest rate swap into Net loss 2,401 — 2,101 — Total other comprehensive income (loss) 3,091 ( 367 ) ( 4,365 ) ( 8,938 ) Comprehensive loss $ ( 9,170 ) $ ( 426,524 ) $ ( 828,704 ) $ ( 450,152 ) The accompanying notes are an integral part of the Consolidated Financial Statements. 4 Cars.com Inc. Consolidated Statements of Stockholders’ Equity (In thousands) (Unaudited) Preferred Stock Common Stock Additional Paid-In Accumulated Accumulated Other Comprehensive Stockholders' Shares Amount Shares Amount Capital Deficit Loss Equity Balance at December 31, 2019 — $ — 66,764 $ 668 $ 1,515,109 $ ( 367,067 ) $ ( 7,642 ) $ 1,141,068 Net loss — — — — — ( 787,434 ) — ( 787,434 ) Other comprehensive loss, net of tax — — — — — — ( 6,811 ) ( 6,811 ) Shares issued in connection with stock-based compensation plans, net — — 197 2 ( 906 ) — — ( 904 ) Stock-based compensation — — — — 1,971 — — 1,971 Balance at March 31, 2020 — — 66,961 670 1,516,174 ( 1,154,501 ) ( 14,453 ) 347,890 Net loss — — — — — ( 24,644 ) — ( 24,644 ) Other comprehensive income, net of tax — — — — — — 645 645 Shares issued in connection with stock-based compensation plans, net — — 239 2 593 — — 595 Stock-based compensation — — — — 4,295 — — 4,295 Balance at June 30, 2020 — — 67,200 672 1,521,062 ( 1,179,145 ) ( 13,808 ) 328,781 Net loss — — — — — ( 12,261 ) — ( 12,261 ) Other comprehensive income, net of tax — — — — — — 1,801 1,801 Shares issued in connection with stock-based compensation plans, net — — 6 — ( 20 ) — — ( 20 ) Stock-based compensation — — — — 4,072 — — 4,072 Balance at September 30, 2020 — $ — 67,206 $ 672 $ 1,525,114 $ ( 1,191,406 ) $ ( 12,007 ) $ 322,373 5 Cars.com Inc. Consolidated Statements of Stockholders’ Equity (In thousands) (Unaudited) Preferred Stock Common Stock Additional Paid-In (Accumulated Deficit) Retained Accumulated Other Comprehensive Stockholders' Shares Amount Shares Amount Capital Earnings Loss Equity Balance at December 31, 2018 — $ — 68,262 $ 683 $ 1,508,001 $ 118,239 $ — $ 1,626,923 Net loss — — — — — ( 9,031 ) — ( 9,031 ) Other comprehensive loss, net of tax — — — — — — ( 7,279 ) ( 7,279 ) Repurchases of common stock — — ( 881 ) ( 9 ) — ( 19,991 ) — ( 20,000 ) Shares issued in connection with stock-based compensation plans, net — — 62 1 ( 744 ) — — ( 743 ) Stock-based compensation — — — — 2,981 — — 2,981 Other — — 12 — ( 181 ) — — ( 181 ) Balance at March 31, 2019 — — 67,455 675 1,510,057 89,217 ( 7,279 ) 1,592,670 Net loss — — — — — ( 6,026 ) — ( 6,026 ) Other comprehensive loss, net of tax — — — — — — ( 1,292 ) ( 1,292 ) Repurchases of common stock — — ( 869 ) ( 9 ) — ( 19,991 ) — ( 20,000 ) Shares issued in connection with stock-based compensation plans, net — — 84 1 447 — — 448 Stock-based compensation — — — — 3,348 — — 3,348 Other — — 2 — — — — — Balance at June 30, 2019 — — 66,672 667 1,513,852 63,200 ( 8,571 ) 1,569,148 Net loss — — — — — ( 426,157 ) — ( 426,157 ) Other comprehensive loss, net of tax — — — — — — ( 367 ) ( 367 ) Repurchases of common stock — — — — — — — — Shares issued in connection with stock-based compensation plans, net — — 6 — ( 57 ) — — ( 57 ) Stock-based compensation — — — — ( 1,071 ) — — ( 1,071 ) Other — — — — ( 11 ) — — ( 11 ) Balance at September 30, 2019 — $ — 66,678 $ 667 $ 1,512,713 $ ( 362,957 ) $ ( 8,938 ) $ 1,141,485 The accompanying notes are an integral part of the Consolidated Financial Statements. 6 Cars.com Inc. Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended September 30, 2020 2019 Cash flows from operating activities: Net loss $ ( 824,339 ) $ ( 441,214 ) Adjustments to reconcile Net loss to Net cash provided by operating activities: Depreciation 15,085 13,427 Amortization of intangible assets 72,444 73,334 Amortization of unfavorable contracts liability — ( 18,885 ) Goodwill and intangible asset impairment 905,885 461,463 Impairment of non-marketable security 9,447 — Unrealized gain on interest rate swap ( 2,482 ) — Amortization of accumulated other comprehensive loss on interest rate swap 2,101 — Stock-based compensation 10,338 5,258 Deferred income taxes ( 102,199 ) ( 52,741 ) Provision for doubtful accounts 3,854 3,844 Amortization of debt issuance costs 2,420 959 Other, net 121 411 Changes in operating assets and liabilities: Accounts receivable 8,814 3,295 Prepaid expenses ( 4,089 ) 1,672 Other current assets ( 9,968 ) 9,992 Other assets 819 ( 16,517 ) Accounts payable 7,465 ( 5,363 ) Accrued compensation 211 ( 2,233 ) Other accrued liabilities 4,349 28,627 Other noncurrent liabilities ( 3,410 ) 15,221 Net cash provided by operating activities 96,866 80,550 Cash flows from investing activities: Purchase of property and equipment ( 12,603 ) ( 15,409 ) Other, net — ( 599 ) Net cash used in investing activities ( 12,603 ) ( 16,008 ) Cash flows from financing activities: Proceeds from revolving loan borrowings 165,000 10,000 Payments of debt issuance costs and other fees ( 3,402 ) — Payments of long-term debt ( 215,312 ) ( 39,688 ) Stock-based compensation plans, net ( 329 ) ( 352 ) Repurchases of common stock — ( 40,000 ) Other — ( 192 ) Net cash used in financing activities ( 54,043 ) ( 70,232 ) Net increase (decrease) in cash and cash equivalents 30,220 ( 5,690 ) Cash and cash equivalents at beginning of period 13,549 25,463 Cash and cash equivalents at end of period $ 43,769 $ 19,773 Supplemental cash flow information: Cash paid for income taxes, net of refunds $ 478 $ 168 Cash paid for interest 21,512 22,413 The accompanying notes are an integral part of the Consolidated Financial Statements. 7 Cars.com Inc. Notes to the Consolidated Financial Statements (Unaudited) NOTE 1. Description of Business, Company History and Summary of Significant Accounting Policies Description of Business. 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. In May 2017, the Company separated from its former parent company, TEGNA Inc. (“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”). 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. 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. and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”. Basis of Presentation . These accompanying unaudited interim Consolidated Financial Statements (“Consolidated Financial Statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. 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, 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 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. The preparation of the accompanying Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. Principles of Consolidation . The accompanying Consolidated Financial Statements include the accounts of Cars.com Inc. and its 100 % owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation. NOTE 2. New Accounting Pronouncements Recently Adopted Accounting Pronouncements Cloud Computing Arrangements. In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. 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. Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses changing the way credit losses on accounts receivable are estimated. Under current U.S. 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 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. 8 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) Reference Rate Reform. In March 2020, the FASB concluded its reference rate reform project and issued ASU 2020-04. The Board undertook the reference rate reform project to address constituents’ concerns about the anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. 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. NOTE 3. Revenue Revenue Summary . In the table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has one reportable segment; therefore, further disaggregation is not applicable at this time. Three Months Ended September 30, Nine Months Ended September 30, Sales channel 2020 2019 2020 2019 Direct $ 123,955 $ 122,878 $ 332,558 $ 349,162 National advertising 17,753 20,161 53,167 59,752 Other 2,684 3,642 8,770 11,215 Retail 144,392 146,681 394,495 420,129 Wholesale — 5,409 — 34,366 Total revenue $ 144,392 $ 152,090 $ 394,495 $ 454,495 Major products and services Subscription advertising and digital solutions $ 116,933 $ 119,495 $ 313,645 $ 357,256 Display advertising 20,643 23,048 60,560 67,755 Pay per lead 4,310 6,720 14,822 21,267 Other 2,506 2,827 5,468 8,217 Total revenue $ 144,392 $ 152,090 $ 394,495 $ 454,495 NOTE 4. Goodwill and Indefinite-lived Intangible Asset The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands): December 31, 2019 Additions Impairment September 30, 2020 Goodwill $ 505,885 $ — $ ( 505,885 ) $ — Indefinite-lived intangible asset 790,020 — ( 400,000 ) 390,020 Goodwill. Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. Goodwill is tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s goodwill is tested for impairment at a level referred to as the reporting unit. 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 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. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performs the quantitative test. Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. 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. 9 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) 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. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, the discount rate and relevant comparable public company earnings multiples. The cash flows employed in the DCF analysis are based on the Company’s best estimate of future sales, earnings and cash flows after considering factors such as general market conditions and recent operating performance. The discount rate utilized in the DCF analysis is based on the reporting unit’s weighted-average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the Company’s reporting unit. Impairment assessment inherently involves management judgments regarding a number of assumptions described above. The reporting unit fair value also depends on the future strength of the U.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. 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. Indefinite-lived Intangible Asset. The Company’s indefinite-lived intangible asset relates to the Cars.com trade name and resulted from TEGNA’s 2014 acquisition of Cars.com. Intangible assets with indefinite lives are tested for impairment annually, or more often if circumstances dictate, such as in the quarter ended March 31, 2020, and written down to fair value as required. The estimates of fair value are determined using the “relief from royalty” methodology, which is a variation of the income approach. 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. 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. 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 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. 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. 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. 10 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) 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. NOTE 5. Debt As of September 30, 2020, the Company was in compliance with the covenants under its Credit Agreement. Term Loan. 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 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. Fair Value. 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 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 (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”). The Second Amendment also includes the following: • A revised maximum permitted “Total Net Leverage Ratio” beginning March 31, 2021 (after the Covenant Adjustment Period) of 6.50 x, with step downs thereafter. • A revised minimum permitted “Consolidated Interest Coverage Ratio” beginning March 31, 2021 (after the Covenant Adjustment Period) of 2.75 x and 3.00 x beginning June 30, 2020. • 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 . 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 %. 11 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) • 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; and • 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. NOTE 6. Interest Rate Swap The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. 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 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 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. 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. NOTE 7. Unfavorable Contracts Liability In connection with the October 2014 acquisition of Cars.com by TEGNA, the Company entered into affiliate agreements with the former owners of Cars.com (Belo Corporation (“Belo”), The McClatchy Company (“McClatchy”), tronc, inc. (“tronc”), and the Washington Post). Under the affiliate agreements, affiliates had the exclusive right to sell and price Cars.com’s products in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charged the affiliates 60 % of the corresponding Cars.com retail rate for products sold to affiliate dealers and recognized revenue generated from these agreements as Wholesale revenue in the Consolidated Statements of Loss. The Unfavorable contracts liability was established as a result of these unfavorable affiliate agreements that the Company entered into as part of TEGNA’s acquisition of the Company in 2014. The Unfavorable contracts liability was amortized on a straight-line basis over the five-year contract period. Prior to the affiliate conversions discussed below, the Company recognized $ 25.2 million of Wholesale revenue with a corresponding reduction of the Unfavorable contracts liability on an annual basis. After the affiliate conversions, the amortization of the Unfavorable contracts liability was recorded as a reduction of Affiliate revenue share within Operating expenses in the Consolidated Statements of Loss. As of September 30, 2019, the Unfavorable contracts liability was fully amortized. The Company amended five of its affiliate agreements (Gannett, McClatchy, TEGNA, tronc, and the Washington Post ) and as a result, has a direct relationship with these dealer customers and recognizes the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. On October 1, 2019, the Belo affiliate agreement expired and the Company now directly serves all dealer customers. As part of the amendments to the affiliate agreements, Gannett, McClatchy, TEGNA, tronc, and the Washington Post agreed to perform certain marketing support and transition services through varying dates, the latest of which was June 29, 2020. 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. 12 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) 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. NOTE 8. Commitments and Contingencies The Company and its subsidiaries are parties from time to time in legal and administrative proceedings involving matters incidental to its business. These matters, whether pending, threatened or unasserted, if decided adversely to the Company or settled, may result in liabilities material to its financial position, results of operations or cash flows. The Company records a liability when it believes that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both the probability and the estimated amount. NOTE 9. Stockholders’ Equity In March 2018, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $ 200 million of the Company’s common stock. The Company was allowed to repurchase stock from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the stock repurchase program was based on market conditions and other factors including price. The repurchase program had a two-year duration, 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 funded the share repurchase program principally with cash from operations. 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. NOTE 10. Stock-Based Compensation Restricted Stock Units (“RSUs”) and Restricted Stock. RSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. RSUs are subject to graded vesting, generally ranging between one and four years and the fair value of RSUs is equal to the Company’s common stock price on the date of grant. Restricted Stock represents RSUs that have been delivered to certain non-employee directors who have elected to receive shares underlying RSUs before they vest. 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 nine months ended September 30, 2020 is as follows (in thousands, except for weighted-average grant date fair value): Number of RSUs and Restricted Stock Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2019 943 $ 24.68 Granted (1) 3,686 5.65 Vested and delivered ( 273 ) 24.63 Forfeited ( 359 ) 11.45 Outstanding as of September 30, 2020 (1)(2) 3,997 8.32 (1) Included in “Granted” and “Outstanding as of September 30, 2020” are 108 shares of Restricted Stock that were delivered, but not yet vested. (2) Included in “Outstanding as of September 30, 2020” are 91 RSUs that were vested, but not yet delivered. Performance Stock Units (“PSUs”). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. The percentage of PSUs that may vest ranges from 0 % to 200 % of the number of PSUs granted based on the Company’s future performance related to certain revenue targets; adjusted earnings before interest, income taxes, depreciation and amortization targets; margin targets; 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 13 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) 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): Number of PSUs Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2019 953 $ 26.60 Granted (1) 715 5.40 Vested and delivered — — Forfeited or cancelled (1) ( 821 ) 26.38 Outstanding as of September 30, 2020 847 8.75 (1) 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. Stock options represent the right to purchase shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. Stock options are subject to three-year cliff vesting and expire 10 years from the grant date. 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 Weighted-Average Grant Date Fair Value Outstanding as of December 31, 2019 — $ — Granted 513 2.80 Vested and delivered — — Forfeited — — Outstanding as of September 30, 2020 513 2.80 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 1.01 % Weighted-average volatility 53.08 % Dividend yield 0 % Expected years until exercise 6.5 NOTE 11. Loss Per Share Basic loss per share is calculated by dividing Net loss by the weighted-average number of shares of common stock outstanding. Diluted loss per share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans, unless the inclusion of such shares would have an anti-dilutive impact. The computation of Loss per share is as follows (in thousands, except per share data): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net loss $ ( 12,261 ) $ ( 426,157 ) $ ( 824,339 ) $ ( 441,214 ) Basic weighted-average common shares outstanding 67,295 66,769 67,163 67,043 Effect of dilutive stock-based compensation awards (1) — — — — Diluted weighted-average common shares outstanding 67,295 66,769 67,163 67,043 Loss per share, basic $ ( 0.18 ) $ ( 6.38 ) $ ( 12.27 ) $ ( 6.58 ) Loss per share, diluted ( 0.18 ) ( 6.38 ) ( 12.27 ) ( 6.58 ) (1) 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. 14 Cars.com Inc. Notes to the Consolidated Financial Statements (continued) (Unaudited) NOTE 12. 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. NOTE 13. Income Taxes Deferred Tax Asset and Valuation Allowance. 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 (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 $ 2,151 21 % $ ( 196,652 ) 21 % State income taxes, net of federal income tax benefit — — ( 36,613 ) 4 NOL carrybacks ( 8,483 ) ( 83 ) ( 8,483 ) 1 Valuation allowance (1) 30,508 298 129,852 ( 14 ) Other, net ( 1,674 ) ( 16 ) ( 205 ) — Income tax expense (benefit) $ 22,502 220 % $ ( 112,101 ) 12 % (1) This item includes the recording of an additional $ 30.9 million related to the correction of an error, as discussed above . 15 Note About Forward-Looking Information This report contains “forward-looking statements” within the meaning of the federal securities laws. 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 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. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “outlook,” “intend,” “strategy,” “plan,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” “mission,” “strive,” “more,” “goal” or similar expressions. 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 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. However, you should understand that these statements are not guarantees of strategic action, performance or results. Our actual results and strategic actions could differ materially from those expressed in the forward-looking statements. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Whether or not any such forward-looking statement is in fact achieved will depend on future events, some of which are beyond our control. Important factors that could cause actual results or events to differ materially from those anticipated include, among others: • The COVID-19 pandemic and related restrictions have materially and adversely affected, and could continue to materially and adversely affect, our business, financial condition, liquidity and results of operations. • Our business is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic issues. • We participate in a highly competitive market, and pressure from existing and new competitors may materially and adversely affect our business, results of operations and financial condition. • If we fail to maintain or increase our base of subscribing dealers that purchase our solutions or to increase our revenue from subscribing dealers, our business, results of operations and financial condition would be materially and adversely affected. • We compete with other consumer automotive websites and mobile applications and other digital content providers for share of automotive-related digital advertising spending and may be unable to maintain or grow our base of advertising customers or increase our revenue from existing advertisers. • 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 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. • We rely on in-house content creation and development to drive traffic to the CARS sites and mobile applications. • We rely in part on Internet search engines and mobile application download stores to drive traffic to the CARS sites and mobile applications. If the CARS sites and mobile applications fail to appear prominently in these search results, traffic to the CARS sites and mobile applications could decline and our business, results of operations or financial condition may be materially and adversely affected. • The value of our assets or operations may be diminished if our information technology systems fail to perform adequately. • We rely on technology systems’ availability and ability to prevent unauthorized access. If our security and resiliency measures fail to prevent all incidents, it could result in damage to our reputation, incur costs and create liabilities. 16 • 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 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 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. • Dealer closures or consolidation among dealers or OEMs could reduce demand for, and the pricing of, our marketing and solutions offerings, thereby leading to decreased earnings. • If growth in the online and mobile automotive advertising market stagnates or declines, our business, results of operations or financial condition could be materially and adversely affected. • Uncertainty exists in the application of various laws and regulations to our business, including privacy laws such as the California Consumer Privacy Act and new tax laws and interpretations. New laws or regulations applicable to our business, or the expansion or interpretation of existing laws and regulations to apply to our business, could subject us to licensing requirements, claims, judgments and remedies, including sales and use taxes, other monetary liabilities and limitations on our business practices, and could increase administrative costs. • Strategic acquisitions, investments and partnerships could pose various risks, increase our leverage, dilute existing stockholders and significantly impact our ability to expand our overall profitability. • The value of our existing intangible assets may become impaired, depending upon future operating results. • Adverse results from litigation or governmental investigations could impact our business practices and operating results. • Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our business, results of operations and financial condition. • If we expand into new geographic markets, we may be prevented from using our brands in such markets. • Our ability to operate effectively could be impaired if we fail to attract and retain our key employees. • Seasonality may cause fluctuations in our revenue and operating results. • Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our common stock. • Our debt agreements contain restrictions that may limit our flexibility in operating our business. • Increases in interest rates could increase interest payable under our variable rate indebtedness. • Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the market value of our current or future debt obligations, including our long-term debt instruments and our bank credit facilities. • We do not expect to pay any cash dividends for the foreseeable future. • Your percentage of ownership in the Company may be diluted in the future. • Certain provisions of our certificate of incorporation, by-laws, and Delaware law may discourage takeovers and limit our ability to use, acquire, or develop certain competing businesses. • Our amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers. For a detailed discussion of many of these risks and uncertainties, see “Part I, Item 1A., Risk Factors” and “Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 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 17 subsequent Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC and available on our website at investor.cars.com or via EDGAR at www.sec.gov. All forward-looking statements contained in this report are qualified by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic and related restrictions. The forward-looking statements contained in this report are based only on information currently available to us and speak only as of the date of this report. We undertake no obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided by the federal securities laws. 18