NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Operations
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. The Company assists consumers in multiple aspects of the vehicle transaction, including providing content and information helpful to their next vehicle acquisition. The Company has also assisted 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.
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 has also generated revenue through its used vehicle acquisition business by offering automotive consumers an option to sell their used vehicle outside of a dealership location through the Company’s wholly owned subsidiary, Tradein Expert, Inc., dba CarZeus. The Company resells these used vehicles indirectly to Dealers through wholesale auctions or through direct to 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. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on March 24, 2022. The Company has made its disclosures in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Company management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2021 Form 10-K.
References to amounts in the condensed consolidated financial statement sections are in thousands, except share and per share data, unless otherwise specified.
As of March 31, 2022, and December 31, 2021, restricted cash primarily consisted of pledged cash pursuant to the CIT Northbridge Credit LLC (“CNC Credit Agreement”) discussed in Note 11 of these Notes to Unaudited Condensed Consolidated Financial Statements.
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Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
During the three-month period ended March 31, 2022, the Company incurred a net loss of $4.3 million and had net cash flows used in operating activities of $2.3 million. On March 31, 2022, the Company had $3.8 million in cash and cash equivalents and an accumulated deficit of $359.7 million. Based on current operating and cash forecasts, the Company does not believe that it currently has sufficient cash to sustain operations for the entire remainder of 2022. Other than the CNC Credit Agreement, which expires March 26, 2023, the Company currently has 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 the Company’s eligible accounts receivable. Given these factors, management believes that there is substantial doubt about the Company’s ability to continue as a going concern for a period of one year after the date the financial statements are issued.
A Special Committee of the Company’s Board of Directors (“Special Committee”) has been created to explore strategic alternatives for the Company and will consider a full range of operational, financial, and other strategic alternatives (“Strategic Alternatives”). The Special Committee has retained Houlihan Lokey Capital, Inc. as its financial advisor to assist with this process. Strategic Alternatives that may be explored or evaluated as part of this process include, but are not limited to:
| ● | Continuing to seek debt or equity financing on terms and conditions acceptable to the Company; |
| ● | Evaluating potential sale/divestiture transactions, including a sale of the Company or its assets; |
| ● | Seeking partnering/licensing transactions; and |
| ● | Restructuring the Company’s debt and operations, including the possibility that the Company may seek protection under the U.S. Bankruptcy Code. |
The Company’s ability to continue to fund its operations for the entire remainder of 2022 is dependent upon Company management’s near-term operating plans to address the Company’s near-term cash and liquidity needs (“Near-Term Operating Plans”), which plans may include, but are not limited to:
| ● | Conducting a review of and reductions to the Company’s cost and expense structure, including reductions in employee expense (which may include furloughs and terminations); |
| ● | Working with current and potential vendors to decrease costs and expenses; |
| ● | Seeking bridge financing that may consist of debt, equity or a combination of the two; |
| ● | Suspending investments in growth strategies and the Company's transformation from a digital media company to a transaction-enabled matchmaker; |
| ● | Suspending capital expenditures; and |
| ● | Suspending, or reducing the scope of or ceasing some or all of the Company’s operations. Management has already determined that it will immediately move to suspend operations of its used vehicle acquisition business. |
The Company’s ability to continue as a going concern is contingent upon the successful execution of Strategic Alternatives and the Near-Term Operating Plans, but the Near-Term Operating Plans, may themselves have a material and adverse effect on the Company’s business, results of operations, financial condition, earnings per share, cash flow or the trading price of the Company’s stock (individually and collectively referred to as the Company’s “financial performance”). There can be no assurance that the Company will be successful in achieving either the Strategic Alternatives or Near-Term Operating Plans or that new financings or other transactions will be available to the Company on commercially acceptable terms, or at all. Additionally, any debt or equity financing that may be obtained may result in substantial shareholder dilution and could have a material and adverse impact on the Company’s financial performance.
The Special Committee and the Company’s management team, working with the Company’s financial, legal and other advisers, plan to proceed in a timely and orderly manner, but have not set a definitive timetable for completion of this process, nor has it made any decisions related to Strategic Alternatives at this time. The Company undertakes no obligation to provide further disclosure regarding developments or the status of the process, the Company’s efforts to pursue implementation of potential Strategic Alternatives or Near-Term Operating Plans, or a decision to seek bankruptcy protection under the U.S. Bankruptcy Code and does not intend to make such disclosure unless and until events warrant disclosure, the Company has filed for protection under the U.S. Bankruptcy Code, or further disclosure is legally required.
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3. Recent Accounting Pronouncements
The Company has reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a material impact to its condensed consolidated financial statements.
4. Revenue Recognition
Revenue is recognized upon transfer of 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 606, “Revenue from Contracts with Customers”, (“ASC 606”) contract assets or contract liabilities that arise from past performance but require a further performance before the obligation can be fully satisfied must be identified and recorded on the balance sheet until respective settlements have been met.
The Company has three main revenue sources – Lead Generation, Digital Advertising and Used Vehicle Sales. Accordingly, the Company recognizes revenue for each source as described below:
| ● | Lead Generation – paid by Dealers and Manufacturers participating in the Company’s Lead programs and are comprised of Lead transaction and/or monthly subscription fees. Lead generation is recognized in the period when service is provided. |
| ● | Digital Advertising – fees paid by Dealers, Manufacturers and third-party wholesale suppliers for (i) the Company’s click traffic program, (ii) display advertising on the Company’s websites and (iii) email and other direct marketing. Revenue is recognized in the period advertisements are displayed on the Company’s Websites or the period in which clicks have been delivered, as applicable. The Company recognizes revenue from the delivery of action-based advertisement (including email and other direct marketing) in the period in which a user takes the action for which the marketer contracted with the Company. For advertising revenue arrangements where the Company is not the principal, the Company recognizes revenue on a net basis. |
| ● | Used Vehicle Sales – Used vehicles acquired by the Company are predominately resold at wholesale auctions or direct to Dealers. Revenue from the sale of these vehicles is recognized upon transfer of ownership of the vehicle to the wholesale customer. |
Variable Consideration
Leads are generally sold with a right-of-return for services that do not meet customer requirements as specified by the relevant contract. Some leads are also contingent upon their subsequent conversion into vehicle sales which may require pricing adjustments. Rights-of-returns and lead conversions are estimable, and provisions for these estimates are recorded as a reduction in revenue by the Company in the period revenue is recognized, and thereby accounted for as variable consideration. The Company includes the allowance for customer credits in its net accounts receivable balances on the Company’s balance sheet at period end. The Company did not have an allowance for customer credits as of March 31, 2022. The allowance for customer credits approximated $27,000 as of December 31, 2021.
Contract Assets and Contract Liabilities
Unbilled Revenue
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing. From time to time, the Company may have balances on its balance sheet representing revenue that has been recognized by the Company upon satisfaction of performance obligations and earning a right to receive payment. These not-yet-invoiced receivable balances are driven by the timing of administrative transaction processing and are not indicative of partially complete performance obligations.
Deferred Revenue
The Company defers the recognition of revenue when cash payments are received or due in advance of satisfying the Company’s performance obligations, including amounts which are refundable. Such activity is not typical for the Company. The Company had no deferred revenue included in its condensed consolidated balance sheets as of March 31, 2022, and December 31, 2021. Payment terms and conditions can vary by contract type. Generally, payment terms within the Company’s customer contracts include a requirement of payment within 30 to 60 days from date of invoice. Typically, customers make payments after receipt of invoice for billed services, and less typically, in advance of rendered services.
The Company has not made any significant changes in applying ASC 606 during the three months ended March 31, 2022.
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Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by revenue source and has determined that disaggregating revenue into these categories sufficiently depicts the differences in the nature, amount, timing and uncertainty of revenue streams.
The following table summarizes revenue from contracts with customers, disaggregated by revenue source, for the three months ended March 31, 2022, and 2021. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Lead generation | | $ | 10,576 | | | $ | 14,186 | |
Digital advertising | | | | | | | | |
Clicks | | | 3,656 | | | | 2,932 | |
Display and other advertising | | | 481 | | | | 762 | |
Total digital advertising | | | 4,137 | | | | 3,694 | |
| | | | | | | | |
Used vehicle sales | | | 4,351 | | | | — | |
Total revenues | | $ | 19,064 | | | $ | 17,880 | |
5. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net income (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 methods, during the period. Potential common shares consist of unvested restricted stock, common shares issuable upon the exercise of stock options and the exercise of warrants.
The following are the share amounts utilized to compute the basic and diluted net income (loss) per share for the three months ended March 31, 2022, and 2021, respectively:
|
|
Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Basic Shares: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
13,843,260 |
|
|
|
13,253,050 |
|
Weighted average unvested restricted stock |
|
|
(548,463 |
) |
|
|
(75,944 |
) |
Basic Shares |
|
|
13,294,797 |
|
|
|
13,177,106 |
|
|
|
|
|
|
|
|
|
|
Diluted Shares: |
|
|
|
|
|
|
|
|
Basic shares |
|
|
13,294,797 |
|
|
|
13,177,106 |
|
Weighted average dilutive securities |
|
|
— |
|
|
|
140,281 |
|
Diluted Shares |
|
|
13,294,797 |
|
|
|
13,317,387 |
|
For the three months ended March 31, 2022, the Company’s basic and diluted net loss per share are the same because the Company generated a net loss for the period. As a result, potentially dilutive securities are excluded from diluted net loss per share because they have an anti-dilutive impact. For the three months ended March 31, 2021, weighted average dilutive securities included dilutive options and restricted stock awards.
For the three months ended March 31, 2022, and 2021, 0.1 million and 4.4 million, respectively, of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share.
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6. Share-Based Compensation
Share-based compensation expense is included in costs and expenses in the unaudited condensed consolidated statements of operations as follows:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Share-based compensation expense: | | | | | | | | |
Sales and marketing | | $ | 50 | | | $ | 30 | |
Technology support | | | 5 | | | | 11 | |
General and administrative | | | 460 | | | | 458 | |
Share-based compensation costs | | $ | 515 | | | $ | 499 | |
Service-Based Options. The Company granted the following service-based options for the three months ended March 31, 2022, and 2021, respectively:
| | Three Months Ended March 31, | |
| | 2021 | | | 2020 | |
| | | | | | | | |
Number of service-based options granted | | | 500,000 | | | | 765,000 | |
Weighted average grant date fair value | | $ | 2.09 | | | $ | 1.82 | |
Weighted average exercise price | | $ | 2.94 | | | $ | 2.60 | |
These options are valued using a Black-Scholes option pricing model. Options issued to employees generally vest one-third on the first anniversary of the grant date and ratably over twenty-four months thereafter. The vesting of these awards is contingent upon the employee’s continued employment with the Company during the vesting period and vesting may be accelerated under certain conditions, including upon a change in control of the Company and, in the case of certain officers of the Company, termination of employment by the Company without cause and voluntary termination of employment by such officer with good reason. Options issued to non-employee directors generally vest monthly over a 12-month period and vesting may be accelerated under certain conditions, including upon a change in control of the Company and upon the termination of service as a director of the Company in the event such termination of service is due to resignation, failure to be re-elected, failure to be nominated for re-election, or without removal for cause.
The grant date fair value of stock options granted during these periods was estimated using the following weighted average assumptions:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
Dividend yield | | | — | | | | — | |
Volatility | | | 94.8 | % | | | 94.4 | % |
Risk-free interest rate | | | 1.6 | % | | | 0.7 | % |
Expected life (years) | | | 4.8 | | | | 4.8 | |
Stock option exercises. The following stock options were exercised during the three months ended March 31, 2022, and 2021, respectively:
| | Three Months Ended March 31, | |
| | 2021 | | | 2020 | |
| | | | | | | | |
Number of stock options exercised | | | — | | | | 54,705 | |
Weighted average exercise price | | $ | — | | | $ | 2.30 | |
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A summary of the Company’s outstanding stock options as of March 31, 2022, and changes during the three months then ended is presented below:
| | Number of Options | | | Weighted Average Exercise Price per Share | | | Weighted Average Remaining Contractual Term | | | Aggregate Intrinsic Value | |
| | | | | | | | | | (years) | | | (thousands) | |
Outstanding at December 31, 2021 | | | 4,381,348 | | | $ | 3.85 | | | | 4.3 | | | $ | 1,662 | |
Granted | | | 500,000 | | | | 2.94 | | | | — | | | | — | |
Exercised | | | — | | | | — | | | | — | | | | — | |
Forfeited or expired | | | (185,826 | ) | | | 4.58 | | | | — | | | | — | |
Outstanding at March 31, 2022 | | | 4,695,522 | | | $ | 3.73 | | | | 4.3 | | | $ | 177 | |
Vested and expected to vest at March 31, 2022 | | | 4,541,629 | | | $ | 3.76 | | | | 4.3 | | | $ | 175 | |
Exercisable at March 31, 2022 | | | 3,214,119 | | | $ | 4.15 | | | | 3.6 | | | $ | 141 | |
Restricted Stock Awards. The Company granted an aggregate of 575,000 and 220,000 restricted stock awards (“RSAs”) to certain executive officers of the Company during the first quarter of 2022 and 2021, respectively. The RSAs are service-based and the forfeiture restrictions lapse with respect to one-third of the restricted stock on each of the first, second and third anniversaries of the date of the award. Lapsing of the forfeiture restrictions may be accelerated in the event of a change in control of the Company and will accelerate upon the death or disability of the holder of the RSAs.
7. Selected Balance Sheet Accounts
Property and Equipment, net. Property and equipment consist of the following:
| | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | |
Computer software and hardware | | $ | 5,027 | | | $ | 5,008 | |
Capitalized internal use software | | | 8,378 | | | | 8,362 | |
Furniture and equipment | | | 1,105 | | | | 1,105 | |
Leasehold improvements | | | 883 | | | | 883 | |
Construction in progress | | | 1,766 | | | | 1,478 | |
| | | 17,159 | | | | 16,836 | |
Less—Accumulated depreciation and amortization | | | (13,259 | ) | | | (12,983 | ) |
Property and Equipment, net | | $ | 3,900 | | | $ | 3,853 | |
Intangible Assets, net. Intangible assets, net consisted of the following (in thousands):
| | | | | | March 31, 2022 | | | December 31, 2021 | |
Definite-Lived Intangible Asset | | Estimated Useful Life (Years) | | | Gross | | | Accumulated Amortization | | | Net | | | Gross | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trademarks/trade names/licenses/ domains | | | 3 | – | 7 | | | $ | 16,589 | | | $ | (16,393 | ) | | $ | 196 | | | $ | 16,589 | | | $ | (16,372 | ) | | $ | 217 | |
Developed technology | | | 5 | – | 7 | | | | 8,955 | | | | (8,411 | ) | | | 544 | | | | 8,955 | | | | (8,138 | ) | | | 817 | |
| | | | | | $ | 25,544 | | | $ | (24,804 | ) | | $ | 740 | | | $ | 25,544 | | | $ | (24,510 | ) | | $ | 1,034 | |
| | | March 31, 2022 | | | December 31, 2021 | |
Indefinite-Lived Intangible Asset | Estimated Useful Life | | Gross | | | Accumulated Amortization | | | Net | | | Gross | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Domain | Indefinite | | $ | 2,600 | | | $ | — | | | $ | 2,600 | | | $ | 2,600 | | | $ | — | | | $ | 2,600 | |
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The Company amortizes specifically identified definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets.
Amortization expense is included in “Cost of revenues – lead generation and digital advertising” and “Depreciation and amortization” in the Unaudited Condensed Consolidated Statements of Operations. Amortization expense was $0.3 million and $0.4 million for the three months ended March 31, 2022, and 2021, respectively.
Amortization expense for the remainder of the year and for future years is as follows:
Year | | Amortization Expense | |
| | | | |
2022 (remaining nine months) | | $ | 609 | |
2023 | | | 86 | |
2024 | | | 45 | |
| | $ | 740 | |
Accrued Expenses and Other Current Liabilities. Accrued expenses and other current liabilities consisted of the following:
| | March 31, 2022 | | | December 31, 2021 | |
| | | | | | | | |
Accrued employee-related benefits | | $ | 1,517 | | | $ | 1,782 | |
Other accrued expenses and other current liabilities: | | | | | | | | |
Other accrued expenses | | | 289 | | | | 201 | |
Amounts due to customers | | | 64 | | | | 77 | |
Other current liabilities | | | 364 | | | | 332 | |
Total other accrued expenses and other current liabilities | | | 717 | | | | 610 | |
| | | | | | | | |
Total accrued expenses and other current liabilities | | $ | 2,234 | | | $ | 2,392 | |
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 and accounts receivable. Cash and cash equivalents are primarily maintained with high credit quality financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits.
Accounts receivable are primarily derived from fees billed to Dealers and Manufacturers. The Company generally requires no collateral to support its accounts receivables and maintains an allowance for bad debts for potential credit losses.
The Company has a concentration of credit risk with its accounts receivable balances. Approximately 53%, or $5.8 million, of gross accounts receivable at March 31, 2022, and approximately 30% of total revenues for the quarter ended March 31, 2022, are related to Autodata Solutions, Urban Science Applications (which represents several Manufacturer programs) and Carat Detroit (which represents General Motors).
| | % of | | | % of | |
Customers | | Revenue | | | Accounts Receivable | |
Autodata Solutions | | | 9 | % | | | 19 | % |
Urban Science Applications | | | 11 | % | | | 18 | % |
Carat Detroit | | | 10 | % | | | 16 | % |
Total | | | 30 | % | | | 53 | % |
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During 2021, approximately 59%, or $8.3 million, of gross accounts receivable at March 31, 2021, and approximately 41% of total revenues for the quarter ended March 31, 2021, are related to Urban Science Applications, Carat, Autodata Solutions and Ford Direct.
| | % of | | | % of | |
Customers | | Revenue | | | Accounts Receivable | |
Carat Detroit | | | 11 | % | | | 17 | % |
Urban Science Applications | | | 10 | % | | | 16 | % |
Autodata Solutions | | | 10 | % | | | 16 | % |
Ford Direct | | | 10 | % | | | 10 | % |
Total | | | 41 | % | | | 59 | % |
8. Leases
The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. The Company has lease arrangements for certain equipment and facilities that typically have original terms not exceeding five years and, in some cases, contain automatic renewal provisions that provide for multiple year renewal terms unless either party, prior to the then-expiring term, notifies the other party of the intention not to renew the lease. The Company’s lease terms may also include options to terminate the lease when it is reasonably certain that the Company will exercise such options. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. The ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Lease Liabilities. Lease liabilities as of March 31, 2022, and December 31, 2021, respectively, consist of the following:
| | March 31, 2022 | | | December 31, 2021 | |
Current portion of lease liabilities | | $ | 729 | | | $ | 781 | |
Long-term lease liabilities, net of current portion | | | 1,303 | | | | 1,432 | |
Total lease liabilities | | $ | 2,032 | | | $ | 2,213 | |
The Company’s aggregate lease maturities as of March 31, 2022, are as follows:
Year | | | | |
2022 (remaining nine months) | | $ | 630 | |
2023 | | | 831 | |
2024 | | | 554 | |
2025 | | | 204 | |
Total minimum lease payments | | | 2,219 | |
Less imputed interest | | | (187 | ) |
Total lease liabilities | | $ | 2,032 | |
Rent expense included in operating expenses and cost of revenue was $0.3 million for the three months ended March 31, 2022, with a weighted-average remaining lease term of 2.7 years and a weighted-average discount rate of 6.28%. Rent expense included in operating expenses and cost of revenue was $0.3 million for the three months ended March 31, 2021, with a weighted-average remaining lease term of 2.8 years and a weighted-average discount rate of 6.25%.
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9. Commitments and Contingencies
Employment Agreements
The Company has employment agreements and severance benefits agreements with certain key employees. A number of these agreements require severance payments and continuation of certain insurance benefits in the event of a termination of the employee’s employment by the Company without cause or by the employee for good reason (as defined in these agreements). Stock option agreements and restricted stock award agreements with some key employees provide for acceleration of vesting of stock options and lapsing of forfeiture restrictions on restricted stock in the event of a change in control of the Company, upon termination of employment by the Company without cause or by the employee for good reason, or upon the employee’s death or disability.
Litigation
From time to time, the Company may be involved in litigation matters arising from the normal course of its business operations. Such 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 its business, results of operations, financial condition, and cash flows. The Company assesses the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. The Company records a loss contingency when an unfavorable outcome is probable, and the amount of the loss can be reasonably estimated. The amount of allowances required, if any, for these contingencies is determined after analysis of each individual case. The amount of allowances may change in the future if there are new material developments in each matter. Gain contingencies are not recorded until all elements necessary to realize the revenue are present. Any legal fees incurred in connection with a contingency are expensed as incurred.
10. Income Taxes
On an interim basis, the Company estimates what its anticipated annual effective tax rate will be and records a quarterly income tax provision in accordance with the estimated annual rate, adjusted accordingly by the tax effect of certain discrete items that arise during the quarter. As the year progresses, the Company refines its estimated annual effective tax rate based on actual year-to-date results. This process can result in significant changes to the Company's estimated effective tax rate. When such activity occurs, the income tax provision is adjusted during the quarter in which the estimates are refined and adjusted. As such, the Company’s year-to-date tax provision reflects the estimated annual effective tax rate. Therefore, these changes along with the adjustments to the Company’s deferred taxes and related valuation allowance may create fluctuations in the overall effective tax rate from period to period.
Due to overall cumulative losses incurred in recent years, the Company maintained a valuation allowance against its deferred tax assets as of March 31, 2022 and December 31, 2021. The Company’s effective tax rate for the three months ended March 31, 2022, differed from the U.S. federal statutory rate primarily due to operating losses that receive no tax benefit as a result of a valuation allowance recorded against the Company's existing tax assets. The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.2 million as of March 31, 2022, all of which, if subsequently recognized, would have affected the Company's tax rate.
As of March 31, 2022 and December 31, 2021, there were no accrued interest and penalties related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense, and the accrued interest and penalties are included in deferred and other long-term liabilities in the Company’s unaudited condensed consolidated balance sheets. There were no material interest or penalties included in income tax expense for the three months ended March 31, 2022, and 2021.
The Company is subject to taxation in the U.S. and in various foreign and state jurisdictions. Due to expired statutes of limitation, the Company’s federal income tax returns for years prior to calendar year 2018 and 2017, respectively are not subject to examination by the U.S. Internal Revenue Service (except for the use of tax losses generated prior to 2018 that may be used to offset taxable income in subsequent years). Generally, for the majority of state jurisdictions where the Company does business, periods prior to calendar year 2017 are no longer subject to examination. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
In response to the coronavirus pandemic, the 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 (“TCJA”). Corporate taxpayers may carryback net operating losses (“NOL’s”) originating during 2018 through 2020 for up to five years, which was not previously allowed under the TCJA. The CARES Act in part also 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 (“Employee Retention Credit”). 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 IRS.
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11. Debt
On March 26, 2020, the Company entered into a $20.0 million Loan, Security and Guarantee Agreement (“CNC Credit Agreement”) with CIT Northbridge Credit LLC, as agent (the “Agent”), and the Company’s U.S. subsidiaries. The CNC Credit Agreement provides for a $20.0 million revolving credit facility with borrowings subject to availability based primarily on limits of 85% of eligible billed accounts receivable and 75% against eligible unbilled accounts receivable. The obligations under the CNC Credit Agreement are guaranteed by the Company’s U.S. subsidiaries and secured by a first priority lien on all of the Company’s and the Company’s U.S. subsidiaries’ tangible and intangible assets.
As of March 31, 2022, the Company had $9.1 million outstanding under the CNC Credit Agreement and approximately $0.4 million of net availability. To increase the borrowing base sufficient enough to meet the minimum borrowing usage requirement, the Company on June 29, 2020, placed $3.0 million into a restricted cash account that provided for greater availability under the CNC Credit Agreement. The Company placed an additional $1.0 million into the same restricted cash account in December 2020. The Company can borrow up to 97.5% of the total restricted cash amount. The restricted cash accrues interest at a variable rate currently averaging 0.25% per annum.
On July 30, 2021, the Company and the Agent entered into a Second Amendment to and Consent Under Loan, Security and Guarantee Agreement (“Credit Facility Second Amendment”). The Credit Facility Second Amendment provides for: (i) the Agent’s and lenders’ consent to the CarZeus Purchase Transaction; (ii) the inclusion of the Tradein Expert as a guarantor, obligor, and pledgor under the Credit Facility Agreement upon the satisfaction of certain conditions; and (iii) a new permitted use of borrowings under the Credit Facility Agreement that will allow Tradein Expert to acquire used vehicle inventories, which this new use of borrowings is limited in the amount of: (a) $1.5 million prior to Tradein Expert becoming a guarantor, obligor, and pledgor under the Credit Facility Agreement; and (b) $3.0 million subsequent to Tradein Expert becoming a guarantor and obligor under the Credit Facility Agreement, which occurred upon the Company and Agent entering into a Joinder Under Loan, Security and Guarantee Agreement and Pledge Agreement Supplement dated as of August 12, 2021.
On September 13, 2021, the Company entered into a Third Amendment to Loan, Security and Guarantee Agreement (“Credit Facility Third Amendment”) with CNC to amend the CNC Credit Agreement to provide for, among other changes, a change in the available borrowing base calculation for the acquisition of used motor vehicle inventory by the Tradein Expert from up to (A) the lesser of (i) $3,000,000.00 and (ii) 85% of the value of eligible accounts receivable arising from the sale of used motor vehicles by Tradein Expert to (B) the lesser of (i) $3,000,000 and (ii) eighty percent (80%) of the purchase price (subject to certain limitations set forth in the Credit Facility Third Amendment) for eligible vehicles (as defined in the Credit Facility Third Amendment) in Tradein Expert’s used motor vehicle inventory. The Credit Facility Third Amendment also reduces the minimum borrowing usage requirement from fifty percent (50%) to forty percent (40%) of the aggregate revolver amount, which is a minimum borrowing usage requirement reduction from $10,000,000 to $8,000,000.
Financing costs related to the CNC Credit Agreement, net of accumulated amortization, of approximately $0.2 million, have been deferred over the initial term of the loan and are included in other assets as of March 31, 2022. The interest rate per annum applicable to borrowings under the CNC Credit Agreement is the LIBO plus 5.5%. The LIBO Rate is equal to the greater of (i) 1.75%, and (ii) the rate determined by the Agent to be equal to the quotient obtained by dividing (1) the LIBO Base Rate (i.e., the rate per annum determined by Agent to be the offered rate that appears on the applicable Bloomberg page) for the applicable LIBOR Loan for the applicable interest period by (2) one minus the Eurodollar Reserve Percentage (i.e., the reserve percentage in effect under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement with respect to Eurocurrency funding for the applicable LIBOR Loan for the applicable interest period). If adequate and reasonable means do not exist for ascertaining or the LIBOR rate is no longer available, the Company and the Agent may amend the CNC Credit Agreement to replace LIBOR with an alternate benchmark rate. If no LIBOR successor rate is determined, the obligation of the lenders to make or maintain LIBOR loans will be suspended and the LIBO Base Rate component will no longer be utilized in determining the base rate.
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If, due to any circumstance affecting the London interbank market, the Agent determines that adequate and fair means do not exist for ascertaining the LIBO Rate on any applicable date (and such circumstances that are identified in the next two paragraphs below are not covered or governed by such provisions below), then until the Agent determines that such circumstance no longer exists, the obligation of lenders to make LIBOR Loans will be suspended and, if requested by the Agent, the Company must promptly, at its option, either (i) pay all such affected LIBOR Loans or (ii) convert such affected LIBOR Loans into loans that bear reference to the Base Rate plus the Applicable Margin.
If the Agent determines that for any reason (i) dollar deposits are not being offered to banks in the London interbank Eurodollar market for the applicable loan amount or applicable interest period, (ii) adequate and reasonable means do not exist for determining the LIBO Rate for the applicable interest period, or (iii) LIBOR for the applicable interest period does not adequately and fairly reflect the cost to the lenders of funding a loan, then the lenders’ obligation to make or maintain LIBOR Loans will be suspended to the extent of the affected LIBOR Loan or interest period until all such loans are converted to loans bearing interest at the Base Rate (as defined below) plus the Applicable Margin (as specified below).
However, if Agent determines that (i) adequate and reasonable means do not exist for ascertaining LIBOR for any requested interest period and such circumstances are unlikely to be temporary; (ii) the administrator of the LIBOR screen rate or a governmental authority having jurisdiction over the Agent has made a public statement identifying a specific date after which LIBOR or the LIBOR screen rate shall no longer be made available, or used for determining the interest rate of loans (“Scheduled Unavailability Date”); or (iii) syndicated loans currently being executed, or that include language similar to that contained in this paragraph are being executed or amended to incorporate or adopt a new benchmark interest rate to replace LIBOR, then Agent and the Company may amend the CNC Credit Agreement to replace LIBOR with an alternate benchmark rate (“LIBOR Successor Rate”) and any such amendment will become effective unless lenders holding more than 50% in value of the loans or commitments under the CNC Credit Agreement do not accept such amendment. If no LIBOR Successor Rate has been determined and the circumstances under clause (i) above exist or the Scheduled Unavailability Date has occurred, (x) the obligation of lenders to make or maintain LIBOR Loans will be suspended (to the extent of the affected LIBOR Loans or interest periods), and (y) the LIBO Base Rate component will no longer be utilized in determining the Base Rate. The Base Rate for any day is a fluctuating rate per annum equal to the highest of: (i) the Federal Funds Rate plus 1/2 of 1%; (ii) the rate of interest in effect for such day as publicly announced from time to time by JPMorgan Chase Bank, N.A. as its “prime rate” in effect for such day; or (iii) the most recently available LIBO Base Rate (as adjusted by any minimum LIBO Rate floor) plus 1%. The Applicable Margin is equal to 5.50%. The CNC Credit Agreement expires on March 26, 2023.
On April 16, 2020, the Company received a Paycheck Protection Program loan (“PPP Loan”) in the amount of approximately $1.38 million from PNC pursuant to the PPP administered by the United States Small Business Administration (“SBA”) under the CARES Act. In connection with the receipt of the PPP Loan, on May 18, 2020, the Company and the Agent entered into the First Amendment to Loan, Security and Guarantee Agreement to accommodate the Company’s receipt of the PPP Loan.
On January 13, 2021, the Company received a notice from PNC Bank regarding forgiveness of the loan in the principal amount of approximately $1.38 million that was made to the Company pursuant to the SBA PPP under the CARES Act of 2020. The notice states that SBA has remitted to PNC a loan forgiveness payment equal to $1.39 million, which constitutes full payment and forgiveness of the principal amount of the PPP loan and all accrued interest. In January 2021, the Company recognized the forgiveness of the PPP Loan as other income in the Consolidated Statements of Operations.
On June 10, 2020, the Company entered into a thirty-six-month equipment financing agreement (“Financing Agreement”) with Dimension Funding LLC. The Financing Agreement provides for an advance payment of approximately $170,000 to be used to secure furniture and fixtures for the Company’s new office location in Irvine, California. Payments of approximately $5,300 (inclusive of imputed interest) are made monthly under the Financing Agreement. As of March 31, 2022, the Company has paid approximately $0.1 million. The Financing Agreement will mature on December 31, 2022.
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The Company’s future commitments under the Financing Agreement as of March 31, 2022, are as follows:
Year | | | | |
2022 (remaining nine months) | | | 48 | |
Total financing debt | | $ | 48 | |
12. Segment Reporting
As a result of the CarZeus Purchase Transaction on August 1, 2021, the Company determined that 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. Revenues generated by the automotive digital marketing segment primarily represent lead generation and digital advertising, while revenues generated by the used vehicle acquisition and resale segment primarily represent used car vehicle sales.
The segment performance is reviewed by the chief executive officer at the operating income (loss) level. The following table provides segment reporting of the Company for the three months ended March 31, 2022:
Three Months Ended March 31, 2022 | |
(In thousands) | | Automotive digital marketing | | | Used vehicle acquisition & resale | | | Total | |
Revenues | | $ | 14,713 | | | $ | 4,351 | | | $ | 19,064 | |
Cost of sales | | | 10,954 | | | | 4,206 | | | | 15,160 | |
Gross profit | | | 3,759 | | | | 145 | | | | 3,904 | |
Operating loss | | | (3,649 | ) | | | (257 | ) | | | (3,906 | ) |
Total assets | | | 28,236 | | | | 1,401 | | | | 29,637 | |