AUTOWEB, INC. Cautionary Note Concerning Forward-Looking Statements
The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "could," "may," "estimates," "expects," "projects," "intends," "plans," "believes," "will" and words or phrases of similar substance used in connection with any discussion of future operations, financial performance, plans, events, trends or circumstances can be used to identify some, but not all, forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve significant risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual outcomes or results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 (including in the section entitled "Overview" below), Part II, Item 1A of this Quarterly Report on Form 10-Q, and under the heading "Risk Factors" in our annual report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K") filed with theSEC onMarch 24, 2022 . Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements. The following discussion of our results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the notes thereto in the 2021 Form 10-K. Our corporate website is located at www.autoweb.com. Information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q. At or through the Investor Relations section of our website we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports as soon as practicable after the reports are electronically filed with or furnished to theSEC .
Unless the context otherwise requires, the terms "we", "us", "our", "AutoWeb"
and "Company" refer to
Basis of Presentation and Critical Accounting Policies
See Note 2, Basis of Presentation, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We prepare our financial statements in conformity with accounting principles generally accepted inthe United States of America , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations may be affected. For a detailed discussion of the application of our critical accounting policies, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K. There have been no changes to our critical accounting policies since we filed our 2021 Form 10-K. Overview Commencing in early 2020 and continuing as of the date of this Quarterly Report on Form 10-Q, the outbreak of coronavirus and emerging variants has led to quarantines, mask mandates, vaccination requirements and stay-at-home/work-from-home orders in a number of countries, states, cities and regions and the closure or limited or restricted access to public and private offices, businesses and facilities, causing disruptions to travel, economic activity, supply chains and financial markets. In particular, Manufacturers have experienced significant disruption in the supply of semiconductor chips required for new vehicles due to a worldwide shortage of these chips. As a result, the ability of Manufacturers to maintain regular production output of certain vehicles, and the corresponding reduction in available new vehicle inventories, have adversely impacted vehicle sales. Further disrupting the automotive industry and the number of vehicles available for sale or lease are disruptions in the supply of other components used in vehicle manufacturing. These disruptions have impacted the willingness or desire of our Dealer and other customers to acquire vehicle Leads or other digital marketing services from us. While coronavirus restrictions have eased in 2022, consumer confidence and spending has declined as a result of other factors, including macroeconomic conditions such as inflationary pressures and the global impact ofRussia's invasion of theUkraine . Vehicle sales have declined, and we continue to experience cancellations, volume reductions or suspensions of purchases of Leads and other digital marketing services by our Dealer and other customers, which has, and may continue to materially and adversely impact our financial performance. We are unable to predict the continuing extent, duration and impact of the foregoing factors on the automotive industry in general, or on our business, operations and financial performance specifically. In light of the impact on us from the foregoing factors, as discussed in Note 2 of the notes to the unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, due to our cash and liquidity position, we believe that there is substantial doubt about our ability to continue as a going concern for a period of one year after the date the financial statements contained in this Quarterly Report on Form 10-Q are issued. The Special Committee is exploring Strategic Alternatives and has retainedHoulihan Lokey Capital, Inc. as its financial advisor to assist in this process. Our ability to continue funding operations is dependent upon the success in implementing Near-Term Operating Plans to address our near-term cash and liquidity needs. Our ability to continue as a going concern is contingent upon the successful execution of Strategic Alternatives and the Near-Term Operating Plans, but the Near-Term Operating Plans may themselves have a material and adverse effect on our financial performance. OnMay 16, 2022 , we suspended our CarZeus operations and furloughed our employees within that segment in order to conserve cash. We are considering further actions and will implement these actions if and when appropriate to further conserve cash. There can be no assurance that we will be successful in achieving either the Strategic Alternatives or Near-Term Operating Plans or that new financing or other transactions will be available to us on commercially acceptable terms, or at all. Additionally, any debt or equity financing that may be obtained may result in substantial shareholder dilution and could have a material and adverse impact on our financial performance. We undertake no obligation to provide further disclosure regarding developments or the status of the process, our efforts to pursue implementation of potential Strategic Alternatives or Near-Term Operating Plans, or a decision to seek protection under theU.S. Bankruptcy Code and does not intend to make such disclosure unless and until events warrant disclosure, we have filed for protection under theU.S. Bankruptcy Code, or further disclosure is legally required. Total revenues in the first three months of 2022 were$19.1 million compared to$17.9 million in the first three months of 2021. The increase in total revenues was largely driven by the addition of used vehicle sales revenue, a result of the CarZeus Purchase Transaction effective as ofAugust 1, 2021 . Partially offsetting the revenue increase is the continued negative impact of the supply chain for new vehicle inventory and sales, coupled with declining consumer confidence and economic inflation. During these times, we have worked to shift our strategy and to adapt to the changing market conditions within the automotive industry by increasing our focus to our core Leads, clicks and email products and services and away from non-core products and services, such as third-party product offerings. In addition, we have intentionally operated at lower levels of media spend in an attempt to match projected industry selling rates. We expect that the Company and its dealers and consumers alike will continue to contend with broader macroeconomic uncertainty, including uncertainties created by high inflation rates and the impact ofRussia's invasion ofUkraine . -17-
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As we continue to work with our traffic suppliers to optimize our search engine
marketing ("SEM") methodologies and our high-quality traffic streams, we are
also testing new traffic acquisition strategies and enhanced mobile consumer
experiences. Further, we continue to improve the consumer experience of our pay
per click product. Our plan is to continue to focus on growing audience,
improving conversion, improving Leads and clicks delivery rates, expanding
distribution, and increasing retail Dealer Leads and clicks budget capacity,
subject to our efforts to conserve cash. We believe that this focus, will create
a more efficient process for how active vehicle shoppers with a vehicle in mind
can be matched with sellers that can meet the shoppers' needs, which may create
opportunities for improved quality of delivery and help strengthen our financial
position.
Our lead and click generation products have historically operated with limited
visibility regarding future performance due to short sales cycles and a high
rate of customer churn as customers are able to join and leave our platform with
limited notice. Our advertising business is also subject to seasonal trends,
with the first quarter of the calendar year typically showing sequential decline
versus the fourth quarter. These factors have historically contributed to
volatility in our revenues, cost of revenues, gross profit, and gross profit
margin. We expect these trends to continue through the remainder of 2022.
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Table of Contents Results of Operations
Three Months Ended
The following table sets forth certain statement of operations data for the three-month periods endedMarch 31, 2022 andDecember 31, 2021 . In accordance with Regulation S-K Item 303(c), as amended, we are providing a comparison of ourMarch 31, 2022 , period against the preceding quarter. We believe this comparison is useful for investors and stakeholders, as it provides more clarity into our current year financial performance. % of total % of total 2022 revenues 2021 revenues $ Change % Change (Dollar amounts in thousands) Revenues: Lead generation$ 10,576 56 %$ 10,673 60 %$ (97 ) (1 )% Digital advertising 4,137 21 3,415 19 722 21 Used vehicle sales 4,351 23 3,722 21 629 17 Total revenues 19,064 100 17,810 100 1,254 7 Cost of revenues - lead generation and digital advertising 10,954 58 10,770 61 184 2 Cost of revenues - used vehicle sales 4,206 22 3,508 20 698 20 Gross profit 3,904 20 3,532 19 372 11 Operating expenses: Sales and marketing 2,650 14 2,401 14 249 10 Technology support 1,533 8 1,616 9 (83 ) (5 ) General and administrative 3,562 19 1,846 10 1,716 93 Depreciation and amortization 65 - 74 - (9 ) (12 ) Total operating expenses 7,810 41 5,937 33 1,873 32 Operating loss (3,906 ) (21 ) (2,405 ) (14 ) (1,501 ) 62 Interest and other income (expense), net (275 ) (1 ) (204 ) (1 ) (71 ) (34 ) Loss before income tax provision (4,181 ) (22 ) (2,609 ) (15 ) (1,572 ) 60 Income tax provision 126 - - - 126 100 Net income (loss)$ (4,307 ) (22 )%$ (2,609 ) (15 )%$ (1,698 ) (65 )% Lead generation. Lead generation revenues decreased$0.1 million , or 1%, in the first quarter of 2022 compared to the fourth quarter of 2021 primarily from a decrease in the volume of automotive leads delivered to Manufacturers and other wholesale customers.Digital Advertising . Digital advertising revenues increased$0.7 million , or 21%, in the first quarter of 2022 compared to the fourth quarter of 2021, a result of an increase in click revenue associated with increased click volume. The increase in click volume is attributed to a renewed focus on higher paying advertisers. -19-
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Used vehicle sales. Used vehicle sales revenue increased
Cost of Revenues - lead generation and digital advertising. Cost of revenues consists of purchase request and traffic acquisition costs and other cost of revenues. Purchase request and traffic acquisition costs consist of payments made to our third-party purchase request providers, including internet portals and online automotive information providers. Other cost of revenues consists of SEM and fees paid to third parties for data and content, including search engine optimization activity, included on our websites; connectivity costs; development costs related to our websites; technology license fees; server equipment depreciation; and technology amortization directly related to our Websites. Cost of revenues increased$0.2 million , or 2%, in the first quarter of 2022 compared to the fourth quarter of 2021 primarily due to increased SEM and traffic acquisition costs. Cost of revenues - used vehicles. Used vehicle cost of revenue increased$0.7 million , or 20%, in the first quarter of 2022 compared to the fourth quarter of 2021. The increase in used vehicle cost of revenues is directly attributable to inefficiencies with staffing and inspection processes in our used vehicle acquisition segment during the first quarter of 2022 compared to the fourth quarter of 2021.
Gross Profit. Gross profit increased
Sales and Marketing. Sales and marketing expense includes costs for developing brand equity, personnel costs and other costs associated with Dealer sales, website advertising and Dealer support. Sales and marketing expense in the first quarter of 2022 increased$0.2 million , or 10%, compared to the fourth quarter of 2021 primarily from an increase in employee expenses related to the expansion of CarZeus. Technology Support. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company's websites and related technologies, and to operate the Company's internal technology infrastructure. Technology support expense in the first quarter of 2022 decreased by$0.1 million , or 5%, compared to the fourth quarter of 2021 primarily from decreased employee related expenses. General and Administrative. General and administrative expense consists of executive, financial, human resources and legal personnel and expenses, public company costs and bad debt expense. General and administrative expense in the first quarter of 2022 increased by$1.7 million , or 93%, from the fourth quarter of 2021 due primarily to timing of cost accruals related to the Company's Annual Incentive Compensation plan as well as other increases in employee related expenses.
Depreciation and Amortization. Depreciation and amortization expense in the first quarter of 2022 was comparable to the fourth quarter of 2021 as our property and equipment continues to depreciate.
Interest and Other Income (Expense), Net. Interest and other income (expense), net was($0.3) million for the first quarter of 2022 compared to$(0.2) million for the fourth quarter of 2021. The increase in interest and other income (expense) is predominately attributable to the expiration of a licensing agreement inJanuary 2022 . The licensing agreement provided other income of$0.1 million during the fourth quarter of 2021. Interest expense includes interest on outstanding borrowings and the amortization of debt issuance costs. Income Taxes. Income tax expense was$0.1 million in the first quarter of 2022. The Company did not have income tax expense in the fourth quarter of 2021. Income tax expense for the quarter endedMarch 31, 2022 , differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowance recorded for such losses. -20-
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Three Months Ended
The following table sets forth certain statement of operations data for the
three-month periods ended
% of total % of total
2022 revenues 2021 revenues $ Change % Change
(Dollar amounts in thousands)
Revenues:
Lead generation $ 10,576 56 % $ 14,186 79 % $ (3,610 ) (25 )%
Digital advertising 4,137 21 3,694 21 443 12
Used vehicle sales 4,351 23 - - 4,351 100
Total revenues 19,064 100 17,880 100 1,184 7
Cost of revenues -
lead generation and
digital advertising 10,954 58 12,071 68 (1,117 ) (9 )
Cost of revenues -
used vehicle sales 4,206 22 - - 4,206 100
Gross profit 3,904 20 5,809 32 (1,905 ) (33 )
Operating expenses:
Sales and marketing 2,650 14 2,200 12 450 20
Technology support 1,533 8 1,367 8 166 12
General and
administrative 3,562 19 3,132 18 430 14
Depreciation and
amortization 65 - 204 1 (139 ) (68 )
Total operating
expenses 7,810 41 6,903 39 907 13
Operating loss (3,906 ) (21 ) (1,094 ) (6 ) (2,812 ) (257 )
Interest and other
income (expense), net (274 ) (1 ) 1,404 8 (1,678 ) (120 )
Loss before income
tax provision (4,181 ) (22 ) 310 2 (4,490 ) (1,449 )
Income tax provision 126 - - - 126 100
Net income (loss) $ (4,307 ) (22 )% $ 310 2 % $ (4,617 ) (1,489 )%
Lead generation. Lead generation revenues decreased $3.6 million , or 25%, in the
first quarter of 2022 compared to the first quarter of 2021 primarily from a
decrease in the volume of automotive leads delivered to Manufacturers and other
wholesale customers. Further contributing to this decrease is the early
termination of the new vehicle leads program by one of our Manufacturer
customers during the second half of 2021.
Digital Advertising . Digital advertising revenues increased $0.4 million , or
12%, in the first quarter of 2022 compared to the first quarter of 2021, as a
result of an increase in click revenue from increased click volume. The increase
in click volume is attributed to a renewed focus on higher paying advertisers.
Used vehicle sales. As a result of the CarZeus Purchase Transaction that was
effective on August 1, 2021 , the Company recorded used vehicle sales of $4.4
million in the first quarter of 2022. The Company had no used vehicle sales in
the first quarter of 2021.
Cost of Revenues - lead generation and digital advertising. Cost of revenues
consists of purchase request and traffic acquisition costs and other costs of
revenues. Purchase request and traffic acquisition costs consist of payments
made to our third-party purchase request providers, including internet portals
and online automotive information providers. Other cost of revenues consists of
SEM and fees paid to third parties for data and content, including search engine
optimization activity, included on our websites; connectivity costs; development
costs related to our websites; technology license fees; server equipment
depreciation; and technology amortization directly related to our websites. Cost
of revenues decreased $1.1 million , or 9%, in the first quarter of 2022 compared
to the first quarter of 2021 in line with the decrease in lead generation
revenues coupled with improved efficiencies in SEM, purchase request and traffic
acquisition costs.
Cost of revenues - used vehicles. As a result of the CarZeus Purchase
Transaction that was effective on
Gross Profit. Gross profit decreased
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Table of Contents Sales and Marketing. Sales and marketing expense include costs for developing our brand equity, personnel costs and other costs associated with Dealer sales, website advertising and Dealer support. Sales and marketing expense in the first quarter of 2022 increased$0.5 million , or 20%, compared to the first quarter of 2021 primarily due to an increase in headcount related to CarZeus coupled with an increase in marketing expenses. Technology Support. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company's websites and related technologies, and to operate the Company's internal technology infrastructure. Technology support expense in the first quarter of 2022 increased by$0.2 million , or 12%, compared to the first quarter of 2021 primarily from higher employee related expenses. General and Administrative. General and administrative expense consists of executive, financial, human resources and legal personnel and expenses, public company costs and bad debt expense. General and administrative expense in the first quarter of 2022 increased by$0.4 million , or 14%, from the first quarter of 2021 primarily from higher professional and consulting fees. Depreciation and Amortization. Depreciation and amortization expense in the first quarter of 2022 decreased by$0.1 million , or 68%, from the first quarter of 2021 primarily due to assets that have been fully depreciated as compared to the same period in the prior year. Interest and Other Income (Expense), Net. Interest and other income (expense), net was$(0.3) million for the first quarter of 2022 compared to$1.4 million for the first quarter of 2021. In the first quarter of 2021, we recorded$1.4 million of income associated with the forgiveness of our PPP Loan. Further contributing to the decrease in interest and other income (expense) was an insurance reimbursement related to theJanuary 2020 malware attack in which we recorded$0.2 million on our Unaudited Condensed Consolidated Statement of Operations in the first quarter of 2021. Interest expense includes interest on outstanding borrowings and the amortization of debt issuance costs. Income Taxes. Income tax expense was$0.1 million in the first quarter of 2022. The Company did not have income tax expense in the first quarter of 2021. Income tax expense for the quarter endedMarch 31, 2022 , differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowance recorded for such losses.
Liquidity and Capital Resources
The table below sets forth a summary of our cash flows for the three months
ended
Three Months Ended
March 31,
2022 2021
(in thousands)
Net cash provided by (used in) operating activities
(284 ) (66 )
Net cash (used in) provided by financing activities (909 ) 134
Our principal sources of liquidity are our cash and cash equivalent balances and
borrowings under the CNC Credit Agreement. Our cash and cash equivalents and
restricted cash totaled $8.1 million as of March 31, 2022 , compared to $11.6
million as of December 31, 2021 . As of March 31, 2022 , we had a net loss of $4.3
million . We had cash used in operations of $2.3 million for the three months
ended March 31, 2022 . As of March 31, 2022 , we had an accumulated deficit of
$359.7 million and stockholders' equity of $9.0 million .
Our objective is to achieve cash generation as a business; however, there is no
assurance that we will be able to achieve this objective. We have experienced
significant historical operating losses and negative cash flows from operations.
Additionally, other than the CNC Credit Agreement, which expires March 26, 2023 ,
we have no committed source of funding from either debt or equity financings.
Borrowings under the CNC Credit Agreement are dependent on, among other things,
the level of our eligible accounts receivable We believe that given these
factors, our current cash position and anticipated cash needs for continuing
operating activities, there is substantial doubt about our ability to continue
as a going concern without obtaining additional sources of financing. Our
ability to operate as a going concern is contingent upon the successful
execution of the Strategic Alternatives and Near-Term Operating Plans (see Note
2 of the notes to these unaudited condensed financial statements in Part I, Item
1 of this Quarterly Report on Form 10-Q). On May 16, 2022 , we suspended our
CarZeus operations and furloughed our employees within that segment in order to
conserve cash. We are considering further actions and will implement these
actions if and when appropriate to further conserve cash. There can be no
assurance that we will be successful in achieving any Strategic Alternatives or
the Near-Term Operating Plans. Further, there can be no assurances that new
financings or other transactions will be available to us on commercially
acceptable terms, or at all.
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Table of Contents Our future capital requirements will depend on many factors, including but not limited to, those discussed in this Item 2, Part II, Item 1A of this Quarterly Report on Form 10-Q and the risk factors set forth in Part I, Item 1A, "Risk Factors" of our 2021 Form 10-K. To the extent that our existing sources of liquidity are insufficient to fund our future operations, we may need to engage in equity or additional or alternative debt financings to secure additional funds. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us. For information concerning our CNC Credit Agreement, see Note 11 included in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.Net Cash (Used in) Provided by Operating Activities. Net cash used in operating activities in the three months endedMarch 31, 2022 of($2.3) million resulted primarily from a net loss of($4.3) million , a$0.6 million net decrease in net working capital, depreciation and amortization of$0.6 million , stock compensation expense of$0.5 million , amortization of right-of-use assets of$0.2 million and a$0.1 million change in deferred tax liabilities. Net cash provided by operating activities in the three months endedMarch 31, 2021 of$0.4 million resulted primarily from depreciation and amortization of$0.6 million , stock compensation expense of$0.5 million , net income of$0.3 million , amortization of right-of-use assets of$0.2 million , and$0.1 million net decrease in net working capital. Offsetting these increases was forgiveness of the PPP loan of approximately$1.4 million .Net Cash Used in Investing Activities. Net cash used in investing activities during the three months endedMarch 31, 2022 , of$0.3 million was related to purchases of property and equipment of$0.2 million coupled with$0.1 million paid in conjunction with the acquisition of CarZeus.
Net cash used in investing activities during the three months ended
Net cash provided by financing activities of
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