Correspondence 0001395942-23-000006 from OPENLANE, Inc. (KAR) (CIK 0001395942) (OPLN)
OPENLANE, Inc. (KAR) (CIK 0001395942)
Date: Jan. 20, 2023 · CIK: 0001395942 · Accession: 0001395942-23-000006
AI Filing Summary & Sentiment
File numbers found in text: 001-34568
Referenced dates: December 27, 2022
Letter
VIA EDGAR Securities and Exchange Commission Division of Corporation Finance Filed February 23, 2022 Form 10-Q for Fiscal Period Ended September 30, 2022 Filed November 2, 2022 File No. 001-34568
Dear Ms. Chaudhry and Mr. Jones:
On behalf of KAR Auction Services, Inc. (the “Company”), this letter provides a response to the comment letter from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Mr. Scott A. Anderson, Chief Accounting Officer of the Company, dated December 27, 2022 (the “Comment Letter”), in connection with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Commission on February 23, 2022 (the “2021 Form 10-K”), and the quarterly report on Form 10-Q for the quarterly period ended September 30, 2022 (the “Q3 2022 Form 10-Q”), filed with the Commission on November 2, 2022. The Company’s responses to the comments raised by the Staff in the Comment Letter are set forth below. For the convenience of the Staff, we have repeated the Staff’s comments before the responses.
Division of Corporation Finance
January 20, 2023
Page 2
Form 10-K for the Fiscal Year Ended December 31, 2021
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Years Ended December 31, 2021 and 2020
ADESA Results
Revenue, page 35
1.It appears the increase in total ADESA/Marketplace revenue in 2021 compared to 2020 was due to the increase in purchased vehicle sales. Also, it appears this revenue category was the primary reason for the decrease in total revenue for the nine months ended September 30, 2022 compared to the corresponding prior year period. We further note that for each quarter in fiscal 2022 the quarterly amount of revenue in the current year period was lower than that for the corresponding prior year period for this revenue category. However, there does not appear to be discussion of any of these points as well the reason for the decreased trend of contribution of this revenue category to total revenue in fiscal 2022. Please explain these points to us and any related trend information pursuant to Item 303(b)(2)(ii) of Regulation S-K with view toward disclosure as appropriate to the extent relevant to interim and annual periods.
RESPONSE: The Company acknowledges the Staff's comment, and in future filings will expand its disclosures to provide additional quantitative information related to certain factors contributing to period-over-period changes in our consolidated and segment results. The Company has disclosed the revenue recognition models for the three ADESA/Marketplace revenue streams: Auction fees, Service revenue and Purchased vehicle sales as noted on page 71 of the 2021 Form 10-K. Please reference the below revised disclosure excerpts from our 2021 Form 10-K related to our ADESA Results section, as examples of how we intend to expand our disclosures in future filings:
Total ADESA Revenue
Revenue from ADESA increased $42.3 million, or 2%, to $1,962.4 million for the year ended December 31, 2021, compared with $1,920.1 million for the year ended December 31, 2020. Businesses acquired since the fourth quarter of 2020 accounted for an increase in revenue of $139.1 million. The change in revenue included the impact of an increase in revenue of $18.5 million due to fluctuations in the Canadian dollar exchange rate and an increase of $7.7 million due to fluctuations in the euro exchange rate. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, ADESA's total revenue in 2021 decreased from 2020. The decrease was primarily attributable to the decrease in the number of vehicles sold.
The 15% decrease in the number of vehicles sold was comprised of a 34% decline in commercial volumes, partially offset by a 37% increase in dealer consignment volumes. The decrease in the number of vehicles sold at auction was driven by a lack of supply in the used car market.
Division of Corporation Finance
January 20, 2023
Page 3
Auction Fees
Auction fees decreased $9.9 million, or 1%, to $877.8 million for the year ended December 31, 2021, compared with $887.7 million for the year ended December 31, 2020. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the year ended December 31, 2021 increased $49, or 17%, reflecting higher vehicle values and a smaller mix of lower-fee commercial off-premise vehicles.
Service Revenue
Service revenue decreased $30.2 million, or 4%, to $707.2 million for the year ended December 31, 2021, compared with $737.4 million for the year ended December 31, 2020, primarily as a result of a $30.6 million decrease in transportation revenue resulting from the decrease in vehicles sold. Typically consigned vehicles located at our facilities utilize our service offerings at a higher rate than off-premise vehicles.
Purchased Vehicle Sales
Purchased vehicle sales increased $82.4 million, or 28%, to $377.4 million for the year ended December 31, 2021, compared with $295.0 million for the year ended December 31, 2020, primarily as a result of the increase in used vehicle values experienced across the industry which drove higher sales prices for 2021 compared with 2020. This has resulted in an increase in the average selling price of purchased vehicles sold.
Please reference the below revised disclosure excerpts from our Q3 2022 Form 10-Q related to our Marketplace Results section, as examples of how we intend to expand our disclosures in future filings:
Total Marketplace Revenue
Revenue from the Marketplace segment increased $22.4 million, or 8%, to $293.9 million for the three months ended September 30, 2022, compared with $271.5 million for the three months ended September 30, 2021. Businesses acquired in the last 12 months accounted for an increase in revenue of $15.2 million. The change in revenue included the impact of decreases in revenue of $8.4 million and $2.4 million due to fluctuations in the euro exchange rate and the Canadian dollar exchange rate, respectively. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, total Marketplace revenue in the third quarter of 2022 increased from the third quarter of 2021. The increase was primarily attributable to the increase in service revenue (discussed below).
The 12% decrease in the number of vehicles sold was comprised of a 17% decline in commercial volumes and a 6% decrease in dealer consignment volumes. The decrease in the number of vehicles sold was driven by an industry-wide lack of wholesale used vehicle supply.
Division of Corporation Finance
January 20, 2023
Page 4
Auction Fees
Auction fees decreased $0.7 million, or 1%, to $88.9 million for the three months ended September 30, 2022, compared with $89.6 million for the three months ended September 30, 2021. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the three months ended September 30, 2022 increased $31, or 12%, reflecting higher vehicle values, the introduction of new dealer off-premise auction fees and a smaller mix of lower-fee commercial off-premise vehicles.
Service Revenue
Service revenue increased $31.0 million, or 24%, to $159.2 million for the three months ended September 30, 2022, compared with $128.2 million for the three months ended September 30, 2021, primarily as a result of increases in transportation revenue of $13.8 million, repossession fees of $11.7 million and platform fees provided by third parties of $7.0 million, partially offset by a decrease in inspection service revenue of $0.6 million, resulting from the decrease in commercial vehicles sold, and a net decrease in other miscellaneous service revenues aggregating approximately $0.9 million.
Purchased Vehicle Sales
Purchased vehicle sales decreased $7.9 million, or 15%, to $45.8 million for the three months ended September 30, 2022, compared with $53.7 million for the three months ended September 30, 2021, primarily as a result of a decrease in the average selling price of purchased vehicles sold as a result of geopolitical events and macroeconomic conditions impacting our European operations.
2.You disclose the increase in ADESA total revenue in fiscal 2021 compared to fiscal 2020 is due to the increase in average revenue per vehicle sold, partially offset by a decrease in the number of vehicles sold. You also quantify the incremental increase in ADESA total revenue in fiscal 2021 from businesses acquired and fluctuations in exchange rates. Excluding these incremental impacts, it appears ADESA total revenue in 2021 decreased from 2020, with an apparent reverse price/volume relationship from that disclosed (i.e., would now be due to a decrease in the number of vehicles sold with a partial offset by an increase in average revenue per vehicle sold). However, this point is not discussed nor any related consequential trend information. Please explain to us why ADESA total revenue decreased on this basis and any related trend information with view toward disclosure as appropriate to the extent relevant to interim and annual periods.
RESPONSE: The Staff’s observation is noted. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, ADESA’s total revenue in 2021 decreased from 2020. The decrease was primarily attributable to the decrease in the number of vehicles sold. As stated on page 35 of the 2021 Form 10-K, the Company experienced a 15% decrease in the number of vehicles sold, driven by a 34% decline in commercial vehicles sold, which resulted from a lack of supply caused by high vehicle values. A
Division of Corporation Finance
January 20, 2023
Page 5
backdrop for this issue is discussed on page 30 under the heading Impact of COVID-19: “The automotive industry has experienced unprecedented market conditions during the pandemic, including a decline in new vehicle production resulting from the shortage of semiconductors. This reduction in supply of new vehicles has caused increased new and used vehicle prices, as well as increased demand for used vehicles. More lessees and dealers are therefore purchasing vehicles at residual value, thus decreasing the number of off-lease vehicles coming to auction. Further, government support and loan accommodations have resulted in fewer repossessed vehicles coming to auction. These factors have contributed to our commercial vehicle volumes declining in 2021 and are expected to continue for the foreseeable future.”
In response 1 above, the Company has provided revised disclosure excerpts for our 2021 Form 10-K as well as our Q3 2022 Form 10-Q as examples of how we intend to expand our disclosures in future filings, including in response to the Staff's observation noted in this question.
Gross Profit, page 36
3.You disclose here and in the same sections for each period presented in the Form 10-Q for the fiscal year ended September 30, 2022 that the entire selling and purchase price of the vehicle are recorded as revenue and cost of services for purchased vehicles sold. From your disclosures it appears the gross profit of purchased vehicles reduces the overall gross profit margin percentage. However, the reason for this is not disclosed nor how the recording of the entire selling and purchase price factors into the amount of gross profit and the related percentage. Please explain to us the reason for these points and any related trend information with view toward disclosure as appropriate to the extent relevant to interim and annual periods.
RESPONSE: The Company confirms that the gross profit of purchased vehicles reduces the overall gross profit margin percentage. Certain vehicles are purchased by the Company (as opposed to consigned to the Company) and remarketed on the Company's own behalf through the Company's auction platforms. Since these vehicle titles transfer to the Company, the full price of the vehicle is recorded as revenue upon sale as opposed to consigned vehicles in which only the fees are recorded as revenue (the value of the vehicle is not recorded in revenue). For example, assume a consigned vehicle is sold for $10,000 at auction, generating Auction fees of $300 and cost of services of $100, resulting in gross profit of $200, or 67%. Now assume the same vehicle is purchased by the Company for $9,700. If the purchased vehicle is then sold for $10,000 at auction, the amount recorded as purchased vehicle sales would be $10,000 and cost of services would be $9,800 ($9,700 plus $100), resulting in the same gross profit of $200, but the gross profit percentage is only 2%.
As noted on page 71 of our 2021 Form 10-K, purchased vehicles represent approximately 1% of the total vehicles sold by the Company. These transactions generally represent a cost of operating a wholesale auction business and are not a core focus of the Company's operations, although purchased vehicle revenue dollars for 2021 represent approximately
Division of Corporation Finance
January 20, 2023
Page 6
19% of total ADESA revenue due to the disproportionate effect of recording purchased vehicle sales at the full selling price of the vehicle. The purpose of the disclosure in question is to provide investors a metric on which to evaluate the operational efficiency of the ADESA/Marketplace segment by eliminating the impact of this gross up on the gross margin percentage.
Form 10-Q for the Fiscal Period Ended September 30, 2022
Condensed Notes to Consolidated Financial Statements
Note 2 - Sale of ADESA U.S. Physical Auction Business and Discontinued Operations, page 12
4.In connection with your sale of the ADESA U.S. physical auction business, you disclose you will continue to own the ADESA tradename, which has an indefinite life. Please explain to us with a view toward disclosure how the book value of this asset will be maintained and you will assess this asset for impairment.
RESPONSE: The ADESA tradename has a book value of $122.8 million. The tradename continues to generate cash flows from our continuing operations and, pursuant to the purchase and commercial agreements with Carvana Group, LLC ("Carvana") and its affiliates, Carvana now pays a fee to the Company for use of the tradename for the ADESA U.S. physical auctions for a defined period. In addition, the Company expects to utilize the ADESA tradename to generate revenue and cash flows indefinitely from its remaining operations.
As noted on page 69 of the 2021 Form 10-K, indefinite-lived tradenames are assessed for impairment, in accordance with ASC 350, annually in the second quarter or more frequently as impairment indicators arise. At the end of each assessment, a determination is made as to whether the tradenames still have an indefinite life. Following the sale of the ADESA U.S. physical auction business in the second quarter of 2022, the Company performed a quantitative assessment of the ADESA tradename. The valuation of the tradename was completed utilizing the expected cash flows from Carvana's fees for use of the ADESA tradename in the U.S. and the expected royalty savings method (or relief from royalties) for our continuing operations and resulted in a fair value in excess of the carrying amount. The Company will continue to evaluate whether the asset meets the definition of an indefinite lived intangible and to assess this asset for impairment annually in the second quarter or more
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KAR Auction Services, Inc.
11299 N. Illinois Street
Carmel, IN 46032
January 20, 2023
VIA EDGAR
Aamira Chaudhry and Doug Jones
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549
Re: KAR Auction Services, Inc.
Form 10-K for Fiscal Year Ended December 31, 2021
Filed February 23, 2022
Form 10-Q for Fiscal Period Ended September 30, 2022
Filed November 2, 2022
File No. 001-34568
Dear Ms. Chaudhry and Mr. Jones:
On behalf of KAR Auction Services, Inc. (the “Company”), this letter provides a response to the comment letter from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to Mr. Scott A. Anderson, Chief Accounting Officer of the Company, dated December 27, 2022 (the “Comment Letter”), in connection with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Commission on February 23, 2022 (the “2021 Form 10-K”), and the quarterly report on Form 10-Q for the quarterly period ended September 30, 2022 (the “Q3 2022 Form 10-Q”), filed with the Commission on November 2, 2022. The Company’s responses to the comments raised by the Staff in the Comment Letter are set forth below. For the convenience of the Staff, we have repeated the Staff’s comments before the responses.
Division of Corporation Finance
January 20, 2023
Page 2
Form 10-K for the Fiscal Year Ended December 31, 2021
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Overview of Results of KAR Auction Services, Inc. for the Years Ended December 31, 2021 and 2020
ADESA Results
Revenue, page 35
1.It appears the increase in total ADESA/Marketplace revenue in 2021 compared to 2020 was due to the increase in purchased vehicle sales. Also, it appears this revenue category was the primary reason for the decrease in total revenue for the nine months ended September 30, 2022 compared to the corresponding prior year period. We further note that for each quarter in fiscal 2022 the quarterly amount of revenue in the current year period was lower than that for the corresponding prior year period for this revenue category. However, there does not appear to be discussion of any of these points as well the reason for the decreased trend of contribution of this revenue category to total revenue in fiscal 2022. Please explain these points to us and any related trend information pursuant to Item 303(b)(2)(ii) of Regulation S-K with view toward disclosure as appropriate to the extent relevant to interim and annual periods.
RESPONSE: The Company acknowledges the Staff's comment, and in future filings will expand its disclosures to provide additional quantitative information related to certain factors contributing to period-over-period changes in our consolidated and segment results. The Company has disclosed the revenue recognition models for the three ADESA/Marketplace revenue streams: Auction fees, Service revenue and Purchased vehicle sales as noted on page 71 of the 2021 Form 10-K. Please reference the below revised disclosure excerpts from our 2021 Form 10-K related to our ADESA Results section, as examples of how we intend to expand our disclosures in future filings:
Total ADESA Revenue
Revenue from ADESA increased $42.3 million, or 2%, to $1,962.4 million for the year ended December 31, 2021, compared with $1,920.1 million for the year ended December 31, 2020. Businesses acquired since the fourth quarter of 2020 accounted for an increase in revenue of $139.1 million. The change in revenue included the impact of an increase in revenue of $18.5 million due to fluctuations in the Canadian dollar exchange rate and an increase of $7.7 million due to fluctuations in the euro exchange rate. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, ADESA's total revenue in 2021 decreased from 2020. The decrease was primarily attributable to the decrease in the number of vehicles sold.
The 15% decrease in the number of vehicles sold was comprised of a 34% decline in commercial volumes, partially offset by a 37% increase in dealer consignment volumes. The decrease in the number of vehicles sold at auction was driven by a lack of supply in the used car market.
Division of Corporation Finance
January 20, 2023
Page 3
Auction Fees
Auction fees decreased $9.9 million, or 1%, to $877.8 million for the year ended December 31, 2021, compared with $887.7 million for the year ended December 31, 2020. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the year ended December 31, 2021 increased $49, or 17%, reflecting higher vehicle values and a smaller mix of lower-fee commercial off-premise vehicles.
Service Revenue
Service revenue decreased $30.2 million, or 4%, to $707.2 million for the year ended December 31, 2021, compared with $737.4 million for the year ended December 31, 2020, primarily as a result of a $30.6 million decrease in transportation revenue resulting from the decrease in vehicles sold. Typically consigned vehicles located at our facilities utilize our service offerings at a higher rate than off-premise vehicles.
Purchased Vehicle Sales
Purchased vehicle sales increased $82.4 million, or 28%, to $377.4 million for the year ended December 31, 2021, compared with $295.0 million for the year ended December 31, 2020, primarily as a result of the increase in used vehicle values experienced across the industry which drove higher sales prices for 2021 compared with 2020. This has resulted in an increase in the average selling price of purchased vehicles sold.
Please reference the below revised disclosure excerpts from our Q3 2022 Form 10-Q related to our Marketplace Results section, as examples of how we intend to expand our disclosures in future filings:
Total Marketplace Revenue
Revenue from the Marketplace segment increased $22.4 million, or 8%, to $293.9 million for the three months ended September 30, 2022, compared with $271.5 million for the three months ended September 30, 2021. Businesses acquired in the last 12 months accounted for an increase in revenue of $15.2 million. The change in revenue included the impact of decreases in revenue of $8.4 million and $2.4 million due to fluctuations in the euro exchange rate and the Canadian dollar exchange rate, respectively. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, total Marketplace revenue in the third quarter of 2022 increased from the third quarter of 2021. The increase was primarily attributable to the increase in service revenue (discussed below).
The 12% decrease in the number of vehicles sold was comprised of a 17% decline in commercial volumes and a 6% decrease in dealer consignment volumes. The decrease in the number of vehicles sold was driven by an industry-wide lack of wholesale used vehicle supply.
Division of Corporation Finance
January 20, 2023
Page 4
Auction Fees
Auction fees decreased $0.7 million, or 1%, to $88.9 million for the three months ended September 30, 2022, compared with $89.6 million for the three months ended September 30, 2021. The decrease in auction fees was primarily the result of a decrease in the number of vehicles sold. Auction fees per vehicle sold for the three months ended September 30, 2022 increased $31, or 12%, reflecting higher vehicle values, the introduction of new dealer off-premise auction fees and a smaller mix of lower-fee commercial off-premise vehicles.
Service Revenue
Service revenue increased $31.0 million, or 24%, to $159.2 million for the three months ended September 30, 2022, compared with $128.2 million for the three months ended September 30, 2021, primarily as a result of increases in transportation revenue of $13.8 million, repossession fees of $11.7 million and platform fees provided by third parties of $7.0 million, partially offset by a decrease in inspection service revenue of $0.6 million, resulting from the decrease in commercial vehicles sold, and a net decrease in other miscellaneous service revenues aggregating approximately $0.9 million.
Purchased Vehicle Sales
Purchased vehicle sales decreased $7.9 million, or 15%, to $45.8 million for the three months ended September 30, 2022, compared with $53.7 million for the three months ended September 30, 2021, primarily as a result of a decrease in the average selling price of purchased vehicles sold as a result of geopolitical events and macroeconomic conditions impacting our European operations.
2.You disclose the increase in ADESA total revenue in fiscal 2021 compared to fiscal 2020 is due to the increase in average revenue per vehicle sold, partially offset by a decrease in the number of vehicles sold. You also quantify the incremental increase in ADESA total revenue in fiscal 2021 from businesses acquired and fluctuations in exchange rates. Excluding these incremental impacts, it appears ADESA total revenue in 2021 decreased from 2020, with an apparent reverse price/volume relationship from that disclosed (i.e., would now be due to a decrease in the number of vehicles sold with a partial offset by an increase in average revenue per vehicle sold). However, this point is not discussed nor any related consequential trend information. Please explain to us why ADESA total revenue decreased on this basis and any related trend information with view toward disclosure as appropriate to the extent relevant to interim and annual periods.
RESPONSE: The Staff’s observation is noted. When excluding revenue from acquired businesses and the effect of fluctuations in exchange rates, ADESA’s total revenue in 2021 decreased from 2020. The decrease was primarily attributable to the decrease in the number of vehicles sold. As stated on page 35 of the 2021 Form 10-K, the Company experienced a 15% decrease in the number of vehicles sold, driven by a 34% decline in commercial vehicles sold, which resulted from a lack of supply caused by high vehicle values. A
Division of Corporation Finance
January 20, 2023
Page 5
backdrop for this issue is discussed on page 30 under the heading Impact of COVID-19: “The automotive industry has experienced unprecedented market conditions during the pandemic, including a decline in new vehicle production resulting from the shortage of semiconductors. This reduction in supply of new vehicles has caused increased new and used vehicle prices, as well as increased demand for used vehicles. More lessees and dealers are therefore purchasing vehicles at residual value, thus decreasing the number of off-lease vehicles coming to auction. Further, government support and loan accommodations have resulted in fewer repossessed vehicles coming to auction. These factors have contributed to our commercial vehicle volumes declining in 2021 and are expected to continue for the foreseeable future.”
In response 1 above, the Company has provided revised disclosure excerpts for our 2021 Form 10-K as well as our Q3 2022 Form 10-Q as examples of how we intend to expand our disclosures in future filings, including in response to the Staff's observation noted in this question.
Gross Profit, page 36
3.You disclose here and in the same sections for each period presented in the Form 10-Q for the fiscal year ended September 30, 2022 that the entire selling and purchase price of the vehicle are recorded as revenue and cost of services for purchased vehicles sold. From your disclosures it appears the gross profit of purchased vehicles reduces the overall gross profit margin percentage. However, the reason for this is not disclosed nor how the recording of the entire selling and purchase price factors into the amount of gross profit and the related percentage. Please explain to us the reason for these points and any related trend information with view toward disclosure as appropriate to the extent relevant to interim and annual periods.
RESPONSE: The Company confirms that the gross profit of purchased vehicles reduces the overall gross profit margin percentage. Certain vehicles are purchased by the Company (as opposed to consigned to the Company) and remarketed on the Company's own behalf through the Company's auction platforms. Since these vehicle titles transfer to the Company, the full price of the vehicle is recorded as revenue upon sale as opposed to consigned vehicles in which only the fees are recorded as revenue (the value of the vehicle is not recorded in revenue). For example, assume a consigned vehicle is sold for $10,000 at auction, generating Auction fees of $300 and cost of services of $100, resulting in gross profit of $200, or 67%. Now assume the same vehicle is purchased by the Company for $9,700. If the purchased vehicle is then sold for $10,000 at auction, the amount recorded as purchased vehicle sales would be $10,000 and cost of services would be $9,800 ($9,700 plus $100), resulting in the same gross profit of $200, but the gross profit percentage is only 2%.
As noted on page 71 of our 2021 Form 10-K, purchased vehicles represent approximately 1% of the total vehicles sold by the Company. These transactions generally represent a cost of operating a wholesale auction business and are not a core focus of the Company's operations, although purchased vehicle revenue dollars for 2021 represent approximately
Division of Corporation Finance
January 20, 2023
Page 6
19% of total ADESA revenue due to the disproportionate effect of recording purchased vehicle sales at the full selling price of the vehicle. The purpose of the disclosure in question is to provide investors a metric on which to evaluate the operational efficiency of the ADESA/Marketplace segment by eliminating the impact of this gross up on the gross margin percentage.
Form 10-Q for the Fiscal Period Ended September 30, 2022
Condensed Notes to Consolidated Financial Statements
Note 2 - Sale of ADESA U.S. Physical Auction Business and Discontinued Operations, page 12
4.In connection with your sale of the ADESA U.S. physical auction business, you disclose you will continue to own the ADESA tradename, which has an indefinite life. Please explain to us with a view toward disclosure how the book value of this asset will be maintained and you will assess this asset for impairment.
RESPONSE: The ADESA tradename has a book value of $122.8 million. The tradename continues to generate cash flows from our continuing operations and, pursuant to the purchase and commercial agreements with Carvana Group, LLC ("Carvana") and its affiliates, Carvana now pays a fee to the Company for use of the tradename for the ADESA U.S. physical auctions for a defined period. In addition, the Company expects to utilize the ADESA tradename to generate revenue and cash flows indefinitely from its remaining operations.
As noted on page 69 of the 2021 Form 10-K, indefinite-lived tradenames are assessed for impairment, in accordance with ASC 350, annually in the second quarter or more frequently as impairment indicators arise. At the end of each assessment, a determination is made as to whether the tradenames still have an indefinite life. Following the sale of the ADESA U.S. physical auction business in the second quarter of 2022, the Company performed a quantitative assessment of the ADESA tradename. The valuation of the tradename was completed utilizing the expected cash flows from Carvana's fees for use of the ADESA tradename in the U.S. and the expected royalty savings method (or relief from royalties) for our continuing operations and resulted in a fair value in excess of the carrying amount. The Company will continue to evaluate whether the asset meets the definition of an indefinite lived intangible and to assess this asset for impairment annually in the second quarter or more