What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-25 compared with 2020-02-26 · 359 added, 366 removed, 502 unchanged (59% of the section changed)

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We have audited the accompanying Consolidated Balance Sheets of Cars.com Inc.

(the Company) as of December 31, 2019 and 2018, the related Consolidated and Combined Statements of (Loss) Income, Comprehensive (Loss) Income, Stockholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the index at Item 15(a) (2) (collectively referred to as the “Consolidated and Combined Financial Statements”).

In our opinion, the Consolidated and Combined Financial Statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S.

(the Company) as of December 31, 2020 and 2019, the related Consolidated Statements of (Loss) Income, Comprehensive (Loss) Income, Stockholders’ Equity and Cash Flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the index at Item 15(a) (2) (collectively referred to as the “Consolidated Financial Statements”).

In our opinion, the Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

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(1) relate to accounts or disclosures that are material to the Consolidated Financial Statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the Consolidated and Combined Financial Statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

The communication of critical audit matters does not alter in any way our opinion on the Consolidated Financial Statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Goodwill

Description of the Matter

At December 31, 2019, the Company’s goodwill was $505.8 million.

As discussed in Note 2 and Note 6 of the Consolidated and Combined Financial Statements, goodwill is tested for impairment at least annually at the reporting unit level on November 1.

Due to an interim triggering event, the Company performed a quantitative impairment analysis as of September 1, 2019, estimating the fair value of the reporting unit by utilizing an income approach which uses the discounted cash flow (“DCF”) analysis and the Company also considered a market-based valuation methodology using comparable public company trading values.

The Company recorded an impairment charge of $379.2 million in the third quarter of 2019.

In the fourth quarter of 2019, the Company performed an updated quantitative impairment analysis of its goodwill and the results of this test indicated that the estimated fair value exceeded the carrying value as of December 31, 2019.

At March 31, 2020, just prior to impairment, the Company’s goodwill was $505.9 million.

As discussed in Note 2 and Note 6 of the Consolidated Financial Statements, goodwill is tested for impairment at least annually at the reporting unit level.

Due to an interim triggering event, the Company performed a quantitative impairment analysis as of March 31, 2020, estimating the fair value of the reporting unit by utilizing an income approach which uses the discounted cash flow (“DCF”) analysis and the Company also considered a market-based valuation methodology using comparable public company trading values.

The Company recorded a full impairment charge of $505.9 million in the first quarter of 2020.

Auditing the Company’s goodwill impairment test was complex due to the significant judgment required in determining the fair value of the reporting unit.

In particular, the fair value estimate was sensitive to significant assumptions that require judgment, including the amount and timing of future cash flows (e.g., revenue growth rates and free cash flow), long-term growth rates, and the weighted average cost of capital (“discount rate”), which are affected by factors such as general market conditions and recent operating performance.

In particular, the fair value estimate was sensitive to significant assumptions that require judgment, including the amount and timing of future cash flows (e.g.

revenue growth rates and EBITDA margins), the weighted average cost of capital (“discount rate”) and the Company’s market capitalization control premium, which are affected by factors such as general market conditions and recent operating performance.

How We Addressed the Matter in Our Audit

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We also tested management's controls to validate that the data used in the valuation was complete and accurate.

To test the estimated fair value of the Company’s goodwill, we performed audit procedures that included, among others, assessing the reasonableness of the methodologies used.

To test the estimated fair value of the Company’s reporting unit, we performed audit procedures that included, among others, assessing the reasonableness of the methodologies used.

We compared the significant assumptions used by management to current industry and economic trends, analyst expectations, changes to the Company’s business model, customer base or product mix and other relevant factors.

We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to assess the changes in the fair values that would result from changes in the assumptions.

Further, we evaluated the reasonableness of the Company’s assumptions by analyzing comparable public company trading values.

We also involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates.

We also involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimate.

Valuation of Indefinite-lived Intangible Asset

Description of the Matter

At December 31, 2019, the Company’s indefinite-lived intangible asset (Cars.com trade name) was $790 million.

As discussed in Note 2 and Note 6 of the Consolidated and Combined Financial Statements, indefinite-lived intangible assets are tested for impairment at least annually.

Due to a triggering event, the Company performed a quantitative impairment analysis as of September 1, 2019, estimating the fair value using the “relief from royalty” methodology, which is a variation of the income approach.

The Company recorded an impairment charge of $82.3 million in the third quarter of 2019.

In the fourth quarter of 2019, the Company performed an updated quantitative impairment analysis of its indefinite-lived intangible asset and the results of this test indicated that the estimated fair value exceeded the carrying value as of December 31, 2019.

At March 31, 2020, just prior to impairment, the Company’s indefinite-lived intangible asset (Cars.com trade name) was $790.0 million.

As discussed in Note 2 and Note 6 of the Consolidated Financial Statements, indefinite-lived intangible assets are tested for impairment at least annually.

Due to an interim triggering event, the Company performed a quantitative impairment analysis as of March 31, 2020, estimating the fair value using the “relief from royalty” methodology, which is a variation of the income approach.

The Company recorded an impairment charge of $400.0 million in the first quarter of 2020.

Auditing the Company’s trade name impairment test was complex due to the significant judgement required in determining the fair value of trade name assets.

In particular, the fair value estimate was sensitive to significant judgments, including amount and timing of future cash flows (e.g.

revenue growth rates), long-term growth rates, royalty rate and weighted average cost of capital (“discount rate”), which are affected by factors such as general market conditions and recent operating performance.

revenue growth rates), royalty rate and weighted average cost of capital (“discount rate”), which are affected by factors such as general market conditions and recent operating performance.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s indefinite-lived intangible asset impairment review process.

For example, we tested controls over management's review of the valuation model and the significant assumptions (e.g., revenue growth rates, long-term growth rates, royalty rate and discount rate) used to develop the prospective financial information.

For example, we tested controls over management's review of the valuation model and the significant assumptions (e.g., revenue growth rates, royalty rate and discount rate) used to develop the prospective financial information.

We also tested management's controls to validate that the data used in the valuation was complete and accurate.

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We also involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates.

We have served as the Company’s auditor since 2016.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2016.

Chicago, Illinois

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Accrued compensation

Unfavorable contracts liability

Current portion of long-term debt

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300,000 shares authorized;

and 68,262 shares issued and outstanding as of December 31, 2019

and December 31, 2018, respectively

66,764 shares issued and outstanding as of December 31, 2020 and

December 31, 2019, respectively

Additional paid-in capital

(Accumulated deficit) retained earnings

Accumulated deficit

Accumulated other comprehensive loss

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Total liabilities and stockholders' equity

The accompanying notes are an integral part of these Consolidated and Combined Financial Statements.

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

Cars.com Inc.

Consolidated and Combined Statements of (Loss) Income

Consolidated Statements of (Loss) Income

(In thousands, except per share data)

Year Ended December 31,

Wholesale (1)

Total revenue

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Operating (loss) income

Nonoperating (expense) income:

Nonoperating expense:

Interest expense, net

Other income, net

Other (expense) income, net

Total nonoperating expense, net

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(Loss) earnings per share:

The accompanying notes are an integral part of these Consolidated and Combined Financial Statements.

For information related to related party transactions, see Note 16 (Related Party).

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

Cars.com Inc.

Consolidated and Combined Statements of Comprehensive (Loss) Income

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

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Net (loss) income

Other comprehensive loss, net of tax:

Other comprehensive income (loss), net of tax:

Interest rate swap

Total other comprehensive loss

Reclassification of accumulated other comprehensive loss on interest rate swap into net income

Total other comprehensive income (loss)

Comprehensive (loss) income

The accompanying notes are an integral part of these Consolidated and Combined Financial Statements.

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

Cars.com Inc.

Consolidated and Combined Statements of Stockholders’ Equity

Consolidated Statements of Stockholders’ Equity

(In thousands)

Preferred Stock

TEGNA's Investment,

(Accumulated Deficit) Retained

Retained Earnings (Accumulated

Accumulated Other Comprehensive

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Balance at December 31, 2017

Cash distribution to TEGNA related to

Deferred taxes related to Separation

Distribution by TEGNA

Shares issued in connection with stock-based

compensation plans, net

Stock-based compensation

Transactions with TEGNA, net (1)

Balance at December 31, 2017

Repurchases of common stock

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Stock-based compensation

Transactions with TEGNA, net (1)

Balance at December 31, 2018

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Stock-based compensation

Transactions with TEGNA, net (1)

Balance at December 31, 2019

The accompanying notes are an integral part of these Consolidated and Combined Financial Statements.

(1) For information related to related party transactions, see Note 16 (Related Party).

Other comprehensive gain, net

Shares issued in connection with

stock-based compensation plans, net

Stock-based compensation

Balance at December 31, 2020

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

Cars.com Inc.

Consolidated and Combined Statements of Cash Flows

Consolidated Statements of Cash Flows

(In thousands)

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Goodwill and intangible asset impairment

Impairment of non-marketable security

Amortization of accumulated other comprehensive loss on interest rate swap

Stock-based compensation

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Other noncurrent liabilities

Cash received from lessor for lease incentives

Net cash provided by operating activities

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Cash flows from financing activities:

Proceeds from issuance of long-term debt

Proceeds from revolving loan borrowings and issuance of long-term debt

Payments of debt issuance costs and other fees

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Repurchases of common stock

Cash distribution to TEGNA related to Separation

Transactions with TEGNA, net

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

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Cash paid for income taxes, net of refunds

Cash paid for interest

The accompanying notes are an integral part of these Consolidated and Combined Financial Statements.

Cash paid for interest and swap

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

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements

Description of business, company history and basis of presentation

Notes to Consolidated Financial Statements

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.

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.

(the “Spin”), which now owns TEGNA’s former digital automotive marketplace business (the “Separation”).

The Company filed a Registration Statement with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on Form 10 relating to the Separation, which was declared effective on May 15, 2017.

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 of the outstanding shares of the Company’s common stock.

Description of business.

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

Through the marketplace, dealer websites and other digital products, the Company showcases dealer inventory, elevates and amplifies dealers’ and automotive manufacturers (“OEMs”) brands, connects sellers with the Company’s ready-to-buy audience and empowers shoppers with the resources and information needed to make confident car buying decisions.

The Company’s digital solutions strategy builds on the rich data and audience of its digital marketplace to offer media and solutions that 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.

In May 2017, the Company separated from its former parent company 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 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”) in 2018.

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

and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire.” For additional information, see Note 4 (Business Combination).

Significant Accounting Policies

Basis of Presentation .

These accompanying Consolidated and Combined Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S.

These accompanying 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 SEC.

The Consolidated and Combined Financial Statements include the accounts of CARS and its 100 % owned subsidiaries.

The Consolidated Financial Statements include the accounts of CARS and its 100 % owned subsidiaries.

All intercompany transactions and accounts have been eliminated in consolidation.

Prior to the Separation, the Company’s financial statements were derived from the historical accounting records of TEGNA and reflect the Company’s financial results as if the Company were a separate entity.

The historical financial statements include allocations of certain TEGNA corporate overhead expenses and totaled $ 2.5 million for the year ended December 31, 2017.

All significant intercompany transactions between either (i) the Company and TEGNA or (ii) the Company and TEGNA affiliates have been included within the Consolidated and Combined Financial Statements and are considered to be effectively settled through equity contributions or distributions at the time the transactions were recorded.

The accumulated net effect of intercompany and certain post-Separation transactions, between either (i) the Company and TEGNA or (ii) the Company and TEGNA affiliates are included in “Transactions with TEGNA, net.” The total net effect of these intercompany or certain post-Separation transactions is reflected in the Consolidated and Combined Statements of Cash Flows as financing activities.

Significant Accounting Policies

Use of Estimates .

The preparation of the accompanying Consolidated and Combined Financial Statements in accordance with U.S.

GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated and Combined Financial Statements and accompanying disclosures.

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 .

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Certain prior year balances have been reclassified to conform to the current year presentation.

Historically, certain costs related to severance, transformation and other exit costs;

costs associated with a stockholder activist campaign;

transaction-related costs;

and the write-off of long-lived assets were reflected in various operating expense line items in the Consolidated and Combined Statements of (Loss) Income.

Beginning on January 1, 2019, these costs are reflected within General and administrative expenses and certain prior year balances have been reclassified to conform to the current year presentation and are summarized in the table below (in thousands).

There is no change to Operating (loss) income as a result of these reclassifications.

No such adjustments were required for the year ended December 31, 2017.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Year Ended December 31, 2018

Cost of revenue and operations

Product and technology

Marketing and sales

General and administrative

Affiliate revenue share

Depreciation and amortization

Total operating expenses

The Company accounts for a customer arrangement when the Company and the customer have an approved contract that specifies the rights and obligations of each party and the payment terms, and the Company believes it is probable that the Company will collect substantially all of the consideration to which the Company will be entitled in exchange for the services that will be provided to the customer.

The Company allocates the contractual transaction price to each distinct performance obligation and recognizes revenue when it satisfies a performance obligation by providing a service to a customer.

Revenue is generated through the Company’s direct sales force (Retail revenue) and affiliate sales channels (Wholesale revenue).

The Company allocates the contractual transaction price to each distinct performance obligation based on the relative standalone selling price and recognizes revenue when it satisfies a performance obligation by providing a service to a customer.

Revenue is generated through the Company’s direct sales force (Retail revenue) and prior to October 2019, through affiliate sales channels (Wholesale revenue).

Marketplace Subscription Advertising Revenue.

The Company’s primary source of Retail revenue and Wholesale revenue are through the sale of marketplace subscription advertising to dealer customers through varying levels of subscription packages.

The Company’s subscription packages provide the dealer customer’s available new and used vehicle inventory to in-market shoppers on the Cars.com website.

The subscription packages are generally a fixed price arrangement with a contract term generally ranging from three to six months that is automatically renewed, typically on a month-to month basis.

The Company’s primary source of Retail revenue and, prior to October 2019, Wholesale revenue is through the sale of marketplace subscription advertising packages to dealer customers.

Our subscription packages allow dealer customers to showcase their new and used vehicle inventory to in-market shoppers on the Cars.com website.

The subscription packages are generally a fixed price arrangement with varying contract terms, typically ranging from three to six months , that are automatically renewed, typically on a month-to month basis.

The Company recognizes subscription package revenue ratably as the service is provided over the contract term.

Marketplace subscription advertising revenue is recorded in Retail revenue and Wholesale revenue in the Consolidated and Combined Statements of (Loss) Income.

Marketplace subscription advertising revenue is recorded in Retail revenue and, prior to October 2019, Wholesale revenue in the Consolidated Statements of (Loss) Income.

The Company also offers its customers several add-on products to the subscription packages.

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The Company recognizes revenue related to these services ratably as the service is provided over the contract term.

The related revenue is recorded in Retail revenue in the Consolidated and Combined Statements of (Loss) Income.

The related revenue is recorded in Retail revenue in the Consolidated Statements of (Loss) Income.

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Prior to October 2019, the Company’s affiliates also sold marketplace subscription advertising to dealer customers, and the Company earned Wholesale revenue through its affiliate agreements.

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Under these agreements, the Company charged the affiliates 60 % of the corresponding Cars.com retail rate for products sold to affiliate dealer customers.

The Company recognized Wholesale revenue ratably as the service is provided over the contract term.

In situations where the Company’s direct sales force sold the Company’s products within an affiliate’s assigned territory, the Company paid the affiliate a revenue share which was classified as Affiliate revenue share in the Consolidated and Combined Statements of (Loss) Income.

Wholesale revenue also includes the amortization of the Unfavorable contracts liability.

The Company recognized Wholesale revenue ratably as the service was provided over the contract term.

Wholesale revenue also included the amortization of the Unfavorable contracts liability.

For further information, see Note 7 (Unfavorable Contracts Liability).

Display Advertising Products and Services Revenue.

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The Company recognizes revenue related to these services at the point in time the service is provided.

Display advertising products revenue sold to dealer customers is recorded in Retail revenue in the Consolidated and Combined Statements of (Loss) Income.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Display advertising products revenue sold to dealer customers is recorded in Retail revenue in the Consolidated Statements of (Loss) Income.

Pay Per Lead Revenue.

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The Company recognizes pay per lead revenue primarily on a per-lead basis at the point in time in which the lead has been delivered.

Revenue related to pay per lead is recorded in Retail and Wholesale revenue, in the Consolidated and Combined Statements of (Loss) Income.

Revenue related to pay per lead is recorded in Retail and Wholesale revenue, in the Consolidated Statements of (Loss) Income.

Other Revenue.

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The Company recognizes other revenue either ratably as the services are provided or at the point in time the services have been performed.

Other revenue is recorded in Retail revenue in the Consolidated and Combined Statements of (Loss) Income.

Other revenue is recorded in Retail revenue in the Consolidated Statements of (Loss) Income.

Cash and Cash Equivalents.

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Accounts Receivable and Allowance for Doubtful Accounts .

Accounts receivable are primarily derived from sales to dealer customers and OEMs and recorded at invoiced amounts.

The allowance for doubtful accounts reflects the Company’s estimate of credit exposure, determined principally on the basis of its collection experience, aging of its receivables and any specific reserves needed for certain customers based on their credit risk.

Bad debt expense for the years ended December 31, 2019, 2018 and 2017 was $ 4.9 million, $ 4.4 million and $ 2.5 million, respectively, and is included in Marketing and sales in the Consolidated and Combined Statements of (Loss) Income.

Accounts receivable are primarily derived from sales to customers and recorded at invoiced amounts.

The allowance for doubtful accounts reflects the Company’s estimate of credit exposure, determined principally on the basis of its collection experience, aging of its receivables, expected losses, and any specific reserves needed for certain customers based on their credit risk.

Bad debt expense is included in Marketing and sales in the Consolidated Statements of (Loss) Income.

The allowance for doubtful accounts was $ 4.4 million and $ 5.0 million as of December 31, 2020 and 2019, respectively.

Concentrations of Credit Risk.

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The Company utilizes the measurement alternative for equity investments without readily determinable fair values and revalues these investments upon the occurrence of an observable price change for similar investments.

The non-marketable investments recorded within Investments and other assets on the Consolidated Balance Sheets were $ 9.4 million as of December 31, 2019 and 2018.

On at least an annual basis, the Company assesses its investments to determine whether any events have occurred, or circumstances have changed, which might have a significant adverse effect on their fair value and which may be indicative of impairment.

There were no impairments recorded for the periods presented in the Consolidated and Combined Statements of (Loss) Income.

In the first quarter of 2020, the Company recorded a full impairment of $ 9.4 million, triggered by the novel coronavirus disease 2019 (“COVID-19”) pandemic and the related restrictions, for the year ended December 31, 2020.

The impairment was included in the Other (expense) income, net line item of the Consolidated Statements of (Loss) Incom e.

The non-marketable investments recorded within Investments and other assets on the Consolidated Balance Sheets were zero and $ 9.4 million as of December 31, 2020 and 2019, respectively.

For further information on the triggering event, see Note 6 (Goodwill and Other Intangible Assets).

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Property and Equipment .

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Computer hardware

Furniture and fixtures

Leasehold improvements

Lesser of useful life or lease term

Furniture and fixtures

Property and equipment, gross

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Normal repairs and maintenance are expensed as incurred.

Any resulting gain or loss from the disposition of those assets is included in General and administrative expense on the Consolidated and Combined Statements of (Loss) Income.

Any resulting gain or loss from the disposition of those assets is included in General and administrative expense on the Consolidated Statements of (Loss) Income.

Internally Developed Technology .

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The Company reviews the carrying amount of internally developed technology for impairment and useful lives whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Capitalized software costs for the years ended December 31, 2019, 2018 and 2017 were $ 19.8 million, $ 11.5

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

million and $ 6.9 million, respectively.

Capitalized costs are included in Property and equipment, net on the Consolidated Balance Sheets.

Capitalized software costs, including cloud computing arrangements, for the years ended December 31, 2020, 2019 and 2018 were $ 16.3 million, $ 19.8 million and $ 11.5 million, respectively.

Capitalized costs, excluding those for cloud computing arrangements, are included in Property and equipment, net on the Consolidated Balance Sheets.

Research and development costs are expensed as incurred.

Cloud Computing Arrangements.

The Company capitalizes costs associated with the development of cloud computing arrangements in a manner consistent with internally developed technology.

Capitalized costs are included in Prepaid expenses on the Consolidated Balance Sheet.

Any amortization is recorded in the same manner on the Consolidated Statement of (Loss) Income as the associated expense with the underlying host arrangement.

These costs as of December 31, 2020 were immaterial.

Goodwill and Other Intangible Assets .

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

As of December 31, 2019, the Company had $ 505.9 million of goodwill which resulted from TEGNA’s acquisition of Cars.com in 2014, the acquisition of DealerRater.com in 2016 and the DI Acquisition in 2018.

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 annually as of November 1 and at a level referred to as the reporting unit.

The level at which the Company tests goodwill for impairment requires the Company 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 process of estimating the fair value of goodwill is subjective and requires the Company to make estimates that may significantly impact the outcome of the analysis.

A qualitative assessment is performed at least annually and 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.

Prior to the first quarter of 2020, the period in which the Company fully impaired our goodwill, goodwill represented the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed.

Goodwill was 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 was tested for impairment at a level referred to as the reporting unit.

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

The Company determined that it operated as a single reporting unit.

The process of estimating the fair value of goodwill is subjective and required the Company 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 concluded it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performed 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.

The Company estimated the fair value of the reporting unit by utilizing an income approach which uses a 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 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 and the Company’s market capitalization.

Determining fair value requires the exercise of significant judgments, including the amount and

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

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.

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For further information, see Note 6 (Goodwill and Other Intangible Assets).

In connection with the Company’s acquisition by TEGNA, the Company recorded an intangible asset with an indefinite life associated with the Cars.com trade name.

The indefinite-lived intangible asset is tested annually, or more often if circumstances dictate, for impairment and is written down to fair value as required.

The estimate of fair value is determined using the “relief from royalty” methodology, which is a variation of the income approach.

The Company’s indefinite-lived intangible asset relates to the Cars.com trade name.

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.

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Acquired software

Content library

Customer relationships

Non-compete agreements

Other trade names

10 - 12 years

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Valuation of Long-Lived Assets .

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Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost to dispose.

No impairment losses were recognized for the periods presented in the Consolidated and Combined Statements of (Loss) Income.

No impairment losses were recognized for the periods presented in the Consolidated Statements of (Loss) Income.

Fair Value of Financial Instruments .

The Company’s financial instruments include marketable securities held at fair value.

The Company’s financial instruments include the interest rate swap (the “Swap”) held at fair value.

Financial instruments also include accounts receivable, accounts payable, debt and other liabilities.

The carrying values of these instruments approximate their fair values.

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.

Level 2 assets and liabilities are based on observable inputs other than quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Derivative Financial Instrument.

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 Credit Agreement principally utilized to fund the Separation and the DI Acquisition, on a notional amount of $ 300 million.

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

Any gains or losses on the Swap are reported as a component of Accumulated other comprehensive loss until reclassified into Interest expense, net in the same period the hedge transaction impacts earnings.

As of December 31, 2019, the fair value of the Swap was an unrealized loss of $ 10.2 million, of which $ 4.2 million and $ 6.0 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets.

During the year ended December 31, 2019, $ 2.0 million was reclassified from Accumulated other comprehensive loss into Interest expense, net.

In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan, the Company entered into 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 Credit Agreement, on a notional amount of $ 300 million.

The amendment entered into in June 2020 (the “Second Amendment”) resulted in the loss of hedge accounting.

For further information, see Note 9 (Interest Rate Swap).

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) income over the remaining life of the Swap.

Each period, a portion of the unrealized loss is recorded to Interest expense, net and Income tax (benefit) expense within the Consolidated

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Statements of ( Loss ) Income .

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

As a result of the amendment entered into in October 2020 (the “Third Amendment”), the existing debt at the time of the amendment resulted in a partial debt extinguishment.

Due to the reduction in value of the underlying Term Loan upon the Third Amendment as compared to the notional amount of the Swap, a proportional amount of the frozen Accumulated other comprehensive loss balance was immediately reclassified into Interest expense, net.

The Swap is recognized on the Consolidated Balance Sheet at fair value and classified based on the instrument’s maturity date.

Income Taxes .

Income taxes are presented on the Consolidated and Combined Financial Statements using the asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying amount of assets and liabilities and their respective tax basis, as well as from operating loss and tax credit carry-forwards.

Income taxes are presented on the Consolidated Financial Statements using the asset and liability method, under which deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying amount of assets and liabilities and their respective tax basis, as well as from operating loss and tax credit carry-forwards.

Deferred income taxes reflect expected future tax benefits (i.e.

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otherwise, uncertain tax positions are recorded as either a current or noncurrent liability in the Consolidated Balance Sheets.

The Company records penalties and interest relating to uncertain tax positions in Income tax (benefit) expense in the Consolidated and Combined Statements of (Loss) Income.

The Company has not recorded any material expense or liabilities related to interest or penalties in its Consolidated and Combined Financial Statements.

The Company records penalties and interest relating to uncertain tax positions in Income tax (benefit) expense in the Consolidated Statements of (Loss) Income.

For further information, see Note 15 (Income Taxes).

Stock-Based Compensation.

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Advertising Costs .

The Company expenses all advertising costs as they are incurred and are included in Marketing and sales in the Consolidated and Combined Statements of (Loss) Income.

The Company expenses all advertising costs as they are incurred and are included in Marketing and sales in the Consolidated Statements of (Loss) Income.

Advertising expense for the years ended December 31, 2020, 2019 and 2018 was $ 80.4 million, $ 115.8 million and $ 109.2 million, respectively.

Cost of Revenue and Operations.

Cost of revenue and operations consist of expenses related to the pay-per-lead products, third-party costs such as processing of dealer vehicle inventory, product fulfillment, customer service and related compensation costs.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Defined Contribution Plans.

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The Company provides a maximum match for 4 % of the employee’s salary and contributions are immediately fully vested.

As part of the cost reduction efforts in response to the COVID-19 pandemic and related restrictions, beginning in the second quarter of 2020, the Company temporarily suspended the employer match of employees’ defined contribution plans for a portion of the year ended December 31, 2020.

As of December 31, 2020, the Company’s match was fully reinstated.

The Company’s contributions to its defined contribution plans for the years ended December 31, 2020, 2019 and 2018 were $ 2.4 million, $ 4.3 million and $ 4.4 million, respectively .

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2016-13, Financial Instruments—Credit Losses changing the way credit losses on accounts receivable are estimated.

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 ASU, the Company will be required to estimate credit losses based on the expected amount of future collections which may result in earlier recognition of allowance for doubtful accounts.

This ASU will be effective in the first quarter of 2020 and will be adopted using a modified retrospective approach.

The Company has evaluated this new guidance and it will not have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

Cloud Computing Arrangements.

In August 2018, the FASB issued 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.

This ASU will be effective in the first quarter of 2020 and will be adopted on a prospective basis.

The Company has evaluated this new guidance and it will not have a material impact on its Consolidated and Combined Financial Statements and related disclosures.

Recently Adopted Accounting Pronouncements

Revenue Recognition.

The FASB amended the FASB Accounting Standards Codification (“ASC”) and created Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Under ASC 606, revenue recognition occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services.

In addition, ASC 606 requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

The Company’s primary source of revenue is the sale of marketplace subscription advertising to car dealerships, which will continue to be recognized ratably over the contract term as the service is provided to the customer.

Effective January 1, 2018, the Company adopted ASC 606 using the modified retrospective method.

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

For further information, see Note 5 (Revenue).

In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current U.S.

The new guidance requires a lessee to recognize a liability to make lease payments (the “lease liability”) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted.

The Company adopted ASU 2016-02 in the first quarter of 2019 utilizing the modified retrospective transition approach for leases existing at, or entered into after, the beginning of the first quarter of 2019 and did not recast the comparative periods presented in the Consolidated and Combined Financial Statements upon adoption.

The Company elected the ‘package of practical expedients’ and did not reassess its prior conclusions about lease identification, lease classification and initial direct costs.

The Company also elected the short-term lease recognition exemption for all leases that qualify and did not recognize right-of-use assets or lease liabilities for those leases.

The Company’s lease agreements are principally related to real estate.

The adoption of ASU 2016-02 resulted in the recognition of operating lease assets of $ 18.2 million and $ 35.0 million in operating lease liabilities on its Consolidated Balance Sheets.

The difference between the operating lease assets and the operating lease liabilities relates to the derecognition of the Company’s deferred rent obligation, which included the impact of a lease incentive received in 2017 related to the 300 South Riverside Lease in Chicago, Illinois and was already recorded on the Consolidated Balance Sheets at the time of the adoption.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

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.

Business Combination

On February 21, 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.

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.” Dealer Inspire is an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, as well as a provider of digital marketing services, including paid, organic, social and creative services.

Dealer Inspire consists of proprietary solutions that are complementary extensions of the Company’s online marketplace platform and current suite of dealer solutions.

The Company expensed as incurred total acquisition costs of $ 4.9 million, of which $ 4.3 million was recorded during the twelve months ended December 31, 2018.

These costs were recorded in General and administrative in the Consolidated and Combined Statements of (Loss) Income.

In connection with the DI Acquisition, Dealer Inspire’s unvested equity awards were cash settled for a total of $ 5.7 million.

The fair value of these awards was based on the price paid per common share to the owners of the acquired businesses and recognized immediately after the DI Acquisition as compensation expense in the Company’s Consolidated and Combined Statements of (Loss) Income.

The Company expensed as incurred total acquisition costs of $ 4.9 million, of which $ 4.3 million was recorded during the year ended December 31, 2018.

These costs were recorded in General and administrative expense in the Consolidated Statements of (Loss) Income.

Purchase Price Allocation.

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Total consideration

A reconciliation of cash consideration to Payment for DI Acquisition, net in the Consolidated and Combined Statements of Cash Flows is as follows (in thousands):

A reconciliation of cash consideration to Payment for DI Acquisition, net in the Consolidated Statements of Cash Flows is as follows (in thousands):

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Cash consideration

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The fair value was estimated utilizing the income approach valuation technique.

The contingent consideration liability is recorded in Other noncurrent liabilities in the Consolidated Balance Sheets.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

In connection with the DI Acquisition, Dealer Inspire’s unvested equity awards were cash settled.

$ 3.9 million in Product and technology, $ 1.0 million in Cost of revenue and operations, $ 0.5 million in Marketing and sales and $ 0.3 million in General and administrative .

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Of the total goodwill recorded in connection with the DI Acquisition, approximately $ 15.0 million was deductible for income tax purposes.

The Company recorded impairments to Goodwill during the years ended December 31, 2020 and 2019 after the determination of triggering events in both periods.

Due to the cumulative impairments through December 31, 2020, all of Goodwill, including the Goodwill recorded as a result of the DI Acquisition, was impaired as of December 31, 2020.

For information related to the goodwill impairment recorded during the years ended December 31, 2020 and 2019, see Note 6 (Goodwill and Other Intangible Assets).

Pro forma Financial Information (unaudited).

The unaudited pro forma revenue and net income of the Company and Dealer Inspire are $ 669.8 million and $ 46.1 million as of December 31, 2018, respectively.

The unaudited pro forma revenue and net income of the Company and Dealer Inspire are $ 669.8 million and $ 46.1 million for the year ended December 31, 2018, respectively.

This information gives effect to pro forma events that are factually supportable and directly attributable to the transaction.

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certain other compensation related costs, including retention bonuses and stock-based compensation;

and interest expense on the borrowings under the revolving loan to fund the DI Acquisition.

and interest expense on the borrowings under the Revolving Credit Facility to fund the DI Acquisition.

Pro forma adjustments were tax-affected at the Company’s corporate blended statutory tax rate applicable during the respective periods presented.

This unaudited pro forma information is presented for informational purposes only and may not be indicative of the historical results of operations that would have been obtained if the DI Acquisition had taken place on January 1, 2018, nor the results that may be obtained in the future.

The unaudited pro forma information does not reflect future synergies or other such costs or savings.

From the date of the DI Acquisition, the Company included Dealer Inspire’s financial results in its Consolidated and Combined Statements of (Loss) Income for the year ended December 31, 2018.

This unaudited pro forma financial information is disclosed for informational purposes only and may not be indicative of the historical results of operations that would have been obtained if the DI Acquisition had taken place on January 1, 2018, nor the results that may be obtained in the future.

The unaudited pro forma financial information does not reflect future synergies or other such costs or savings.

From the date of the DI Acquisition, the Company included Dealer Inspire’s financial results in its Consolidated Statements of (Loss) Income for the year ended December 31, 2018.

Dealer Inspire contributed revenue of $ 53.1 million and a net loss of $ 11.3 million.

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Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Notes to Consolidated Financial Statements (Continued)

Revenue Summary .

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therefore, further disaggregation is not applicable at this time.

Prior to October 2019, the Company’s affiliates also sold marketplace subscription advertising to dealer customers, and the Company earned Wholesale revenue through its affiliate agreements.

For further information, see Note 7 (Unfavorable Contracts Liability).

Year Ended December 31,

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Goodwill and Indefinite-Lived Intangible Asset .

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

In September 2019, the Company determined there was a triggering event, primarily caused by a sustained decrease in the Company's stock price after the completion of the strategic alternatives review process and performed interim quantitative impairment tests.

The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values.

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For further information, see Note 2 (Significant Accounting Polices).

In March 2020, the Company determined there was a triggering event, caused by the economic impacts of the 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 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 or reversed some of these related restrictions, many have been subsequently reinstated.

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

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.

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

respect to managing its 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 its dealer customers in the second quarter of 2020, have negatively impacted its 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.

The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands):

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Other trade names

Non-compete agreements

Content library

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Amortization for the years ended December 31, 2019, 2018 and 2017 is $ 98.6 million, $ 91.0 million and $ 77.9 million, respectively.

Projected annual amortization expense for amortizable intangible assets is as follows (in thousands):

Non-compete agreements

As of December 31, 2020, projected annual amortization expense for amortizable intangible assets is as follows (in thousands):

Unfavorable Contracts Liability

In connection with the October 2014 acquisition of CARS by TEGNA, the Company entered into affiliate agreements with the former owners of CARS.

Under the affiliate agreements, affiliates have the exclusive right to sell and price the Company’s products and services in their local territories, paying the Company a wholesale rate for the Company’s products.

The Company charged the affiliates 60 % of the corresponding Cars.com’s retail rate for products sold to affiliate dealer customers and recognized revenue generated from these agreements as Wholesale revenue in the Consolidated and Combined Statements of (Loss) Income.

The Unfavorable contracts liability was established as a result of these below market-rate unfavorable affiliate agreements that the Company entered into as part of TEGNA’s acquisition of the Company in 2014.

In connection with the October 2014 acquisition of CARS by the Company’s former parent, the Company entered into affiliate agreements with the former owners of CARS.

Under the affiliate agreements, which were fully terminated by October 2019, affiliates had the exclusive right to sell and price the Company’s products and services in their local territories, paying the Company a wholesale rate for the Company’s products.

The Company charged the affiliates 60 % of the corresponding Cars.com’s retail rate for products sold to affiliate dealer customers and prior to October 2019, recognized revenue generated from these agreements as Wholesale revenue in the Consolidated Statements of (Loss) Income.

The Unfavorable contracts liability was established as a result of

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

these below market-rate unfavorable affiliate agreements that the Company entered into as part of TEGNA’s acquisition of the Company in 2014.

Prior to the affiliate conversions discussed below, over the annual contract period, the Company recognized $ 25.2 million of Wholesale revenue with a corresponding reduction of the Unfavorable contracts liability.

The Unfavorable contracts liability was fully amortized as of September 30, 2019 and as of December 31, 2019 and 2018, the Unfavorable contracts liability on the Consolidated Balance Sheets was zero and $ 18.9 million within Current liabilities, respectively.

The Company has 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 before the original contractual conversion date specified.

As a result, we recognize the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated and Combined Statements of (Loss) Income.

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 have agreed to perform certain marketing support and transition services through varying dates, the latest of which is June 29, 2020.

The fees the Company pays associated with the amended affiliate agreements are recorded as Affiliate revenue share expense within Operating expenses in the Consolidated and Combined Statements of (Loss) Income.

The Unfavorable contracts liability was fully amortized as of September 30, 2019.

The Company amended five of its affiliate agreements (Gannett, McClatchy, TEGNA, tronc, and the Washington Post) and as a result, had a direct relationship with these dealer customers before the original contractual conversion date specified.

As a result, the Company recognizes the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of (Loss) Income.

On October 2019, the Belo affiliate agreement expired.

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) Income.

The Company no longer records the amortization of the Unfavorable contracts liability associated with the converted markets to revenue as the Company is recognizing this direct revenue at retail rates.

The amortization of the Unfavorable contracts liability was recorded as a reduction of Affiliate revenue share within Operating expenses in the Consolidated and Combined Statements of (Loss) Income.

The amortization of the Unfavorable contracts liability related to these converted markets was recorded as a reduction of Affiliate revenue share within Operating expenses in the Consolidated Statements of (Loss) Income.

As of December 31, 2019, the Unfavorable contracts liability has been fully amortized.

During the year ended December 31, 2019, the Company recorded $ 17.5 million as a reduction to Affiliate revenue share, rather than Wholesale revenue, in the Consolidated and Combined Statements of (Loss) Income.

The reduction to Affiliate revenue share was partially offset by the fees associated with the marketing support and transition services.

The Company’s Unfavorable contracts liability activity for the year ended December 31, 2019 is as follows (in thousands):

December 31, 2018

Amortization into Wholesale revenue (1)

Amortization into Affiliate revenue share (2)

December 31, 2019

Amount represents the amortization of the Unfavorable contracts liability related to the remaining affiliate agreements into Wholesale revenue in the Consolidated and Combined Statements of (Loss) Income.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Amount represents the amortization of the Unfavorable contracts liability related to the converted McClatchy, tronc and Washington Post affiliate agreements into Affiliate revenue share within Operating expenses in the Consolidated and Combined Statements of (Loss) Income .

During the years ended December 31, 2020 and 2019, the Company recorded zero and $ 17.5 million, respectively, as a reduction to Affiliate revenue share, rather than Wholesale revenue, in the Consolidated Statements of (Loss) Income.

As of October 2019, the Company has direct relationships with all of its dealer customers.

In addition, as of June 30, 2020, the Company no longer incurs affiliate revenue share expense.

Credit Agreement.

On May 31, 2017, the Company and certain of its domestic wholly-owned subsidiaries (collectively, the “Guarantors”) entered into a Credit Agreement (the “Credit Agreement”) with the lenders named therein.

In October 2019, we entered into an amendment to the Company’s 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 Credit Agreement matures on May 31, 2022 and includes (a) revolving loan commitments in an aggregate principal amount of up to $ 450 million (of which up to $ 25 million may be in the form of letters of credit at its request) and (b) term loans in an aggregate principal amount of $ 450 million.

Interest on the borrowings under the Credit Agreement is payable based on either (i) the London Interbank Offered Rate (“LIBOR”) or (ii) the Alternate Base Rate (“ABR”), as defined in the Credit Agreement, in either case plus an applicable margin and fees which, after the second full fiscal quarter following the closing date, is based upon its total net leverage ratio.

Subsequent to the initial Credit Agreement, the Company has entered into three amendments.

First Amendment.

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 Credit Agreement was to mature on May 31, 2022 and included (a) revolving loan commitments in an aggregate principal amount of up to $ 450 million (of which up to $ 25 million may be in the form of letters of credit at its request) and (b) term loans in an aggregate principal amount of $ 450 million.

Interest on the borrowings under the Credit Agreement was payable based on either (i) the London Interbank Offered Rate (“LIBOR”) or (ii) the Alternate Base Rate (“ABR”), as defined in the Credit Agreement, in either case plus an applicable margin and fees which, after the second full fiscal quarter following the closing date, is based upon its total net leverage ratio.

The ABR is the greater of (a) the prime rate, (b) the New York Fed Bank Rate plus 50 basis points or (c) adjusted LIBOR, which is computed as the LIBOR Screen Rate at 11:00 AM on such day.

The applicable margin varies between 1.25 % to 2.0 % for LIBOR borrowings and 0.25 % to 1.0 % for ABR borrowings, depending on the Company’s net leverage ratio.

The Credit Agreement requires a total maximum total net leverage of 4.50 x with incremental step downs through the maturities of the term loan and the revolving loan.

On May 31, 2017, the Company borrowed $ 675 million to fund a $ 650 million cash payment to TEGNA immediately prior to the distribution, to pay fees and expenses related to the Separation and to fund working capital.

The term loan requires quarterly amortization payments which commenced on September 30, 2017.

Debt issuance costs were $ 5.5 million and $ 4.1 million at December 31, 2019 and December 31, 2018, respectively.

These debt issuance costs are recorded as a reduction of debt and the debt is accreted using the effective interest method with the amortization recorded in Interest expense, net on the Consolidated and Combined Statements of (Loss) Income.

Debt Guarantors, Collateral, Covenants and Restrictions.

The obligations under the Credit Agreement are guaranteed by the Guarantors and the Company.

The Guarantors secured their respective obligations under the Credit Agreement by granting liens in favor of the agent on substantially all of their assets.

The terms of the Credit Agreement include representations and warranties, affirmative and negative covenants (including certain financial covenants) and events of default that are customary for credit facilities of this nature.

The negative covenants place restrictions and limitations on the Company’s ability to incur additional indebtedness, make distributions or other restricted payments, create liens, make certain equity or debt investments, engage in mergers or consolidations and engage in certain transactions with affiliates.

As of December 31, 2019, the Company is in compliance with the covenants under its various credit agreements.

The applicable margin varied between 1.25 % to 2.0 % for LIBOR borrowings and 0.25 % to 1.0 % for ABR borrowings, depending on the Company’s net leverage ratio.

The Credit Agreement required a total maximum total net leverage of 4.50 x with incremental step downs through the maturities of the Term Loan and the Revolving Loan.

Second Amendment.

In June 2020, the Company entered into an amendment that provided 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 included 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.

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

A minimum liquidity requirement of $ 75.0 million;

and added an anti-cash hoarding covenant, which requires, during the Covenant Adjustment Period, mandatory prepayments of the Revolving Credit Facility with the amount of any unrestricted cash located in the Company’s deposit accounts in excess of $ 75.0 million .

Third Amendment On October 30, 2020, the Company entered into the Third Amendment to its Credit Agreement, in which the Company reduced the size of the outstanding borrowings under the Credit Agreement to an aggregate principal amount of $ 430.0 million, comprised of $ 230.0 million of the Revolving Credit Facility and $ 200.0 million of the Term Loan, 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 temporary 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 ABR margin of 1.75 % and a maximum Eurodollar margin of 2.75 %.

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 and removed the related minimum liquidity requirement and anti-cash hoarding covenant that were implemented pursuant to the Second Amendment.

As of December 31, 2020, the outstanding borrowings under the Term Loan were $ 197.5 million and the interest rate in effect was 2.8 %.

During the year ended December 31, 2019, the Company made $ 28.1 million in quarterly Term Loan payments.

During the year ended December 31, 2020, the Company made $ 190.6 million in Term Loan payments.

A portion of the proceeds from the $ 400.0 million bond issuance (“Bond Offering”) were used to repay $ 162.8 million of the borrowings under the Term Loan.

Interest on the Term Loan is typically paid on a monthly basis.

Revolving Loan.

As of December 31, 2019, the outstanding borrowings under the Revolving Loan were $ 260.0 million and the interest rate in effect was 3.7 %.

During the year ended December 31, 2018, the Company borrowed $ 165.0 million to fund the DI Acquisition and $ 30.0 million to fund share repurchases.

The Company also made $ 30.0 million in voluntary Revolving Loan payments during the year ended December 31, 2019.

As of December 31, 2019, the Company was permitted to borrow an additional $ 190.0 million under the Revolving Loan.

The Company’s borrowings are limited by its net leverage ratio, which was 3.8 to 1.0 as of December 31, 2019.

As of December 31, 2020, there were no outstanding borrowings under the Revolving Loan.

During 2020, the Company borrowed $ 165.0 million on the Revolving Loan, and paid down $ 190.0 million before using $ 235.0 million of the proceeds from the Bond Offering to repay the outstanding borrowings under the Revolving Loan.

Bond Offering.

In October 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 Loan, repay $ 162.8 million of borrowings under its Term Loan and pay fees associated with the offering and refinancing.

Interest on the bonds is due semi-annually .

Debt Issuance Costs.

Debt issuance costs related to the various amendments and issuances were $ 17.7 million and $ 5.5 million at December 31, 2020 and December 31, 2019, respectively.

Depending on the nature of the debt issuance costs and the underlying debt to which it relates, they are recorded as either a reduction of debt and accreted using the effective interest method or as a deferred asset and accreted using the straight-line method with the amortization recorded in Interest expense, net on the Consolidated Statements of (Loss) Income.

Debt Extinguishment.

The Third Amendment resulted in a partial debt extinguishment of $ 1.8 million of the previously capitalized debt issuance costs and included in Other (expense) income, net of the Consolidated Statements of (Loss) Income for the year ended December 31, 2020.

Debt Guarantors, Collateral, Covenants and Restrictions.

The obligations under the debt agreements are guaranteed by the Guarantors and the Company.

The Guarantors secured their respective obligations under the debt agreements by granting liens in favor of the agent on substantially all of their assets.

The terms of the debt agreement include representations and warranties, affirmative and negative covenants (including certain financial covenants) and events of default that are customary for credit facilities of this nature.

As of December 31, 2020, the Company is in compliance with the covenants under its debt agreements.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Notes to Consolidated Financial Statements (Continued)

Long-term Debt Maturities.

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Excluded from these amounts are the amortization of debt issuance and other costs related to indebtedness.

T he Company’s contractual payments at December 31, 2019 under then-outstanding long-term debt agreements in each of the next five calendar years are as follows (in thousands):

As of December 31, 2020, the Company’s contractual payments under then-outstanding long-term debt agreements in each of the next five calendar years and thereafter are as follows (in thousands):

Interest Rate Swap

The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations.

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 was frozen and is now being ratably reclassified into Net (loss) income over the remaining life of the Swap through Interest expense, net and Income tax (benefit) expense within the Consolidated Statements of (Loss) Income.

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

The Third Amendment triggered a partial debt extinguishment, including a partial extinguishment of the underlying Term Loan.

Due to the reduction in the Term Loan as compared to the notional amount of the Swap, the Company wrote-off a proportional amount of the frozen Accumulated other comprehensive loss balance as of the date of the partial extinguishment proportional to the reduction in the underlying notional amount of Term Loan.

As a result, the Company included $ 4.5 million in Interest expense, net on the Consolidated Statements of (Loss) Income, prior to any impact of the valuation allowance.

The Company will continue to amortize the remaining Accumulated other comprehensive loss to Interest expense, net and Income tax (benefit) expense within the Consolidated Statements of (Loss) Income through the remainder of the term of the Swap.

Any changes in the fair value of the Swap will continue to be recorded within Other (expense) income, net on the Consolidated Statements of (Loss) Income.

As of December 31, 2020, the fair value of the Swap was an unrealized loss of $ 12.1 million, of which $ 8.5 million and $ 3.6 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets.

During the years ended December 31, 2020 and December 31, 2019, $ 11.1 million and $ 2.0 million was reclassified from Accumulated other comprehensive loss and recorded in Interest expense, net, respectively.

During the year ended December 31, 2020, the Company made payments of $ 7.0 million related to the Swap.

During the year ended December 31, 2020, $ 1.3 million was reclassified as a tax benefit from Accumulated other comprehensive loss into Income tax (benefit) expense on the Consolidated Statements of (Loss) Income.

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

The Company is obligated as a lessee under certain non-cancelable operating leases for office space, and is also obligated to pay insurance, maintenance and other executory costs associated with the leases.

In May 2016, the Company entered into a new lease of office space in Chicago, Illinois.

In May 2016, the Company entered into a lease of office space in Chicago, Illinois.

The lease extends through June 2031 and monthly rental payments under the lease escalate by 2.5 % each year throughout the lease.

As of December 31, 2019, the Company’s scheduled future minimum lease payments under operating leases having initial noncancelable lease terms of more than one year, were as follows (in thousands):

As of December 31, 2020, the Company’s scheduled future minimum lease payments under operating leases having initial noncancelable lease terms of more than one year, is as follows (in thousands):

Total minimum lease payments

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Therefore, in order to discount lease payments to present value, the Company has estimated its incremental borrowing rate based on information available at either the lease transition date (for those leases that commenced prior to January 1, 2019) or the lease commencement date (for those leases that commenced after January 1, 2019).

As of December 31, 2019, the Company’s operating lease assets, included in Investments and other assets, were $ 16.9 million and operating lease liabilities were $ 33.6 million, the current maturities of which is included in Other accrued liabilities and the long-term portion of which is included in Other noncurrent liabilities.

As of December 31, 2020 and 2019, the Company’s operating lease assets, included in Investments and other assets, were $ 16.0 million and $ 16.9 million, respectively, and operating lease liabilities were $ 33.3 million and $ 33.6 million, respectively, the current maturities of which is included in Other accrued liabilities and the long-term portion of which is included in Other noncurrent liabilities.

The difference between the operating lease assets and the operating lease liabilities is primarily due to a lease incentive received in 2017 related to the 300 South Riverside Lease in Chicago, Illinois .

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Rental expense in 2018 was $ 8.2 million.

Other information related to the Company’s operating leases for the year ended December 31, 2020 is as follows (in thousands, except months and percentage):

Year Ended December 31,

Income statement information:

December 31, 2019

Operating lease cost

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Other information:

Cash paid for operating leases for the year ended December 31, 2019

Weighted-average remaining lease term (in months) as of December 31, 2019

Cash paid for operating leases

Weighted-average remaining lease term (in months)

Weighted-average discount rate as of December 31

Rental expense in 2018 and 2017 was $ 8.2 million and $ 7.3 million, respectively.

Commitments and Contingencies

Commitments and Contingences

The Company and its subsidiaries are parties from time to time in legal and administrative proceedings involving matters incidental to its business.

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Significant judgment is required to determine both the probability and the estimated amount.

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Stockholders Equity

In March 2018, the Company’s Board of Directors authorized a share repurchase program to acquire up to $ 200 million of the Company’s common stock.

The Company may repurchase shares 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 share repurchase program will be based on market conditions and other factors including price.

The repurchase program has a two-year duration, does 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 intends to fund the share repurchase program principally with cash from operations.

During the year ended Decem ber 31, 2019, the Company repurchased and subsequently retired 1.7 million shares for $ 40 million.

In March 2018, the Company’s Board of Directors authorized a two-year share repurchase program to acquire up to $ 200 million of the Company’s common stock.

The Company repurchased shares 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 share repurchase program were based on market conditions and other factors including price.

The repurchase program did not require the purchase of any minimum number of shares and 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 year ended December 31, 2020.

The Company repurchased and subsequently retired 1.7 million shares for $ 40.0 million during the year ended December 31, 2019.

Stock-Based Compensation

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The Company issues new shares of CARS common stock for shares delivered under the Omnibus Plan.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Prior to the Separation and distribution from TEGNA, certain CARS current and former employees received TEGNA restricted share units based on TEGNA common stock.

Due to the spin-off from TEGNA, all outstanding TEGNA restricted share units held by certain CARS current and former employees following the Separation were converted into an award denominated in shares of CARS common stock, with the number of shares subject to the award adjusted in a manner intended to preserve the aggregate intrinsic value of the original TEGNA restricted share units award as measured immediately before and after the Separation.

Stock-based compensation expense relates to awards issued in connection with and after the Separation.

Information related to stock-based compensation expense is as follows (in thousands):

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compensation expense

Information related to outstanding stock-based compensation awards as of December 31, 2019 for restricted share units (“RSUs”), performance share units (“PSUs”), and the Cars.com Employee Stock Purchase Plan (“ESPP”) is as follows (in thousands, except for weighted-average remaining period):

Information related to outstanding stock-based compensation awards as of December 31, 2020 for restricted share units (“RSUs”), restricted stock, performance share units (“PSUs”), and the Cars.com Employee Stock Purchase Plan (“ESPP”) is as follows (in thousands, except for weighted-average remaining period):

Weighted-Average

Remaining Period

Restricted Share Units.

RSUs and Restricted Stock

Stock Options

Restricted Share Units 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.

RSU’s are subject to graded vesting, generally ranging between one and four years and the fair value of the RSUs is equal to the Company’s common stock price on the date of grant.

RSU activity for the year ended December 31, 2019 is as follows (in thousands, except for weighted-average grant date fair value):

RSUs are subject to graded vesting, generally ranging between one and four years and the fair value of the 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 year ended December 31, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

of RSUs and Restricted Stock

Weighted-Average

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Outstanding as of December 31, 2020 (1) (2)

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Included in “Granted” and “Outstanding as of December 31, 2020” are 108 of Restricted Stock that was delivered, but not yet vested.

The outstanding balance as of December 31, 2020 includes 91 RSUs that were vested, but not yet delivered.

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The total grant-date fair value of RSUs that vested during the years ended December 31, 2020 and 2019 was $ 8.9 million and $ 7.1 million, respectively.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Performance Share Units.

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The fair value of the PSUs is equal to the Company’s common stock price on the date of grant.

Expense related to PSUs is recognized when the performance conditions are probable of being achieved.

PSU activity for the year ended December 31, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

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Vested and delivered

Forfeited or cancelled (1)

Outstanding as of December 31, 2020

The PSUs granted during the years ended December 31, 2019 and the remaining PSUs granted during the year ended December 31, 2018 require continued employee service.

The percentage of these PSUs that shall vest will range from 0 % to 200 % of the number of PSUs granted based on the Company’s future performance related to certain revenue and adjusted earnings before interest, income taxes, depreciation and amortization targets over a three-year performance period.

These PSUs are subject to cliff vesting over three years .

During the year ended December 31, 2018, the Company granted 632,000 to certain employees in connection with the DI Acquisition and require continued employee service.

Included in "Forfeited or cancelled" are 646 shares that were cancelled and replaced by new RSU or PSU grants during the year ended December 31, 2020.

The PSUs outstanding as of December 31, 2020 require continued employee service.

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

During the year ended December 31, 2018, the Company granted 632,000 PSUs to certain employees in connection with the DI Acquisition and require continued employee service.

The percentage of PSUs that shall vest will range from 0 % to 150 % of the number of PSUs granted based on Dealer Inspire’s future performance related to certain revenue targets over a three-year performance period.

These PSUs are subject to graded vesting over three years .

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 year ended December 31, 2020 is as follows (in thousands, except for weighted-average grant date fair value):

Weighted-Average

Outstanding as of December 31, 2019

Vested and delivered

Outstanding as of December 31, 2020

The fair value of the stock options granted during the year ended December 31, 2020 are estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Risk-free interest rate

Weighted-average volatility

Dividend Yield

Expected years until exercise

Employee Stock Purchase Plan.

On September 19, 2017, the Company’s Board of Directors approved the Cars.com Employee Stock Purchase Plan (the “ESPP”).

In September 2017, the Company’s Board of Directors approved the Cars.com Employee Stock Purchase Plan (the “ESPP”).

Eligible employees may authorize payroll deductions of up to 10 % of the employee’s base earnings with a maximum of $ 10,000 per every six-month offering period to purchase CARS common stock at a purchase price per share equal to 85 % of the lower of (i) the closing market price per share of CARS at the beginning of the offering period or (ii) the closing market price per share at the end of the offering period.

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As of December 31, 2020, 2.5 million shares were available for issuance under the ESPP.

The Company issued 0.1 million shares related to the ESPP for the years ended December 31, 2019 and 2018.

The Company recorded $ 0.5 million and $ 0.4 million of stock-based compensation expense related to the ESPP for the years ended December 31, 2019 and 2018, respectively.

The Company issued 0.3 million and 0.1 million shares related to the ESPP and recorded $ 0.7 million and $ 0.5 million of stock-based compensation expense related to the ESPP for the years ended December 31, 2020 and 2019, respectively.

(Loss) Earnings Per Share

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Diluted (loss) earnings 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 computations of the Company’s basic and diluted (loss) earnings per share are set forth below (in thousands, except per share amounts):

The computations of the Company’s basic and diluted (loss) earnings per share is as follows (in thousands, except per share amounts):

Year Ended December 31,

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(Loss) earnings per share, diluted

As of the Separation date of May 31, 2017, the total shares outstanding were 71.6 million.

For the year ended December 31, 2017, the calculation of both basic and diluted earnings per share includes the 71.6 million shares as the shares outstanding during the period of January 1, 2017 through May 31, 2017.

If the Company had been in a net income position, 0.8 million potential common shares would have been included from diluted weighted-average common shares outstanding for the year ended December 31, 2019 as their inclusion would have had an anti-dilutive effect.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

As of December 31, 2019, the Company has two classes of stock which consist of common stock and preferred stock.

As of December 31, 2019, the Company has only issued common stock at a par value of $ 0.01 .

There were 2,727 and 809 potential common shares excluded from diluted weighted-average common shares outstanding for the years ended December 31, 2020 and December 31, 2019, respectively, as their inclusion would have had an anti-dilutive effect.

Selected Information Related to Income Taxes.

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(Loss) income before income taxes

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

Year Ended December 31,

state and local

Total current income tax expense

Total current income tax (benefit) expense

state and local

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Income tax provision at statutory rate

Tax effect of pre-Separation earnings

State income taxes, net of federal income tax benefit

Book impairment and other permanent differences

Goodwill impairment

Effect of change in apportionment factors

Write-off of permanent outside basis difference

Effect of U.S.

federal tax rate change (4)

NOL carrybacks rate differential

Valuation allowance

Income tax (benefit) expense

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

On February 3, 2017, the Company entered into a Tax Matters Agreement with TEGNA, which governs the tax relationship between the Company and TEGNA for the tax periods through the May 31, 2017 Separation of the Company from TEGNA.

Under this agreement, TEGNA is responsible for all payments of federal and state income tax due with respect to pre-closing tax liabilities.

Accordingly, TEGNA prepared all federal, state and local income tax returns for the pre-closing period.

Pursuant to the Tax Matters Agreement, TEGNA agreed to indemnify the Company for:

(1) all pre-closing taxes, including any pre-closing taxes resulting from any audit, amendment, other change or adjustment, (2) any taxes resulting from a breach by TEGNA of any covenant in the Tax Matters Agreement and (3) any stamp, sales and use, gross receipts, value-added or other transfer taxes imposed on TEGNA on the Separation of the Company from TEGNA, any refund of pre-closing taxes, or other taxes for which TEGNA is responsible are for the benefit of, and will be paid to, TEGNA.

The Company agreed to indemnify TEGNA for:

(1) all post-closing taxes, (2) any taxes resulting from a breach by the Company of any covenant in the Tax Matters Agreement, (3) any tax arising from the failure or breach of any representation or covenant made by the Company which failure or breach results in the intended tax consequences of the Separation transaction not being achieved and (4) any stamp, sales and use, gross receipts, value-added or other transfer tax imposed on the Company on the Separation of the Company from TEGNA.

The income tax benefit for the year ended December 31, 2017 is based upon seven months of Cars.com, LLC activity and twelve months of DealerRater activity.

This reflects changes in apportionment factors upon the finalization of the post-Spin 2017 state tax returns in the fourth quarter of 2018.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation, which made broad and complex changes to the U.S.

tax code, including, but not limited to, the following that impact the Company:

(1) reducing the U.S.

federal corporate income tax rate from 35 % to 21 %;

(2) enhancing and extending the option to claim accelerated depreciation deductions by allowing full expensing of qualified property through 2022;

(3) limiting the deductibility of certain executive compensation;

and (4) limiting certain other deductions.

The Company recorded net tax expense of $ 80.3 million in 2017 related to the revaluation of its net deferred tax liabilities, in accordance with ASC 740.

The Company’s effective tax rate for the year ended December 31, 2019 differed from the federal statutory rate of 21 %, primarily due to the tax impact of the goodwill and intangible asset impairment and other permanent differences.

The Company’s effective tax rate for the year ended December 31, 2018 differed from the federal statutory rate of 21 %, primarily due to unfavorable changes in the apportionment factors upon the finalization of the post-Spin 2017 state tax returns in the fourth quarter of 2018 and state income tax expenses.

The Company’s effective tax rate for the year ended December 31, 2017 differed from the federal statutory rate of 35 %, primarily due to the non-cash income tax benefits of $ 16 million, $ 51 million and $ 80 million related to pre-Separation earnings, of which the payments were the responsibility of TEGNA, the write-off of the permanent outside basis difference resulting from the change in the tax status of the Cars.com, LLC flow-through entity and the reduction in the corporate federal income tax rate, respectively.

Deferred Tax Assets and Liabilities.

As part of the implementation of the post-Separation legal entity structure, the Company was required to record deferred tax assets and liabilities for temporary differences between financial accounting and tax reporting.

Accordingly, in 2017, the Company recorded $ 246 million of net deferred tax liabilities associated with the outside basis difference in the Cars.com, LLC flow-through entity, with the offset recorded in TEGNA’s investment net.

In October 2017, Cars.com, LLC prospectively changed its corporate structure to convert from being taxed as a partnership to being taxed as a C corporation.

As a result of the change in corporate structure, Cars.com, LLC was also required to change its reporting of deferred tax assets and liabilities.

During the period, the Company recorded a $ 51 million non-cash write-off of the permanent outside basis difference resulting from this reporting change.

The Company has recorded deferred tax assets related to federal and state income tax net operating loss (“NOL”) carryforwards of approximately $ 7.1 million and $ 1.5 million, respectively.

The federal NOL, and the majority of the state NOLs, can be carried forward indefinitely.

The Company also has recorded deferred tax assets related to federal and Illinois research and development (“R&D”) tax credit carryforwards of $ 1.8 million and $ 0.8 million, respectively.

The federal and state R&D tax credits may be carried forward 20 years and 5 years, respectively.

The Company expects to fully utilize all NOL and tax credit carryforwards before the expiration of any carryforward period.

The Company has recorded deferred tax assets related to federal and state income tax net operating loss (“NOL”) carryforwards of approximately $ 2.1 million and $ 8.6 million as of December 31, 2020 and 2019, respectively.

The federal NOL, and a portion of the state NOLs, can be carried forward indefinitely, although certain jurisdictions, including federal and numerous states, limit NOL carryforwards to a percentage of current year taxable income.

The Company also has recorded deferred tax assets related to federal and state research and development (“R&D”) tax credit carryforwards of $ 4.3 million and $ 2.6 million, net of uncertain tax positions, as of December 31, 2020 and 2019, respectively.

The federal and state R&D tax credits generally may be carried forward 20 years and 5 years, respectively.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

Notes to Consolidated Financial Statements (Continued)

Significant components of the deferred tax assets and liabilities are as follows (in thousands):

Deferred income tax liabilities:

Lease obligations

Indefinite lived intangibles

Right of use assets

Total deferred tax liabilities

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Accrued compensation

Right of use assets

Unfavorable contracts liability

Definite lived intangibles

Lease obligations

NOL and tax credit carryforwards

2 unchanged sentences

Net deferred tax liability

The deferred tax assets and liabilities recognized in the Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019 were as follows (in thousands):

Investments and other assets

Deferred tax liability

Net deferred tax liabilities

On March 27, 2020, the CARES Act was enacted into law.

The CARES Act is a tax and spending package intended to provide economic relief to address the impact of the COVID-19 pandemic.

The CARES Act includes several significant business tax provisions that, among other things, would allow businesses to carry back NOLs arising in 2018, 2019, and 2020 to the five prior tax years.

As a result of the CARES Act, the Company estimates that it will be able to obtain a net tax refund of $ 9.9 million from the carryback of NOLs.

The Company's net receivable is included in Other current assets on the Consolidated Balance Sheet.

Uncertain Tax Positions.

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Balance as of January 1

Additions based on tax positions related to the current year

Additions for tax positions of prior years

Income before income taxes

At December 31, 2019 and 2018, there are $ 1.5 million and $ 0.6 million of unrecognized tax benefits that, if recognized, would affect the annual tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense.

During the years ended December 31, 2019, 2018 and 2017, amounts paid and amounts accrued for the payment of interest and penalties accrued was immaterial.

The Company files a consolidated U.S.

federal income tax return as well as income tax returns in various state and local jurisdictions.

The Company's tax returns are routinely audited by federal and state tax authorities and these tax audits are at various stages of completion at any given time.

The Company's tax returns are routinely audited by federal and state tax authorities and these tax audits are at various stages of

Cars.com Inc.

Notes to Consolidated Financial Statements (Continued)

completion at any given time.

Generally, the Company’s tax returns open to examination by a federal or state taxing authority are for years beginning on or after December 31, 2016.

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The CODM makes resource allocation decisions to maximize the Company’s consolidated financial results.

For the year ended December 31, 2019, the Company had one operating and reportable segment that generates revenue through two sales channels (Retail and Wholesale) which are presented on the Consolidated and Combined Statements of (Loss) Income.

Cars.com Inc.

Notes to Consolidated and Combined Financial Statements (Continued)

October 2019, the Company now has a direct relationship with all dealer customers and recognizes revenue associate d with converted dealers as Retail revenue, rather than Wholesale revenue.

For the year ended December 31, 2020, the Company had one operating and reportable segment.

For the years ended December 31, 2020, 2019 and 2018, the Company did not have any one customer that generated greater than 10% of total revenue.

Substantially all revenue and long-lived assets were generated and located within the U.S.

Related Party

The Company was party to a commercial agreement with TEGNA, who was considered a related party through the Separation date of May 31, 2017.

Related party revenue earned from this agreement was zero for the years ended December 31, 2019 and 2018 and $ 3.4 million for the year ended December 31, 2017.

The commercial agreement with TEGNA is effective until June 29, 2020 .

Prior to the Separation, TEGNA utilized a centralized approach to cash management and the financing of its operations, providing funds to its subsidiaries as needed.

These transactions were recorded in “TEGNA’s investment, net” when advanced.

Accordingly, none of TEGNA’s cash and cash equivalents were assigned to the Company in TEGNA’s financial statements.

Cash and cash equivalents in the Company’s Consolidated Balance Sheets represent cash held directly by the Company.

Equity in the Consolidated Balance Sheets represents the accumulated balance of transactions between the Company and TEGNA, the Company’s paid-in-capital and TEGNA’s interest in the Company’s accumulated deficit, and are presented within “TEGNA’s investment, net.” The amounts comprising the accumulated balance of transactions between the Company and TEGNA and TEGNA affiliates include (1) the cumulative net assets attributed to the Company by TEGNA and TEGNA affiliates;

(2) the cumulative net advances to TEGNA representing the Company’s cumulative funds swept (net of funding provided by TEGNA and TEGNA affiliates to the Company) as part of the centralized cash management program;

and (3) certain post-Separation transactions.

Selected Quarterly Financial Data (Unaudited)

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Operating (loss) income

Net (loss) income

(Loss) earnings per share, basic (1)

(Loss) earnings per share, diluted (1)

Cost of revenue and operations

Operating (loss) income

Loss per share, basic (1)

Loss per share, diluted (1)

Cost of revenue and operations

Operating income

Earnings per share, basic

Earnings per share, diluted

The total of the (Loss) earnings per share, basic and (Loss) earnings per share, diluted line items may not agree to the year ended December 31, 2020 and 2019 due to the rounding of quarterly amounts.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

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-K

Item 8. Financial Statements and Supplementary Data