Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

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. 

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.

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.

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.

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		13,144,314
Weighted average common shares repurchased		—		—
Basic Shares		13,299,824		13,144,314
Diluted Shares:
Basic Shares		13,299,824		13,144,314
Weighted average dilutive securities		—		—
Dilutive Shares		13,299,824		13,144,314

For the years ended December 31, 2021 and 2020, basic and diluted weighted average shares are the same as the Company generated a net loss for each period and potentially dilutive securities are excluded because they have an anti-dilutive impact.  Potentially dilutive securities representing approximately 267,000 and 6,000 shares of common stock for the years ended December 31, 2021 and 2020, respectively.

Share-Based Compensation.  The Company grants stock-based awards (“Awards”) primarily in the form of stock options and restricted stock awards (“RSAs”) under several of its stock-based compensation Plans (the “Plans”). The Company recognizes share-based compensation based on the Awards’ fair value, net of estimated forfeitures on a straight-line basis over the requisite service periods, which is generally over the Awards’ respective vesting period, or on an accelerated basis over the estimated performance periods for stock options with performance conditions. See Note 9 for more information.

Restricted stock fair value is measured on the grant date based on the quoted market price of the Company’s common stock, and the stock option fair value is estimated on the grant date using the Black-Scholes option pricing model based on the underlying common stock closing price as of the date of grant, the expected term, stock price volatility and risk-free interest rates.

Business Segment. 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.

Advertising Expense.  Advertising costs are expensed in the period incurred and the majority of advertising expense is recorded in sales and marketing expense. Advertising expense for the years ended December 31, 2021 and 2020 was $0.8 million and $0.3 million, respectively.

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 consolidated financial statements.