UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
b
For the quarterly period ended
OR
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
|
|
(Address of principal executive offices)
(
Registrant’s telephone number, including area code
|
Securities registered pursuant to Section 12(b) of the Act: |
||||
|
|
|
|
|
|
|
Title of each class |
|
Trading Symbol |
|
Name of each exchange on which registered |
|
|
|
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
|
☒ |
|
Accelerated filer |
|
☐ |
|
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
|
|
|
|
|
|
Emerging growth company |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 23, 2020, the registrant had
Table of Contents
|
|
|
Page |
|
PART I. |
2 |
|
|
Item 1. |
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
|
Item 3. |
30 |
|
|
Item 4. |
30 |
|
|
PART II. |
31 |
|
|
Item 1. |
31 |
|
|
Item 1A. |
31 |
|
|
Item 2. |
32 |
|
|
Item 3. |
32 |
|
|
Item 4. |
32 |
|
|
Item 5. |
32 |
|
|
Item 6. |
32 |
|
|
34 |
||
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Cars.com Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
|
|
|
June 30, 2020 |
|
|
December 31, 2019 |
|
||
|
|
|
(unaudited) |
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
Investments and other assets |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
Liabilities and stockholders' equity: |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
|
|
|
Accrued compensation |
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
Other accrued liabilities |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
|
|
|
|
|
|
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
|
|
|
|
Deferred tax liability |
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
|
Preferred Stock at par, $ issued and outstanding as of June 30, 2020 and December 31, 2019, respectively |
|
|
|
|
|
|
|
|
|
Common Stock at par, $ December 31, 2019, respectively |
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
|
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
|
Total stockholders' equity |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
2
Cars.com Inc.
Consolidated Statements of Loss
(In thousands, except per share data)
(Unaudited)
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue and operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate revenue share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible asset impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Nonoperating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Other income (expense), net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total nonoperating expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Loss before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Income tax expense (benefit) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Diluted |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
3
Cars.com Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Amortization of interest rate swap into Net loss |
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Total other comprehensive (loss) income |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Comprehensive loss |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The accompanying notes are an integral part of the Consolidated Financial Statements.
4
Cars.com Inc.
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
Accumulated Other Comprehensive |
|
|
Stockholders' |
|
||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
||||||||
|
Balance at December 31, 2019 |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Shares issued in connection with stock-based compensation plans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with stock-based compensation plans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2020 |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional Paid-In |
|
|
Retained |
|
|
Accumulated Other Comprehensive |
|
|
Stockholders' |
|
||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Equity |
|
||||||||
|
Balance at December 31, 2018 |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Shares issued in connection with stock-based compensation plans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Balance at March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Repurchases of common stock |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Shares issued in connection with stock-based compensation plans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019 |
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
5
Cars.com Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile Net loss to Net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
|
|
|
|
|
|
|
Amortization of unfavorable contracts liability |
|
|
|
|
|
|
( |
) |
|
Goodwill and intangible asset impairment |
|
|
|
|
|
|
|
|
|
Impairment of non-marketable security |
|
|
|
|
|
|
|
|
|
Unrealized gain on interest rate swap |
|
|
( |
) |
|
|
|
|
|
Amortization of accumulated other comprehensive loss on interest rate swap |
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
( |
) |
|
|
( |
) |
|
Provision for doubtful accounts |
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
Other, net |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
Prepaid expenses |
|
|
( |
) |
|
|
|
|
|
Other current assets |
|
|
( |
) |
|
|
|
|
|
Other assets |
|
|
|
|
|
|
( |
) |
|
Accounts payable |
|
|
|
|
|
|
|
|
|
Accrued compensation |
|
|
( |
) |
|
|
( |
) |
|
Other accrued liabilities |
|
|
( |
) |
|
|
|
|
|
Other noncurrent liabilities |
|
|
( |
) |
|
|
|
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
|
Other, net |
|
|
|
|
|
|
( |
) |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from revolving loan borrowings |
|
|
|
|
|
|
|
|
|
Payments of debt issuance costs and other fees |
|
|
( |
) |
|
|
|
|
|
Payments of long-term debt |
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation plans, net |
|
|
( |
) |
|
|
( |
) |
|
Repurchases of common stock |
|
|
|
|
|
|
( |
) |
|
Other |
|
|
|
|
|
|
( |
) |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds |
|
$ |
|
|
|
$ |
|
|
|
Cash paid for interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Consolidated Financial Statements.
6
Cars.com Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE 1. Description of Business, Company History and Summary of Significant Accounting Policies
Description of Business. Cars.com Inc., (the “Company” or CARS) is a leading digital marketplace 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., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). On
In February 2018, the Company acquired all of the outstanding stock of Dealer Inspire Inc., an innovative technology leader providing progressive dealer websites, digital retailing and messaging platform products, and substantially all of the net assets of Launch Digital Marketing LLC, a provider of digital marketing services, including paid, organic, social and creative services (collectively, the “DI Acquisition”). The post-DI Acquisition business related to Dealer Inspire, Inc. and Launch Digital Marketing LLC is referred to collectively as “Dealer Inspire”.
Basis of Presentation. These accompanying unaudited interim Consolidated Financial Statements (“Consolidated Financial Statements”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2019, which are included in the Company's Annual Report on Form 10-K dated February 26, 2020 (the “December 31, 2019 Financial Statements”).
The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in the December 31, 2019 Financial Statements. In the opinion of management, the Consolidated Financial Statements contain all adjustments (consisting of a normal, recurring nature) necessary to present fairly the Company's financial position, results of operations, cash flows and changes in stockholders' equity as of the dates and for the periods indicated. The unaudited results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020.
Use of Estimates. The preparation of the accompanying Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates.
Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of Cars.com Inc. and its
NOTE 2. New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Cloud Computing Arrangements. In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs for internal-use software. The Company adopted this new guidance as of January 1, 2020. The adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.
Financial Instruments – Credit Losses. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses changing the way credit losses on accounts receivable are estimated. Under current U.S. GAAP, credit losses on trade accounts receivable are recognized once it is probable that such losses will occur. Under this new guidance, the Company is required to
7
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
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.
Reference Rate Reform. In March 2020, the FASB concluded its reference rate reform project and issued ASU 2020-04. The Board undertook the reference rate reform project to address constituents’ concerns about the anticipated transition away from the use of the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company adopted this new guidance as of January 1, 2020. The adoption did not have a material impact on its Consolidated Financial Statements and related disclosures.
NOTE 3. Revenue
Revenue Summary. In the table below (in thousands), revenue is disaggregated by sales channel and major products and services. The Company only has
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Sales channel |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Direct |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
National advertising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Major products and services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription advertising and digital solutions |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Display advertising |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay per lead |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTE 4. Goodwill and Indefinite-lived Intangible Asset
The changes in the carrying amount of goodwill and indefinite-lived intangible asset are as follows (in thousands):
|
|
|
December 31, 2019 |
|
|
Additions |
|
|
Impairment |
|
|
June 30, 2020 |
|
||||
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Indefinite-lived intangible asset |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Triggering Event. In March 2020, the Company determined there was a triggering event, caused by the economic impacts of the novel coronavirus disease 2019 (“COVID-19”) pandemic and related restrictions.
In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it has spread throughout the United States and the rest of the world with different geographical locations impacted more than others. COVID-19 has resulted in governmental authorities around the country implementing numerous measures to contain the virus, such as quarantines, shelter-in-place orders and business shutdowns (the “restrictions”). Although certain jurisdictions have relaxed some of these restrictions, these restrictions have had, and the Company expects they will continue to have, a negative impact on regional and national economies and the automotive industry for an uncertain duration.
The COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and are expected to result in reduced consumer spending and an economic slowdown or recession of unknown duration. Automobile dealers operate in a highly competitive market and are vulnerable to both decreased demand for new and used vehicles and periods of an economic slowdown or recession. Furthermore, dealerships have temporarily or permanently closed and more may close in the near future as a result of the
8
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
COVID-19 pandemic and related restrictions. Due to negative changes in the financial condition of dealers, in the second half of March 2020, the Company’s customers began to adjust, reduce or suspend their operating activities. This resulted and may continue to result in decreased subscription revenue and reduced demand for the Company’s services.
In an effort to assist its dealer customers impacted by the COVID-19 pandemic and related restrictions, the Company provided, among other measures, financial relief in the form of certain invoice credits of
The effects of the COVID-19 pandemic and the related restrictions, particularly reduced consumer spending and the discounts that the Company has provided its dealer customers for the second quarter of 2020, have negatively impacted the Company’s results of operations, cash flows and financial position. In addition, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of the COVID-19 pandemic and related restrictions. Thus, the amount and timing of future cash flows, used in the valuation models to estimate the fair value of the Company’s assets, has been significantly and negatively impacted by the COVID-19 pandemic and related restrictions.
Impairment Assessment. The Company performed interim quantitative impairment tests as of March 31, 2020. The results of the goodwill and indefinite-lived intangible asset impairment tests indicated that the carrying values exceeded the estimated fair values and thus, the Company recorded an impairment of $
Goodwill. Goodwill represents the excess of acquisition cost over the fair value of assets acquired, including identifiable intangible assets, net of liabilities assumed. Goodwill is tested for impairment on an annual basis or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s goodwill is tested for impairment at a level referred to as the reporting unit. The level at which the Company tests goodwill for impairment requires us to determine whether the operations below the business segment level constitute a business for which discrete financial information is available and segment management regularly reviews the operating results. The Company has determined that CARS operates as a single reporting unit.
The process of estimating the fair value of goodwill is subjective and requires us to make estimates that may significantly impact the outcome of the analysis. A qualitative assessment considers events and circumstances such as macroeconomic conditions, industry and market conditions, cost factors and overall financial performance, as well as company specifications. If after performing this assessment, the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then the Company performs the quantitative test.
Under the quantitative test, a goodwill impairment is identified by comparing the fair value of the reporting unit to the carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, goodwill is considered impaired and an impairment charge is recognized in an amount equal to the excess, not to exceed the carrying amount of goodwill.
The Company estimated the fair value of the reporting unit with an income approach using the discounted cash flow (“DCF”) analysis and the Company also considered a market-based valuation methodology using comparable public company trading values. Determining fair value requires the exercise of significant judgments, including the amount and timing of expected future cash flows, long-term growth rates, the discount rate and relevant comparable public company earnings multiples. The cash flows employed in the DCF analysis are based on the Company’s best estimate of future sales, earnings and cash flows after considering factors such as general market conditions and recent operating performance. The discount rate utilized in the DCF analysis is based on the reporting unit’s weighted-average cost of capital, which takes into account the relative weights of each component of capital structure (equity and debt) and represents the expected cost of new capital, adjusted as appropriate to consider the risk inherent in future cash flows of the Company’s reporting unit.
Impairment assessment inherently involves management judgments regarding a number of assumptions described above. The reporting unit fair value also depends on the future strength of the U.S. economy. New and developing competition as well as technological change could also adversely affect future fair value estimates. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of the Company’s recorded goodwill, differences in assumptions could have a material effect on the estimated fair values.
9
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
NOTE 5. Debt
As of June 30, 2020, the Company was in compliance with the covenants under its Credit Agreement.
Term Loan. As of June 30, 2020, the outstanding principal amount under the Term Loan was $
Revolving Loan. As of June 30, 2020, the outstanding borrowings under the Revolving Loan were $
Fair Value. The Company's debt is classified as Level 2 in the fair value hierarchy and the fair value is measured based on comparable trading prices, ratings, sectors, coupons and maturities of similar instruments. As of June 30, 2020, the fair value of the outstanding indebtedness was approximately $
Credit Agreement. In October 2019, the Company entered into an amendment to its Credit Agreement to increase the total net leverage covenant during the remaining term of the Credit Agreement while preserving the favorable pricing structure from the original agreement. The amendment increased the Company’s maximum total net leverage ratio from
In June 2020, the Company entered into the second amendment to its Credit Agreement (the “Second Amendment”) that provides for a waiver with respect to the Total Net Leverage Ratio and Consolidated Interest Coverage Ratio (each as defined in the Credit Agreement) financial covenants for the covenant testing periods through December 31, 2020 (the “Covenant Adjustment Period”). The Second Amendment also includes the following:
|
• |
A revised maximum permitted “Total Net Leverage Ratio” beginning March 31, 2021 (after the Covenant Adjustment Period) of |
|
• |
A revised minimum permitted “Consolidated Interest Coverage Ratio” beginning March 31, 2021 (after the Covenant Adjustment Period) of |
|
• |
Includes a minimum liquidity requirement of $ |
NOTE 6. Interest Rate Swap
The interest rate on borrowings under the Company’s Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on its borrowing under the Term Loan, the Company entered into an interest rate swap (the “Swap”) effective December 31, 2018. Under the terms of the Swap, the Company is locked into a fixed rate of interest of
The Second Amendment triggered a quantitative hedge effectiveness test, which resulted in the loss of hedge accounting. As a result, as of the date of the Second Amendment, the unrealized loss included within Accumulated other comprehensive loss will be ratably reclassified into Net loss over the remaining term of the Swap. A portion of the unrealized loss will be recorded to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Loss. Subsequent to the Second Amendment, any changes in the fair value of the Swap are recorded within Other income (expense), net on the Consolidated Statements of Loss.
10
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
As of June 30, 2020, the fair value of the Swap was an unrealized loss of $
NOTE 7. Unfavorable Contracts Liability
In connection with the October 2014 acquisition of Cars.com by TEGNA, the Company entered into affiliate agreements with the former owners of Cars.com (Belo Corporation (“Belo”), The McClatchy Company (“McClatchy”), tronc, inc. (“tronc”), and the Washington Post). Under the affiliate agreements, affiliates had the exclusive right to sell and price Cars.com’s products in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charged the affiliates
Prior to the affiliate conversions discussed below, the Company recognized $
The Company amended five of its affiliate agreements (Gannett, McClatchy, TEGNA, tronc, and the Washington Post) and as a result, has a direct relationship with these dealer customers and recognizes the revenue associated with converted dealers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. On October 1, 2019, the Belo affiliate agreement expired and the Company now directly serves all dealer customers.
As part of the amendments to the affiliate agreements, Gannett, McClatchy, TEGNA, tronc, and the Washington Post agreed to perform certain marketing support and transition services through varying dates, the latest of which was June 29, 2020. The fees the Company incurred associated with the amended affiliate agreements were recorded as Affiliate revenue share expense within Operating expenses in the Consolidated Statements of Loss.
Therefore, during the six months ended June 30, 2020 and June 30, 2019, the Company recorded
NOTE 8. Commitments and Contingencies
The Company and its subsidiaries are parties from time to time in legal and administrative proceedings involving matters incidental to its business. These matters, whether pending, threatened or unasserted, if decided adversely to the Company or settled, may result in liabilities material to its financial position, results of operations or cash flows. The Company records a liability when it believes that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both the probability and the estimated amount.
NOTE 9. Stockholders’ Equity
In March 2018, the Company’s Board of Directors authorized a stock repurchase program to acquire up to $
11
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
2020, the repurchase program expired and there were
NOTE 10. Stock-Based Compensation
Restricted Stock Units (“RSUs”) and Restricted Stock. RSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting, subject to any restrictions as specified in the individual holder’s award agreement. RSUs are subject to graded vesting, generally ranging between
|
|
|
Number of RSUs and Restricted Stock |
|
|
Weighted-Average Grant Date Fair Value |
|
||
|
Outstanding as of December 31, 2019 |
|
|
|
|
|
$ |
|
|
|
Granted (1) |
|
|
|
|
|
|
|
|
|
Vested and delivered |
|
|
( |
) |
|
|
|
|
|
Forfeited |
|
|
( |
) |
|
|
|
|
|
Outstanding as of June 30, 2020 (1)(2) |
|
|
|
|
|
|
|
|
|
|
(1) |
Included in “Granted” and “Outstanding as of June 30, 2020” are 108 shares of Restricted Stock that were delivered, but not yet vested. |
|
|
(2) |
Included in “Outstanding as of June 30, 2020” are |
Performance Stock Units (“PSUs”). PSUs represent the right to receive unrestricted shares of the Company’s common stock at the time of vesting. The fair value of the PSUs is equal to the Company’s common stock price on the date of grant. The percentage of PSUs that may vest ranges from
|
|
|
Number of PSUs |
|
|
Weighted-Average Grant Date Fair Value |
|
||
|
Outstanding as of December 31, 2019 |
|
|
|
|
|
$ |
|
|
|
Granted (1) |
|
|
|
|
|
|
|
|
|
Vested and delivered |
|
|
|
|
|
|
|
|
|
Forfeited or cancelled (1) |
|
|
( |
) |
|
|
|
|
|
Outstanding as of June 30, 2020 |
|
|
|
|
|
|
|
|
|
|
(1) |
Included in "Forfeited or cancelled" are |
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 cliff vesting and expire
12
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
Number of Options |
|
|
Weighted-Average Grant Date Fair Value |
|
||
|
Outstanding as of December 31, 2019 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
Vested and delivered |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2020 |
|
|
|
|
|
|
|
|
The fair value of the stock options granted during the six months ended June 30, 2020 are estimated on the grant date using the Black-Scholes option pricing model, using the following assumptions:
|
Risk-free interest rate |
|
|
% |
|
Weighted-average volatility |
|
|
% |
|
Dividend yield |
|
|
% |
|
Expected years until exercise |
|
|
|
NOTE 11. Loss Per Share
Basic loss per share is calculated by dividing Net loss by the weighted-average number of shares of common stock outstanding. Diluted loss per share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans, unless the inclusion of such shares would have an anti-dilutive impact.
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Basic weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock-based compensation awards (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Loss per share, diluted |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
(1) |
There were |
NOTE 12. Other (Expense) Income, net
Included in Other (expense) income, net in the six months ended June 30, 2020 was a full impairment of $
NOTE 13. Income Taxes
Deferred Tax Asset and Valuation Allowance. As a result of the goodwill and indefinite-lived intangible asset impairments recorded during the six months ended June 30, 2020, the Company had a $
Effective Tax Rate. The effective income tax rate, expressed by calculating the income tax expense as a percentage of Income before income tax, was
13
Cars.com Inc.
Notes to the Consolidated Financial Statements (continued)
(Unaudited)
deferred tax asset position recorded during the six months ended June 30, 2020. The effective income tax rate was
New Tax Law. On July 2, 2020, the Department of the Treasury issued temporary and proposed regulations addressing the carryback of net operating losses generated in 2019 and 2020 to prior years under the Coronavirus Aid, Relief, and Economic Security Act. The Company is reviewing these rules and any impact will be reported during the nine months ending September 30, 2020.
14
Note About Forward-Looking Information
This report contains “forward-looking statements” within the meaning of the federal securities laws. All statements other than statements of historical facts are forward-looking statements. Forward-looking statements include information concerning the impact of the COVID-19 pandemic and related restrictions on our industry, our dealer customers and our results of operations, our business strategies, strategic alternatives, plans and objectives, market potential, outlook, trends, future financial performance, planned operational and product improvements, potential strategic transactions, liquidity, including expense reduction and draws from our revolving credit facility, and other matters and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements, strategic actions or prospects may differ materially from those expressed or implied by these forward-looking statements. These statements often include words such as “believe,” “expect,” “project,” “anticipate,” “outlook,” “intend,” “strategy,” “plan,” “estimate,” “target,” “seek,” “will,” “may,” “would,” “should,” “could,” “forecasts,” “mission,” “strive,” “more,” “goal” or similar expressions. Forward-looking statements are based on our current expectations, beliefs, strategies, estimates, projections and assumptions, based on our experience in the industry as well as our perceptions of historical trends, current conditions, expected future developments, current developments regarding the COVID-19 pandemic and other factors we think are appropriate. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are expressed in good faith and we believe these judgments are reasonable. However, you should understand that these statements are not guarantees of strategic action, performance or results. Our actual results and strategic actions could differ materially from those expressed in the forward-looking statements. Given these uncertainties, forward-looking statements should not be relied on in making investment decisions. Comparisons of results between current and prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data. Whether or not any such forward-looking statement is in fact achieved will depend on future events, some of which are beyond our control.
Important factors that could cause actual results or events to differ materially from those anticipated include, among others:
|
• |
The COVID-19 pandemic and related restrictions have materially and adversely affected, and could continue to materially and adversely affect, our business, financial condition, liquidity and results of operations. |
|
• |
Our business is subject to risks related to the larger automotive ecosystem, including consumer demand and other macroeconomic issues. |
|
• |
We participate in a highly competitive market, and pressure from existing and new competitors may materially and adversely affect our business, results of operations and financial condition. |
|
• |
If we fail to maintain or increase our base of subscribing dealers that purchase our solutions or to increase our revenue from subscribing dealers, our business, results of operations and financial condition would be materially and adversely affected. |
|
• |
We compete with other consumer automotive websites and mobile applications and other digital content providers for share of automotive-related digital advertising spending and may be unable to maintain or grow our base of advertising customers or increase our revenue from existing advertisers. |
|
• |
Market acceptance of and influence over certain of our products and services is concentrated in a limited number of automobile OEMs and dealership associations, and we may not be able to maintain or grow these relationships. |
|
• |
We may face difficulties in transitioning to a full-service solutions provider that helps automotive brands and dealers create enduring customer relationships. |
|
• |
We rely on third-party service providers for many aspects of our business, including automobile pricing and other data, and any failure to maintain these relationships could harm our business. |
|
• |
We rely on in-house content creation and development to drive traffic to the CARS sites and mobile applications. |
|
• |
We rely in part on Internet search engines and mobile application download stores to drive traffic to the CARS sites and mobile applications. If the CARS sites and mobile applications fail to appear prominently in these search results, traffic to the CARS sites and mobile applications could decline and our business, results of operations or financial condition may be materially and adversely affected. |
|
• |
The value of our assets or operations may be diminished if our information technology systems fail to perform adequately. |
|
• |
We rely on technology systems’ availability and ability to prevent unauthorized access. If our security and resiliency measures fail to prevent all incidents, it could result in damage to our reputation, incur costs and create liabilities. |
15
|
• |
Our business depends on strong brand recognition, and any failure to maintain, protect and enhance our brands could hurt our ability to retain or expand our base of consumers, customers and advertisers, and our ability to increase the frequency with which consumers, dealers and advertisers use our services. |
|
• |
We cannot assure you that we will be able to continue to successfully develop and launch new products or grow our complementary product offerings. |
|
• |
Our business is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenue will decrease. |
|
• |
If we do not adapt to automated buying strategies quickly, our display advertising revenue could be adversely affected. |
|
• |
If our mobile applications do not continue to meet consumer demands or we are unable to successfully monetize our mobile advertising solutions, our business, results of operations or financial condition may be materially and adversely affected. |
|
• |
Dealer closures or consolidation among dealers or OEMs could reduce demand for, and the pricing of, our marketing and solutions offerings, thereby leading to decreased earnings. |
|
• |
If growth in the online and mobile automotive advertising market stagnates or declines, our business, results of operations or financial condition could be materially and adversely affected. |
|
• |
Uncertainty exists in the application of various laws and regulations to our business, including privacy laws such as the California Consumer Privacy Act and new tax laws and interpretations. New laws or regulations applicable to our business, or the expansion or interpretation of existing laws and regulations to apply to our business, could subject us to licensing requirements, claims, judgments and remedies, including sales and use taxes, other monetary liabilities and limitations on our business practices, and could increase administrative costs. |
|
• |
Strategic acquisitions, investments and partnerships could pose various risks, increase our leverage, dilute existing stockholders and significantly impact our ability to expand our overall profitability. |
|
• |
The value of our existing intangible assets may become impaired, depending upon future operating results. |
|
• |
Adverse results from litigation or governmental investigations could impact our business practices and operating results. |
|
• |
Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our business, results of operations and financial condition. |
|
• |
If we expand into new geographic markets, we may be prevented from using our brands in such markets. |
|
• |
Our ability to operate effectively could be impaired if we fail to attract and retain our key employees. |
|
• |
Seasonality may cause fluctuations in our revenue and operating results. |
|
• |
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our common stock. |
|
• |
Our debt agreements contain restrictions that may limit our flexibility in operating our business. |
|
• |
Increases in interest rates could increase interest payable under our variable rate indebtedness. |
|
• |
Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the market value of our current or future debt obligations, including our long-term debt instruments and our bank credit facilities. |
|
• |
We do not expect to pay any cash dividends for the foreseeable future. |
|
• |
Your percentage of ownership in the Company may be diluted in the future. |
|
• |
Certain provisions of our certificate of incorporation, by-laws, and Delaware law may discourage takeovers and limit our ability to use, acquire, or develop certain competing businesses. |
|
• |
Our amended and restated certificate of incorporation designates the state courts of the State of Delaware, or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors and officers. |
For a detailed discussion of many of these risks and uncertainties, see “Part I, Item 1A., Risk Factors” and “Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020, our
16
subsequent Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC and available on our website at investor.cars.com or via EDGAR at www.sec.gov. All forward-looking statements contained in this report are qualified by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth above, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic and related restrictions. The forward-looking statements contained in this report are based only on information currently available to us and speak only as of the date of this report. We undertake no obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, or changes in future operating results over time or otherwise. The forward-looking statements in this report are intended to be subject to the safe harbor protection provided by the federal securities laws.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our business, financial condition, results of operations and quantitative and qualitative disclosures should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Note About Forward-Looking Information” in this Quarterly Report on Form 10-Q. The financial information discussed below and included elsewhere in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations and cash flows may be in the future.
References in this discussion and analysis to “we,” “us,” “our” and similar terms refer to Cars.com Inc. and its subsidiaries, collectively, unless the context indicates otherwise.
Business Overview
We are a leading digital marketplace and solutions provider for the automotive industry that connects car shoppers with sellers and original equipment manufacturers (“OEM”s). Our 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. Our portfolio of brands includes Cars.com, Dealer Inspire and DealerRater, in addition to Auto.com, PickupTrucks.com and NewCars.com.
In May 2017, we separated from our former parent company, TEGNA Inc. (“TEGNA”) by means of a spin-off of a newly formed company, Cars.com Inc., which now owns TEGNA’s former digital automotive marketplace business (the “Separation”). Our 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”).
Overview of Results
|
(in thousands, except percentages) |
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Revenue (1) |
|
$ |
102,009 |
|
|
$ |
148,207 |
|
|
$ |
250,103 |
|
|
$ |
302,405 |
|
|
Net loss (2) |
|
|
(24,644 |
) |
|
|
(6,026 |
) |
|
|
(812,078 |
) |
|
|
(15,057 |
) |
|
Retail revenue as % of total revenue |
|
|
100 |
% |
|
|
90 |
% |
|
|
100 |
% |
|
|
90 |
% |
|
Wholesale revenue as % of total revenue |
|
|
0 |
% |
|
|
10 |
% |
|
|
0 |
% |
|
|
10 |
% |
|
(1) |
The decrease in revenue for the three and six months ended June 30, 2020 was primarily attributed to the COVID-19 pandemic and related restrictions, including the impact of the discounts we provided to our dealer customers. |
|
(2) |
The net loss for the three months ended June 30, 2020 was primarily attributed to the decline in revenue, partially offset by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions. The net loss for the six months ended June 30, 2020 was primarily attributed to the goodwill and intangible asset impairment of $905.9 million, or $757.1 million net of tax, as well as the impact of the COVID-19 pandemic and related restrictions. The net loss in each period was impacted by the following costs (in thousands): |
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Severance, transformation and other exit costs |
|
$ |
4,764 |
|
|
$ |
1,058 |
|
|
$ |
6,168 |
|
|
$ |
7,511 |
|
|
Transaction-related costs (1) |
|
|
20 |
|
|
|
2,579 |
|
|
|
117 |
|
|
|
4,623 |
|
|
Costs associated with stockholder activist campaign |
|
|
— |
|
|
|
5,225 |
|
|
|
— |
|
|
|
7,920 |
|
|
Total |
|
$ |
4,784 |
|
|
$ |
8,862 |
|
|
$ |
6,285 |
|
|
$ |
20,054 |
|
|
(1) |
Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. |
2020 Highlights and Trends
Coronavirus disease 2019 (“COVID-19”). In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it has spread throughout the United States and the rest of the world with different geographical locations impacted more than others. The COVID-19 pandemic has resulted in governmental authorities around the country implementing numerous measures to
18
contain the virus, such as quarantines, shelter-in-place orders and business shutdowns (the “related restrictions”). These restrictions have had, and we expect they will continue to have, a negative impact on regional and national economies and the automotive industry for an uncertain duration. While certain jurisdictions have relaxed some of these related restrictions, any resurgences of the pandemic may slow the reopening process.
The COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and have resulted in reduced consumer spending and an economic slowdown or recession. OEMs and automobile dealers operate in a highly competitive market and are vulnerable to both decreased supply and demand for new and used vehicles, as well as corresponding changes in vehicle pricing. Furthermore, certain OEMs have temporarily ceased production and certain dealerships have temporarily or permanently closed and more may close in the future in light of the COVID-19 pandemic and related restrictions. As a result of negative changes in the financial condition of dealers and overall uncertainty related to the automotive industry, in the second half of March 2020, our customers began to adjust, reduce or suspend their operating activities. This resulted and may continue to result in decreased subscription revenue and reduced demand for our services. Moreover, depending upon the progress of the pandemic and the government and societal responses thereto, our customers may implement further cost-savings measures, including additional reductions of their advertising spend.
In an effort to assist our dealer customers impacted by the COVID-19 pandemic and related restrictions, we provided, among other measures, financial relief in the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020. With respect to managing our expenses, we implemented multiple initiatives including both permanent and temporary measures, to adjust expenses with changes in revenue. These initiatives included an employee furlough and reduction in force, salary reductions, freezes on hiring and temporary labor, deferral of merit and promotion increases; a reduction of our marketing expense, while carefully maintaining consumer engagement as evidenced by our strong organic traffic; partnering with our vendors to reduce cost; and significant reductions of non-essential spending. We remain committed to and have intensified our efforts around cash flow discipline, including the identification of significant capital expenditures that can be deferred, and working capital management.
The effects of the COVID-19 pandemic and the related restrictions, particularly reduced consumer spending and the discounts that we provided our dealer customers for the second quarter of 2020, have negatively impacted our results of operations, cash flows and financial position. In addition, the extent of the impact will vary depending on the duration and severity of the economic and operational impacts of the COVID-19 pandemic and related restrictions. Therefore, the results for the six months ended June 30, 2020, may not be indicative of the results for the year ending December 31, 2020.
We have taken steps to strengthen our financial position during this period of heightened uncertainty. In June 2020, we entered into an amendment to our Credit Agreement (the “Second Amendment”) that provides for a waiver with respect to the Total Net Leverage Ratio and Consolidated Interest Coverage Ratio (each as defined in the Credit Agreement) financial covenants for the covenant testing periods through December 31, 2020 (the “Covenant Adjustment Period”). As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility. For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers will assist us as we navigate a rapidly changing marketplace. Additionally, we are focused on equipping our dealer customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying consumers are shopping from home. These solutions include virtual showrooms, home delivery badging, online chat and our FUELTM In-Market Video (“FUEL IMV”) product that allows dealers to target in-market buyers on streaming platforms.
Reduction in Force. On April 29, 2020, we announced the permanent reduction in force of approximately 170 people, the majority of whom had been placed on furlough in early April 2020. We estimate the pre-tax costs for this action to be in the range of approximately $4.0 to $4.75 million, substantially all of which are related to employee severance and were recorded during the three months ended June 30, 2020.
Traffic. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealers and national advertisers. We have been diligently focused on growing our audience, the fundamental deliverable of any marketplace business.
Driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping, we have experienced consistent year-over-year quarterly traffic growth. In the second quarter of 2020, we maintained strong organic Traffic growth, at rates that accelerated throughout the quarter, and achieved 10% growth in Traffic and 6% growth in Average Monthly Unique Visitors, compared to the prior year.
19
Although we experienced strong traffic in the first two quarters of 2020, given the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions, competitive spending, and reduced consumer spending, among other factors, we are uncertain as to how this may impact our traffic for the rest of 2020 and beyond.
Dealer Customers. In the second quarter of 2020, Dealer Customers declined by 905, or 5%, to 18,033 as of June 30, 2020, as compared with 18,938 as of March 31, 2020. This decrease was a result of lower sales and elevated cancellations as a result of the COVID-19 pandemic and related restrictions, partially offset by growth in digital solutions customers.
Given the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending, we are uncertain as to how this may impact our dealer customers for the rest of 2020 and beyond.
Credit Agreement Amendment. In June 2020, the Company entered into the Second Amendment to address the uncertainty around the impact of the COVID-19 pandemic that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter. During the covenant holiday period there is a minimum liquidity requirement of $75.0 million. For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
FUEL IMV Launch. In February 2020, we announced the launch of FUEL IMV, an innovative digital video solution focused on the $9.7 billion spent on TV advertising by the U.S. auto market. The new solution helps dealers, original equipment manufacturers and regional/dealer ad associations target serious ready-to-buy shoppers with digital videos streamed across various platforms, and combat the high costs and inefficiencies of traditional television advertising. We began generating FUEL IMV revenue in the first quarter of 2020.
Digital Solutions OEM Agreement. In 2019, we were selected as one of four preferred website providers to General Motors (“GM”). This allowed us to begin selling our website solutions to more than 4,100 GM dealers. This program is semi-exclusive and provides GM dealers a choice in provider for the first time in 15 years. We remain on track to launch the majority of our 800+ GM websites by the end of the year. This new agreement provides us with the opportunity to substantially increase our current website customer base, which was approximately 3,800 as of June 30, 2020.
Technology Transformation. In February 2019, we announced a restructuring of the product and technology teams, which primarily focused on shifting our technology spend towards innovation to improve our speed of product delivery, to enable integration across current and future systems, and to migrate our systems to the cloud (the “Technology Transformation”). In connection with the Technology Transformation, we aligned our product and technology teams with our long-term growth strategy to expand beyond listings to a digital solutions marketplace. As part of this process, we streamlined the existing teams as we modernize our technology platform and invest in a more efficient cloud-based infrastructure focused on machine learning, product innovation and growth. Although the impact of the COVID-19 pandemic and related restrictions has elongated our timeline for the completion of the Technology Transformation, we have achieved cost efficiencies and expect to achieve further cost efficiencies upon completion of the Technology Transformation.
Key Operating Metrics
We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make operating and strategic decisions. Information regarding Traffic and Average Monthly Unique Visitors is as follows:
|
|
|
Three Months Ended June 30, |
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
|
2020 |
|
|
2019 |
|
|
% Change |
|
||||||
|
Traffic (Visits) |
|
|
143,972,000 |
|
|
|
130,626,000 |
|
|
|
10 |
% |
|
|
302,893,000 |
|
|
|
263,099,000 |
|
|
|
15 |
% |
|
Average Monthly Unique Visitors |
|
|
22,810,000 |
|
|
|
21,559,000 |
|
|
|
6 |
% |
|
|
23,869,000 |
|
|
|
21,984,000 |
|
|
|
9 |
% |
20
Information regarding Dealer Customers and Direct Monthly Average Revenue Per Dealer is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020 |
|
|
June 30, 2019 |
|
|
% Change |
|
|
March 31, 2020 |
|
|
% Change |
|
|||||
|
Dealer Customers |
|
|
18,033 |
|
|
|
18,891 |
|
|
|
(5 |
)% |
|
|
18,938 |
|
|
|
(5 |
)% |
|
Direct Monthly Average Revenue Per Dealer |
|
$ |
1,442 |
|
|
$ |
2,163 |
|
|
|
(33 |
)% |
|
$ |
2,092 |
|
|
|
(31 |
)% |
Traffic (Visits). Traffic is fundamental to our business. Traffic to the CARS network of websites and mobile apps provides value to our advertisers in terms of audience, awareness, consideration and conversion. In addition to tracking traffic volume and sources, we monitor activity on our properties, allowing us to innovate and refine our consumer-facing offerings. Traffic is defined as the number of visits to CARS desktop and mobile properties (responsive sites and mobile apps), measured using Adobe Analytics. Traffic does not include traffic to Dealer Inspire websites. Visits refers to the number of times visitors accessed CARS properties during the period, no matter how many visitors make up those visits. Traffic provides an indication of our consumer reach. Although our consumer reach does not directly result in revenue, we believe our ability to reach in-market car shoppers is attractive to our dealer customers and national advertisers.
We believe the growth in Traffic was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping accelerated by the COVID-19 pandemic and related restrictions. For the three and six months ended June 30, 2020, mobile traffic accounted for 75% of total Traffic. For the three and six months ended June 30, 2019, mobile traffic accounted for 71% of total Traffic.
Although we experienced strong traffic in the first two quarters of 2020, the unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our traffic in 2020 and beyond.
Average Monthly Unique Visitors (“UVs”). Growth in unique visitors and consumer traffic to our network of websites and mobile apps increases the number of impressions, clicks, leads and other events we can monetize to generate revenue. We define UVs in a given month as the number of distinct visitors that engage with our platform during that month. Visitors are identified when a user first visits an individual CARS property on an individual device/browser combination or installs one of our mobile apps on an individual device. If a visitor accesses more than one of our web properties or apps or uses more than one device or browser, each of those unique property/browser/app/device combinations counts towards the number of UVs. UVs do not include Dealer Inspire UVs. We measure UVs using Adobe Analytics.
The growth in UVs was driven by our product innovations and investments in and efficiencies gained in search engine optimization, brand awareness and paid channels and a shift from in-person to virtual automobile research and shopping accelerated by the COVID-19 pandemic and related restrictions.
Dealer Customers. Dealer Customers represent dealerships using our products as of the end of each reporting period. Each physical or virtual dealership location is counted separately, whether it is a single-location proprietorship or part of a large consolidated dealer group. Multi-franchise dealerships at a single location are counted as one dealer.
Total Dealer Customers declined 5% from March 31, 2020. This decrease was primarily driven by cancellations of marketplace customers and lower new dealer customer sales, principally due to the COVID-19 pandemic and related restrictions. This decrease was partially offset by growth in digital solutions customers.
Total Dealer Customers declined 5% from June 30, 2019. This decrease was primarily driven by cancellations of marketplace customers and lower new dealer customer sales, principally due to the COVID-19 pandemic and related restrictions. This decrease was partially offset by growth in digital solutions customers.
The unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our dealer customers in 2020 and beyond.
Average Revenue Per Dealer (“ARPD”). We believe our ability to grow ARPD is an indicator of the value proposition of our products. We define ARPD as Direct retail revenue during the period divided by the monthly average number of direct dealer customers during the same period.
ARPD declined 31% from the ARPD of $2,092 for the three months ended March 31, 2020, primarily due to the impact of the invoice credits we provided to our marketplace customers during the second quarter of 2020 and in response to the COVID-19 pandemic and related restrictions.
21
ARPD declined 33% from June 30, 2019, primarily due to the impact of the invoice credits we provided to our marketplace customers during the second quarter of 2020 and in response to the COVID-19 pandemic and related restrictions.
Factors Affecting Our Performance. Our business is impacted by the changes in the larger automotive environment, including consumer demand and other macroeconomic factors, and changes related to automotive digital advertising. Changes in car sales volumes in the United States and reduced dealer profitability also influence OEMs’ and dealerships’ willingness to increase spend with automotive marketplaces like Cars.com. Beginning in the later part of March 2020, we observed decreased car sales and dealer profitability. Due to the impact of the COVID-19 pandemic and the related restrictions, these decreases are expected to continue in the near-term. The unknown duration and economic uncertainty related to the COVID-19 pandemic and related restrictions and reduced consumer spending have impacted and may continue to impact our business in 2020 and beyond.
Our long-term success will depend in part on our ability to continue to transform our business toward a multi-faceted suite of digital solutions that complement our online marketplace offerings. We believe our core strategic strengths, including our powerful family of brands, growing high-quality audience and suite of digital solutions for advertisers will assist us as we navigate a rapidly changing marketplace. Additionally, we are focused on equipping our customers with digital solutions to enable them to compete in an environment in which an increasing number of car-buying customers are shopping from home. These solutions include virtual showrooms, home delivery badging, online chat and our FUELTM In-Market Video product that allows dealers to target in-market buyers on streaming platforms. The foundation of our continued success is the value we deliver to customers, and we believe that our large and growing audience of in-market, undecided car shoppers and innovative solutions deliver significant value to our customers.
Results of Operations
Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
|
|
|
Three Months Ended June 30, |
|
|
Increase |
|
|
|
|
|
||||||
|
(In thousands, except percentages) |
|
2020 |
|
|
2019 |
|
|
(Decrease) |
|
|
% Change |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
83,242 |
|
|
$ |
111,190 |
|
|
$ |
(27,948 |
) |
|
|
(25 |
)% |
|
National advertising |
|
|
16,021 |
|
|
|
19,296 |
|
|
|
(3,275 |
) |
|
|
(17 |
)% |
|
Other |
|
|
2,746 |
|
|
|
3,624 |
|
|
|
(878 |
) |
|
|
(24 |
)% |
|
Retail |
|
|
102,009 |
|
|
|
134,110 |
|
|
|
(32,101 |
) |
|
|
(24 |
)% |
|
Wholesale |
|
|
— |
|
|
|
14,097 |
|
|
|
(14,097 |
) |
|
|
(100 |
)% |
|
Total revenue |
|
|
102,009 |
|
|
|
148,207 |
|
|
|
(46,198 |
) |
|
|
(31 |
)% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue and operations |
|
|
22,912 |
|
|
|
24,319 |
|
|
|
(1,407 |
) |
|
|
(6 |
)% |
|
Product and technology |
|
|
12,031 |
|
|
|
15,339 |
|
|
|
(3,308 |
) |
|
|
(22 |
)% |
|
Marketing and sales |
|
|
32,036 |
|
|
|
53,740 |
|
|
|
(21,704 |
) |
|
|
(40 |
)% |
|
General and administrative |
|
|
16,460 |
|
|
|
21,963 |
|
|
|
(5,503 |
) |
|
|
(25 |
)% |
|
Affiliate revenue share |
|
|
4,601 |
|
|
|
2,176 |
|
|
|
2,425 |
|
|
|
111 |
% |
|
Depreciation and amortization |
|
|
31,193 |
|
|
|
29,666 |
|
|
|
1,527 |
|
|
|
5 |
% |
|
Total operating expenses |
|
|
119,233 |
|
|
|
147,203 |
|
|
|
(27,970 |
) |
|
|
(19 |
)% |
|
Operating (loss) income |
|
|
(17,224 |
) |
|
|
1,004 |
|
|
|
(18,228 |
) |
|
***% |
|
|
|
Nonoperating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(7,924 |
) |
|
|
(7,711 |
) |
|
|
(213 |
) |
|
|
3 |
% |
|
Other income, net |
|
|
557 |
|
|
|
9 |
|
|
|
548 |
|
|
***% |
|
|
|
Total nonoperating expense, net |
|
|
(7,367 |
) |
|
|
(7,702 |
) |
|
|
335 |
|
|
|
(4 |
)% |
|
Loss before income taxes |
|
|
(24,591 |
) |
|
|
(6,698 |
) |
|
|
(17,893 |
) |
|
***% |
|
|
|
Income tax expense (benefit) |
|
|
53 |
|
|
|
(672 |
) |
|
|
725 |
|
|
***% |
|
|
|
Net loss |
|
$ |
(24,644 |
) |
|
$ |
(6,026 |
) |
|
$ |
(18,618 |
) |
|
***% |
|
|
*** Not meaningful
Retail Revenue—Direct. Direct revenue consists of marketplace and digital solutions sold to dealer customers. Direct revenue is our largest revenue stream, representing 81.6% and 75.0% of total revenue for the three months ended June 30, 2020 and 2019, respectively.
22
As of October 1, 2019, we have successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. During the three months ended June 30, 2020, the affiliate market conversions contributed an incremental $10.8 million to Direct revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
The overall decrease was primarily due to a 33% decline in ARPD from June 30, 2019 primarily due to the impact of the invoice credits we provided to our dealer customers during the second quarter of 2020 in response to the COVID-19 pandemic and related restrictions, as well as a 5% decline in Dealer Customers.
Retail Revenue—National Advertising. National advertising revenue consists of display advertising and other solutions sold to OEMs, advertising agencies and automotive dealer customers. National advertising revenue represents 15.7% and 13.0% of total revenue for the three months ended June 30, 2020 and 2019, respectively. National advertising revenue declined 17%, primarily due to higher cancellations, principally due to the COVID-19 pandemic and related restrictions.
Wholesale Revenue. Wholesale revenue represented the fees we charged for marketplace and digital solutions sold to dealers by affiliates. The fees represented approximately 60% of the retail value for the same online subscription products sold by our direct sales team. Wholesale revenue represented 9.5% of total revenue for the three months ended June 30, 2019. As of October 1, 2019, we successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Cost of revenue and operations. Cost of revenue and operations expense primarily consists of expenses related to our pay-per-lead products, third-party costs for processing dealer vehicle inventory, product fulfillment, customer service and compensation costs. Cost of revenue and operations expense represents 22.5% and 16.4% of total revenue for the three months ended June 30, 2020 and 2019, respectively. Cost of revenue and operations expense decreased $1.4 million, primarily due to lower third party costs and lower compensation costs, driven by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions, partially offset by growth in dealer websites and related digital solutions, which have an inherently higher cost of revenue.
Product and technology. The product team creates and manages consumer and dealer-facing innovation, manages consumer user experience and includes the costs associated with our editorial and data strategy teams. The technology team develops and supports our products and websites. Product and technology expense includes compensation costs, as well as license fees for vehicle specifications, search engine optimization, hardware/software maintenance, software licenses, data center and other infrastructure costs. Product and technology expense represents 11.8% and 10.3% of total revenue for the three months ended June 30, 2020 and 2019, respectively. Product and technology expense decreased primarily due to cost efficiencies and lower compensation costs as a result of the Technology Transformation and by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.
Marketing and sales. Marketing and sales expense primarily consists of traffic and lead acquisition costs (including search engine and other online marketing), TV and digital display/video advertising and creative production, market research, trade events and compensation costs for the marketing, sales and sales support teams. Marketing and sales expenses represent 31.4% and 36.3% of total revenue for the three months ended June 30, 2020 and 2019, respectively. Marketing and sales expense decreased due to a reduction of our marketing expense which was achieved by focusing on customer acquisition and leveraging efficiencies gained, while carefully maintaining consumer engagement as evidenced by our strong organic traffic, and a shift from in-person to virtual automobile research and shopping.
General and administrative. General and administrative expense primarily consists of compensation costs for the executive, finance, legal, human resources, facilities and other administrative employees. In addition, general and administrative expense includes office space rent, legal and accounting services, other professional services, transaction-related costs and costs related to the write-off and loss on assets, excluding the goodwill and intangible asset impairment discussed below. General and administrative expense represents 16.1% and 14.8% of total revenue for the three months ended June 30, 2020 and 2019, respectively. During the three months ended June 30, 2020 and 2019, General and administrative expense included the following costs (in thousands):
23
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Severance, transformation and other exit costs |
|
$ |
4,764 |
|
|
$ |
1,058 |
|
|
Transaction-related costs (1) |
|
|
20 |
|
|
|
2,579 |
|
|
Costs associated with stockholder activist campaign |
|
|
— |
|
|
|
5,225 |
|
|
Total |
|
$ |
4,784 |
|
|
$ |
8,862 |
|
|
(1) |
Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. |
Excluding these costs, general and administrative expense decreased 10.9% for the three months ended June 30, 2020, compared to the prior year. General and administrative expenses decreased primarily due to our management of expenses, primarily related to compensation, to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.
Depreciation and amortization. Depreciation and amortization expense increased primarily due to depreciation and amortization on additional assets acquired.
Affiliate revenue share. Affiliate revenue share expense represents payments made to affiliates pursuant to our affiliate agreements and amortization of the Unfavorable contracts liability related to converted markets. Affiliate revenue share expense increased, primarily due to the additional markets converted during the last twelve months, partially offset by the expiration of certain affiliate agreements and no amortization of the unfavorable contracts liability. A summary of Affiliate revenue share expense is as follows (in thousands):
|
|
Three Months Ended June 30, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Affiliate revenue share expense, gross |
$ |
4,601 |
|
|
$ |
8,011 |
|
|
Less: Amortization of the Unfavorable contracts liability |
|
— |
|
|
|
(5,835 |
) |
|
Affiliate revenue share expense, as reported |
$ |
4,601 |
|
|
$ |
2,176 |
|
For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Interest expense, net. Interest expense, net increased by $0.2 million compared to the prior year. For information related to our interest rate swap, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Other income, net. Other income, net increased, primarily due to the unrealized gain on the mark-to-market adjustment related to the interest rate swap. For information related to the impairment, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Income tax benefit. The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income taxes, was 0% for the three months ended June 30, 2020 and differed from the U.S. federal statutory rate of 21%, due to the full valuation allowance on the U.S. company’s net deferred tax asset position.
24
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, |
|
|
Increase |
|
|
|
|
|
||||||
|
(In thousands, except percentages) |
|
2020 |
|
|
2019 |
|
|
(Decrease) |
|
|
% Change |
|
||||
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
208,603 |
|
|
$ |
226,284 |
|
|
$ |
(17,681 |
) |
|
|
(8 |
)% |
|
National advertising |
|
|
35,414 |
|
|
|
39,591 |
|
|
|
(4,177 |
) |
|
|
(11 |
)% |
|
Other |
|
|
6,086 |
|
|
|
7,573 |
|
|
|
(1,487 |
) |
|
|
(20 |
)% |
|
Retail |
|
|
250,103 |
|
|
|
273,448 |
|
|
|
(23,345 |
) |
|
|
(9 |
)% |
|
Wholesale |
|
|
— |
|
|
|
28,957 |
|
|
|
(28,957 |
) |
|
|
(100 |
)% |
|
Total revenue |
|
|
250,103 |
|
|
|
302,405 |
|
|
|
(52,302 |
) |
|
|
(17 |
)% |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue and operations |
|
|
48,942 |
|
|
|
49,898 |
|
|
|
(956 |
) |
|
|
(2 |
)% |
|
Product and technology |
|
|
26,904 |
|
|
|
33,202 |
|
|
|
(6,298 |
) |
|
|
(19 |
)% |
|
Marketing and sales |
|
|
86,958 |
|
|
|
114,083 |
|
|
|
(27,125 |
) |
|
|
(24 |
)% |
|
General and administrative |
|
|
30,577 |
|
|
|
45,851 |
|
|
|
(15,274 |
) |
|
|
(33 |
)% |
|
Affiliate revenue share |
|
|
10,970 |
|
|
|
4,630 |
|
|
|
6,340 |
|
|
***% |
|
|
|
Depreciation and amortization |
|
|
62,154 |
|
|
|
57,791 |
|
|
|
4,363 |
|
|
|
8 |
% |
|
Goodwill and intangible asset impairment |
|
|
905,885 |
|
|
|
— |
|
|
|
905,885 |
|
|
***% |
|
|
|
Total operating expenses |
|
|
1,172,390 |
|
|
|
305,455 |
|
|
|
866,935 |
|
|
***% |
|
|
|
Operating loss |
|
|
(922,287 |
) |
|
|
(3,050 |
) |
|
|
(919,237 |
) |
|
***% |
|
|
|
Nonoperating (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(15,450 |
) |
|
|
(15,277 |
) |
|
|
(173 |
) |
|
|
1 |
% |
|
Other (expense) income, net |
|
|
(8,944 |
) |
|
|
128 |
|
|
|
(9,072 |
) |
|
***% |
|
|
|
Total nonoperating expense, net |
|
|
(24,394 |
) |
|
|
(15,149 |
) |
|
|
(9,245 |
) |
|
|
61 |
% |
|
Loss before income taxes |
|
|
(946,681 |
) |
|
|
(18,199 |
) |
|
|
(928,482 |
) |
|
***% |
|
|
|
Income tax benefit |
|
|
(134,603 |
) |
|
|
(3,142 |
) |
|
|
(131,461 |
) |
|
***% |
|
|
|
Net loss |
|
$ |
(812,078 |
) |
|
$ |
(15,057 |
) |
|
$ |
(797,021 |
) |
|
***% |
|
|
*** Not meaningful
Retail Revenue—Direct. Direct revenue is our largest revenue stream, representing 83.4% and 74.8% of total revenue for the six months ended June 30, 2020 and 2019, respectively.
As of October 1, 2019, we have successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. We now have a direct relationship with all dealer customers and recognize the revenue associated with converted dealer customers as Retail revenue, rather than Wholesale revenue, in the Consolidated Statements of Loss. During the six months ended June 30, 2020, the affiliate market conversions contributed an incremental $28.3 million to Direct revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
The overall decrease was primarily due to a 33% decline in ARPD from June 30, 2019 primarily due to the impact of the invoice credits we provided to our dealer customers during the second quarter of 2020 in response to the COVID-19 pandemic and related restrictions, as well as a 5% decline in Dealer Customers.
Retail Revenue—National Advertising. National advertising revenue represents 14.2% and 13.1% of total revenue for the six months ended June 30, 2020 and 2019, respectively. National advertising revenue declined 11%, primarily due to higher cancellations, principally due to the COVID-19 pandemic and related restrictions.
Wholesale Revenue. The fees represented approximately 60% of the retail value for the same online subscription products sold by our direct sales team. Wholesale revenue represented 9.6% of total revenue for the six months ended June 30, 2019. As of October 1, 2019, we successfully converted all affiliates to our direct control, and no longer have Wholesale revenue. For information related to the affiliate market conversions, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Cost of revenue and operations. Cost of revenue and operations expense represents 19.6% and 16.5% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Cost of revenue and operations expense decreased primarily due to lower third party costs, driven by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related
25
restrictions, partially offset by an increase in compensation costs and growth in dealer websites and related digital solutions, which have an inherently higher cost of revenue.
Product and technology. Product and technology expense represents 10.8% and 11.0% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Product and technology expense decreased primarily due to lower compensation costs and cost efficiencies as a result of the Technology Transformation by our management of expenses to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.
Marketing and sales. Marketing and sales expenses represent 34.8% and 37.7% of total revenue for the six months ended June 30, 2020 and 2019, respectively. Marketing and sales expense decreased due to a reduction of our marketing expense which was achieved by focusing on customer acquisition and leveraging efficiencies gained, while carefully maintaining consumer engagement as evidenced by our strong organic traffic, and a shift from in-person to virtual automobile research and shopping.
General and administrative. General and administrative expense represents 12.2% and 15.2% of total revenue for the six months ended June 30, 2020 and 2019, respectively. During the six months ended June 30, 2020 and 2019, General and administrative expense included the following costs (in thousands):
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Severance, transformation and other exit costs |
|
$ |
6,168 |
|
|
$ |
7,511 |
|
|
Transaction-related costs (1) |
|
|
117 |
|
|
|
4,623 |
|
|
Costs associated with stockholder activist campaign |
|
|
— |
|
|
|
7,920 |
|
|
Total |
|
$ |
6,285 |
|
|
$ |
20,054 |
|
|
(1) |
Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. |
Excluding these costs, general and administrative expense decreased 5.8% for the six months ended June 30, 2020, compared to the prior year. General and administrative expenses decreased primarily due to our management of expenses, primarily related to compensation, to adjust to changes in revenue due to the COVID-19 pandemic and related restrictions.
Depreciation and amortization. Depreciation and amortization expense increased primarily due to depreciation and amortization on additional assets acquired.
Affiliate revenue share. Affiliate revenue share expense increased, primarily due to the additional markets converted during the last twelve months, partially offset by the expiration of certain affiliate agreements. A summary of Affiliate revenue share expense is as follows (in thousands):
|
|
Six Months Ended June 30, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Affiliate revenue share expense, gross |
$ |
10,970 |
|
|
$ |
16,299 |
|
|
Less: Amortization of the Unfavorable contracts liability |
|
— |
|
|
|
(11,669 |
) |
|
Affiliate revenue share expense, as reported |
$ |
10,970 |
|
|
$ |
4,630 |
|
For information related to the Unfavorable contracts liability, see Note 7 (Unfavorable Contracts Liability) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Goodwill and intangible asset impairment. We determined there was a triggering event, caused by the economic impacts of the COVID-19 pandemic and related restrictions. We 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, we recorded an impairment of $505.9 million and $400.0 million, respectively. For information related to the impairment, see Note 4 (Goodwill and Indefinite-lived Intangible Asset) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Interest expense, net. Interest expense, net increased by $0.2 million compared to the prior year. For information related to our interest rate swap, see Note 5 (Debt) and Note 6 (Interest Rate Swap) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
26
Other (expense) income, net. Other (expense) income, net decreased, primarily due to an impairment of a $9.4 million of non-marketable investment, triggered by the COVID-19 pandemic and the related restrictions. This investment had been recorded within Investments and other assets on the Consolidated Balance Sheets.
Income tax benefit. The effective income tax rate, expressed by calculating the income tax benefit as a percentage of Loss before income taxes, was 14% for the six months ended June 30, 2020 and differed from the U.S. federal statutory rate of 21%, primarily due to the tax impact of the goodwill and intangible asset impairments and a full valuation allowance on the U.S. company’s net deferred tax asset position.
Liquidity and Capital Resources
Overview. Our primary sources of liquidity are cash flows from operations, available cash reserves and debt capacity available under our credit facilities. Our operations have generated positive operating cash flows in 2020 and 2019 which, along with our Term and Revolving Loans described below, provides adequate liquidity to meet our business needs, including those for investments and strategic acquisitions. In addition, we may raise additional funds through other public or private debt or equity financings. At this time, we do not expect the impact of the COVID-19 pandemic and related restrictions to impact our ability to meet our business needs for the foreseeable future. However, our ability to maintain adequate liquidity for our operations in the future is dependent upon a number of factors, including our revenue, macroeconomic conditions, the duration and severity of the economic and operational impacts caused by the COVID-19 pandemic and related restrictions, our ability to contain costs, including capital expenditures, and to collect accounts receivable, and various other factors, many of which are beyond our direct control. We are subject to certain financial and other covenants contained in our Credit Agreement. In June 2020, we entered into an amendment to our Credit Agreement that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter. In addition, the Second Amendment also includes a minimum liquidity requirement of $75.0 million and adds an anti-cash hoarding covenant, which requires, during the Covenant Adjustment Period, mandatory prepayments of the revolving credit loans with the amount of any unrestricted cash located in the Company’s deposit accounts in excess of $75.0 million. The impact of the COVID-19 pandemic and related restrictions may affect our ability to comply with such covenants. We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. See Part II, Item 1A., “Risk Factors” of this Quarterly Report on Form 10-Q. As of June 30, 2020, Cash and cash equivalents were $56.9 million.
Term Loan and Revolving Loan. As of June 30, 2020, the outstanding principal amount under the Term Loan was $371.3 million, with an interest rate of 5.5%, including the impact of the interest rate swap. The outstanding borrowings under the Revolving Loan were $275.0 million, with an interest rate of 3.3%. During the six months ended June 30, 2020, we made $16.9 million in mandatory Term Loan payments and $150.0 million in Revolving Loan payments. The debt repayments were primarily associated with the $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020. As of June 30, 2020, $175.0 million was available to borrow under the Revolving Loan.
In October 2019, we entered into an amendment to our Credit Agreement to increase the total net leverage covenant during the remaining term of the Credit Agreement while preserving the favorable pricing structure from the original agreement. The amendment increased our maximum total net leverage ratio from 3.75x to 4.50x with incremental step downs through the maturities of the Term Loan and the Revolving Loan on May 31, 2022. In June 2020, we entered into an amendment to our Credit Agreement that includes a covenant holiday with an exemption from the net leverage and interest coverage ratios that addresses the impact of COVID-19 through the end of 2020, and maximum net leverage of 6.50x effective March 31, 2021, with step downs thereafter. During the covenant holiday period there is a minimum liquidity requirement of $75.0 million. As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility.
Interest Rate Swap. The interest rate on borrowings under our Term Loan is floating and, therefore, subject to fluctuations. In order to manage the risk associated with changes in interest rates on our borrowing, we entered into an interest rate swap agreement (the “Swap”) effective December 31, 2018. Under the terms of the Swap, we are locked into a fixed rate of interest of 2.96% plus an applicable margin, as defined in our Credit Agreement, on a notional amount of $300 million.
The Second Amendment triggered a quantitative hedge effectiveness test, which resulted in the loss of hedge accounting. As a result, as of the date of the amendment, the unrealized loss included within Accumulated other comprehensive loss will be ratably reclassified into Net loss over the remaining term of the Swap. A portion of the unrealized loss shall be recorded to Interest expense, net and Income tax expense (benefit) within the Consolidated Statements of Loss. Subsequent to the Second Amendment, any changes in the fair value of the Swap are recorded within Other income (expense), net on the Consolidated Statements of Loss.
27
As of June 30, 2020, the fair value of the Swap was an unrealized loss of $16.1 million, of which $8.4 million and $7.7 million is recorded in Other accrued liabilities and Other noncurrent liabilities, respectively, on the Consolidated Balance Sheets. During the six months ended June 30, 2020 and June 30, 2019, $3.1 million and $0.7 million in Interest expense, net of which $0.3 million and zero was reclassified from Accumulated other comprehensive loss, respectively. During the six months ended June 30, 2020, $0.1 million was reclassified from Accumulated other comprehensive loss into Income tax expense (benefit) on the Consolidated Statements of Loss. Additionally, $0.6 million was included within Other income (expense), net on the Consolidated Statements of Loss related to the change in the fair value of the Interest rate swap from the date of the Second Amendment to June 30, 2020.
Share Repurchase Program. In March 2018, our Board of Directors authorized a stock repurchase program to acquire up to $200 million of our common stock over a two-year period. We were allowed to repurchase stock from time to time in open market transactions or through privately negotiated transactions in accordance with applicable federal securities laws. The timing and amounts of any purchases under the stock repurchase program will be based on market conditions and other factors including price. The repurchase program did not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice. In March 2020, the repurchase program expired and there were no share repurchases during 2020. The Company repurchased and subsequently retired 1.7 million shares for $40.0 million during the six months ended June 30, 2019.
Cash Flows. Details of our cash flows are as follows (in thousands):
|
|
|
Six Months Ended June 30, |
|
|
|
|
|
|||||
|
|
|
2020 |
|
|
2019 |
|
|
Change |
|
|||
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
57,629 |
|
|
$ |
50,755 |
|
|
$ |
6,874 |
|
|
Investing activities |
|
|
(8,725 |
) |
|
|
(9,953 |
) |
|
|
1,228 |
|
|
Financing activities |
|
|
(5,508 |
) |
|
|
(56,726 |
) |
|
|
51,218 |
|
|
Net change in cash and cash equivalents |
|
$ |
43,396 |
|
|
$ |
(15,924 |
) |
|
$ |
59,320 |
|
Operating Activities. The increase in cash provided by operating activities was primarily related to reduction of net loss, excluding the impact of non-cash items, as well as changes in operating assets and liabilities. In addition, the net loss for the six months ended June 30, 2020 and 2019 was impacted by the following costs (in thousands):
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Severance, transformation and other exit costs |
|
$ |
6,168 |
|
|
$ |
7,511 |
|
|
Transaction-related costs (1) |
|
|
117 |
|
|
|
4,623 |
|
|
Costs associated with stockholder activist campaign |
|
|
— |
|
|
|
7,920 |
|
|
Total |
|
$ |
6,285 |
|
|
$ |
20,054 |
|
|
(1) |
Transaction-related costs are certain expense items resulting from actual or potential transactions such as business combinations, mergers, acquisitions, dispositions, spin-offs, financing transactions, and other strategic transactions, including, without limitation, (a) transaction-related bonuses and (b) expenses for advisors and representatives such as investment bankers, consultants, attorneys and accounting firms. Transaction-related costs may also include, without limitation, transition and integration costs such as retention bonuses and acquisition-related milestone payments to acquired employees, in addition to consulting, compensation and other incremental costs associated with integration projects. |
Investing Activities. The decrease in cash used in investing activities is primarily due to a decrease in purchases of property and equipment.
Financing Activities. During the six months ended June 30, 2020, cash used in financing activities is primarily related to $166.9 million in debt repayments and $3.3 million of debt issuance costs related to the Second Amendment. The debt repayments were primarily associated with the $165.0 million in proceeds related to our draw on our revolver during the first quarter of 2020. For information related to our Term and Revolving Loans, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Commitments and Contingencies. For information related to commitments and contingencies, see Note 8 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements. We do not have any material off-balance sheet arrangements.
28
Critical Accounting Policies. For information related to critical accounting policies, see “Critical Accounting Policies and Estimates” in Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of the Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on February 26, 2020 and see Note 1 (Description of Business, Company History and Summary of Significant Accounting Policies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q. During the six months ended June 30, 2020, there have been no changes to our critical accounting policies.
Recent Accounting Pronouncements. For information related to recent accounting pronouncements, see Note 2 (New Accounting Pronouncements) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
29
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see “Quantitative and Qualitative Disclosures About Market Risk,” in Part II, Item 7A., of the Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020. Our exposures to market risk have not changed materially since December 31, 2019.
Item 4. Controls and Procedures
Disclosure Controls and Procedures. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control Over Financial Reporting. During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). We have not experienced any material impact to our internal control over financial reporting despite the fact that most of our employees are working remotely due to the novel coronavirus disease 2019 (“COVID-19”) pandemic and related restrictions. We are continually monitoring and assessing the COVID-19 pandemic and related restrictions on our internal controls to minimize the effect on their design and operating effectiveness.
30
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
For information relating to legal proceedings, see Note 8 (Commitments and Contingencies) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
Our business and the ownership of our common stock are subject to a number of risks and uncertainties, including those described in Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission (“SEC”) on February 26, 2020, which could materially affect our business, financial condition, results of operations and future results. Other than as set forth below, there have been no material changes from the risk factors described in our Annual Report on Form 10-K.
The COVID-19 pandemic and related restrictions have materially and adversely affected, and could continue to materially and adversely affect, our business, financial condition, liquidity and results of operations.
The novel coronavirus disease 2019 (“COVID-19”) pandemic and related restrictions have resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide, and have caused significant volatility in U.S. and international debt and equity markets.
Our business, financial condition, liquidity and operating results have been, and will continue to be, adversely affected by the COVID-19 pandemic and related restrictions, including any resurgences of the pandemic. For example, the COVID-19 pandemic and related restrictions have caused a widespread increase in unemployment and are expected to result in reduced consumer spending and an economic slowdown or recession. Substantially all of our revenue is generated from subscription services offered to automotive dealers and our national advertising offerings to original equipment manufacturers (“OEMs") and other advertisers in or endemic to the automotive industry and our business may be negatively affected during times of low automobile sales and high unemployment. To the extent that a weakened economy continues to impact our customers’ ability or willingness to pay for our services or our vendors’ ability to provide services to us, our operations, liquidity and financial condition could be negatively impacted.
OEMs and automobile dealers operate in a highly competitive market and are vulnerable to both decreased supply and demand for new and used vehicles, as well as corresponding changes in vehicle pricing. Furthermore, certain OEMs have temporarily ceased production and certain dealerships have temporarily or permanently closed and more may close in the future in light of the COVID-19 pandemic and related restrictions. Negative changes in the financial condition of dealers has resulted and may continue to result in decreased subscription revenue and reduced demand for our services. Moreover, the impact of the COVID-19 pandemic and related restrictions on dealers may materially reduce our number of dealer customers in the future. Additionally, OEMs have and may continue to reduce their advertising spend on our platforms due to the impact of the COVID-19 pandemic and related restrictions on the automotive industry. All of these factors could adversely impact our profitability and financial results.
In an effort to assist our dealer customers impacted by the COVID-19 pandemic and related restrictions, we provided, among other measures, financial relief in the form of certain invoice credits of 50% for April 2020 and 30% for May and June 2020. These discounts and reduced consumer spending have negatively impacted our revenue and results of operations in the near term and, if not effective in mitigating the effects of the COVID-19 pandemic and related restrictions on our dealer customers, may adversely affect our business and results of operations more substantially in the long term.
With respect to managing our expenses, we have implemented multiple initiatives to adjust our expenses in response to changes in revenue. These steps have included an employee furlough, reduction in force, salary reductions, freezes on hiring and temporary labor, deferral of merit and promotion increases; a reduction of our marketing expense, while carefully maintaining consumer engagement as evidenced by our strong organic traffic; partnering with vendors to reduce cost; and significant reductions of non-essential spending. Despite our efforts, we cannot accurately predict whether these measures will be effective in mitigating the impact of the COVID-19 pandemic and related restrictions on our operations, liquidity and financial condition or whether these measures will affect the productivity of our workforce, reduce consumer traffic to our websites or otherwise affect our operations. We may be required to implement additional expense-reduction measures or amend our debt instruments in the future if the COVID-19 pandemic and related restrictions persist over a longer period, which could further adversely impact our operations, liquidity and financial condition.
The extent to which the COVID-19 pandemic and responses to it impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including: the duration and scope of the pandemic; actions that have been and continue to be taken in response to the pandemic; the availability and cost to access the capital markets; the effect on our dealer customers’ demand
31
for and ability to pay for our services; the effect on consumer demand for our services; disruptions or restrictions on our employees’ ability to work and travel; and impacts on employee health and responses to it. During the period of the COVID-19 pandemic and related restrictions, we may not be able to provide the same level of customer service and product features that our dealer customers and consumers are used to, which could negatively impact their perception of our service resulting in an increase in cancellations or reduction in traffic to our website.
We are subject to certain financial and other covenants contained in our Credit Agreement. The impact of the COVID-19 pandemic and related restrictions may affect our ability to comply with such covenants. We have taken steps to strengthen our financial position during this period of heightened uncertainty. In June 2020, we entered into an amendment to our Credit Agreement (the “Second Amendment”) that provides for a waiver with respect to the Total Net Leverage Ratio and Consolidated Interest Coverage Ratio financial covenants for the covenant testing periods through December 31, 2020 (the “Covenant Adjustment Period”). As of June 30, 2020, our liquidity, as defined in the Credit Agreement, was approximately $232.2 million including cash and cash equivalents and availability under the revolving credit facility. We may further seek to amend our Credit Agreement to provide greater comfort that we will be able to remain in compliance with our obligations but we may not be able to do so on terms that are acceptable or to the extent necessary to avoid a default, depending upon conditions in the credit markets, the length and depth of the market reaction to the pandemic and our ability to compete in this environment. We may also seek to raise funds through debt or equity financing in the future to fund operations, significant investments or acquisitions that are consistent with our strategy. Due to the risks created by the COVID-19 pandemic and related restrictions the conditions of the capital markets may be more volatile and uncertain. If we need to access the capital markets, there can be no assurance that financing may be available on attractive terms, if at all. For information related to debt, see Note 5 (Debt) to the accompanying Consolidated Financial Statements included in Part I, Item 1., “Financial Statements” of this Quarterly Report on Form 10-Q.
We will continue to actively monitor the issues raised by the COVID-19 pandemic and related restrictions and may take further actions that alter our business operations, as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners and stockholders. It is not clear what the potential lasting effects any such alterations or modifications may have on our business, including the effects on our OEM and dealer customers, suppliers or vendors, consumers or on our financial results. The impact of the COVID-19 pandemic and related restrictions may also heighten other risks discussed in our Annual Report on Form 10-K, which could adversely affect our business, financial condition, liquidity and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Index
|
Exhibit Number |
|
Description |
|
10.1** |
|
|
|
10.2*^ |
|
|
|
10.3**^ |
|
32
|
Exhibit Number |
|
Description |
|
|
|
|
|
31.1* |
|
|
|
31.2* |
|
|
|
32.1* |
|
|
|
32.2* |
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
104 |
|
The cover page from this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL (included with Exhibit 101 attachments) |
|
|
|
|
|
* |
Filed herewith. |
|
** |
Previously filed. |
|
^ |
Management contract or compensatory plan or arrangement. |
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
Cars.com Inc. |
||
|
|
|
|
|
|
|
Date: July 30, 2020 |
|
By: |
|
/s/ T. Alex Vetter |
|
|
|
|
|
T. Alex Vetter |
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
Date: July 30, 2020 |
|
By: |
|
/s/ Sonia Jain |
|
|
|
|
|
Sonia Jain |
|
|
|
|
|
Chief Financial Officer |
34