AUTOWEB, INC. This Quarterly Report on Form 10-Q is being filed in accordance with the requirements of the Exchange Act and is neither a recommendation, an offer to purchase nor a solicitation of an offer to sell any securities of the Company. Parent and Purchaser have filed with theSEC onAugust 3, 2022 a Tender Offer Statement on Schedule TO containing an offer to purchase, a form of letter of transmittal and other documents relating to the Offer, and the Company has filed with theSEC onAugust 3, 2022 a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer. THE TENDER OFFER MATERIALS (INCLUDING AN OFFER TO PURCHASE, THE RELATED LETTER OF TRANSMITTAL AND CERTAIN OTHER TENDER OFFER DOCUMENTS) AND THE SOLICITATION/RECOMMENDATION STATEMENT ON SCHEDULE 14D-9 CONTAIN IMPORTANT INFORMATION. THE COMPANY'S STOCKHOLDERS ARE URGED TO READ THESE DOCUMENTS CAREFULLY BECAUSE THEY CONTAIN IMPORTANT INFORMATION THAT HOLDERS OF THE COMPANY'S SECURITIES SHOULD CONSIDER BEFORE MAKING ANY DECISION REGARDING TENDERING THEIR SECURITIES. The offer to purchase, the related letter of transmittal and certain other tender offer documents, as well as the Solicitation/Recommendation Statement, will be made available to all holders of the Company's stock at no expense to them. Those documents may be obtained without charge at theSEC's website at www.sec.gov or by directing a request to Purchaser or its agent for the tender offer as set forth in the tender offer documents.
Cautionary Note Concerning Forward-Looking Statements
The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "anticipates," "could," "may," "estimates," "expects," "projects," "intends," "plans," "believes," "will" and words or phrases of similar substance used in connection with any discussion of future operations, financial performance, plans, events, trends or circumstances can be used to identify some, but not all, forward-looking statements. In particular, statements regarding expectations and opportunities, including related to the Transactions and the Company's ability to continue as a going concern, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to consummate the Transactions, carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve significant risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual outcomes or results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 (including in the section entitled "Overview" below), Part II, Item 1A of this Quarterly Report on Form 10-Q, and under the heading "Risk Factors" in our annual report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K") filed with theSEC onMarch 24, 2022 . Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements. The following discussion of our results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the notes thereto in the 2021 Form 10-K. Our corporate website is located at www.autoweb.com. Information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q. At or through the Investor Relations section of our website we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports as soon as practicable after the reports are electronically filed with or furnished to theSEC .
Unless the context otherwise requires, the terms "we", "us", "our", "AutoWeb"
and "Company" refer to
Basis of Presentation and Critical Accounting Policies
See Note 2, Basis of Presentation, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We prepare our financial statements in conformity with accounting principles generally accepted inthe United States of America , which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations may be affected. For a detailed discussion of the application of our critical accounting policies, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2021 Form 10-K. There have been no changes to our critical accounting policies since we filed our 2021 Form 10-K. -19-
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Recent Developments As disclosed in Note 2 to the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, and as previously reported in theJuly 25th Form 8-K, onJuly 24, 2022 , the Company entered into the Merger Agreement with Parent and Purchaser. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, onAugust 3, 2022 , Purchaser commenced the Offer to acquire all of the outstanding shares of Company Common Stock at the Offer Price. As soon as practicable after acquiring sufficient shares of Company Common Stock pursuant to the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Purchaser will merge with and into Company, and Company will become a wholly-owned subsidiary of Parent as a result of the Merger. In the Merger, the shares of Company Common Stock remaining outstanding following the consummation of the Offer (other than (i) shares owned immediately prior to the time as of the Effective Time by the Company or any direct or indirect wholly-owned subsidiary of the Company, (ii) shares owned as of immediately prior to the Effective Time by Parent, Purchaser or any other direct or indirect wholly-owned subsidiary of Parent, or (iii) shares held by stockholders who have preserved their appraisal rights underDelaware law), will be converted into the right to receive the Offer Price.
On
Overview Commencing in early 2020 and continuing as of the date of this Quarterly Report on Form 10-Q, the outbreak of coronavirus and emerging variants has led to quarantines, mask mandates, vaccination requirements and stay-at-home/work-from-home orders in a number of countries, states, cities and regions and the closure or limited or restricted access to public and private offices, businesses and facilities, causing disruptions to travel, economic activity, supply chains and financial markets. In particular, Manufacturers have experienced significant disruption in the supply of semiconductor chips required for new vehicles due to a worldwide shortage of these chips. As a result, the ability of Manufacturers to maintain regular production output of certain vehicles, and the corresponding reduction in available new vehicle inventories, have adversely impacted vehicle sales. Further disrupting the automotive industry and the number of vehicles available for sale or lease are disruptions in the supply of other components used in vehicle manufacturing. These disruptions have impacted the willingness or desire of our Dealer and other customers to acquire vehicle Leads or other digital marketing services from us. While coronavirus restrictions have eased in 2022, consumer confidence and spending has declined as a result of other factors, including macroeconomic conditions such rising inflation and the global impact ofRussia's invasion of theUkraine . Vehicle sales have declined, and we continue to experience cancellations, volume reductions or suspensions of purchases of Leads and other digital marketing services by our Dealer and other customers, which has continued to materially and adversely impact our financial performance. We are unable to predict the continuing extent, duration and impact of the foregoing factors on the automotive industry in general, or on our business, operations and financial performance specifically. In light of the impact on us from the foregoing factors, as discussed in Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, due to our cash and liquidity position, we believe that there is substantial doubt about our ability to continue as a going concern for a period of one year after the date the financial statements contained in this Quarterly Report on Form 10-Q are issued. Our ability to continue as a going concern is contingent upon the consummation of the Transactions. If the Transactions are not consummated, we believe that we will have no alternative other than to liquidate or to seek protection under theU.S. bankruptcy laws. Total revenues in the first six months of 2022 were$36.3 million compared to$36.6 million in the first six months of 2021. The decrease in total revenues was largely driven by the suspension of our CarZeus operations (suspended onMay 16, 2022 ), the continued negative impact of the supply chain for new vehicle inventory and sales, declining consumer confidence, economic inflation and the one-time lump sum payment for the early termination of the new vehicle leads program by one of our manufacturing customers of$0.5 million in the second quarter of 2021. We have worked to shift its strategy and to adapt to the changing market conditions within the automotive industry by increasing the focus on core Leads, clicks and email products and services and away from non-core products and services. In addition, we have intentionally operated at lower levels of media spend in an attempt to match projected industry selling rates. We expect that the Company and its dealers and consumers alike will continue to contend with broader macroeconomic uncertainty, including uncertainties created by record inflation and the continued impact ofRussia's invasion ofUkraine . Our lead and click generation products have historically operated with limited visibility regarding future performance due to short sales cycles and a high rate of customer churn as customers are able to join and leave our platform with limited notice. Our advertising business is also subject to seasonal trends, with the first quarter of the calendar year typically showing sequential decline versus the fourth quarter. These factors have historically contributed to volatility in our revenues, cost of revenues, gross profit, and gross profit margin. We expect these trends to continue through the remainder of 2022. -20- --------------------------------------------------------------------------------
Results of Operations
Three Months Ended
The following table sets forth certain statement of operations data for the three-month periods endedJune 30, 2022 , andMarch 31, 2022 (certain balances and calculations have been rounded for presentation). In accordance with Regulation S-K Item 303(c), as amended, we are providing a comparison of ourJune 30, 2022 , period against the preceding quarter. We believe this comparison is useful for investors and stakeholders, as it provides more clarity into our current year financial performance. % of % of Total Total June 30, 2022 Revenues March 31, 2022 Revenues Change % Change (Dollar amounts in thousands) Revenues: Lead generation $ 9,503 55 %$ 10,576 55 %$ (1,073 ) (10 )% Digital advertising 4,012 23 4,137 22 (125 ) (3 ) Used vehicle sales 3,680 22 4,351 23 (671 ) (15 ) Total revenues 17,195 100 19,064 100 (1,869 ) (10 ) Cost of revenues - lead generation and digital advertising 10,017 58 10,954 58 (937 ) (9 ) Cost of revenues - used vehicle sales 3,497 20 4,206 22 (709 ) (17 ) Gross profit 3,681 21 3,904 20 (223 ) (6 ) Operating expenses: Sales and marketing 2,303 13 2,650 14 (347 ) (13 ) Technology support 1,702 10 1,533 8 169 11 General and administrative 3,793 22 3,562 19 231 6 Depreciation and amortization 84 - 65 - 19 29 Total operating expenses 7,882 47 7,810 41 72 1 Operating loss (4,201 ) (24 ) (3,906 ) (21 ) (295 ) (8 )
Interest and other income (expense), net (248 ) (1 ) (275 ) (1 ) 27 10 Loss before income tax provision (4,449 ) (25 ) (4,181 ) (22 ) (268 ) 6 Income tax provision - - 126 - (126 ) (100 ) Net loss$ (4,449 ) (25 )%$ (4,307 ) (22 )%$ (142 ) 3 % Lead generation. Lead generation revenues decreased$1.1 million , or 10%, in the second quarter of 2022 compared to the first quarter of 2022 primarily from a decrease in the volume of automotive leads delivered to Manufacturers and other wholesale customers. Digital advertising. Digital advertising revenues decreased$0.1 million , or 3%, in the second quarter of 2022 compared to the first quarter of 2022 primarily as a result of decreased display advertising traffic on our websites. Used vehicle sales. Used vehicle sales revenue decreased$0.7 million , or 15%, in the second quarter of 2022 compared to the first quarter of 2022. The decrease in used vehicle sales revenue is directly attributable to suspending our CarZeus operations effectiveMay 16, 2022 . -21- --------------------------------------------------------------------------------
Cost of revenues - lead generation and digital advertising. Cost of revenues decreased$0.9 million , or 9%, in the second quarter of 2022 compared to the first quarter of 2022 as a result of lower revenue offset by an increase in click publisher costs. Cost of revenues - used vehicles. Used vehicle cost of revenue decreased$0.7 million , or 17%, in the second quarter of 2022 compared to the first quarter of 2022. The decrease in used vehicle cost of revenues is directly attributable to suspending our CarZeus operations effectiveMay 16, 2022 . Gross profit. Gross Profit decreased$0.2 million , or 6%, in the second quarter of 2022 compared to the first quarter of 2022. This was a direct result of a decrease in the volume of automotive leads coupled with decreased display advertising traffic on our websites.
Sales and marketing. Sales and marketing expense in the second quarter of 2022
decreased
Technology support. Technology support expense in the second quarter of 2022 increased by$0.2 million , or 11%, compared to the first quarter of 2022 due primarily from increased employee related expenses. General and administrative. General and administrative expense in the second quarter of 2022 increased$0.2 million , or 6% compared to the first quarter of 2022 due primarily to higher professional and consulting related fees. Income taxes. We did not recognize any expense related to income tax in the second quarter of 2022 compared to$0.1 million in the first quarter of 2022. Our income tax rate for the second quarter of 2022 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowance recorded for such losses.
Six Months Ended
The following table sets forth certain statement of operations data for the
six-month periods ended
% of % of
Total Total
2022 Revenues 2021 Revenues Change % Change
(Dollar amounts in thousands)
Revenues:
Lead generation $ 20,079 55 % $ 29,411 80 % $ (9,332 ) (32 )%
Digital advertising 8,149 22 7,205 20 944 13
Used vehicle sales 8,031 22 - - 8,031 100
Total revenues 36,259 100 36,616 100 (357 ) (1 )
Cost of revenues -
lead generation and
digital advertising 20,971 58 24,250 66 (3,279 ) (14 )
Cost of revenues -
used vehicle sales 7,703 21 - - 7,703 100
Gross profit 7,585 21 12,366 34 (4,781 ) (39 )
Operating expenses:
Sales and marketing 4,953 14 4,303 12 650 15
Technology support 3,235 9 2,638 7 597 23
General and
administrative 7,355 20 6,221 17 1,134 18
Depreciation and
amortization 148 - 400 1 (252 ) (63 )
Total operating
expenses 15,691 43 13,562 37 2,129 16
Operating loss (8,106 ) (22 ) (1,196 ) (3 ) (6,910 ) 578
Interest and other
income (expense), net (524 ) (1 ) 1,202 3 (1,726 ) (144 )
(Loss) income before
income tax provision (8,630 ) (23 ) 6 - (8,636 ) N/A
Income tax provision 126 - - - 126 100
%
Net (loss) income $ (8,756 ) (23 ) $ 6 - % $ (8,762 ) N/A %
-22---------------------------------------------------------------------------------
Lead generation. Lead generation revenues decreased$9.3 million , or 32%, in the first six months of 2022 compared to the first six months of 2021 primarily as a result of the continued negative impact of the supply chain for new vehicle inventory and sales, declining consumer confidence and rising inflation. Further contributing to this decrease was a one-time lump sum payment for the early termination of the new vehicle leads program by one of our manufacturing customers which approximated$0.5 million in the second quarter of 2021. Digital advertising. Digital advertising revenues increased$0.9 million , or 13%, in the first six months of 2022 compared to the first six months of 2021 primarily as a result of an increase in click revenue associated with increased click volume. The increase in click volume is attributed to a renewed focus on higher paying advertisers during 2022. Used vehicle sales. As a result of the CarZeus Purchase Transaction that was effective onAugust 1, 2021 , the Company recorded used vehicle sales of$8.0 million in the first six months of 2022. The Company had no used vehicle sales in the first six months of 2021. Cost of revenues - lead generation and digital advertising. Cost of revenues decreased$3.3 million , or 14%, in the first six months of 2022 compared to the first six months of 2021 which in line with the decrease in lead generation revenues coupled with improved efficiencies in SEM, purchase request and traffic acquisition costs. Cost of revenues - used vehicles. As a result of the CarZeus Purchase Transaction that was effective onAugust 1, 2021 , the Company recorded cost of revenues for used vehicles of$7.7 million in the first six months of 2022. The Company had no cost of revenue for used vehicles in the first six months of 2021. Gross profit. Gross profit. Gross Profit decreased$4.8 million , or 39%, for the first six months of 2022 compared to the first six months of 2021 as a result of adding the used vehicle acquisition business, which did not operate in the comparable period in the prior year. The used vehicle acquisition business generally operates with lower gross margins than the Company's Lead generation and Digital advertising operations. Further contributing to the decrease in revenue related to one of our manufacturing customers who terminated their new vehicle leads program with the Company in the prior year period. The company received an early termination fee of approximately$0.5 million in the second quarter of 2021. Sales and marketing. Sales and marketing expense in the first six months of 2022 increased$0.7 million , or 15%, compared to the first six months of 2021 primarily due to an increase in headcount related to CarZeus coupled with an increase in marketing expenses during the current year to date period.
Technology support. Technology support expense in the first six months of 2022
increased by
General and administrative. General and administrative expense in the first six months of 2022 increased$1.1 million , or 18%, compared to the first six months of 2021 primarily a result of higher professional and consulting related fees from the Company's strategic initiative processes launched in the second quarter of 2022.
Depreciation and amortization. Depreciation and amortization expense in the
first six months of 2022 decreased
Interest and other income (expense), net. Interest and other income (expense) was$0.5 million of expense for the first six months of 2022 compared to$1.2 million of income in the first six months of 2021. In the first quarter of 2021, we recorded$1.4 million of income associated with the forgiveness of our PPP Loan. Further contributing to the decrease in interest and other income (expense) was an insurance reimbursement related to theJanuary 2020 malware attack in which we recorded$0.2 million on our Unaudited Condensed Consolidated Statement of Operations during 2021. Interest expense includes interest on outstanding borrowings and the amortization of debt issuance costs. Income taxes. Income tax expense was$0.1 million for the first six months of 2022. We did not have income tax expense in the first six months of 2021. Our income tax rate for the first six months of 2022 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowance recorded for such losses. -23- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The table below sets forth a summary of our cash flows for the six months endedJune 30, 2022 , and 2021: Six Months EndedJune 30, 2022 2021 (In thousands)
Net cash (used in) provided by operating activities
(415 ) (770 )
Net cash (used in) provided by financing activities (5,290 ) 113
Our principal sources of liquidity are our borrowings under the CNC Credit Agreement. Our cash and cash equivalents and restricted cash totaled$2.8 million as ofJune 30, 2022 , compared to$11.6 million as ofDecember 31, 2021 . As ofJune 30, 2022 , we had a net loss of$8.8 million . We had cash used in operations of$3.1 million for the six months endedJune 30, 2022 . As ofJune 30, 2022 , we had an accumulated deficit of$364.2 million and stockholders' equity of$5.0 million . Our objective is to achieve cash generation as a business; however, there is no assurance that we will be able to achieve this objective. Additionally, other than the CNC Credit Agreement, which expiresMarch 26, 2023 , we have no committed source of funding from either debt or equity financings. Borrowings under the CNC Credit Agreement are dependent on, among other things, the level of our eligible accounts receivable We believe that given these factors, our current cash position and anticipated cash needs for continuing operating activities, there is substantial doubt about our ability to continue as a going concern without obtaining additional sources of financing. Our ability to operate as a going concern is contingent upon the consummation of the Transactions (see Note 2 of the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). Our future capital requirements and our ability to continue as a going concern is contingent on the consummation of the Transactions. There can be no assurance that we will be successful in consummating the Transactions, and if the Transactions are not consummated, we believe that we would have no alternative other than to liquidate or to seek protection under theU.S. bankruptcy laws. For information concerning our CNC Credit Agreement, see Note 9 included in the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.Net Cash (Used in) Provided by Operating Activities. Net cash used in operating activities in the six months endedJune 30, 2022 , of$3.1 million resulted primarily from a net loss of$8.8 million which was offset by a$3.0 million net decrease in net working capital, depreciation and amortization of$1.2 million , stock compensation expense of$1.0 million , amortization of right-of-use assets of$0.4 million and a$0.1 million change in deferred tax liabilities. Net cash provided by operating activities in the six months endedJune 30, 2021 , of$0.7 million resulted primarily from depreciation and amortization of$1.3 million , stock compensation expense of$0.9 million and the amortization of right-of-use assets of$0.5 million . Offsetting these non-cash charges was the forgiveness of the PPP loan of$1.4 million coupled with a$0.6 million net increase in net working capital.Net Cash Used in Investing Activities. Net cash used in investing activities was approximately$0.4 million in the six months endedJune 30, 2022 , was primarily related to purchases of property and equipment of$0.3 million coupled with$0.1 million paid in conjunction with the acquisition of CarZeus Net cash used in investing activities was approximately$0.8 million in the six months endedJune 30, 2021 , which primarily related to purchases of property and equipment and expenditures related to capitalized internal use software.Net Cash (Used in) Provided by Financing Activities. Net cash used in financing activities of$5.3 million during the six months endedJune 30, 2022 , primarily consisted of net borrowings on the Company's credit facility. Net cash provided by financing activities of$0.1 million during the six months endedJune 30, 2021 , primarily consisted of$0.2 million of proceeds from the exercise of common stock offset by$0.1 million of net borrowings on the credit facility coupled with payments made under the financing agreement. -24-
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