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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-K

 

(Mark One)

 

         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2021

or

 

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number 1-34761

 

https://cdn.kscope.io/fe277e53d30bf3dbd6e4206d7c76764e-autoweb.jpg

 

AutoWeb, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

33-0711569

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

400 North Ashley Drive, Suite 300

Tampa, Florida 33602

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (949) 225-4500

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

AUTO

The Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

 

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.    Yes  ☒    No  ☐

 

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).     Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by registered public accounting firm that prepared or issued its audit report. Yes      No  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes      No  ☒

 

Based on the closing sale price of $3.12 for our common stock on The Nasdaq Capital Market on June 30, 2021, the aggregate market value of outstanding shares of common stock held by non-affiliates was approximately $28 million.

 

As of March 22, 2022, there were 14,051,149 shares of our common stock outstanding.

 

Documents Incorporated by Reference

 

Portions of our Definitive Proxy Statement for the 2022 Annual Meeting, expected to be filed within 120 days of our fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 



 

AutoWeb, Inc.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021

 

 

   

Page

Number

Part I

 

 

 

 

Item 1

Business

 

1

Item 1A

Risk Factors

 

9

Item 1B

Unresolved Staff Comments

 

26

Item 2

Properties

 

26

Item 3

Legal Proceedings

 

26

Item 4

Mine Safety Disclosures

 

26

 

Part II

 

 

 

 

Item 5

Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

27

Item 6

[Reserved]

 

27

Item 7

Managements Discussion and Analysis of Financial Condition and Results of Operations

 

27

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

 

35

Item 8

Financial Statements and Supplementary Data

 

35

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

35

Item 9A

Controls and Procedures

 

35

Item 9B

Other Information

 

36

Item 9C

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

  36

 

Part III

 

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

 

36

Item 11

Executive Compensation

 

36

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

36

Item 13

Certain Relationships and Related Transactions, and Director Independence

 

36

Item 14

Principal Accountant Fees and Services

 

36

 

Part IV

 

 

 

 

Item 15

Exhibits and Financial Statement Schedules

 

37

Item 16

Form 10-K Summary

 

42

 

Signatures

 

43

 

 

 

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 Annual Report on Form 10-K and our proxy statement, parts of which are incorporated herein by reference, contain such 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,” “pending,” “plans,” “believes,” “will” and words of similar substance, or the negative of those words, used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Annual Report on Form 10-K 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 risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include but are not limited to, those discussed in “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. 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.

 

SUMMARY OF RISKS AFFECTING OUR BUSINESS

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” later in this Annual Report on Form 10-K. These risks include, but are not limited to, the following:

 

Risks Associated with our Business Operations and Industry

 

 

We may be unable to increase Lead revenues and could continue to suffer declining revenues due to Dealer attrition or loss of Manufacturer customers.

 

We may lose customers or quality Lead suppliers to our competitors.

 

Risks associated with our ability to maintain or grow manufacturer relationships through our third-party sales channel and direct-to-Manufacturer wholesale programs.

 

Risks associated with the availability of or access to used vehicle inventory.

 

Increased costs associated with vehicle acquisition and reduced sales prices as a result of highly fragmented and competitive retail used vehicle industry.

 

Changes in internet search engine algorithms, pricing or operational dynamics could materially or adversely affect our financial performance.

 

We are affected by general economic and market conditions, and conditions in the automotive industry.

 

Natural disasters, public health crises, political crises and other catastrophic events or other events outside of our control could materially and adversely impact our financial performance.

 

If we lose our key personnel or are unable to attract, train and retain additional highly qualified personnel, our financial performance may be adversely impacted.

 

We are exposed to risks associated with overseas operations.

 

Acquisition of new businesses, products or technologies, could divert our management’s attention from our business, disrupt our operations and materially and adversely impact our financial performance.

 

We are dependent upon third parties for certain support services and should they fail to perform, our financial performance could be materially and adversely affected.

 

Our financial performance may be materially and adversely affected by investments in technology in order to keep our products and services relevant.

 

Interruptions or failures in our information technology platforms, communication systems or security systems could materially and adversely affect our financial performance.

 

Financial, Accounting and Liquidity Risks

 

 

Concentration of credit risk and risks due to significant customers could materially and adversely affect our financial performance.

 

If we are unable to generate positive cash flows, we may not be able to continue operations unless we are able to obtain additional cash through alternative sources.

 

If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to maintain or grow the business and respond to challenges or unforeseen circumstances could be significantly limited, and our financial performance could be materially and adversely affected.

 

If our internal controls and procedures fail, our financial condition, results of operations and cash flow could be materially and adversely affected.

 

 

 

 

Personal Information and Data Security and Privacy Risks

 

 

The failure to comply with privacy laws could materially and adversely impact our financial performance.

 

Risks associated with compliance with telemarketing and advertising laws and regulations.

 

Data security risks related to confidential and personal information of customers and consumers.

 

Risks related to online fraud and scams.

 

Risks associated with compliance with anti-spam laws, rules, and regulations.

 

Risks Associated with Regulatory Matters

 

 

Uncertainty exists in the application of various new and existing laws and regulations to our business.

 

Compliance with Automotive Dealer/ Broker and Vehicle Advertising Laws.

 

Compliance with Financial Broker and Consumer Credit Laws.

 

Compliance with Insurance Broker Laws.

 

Risks Associated with Tax Matters

 

 

Changes in the taxation of internet commerce may result in increased costs.

 

If our ability to use our net operating loss carryforwards and other tax attributes is limited, we may not receive the benefit of those assets.

 

Risks Associated with Ownership of Our Securities

 

 

The public market for our common stock may be volatile.

 

Our common stock could be delisted from The Nasdaq Capital Market if we are not able to satisfy continued listing requirements.

 

Our certificate of incorporation and bylaws, tax benefit preservation plan and Delaware law contain provisions that could make it more difficult for a third party to acquire us.

 

Our bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

 

We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stock price to decline.

 

Concentration of ownership among our existing executive officers and directors, their affiliates and holders of 5% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions.

 

You may experience future dilution as a result of future equity offerings.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

We do not expect to declare any dividends in the foreseeable future.

 

Risks Associated with Litigation

 

 

Misappropriation or infringement of our intellectual property and proprietary rights and enforcement actions to protect our intellectual property could materially and adversely affect our financial performance.

 

Our financial performance could be adversely affected by actions of third parties that could subject us to litigation.

 

Our financial performance could be materially and adversely affected by other litigation.

 

 

 

 

PART I

Item 1.         Business

 

Overview

 

AutoWeb, Inc., a Delaware corporation, was formed on May 17, 1996, and is headquartered in Tampa, Florida, with offices in Irvine California and Guatemala City, Guatemala. AutoWeb is an automotive industry marketing and used vehicle acquisition and resale company focused on being a “matchmaker” by matching consumers seeking to acquire vehicles and vehicle sellers that can best meet those consumers’ needs. We assist consumers in multiple aspects of a vehicle transaction, including providing valuable content and information to assist consumers in making informed decisions regarding their next vehicle to acquire. The Company also assists consumers who would like to sell their current vehicle through the Company’s CarZeus vehicle acquisition business, which provides an additional product line extension to the Company’s digital marketing offerings. The terms “we,” “us,” “our,” the “Company” or “AutoWeb” and any other similar terms refer to AutoWeb, Inc. and its consolidated subsidiaries, unless otherwise indicated in this Annual Report on Form 10-K.

 

On July 31, 2021, the Company and Tradein Expert, Inc., a Delaware corporation and wholly owned subsidiary of the Company  (“Tradein Expert”), entered into and consummated an Asset Purchase Agreement (“Purchase Agreement”), by and among the Company, Tradein Expert, Car Acquisition, LLC, a Texas limited liability company dba CarZeus (“Seller”), Carzuz.com LLC, a Texas limited liability company, McCombs Family Partners, Ltd., a Texas limited partnership and Phil Kandera, an individual, pursuant to which Tradein Expert acquired specified assets of Seller’s San Antonio, Texas-based used vehicle acquisition platform that operates under the name CarZeus (“CarZeus Purchase Transaction”). Through the Tradein Expert entity (dba CarZeus), the Company purchases used vehicles directly from consumers and resells them through wholesale channels. The operations of CarZeus are included in AutoWeb’s financial statements as of August 1, 2021.

 

The Company primarily generates revenue by assisting automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers” or “OEMs”) in marketing and selling new and used vehicles to consumers through the Company’s online lead and traffic referral programs, dealer marketing products and services, and online advertising.  The Company also offers automotive consumers an option to sell their used vehicle outside of a dealership location. The Company resells these vehicles indirectly to Dealers through wholesale auctions or through direct to Dealer sales.

 

Our consumer-facing automotive websites (“Company Websites”) provide consumers with information and tools to aid them with their automotive purchase decisions, the ability to sell their used vehicle without going to a Dealer, and the convenience of submitting inquiries directly to Dealers requesting that the Dealers contact the consumers regarding purchasing or leasing vehicles (“Leads”). Leads are internally-generated from our Company Websites (“Internally Generated Leads”) or acquired from third parties (“Non-Internally Generated Leads”) that generate Leads from their websites (“Non-Company Websites”). Our click traffic referral program provides consumers who are shopping for vehicles online with targeted offers based on make, model and geographic location. As these consumers conduct online research on our Company Websites or on the site of one of our network of automotive publishers, they are presented with relevant offers on a timely basis and, upon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of our Dealer, Manufacturer, or other advertising customers.

 

 

Products and Services

 

We sell Internally Generated Leads and Non-Internally Generated Leads directly to Dealers and indirectly to Dealers through a wholesale market consisting of Manufacturers and other third parties in the automotive Lead distribution industry.  The click traffic program sends consumers to Dealer, Manufacturer, or other advertising customer websites when the consumer clicks on advertisements on Company Websites as well as on websites operated by third parties contracted with the Company as publishers under the click traffic program. We also offer Dealers and Manufacturers other products and services, including WebLeads+ and Payment Pro®, to assist in capturing online, in-market customers and in selling more vehicles by improving the conversion of Leads to sale transactions. In addition, as previously discussed, beginning August 1, 2021, we also acquire used vehicles from consumers and re-sell those vehicles to Dealers, primarily indirectly through third party wholesale auctions and through direct to Dealer sales.

 

Lead Programs

 

We provide Dealers and Manufacturers with opportunities to efficiently market their vehicles to potential buyers.  Dealers and Manufacturers participate in our Lead, display advertising and direct marketing programs, reaching consumers who are in the market to acquire a vehicle. For consumers, we provide, at no cost, an easy way to obtain valuable information and research material to assist them in the vehicle shopping process. Consumer Leads are acquired through our Company Websites or from third parties through their websites. For consumers using our Company Websites, we provide research information, including vehicle specifications, trade in values, safety and pricing data, photos, videos, regional rebates and incentives, and additional tools, such as comparison and configuration tools, to assist them in the buying process.  We also provide additional content on our Company Websites, including a database of articles, consumer and professional reviews, and other analyses.  

 

New Vehicle Leads Program. Our new vehicle Leads program allows consumers to submit requests for pricing and availability of specific new vehicle makes and models.  A Lead provides a Dealer with information regarding the make and model of vehicle the consumer is interested in purchasing as well as the consumer’s contact information.

 

Dealers participating in our new vehicle Leads program are provided with iControl ®, a proprietary technology that provides Dealers control over the volume and source of their Leads. iControl can be managed at the dealership (or by a representative of AutoWeb on behalf of the dealership) or at the Dealer group level from a web-based, easy-to-use console that makes it quick and efficient for dealerships to change their Lead acquisition strategy to adjust for inventory conditions and broader industry patterns (such as changes in gas prices or consumer demand). From the console, dealerships can easily reduce or expand territories and increase, restrict or block specific models and Lead web sources, making it much easier to manage inventory challenges and focus marketing resources more efficiently.

 

Our Leads are subject to a quality verification system designed to maintain high-quality Leads and increase Lead buy rates for our Lead customers. Quality verification includes validation of consumer contact information. Our proprietary quality verification process also involves arrangements with third-party vendors specializing in customer validation. After a Lead has been verified, and if we have placement coverage for the Lead within our network of Dealer customers, we send the Lead to selected Dealers in the consumer’s geographic area that sell the type of vehicle requested by the consumer. Additionally, we send an email to the consumer with the Dealer’s name and phone number, and, if applicable, the name of the dealership’s internet manager. Dealers contact the consumer with a price quote and availability information for the requested vehicle. We also sell Leads wholesale to Manufacturers for delivery to their Dealers and also to third parties that have placement coverage for the Lead outside of our Dealer network.

 

Dealers participate in our retail new vehicle Leads program by entering into contracts directly with us or through major Dealer groups. Generally, Dealer contracts are non-exclusive and may be terminated for convenience by either party with 30 days’ notice. The majority of our retail new vehicle Lead revenues consists of either a monthly subscription fee or a per-Lead fee paid by our network of Dealers. We generally reserve the right to adjust our fees at any time during the term of the contract with at least 30 days’ notice. Manufacturers (directly or through their marketing agencies) and other third parties participate in our wholesale new vehicle Leads programs generally by entering into agreements where either party has the right to terminate for convenience upon prior notice, with the length of time for the notice varying by contract. Revenues from retail new vehicle Leads accounted for approximately 16% and 17% of total revenues in 2021 and 2020, respectively. Revenues from wholesale Leads accounted for approximately 53% and 58% of total revenues in 2021 and 2020, respectively.

 

 

Used Vehicle Leads Program. Our used vehicle Leads program allows consumers to search for used vehicles according to specific search parameters including price, make, model, mileage, year and location of the vehicle. The consumer is able to locate and display the description, price and, if available, digital images of vehicles that satisfy the consumer’s search parameters.  The consumer can then submit a Lead for additional information regarding a specific vehicle of interest that the Company delivers to the Dealer offering the vehicle. In addition to sending Leads directly to Dealers through our Lead delivery system, consumers may choose to contact the Dealer using a toll-free number posted next to each vehicle in the consumer’s search results. We charge each Dealer that participates in the used vehicle Leads program either a monthly subscription fee or a per Lead fee.  Revenues from used vehicle Leads accounted for 3% and 4% of total revenues in 2021 and 2020, respectively.

 

Advertising Programs

 

Our Company Websites attract an audience of prospective automotive buyers that advertisers can target through display advertising. A primary way advertisers use our Company Websites to reach consumers is through vehicle content targeting. This allows automotive marketers to reach consumers while they are researching one of our automotive segments, such as mini-vans or SUVs, and offers Manufacturers sponsorship opportunities to assist in their customer retention and new consumer acquisition strategies. Our Company Websites also offer Manufacturers the opportunity to feature their makes and models within highly contextual content. Through advertising placements, Manufacturers can direct consumers to their respective websites for further information. We believe this transfer of focused, interested consumers to Manufacturer sites is the most significant action measured by Manufacturers in evaluating our performance and value for the Manufacturers’ marketing programs. Through our agreement with a third party, the third party sells our fixed placement advertising across our Company Websites to automotive advertisers. We also offer a direct marketing platform that enables Manufacturers to target in-market consumers selectively during the often-extended vehicle shopping process. Designed to keep a specific automotive brand in consideration, our direct marketing programs allow automotive marketers to deliver specific communication through either email or direct mail formats to in-market consumers during the shopping process.

 

Our click traffic program is a pay-per-click advertising program. The click traffic program utilizes proprietary technology to provide consumers targeted offers based on make, model and geographic location. As consumers are conducting research on one of our consumer facing websites or on the site of one of our network of automotive publishers, they are presented with timely, relevant offers and, upon the consumer clicking the displayed advertisement, are sent to the website of one of our Dealer, Manufacturer or other advertising customers. The AutoWeb network of publisher websites reaches and engages with millions of potential car buyers each month, and we believe our network of publisher websites provides high-intent, high-quality traffic that Dealers and other customers cannot typically reach through their own marketing efforts. The click traffic program is flexible and in addition to driving traffic to a vehicle detail page, it sends website traffic to new vehicle sales, service, used vehicles or any other department where our customers want to engage with in-market consumers. In addition, we believe that our click traffic program can be used to more effectively reach competitive shoppers who are researching competitor brands than typical search engines. Advertisers only pay for the clicks they receive and are able to structure campaigns with flexible budgets and no long-term commitments in order to effectively manage spend against their key performance indicators. We receive ongoing feedback from our customers that indicates this traffic provides highly targeted marketing opportunities and is a valuable tool to assist Dealers in selling more vehicles.

 

Advertising revenues, including direct marketing, accounted for 20% of total revenues in 2021 and 2020.

 

Used Vehicle Acquisition

 

As a result of the CarZeus Purchase Transaction, beginning August 1, 2021, we now acquire used vehicles from consumers and resell these vehicles wholesale to Dealers, either indirectly through third party auctions or through direct to dealer sales. Our used vehicle acquisition and resale operations are located in Texas with operations in San Antonio, Austin and Houston. Our used vehicle acquisition and resale operations accounted for 7% of total revenues in 2021.

 

Other Dealer Products and Services

 

The Company also offers products and services that assist Dealers in connecting with in-market consumers and in closing vehicle sales.

 

 

WebLeads+. Designed to work in connection with a Dealer’s participation in our Leads programs, WebLeads+ is a third-party product that offers a Dealer multiple coupon options that display relevant marketing messages to consumers visiting the Dealer’s website.  With WebLeads+, consumers who visit the Dealer’s website are encouraged to take action in two ways.  First, on the Dealer website, a consumer is presented with a customized special offer formatted for easy Lead submission. If a vehicle quote is requested, the Lead goes directly to the dealership management tool so the dealership sales team can promptly address the customer’s request.  Second, if the consumer leaves the Dealer’s website but remains online, the WebLeads+ product keeps the coupon active in a new browser, which provides the Dealer a repeat branding opportunity and the consumer an easy way to re-engage with the Dealer’s website through submission of a Lead.  The additional Leads generated by the coupons are seamlessly integrated into our Extranet tool.

 

Payment Pro®.  Payment Pro® is a Dealer website conversion tool based on a third-party product that offers consumers real-time online monthly payment information based on an instant evaluation process.  Payments are based on a third-party review of the consumer’s credit, the actual vehicle being researched, and Dealer finance rates and without requiring a credit check. The Lead goes directly into the Dealer’s management tool so that the dealership sales team can promptly address the consumer’s inquiry.

 

Strategy

 

Our goal is to transition from primarily an automotive digital media provider to a transactionally focused matchmaker that participates in the vehicle transaction process in multiple ways. We plan to achieve this objective through the following principal strategies:

 

Increase the Supply of High-Quality Leads. High-quality Leads are those Leads that result in high transaction (i.e., vehicle acquisition) closing rates for our Dealer and Manufacturer customers.  Internally Generated Leads are generally higher quality than Non-Internally Generated Leads and increase the overall quality of our Lead portfolio. Non-Internally Generated Leads are of varying quality depending on the source of these Leads. We plan to increase the supply of high-quality Leads generated to sell to our customers primarily by:

 

 

Increasing traffic acquisition activities on Company Websites. Traffic to our Company Websites is monetized primarily though the creation of Leads that are delivered to our Dealer or Manufacturer customers to help them market and sell new and used vehicles and through the sale of advertising space on our Company Websites. We plan to increase the traffic to our Company Websites through effective search engine optimization (“SEO”) and search engine marketing (“SEM”) traffic acquisition activities and enhancements to our Company Websites. SEO is the practice of optimizing keywords in website content to drive traffic to a website through natural search. SEM is the practice of bidding on keywords on search engines to drive traffic to a website.

 

 

SEO and SEM traffic acquisition activities. Traffic to our Company Websites is obtained through a variety of sources and methods, including direct navigation, SEO, SEM, direct marketing and partnering with other website publishers that provide links to our websites. Our goal is that over time, paid traffic such as SEM will be balanced by greater visitation from direct navigation and SEO, which we expect to result in increased Lead volume and Lead gross profit margins.

 

 

Continuing to enhance the quality and user experience of our Company Websites. We continuously make enhancements to our Company Websites, including in the design and functionality and by adding new and compelling features for consumers to engage with. These enhancements are intended to position our Company Websites as best-in-class destinations for automotive purchase research by consumers. By doing so, we believe we will increase the volume of our Internally Generated Leads.

 

 

Increasing the conversion rate of visitors to Leads on our Company Websites. Through increased and optimized SEO and SEM activities and significant content, tools and user interface enhancements to our websites, we believe we will be able to increase the number of website visits and improve website “engagement” by consumers, thereby increasing the conversion of page views into Leads. We believe that an increased conversion rate of page views into Leads could result in higher revenue per visitor.

 

 

Relationships with Suppliers of High-Quality, Non-Internally Generated Leads. We plan to continue to develop and maintain strong relationships with suppliers that consistently provide high-quality Non-Internally Generated Leads.

 

 

Increasing Leads Sales to our Customers. Our principal source of revenue comes from the sale of Leads to our retail and wholesale Lead customers. Our goal is to increase sales of Leads to our customers primarily by:

 

 

Increasing Lead Sales to Dealers. The sale of Leads to our Dealer network constitute a significant source of revenues. During 2021, we continued to focus our Dealer acquisition and retention strategies on dealerships to which we could deliver a higher percentage of Internally Generated Leads. We believe this will result in increased vehicle sales for our Dealers and ultimately stronger relationships with our Dealers due to the higher quality of Internally Generated Leads as previously discussed. Our goal is to increase the number of Leads sold to our retail Dealer customers by:

 

 

o

increasing the quality of Leads sold to Dealers,

 

o

increasing the number of Dealers in our Dealer network,

 

o

reducing Dealer network churn,

 

o

providing customizable Lead programs to meet our Dealers’ unique marketing requirements,

 

o

providing additional value-added marketing services that assist Dealers in more effectively utilizing the internet to market and sell new and used vehicles,

 

o

increasing overall Dealer satisfaction by improving all aspects of our services,

 

o

focusing on higher revenue Dealers that are more cost-effective to support, and 

 

o

enhancing our internal Lead generation activities by leveraging our expanded retail lead coverage.

 

 

Increasing Lead Sales to Wholesale Customers. We currently have agreements to sell Leads to Manufacturer Lead programs. We intend to continue to demonstrate the value of third-party leads to Manufacturers by providing close rate and cross sell data to our wholesale customers that demonstrates that third-party leads result in incremental sales for Manufacturers. Our intention is to increase revenue by providing a compelling use case that causes Manufacturers to enhance their business rules, program capacity, pricing and coverage so each Manufacturer can purchase an optimal mix of Leads.

 

 

Focus on Internal Traffic Acquisition Processes. We are continuing to focus on prioritizing our internal traffic acquisition processes by obtaining higher quality impressions for both Dealers and wholesale customers, which we believe should yield increased gross profit margins.

 

Continuing to develop the click traffic program for online automotive advertisers and publishers.  Our click traffic program uses proprietary technology and a pay-per-click business model to analyze web traffic and adjust advertiser costs accordingly based on traffic quality.  This traffic network is targeted to attract high-intent, high-volume publishers and is intended to allow them to monetize traffic that has previously been under-monetized.  In-market car shoppers are presented with highly relevant display advertisements and benefit from an online experience that delivers information that consumers use in making their car buying decisions.  Manufacturers benefit from this high-quality traffic from serious in-market car buyers.  Our click traffic program enables Manufacturers and Dealers to optimize their advertising by driving traffic to appropriate areas of their Tier 1 (Manufacturer national advertising), Tier 2 (Manufacturer and advertising associations regional advertising) and Tier 3 (Dealer) websites.  

We believe Manufacturers and Dealers will see the measurable attribution from this click traffic and will reallocate marketing spend from traditional channels into this medium. We also plan to grow the size of this addressable marketplace by adding high-quality and high-volume automotive publishers to our network, targeting in-market consumers on a variety of social media platforms and by continuing to optimize this advertising platform on our consumer-facing websites. In addition, we believe that the flexibility of our solution combined with high-quality traffic with automotive purchase intent may allow us to grow our click advertiser base as the level of attribution from this product is understood by advertising partners.

 

Display Advertising Revenues.  As traffic to, and time spent on, our Company Websites by consumers increases, we will seek to increase our advertising revenues.  Through our agreement with a third party, we benefit from the third party’s relationships with major automotive Manufacturers and/or the third party’s advertising agencies by increasing revenues for our traditional display advertising.

 

Continuing to Expand our Products and Services. We gather significant amounts of data on consumer vehicle purchase intent.  We intend to use these data to create products and services, including direct business database offerings, that we believe will ultimately assist Manufacturers and Dealers in marketing and selling more vehicles.  Our objective is to generate revenues from this asset in the most effective and efficient ways possible.

 

 

Used Vehicle Acquisition. In connection with the CarZeus Purchase Transaction, beginning August 1, 2021, we also sell used vehicles which are acquired from consumers and sold to Dealers indirectly through third party wholesale auctions and through direct to Dealer sales. The CarZeus Purchase Transaction provided the Company with an additional monetization opportunity by leveraging our existing expertise in identifying high quality in-market buyers in order to participate more meaningfully in the used vehicle acquisition and sales process through the acquisition of used vehicles from consumers and resale of these vehicles into the wholesale sales channel. We believe this acquisition allows us to increase our total addressable market by expanding our presence in the used vehicle space, while giving us the opportunity to enhance the offerings and usefulness of our underutilized Company Websites and monetize our traffic more effectively. We plan to use our traffic acquisition capabilities and operational efficiency to drive growth, improve financial performance and build scalable operating processes to enhance performance within the San Antonio, Austin and Houston, Texas markets. With this foundation in place, we plan to prepare the business for broader geographic expansion over time.

 

Strategic Acquisitions, Investments and Alliances. Our goal is to grow and enhance our business. We may do so, in part, through strategic acquisitions, investments and alliances. We continue to review strategic opportunities that may provide opportunities for growth. We believe strategic acquisitions, investments and alliances may allow us to increase market share, benefit from advancements in technology and strengthen our business operations by enhancing our product and service offerings.

 

Our ability to implement the foregoing strategies and plans and to achieve our goals is subject to risks and uncertainties, many of which are beyond our control.  Accordingly, there is no assurance that we will successfully implement our strategies and plans or achieve our goals.  See “Item 1A. Risk Factors” of this Annual Report on Form 10-K and the discussion of “Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

 

Seasonality

 

Our quarterly revenues and operating results have fluctuated in the past and may fluctuate in the future due to various factors, including consumer buying trends, changing economic conditions, Manufacturer new vehicle production levels, Manufacturer incentive programs and actual or threatened severe weather events.  Lead volume is typically highest in the summer (third quarter) and winter (first quarter) months, followed by spring (second quarter) and fall (fourth quarter). Historical seasonality trends have been and may continue to be impacted by externalities such as pandemics, supply chain disruptions and new vehicle inventory shortages.

 

Intellectual Property

 

Our intellectual property includes patents related to our innovations, products and services; trademarks related to our brands, products and services; copyrights in software and creative content; trade secrets; and other intellectual property rights and licenses of various kinds. We seek to protect our intellectual property assets through patent, copyright, trade secret, trademark and other laws and through contractual provisions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and non-disclosure agreements with third parties with whom we conduct business in order to secure our proprietary rights and additionally limit access to, and disclosure of, our proprietary information.  We have registered trademarks with the United States Patent and Trademark Office, including AutoWeb®, AutoWeb.com®, the global highway logo, Autobytel, Autobytel.com, MyGarage, iControl®, TextShield®, and Payment Pro® and have a pending application for the registration of the CarZeus trademark. We cannot provide any assurances that any of our intellectual property rights will be enforceable by us in litigation or will not be successfully challenged. Additional information regarding certain risks related to our intellectual property is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

Competition

 

In the automotive-related digital marketing services marketplace we compete for Dealer and Manufacturer customers.  Competition with respect to our core Lead referral programs continued to be impacted by changing industry conditions in 2021. We continue to compete with several companies that maintain business models similar to ours, some with greater resources. In addition, competition has increased from larger competitors that traditionally have competed only in the used vehicle market.  Dealers continue to invest in their proprietary websites and traffic acquisition activities, and we expect this trend to continue as Dealers strive to own and control more Lead generating assets under their captive brands. Additionally, all major Manufacturers that market their vehicles in the U.S. have their own websites that market their vehicles direct to consumers and generate Leads for delivery direct to Manufacturer Dealers. We compete primarily based on Lead quality and pricing.

 

 

We believe third-party Leads have been the standard in our industry for many years.  However, we continue to observe new and emerging business models, including pay-per-sale and consumer pay models, relating to the generation and delivery of Leads.  From time to time, new products and services are introduced that take the focus away from third-party Lead generation, which we believe is a profitable way to sell vehicles to in-market buyers. Dealers and Manufacturers may decide to pull back on their third-party Lead programs to test these new approaches.

 

In the display advertising marketplace, we compete with major internet portals, transaction-based websites, automotive related companies, numerous lifestyle websites and emerging entrants in the automotive click revenue medium. According to industry forecasts, the top two digital advertising platforms in the U.S. are Google and Facebook, which are expected to maintain their dominant hold on digital advertising dollars. We also compete with traditional marketing channels such as print, radio, and television.

 

In pay-per-click advertising, we compete with established search engine providers as well as a growing number of digital marketing platforms focused on generating dealership website traffic from inventory listings and social media campaigns. In addition, some industry providers who have historically specialized in inventory aggregation or in providing SEM agency services to Dealers are now expanding into the area of website traffic generation. Further, many dealership website providers are now offering traffic solutions as part of their bundle of services.

 

Some traditional data providers are also moving to deliver personalized digital marketing services at scale. These digital marketing hubs and data management platforms provide marketers with standardized access to audience data, content, workflow triggers and operational analytics to automate execution and optimization of multichannel campaigns. These services could be used as a source of lead generation and website traffic by Dealers and Manufacturers and could replace our existing product offerings.

 

The U.S. used car acquisition marketplace is highly fragmented, and we face competition from franchised dealers, who sell both new and used vehicles, online buyers, independent used car dealers and private parties. Competition in our industry has evolved with the adoption of online platforms and marketing tools, all of which facilitate increased competition. A number of our competitors maintain business models similar to ours, many of which have much greater resources. We believe that our principal competitive advantage in used vehicle acquisition is our ability to provide a high degree of customer satisfaction with the car selling experience through competitive price offers and our customer-friendly sales process.

 

Customers

 

We have a concentration of credit risk with our automotive industry related accounts receivable balances, particularly with Carat Detroit (General Motors), Urban Science Applications (which represents several Manufacturer programs) and Autodata Solutions and Shift Digital. Approximately 43% or $30.9 million of total revenues and approximately 64% or $7.3 million of gross accounts receivable were related to these four customers at December 31, 2021 as follows:  

 

Customers

 

% of

Revenue

   

% of

Account Receivable

 

Carat Detroit

    12 %     20 %

Urban Science Applications

    12 %     18 %

Autodata Solutions

    13 %     16 %

Shift Digital

    6 %     10 %

Total

    43 %     64 %

 

Operations and Technology

 

We believe our future success is significantly dependent upon our ability to provide high-performing, reliable, and comprehensive websites and advertising systems; enhance consumer and Dealer product and service offerings; maintain the highest levels of information privacy; and ensure transactional security. Our Company Websites and advertising systems are hosted at a secure third-party data center facility and with public cloud providers. The data center and public cloud systems utilize redundant power infrastructure and network connectivity, distributed services, fire detection and suppression systems and physical security protocols to prevent unauthorized access and to provide high service availability, upon which our technology is built, deployed and operated. While our network and computer systems are built on industry standard technology, our Websites and information technology systems are susceptible to, and have been impacted by, outages and interruptions, including the malware attack we experienced in January 2020. For additional information regarding risks related to our information technology, see Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

 

System enhancements are primarily intended to accommodate increased traffic across our Company Websites, improve the speed in which Leads and advertisements are processed, introduce new and enhanced products and services, and provide cybersecurity protections against evolving technology threats. System enhancements entail the implementation of sophisticated new technology and system processes. We implement industry standard automation and delivery processes and employ centralized quality assurance to improve the quality, scalability, security, compliance, and availability of our products. We plan to continue to make investments in technology as necessary to improve our service offerings.

 

Government Regulation

 

We are subject to laws and regulations generally applicable to providers of digital marketing services and companies engaged in used vehicle acquisition and resale, including federal and state laws and regulations governing data security and privacy; voice, email and text messaging communications with consumers; unfair and deceptive acts and practices; advertising; contests, sweepstakes and promotions; content regulation and motor vehicle dealer licensing. For additional important information related to government regulation of our business, including governmental regulations relating to the marketing and sale of automobiles, see the information set forth in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

Employees

 

As of March 22, 2022, we had 162 full-time employees.

 

Available Information

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the SEC. Our corporate website is located at www.autoweb.com. Information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make these filings available at or through the Investor Relations section of our website. In addition, the SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s website is www.sec.gov.

 

 

Item 1A.         Risk Factors

 

The risks described below are not the only risks that we face. The following risks as well as risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially and adversely affect our business, results of operations, financial condition, earnings per share, cash flow or the trading price of our stock, individually and collectively referred to in these Risk Factors as our “financial performance.” See also the discussion of “Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

 

Risks Associated with our Business Operations and Industry

 

We may be unable to increase Lead revenues and could continue to suffer declining revenues due to Dealer attrition or loss of Manufacturer customers.

 

We predominately derive our Lead revenues from Lead fees paid by Dealers and Manufacturers participating in our Leads programs. Our Lead revenues decreased $9.0 million, or 15%, in 2021 compared to 2020. Our ability to increase revenues from sales of Leads is dependent on a mix of interrelated factors that include attracting and retaining Dealers and Manufacturers and increasing the number of high-quality Leads we sell to Dealers and Manufacturers. Our Lead sales strategy is intended to result in more profitable relationships with our Dealers both in terms of cost to supply Leads and to support the Dealers. Dealer churn and termination of Manufacturer Lead programs impact our revenues, and if our sales strategy does not mitigate the loss in revenues by maintaining the overall number of Leads sold by increasing sales to other Dealers or Manufacturers while maintaining the overall margins we receive from the Leads sold, our revenues will decrease. We cannot provide any assurances that we will be able to increase Lead revenues, prevent Dealer attrition or program terminations by Manufacturers or offset the revenues lost due to Dealer attrition or program terminations by Manufacturers by other means, and our failure to do so could materially and adversely affect our financial performance.

 

We may lose customers or quality Lead suppliers to our competitors.

 

Our ability to provide increased numbers of high-quality Leads to our customers is dependent on increasing the number of Internally Generated Leads and acquiring high-quality Non-Internally Generated Leads from third parties. Originating Internally Generated Leads is dependent on our ability to increase consumer traffic to our Company Websites by providing secure and easy to use websites with relevant and quality content for consumers and increasing visibility of our brands to consumers and by our SEM activities. We compete for Dealer and Manufacturer customers and for acquisition of Non-Internally Generated Leads with companies that maintain automotive Lead referral businesses that are very similar to ours. Many of these competitors are larger than us and have greater financial resources than we have. If we lose customers or quality Lead supply volume to our competitors, or if our pricing or cost to acquire Leads is adversely impacted, our financial performance will be materially and adversely affected.

 

We depend on Manufacturers, through our third-party sales channel and direct-to-Manufacturer wholesale programs, for a significant amount of our revenues, and we may not be able to maintain or grow these relationships.

 

We depend on Manufacturers, through our third-party sales channel and direct-to-Manufacturer wholesale programs for a significant amount of our revenues. A decline in the level of advertising on our websites, reductions in advertising rates, terminations of their third-party Lead programs by Manufacturers or any significant failure to develop additional sources of advertising would cause our advertising revenues to decline, which could have a material adverse effect on our financial performance. We periodically negotiate revisions to existing agreements and these revisions could decrease our wholesale program revenues in future periods. A number of our third-party sales channel agreements and Manufacturer agreements may be terminated at any time without cause or upon expiration of the current term of the agreement. We may not be able to maintain our relationships with sales channel third parties or Manufacturers on favorable terms or find alternative comparable relationships capable of replacing revenues on terms satisfactory to us. If we cannot do so, our revenues would decline, which could have a material adverse effect on our financial performance.

 

A reduction in the availability of, or access to, used vehicle inventory could adversely affect our business by increasing the costs of vehicles purchased and reducing the volume of units purchased for resale.

 

Our Tradein Expert (dba CarZeus) operations acquire used vehicles primarily from individual consumers. There can be no assurance that sufficient inventory of used vehicles will continue to be available to Tradein Expert. or will be available at prices acceptable to Tradein Expert. Tradein Expert might have to absorb a portion of any cost increases in inventory without being able to pass those increases to vehicle purchasers. Any reduction in the availability of used vehicle inventory or increases in the cost of vehicles could adversely affect Tradein Expert’s financial performance. Tradein Expert could have negative gross profit when the cost of inventory is greater than the resale price of that inventory. As a result of severely constrained new car inventories, there has been a significant increase in demand and prices for used vehicles

 

 

The retail used vehicle industry is fragmented and highly competitive, which could result in increased costs to acquire vehicles, lower sales prices due to competitive pressure.

 

Tradein Expert competes principally with (i) the used vehicle retail operations of franchised automobile dealerships, (ii) independent used vehicle dealers, some of which have significantly greater financial resources, and (iii) individuals who sell used vehicles in private transactions. Increased competition in the used vehicle market, including new entrants to the market, could result in increased costs for used vehicles and lower-than-expected vehicle sales and margins for Tradein Expert. Further, if Tradein Expert’s competitors seek to gain or retain market share by increasing the prices they pay for used vehicles or reducing prices for used vehicles they sell, Tradein Expert may have to respond by increasing the prices it pays for vehicles or reducing the sales prices of used vehicles it sells to its customers in order to remain competitive, which may result in a decrease in Tradein Expert’s sales and ability to achieve profitability.

 

Our financial performance could be materially and adversely affected by changes in internet search engine algorithms, pricing or operational dynamics.

 

We use Google to generate a significant portion of the traffic to our websites, and, to a lesser extent, we use other search engines and meta-search websites to generate traffic to our websites, principally through pay-per-click advertising campaigns. The pricing and operating dynamics on these search engines can experience rapid change commercially, technically and competitively. For example, Google frequently updates and changes the logic that determines the placement and display of results of a consumer's search, such that the placement of links to our websites can be negatively affected and our costs to improve or maintain our placement in search results can increase. Our ability to continue to use Google could be impacted as a result of the Company’s credit position. Our financial performance would be materially and adversely affected if we were no longer able to use Google for generation of traffic to our websites.

 

We are affected by general economic and market conditions, and, in particular, conditions in the automotive industry.

 

Our financial performance is affected by general economic and market factors, conditions in the automotive industry, and the market for automotive marketing services, including, but not limited to, the following:

 

 

Pricing and purchase incentives for vehicles;

 

 

Availability and terms, including interest rates, of automotive financing;

 

 

The expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better-quality vehicles and longer warranties;

 

 

The impact of fuel prices, which increased significantly in the last year and into 2022 (most recently as a result of the impact of sanctions placed on Russia due to its invasion of Ukraine) and are expected to continue to increase, on demand for the number and types of vehicles;

 

 

Increases or decreases in the number of retail Dealers or in the number of Manufacturers and other wholesale customers in our customer base;

 

 

Volatility in spending by Manufacturers and others in their marketing budgets and allocations;

 

 

The competitive impact of consolidation in the online automotive consumer referral industry;

 

 

The effect of changes in transportation policy, including the potential increase of public transportation options;

 

 

The effect of fewer vehicles being purchased as a result of new business models and changes in consumer attitudes regarding the need for vehicle ownership;

 

 

The impact of inflation, which has been increasing significantly, on consumer spending and consumer confidence;

 

 

Disruption in the automotive manufacturing and parts supply chains caused by natural disasters, epidemics and pandemics, adverse weather, incidents of civil unrest and other events may affect the supply of vehicle and parts inventories to Manufacturer’s and Dealers; and

 

 

The impact of high unemployment on the willingness or ability of consumers to acquire new or used vehicles.

 

 

Natural disasters, public health crises, political crises and other catastrophic events or other events outside of our control could damage our facilities or systems or the facilities or systems of third parties on which we depend on, adversely impact and cause disruptions in supply chains or vehicle inventory and could adversely impact consumer confidence and spending.

 

If any of our facilities or the facilities of our third-party service or Lead providers are affected by natural disasters, such as earthquakes, tsunamis, wildfires, power shortages, floods, public health crises (such as pandemics and epidemics), political crises (such as terrorism, insurrection, war, political instability or other conflict) or other events outside our control, including a cyberattack, our critical business or IT systems could be destroyed or disrupted and our ability to conduct normal business operations, and our financial performance, could be materially and adversely affected. Moreover, these types of events could negatively impact Dealers, Manufacturers and consumer confidence and spending in the impacted regions or, depending upon the severity, globally, which could adversely impact our financial performance.

 

In early 2020 and continuing as of the date of this Annual Report on Form 10-K, 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 widespread disruptions to travel, economic activity, supply chains and financial markets. The continuing effect of the coronavirus pandemic has led our Manufacturer and Dealer customers to experience disruptions in the supply of vehicle and parts inventories, and in the overall health, safety and availability of their labor force. Manufacturers have also shut down assembly plants, adversely impacting inventories of new vehicles. Volatility in the financial markets, concerns about exposure to the virus, governmental quarantines, mask mandates, vaccination requirements, stay-at-home/work-from-home orders, business closures and employment furloughs and layoffs have also impacted consumer confidence and spending. Lower consumer confidence may continue even after quarantines, mask mandates, vaccination requirements, stay-at-home/work-from-home orders and business closures have ended. These disruptions have impacted the willingness or desire of our customers to acquire vehicle Leads or other digital marketing services from us. We are also experiencing direct disruptions in our operations due to the overall health and safety of, and concerns for, our labor force and as a result of governmental “social distancing” programs, quarantines, mask mandates, vaccination requirements and stay-at-home/work-from-home orders, leading us to reduce or restrict access to our offices and allowing employees to work remotely from their homes.

 

In addition to the continued impact of the coronavirus pandemic on supply chains and vehicle inventories and sales, Manufacturers have also 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 new vehicle sales and increased demand for used vehicles. 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.

 

We are unable to predict the continuing extent, duration and impact of the supply chain disruptions on the automotive industry in general, and on our business and operations specifically. The spread of coronavirus variants and governmental responses thereto may prolong or increase the negative impacts of the pandemic. Vehicle sales have declined, and we continue to experience cancellations or suspensions of purchases of Leads and other digital marketing services by our customers, which could continue to materially and adversely affect our financial performance. In light of the continuing impact of the pandemic and supply chain disruptions, we have continued taking steps to reduce our overall Lead and click generation efforts and corresponding costs to better align our volumes with industry demand and consumer intent and ability to purchase or lease vehicles. We will continue to evaluate these and other cost reduction measures, and explore all options available to us, in order to minimize the impact of these events on us.

 

If we lose our key personnel or are unable to attract, train and retain additional highly qualified executive, sales, marketing, managerial and technical personnel, our financial performance may be adversely impacted.

 

Our future success depends on our ability to identify, hire, train and retain highly-qualified executive, sales, marketing, managerial and technical personnel. In addition, as we introduce new services, we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary highly qualified executive, managerial, technical, sales and marketing personnel could have a material adverse effect on our financial performance.

 

 

Our business and operations are substantially dependent on the performance of our executive officers and other key employees. Each of these executive officers and other key employees could be difficult to replace. There is no guarantee that any of our executive officers or other key employees will remain employed with us. The loss of the services of one or more of our executive officers or other key employees could have a material adverse effect on our financial performance.

 

Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide competitive compensation packages, including cash and stock-based compensation. Our primary forms of stock-based incentive awards are stock options and restricted stock. If the anticipated value of such stock-based incentive awards does not materialize, if our stock-based compensation otherwise ceases to be viewed as a valuable benefit, or if our total compensation package is not viewed as being competitive, our ability to attract, retain and motivate executives and other key employees could be adversely impacted.

 

We are exposed to risks associated with overseas operations.

 

We currently maintain website, software development and other operations in Guatemala and may contract with third party service providers that provide services to us through their overseas operations. These overseas operations are subject to many inherent risks, including but not limited to:

 

 

Political and social instability;

 

 

Exposure to different business practices and legal standards, particularly with respect to labor and employment laws and intellectual property;

 

 

Continuation of overseas conflicts and the risk of terrorist attacks and resulting heightened security;

 

 

The imposition of governmental controls and restrictions and unexpected changes in regulatory requirements;

 

 

Theft and other crimes;

 

 

Nationalization of business and blocking of cash flows;

 

 

Changes in taxation and tariffs;

 

 

Difficulties in staffing and managing international operations; and

 

 

Foreign currency exchange fluctuations.

 

These risks can significantly impact our overseas operations and outsourcing. Increases in the cost, or disruptions, of such operations and outsourcing, could materially and adversely affect our financial performance. In addition, we are subject to certain anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If we or any of our employees or agents violates these laws, we could become subject to sanctions or significant penalties that could negatively affect our reputation and financial performance.

 

We may acquire other businesses, products or technologies, which could divert our managements attention from our business, disrupt our operations and materially and adversely impact our financial performance.

 

As part of our strategy to grow our business, we evaluate whether to acquire other businesses, products or technologies that we believe will complement or enhance our existing business rather than develop these internally. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to identify suitable candidates or to complete identified acquisitions. The integration of acquisitions requires significant time and resources, and we may not manage these processes successfully. We cannot provide any assurances that any completed acquisitions will be successful.

 

In order to complete acquisitions, we may issue common stock or securities convertible into or exercisable for common stock, potentially creating dilution for existing stockholders. Issuance of equity securities may also restrict utilization of net operating loss carryforwards because of an annual limitation due to ownership change limitations under the Internal Revenue Code. We may also borrow to finance acquisitions, and the amount and terms of any potential future acquisition-related or other borrowings may not be favorable to the Company and could affect our financial performance. An announced acquisition transaction may not close timely or at all, which may cause our financial performance to differ from expectations in a given period.

 

 

Acquisitions involve numerous risks that include the following, any of which could materially and adversely affect our financial performance:

 

 

We may not fully realize all of the anticipated benefits of an acquisition or may not realize them in the timeframe expected, including due to acquisitions where we expand into product and service offerings or enter or expand into markets in which we are not experienced;

 

 

We may be required to make substantial investments of resources to support our acquisitions, which would result in significant ongoing operating expenses and could divert resources and management attention from other areas of our business;

 

 

Acquisitions may result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, goodwill and asset impairment charges, charges from the elimination of duplicative facilities and contracts, assumed litigation and other liabilities, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans;

 

 

Our due diligence process may fail to identify significant issues with an acquired company that may result in unexpected or increased costs, expenses or liabilities that could make an acquisition less profitable or unprofitable;

 

 

The failure to further our strategic objectives through acquisitions may require us to expend additional resources to develop products, services and technology internally;

 

 

Acquisitions may lead to litigation that can be costly to defend or settle, even if no actual liability exists;

 

 

Integrations of acquisitions are often complex, time consuming and expensive, and if acquisitions are not successfully integrated, they could materially and adversely affect our financial performance. The challenges involved with integration of acquisitions include:

 

 

o

Diversion of management attention to assimilating the acquired business from other business operations and concerns;

 

 

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Integration of the acquired business’s accounting, management information, human resources, legal and other administrative systems into our systems;

 

 

o

Difficulties in assimilating the operations and personnel of an acquired business into our own business;

 

 

o

Convincing our customers and suppliers and the customers and suppliers of the acquired business that the transaction will not diminish client service standards or business focus and that they should not defer purchasing decisions or switch to other suppliers;

 

 

o

Consolidating and rationalizing corporate IT infrastructure, which may include multiple legacy systems from various acquisitions and integrating software code and business processes;

 

 

o

Persuading employees that business cultures are compatible, maintaining employee morale, retaining key employees and integrating employees into the Company;

 

 

o

Coordinating and combining administrative, manufacturing, technology, research and development, sales and marketing and other operations, subsidiaries, facilities and relationships;

 

 

o

Transition of the acquired business’s users to our websites and mobile applications;

 

 

o

Transition of customers to our products and services and our contracts;

 

 

o

Risks associated with the businesses, products or technologies we acquired, which may differ from or be more significant than the risks our business faces;

 

 

o

Liability for the activities, products or services of the business we acquired, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

 

o

Litigation or other claims in connection with the business, product or technology we acquired, including claims from terminated employees, consumers, former stockholders or other third parties; and

 

 

o

The need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies.

 

We are dependent upon third parties for certain support services and should they fail to perform, our financial performance could be materially and adversely affected.

 

We rely on various third parties from which we acquire Leads, clicks, or consumer traffic for resale to our customers and to provide certain support services. Should a third party fail to perform or perform adequately, our financial performance could be materially and adversely affected.

 

 

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 revenues will decrease. Our financial performance may be materially and adversely affected by material investments in technology.

 

The internet and electronic commerce markets are characterized by rapid technological change, changes in user and customer requirements, frequent new service and product introductions embodying new technologies, including mobile internet applications, and the emergence of new industry standards and practices that could render our existing websites and technology obsolete. These market characteristics are intensified by the evolving nature of the market and the fact that companies are expected to introduce new internet products and services on a regular basis. If we are unable to adapt to changing technologies, our financial performance could be materially and adversely affected. Our performance will depend, in part, on our ability to continue to enhance our existing services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our websites, mobile applications and other proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our websites or other proprietary technology to customer requirements or to emerging industry standards. In addition, our financial performance could be materially and adversely affected by material investments in technology in order to keep pace with technological advances.

 

Interruptions or failures in our information technology platforms, communication systems or security systems could materially and adversely affect our financial performance.

 

Our information technology and communications systems are susceptible to outages and interruptions due to fire, flood, earthquake, power loss, telecommunications failures, cyberattacks, terrorist attacks, technology operations and development failures, failure of redundant systems and disaster recovery plans and similar events. Such outages and interruptions could damage our reputation and materially and adversely impact our financial performance. Despite our network security measures, our information technology platforms are vulnerable to computer viruses, worms, physical and electronic break-ins, sabotage, malware attacks, insider threats and similar disruptions from unauthorized tampering, as well as coordinated denial-of-service attacks. We do not have multiple site capacity for all of our services. In the event of delays or disruptions to services we rely on third-party providers to perform disaster recovery planning and services on our behalf. We are vulnerable to extended failures to the extent that planning and services are not adequate to meet our continued technology platform, communication or security systems’ needs. We rely on third-party providers for our primary and secondary internet connections. Our co-location service and public cloud services that provide infrastructure and platform services, environmental and power support for our technology platforms, communication systems and security systems are received from third-party providers. We have little or no control over these third-party providers. Any disruption of the services they provide us or any failure of these third-party providers to effectively design and implement sufficient security systems or plan for increases in capacity could, in turn, cause delays or disruptions in our services. We are insured for some, but not all, of these events. Even for those events for which we are insured and have coverage under the terms and conditions of the applicable policies, there are no assurances given that the coverage limits would be sufficient to cover all losses we might incur or experience. We have recently conducted evaluations of our technology and business systems, and based on these evaluations, we believe that our technology infrastructure, our accounting and business systems and disaster recovery procedures are in need of upgrades and replacements. Failure to implement these updates and upgrades could result in systems failures, inability to promptly recover from system failures, and data security risks. We anticipate incurring significant expenses in upgrading and replacing technology infrastructure and business systems over the next three years. Our financial performance may be materially and adversely affected by material investments in new technology infrastructure and business systems.

 

 

 

Financial, Accounting and Liquidity Risks

 

Concentration of credit risk and risks due to significant customers could materially and adversely affect our financial performance.

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are primarily maintained with one financial institution in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. Generally, these deposits may be redeemed upon demand. Accounts receivable are primarily derived from fees billed to Dealers and Manufacturers. We have a concentration of credit risk with our automotive industry related accounts receivable balances, particularly with Carat Detroit (General Motors), Urban Science Applications (which represents several Manufacturer programs), Autodata Solutions and Shift Digital. During 2021, approximately 43%, or $30.9 million of our total revenues and approximately 64% or $7.3 million of gross accounts receivable were related to these four customers at December 31, 2021. No collateral is required to support our accounts receivables, and we maintain an allowance for bad debts for potential credit losses. If there is a decline in the general economic environment or other factors that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with our services, additional estimated allowances for bad debts and customer credits may be required, and the adverse impact on our financial performance could be material.

 

If we are unable to generate positive cash flows, we may not be able to continue operations unless we are able to obtain additional cash through private or public sales of securities, debt financings or partnering/licensing transactions.

 

As of December 31, 2021, we had cash and cash equivalents of $7.3 million and restricted cash of $4.3 million. For the year ended December 31, 2021, we had a net loss of $5.7 million and had net cash used in operations of $0.9 million. As of December 31, 2021, we had an accumulated deficit of $355.4 million and stockholders’ equity of $12.8 million. Although we have developed a strategic plan with the objective to achieve cash generation as a business, if we are unsuccessful in achieving this objective, we may need to seek to satisfy our future cash needs through private or public sales of securities, debt financings or partnering/licensing transactions; however, there is no assurance that we will be successful in satisfying our future cash needs such that we will be able to continue operations. If we continue to experience losses and cannot comply with the covenants in our Loan, Security and Guarantee Agreement dated as of March 26, 2020, as amended, with CIT Northbridge Credit LLC, as agent, (“CNC Credit Agreement”) or if our borrowing base limits are diminished, we may not be able to borrow sufficient funds under CNC Credit Agreement to satisfy our future cash needs.

 

If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our financial performance could be materially and adversely affected.

 

Our future capital requirements will depend on many factors, including but not limited to, implementing new strategic plans, modernizing and upgrading our technology and systems, pursuing business objectives and responding to business opportunities, challenges or unforeseen circumstances, developing new or improving existing products or services, enhancing our operating infrastructure and acquiring complementary businesses and technologies. In addition, if we continue to experience losses and cannot comply with covenants in the CNC Credit Agreement or if our borrowing base limits are diminished, we may be unable to borrow sufficient funds under the CNC Credit Agreement to satisfy our future cash needs. Although we have developed a strategic plan with the objective to achieve cash generation as a business, if our plans are unsuccessful, we may need to seek to satisfy our future cash needs through private or public sales of securities, debt financings or partnering/licensing transactions; however, there is no assurance that we will be successful in satisfying our future cash needs such that we will be able to continue operations.

 

We will require additional capital to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to develop new products or services, improve existing products and services, enhance our operating infrastructure and acquire complementary businesses and technologies. As a result, we expect that we will need to engage in equity or 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. If capital is not available to us, or is not available to us on favorable terms, our financial performance would be materially and adversely affected.

 

 

 

The CNC Credit Agreement contains restrictive covenants that may make it more difficult for us to obtain additional capital, as could any additional debt financing that we may secure in the future that could involve additional restrictive covenants. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our financial performance could be materially and adversely affected. The CNC Credit Agreement expires in March 2023.

 

If our internal controls and procedures fail, our financial condition, results of operations and cash flow could be materially and adversely affected.

 

Pursuant to the Sarbanes-Oxley Act, management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal controls over financial reporting are processes designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. As a smaller reporting company (as defined by the SEC), we are not required to obtain a separate attestation of our internal control over financial reporting from our independent auditors. Our ability to report our financial results on a timely and accurate basis could be adversely affected by a failure in our internal control over financial reporting. If our financial statements are not fairly presented, investors may not have an accurate understanding of our operating results and financial condition. If our financial statements are not timely filed with the SEC, we could be delisted from The Nasdaq Capital Market. If either or both of these events occur, it could have a material adverse effect on our ability to operate our business and the market price of our common stock. In addition, a failure in our internal control over financial reporting could materially and adversely affect our financial performance.

 

Our internal controls may not prevent all potential errors or fraud. Any control system, no matter how well designed and implemented, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved. We, or our independent registered public accountants, may identify material weaknesses in our internal controls which could adversely affect our ability to ensure proper financial reporting and could affect investor confidence in us and the price of our common shares.

 

Personal Information and Data Security and Privacy Risks

 

Our business is subject to various laws, rules and regulations relating to data security and privacy. New data security and privacy laws, rules and regulations may be adopted regarding the internet or other online services that could limit our business flexibility or cause us to incur higher compliance costs. In each case, our financial performance could be materially and adversely affected. Identified below are some of these risks that we believe could materially and adversely affect our financial performance.

 

 

The failure to comply with privacy laws could materially and adversely impact our financial performance.

 

Various laws, rules and regulations govern the collection, use, retention, sale, disclosure, sharing and security of data and personal information that we receive from consumers, customers, advertisers and Lead referral and advertising affiliates. In addition, we have and post on our website our own privacy policies and practices concerning the collection, use, retention, sale, disclosure, sharing and security of user data and personal information. Any failure, or perceived failure, by us to comply with our posted privacy policies, Federal Trade Commission requirements or orders or other federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others. Further, failure or perceived failure by us to comply with our policies, applicable requirements or industry self-regulatory principles related to the collection, use, retention, sale, disclosure, sharing and security of data and personal information or other privacy-related matters could result in a loss of user confidence in us, damage to our brands, and ultimately in a loss of consumers, customers, advertisers or Lead referral and advertising affiliates. We cannot predict whether new legislation or regulations concerning privacy and data security issues related to our business will be adopted, or if adopted, whether they could impose requirements that may result in a decrease in our Lead referrals and materially and adversely affect our financial performance. Proposals that have or are currently being considered include restrictions relating to the collection, use, retention, sale, disclosure, sharing and security of data and personal information obtained through the tracking of internet use, including the possible implementation of a “Do Not Track” list, that would allow internet users to opt-out of such tracking. Other proposals include enhanced rights for consumers to obtain information regarding the sharing or sale of their personal information and rights to opt-out or prevent the sharing or sale of their personal information to third parties, similar to the European Union’s General Data Protection Regulation. The State of California enacted the California Consumer Privacy Act of 2018 (“CCPA”), that includes significant personal information privacy rights for consumers, including rights to know about the personal information collected and sold by a business, have a consumer’s personal information deleted, and to opt-out of any sales of the consumer’s personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. In addition, in November 2020, voters in California approved Proposition 24, which enacted the California Privacy Rights Act of 2020 (“CPRA”). This act includes various amendments to the CCPA and expansion of rights thereunder and creates a new California Privacy Protection Agency with full administrative power, authority and jurisdiction to implement and enforce the CCPA, as amended by the CPRA. Other states have enacted data privacy legislation and other states may do so in the future. Compliance with these laws, could have a material and adverse effect on our financial performance. The CCPA, as amended, and regulations promulgated thereunder may increase our compliance costs and potential liability. Modifications to our data processing practices and policies, products and consumer experience that we have made and may need to make to comply with the CCPA, as amended, and similar legislation, or that we may be required to make in the future as a result of the continuing changes to the requirements under that legislation or similar future legislation, may materially negatively impact our financial performance.

 

Risks associated with telemarketing and advertising.

 

We and our third-party Lead suppliers are subject to various federal and state laws, rules, regulations and orders regarding telemarketing and privacy, including restrictions on the use of unsolicited emails and restrictions on marketing activities conducted through the use of telephonic communications (including text messaging to mobile telephones). Our financial performance could be materially and adversely affected by newly-adopted or amended laws, rules, regulations and orders relating to telemarketing and increased enforcement of such laws, rules, regulations or orders by governmental agencies or by private litigants. The regulations adopted by the Federal Communications Commission under the Telephone Consumer Protection Act (“TCPA”) require the prior express written consent of the called party before a caller can initiate telemarketing calls (i) to wireless numbers (including text messaging) using an automatic telephone dialing system or an artificial or prerecorded voice; or (ii) to residential lines using an artificial or prerecorded voice. Failure to comply with the TCPA can result in significant penalties, including statutory damages. We may become subject to lawsuits (including class-action lawsuits) alleging that our business violated the TCPA. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble the damage award for willful or knowing violations. Such litigation, even if not meritorious, could result in substantial costs and diversion of management attention and an adverse outcome could materially and adversely affect our financial performance. Our efforts to comply with these regulations may negatively affect conversion rates of Leads, and thus, our revenue or profitability.

 

 

Data security risks.

 

A significant issue for online businesses like ours is the secure transmission of confidential and personal information over public networks and data security of retained confidential and personal information. Concerns over the security of transactions conducted on the internet, consumer identity theft and user privacy issues have been significant issues impacting the growth in consumer use of the internet, online advertising and e-commerce. Despite our implementation of security detection, prevention and monitoring measures, our computer systems or those of our vendors are susceptible to electronic or physical computer break-ins, viruses and other disruptive harms and security breaches. For example, in early 2020 we discovered that our network was impacted by malware that encrypted servers on most systems and disrupted consumer and customer access to many of our services, although we did not discover any evidence that caused us to conclude that there has been any unauthorized access to or acquisition of any consumer personal information or customer confidential information. In addition, consumers may experience losses of personally identifiable information as a result of corporate identity theft. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may specifically compromise our security measures. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures on a timely basis. Any perceived or actual unauthorized disclosure of personally identifiable information that we collect or store, whether through breach of our network by an unauthorized party, employee theft or misuse, or otherwise, could harm our reputation and brands, substantially impair our ability to attract and retain our audiences, or subject us to claims or litigation arising from damages suffered by consumers or Lead or traffic suppliers. If consumers experience identity theft related to personally identifiable information we collect or store, we may be exposed to liability, adverse publicity and damage to our reputation. To the extent that unauthorized disclosure of personally identifiable information or corporate identity theft gives rise to reluctance to use our websites or to supply us leads or traffic, or a decline in consumer confidence in financial transactions over the internet, our business could be adversely affected. Alleged or actual breaches of the network of one of our business partners or competitors whom consumers associate with us could also harm our reputation and brands. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information, including states that have enacted laws requiring companies to inform individuals of any security breaches that result in their personal information being stolen. Because our success depends on the acceptance of online services and e-commerce, we may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by those breaches. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security, and we may need to expend significant resources in protecting against or remediating security breaches and cyberattacks.

 

We are insured for some, but not all, of the foregoing risks. Even for those risks for which we are insured and have coverage under the terms and conditions of the applicable policies, there are no assurances given that the coverage limits would be sufficient to cover all costs, liabilities or losses we might incur or experience.

 

Online fraud and scams.

 

Internet fraud has been increasing over the past few years, and we have experienced fraudulent use of our name and trademarks on websites in connection with the purported sale of vehicles offered on third-party websites, with payments to be handled through an online escrow service purported to be owned and operated by us. These fraudulent online transactions and scams, should they continue to increase in prevalence, could affect our reputation with consumers and give rise to claims by consumers for funds transferred to the fraudulent accounts, which could materially and adversely affect our financial performance.

 

Anti-spam laws, rules, and regulations.

 

Various state and federal laws, rules and regulations regulate email communications and internet advertising and restrict or prohibit unsolicited email (commonly known as “spam”). These laws, rules or regulations may adversely affect our ability to market our services to consumers in a cost-effective manner. The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (“CAN-SPAM”) imposes complex and often burdensome requirements in connection with sending commercial emails. In addition, state laws regulating the sending of commercial emails, including California’s law regulating the sending of commercial emails, to the extent found to not be preempted by CAN-SPAM, may impose requirements or conditions more restrictive than CAN-SPAM. Violation of these laws, rules or regulations may result in monetary fines or penalties or damage to our reputation.

 

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Risks Associated with Regulatory Matters

 

Uncertainty exists in the application of various laws and regulations to our business. New laws or regulations applicable to our business, or expansion or interpretation of existing laws and regulations to apply to our business, could subject us to licensing, claims, judgments and remedies, including civil and criminal penalties and limitations on our business practices, and could increase administrative costs or materially and adversely affect our financial performance.

 

We operate in a regulatory climate in which there is uncertainty as to the application of various laws and regulations to our business. Our business could be significantly affected by different interpretations or applications of existing laws or regulations, future laws or regulations, or actions or rulings by judicial or regulatory authorities. Compliance with these laws and regulations may require us to obtain licenses at an undeterminable and possibly significant initial and annual expense that could decrease the popularity or impede the expansion of e-commerce and internet marketing, restrict our present business practices, require us to implement costly compliance procedures or expose us and/or our customers to potential civil or criminal liability.

 

We may be deemed to “operate” or “do business” in states where our customers conduct their business, resulting in regulatory action. If any state licensing laws were determined to be applicable to us, and if we are required to be licensed and we are unable to do so, or we are otherwise unable to comply with laws or regulations, we could be subject to fines or other penalties or be compelled to discontinue operations in those states. In the event any state’s regulatory requirements impose state-specific requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our digital marketing programs in that state in a manner that may undermine the program’s attractiveness to consumers or Dealers. In the alternative, if we determine that the licensing and related requirements are overly burdensome, we may elect not to operate in, or to terminate operations in, that state. In each case, our financial performance could be materially and adversely affected.

 

The following description of laws and regulations to which we may be subject is not exhaustive, and the regulatory framework governing our operations is subject to continuous change. The enactment of new laws and regulations or the interpretation of existing laws and regulations in an unfavorable way may affect the operation of our business, directly or indirectly, which could result in substantial regulatory compliance costs, civil or criminal penalties, including fines, adverse publicity, loss of participating dealers, lost revenues, increased expenses and decreased profitability.

 

Automotive Dealer/ Broker and Vehicle Advertising Laws.

 

All states comprehensively regulate vehicle sales and lease transactions, including strict licensure requirements for automotive dealers (and, in some states, automotive brokers) and vehicle advertising. We do not sell motor vehicles in any state, except for Tradein Expert, our used vehicle acquisition and selling service that is licensed as a motor vehicle dealer in the State of Texas. State regulatory authorities or third parties could take the position that some of the regulations applicable to dealers or to the manner in which motor vehicles are advertised and sold generally are directly applicable to our digital marketing and consumer referrals business. We believe that most of these laws and regulations specifically address only traditional vehicle purchase and lease transactions, not internet-based digital marketing and consumer referral programs such as our programs. If we determine that the licensing or other regulatory requirements in a given state are applicable to our digital marketing and consumer referrals business or to a particular marketing services program, we may elect to obtain required licenses and comply with applicable regulatory requirements. However, if licensing or other regulatory requirements are overly burdensome, we may elect to terminate operations or particular marketing services programs in that state, elect to not operate or introduce particular marketing services programs in that state or modify the service to comply with applicable law without being subjected to licensing requirements. In some states we have modified our marketing programs or pricing models to reduce uncertainty regarding our compliance with local laws.

 

With regard to our vehicle acquisition and resale business, we are subject to the motor vehicle dealer licensing and other related laws and regulations in the State of Texas, as well as changes in these laws and regulations and the manner in which they are interpreted or applied. The violation of any of these laws or regulations could result in administrative, civil or criminal penalties or in a cease-and-desist order against our vehicle acquisition and resale business operations, any of which could damage our reputation and have a material adverse effect on our financial performance. 

 

The Federal Trade Commission (“FTC”) has authority to take actions to remedy or prevent advertising practices that it considers to be unfair or deceptive and that affect commerce in the United States. In addition to generally applicable consumer protection laws, many states in which we do business have laws and regulations that specifically regulate the advertising for sale of new or used motor vehicles. These state advertising laws and regulations are frequently subject to multiple interpretations and are not uniform from state to state, sometimes imposing inconsistent requirements on the advertiser of a new or used motor vehicle.

 

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Some states in which we do business have laws and regulations that strictly regulate or prohibit the brokering of motor vehicles or the making of so-called “bird-dog” payments by dealers to third parties in connection with the sale of motor vehicles through persons other than licensed salespersons. If our products or services are determined to fall within the scope of those laws or regulations, we may be forced to implement new measures, which could be costly, to reduce our exposure to those obligations, including the discontinuation of certain products or services in affected jurisdictions.

 

If our products or services are determined not to comply with relevant licensing, advertising or other regulatory requirements, we could be subject to significant civil and criminal penalties, including fines, or the award of significant damages in class action or other civil litigation, as well as orders interfering with our ability to continue providing our products and services in some or all states. In addition, even without a determination that our products or services do not comply with relevant regulatory requirements, if customers are uncertain about the applicability of those laws and regulations to our business, we may be subjected to adverse publicity and lose, or have difficulty increasing the number of, customers for our products and services, which could adversely affect our future growth and materially and adversely impact our financial performance.

 

Financial Broker and Consumer Credit Laws.

 

Through our websites, consumers can click through to Dealer, Manufacturer and potential lender websites to obtain information regarding automotive financing. All online applications for financing quotes are completed on the respective third party’s websites. We receive marketing fees from financial institutions and Dealers in connection with this marketing activity. We do not demand, nor do we receive any fees from consumers for these services. In the event states require us to be licensed as a financial broker or finder, we may be unable to comply with a state’s laws or regulations, or we could be required to incur significant fees and expenses to obtain any required financial broker or finder license and comply with regulatory requirements. In addition, the federal Consumer Financial Protection Bureau has broad regulatory powers, which could lead to regulation of our advertising business directly or indirectly through regulation of automotive finance companies and other financial institutions. California has enacted the California Consumer Financial Protection Law that significantly expanded the regulatory and enforcement authority of the Department of Financial Protection and Innovation. Other states may expand or create new state level consumer financial protection agencies that could lead to increased regulation of our business.

 

If our products or services are determined not to comply with relevant financial broker or consumer credit licensing or other regulatory requirements, we could be subject to significant civil and criminal penalties, including fines, or the award of significant damages in class action or other civil litigation, as well as orders interfering with our ability to continue providing our products and services in some or all states. In addition, even without a determination that our products or services do not comply with relevant regulatory requirements, if customers are uncertain about the applicability of those laws and regulations to our business, we may be subjected to adverse publicity and lose, or have difficulty increasing the number of, customers for our products and services, which could adversely affect our future growth and materially and adversely impact our financial performance.

 

Insurance Broker Laws. We provide links on our websites and referrals from call centers enabling consumers to be referred to third parties to receive quotes for automobile insurance and other products or services, including vehicle service contracts, that may be deemed to be insurance under applicable state laws. All online applications for quotes are completed on the respective insurance carriers’ or other third-party websites, and all applications for quotes obtained through call center referrals are conducted by the insurance carrier or other third party. We receive marketing fees from participants in connection with this marketing activity. We do not receive any premiums from consumers nor do we charge consumers fees for our services. In the event states require us to be licensed under applicable insurance brokering or sales laws, we may be unable to comply with a state’s laws or regulations, or we could be required to incur significant fees and expenses to obtain required licenses and comply with regulatory requirements.

 

If our products or services are determined not to comply with relevant insurance brokering or sales licensing or other regulatory requirements, we could be subject to significant civil and criminal penalties, including fines, or the award of significant damages in class action or other civil litigation, as well as orders interfering with our ability to continue providing our products and services in some or all states. In addition, even without a determination that our products or services do not comply with relevant regulatory requirements, if customers are uncertain about the applicability of those laws and regulations to our business, we may be subjected to adverse publicity and lose, or have difficulty increasing the number of, customers for our products and services, which could adversely affect our future growth and materially and adversely impact our financial performance.

 

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Risks Associated with Tax Matters

 

Changes in the taxation of internet commerce may result in increased costs.

 

Because our business is dependent on the internet, the adoption of new local, state or federal tax laws or regulations or new interpretations of existing laws or regulations by governmental authorities may subject us to additional local, state or federal sales, use or income taxes and could decrease the growth of internet usage or marketing or the acceptance of internet commerce which could, in turn, decrease the demand for our services and increase our costs. As a result, our financial performance could be materially and adversely affected. State taxing authorities are reviewing and re-evaluating the tax treatment of companies engaged in internet commerce, including the application of sales taxes to internet marketing businesses similar to ours, as a source of tax revenues. We accrue for tax contingencies based upon our estimate of the taxes ultimately expected to be paid, which we update over time as more information becomes available, new legislation or rules are adopted or taxing authorities interpret their existing statutes and rules to apply to internet commerce, including internet marketing businesses similar to ours. The amounts ultimately paid in resolution of reviews or audits by taxing authorities could differ materially from the amounts we have accrued and result in additional tax expense, and our financial performance could be materially and adversely affected.

 

If our ability to use our net operating loss carryforwards and other tax attributes is limited, we may not receive the benefit of those assets.

 

We had federal net operating loss carryforwards of approximately $110.7 million and state net operating loss carryforwards of approximately $55.7 million at December 31, 2021. These federal and state net operating loss carryforwards begin to expire in the years ending December 31, 2025 and 2028, respectively. Federal net operating losses generated after December 31, 2017, will not expire and will carry forward indefinitely, but will be limited in any given year to offsetting a maximum of 80% of our taxable income for the year, determined without regard to the application of such net operating loss carryforwards.

 

Sections 382 and 383 of the Internal Revenue Code impose substantial restrictions on the use of net operating losses and other tax attributes in the event of a cumulative “ownership change” of a corporation of more than 50% over a three-year period. Accordingly, if we generate taxable income in the future, changes in our stock ownership, including equity offerings, as well as other changes that may be outside our control, could potentially result in material limitations on our ability to use our net operating loss and research tax credit carryforwards.

 

Risks Associated with Ownership of Our Securities

 

The public market for our common stock may be volatile, especially because market prices for internet-related and technology stocks have often been unrelated to operating performance.

 

Our common stock is currently listed on The Nasdaq Capital Market under the symbol “AUTO,” but we cannot assure that an active trading market will be sustained or that the market price of the common stock will not decline. The stock market in general periodically experiences significant price fluctuations. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

 

Actual or anticipated variations in our quarterly operating results;

 

 

Historical and anticipated operating metrics such as the number of participating Dealers, volume of Lead deliveries to Dealers, the number of visitors to Company Websites and the frequency with which they interact with Company Websites;

 

 

Announcements by us or our competitors of new product or service offerings;

 

 

Announced or completed acquisitions of or investments in businesses or technologies by us or our competitors;

 

 

Actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

 

Low trading volumes;

 

 

Concentration of holdings in our common stock resulting in low public float and trading volume for our shares;

 

 

Decisions by holders of large blocks of our stock to sell their holdings on accelerated time schedules, including by reason of their decision to liquidate investment funds that hold our stock;

 

 

Competitive developments, including actions by Manufacturers;

 

 

Data or network security incidents and breaches;

 

 

Loan covenant defaults;

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New laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

 

Litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

 

Conditions and trends in the internet, electronic commerce and automotive industries;

 

 

Changes in accounting standards, policies, guidelines, interpretations or principles affecting the technology or automotive industry;

 

 

Rumors, whether or not accurate, about us, our industry, our competitors or possible transactions or other events;

 

 

Any significant change in our management;

 

 

Reaction by certain market participants to the activities of other market participants, such as large short positions on our stock;

 

 

The impact of open market repurchases of our common stock;

 

 

Comments posted on internet discussion sites; and

 

 

General market or economic conditions and other factors.

 

Further, the stock markets in general, including the market for automotive marketing services companies like us, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market factors have affected and may adversely affect the market price of our common stock. In addition, general economic, political and market conditions, such as recessions, interest rate changes, inflation, energy price changes, epidemics and pandemics, international currency fluctuations, terrorist acts, insurrections, political revolutions, military actions or wars, may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies with publicly traded securities.

 

Our common stock could be delisted from The Nasdaq Capital Market if we are not able to satisfy continued listing requirements, in which case the price of our common stock and our ability to raise additional capital and issue equity-based compensation may be adversely affected, and trading in our stock may be less orderly and efficient.

 

For our common stock to continue to be listed on The Nasdaq Capital Market, we must satisfy various continued listing requirements established by The Nasdaq Stock Market LLC. In the event we are not able to satisfy these continued listing requirements, we expect that our common stock would be quoted on an over-the-counter market.  These markets are generally considered to be less efficient and less broad than The Nasdaq Capital Market. Investors may be reluctant to invest in the common stock if it is not listed on The Nasdaq Capital Market or another stock exchange. Delisting of our common stock could have a material adverse effect on the price of our common stock and would also eliminate our ability to rely on the preemption of state securities registration and qualification requirements afforded by Section 18 of the Securities Act of 1933 for “covered securities.” The loss of this preemption could result in higher costs associated with raising capital, could limit resale of our stock in some states, and could adversely impact our ability to issue equity-based compensation to our employees.

 

One of the continued listing requirements is that our Common Stock not trade below a minimum closing bid requirement of $1.00 for 30 consecutive business days. Should our Common Stock trade below the $1.00 minimum closing bid requirement for 30 business days, Nasdaq would send us a deficiency notice, advising that it is being afforded a compliance period of 180 days to regain compliance with the requirement. This 180-day compliance period may be extended by Nasdaq for another 180 days, subject to certain conditions being satisfied, including that we meet other continued listing requirements and provides a written notice to Nasdaq that we intend to regain compliance with the $1.00 minimum closing bid requirement during the extended period, by effecting a reverse stock split, if necessary.

 

No assurances can be given that we will continue to be able to meet the continued listing requirements for listing of our common stock on The Nasdaq Capital Market.

 

Our certificate of incorporation and bylaws, tax benefit preservation plan and Delaware law contain provisions that could make it more difficult for a third party to acquire us and could discourage, delay or prevent a third party from acquiring us or limit the price third parties are willing to pay for our stock.

 

Provisions of our certificate of incorporation and bylaws relating to our corporate governance and provisions in our Tax Benefit Preservation Plan could make it difficult for a third party to acquire us and could discourage a third party from attempting to acquire control of us. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

 

 

Our certificate of incorporation allows us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders. Our certificate of incorporation also provides that the Board of Directors is divided into three classes, which may have the effect of delaying or preventing changes in control or change in our management because less than a majority of the Board of Directors are up for election at each annual meeting, and as a result of the classified board the Delaware General Corporation Law (“DGCL”) provides that directors may only be removed for cause. In addition, provisions in our restated certificate of incorporation and bylaws:

 

 

Create a classified Board of Directors whose members serve staggered three-year terms;

 

 

Require that actions to be taken by our stockholders may be taken only at an annual or special meeting of our stockholders and not by written consent;

 

 

Authorize “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

 

Specify that special meetings of our stockholders can be called only by our Board of Directors, a committee of the Board of Directors, the Chairman of our Board of Directors or our President;

 

 

Establish advance notice procedures for stockholders to submit nominations of candidates for election to our Board of Directors and other proposals to be brought before a stockholders meeting;

 

 

Provide that our bylaws may be amended by our Board of Directors without stockholder approval;

 

 

Allow our Board of Directors to establish the size of our Board of Directors;

 

 

Provide that vacancies on our Board of Directors or newly created directorships resulting from an increase in the number of our directors may be filled only by a majority of directors then in office, even though less than a quorum; and

 

 

Do not give the holders of our common stock cumulative voting rights with respect to the election of directors.

 

Under our Tax Benefit Preservation Plan, rights to purchase capital stock of the Company (“Rights”) have been distributed as a dividend at the rate of five Rights for each share of common stock. Each Right entitles its holder, upon triggering of the Rights, to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a price of $20.00 (as this price may be adjusted under the Tax Benefit Preservation Plan) or, in certain circumstances, to instead acquire shares of common stock. The Rights will convert into a right to acquire common stock or other capital stock of the Company in certain circumstances and subject to certain exceptions. The Rights will be triggered upon the acquisition of 4.90% or more of the Company’s outstanding common stock or future acquisitions by any existing holders of 4.90% or more of the Company’s outstanding common stock. If a person or group acquires 4.90% or more of our common stock, all Rights holders, except the acquirer, will be entitled to acquire at the then exercise price of a Right that number of shares of our common stock which, at the time, has a market value of two times the exercise price of the Right. The Tax Benefit Preservation Plan authorizes our Board of Directors to exercise discretionary authority to deem a person acquiring common stock in excess of 4.90% not to be an “Acquiring Person” under the Tax Benefit Preservation Plan, and thereby not trigger the Rights, if the Board finds that the beneficial ownership of the shares by the person acquiring the shares will not be likely to directly or indirectly limit the availability to the Company of the net operating loss carryovers and other tax attributes that the plan is intended to preserve or is otherwise in the best interests of the Company.

 

We are also subject to Section 203 of the DGCL, which, in general, prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns or did own 15% or more of the corporation’s voting stock. Section 203 could discourage a third party from attempting to acquire control of us.

 

Any provision of our certificate of incorporation or bylaws, our Tax Benefit Preservation Plan or of Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

 

Our bylaws provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.

 

Our bylaws provide that, unless we otherwise agree, the Court of Chancery of the State of Delaware will be the exclusive forum for:

 

 

any derivative action or proceeding brought on our behalf;

 

any action asserting a breach of fiduciary duty;

 

any action asserting a claim against us under the Delaware General Corporation Law, our certificate of incorporation or our bylaws; and

 

any action asserting a claim against us that is governed by the internal-affairs doctrine.

 

This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or other agents, which may discourage lawsuits against us and our directors, officers, employees and other agents. If a court were to find this exclusive-forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could materially and adversely impact our financial performance.

 

We may fail to meet our publicly announced guidance or other expectations about our business and future operating results, which could cause our stock price to decline.

 

We have provided and may continue to provide guidance about our business and future operating results as part of our press releases, investor conference calls or otherwise. In developing this guidance, our management must make significant assumptions and judgments about our future performance. Our future business results may vary significantly from management’s guidance due to a number of factors, many of which are outside of our control, and which could materially and adversely affect our financial performance. If our publicly announced guidance of future operating results fails to meet the expectations of securities analysts, investors or other interested parties, the price of our common stock could decline.

 

Concentration of ownership among our existing executive officers and directors, their affiliates and holders of 5% or more of our outstanding common stock may prevent new investors from influencing significant corporate decisions.

 

As of April 23, 2021, our executive officers, directors and holders of 5% or more of our outstanding common stock (based upon the most recent filings on Schedule 13D or Schedule 13G with the SEC with respect to each such holder) beneficially own, in the aggregate, approximately 41% of our outstanding shares of common stock (assuming exercise of all beneficially owned shares represented by stock options or warrants exercisable within sixty days of the record date for our 2021 annual meeting of stockholders). Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree, or which are not in your interests. These stockholders are able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders, which in turn could reduce the price of our common stock.

 

You may experience future dilution as a result of future equity offerings.

 

If we raise additional funds through the sale of equity or convertible debt securities, the issuance of the securities will result in dilution to our stockholders. We may sell shares or other securities in any other offering at a price per share that is less than the price per share paid by investors in the past, and investors purchasing shares or other securities in the future could have rights superior to existing stockholders. The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common stock, in future transactions may be higher or lower than the price per share paid in the past. In addition, if we were to issue securities in connection with our acquisition of complementary businesses, products or technologies, our stockholders would also experience dilution. In November 2020, we filed a shelf registration statement on Form S-3, which may be used to raise additional capital in the future through a variety of equity or debt offerings that could result in dilution to existing stockholders. In addition, we have reserved shares for issuance under our equity-based incentive plans. The issuance and subsequent sale of these shares will be dilutive to our existing stockholders and the trading price of our common stock could decline.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who cover us change their recommendation regarding our stock adversely or provide more favorable relative recommendations about our competitors, our stock price could decline. If any analyst who covers us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

 

We do not expect to declare any dividends in the foreseeable future.

 

We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. In addition, the terms of our credit facility currently restrict our payment of cash dividends on our capital stock. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

Risks Associated with Litigation

 

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 financial performance.

 

Litigation regarding intellectual property rights is common in the internet and technology industries. We expect that internet technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Our proprietary systems and technology are a competitive factor. While we rely on trademark, trade secret, patent and copyright law, confidentiality agreements and technical measures to protect our proprietary and intellectual property rights, we believe that the technical and creative skills of our personnel, continued development of our proprietary systems and technology, brand-name recognition and reliable website maintenance are more essential in establishing and maintaining a leadership position and strengthening our brands. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult and may be expensive. We have no assurance that the steps taken by us will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, patent, copyright and trade secret protection may not be available when our products and services are made available online. In addition, if litigation becomes necessary to enforce or protect our intellectual property rights or to defend against claims of infringement or invalidity, this litigation, even if successful, could result in substantial costs and diversion of resources and management attention. We also have no assurances that our products and services do not infringe on the intellectual property rights of third parties. Claims of infringement, even if unsuccessful, could result in substantial costs and diversion of resources and management attention. If we are not successful, we may be subject to preliminary and permanent injunctive relief and monetary damages which may be trebled in the case willful infringements.

 

Our financial performance could be adversely affected by actions of third parties that could subject us to litigation.

 

We could face liability for information retrieved or obtained from or transmitted over the internet by third parties and liability for products sold over the internet by third parties. We could be exposed to liability with respect to third-party information that may be accessible through our websites, links or vehicle review services. These claims might, for example, be made for defamation, negligence, patent, copyright or trademark infringement, personal injury, breach of contract, unfair competition, false advertising, invasion of privacy or other legal theories based on the nature, content or copying of these materials. These claims might assert, among other things that, by directly or indirectly providing links to websites operated by third parties we should be liable for copyright or trademark infringement or other wrongful actions by such third parties through those websites. It is also possible that, if any third-party content provided on our websites contains errors, consumers could make claims against us for losses incurred in reliance on such information. Any claims could result in costly litigation, divert management’s attention and resources, cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.

 

We also enter into agreements with other companies under which any revenues that results from the purchase or use of services through direct links to or from our websites or on our websites is shared. In addition, we acquire personal information and data in the form of Leads purchased from third-party websites involving consumers who submitted personally identifiable information and data to the third parties and not directly to us. These arrangements may expose us to additional legal risks and uncertainties, including disputes with these parties regarding revenue sharing, local, state and federal government regulation and potential liabilities to consumers of these services, even if we do not provide the services ourselves or have direct contact with the consumer. These liabilities can include liability for violations by these third parties of laws, rules and regulations, including those related to data security and privacy laws and regulations; unsolicited email, text messaging, telephone or wireless voice marketing; and licensing. We have no assurance that any indemnification provided to us in our agreements with these third parties, if available, will be adequate.

 

Our financial performance could be materially and adversely affected by other litigation.

 

From time to time, we are involved in litigation or legal matters not related to intellectual property rights and arising from the normal course of our business activities. The actions filed against us and other litigation or legal matters, even if not meritorious, could result in substantial costs and diversion of resources and management attention and an adverse outcome in litigation could materially and adversely affect our financial performance. Our liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could have a material adverse effect on our financial performance.

 

 

 

Item 1B.         Unresolved Staff Comments

 

Not applicable.

 

Item 2.         Properties

 

Our principal executive office is located in Tampa, Florida and consists of approximately 13,000 square feet under a lease that expires in May 2024. Our Irvine, California office consists of approximately 12,000 square feet of leased office space under a lease that expires in July 2025. Our used vehicle acquisition business located in San Antonio, Texas consists of approximately 2,000 square feet of leased office space under a lease that expires in July 2023. Our website development operations located in Guatemala City, Guatemala occupy approximately 10,000 square feet of leased office space under leases that expire in March 2022. We are currently in negotiations with the landlord to reduce the amount of office space in our Guatemala office. We believe that our existing facilities are adequate to meet our needs and that existing needs and future growth can be accommodated by leasing alternative or additional space or by allowing employees to work remotely.

 

Item 3.         Legal Proceedings

 

From time to time, we may be involved in litigation matters arising from the normal course of our business activities. Litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention, and an adverse outcome in litigation could materially adversely affect our business, results of operations, financial condition, cash flows, earnings per share and stock price.

 

Item 4.         Mine Safety Disclosures

 

Not applicable. 

 

 

PART II

 

Item 5.         Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information

 

Our common stock, par value $0.001 per share, is listed on The Nasdaq Capital Market and trades under the symbol “AUTO.”

 

As of March 22, 2022, there were 147 holders of record of our common stock. We have never declared or paid any cash dividends on our common stock and we do not expect to pay any cash dividends in the foreseeable future.  Payment of any future dividends will depend on our earnings, cash flows and financial condition and will be subject to legal and contractual restrictions.

 

Item 6.         [Reserved]

 

Not applicable.

 

Item 7.         Managements Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion of our results of operations and financial condition in conjunction with the “Risk Factors” included in Part I, Item 1A and our Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.  See also the discussion of “Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

 

Overview

 

As reflected under the section “Results of Operations” in this Item 7, the decline in total revenues for 2021 compared to 2020 was primarily related to the impact of the coronavirus pandemic on the vehicle parts supply chain, vehicle sales, the overall demand from our customers for our leads and clicks products and the loss of one of our major manufacturing customers.  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. This shift also negatively impacted total revenues for 2021. Generally lower retail Leads sales levels resulting from attrition in our retail dealer network that occurred in the second half of 2020 further contributed to lower total revenues during the year ended December 31, 2021. The addition of used vehicle sales revenue as a result of the CarZeus Purchase Transaction effective as of August 1, 2021 partially offset the revenue declines in our core business. 

 

As a result of the continued impact of the coronavirus pandemic on the supply chain for new vehicle inventory and sales, we have continued to intentionally operate at lower levels of media spend to match projected industry selling rates. We expect that in 2022, dealers and consumers alike will continue to contend with broader macroeconomic uncertainty, including uncertainties created by high inflation rates and Russia’s recent invasion of Ukraine. Our objective is to provide the appropriate mix of high-quality Leads and click traffic to our customers by staying aligned with automotive supply and demand dynamics. 

 

Finally, the disruption from the January 2020 malware attack on the Company’s systems also negatively impacted total revenues in 2020. In March 2021, we received an approximate $0.3 million insurance reimbursement related to the January 2020 malware attack, which is partially included in other income during the year ended December 31, 2021.

 

As we continue to work with our traffic suppliers to optimize our search engine marketing ("SEM") methodologies and further grow our high-quality traffic streams, we are also investing in and testing new traffic acquisition strategies and enhanced mobile consumer experiences. Further, we continue to invest in our pay-per-click approach to improve the consumer experience of that product. With a more efficient traffic acquisition model emerging, our plan for 2022 and beyond is to grow audience, improve conversion, improve Leads and clicks delivery rates, expand distribution, and increase retail Dealer Leads and clicks budget capacity. We believe that this focus, along with plans to develop or integrate new, innovative products and re-platforming existing experiences 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 will create opportunities for improved quality of delivery and strengthen our position for revenue growth.

 

 

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. These trends were apparent through 2021 and we anticipate they will continue into 2022 and beyond.

 

To maximize our growth potential as a more involved matchmaker, we believe that we must continue to optimize our platform and products to facilitate more comprehensive matches between vehicle shoppers and vehicle sellers who can meet these shoppers’ needs. These investments began with improvements to shop.car.com and continued throughout 2021, spanning similar improvements to our additional properties, as well as our strategic relationship with CreditIQ and the CarZeus Purchase Transaction. We have also made progress with layering additional retail-ready components into our platform. At the beginning of June 2021, we announced our new strategic relationship with CreditIQ, an automotive retailing-focused software and service company that enables dealers to provide seamless digital retail experiences to consumers. This relationship allows shoppers using our search funnel to calculate car payments on a vehicle of interest, which streamlines the car buying process for both buyers and sellers. Features like these not only enhance our platform’s user experience, but also enable us to create more tailored profiles of the buyers using our sites to understand what kind of shopping experience they’re seeking.

 

We plan to expand both this base and the offerings of our platform even further as a result of the CarZeus Purchase Transaction, which we believe positions us to participate more meaningfully in the used vehicle acquisition and sales market by providing us the opportunity to purchase used vehicles directly from consumers and resell them primarily through wholesale auctions, forming an additional method of monetization along the vehicle purchase transaction in addition to our existing consumer offerings. We believe this acquisition will also allow us to increase our total addressable market by expanding our presence in the used vehicle market, while giving us the opportunity to enhance the offerings and usefulness of our digital marketing and lead acquisition expertise. We plan to use our traffic acquisition capabilities and operational efficiency to drive growth, improve financial performance and build scalable operating processes to enhance performance within the San Antonio, Austin and Houston, Texas markets. With this foundation in place, we plan to prepare the business for broader geographic expansion over time. 

 

Although we are not able to provide any specific guidance regarding our full year 2022 future business, results of operations, financial condition, earnings per share, cash flow or the trading price of our stock (individually and collectively referred to as the Company’s “financial performance”) with detail or accuracy, many industry analysts have forecast modest improvement in the new vehicle unit sales seasonally adjusted annual rate from 14.9 million units in 2021 to a range of 15.2-16.0 million units in 2022, or 1-7% growth. New vehicle sales levels are expected to continue to be challenged until new vehicle inventories normalize.

 

In early 2020 and continuing as of the date of this Annual Report on Form 10-K, 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 widespread disruptions to travel, economic activity, supply chains and financial markets. The continuing effects of the coronavirus pandemic has led our Manufacturer and Dealer customers to experience disruptions in the supply of vehicle and parts inventories, and in the overall health, safety and availability of their labor force. Manufacturers have also shut down assembly plants, adversely impacting inventories of new vehicles. Volatility in the financial markets, concerns about exposure to the virus, governmental quarantines, mask mandates, vaccination requirements, stay-at-home/work-from-home orders, business closures and employment furloughs and layoffs have also impacted consumer confidence and spending. Lower consumer confidence may continue even after quarantines, mask mandates, vaccination requirements, stay-at-home/work-from-home orders and business closures have ended. These disruptions have impacted the willingness or desire of our customers to acquire vehicle Leads or other digital marketing services from us. We are also experiencing direct disruptions in our operations due to the overall health and safety of, and concerns for, our labor force and as a result of governmental “social distancing” programs, quarantines, mask mandates, vaccination requirements and stay-at-home/work-from-home orders, leading us to reduce/restrict access to our offices and allowing employees to work remotely from their homes.

 

In addition to the continued impact of the coronavirus pandemic on supply chains and vehicle inventories and sales, Manufacturers have also 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.

 

 

We are unable to predict the continuing extent, duration and impact of the supply chain disruptions on the automotive industry in general, and on our business and operations specifically. The spread of coronavirus variants and governmental responses thereto may prolong or increase the negative impacts of the pandemic. Vehicle sales have declined, and we continue to experience cancellations or suspensions of purchases of Leads and other digital marketing services by our customers, which could continue to materially and adversely affect our financial performance. In light of the continuing impact of the pandemic and supply chain disruptions, we have continued taking steps to reduce our overall Lead and click generation efforts and corresponding costs to better align our volumes with industry demand and consumer intent and ability to purchase or lease vehicles. We will continue to evaluate these and other cost reduction measures, and explore all options available to us, in order to minimize the impact of these events on us.

 

Segment Information

 

As a result of the CarZeus Purchase Transaction on July 31, 2021, the Company has determined that it now operates in two reportable segments: Automotive digital marketing and used vehicle acquisition and resale through the Company’s Tradein Expert subsidiary. The automotive digital marketing segment consists of all aspects related to automotive digital marketing, whereas the used vehicle acquisition and resale segment consists solely of the used vehicle acquisition and wholesale reselling business.

 

Operating Metrics

 

We evaluate several key operating metrics, or key performance indicators, that we believe are instrumental to understanding the direction of our business, including Lead traffic, volume, retail dealer count and Lead capacity; click traffic and click volume, vehicles purchased and sold, sales price per vehicle, cost per vehicle and gross profit per vehicle.

 

Lead Traffic and Volume. Lead traffic is the number of consumers who visited our entire portfolio of owned Lead websites during the applicable review period. Lead traffic represents the total opportunity of potential Internally and Non-Internally generated Lead revenue, as it represents the prospective consumer engaging with our experiences. Lead volume means the total new and used vehicle Leads invoiced to retail and wholesale customers for the applicable review period. Lead volume directly translates to Lead revenue, as we bill our clients for the Lead volume we deliver to them. Although we are not able at this time to disclose any guidance as to 2022 Lead traffic or Lead volume with any detail or accuracy, we do anticipate some typical level of volatility in our Lead traffic and Lead volume, and we anticipate that our Lead sourcing mix between Internally Generated Leads and Non-Internally Generated Leads will vary as we balance quality and quantity of our core Lead product. We are also balancing the gross margin economic characteristics of Internally Generated Leads and Non-Internally Generated Leads.

 

Retail Dealer Count and Capacity. Retail dealer count means the number of franchised dealers contracted for delivery of retail new vehicle Leads plus the number of vehicle dealers (franchised or independent) contracted for delivery of retail used vehicle Leads. Retail dealer count growth enables more opportunity to create a match between Lead volume and retail dealer inventory, and ultimately translates into retail Dealer Lead capacity. Retail Dealer Lead capacity is the sum of the number of new and used vehicle Leads contracted for by new or used retail vehicle Dealers that the Dealers wish to receive each month (i.e., “targets”) during the applicable review period. Retail capacity represents the total available opportunity to monetize Lead volume within the Retail Dealer channel. We believe that we need to refine our distribution channel effectiveness and improve our relationships with the top 150 dealer groups in the United States. We expect some volatility in both dealer count and lead capacity during 2022 as we continue to evolve our engagement model for both retail dealers and the top 150 dealer groups.

 

Click Traffic and Volume. Click traffic is the total number of visits to Company-owned click referral websites during the applicable review period. Click traffic encompasses the total opportunity of potential Internally and Non-Internally generated click revenue, as it represents the prospective consumer engaging with our experiences. Click volume is the number of times consumers clicked on advertisements on the Company’s click referral websites during the applicable review period. Click volume directly translates to click revenue, as we bill our clients for the click volume we deliver to them. We anticipate click volume and ultimately click monetization will be impacted by overall customer mix between non-endemic (i.e., non-automotive) advertisers and endemic (i.e., automotive) advertisers. We intend to continue to focus on shifting this mix towards endemic (i.e., automotive) advertisers in order to create the right match for our click volume and overall monetization opportunities. While we are taking steps in this direction, this is an area of focus in order to get performance back to an optimized level.

 

 

Lead Quality. Our business, results of operations and financial condition are impacted by the volume and quality of our Leads. We measure Lead quality by the conversion of Leads to actual vehicle sales, which we refer to as the “buy rate.” Buy rate is the percentage of Leads delivered to our customers that resulted in a vehicle purchase within ninety days of the date of the Lead submission. High-quality Leads delivered to the right customer will have a higher buy rate than lower quality or unmatched Leads. We rely on detailed feedback from Dealers and from Manufacturers and other wholesale customers to confirm the performance of our Leads. Our Manufacturer and other wholesale customers each compare the Leads we deliver to them against vehicle sales and provide us with information about those vehicle purchases related to the consumer leads submitted through our experiences. We also obtain vehicle registration data from a third-party provider to conduct our own internal review of buy rate and Lead quality.

 

Used Vehicle Acquisition & Resale Metrics. Vehicles purchased is the number of vehicles acquired during a period that are available for resale. Vehicles sold is the number of vehicles resold at auctions or direct to Dealers. The sales price per vehicle is the amount the auction participant or dealer has paid to acquire each vehicle. The cost per vehicle is the amount we paid to acquire each vehicle plus any reconditioning or auction fees. Gross profit per vehicle is the difference between the sales price per vehicle and the cost per vehicle.

 

Results of Operations

 

Fiscal Year 2021 Compared to Fiscal year 2020

 

The following table sets forth our results of operations as a percentage of total revenues for the years ended December 31, 2021, and 2020 (certain percentages below may not sum due to rounding):

 

    Years Ended December 31,   
   

2021

   

2020

 

Revenues:

               

Lead generation

    72.8

%

    79.8

%

Digital advertising

 

19.8

   

20.2

 

Used vehicle sales

    7.4       0.0  

Total revenues

    100.0       100.0  

Cost of revenues – lead generation and digital advertising

    64.7       69.1  

Cost of revenues – used vehicle sales

    6.9        

Gross profit

    28.4       30.9  

Operating expenses:

               

Sales and marketing

    12.8       10.7  

Technology support

    7.9       8.6  

General and administrative

    15.8       16.6  

Depreciation and amortization

    0.9       2.2  

Total operating expenses

    37.4       38.1  

Operating loss

    (9.0 )     (7.2 )

Interest and other income, net

    1.1       (1.7 )

Loss before income tax provision

    (7.9 )     (8.9 )

Income tax provision (benefit)

           

Net loss

    (7.9

)%

    (8.9

)%

 

Revenues by groups of similar services and gross profits are as follows (dollars in thousands):

 

   

Years Ended December 31,

 
   

2021

   

2020

   

$ Change

    % Change  

Revenues:

                               

Lead generation

  $ 52,117     $ 61,129     $ (9,012 )     (15

)%

Digital advertising

    14,142       15,441       (1,299 )     (8 )

Used vehicle sales

    5,326             5,326       N/A  

Total revenues

    71,585       76,570       (4,985 )     (7 )

Cost of revenues – lead generation and digital advertising

    46,300       52,890       (6,590 )     (12 )

Cost of revenues – used vehicle wholesale

    4,954             4,954       N/A  

Gross profit

  $ 20,331     $ 23,680     $ (3,349 )     (14

)%

 

 

Lead Generation. Lead generation revenues decreased $9.0 million or 15% in 2021 compared to 2020. The decrease in Lead generation revenues was primarily the result of 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, which was partially offset by a $0.5 million payment made for the early termination of this Manufacturer.

 

Digital advertising.  Digital advertising revenue decreased $1.3 million or 8% in 2021 compared to 2020. The decrease was primarily the result of a decrease in click revenue from an overall decrease in click volume year over year. The continued impact of the coronavirus pandemic and our internal decision to reduce overall click generation efforts to better align with industry demand led to the decrease in click volume. 

 

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 $5.3 million in 2021. The Company had no used vehicle sales in 2020.

 

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.

 

The $6.6 million or 12% decrease in cost of revenues in 2021 compared to 2020 was primarily from a reduction in revenue, decreased SEM, purchase request and traffic acquisition costs.

 

Cost of revenues used vehicles. As a result of the CarZeus Purchase Transaction that was effective on August 1, 2021, used vehicle cost of revenues was $5.0 million in 2021. The Company did not have any used vehicle cost of revenues in 2020.

 

Gross Profit. Gross profit decreased $3.3 million, or 14%, compared to 2020 due to reductions in Lead traffic and Lead volume. Further contributing to this decrease was the early termination of the new vehicle Leads program by one of our Manufacturer customers during the second half of 2021, which was partially offset by a $0.5 million payment made for the early termination of this Manufacturer.

 

Operating expenses, interest and other income and income tax provision were as follows (dollars in thousands):

 

    Years Ended December 31,            
   

2021

   

2020

   

$ Change

   

% Change

 

Operating expenses:

                               

Sales and marketing

  $ 9,170     $ 8,201     $ 969       12

%

Technology support

    5,649       6,574       (925 )     (14 )

General and administrative

    11,324       12,718       (1,394 )     (11 )

Depreciation and amortization

    653       1,711       (1,058 )     (62 )

Total operating expenses

  $ 26,796     $ 29,204     $ (2,408 )     (8

)%

                                 

Interest and other (expense) income, net

  $ 807     $ (1,286 )   $ 2,093       N/A  
                                 

Income tax provision

  $     $ 10     $ (10 )     (100

)%

 

Sales and Marketing. Sales and marketing expense includes costs for developing our brand, personnel costs, and other costs associated with retail Dealer and Manufacturer sales, website advertising and Dealer support. Sales and marketing expense for the year ended December 31, 2021, increased $1.0 million, or 12%, compared to the 2020 period, primarily from an increase in headcount related to the CarZeus Purchase Transaction coupled with an increase in marketing expenses.

 

 

Technology Support. Technology support includes compensation, benefits, software licenses and other direct costs incurred by us to enhance, manage, maintain, support, monitor and operate our websites and related technologies, and to operate our internal technology infrastructure. Technology support expense for the year ended December 31, 2021, decreased $0.9 million, or 14%, compared to the year ended December 31, 2020. The change was due primarily to a reduction in consulting and headcount related expenses.

 

General and Administrative. General and administrative expense consists of certain executive, financial, human resources, legal and facilities personnel expenses, public company and bad debt expense. General and administrative expense for the year ended December 31, 2021, decreased $1.4 million, or 11%, compared to 2020 primarily from reductions in recruitment, travel-related expenses, bad debt expense, rent and severance.

 

Depreciation and Amortization. Depreciation and amortization expense for the year ended December 31, 2021, decreased $1.1 million, or 62%, when compared to the 2020 period. This decrease was primarily from assets that have been fully depreciated as compared to the same period in the prior year.

 

Interest and Other (Expense) Income, net. Interest and other (expense) income increased approximately $2.1 million when compared to the 2020 period. In the first quarter of 2021, we recorded $1.4 million of income associated with the forgiveness of our Paycheck Protection Program loan. Further contributing to the increase in interest and other income (expense) was an insurance reimbursement related to the January 2020 malware attack of which $0.2 million was recorded on our fiscal year 2021 Condensed Consolidated Statement of Operations. Interest expense decreased to $1.0 million for the year ended December 31, 2021, compared to $1.6 million for the year ended December 31, 2020, primarily from the write-off of our deferred financing fees associated with the revolving line of credit under the PNC Credit Facility. Interest expense also includes interest on outstanding borrowings and the amortization of debt issuance costs.

 

Income tax provision. Income tax expense was de minimis for the years ended December 31, 2021, and 2020. Operating losses during the year ended December 31, 2021 did not result in tax as valuation allowances were recorded against the deferred tax assets. Income tax expense was driven by changes in certain state taxes.

 

Liquidity and Capital Resources

 

The table below sets forth a summary of our cash flow for the years ended December 31, 2021 and 2020 (dollars in thousands):

 

   

Years Ended December 31,

 
   

2021

   

2020

 
                 

Net cash (used in) provided by operating activities

  $ (1,416 )   $ 1,901  

Net cash (used in) investing activities

    (2,044 )     (596 )

Net cash (used in) provided by financing activities

    (18 )     7,856  

 

Our principal sources of liquidity are our cash and cash equivalent balances and borrowings under the CNC Credit Agreement.  See Note 6 of the “Notes to Consolidated Financial Statements” included in our Consolidated Financial Statements under Part IV, Item 15 of this Annual Report on Form 10-K. Our cash and cash equivalents and restricted cash totaled $11.6 million as of December 31, 2021, compared to $15.1 million as of December 31, 2020. As of December 31, 2021, we had an accumulated deficit of $355.4 million and stockholders’ equity of $12.8 million.

 

Net Cash (Used in) Provided by Operating Activities.  Net cash used in operating activities totaled $0.9 million for the year ended December 31, 2021, compared to net cash provided by operating activities of $1.9 million in the prior year. Net cash used in operating activities for the year ended December 31, 2021 was primarily related our net loss of $5.7 million, the forgiveness of the Paycheck Protection Program loan of $1.4 million and the provision for bad debt of $0.2 million. These decreases were offset by depreciation and amortization of $2.5 million, stock compensation expense of $1.9 million, right-of-use asset amortization of $0.9 million and other non-cash charges of $0.6 million.

 

Net Cash (Used in) Investing Activities.  Net cash used in investing activities of $2.0 million for the year ended December 31, 2021, primarily related to purchase of property and equipment and expenditures related to capitalized internal use software of $1.7 million coupled with $0.3 million paid in the acquisition of certain assets of Car Acquisition, LLC in the CarZeus Purchase Transaction effective August 1, 2021.

 

Net Cash (Used in) Provided by Financing Activities. Net cash provided by financing activities was generally unchanged for the year ended December 31, 2021. Net cash provided by financing activities of $0.02 million primarily consisted of net borrowings on the Company’s credit facilities offset by $0.2 million of proceeds from the exercise of stock options.

 

 

We have developed a strategic plan focused on improving operating performance in the future that includes modernizing and upgrading our technology and systems, pursuing business objectives and responding to business opportunities, developing new or improving existing products and services and enhancing operating infrastructure.

 

Our objective is to achieve cash generation as a business; however, there is no assurance that we will be able to achieve this objective. The CNC Credit Agreement expires in March 2023. If we are unable to obtain adequate financing or financing on terms satisfactory to us, or when we require it, the ability to continue operating could be significantly limited, and our financial performance could be materially and adversely affected.

 

In response to the coronavirus pandemic, the CARES Act was signed into law in March 2020. The CARES Act in part provides for an employee retention credit, which is a refundable tax credit against certain employment taxes equal to 50% of qualified wages an eligible employer pays to employees. In March 2022, we amended certain payroll tax filings in conjunction with the employee retention credit and are awaiting confirmation of the credit from the Internal Revenue Service.

 

We believe current cash reserves and operating cash flows are adequate to sustain operations for the next twelve months. If we are unsuccessful in improving our operating performance and in meeting our objectives to achieve cash generation, we may need to seek to satisfy our future cash needs through private or public sales of securities, debt financings or partnering/licensing transactions; however, in this event, there is no assurance that we will be able to obtain alternative sources of cash on acceptable terms to satisfy our future cash needs.

 

Contractual Obligations

 

The following table provides aggregated information about our outstanding contractual obligations as of December 31, 2021 (in thousands):

 

   

Total

   

Less than 1 year

   

1-3 years

   

3-5 years

   

More than 5 years

 

Credit Facility Obligations (a)

  $ 10,001     $     $ 10,001     $     $  

Operating Lease Obligations (b)

    2,403       881       1,522              

Debt Obligations (c)

    64       64                    

Total

  $ 12,468     $ 945     $ 11,523     $     $  

 

(a) Credit Facility obligations as defined by ASC 470, “Debt,” and disclosed in Note 6 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

(b) Operating lease obligations as defined by ASC 842, “Leases,” and disclosed in Note 7 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

(c) Debt obligations as defined by ASC 470, “Debt,” and disclosed in Note 6 of the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

Critical Accounting Estimates

 

Our significant accounting policies are discussed in Note 2 – Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements included in Part II, Item 8– Financial Statements and Supplementary Data to this Annual Report on Form 10-K. We consider the accounting policies described below to be critical in preparing our consolidated financial statements. These policies require us to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures of contingencies. Our assumptions, estimates and judgments are based on historical experience, current trends and other factors to be relevant at the time we prepare the consolidated financial statements. Although our estimates and assumptions are reasonable, we cannot determine future events. Consequently, actual results could differ materially from our assumptions and estimates.

 

Revenue Recognition. Revenue is recognized when the Company transfers control of promised goods or services to the Company’s customers, or when the Company satisfies any performance obligations under contract. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for respective goods or services provided. Further, under Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, contract assets or contract liabilities that arise from past performance but require further performance before obligation can be fully satisfied must be identified and recorded on the balance sheet until respective settlements have been met.

 

 

The Company performs the following steps in order to properly determine revenue recognition and identify relevant contract assets and contract liabilities:

 

 

identify the contract with a customer;

 

identify the performance obligations in the contract;

 

determine the transaction price;

 

allocate the transaction price to the performance obligations in the contract; and

 

recognize revenue when, or as, the Company satisfies a performance obligation.

 

The Company earns revenue by providing Leads, advertising and mobile products and services used by Dealers and Manufacturers in their efforts to market and sell new and used vehicles to consumers. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The Company records revenue on distinct performance obligations at a single point in time, when control is transferred to the customer. In addition, the Company Used vehicles acquired by Tradein Expert are predominately resold at auctions or direct to Dealers, and revenue from the sale of these vehicles is recognized upon transfer of ownership of the vehicle to the Company's wholesale customer.

 

Allowances for Bad Debts and Customer Credits.  The allowance for bad debts is an estimate of bad debt expense that could result from the inability or refusal of customers to pay for services. Additions to the estimated allowance for bad debts are recorded to general and administrative expenses and are based on factors such as historical write-off percentages, the current business environment and known concerns within the current aging of accounts receivable. Reductions in the estimated allowance for bad debts due to subsequent cash recoveries are recorded as a decrease in general and administrative expenses. As specific bad debts are identified, they are written off against the previously established estimated allowance for bad debts with no impact on operating expenses.

 

The allowance for customer credits is an estimate of adjustments for services that do not meet the customer requirements. Additions to the estimated allowance for customer credits are recorded as a reduction of revenues and are based on the Company’s historical experience of: (i) the amount of credits issued; (ii) the length of time after services are rendered that the credits are issued; (iii) other factors known at the time; and (iv) future expectations. Reductions in the estimated allowance for customer credits are recorded as an increase in revenues. As specific customer credits are identified, they are written off against the previously established estimated allowance for customer credits with no impact on revenues. From time to time, the Company may issue discounts or credits on current invoices. These discounts or credits are direct reductions to revenue without a change in the allowance for customer credits.

 

If there is a decline in the general economic environment that negatively affects the financial condition of the Company’s customers or an increase in the number of customers that are dissatisfied with their services, additional estimated allowances for bad debts and customer credits may be required, and the impact on the Company’s business, results of operations, financial condition, earnings per share, cash flow or the trading price of our stock could be material.

 

Capitalized Internal Use Software and Website Development Costs.  The Company capitalizes costs to develop internal use software in accordance with ASC 350-40, “Internal-Use Software”, and ASC 350-50, “Website Development Costs”, which require the capitalization of external and internal computer software costs and website development costs, respectively, incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training and maintenance costs are expensed as incurred while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized internal use software development costs are amortized using the straight-line method over an estimated useful life of three to five years. Capitalized website development costs, once placed in service, are amortized using the straight-line method over the estimated useful life of the related websites.

 

Recent Accounting Pronouncements

 

See Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K for recent accounting pronouncements.

 

 

Item 7A.         Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable  

 

Item 8.         Financial Statements and Supplementary Data

 

Reference is made to the Consolidated Financial Statements, the Reports thereon, the Notes thereto, and the supplementary data commencing on page F-1 of this Annual Report on Form 10-K, which Consolidated Financial Statements, Reports, Notes and data are incorporated herein by reference.

 

Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.         Controls and Procedures

 

Disclosure Controls and Procedures

 

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2021 pursuant to Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act. Based on this evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2021.

 

Managements Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15(d)-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

The Company’s internal controls over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision and with the participation of management, including the Company’s chief executive officer and chief financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021. Management reviewed the results of its assessment with the Audit Committee of the Board of Directors.

 

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fourth fiscal quarter of the Company’s year ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B.         Other Information

 

Not applicable.

 

Item 9C.         Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

Not applicable.

PART III

 

Information called for by the Items included under this Part III is incorporated by reference to the sections listed below of our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders that will be filed not later than 120 days after December 31, 2021 (“2021 Proxy Statement”).

 

Item 10         Directors, Executive Officers and Corporate Governance

 

The information required by this item is incorporated by reference to our definitive proxy statement to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2021.

 

Item 11         Executive Compensation

 

The information required by this item is incorporated by reference to our definitive proxy statement to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2021. 

 

Item 12         Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item is incorporated by reference to our definitive proxy statement to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2021. 

 

Item 13         Certain Relationships and Related Transactions, and Director Independence

 

The information required by this item is incorporated by reference to our definitive proxy statement to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2021. 

 

Item 14         Principal Accountant Fees and Services

 

The information required by this item is incorporated by reference to our definitive proxy statement to be filed with the SEC in connection with our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2021.

 

 

PART IV

 

Item 15.         Exhibits and Financial Statement Schedules

 

(a) The following documents are filed as a part of this Annual Report on Form 10-K:

 

(1)         Financial Statements:

 

Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.

 

(2)         Financial Statement Schedules:

 

Schedule II - Valuation Qualifying Accounts

   

F-30

 

 

All other schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or the Notes thereto.

 

(3)         Exhibits:

 

The documents listed below are being filed or have previously been filed on behalf of the Company and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith.

 

 

EXHIBIT INDEX

 

Number

Description

   

2.1‡

Asset Purchase Agreement dated as of July 31, 2021, by and among Company, Tradein Expert, Inc., Car Acquisition, LLC, Carzuz.com LLC, McCombs Family Partners, Ltd., and Phil Kandera, incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on August 2, 2021 (SEC File No. 001-34761).

   

3.1

Seventh Amended and Restated Certificate of Incorporation of AutoWeb, Inc. (filed with the Secretary of the State of Delaware on June 22, 2020), incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on June 23, 2020 (SEC File No. 001-34761).

   

3.2

Seventh Amended and Restated Bylaws of AutoWeb, Inc. dated as of October 9, 2017, incorporated by reference to Exhibit 3.5 to the Current Report on Form 8-K filed with the SEC on October 10, 2017 (SEC File No. 001-34761).

   

4.1*

Description of AutoWeb, Inc. Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.

   

4.2

Tax Benefit Preservation Plan dated as of May 26, 2010, by and between Company and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; and Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Company, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239); Amendment No. 1 to Tax Benefit Preservation Plan dated as of April 14, 2014, between Company and Computershare Trust Company, N.A., as rights agent, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 16, 2014 (SEC File No. 001-34761); Amendment No. 2 to Tax Benefit Preservation Plan dated as of April 13, 2017, between Company and Computershare Trust Company, N.A., as rights agent, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 14, 2017 (SEC File No. 001-34761); Amendment No. 3 to Tax Benefit Preservation Plan dated as of March 31, 2020, between Company and Computershare Trust Company, N.A., as rights agent, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 2, 2020 (SEC File No. 001-34761); Certificate of Adjustment Under Section 11(m) of the Tax Benefit Preservation Plan, incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 2012 filed with the SEC on November 8, 2012 (SEC File No. 001-34761).

   

10.1■

AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 23, 2014 (SEC File No. 001-34761); Amended and Restated AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan (supersedes and replaces the AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan filed under Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on June 23, 2014 (SEC File No. 001-34761), incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761); Form of Non-Employee Director Stock Option Award Agreement under the Amended and Restated AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.12 on the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761); Form of Executive Stock Option Award Agreement under the Amended and Restated AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.13 on the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761); Form of Non-Executive Employee Stock Option Award Agreement under the Amended and Restated AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.14 on the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761); Form of Subsidiary Employee Stock Option Award Agreement under the Amended and Restated AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.15 on the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761); and Form of Restricted Stock Award Agreement under the Amended and Restated AutoWeb, Inc. (formerly Autobytel Inc.) 2014 Equity Incentive Plan, incorporated by reference to Exhibit 10.16 on the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761).

 

 

10.2■

AutoWeb, Inc. 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 on the Current Report on Form 8-K filed with the SEC on June 27, 2018 (SEC File No. 001-34761); Form of Non-Employee Director Stock Option Award Agreement (Non-Qualified Stock Option) under the AutoWeb, Inc. 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for the Quarterly Period ended June 30, 2018, filed with the SEC on August 2, 2018 (SEC File No. 001-34761); Form of Employee Stock Option Award Agreement (Non-Qualified Stock Option) (Executive) under the AutoWeb, Inc. 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.9 on the Quarterly Period ended June 30, 2018, filed with the SEC on August 2, 2018 (SEC File No. 001-34761); Form of Employee Stock Option Award Agreement (Non-Qualified Stock Option) (Non-Executive) under the AutoWeb, Inc. 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.10 on the Quarterly Period ended June 30, 2018, filed with the SEC on August 2, 2018 (SEC File No. 001-34761); and Form of Restricted Stock Award Agreement under the AutoWeb, Inc. 2018 Equity Incentive Plan, incorporated by reference to Exhibit 10.11 on the Quarterly Period ended June 30, 2018, filed with the SEC on August 2, 2018 (SEC File No. 001-34761).

   

10.3■

Form of Amended and Restated Indemnification Agreement between Company and its directors and officers, incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC on July 22, 2010 (SEC File No. 001-34761).

   

10.4■

Form of Indemnification Agreement between Company and its directors and officers, incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K for the Year Ended December 31, 2017, filed with the SEC on March 15, 2018 (SEC File No. 001-34761).

   

10.5■

Employment Agreement dated as of April 12, 2018, between Company and Jared Rowe, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on April 18, 2018 (SEC File No. 001-34761); as amended by Amendment No. 1 to Employment Agreement dated as of August 26, 2019, incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed with the SEC on November 7, 2019 (SEC File No. 001-34761).

   

10.6■

Inducement Stock Option Award Agreement dated as of April 12, 2018, between Company and Jared Rowe, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on April 18, 2018 (SEC File No. 001-34761).

   

10.7■

Letter Agreement dated as of October 10, 2006, between Company and Glenn Fuller, as amended by Memorandum dated April 18, 2008, Memorandum dated as of December 8, 2008, and Memorandum dated as of March 1, 2009, incorporated by reference to Exhibit 10.77 to the Annual Report on Form 10-K for the Year Ended December 31, 2008, filed with the SEC on March 13, 2009 (SEC File No. 000-22239); as amended by Memorandum dated as of January 31, 2017, incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the Year Ended December 31, 2016, filed with the SEC on March 9, 2017 (SEC File No. 001-34761); and as amended by Memorandum dated April 18, 2018, incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K for the Year Ended December 31, 2018, filed with the SEC on March 7, 2019 (SEC File No. 001-34761).

   

10.8■

Third Amended and Restated Severance Benefits Agreement dated as of March 3, 2021, between Company and Glenn Fuller, incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021 (SEC File No. 001-34761).

   

10.9■

Offer of Employment dated as of November 26, 2018, between Company and Daniel Ingle, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 16, 2019 (SEC File No. 001-34761).

   

10.10■

Inducement Stock Option Award Agreement dated as of January 16, 2019, between Company and Daniel Ingle, incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 7, 2019 (SEC File No. 001-34761).

   

 

 

10.11■

Amended and Restated Severance Benefits Agreement dated as of March 3, 2021, between Company and Daniel Ingle, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on March 4, 2021 (SEC File No. 001-34761).

   

10.12■

Offer of Employment dated as of January 4, 2022, between Company and Carlton Hamer, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 7, 2022 (SEC File No. 001-34761).

   

10.13■*

Inducement Stock Option Award Agreement dated as of January 10, 2022, between Company and Carlton Hamer.

   

10.14■*

Severance Benefits Agreement dated as of January 10, 2022, between Company and Carlton Hamer.

   

10.15■

Offer of Employment dated as of October 2, 2018, between Company and Sara Partin, incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 2018, filed with the SEC on November 8, 2018 (SEC File No. 001-34761).

   

10.16■

Inducement Stock Option Award Agreement dated as of October 22, 2018, between Company and Sara Partin, incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 2018, filed with the SEC on November 8, 2018 (SEC File No. 001-34761).

   

10.17■

Amended and Restated Severance Benefits Agreement dated as of March 3, 2021, between Company and Sara Partin, incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021 (SEC File No. 001-34761).

   

10.18■*

Offer of Employment dated as of December 13, 2021, between Company and Scott Edwards.

   

10.19■*

Inducement Stock Option Award Agreement dated as of February 7, 2022, between Company and Scott Edwards.

   

10.20■*

Severance Benefits Agreement dated as of February 7, 2022, between Company and Scott Edwards.

   

10.21■*

Offer of Employment dated as of April 2, 2019, between Company and Brett Nanigian.

   

10.22■*

Severance Benefits Agreement dated as of February 3, 2022, between Company and Brett Nanigian.

   

10.23

Fourth Amended and Restated Stockholder Agreement dated as of March 1, 2017, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 2, 2017 (SEC File No. 001-34761).

   

10.24

Lease Agreement dated as of March 11, 2020, between Company and The Irvine Company LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 16, 2020 (SEC File No. 001-34761).

   

10.25

Lease Agreement dated as of December 9, 2015, between Company and Rivergate Tower Owner, LLC, as amended by Amendment No. 1 to Lease Agreement dated November 21, 2016, incorporated by reference to Exhibit 10.35 to the Annual Report on Form 10-K filed with the SEC on March 9, 2017 (SEC File No. 001-34761).

   

10.26

Contract for Lease and Deposit dated as of June 1, 2016, between AW GUA, Limitada, and Mertech, Sociedad Anonima, for office No. 1101, incorporated by reference to Exhibit 10.33 to Annual Report on Form 10-K filed with the SEC on March 9, 2017 (SEC File No. 001-34761); Letter Agreements for Lease Extension dated as of December 18, 2019 and January 6, 2020, between AW GUA, Limitada, and Mertech, Sociedad Anonima, for office No. 1101, incorporated by reference to Exhibit 10.32 to the Annual Report on Form 10-K filed with the SEC on March 27, 2020 (SEC File No. 001-34761).

 

 

10.27

Contract for Lease and Deposit dated as of June 1, 2016, between AW GUA, Limitada, and Mertech, Sociedad Anonima, for office No. 1102, incorporated by reference to Exhibit 10.34 to Annual Report on Form 10-K filed with the SEC on March 9, 2017 (SEC File No. 001-34761); Letter Agreements for Lease Extension dated as of December 18, 2019 and January 6, 2020, between AW GUA, Limitada, and Mertech, Sociedad Anonima, for office No. 1102, incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K filed with the SEC on March 27, 2020 (SEC File No. 001-34761).

   

10.28*

Vance Jackson Service Center Lease Agreement dated as of August 1, 2021, between Tradein Expert, Inc., a wholly owned subsidiary of AutoWeb, Inc., and Hooten Non Exempt Family Trust B.

   

10.29

Tax Benefit Preservation Plan Exemption Agreement and Irrevocable Proxy dated as of November 15, 2017, by and among Company, Piton Capital Partners LLC, a Delaware limited liability company (“Piton Capital”), and Piton Capital’s managing members, incorporated by reference to Exhibits 10.1 and 10.2, respectively, to the Current Report on Form 8-K filed with the SEC on November 17, 2017 (SEC File No. 001-34761).

   

10.30

Tax Benefit Preservation Plan Exemption Agreement and Irrevocable Proxies, effective as of November 30, 2018, by and among Company, Daniel M. Negari, The 1 8 999 Trust, a trust organized under the laws of Nevada, Michael R. Ambrose, and The Insight Trust, a trust organized under the laws of Nevada, incorporated by reference to Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5, respectively, to the Current Report on Form 8-K filed with the SEC on November 30, 2018 (SEC File No. 001-34761).

   

10.31

Tax Benefit Preservation Plan Exemption Agreement and Irrevocable Proxy dated as of May 12, 2021, by and among Company and Global Value Investment Corp., a Delaware corporation, incorporated by reference to Exhibits 10.1 and 10.2, respectively, to the Current Report on Form 8-K filed with the SEC on May 17, 2021 (SEC File No. 001-34761).

   

10.32

Form of Warrant to Purchase Common Stock (on an as-converted basis following the conversion of Series B Junior Preferred Stock) dated as of October 1, 2015, issued by the Company to the persons listed on Schedule A thereto, which is incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on October 6, 2015 (SEC File No. 001-34761).

   

10.33

Loan, Security and Guarantee Agreement dated as of March 26, 2020, by and among AutoWeb, Inc., as Borrower, Autobytel, Inc., AW GUA USA, Inc., and Car.com, Inc., as Guarantors, Certain Financial Institutions, as lenders, and CIT Northbridge Credit LLC, as agent, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 26, 2020 (SEC File No. 001-34761); as amended by First Amendment to Loan, Security and Guarantee Agreement dated as of May 18, 2020, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on May 19, 2020 (SEC File No. 001-34761); Second Amendment to and Consent Under Loan, Security and Guarantee Agreement dated as of July 30, 2021, by and among CIT Northbridge Credit LLC, as Agent, the Lenders Party thereto, AutoWeb, Inc., as Borrower, and Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on August 2, 2021 (SEC File No. 001-34761); Joinder Under Loan, Security and Guarantee Agreement and Pledge Agreement Supplement dated as of August 12, 2021, by and among CIT Northbridge Credit LLC, as Agent, the Lenders Party thereto, AutoWeb, Inc., as Borrower, and Tradein Expert, Inc., Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarterly Period ended September 30, 2021, filed with the SEC on November 4, 2021 (SEC File No. 001-34761); and Third Amendment to and Consent Under Loan, Security and Guarantee Agreement dated as of September 13, 2021, by and among CIT Northbridge Credit LLC, as Agent, the Lenders Party thereto, AutoWeb, Inc., as Borrower, and Tradein Expert, Inc., Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 15, 2021 (SEC File No. 001-34761).

   

21.1*

Subsidiaries of AutoWeb, Inc.

   

23.1*

Consent of Independent Registered Public Accounting Firm, Moss Adams LLP.

   

 

 

24.1*

Power of Attorney (included in the signature page hereto).

   

31.1*

Chief Executive Officer Section 302 Certification of Periodic Report dated March 24, 2022.

   

31.2*

Chief Financial Officer Section 302 Certification of Periodic Report dated March 24, 2022.

   

32.1*

Chief Executive Officer and Chief Financial Officer Section 906 Certification of Periodic Report dated March 24, 2022.

   

101.INS

Inline XBRL Instance Document.

   

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

   

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document.

   

101.DEF

Inline XBRL Taxonomy Extension Definition Document.

   

101.LAB

Inline XBRL Taxonomy Label Linkbase Document.

   

101.PRE

Inline XBRL Taxonomy Presentation Linkbase Document.

   

104

Cover Page Interactive Data File (embedded within the Inline XBRL Document and included in Exhibit 101)

 

*

Filed or Furnished herewith.

 

Management Contract or Compensatory Plan or Arrangement.

 

Certain attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K because the information contained therein is not material and is not otherwise publicly disclosed. AutoWeb will furnish supplementally copies of such attachments to the SEC or its staff upon request.

 

Item 16.         Form 10-K Summary

 

None.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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, on the 24 day of March 2022.

 

 

AUTOWEB, INC.

 

 

 

 

 

 

By:

/s/ JARED R. ROWE

 

 

 

Jared R. Rowe

 

 

 

President, Chief Executive Officer and Director

 

 

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each of AutoWeb, Inc., a Delaware corporation (“Company”), and the undersigned Directors and Officers of AutoWeb, Inc. hereby constitute and appoint Jared R. Rowe, Carlton Hamer and Glenn E. Fuller as the Company’s or such Director’s or Officer’s true and lawful attorneys-in-fact and agents, for the Company or such Director or Officer and in the Company’s or such Director’s or Officer’s name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in connection therewith, as fully to all intents and purposes as the Company or such Director or Officer might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

Title

Date

 

     

 

/s/ MICHAEL J. FUCHS

Michael J. Fuchs

Chairman of the Board and Director

March 24, 2022

 

     

 

/s/ JARED R. ROWE

Jared R. Rowe

President, Chief Executive Officer and Director

(Principal Executive Officer)

March 24, 2022

 

 

 

 

 

/s/ CARLTON HAMER

Carlton Hamer

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

March 24, 2022

 

 

 

 

 

/s/ JOSH BARSETTI

Josh Barsetti

Vice President, Controller

(Principal Accounting Officer) 

March 24, 2022

 
 

 

 

 

/s/ MICHAEL A. CARPENTER

Michael A. Carpenter

Director

March 24, 2022

 

 

 

 

 

/s/ MATIAS DE TEZANOS

Matias de Tezanos

Director

March 24, 2022

 
       

/s/ CHAN GALBATO

Chan Galbato

Director

March 24, 2022

 

       

/s/ MARK N. KAPLAN

Mark N. Kaplan

Director

March 24, 2022

 

 

 

 

 

/s/ JANET M. THOMPSON

Janet M. Thompson

Director

March 24, 2022

 

 

 

 

 

/s/ JOSE VARGAS

Jose Vargas

Director

March 24, 2022

 

 

AUTOWEB, INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

   

Page

 

Report of Independent Registered Public Accounting Firm (Moss Adams LLP, San Diego, CA, PCAOB ID: 659)

   

2

 

Consolidated Balance Sheets

   

4

 

Consolidated Statements of Operations

   

5

 

Consolidated Statements of Stockholders Equity

   

6

 

Consolidated Statements of Cash Flows

   

7

 

Notes to Consolidated Financial Statements

   

8

 
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

AutoWeb, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of AutoWeb, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

 

Revenue recognition Identifying and evaluating terms and conditions in contracts

 

As described in Note 3 to the consolidated financial statements, the Company applies the following steps in their determination of revenue to be recognized: 1) identification of the contract with a customer; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when, or as, the Company satisfies a performance obligation.

The Company earns revenue from multiple revenue streams and frequently enters into contracts that include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Further, the Company’s revenue contracts are subject to frequent amendment.

 

The identification and evaluation of all relevant terms and conditions in each contract has been determined to be a critical audit matter. The principal considerations for this determination include the fact that the Company’s revenue process is largely manual and requires the evaluation of a large volume of contracts which are subject to frequent modification or amendment, which requires significant effort by the Company to identify and evaluate all the relevant terms and conditions in each contract with a customer and the impact of each on revenue recognition. This led to a high degree of audit effort in performing our audit procedures to evaluate whether all the relevant terms and conditions in its revenue contracts were appropriately identified and evaluated by the Company.

 

The primary audit procedures we performed to address the critical audit matter included, among others, testing the completeness and accuracy of the Company’s identification and evaluation of the appropriate contract utilized by examining revenue arrangements on a test basis, and testing the Company’s application of the terms and conditions in the contract by inspecting the corresponding invoice and payment remittance to ensure the revenue was recognized in the appropriate period and for the appropriate amount.

 

/s/ Moss Adams LLP

 

San Diego, California

March 24, 2022

 

We have served as the Company’s auditor since 2012.

 

 

 

AUTOWEB, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

  

December 31,

2021

  

December 31,

2020

 

Assets

        

Current assets:

        

Cash and cash equivalents

 $7,315  $10,803 

Restricted cash

  4,314   4,304 

Accounts receivable, net of allowances for bad debts and customer credits of $101 and $406 at December 31, 2021 and 2020, respectively

  11,433   13,955 

Vehicle inventory

  1,076    

Prepaid expenses and other current assets

  998   847 

Total current assets

  25,136   29,909 

Property and equipment, net

  3,853   2,953 

Right-of-use assets

  1,993   2,892 

Intangible assets, net

  3,634   4,733 

Other assets

  516   642 

Total assets

 $35,132  $41,129 
         

Liabilities and Stockholders Equity

        

Current liabilities:

        

Accounts payable

 $7,705  $7,233 

Borrowings under revolving credit facility

  10,001   10,185 

Accrued employee-related benefits

  1,782   2,123 

Other accrued expenses and other current liabilities

  610   538 

PPP loan

     1,384 

Current portion of lease liabilities

  781   1,015 

Current portion of financing debt

  64   65 

Total current liabilities

  20,943   22,543 

Lease liabilities, net of current portion

  1,432   2,191 

Financing debt, net of current portion

     60 

Total liabilities

  22,375   24,794 

Commitments and contingencies (Note 7)

          

Stockholders’ equity:

        

Preferred stock, $0.001 par value; 11,445,187 shares authorized

        

Series A Preferred stock 2,000,000 shares authorized, none issued and outstanding at December 31, 2021 and 2020, respectively

      

Common stock, $0.001 par value; 55,000,000 shares authorized; 13,489,482 and 13,169,204 shares issued and outstanding at December 31, 2021 and 2020, respectively

  13   13 

Additional paid-in capital

  368,168   366,087 

Accumulated deficit

  (355,424)  (349,765

)

Total stockholders’ equity

  12,757   16,335 

Total liabilities and stockholders’ equity

 $35,132  $41,129 

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 

 

AUTOWEB, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per-share data)

 

  

Years Ended December 31,

 
  

2021

  

2020

 

Revenues:

        

Lead generation

 $52,117  $61,129 

Digital advertising

  14,142   15,441 

Used vehicle sales

  5,326    

Total revenues

  71,585   76,570 

Cost of revenues – lead generation and digital advertising

  46,300   52,890 

Cost of revenues – used vehicle sales

  4,954    

Gross profit

  20,331   23,680 

Operating expenses:

        

Sales and marketing

  9,170   8,201 

Technology support

  5,649   6,574 

General and administrative

  11,324   12,718 

Depreciation and amortization

  653   1,711 

Total operating expenses

  26,796   29,204 

Operating loss

  (6,465)  (5,524)

Interest and other (expense) income:

        

Interest expense

  (1,011)  (1,524)

Other income

  1,817   238 

Loss before income tax provision

  (5,659)  (6,810)

Income tax provision

     10 

Net loss

 $(5,659) $(6,820)
         

Basic loss per common share

 $(0.43) $(0.52)

Diluted loss per common share

 $(0.43) $(0.52)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

AUTOWEB, INC. 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except share data)

 

  

Common Stock

  

Preferred Stock

  

Additional

  

 

     
  

Number

of Shares

  

Amount

  

Number

of Shares

  

Amount

  Paid-In- Capital  Accumulated Deficit  

Total

 
                             

Balance at December 31, 2019

  13,146,831  $13     $  $364,028  $(342,945) $21,096 

Share-based compensation

              1,984      1,984 

Issuance of common stock upon exercise of stock options

  22,373            75      75 

Net loss

                 (6,820)  (6,820)

Balance at December 31, 2020

  13,169,204  $13     $  $366,087  $(349,765) $16,335 

Share-based compensation

              1,854      1,854 

Issuance of common stock upon exercise of stock options

  100,278            227      227 

Issuance of restricted stock

  220,000                   

Net loss

                 (5,659)  (5,659)

Balance at December 31, 2021

  13,489,482  $13     $  $368,168  $(355,424) $12,757 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

AUTOWEB, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

  

Years Ended December 31,

 
  

2021

  

2020

 

Cash flows from operating activities:

        

Net loss

 $(5,659) $(6,820)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

        

Depreciation and amortization

  2,484   3,624 

Provision for bad debt

  (227)  291 

Provision for customer credits

  52   83 

Forgiveness of PPP Loan

  (1,384)   

Share-based compensation

  1,854   1,984 

Right-of-use-assets

  899   1,426 

Loss on disposal of assets

     6 

Changes in assets and liabilities:

        

Accounts receivable

  2,697   9,722 

Prepaid expenses and other current assets

  (151)  418 

Vehicle inventory

  (1,076)   

Other non-current assets

  126   19 

Accounts payable

  306   (7,279)

Accrued expenses and other current liabilities

  (344)  (325)

Lease liabilities

  (993)  (1,248)

Net cash (used in) provided by operating activities

  (1,416)  1,901 

Cash flows from investing activities:

        

Purchases of property and equipment

  (1,719)  (596)

Purchase of intangible asset

  (325)   

Net cash (used in) investing activities

  (2,044)  (596)

Cash flows from financing activities:

        

Borrowings under PNC credit facility

     28,564 

Principal payments on PNC credit facility

     (32,308)

Borrowings under CNC credit facility

  73,719   71,072 

Principal payments on CNC credit facility

  (73,903)  (60,887)

Borrowings under the PPP loan

     1,384 

Payments under financing agreement

  (61)  (44)

Net proceeds from stock option exercises

  227   75 

Net cash (used in) provided by financing activities

  (18)  7,856 

Net (decrease) increase in cash and cash equivalents

  (3,478)  9,161 

Cash and cash equivalents and restricted cash, beginning of period

  15,107   5,946 

Cash and cash equivalents and restricted cash, end of period

 $11,629  $15,107 
         

Reconciliation of cash and cash equivalents and restricted cash

        

Cash and cash equivalents at beginning of period

 $10,803  $892 

Restricted cash at beginning of period

  4,304   5,054 

Cash and cash equivalents and restricted cash at beginning of period

 $15,107  $5,946 
         

Cash and cash equivalents at end of period

 $7,315  $10,803 

Restricted cash at end of period

  4,314   4,304 

Cash and cash equivalents and restricted cash at end of period

 $11,629  $15,107 
         

Supplemental disclosure of cash flow information:

        

Cash paid for income taxes

 $  $1 

Cash refunds for income taxes

 $1  $849 

Cash paid for interest

 $872  $845 
         

Supplemental schedule of non-cash investing and financing activities:

        

Right-of-use assets obtained in exchange for operating lease liabilities

 $  $1,790 

Financing for the purchase of fixed assets

 $166  $170 

Purchases on account related to capitalized software

 $  $99 

Intangible asset holdback

 $75  $ 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

AUTOWEB, INC. 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.         Organization and Operations of AutoWeb         

 

AutoWeb, Inc. (“AutoWeb” or the “Company”) is an automotive industry marketing and used vehicle acquisition and reselling company focused on being a “matchmaker” to better connect consumers seeking to acquire vehicles and vehicle sellers that can meet the consumers’ needs.  We assist consumers in multiple aspects of the vehicle transaction, including providing content and information helpful to their next vehicle to acquisition. The Company also assists consumers choosing to sell their current vehicle, which provides an added monetization opportunity in addition to the Company’s existing consumer offerings. The Company primarily generates revenue through automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) by helping them market and sell new and used vehicles to consumers through the Company’s programs for online lead and traffic referrals, dealer marketing products and services, and online advertising.  The Company also acquires used vehicles from consumers and sells those vehicles through third party wholesale auctions and directly to Dealers.

 

On  July 31, 2021, the Company and Tradein Expert, Inc., a Delaware corporation and wholly owned subsidiary of the Company  (“Tradein Expert”), entered into and consummated an Asset Purchase Agreement (“Purchase Agreement”), by and among the Company, Tradein Expert, Car Acquisition, LLC, a Texas limited liability company dba CarZeus (“Seller”), Carzuz.com LLC, a Texas limited liability company, McCombs Family Partners, Ltd., a Texas limited partnership and Phil Kandera, an individual, pursuant to which Tradein Expert acquired specified assets of Seller’s San Antonio, Texas-based used vehicle acquisition platform that operates under the name CarZeus (“CarZeus Purchase Transaction”). Through the Tradein Expert entity (dba CarZeus), the Company purchases used vehicles directly from consumers and resells them through wholesale channels. The operations of CarZeus are included in AutoWeb’s financial statements as of August 1, 2021.

 

The aggregate consideration for the CarZeus Purchase Transaction was $0.4 million in cash. The Purchase Agreement contains representations, warranties, covenants, and conditions the Company believes are customary for a transaction of this size and type, as well as indemnification provisions subject to specified conditions, including a six-month holdback of approximately $0.1 million (“Holdback Amount”) of the purchase price as a source of security for any indemnification obligations. On  August 2, 2021, the Company paid approximately $0.3 million of the purchase consideration, and on February 3rd, 2022, paid the remaining $0.1 million Holdback Amount.

 

The Company primarily generates revenue through assisting Dealers and Manufacturers by marketing and selling new and used vehicles to consumers through the Company’s programs for online lead and traffic referrals, dealer marketing products and services, and online advertising.  The Company also offers automotive consumers an option to sell their used vehicle outside of a dealership location. The Company resells these vehicles indirectly to Dealers through wholesale auctions or through direct Dealer sale.

 

The Company’s consumer-facing websites (“Company Websites”) provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to submit inquiries requesting Dealers to contact consumers regarding purchasing or leasing vehicles (“Leads”). Leads are internally generated from Company Websites or acquired from third parties that generate Leads from their websites. 

 

The Company’s click traffic referral program provides consumers who are shopping for vehicles online with targeted offers based on make, model and geographic location. As these consumers conduct online research on Company Websites or on the site of one of the Company’s network of automotive publishers, they are presented with relevant offers on a timely basis and, upon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of the Company’s Dealer, Manufacturer or advertising customers.

 

 

2.         Summary of Significant Accounting Policies

 

Basis of Presentation.  These Consolidated Financial Statements include the accounts of AutoWeb Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.  Certain prior year amounts have been reclassified to conform to current period classification.  These reclassifications had no effect on the reported results of operations.

 

Accounting Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires the Company 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. Significant estimates include, but are not limited to, allowances for bad debts and customer credits, useful lives of depreciable assets and capitalized software costs, long-lived asset impairments, goodwill and purchased intangible asset valuations, accrued liabilities, contingent payment provisions, debt valuation and valuation allowance for deferred tax assets, warrant valuation and stock-based compensation expense. Actual results could differ from those estimates. 

 

F- 8

 

Cash and Cash Equivalents.   All highly liquid investments with an original maturity of 90 days or less at the date of purchase are classified as cash equivalents. Cash and cash equivalents represent amounts held by the Company for use by the Company and are recorded at cost, which approximates fair value.

 

Restricted Cash. Restricted cash primarily consists of funds pledged pursuant to the CNC Credit Agreement (See Note 6).

 

Accounts Receivable.  Credit is extended to customers based on an evaluation of the customer’s financial condition, and when credit is extended, collateral is generally not required. Interest is not normally charged on receivables.

 

Allowances for Bad Debts and Customer Credits.  The allowance for bad debts is an estimate of bad debt expense that could result from the inability or refusal of customers to pay for services. Additions to the estimated allowance for bad debts are recorded to general and administrative expenses and are based on factors such as historical write-off percentages, the current business environment and known concerns within the current aging of accounts receivable. Reductions in the estimated allowance for bad debts due to subsequent cash recoveries are recorded as a decrease in general and administrative expense. As specific bad debts are identified, they are written off against the previously established estimated allowance for bad debts with no impact on operating expenses.

 

Fair Value of Financial Instruments.  The Company records its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The Company uses valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instrument’s valuation.

 

Cash equivalents, restricted cash, accounts receivable, net of allowance, accounts payable and accrued liabilities, are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments.

 

Concentration of Credit Risk and Risks Due to Significant Customers.  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash and cash equivalents are primarily maintained with two financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. Generally, these deposits may be redeemed upon demand.

 

If there is a decline in the general economic environment that negatively affects the financial condition of the Company’s customers or an increase in the number of customers that are dissatisfied with our services, additional estimated allowances for bad debts and customer credits may be required and the impact on the Company’s business, results of operations, financial condition, earnings per share, cash flow or the trading price of the Company’s stock could be material.

 

F- 9

 

The Company has a concentration of credit risk with the Company’s automotive industry related accounts receivable balances, particularly with Carat Detroit (General Motors), Urban Science Applications (which represents several Manufacturer programs), Autodata Solutions and Shift Digital. During and for the year ended December 31, 2021, approximately 43%, or $30.9 million of our total revenues and approximately 64% or $7.3 million of gross accounts receivable were related to these four customers as follows:  

 

  

% of

  

% of

 

Customers

 

Revenue

  

Account Receivable

 

Carat Detroit

  12%  20%

Urban Science Applications

  12%  18%

Autodata Solutions

  13%  16%

Shift Digital

  6%  10%

Total

  43%  64%

 

During 2020, approximately 46% of the Company’s total revenues were derived from Carat Detroit (General Motors), Ford Direct, Urban Science Applications (which represents several Manufacturer programs) and Autodata Solutions. Approximately 62% or $8.6 million of gross accounts receivable related to these four customers at December 31, 2020.  

 

  

% of

  

% of

 

Customers

 

Revenue

  

Account Receivable

 

Carat Detroit

  12%  19%

Ford Direct

  11%  16%

Urban Science Applications

  12%  15%

Autodata Solutions

  11%  12%

Total

  46%  62%

 

Property and Equipment.  Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally three years. Amortization of leasehold improvements is provided using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. Repair and maintenance costs are charged to operating expenses as incurred. Gains or losses resulting from the retirement or sale of property and equipment are recorded as operating income (expense), respectively.

 

Vehicle inventory. Inventory is primarily comprised of vehicles held for sale and is stated at cost.  Vehicle inventory cost is determined by specific identification and includes vehicle cost, auction fees (if applicable) and reconditioning costs. Reconditioning costs are generally immaterial. Overhead costs associated with reconditioning vehicles are expensed as incurred.

 

Operating Leases.  The Company leases office space and certain office equipment under operating lease agreements which expire on various dates through 2025, with options to renew on expiration of the original lease terms. These operating lease agreements include one related-party agreement, whereby the Company paid approximately $0.1 million in lease payments during 2021.

 

The lease term begins on the date of initial possession of the leased property for purposes of recognizing rent expense on a straight-line basis over the term of the lease. Lease renewal periods are considered on a lease-by-lease basis and are generally not included in the initial lease term.

 

F- 10

 

Capitalized Internal Use Software and Website Development Costs.  The Company capitalizes costs to develop internal use software in accordance with ASC 350-40, “Internal-Use Software,” and ASC 350-50, “Website Development Costs,” which require the capitalization of external and internal computer software costs and website development costs, respectively, incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training and maintenance costs are expensed as incurred while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized internal use software development costs are amortized using the straight-line method over an estimated useful life of three to five years. Capitalized website development costs, once placed in service, are amortized using the straight-line method over the estimated useful life of the related websites.  The Company placed in service $1.0 million and $1.5 million of such costs for the years ended December 31, 2021 and 2020, respectively.

 

Indefinite-lived intangible assets. Indefinite-lived intangible assets consist of domain names, which were acquired as part of the Dealix/Autotegrity acquisition in 2015 as well as the CarZeus asset acquisition in 2021, and are tested for impairment at least annually, or more frequently if an event occurs or change occurs that would indicate the existence of a potential impairment. When evaluating indefinite-lived intangible assets for impairment, the Company may first perform a qualitative analysis to determine whether it is more-likely-than-not that the indefinite-lived intangible assets are impaired. If the Company does not perform the qualitative assessment, or if the Company determines that it is more-likely-than-not that the fair value of the indefinite-lived intangible asset exceeds its carrying amount, the Company will calculate the estimated fair value of the indefinite-lived intangible asset. Fair value is the price a willing buyer would pay for the indefinite-lived intangible asset and is typically calculated using an income approach. If the carrying amount of the indefinite-lived intangible asset exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value.

 

Impairment of Long-Lived Assets and Intangible Assets.  The Company periodically reviews long-lived amortizing assets to for indicators of impairment. The Company assesses the impairment of these assets, or the need to accelerate amortization, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the long-lived assets and other intangibles. Future events could cause the Company to conclude that impairment indicators exist and that the assets should be reviewed to determine their fair value. The Company assesses the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on a valuation process that provides an estimate of the fair value of these assets using a discounted cash flow model, which includes many assumptions and estimates. Once the valuation is determined, the Company would write-down these assets to their determined fair value, if necessary. Any write-down could have a material adverse effect on the Company’s financial condition and results of operations. The Company did not record any impairment of long-lived assets and intangible assets in 2021 or 2020, respectively.

 

Cost of Revenues lead generation and digital advertising. Cost of revenues consists of Lead and traffic acquisition costs, other cost of revenues as well as costs associated with vehicle acquisition and resale. Lead and traffic acquisition costs consist of payments made to the Company’s Lead providers, including internet portals and on-line automotive information providers. Other cost of revenues consists of search engine marketing (“SEM”) and fees paid to third parties for data and content, including search engine optimization (“SEO”) activity, included on the Company’s properties, connectivity costs and development costs related to the Company Websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to Company Websites.  SEM, sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website.

 

Cost of Revenues used vehicle sales. Added costs in the fiscal year ended December 31, 2021 related to vehicle acquisition and resale are a direct result of the CarZeus Purchase Transaction on July 31, 2021, the results of which are incorporated into our consolidated financial statements as of August 1, 2021. These costs are predominately related to the acquisition and ultimate resale of used vehicles.

 

Income Taxes.  The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records a valuation allowance, if necessary, to reduce deferred tax assets to an amount it believes is more-likely-than-not to be realized.

 

F- 11

 

In response to the coronavirus pandemic, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (“TCJA”). Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the TCJA. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020.

 

Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the TCJA) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the TCJA. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision for the year ended December 31, 2021, or to its net deferred tax assets as of December 31, 2021.

 

Computation of Basic and Diluted Net Loss per Share.  Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period.  Diluted net loss per share is computed using the weighted-average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock and if-converted method, during the period. Potential common shares consist of unvested restricted stock, common shares issuable upon the exercise of stock options, the exercise of warrants, and conversion of convertible notes.

 

Share amounts utilized to compute the basic and diluted net loss per share are as follows:

 

  

2021

  

2020

 

Basic Shares:

        

Weighted average common shares outstanding

  13,299,824