UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended SeptemberJune 30, 20182019
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to .
Commission file number 1-34761
AutoWeb, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | | 33-0711569 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | | |
18872 MacArthur Boulevard, Suite 200, Irvine, California | | 92612 |
(Address of principal executive offices) | | (Zip |
400 North Ashley Drive, Suite 300
Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
(949) 225-4500
(Registrant’s telephone number, including area code)code:(949) 225-4500
18872 MacArthur Boulevard, Suite 200
Irvine, California 92612
(Former Address, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, par value $0.001 per share | AUTO | The Nasdaq Capital Market |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]☐ | Accelerated filer [X]☐ |
Non-accelerated filer [ ]☐ | Smaller reporting company [X] ☒ |
| | Emerging growth company [ ]☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
As of NovemberAugust 5, 2018,2019, there were 12,948,950 13,146,831 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.
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PARTPART I. FINANCIALFINANCIAL INFORMATION
Item 1. Financial Statements
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except share and per-share data)
| | | | |
| Assets | | |
| Current assets: | | |
| Cash and cash equivalents | $15,824 | $24,993 | $1,431 | $13,600 |
| Short-term investment | 257 | 254 | |
| Accounts receivable, net of allowances for bad debts and customer credits of $615 and $892 at September 30, 2018 and December 31, 2017, respectively | 25,267 | 25,911 | |
| Restricted cash | | 5,016 | — |
| Accounts receivable, net of allowances for bad debts and customer credits of $553 and $566 at June 30, 2019 and December 31, 2018, respectively | | 23,331 | 26,898 |
Prepaid expenses and other current assets | 1,268 | 1,805 | 1,655 | 1,245 |
| Total current assets | 42,616 | 52,963 | 31,433 | 41,743 |
| Property and equipment, net | 3,614 | 4,311 | 3,405 | 3,181 |
| Investments | — | 100 | |
| Right-of-use assets | | 3,301 | — |
| Intangible assets, net | 13,487 | 29,113 | 9,291 | 11,976 |
| Goodwill | — | 5,133 | |
| Long-term deferred tax asset | — | 692 | |
| 853 | 601 | 819 | 516 |
| Total assets | $60,570 | $92,913 | 48,249 | 57,416 |
Liabilities and Stockholders’ Equity | | |
| Current liabilities: | | |
| Accounts payable | $10,386 | $7,083 | 15,627 | 17,572 |
| Accrued employee-related benefits | 2,921 | 2,411 | 2,391 | 3,125 |
| Other accrued expenses and other current liabilities | 7,983 | 7,252 | 2,064 | 2,204 |
| Current portion of lease liabilities | | 1,552 | — |
Current convertible note payable | 1,000 | — | — | 1,000 |
| Total current liabilities | 22,290 | 16,746 | 21,634 | 23,901 |
| Convertible note payable | — | 1,000 | |
Borrowings under revolving credit facility | — | 8,000 | |
| Lease liabilities, net of current portion | | 1,894 | — |
| Total liabilities | 22,290 | 25,746 | 23,528 | 23,901 |
| Commitments and contingencies (Note 11) | | |
| Commitments and contingencies (Note 10) | | — |
| Stockholders’ equity: | | |
| Preferred stock, $0.001 par value, 11,445,187 shares authorized | —
| |
| Series A Preferred stock, none issued and outstanding | — | — |
| Common stock, $0.001 par value; 55,000,000 shares authorized, and 12,948,950 and 13,059,341 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | 13 | |
| Common stock, $0.001 par value; 55,000,000 shares authorized and 13,146,831 and 12,960,450 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | 13 |
| Additional paid-in capital | 360,698 | 356,054 | 362,737 | 361,218 |
| (322,431) | (288,900) | (338,029) | (327,716) |
Total stockholders’ equity | 38,280 | 67,167 | 24,721 | 33,515 |
| Total liabilities and stockholders’ equity | $60,570 | $92,913 | $48,249 | $57,416 |
| | | |
See accompanying notes to unaudited condensed consolidated condensed financial statements.
UNAUDITED CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)LOSS
(Amounts in thousands, except per-share data)
| | Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | |
| | | | | | | | | |
| | | |
| Revenues: | | |
| Lead fees | $24,986 | $27,711 | $71,277 | $83,149 | $21,691 | $22,211 | $47,389 | $46,291 |
| Advertising | 6,606 | 8,946 | 21,643 | 24,914 | 5,432 | 6,950 | 11,310 | 15,037 |
| 103 | 215 | 416 | 741 | 19 | 131 | 47 | 313 |
| Total revenues | 31,695 | 36,872 | 93,336 | 108,804 | 27,142 | 29,292 | 58,746 | 61,641 |
| 26,278 | 25,786 | 74,702 | 74,171 | 21,758 | 23,765 | 47,605 | 48,423 |
Cost of revenues – impairment | 9,014 | — | 9,014 | — | |
| Gross (loss) profit | (3,597) | 11,086 | 9,620 | 34,633 | |
| Gross profit | | 5,384 | 5,527 | 11,141 | 13,218 |
| Operating expenses: | | |
| Sales and marketing | 3,333 | 3,692 | 10,096 | 10,684 | 2,956 | 3,052 | 5,834 | 6,764 |
| Technology support | 4,303 | 3,141 | 10,653 | 9,582 | 2,182 | 2,965 | 4,962 | 6,351 |
| General and administrative | 3,639 | 2,818 | 11,980 | 9,040 | 4,026 | 3,765 | 8,316 | 8,340 |
| Depreciation and amortization | 1,172 | 1,192 | 3,495 | 3,623 | 1,201 | 1,163 | 2,440 | 2,323 |
| — | 5,133 | —
| — | 5,133 |
Long-lived asset impairment | 1,968 | — | 1,968 | — | |
| Total operating expenses | 14,415 | 10,843 | 43,325 | 32,929 | 10,365 | 10,945 | 21,552 | 28,911 |
| | | |
| Operating (loss) income | (18,012) | 243 | (33,705) | 1,704 | |
| Operating (loss) | | (4,981) | (5,418) | (10,411) | (15,693) |
Interest and other income (expense), net | (24) | (93) | 178 | (289) | 33 | 201 | 103 | 201 |
| (Loss) Income before income tax provision | (18,036) | 150 | (33,527) | 1,415 | |
| Loss before income tax provision | | (4,948) | (5,217) | (10,308) | (15,492) |
| — | 81 | 4 | 539 | 5 | — | 5 | 4 |
| Net (loss) income and comprehensive (loss) income | $(18,036) | $69 | $(33,531) | $876 | |
| Net loss and comprehensive loss | | $(4,953) | $(5,217) | $(10,313) | $(15,496) |
| | | |
| Basic (loss) earnings per common share | $(1.41) | $0.01 | $(2.64) | $0.08 | |
| Basic loss per common share | | $(0.38) | $(0.41) | $(0.79) | $(1.22) |
| | | |
| Diluted (loss) earnings per common share | $(1.41) | $0.01 | $(2.64) | $0.07 | |
| Diluted loss per common share | | $(0.38) | $(0.41) | $(0.79) | $(1.22) |
| | | |
See accompanying notes to unaudited condensed consolidated condensed financial statements.
UNAUDITED CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
(Amounts in thousands)thousands, except share data)
| | Nine Months Ended September 30, |
| | | |
| Cash flows from operating activities: | | |
Net (loss) income and comprehensive (loss) income | $(33,531) | $876 |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | |
| Depreciation and amortization | 6,534 | 5,499 |
| Goodwill impairment | 5,133 | — |
| Intangible asset impairment | 9,014 | — |
| Provision for bad debts | 216 | 294 |
| Provision for customer credits | 177 | 29 |
| Share-based compensation | 4,365 | 2,918 |
| Gain on investment | (25) | — |
| Loss on disposal of assets | — | 7 |
| Long-lived asset impairment | 1,968 | — |
| Change in deferred tax asset | 692 | 119 |
| Changes in assets and liabilities: | | |
| Accounts receivable | 251 | 5,808 |
| Prepaid expenses and other current assets | 532 | (392) |
| Other assets | (615) | 132 |
| Accounts payable | 3,303 | 290 |
Accrued expenses and other current liabilities | 1,243 | (3,112) |
Net cash (used in) provided by operating activities | (743) | 12,468 |
| Cash flows from investing activities: | | |
| Purchases of property and equipment | (828) | (1618) |
| Purchase of intangible asset | —
| (600)
|
Proceeds from sale of investment
| 125 | — |
Net cash used in investing activities | (703) | (2,218) |
| Cash flows from financing activities: | | |
| Payments on term loan borrowings | — | (3,938) |
| Payment on revolving credit facility | (8,000) | — |
| Repurchase of common stock | — | (1,196) |
| Proceeds from issuance of common stock | 200 | — |
Proceeds from exercise of stock options | 77 | 1,068 |
Net cash used in financing activities | (7,723) | (4,066) |
| Net (decrease) increase in cash and cash equivalents | (9,169) | 6,184 |
Cash and cash equivalents, beginning of period | 24,993 | 38,512 |
| Cash and cash equivalents, end of period | $15,824 | $44,696 |
| | | |
| Supplemental disclosure of cash flow information: | | |
| Cash paid for income taxes | $— | $445 |
| Cash paid for interest | $103 | $648 |
Three Months Ended June 30, 2018 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| Balance at March 31, 2018 | $12,896,225 | 13 | — | $— | $357,754 | $(299,179) | $58,588 |
| Share-based compensation | — | — | — | — | 943 | — | 943 |
| Issuance of common stock upon exercise of stock options | 750 | — | — | — | 1 | — | 1 |
| Cancellation of restricted stock | (10,000) | — | — | — | — | — | — |
| Issuance of common stock | 60,975 | — | — | — | 200 | — | 200 |
| Net loss | — | — | — | — | — | (5,217) | (5,217) |
| Balance at June 30, 2018 | 12,947,950 | 13 | — | $— | $358,898 | $(304,396) | $54,515 |
See accompanying notes to unaudited consolidated condensed financial statements.| Three Months Ended June 30, 2019 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| Balance at March 31, 2019 | $13,116,462 | 13 | — | $— | $362,076 | $(333,076) | $29,013 |
| Share-based compensation | — | — | — | — | 560 | — | 560 |
| Issuance of common stock upon exercise of stock options | 57,036 | — | — | — | 101 | — | 101 |
| Cancellation of restricted stock | (26,667) | — | — | — | — | — | — |
| Net loss | — | — | — | — | — | (4,953) | (4,953) |
| Balance at June 30, 2019 | 13,146,831 | 13 | — | $— | $362,737 | $(338,029) | $24,721 |
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY CONTINUED
(in thousands, except share data)
| Six Months Ended June 30, 2018 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| Balance at December 31, 2017 | $13,059,341 | 13 | — | $— | $356,054 | $(288,900) | $67,167 |
| Share-based compensation | — | — | — | — | 2,570 | — | 2,570 |
| Issuance of common stock upon exercise of stock options | 15,967 | — | — | — | 74 | — | 74 |
| Cancellation of restricted stock | (188,333) | — | — | — | — | — | — |
| Issuance of common stock | 60,975 | — | — | — | 200 | — | 200 |
| Net loss | — | — | — | — | — | (15,496) | (15,496) |
| Balance at June 30, 2018 | 12,947,950 | 13 | — | $— | $358,898 | $(304,396) | $54,515 |
| Six Months Ended June 30, 2019 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| Balance at December 31, 2018 | $12,960,450 | 13 | — | $— | $361,218 | $(327,716) | $33,515 |
| Share-based compensation | — | — | — | — | 1,111 | — | 1,111 |
| Issuance of common stock upon exercise of stock options | 213,048 | — | — | — | 408 | — | 408 |
| Cancellation of restricted stock | (26,667) | — | — | — | — | — | — |
| Net loss | — | — | — | — | — | (10,313) | (10,313) |
| Balance at June 30, 2019 | 13,146,831 | 13 | — | $— | $362,737 | $(338,029) | $24,721 |
AUTOWE
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(10,313) | $(15,496) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | |
| Depreciation and amortization | 3,509 | 4,360 |
| Goodwill impairment | — | 5,133 |
| Provision for bad debts | 122 | 146 |
| Provision for customer credits | 120 | 153 |
| Share-based compensation | 1,111 | 2,569 |
| Right-of-use assets | 924 | — |
| Lease liabilities | (924) | — |
| Gain on sale of investment | — | (125) |
| Change in deferred tax asset | — | 692 |
| Changes in assets and liabilities: | | |
| Accounts receivable | 3,325 | 1,548 |
| Prepaid expenses and other current assets | (410) | 428 |
| Other assets | (303) | (632) |
| Accounts payable | (1,945) | 2,058 |
| Accrued expenses and other current liabilities | (787) | 437 |
| Net cash (used in) provided by operating activities | (5,571) | 1,271 |
| Cash flows from investing activities: | | |
| Payments for property and equipment | (990) | (392) |
| Proceeds from sale of investment | — | 125 |
| Net cash used in investing activities | (990) | (267) |
| Cash flows from financing activities: | | |
| Borrowings under revolving credit facility | 16,940 | — |
| Principal payments on revolving credit facility | (16,940) | (8,000) |
| Payments on convertible note | (1,000) | — |
| Proceeds from issuance of common stock | — | 200 |
| Proceeds from exercise of stock options | 408 | 74 |
| Net cash used in financing activities | (592) | (7,726) |
| Net decrease in cash and cash equivalents | (7,153) | (6,722) |
| Cash and cash equivalents and restricted cash, beginning of period | 13,600 | 24,993 |
| Cash and cash equivalents and restricted cash, end of period | $6,447 | $18,271 |
| | | |
| Reconciliation of cash and cash equivalents and restricted cash | | |
| Cash and cash equivalents at beginning of period | $13,600 | $24,993 |
| Restricted cash at beginning of period | — | — |
| Cash and cash equivalents and restricted cash at beginning of period | $13,600 | $24,993 |
| | | |
| Cash and cash equivalents at end of period | $1,431 | $18,271 |
| Restricted cash at end of period | 5,016 | — |
| Cash and cash equivalents and restricted cash at end of period | $6,447 | $18,271 |
| | | |
| Supplemental disclosure of cash flow information: | | |
| Cash paid for income taxes | $1 | $— |
| Cash refunds for income taxes | 124 | — |
| Cash paid for interest | $40 | $88 |
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Organization and Operations
AutoWeb, Inc. (“AutoWeb” or the “Company”) is a digital marketing company for the automotive industry that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers by utilizing the Company’s digital sales enhancing products and services.
The Company’s consumer-facing automotive websites (“Company Websites”) provide consumers with information and tools to aid them with their automotive purchase decisions and gives in-market consumers the ability to connect with Dealers regarding purchasing or leasing vehicles. These consumers are connected to Dealers via the Company’s various programs for online lead referralsvehicles (“Leads”). Leads are internally-generated from Company Websites or acquired from third parties that generate Leads from their websites.The AutoWeb® “click traffic” consumerCompany’s click traffic referral product engagesprogram provides consumers who are shopping for vehicles online with car buyers from AutoWeb’stargeted 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 websitespublishers, they are presented with relevant offers on a timely basis and, usesupon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of the Company’s proprietary technology to present them with highly relevant offers based on their make and model of interest and their geographic location. The Company then directs these in-market consumers to key areas of a Dealer’sDealer, Manufacturer or Manufacturer’s website to maximize conversion for sales or other products or services.
advertising customers.
The Company was incorporated in Delaware on May 17, 1996. Its principal corporate offices are located in Irvine, California. The Company’s common stock is listed on Thethe NASDAQ Capital Market under the symbol AUTO.
On October 9, 2017, Effective August 7, 2019, the Company’s board of directors designated the Company’s office in Tampa, Florida located at 400 North Ashley Drive, Suite 300, Tampa, Florida 33602 as the Company’s principal office for the transaction of business of the Company changed its name from Autobytel Inc.pursuant to AutoWeb, Inc., assuming the name of AutoWeb, Inc., which was the nameSection 1.02 of the company thatCompany’s bylaws and as the Company acquired in October 2015. In connection with this name change, the Company changed its stock ticker symbol from “ABTL” to “AUTO” on The NASDAQ Capital Market.
Company’s principal executive offices.
2. Basis of Presentation
The accompanying unaudited condensed consolidated condensed financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K for the year ended December 31, 20172018 (“20172018 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”). AutoWeb 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 Article 10 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 management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation. The unaudited condensed consolidated condensed statements of operations and comprehensive income (loss)loss and cash flows for the periods ended SeptemberJune 30, 2018 and 20172019 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period. The Company had no items of comprehensive income or loss for any of the periods presented. The unaudited condensed consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 20172018 Form 10-K.
Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation.
References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
On April 30, 2019, the Company entered into a $25.0 million Revolving Credit and Security Agreement ("Credit Agreement" or “Revolving Loan”) with PNC Bank, N.A. (“PNC”) as agent, and the Company’s U.S. subsidiaries Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, (“Company Subsidiaries”). The obligations under the Credit Agreement are guaranteed by the Company Subsidiaries and secured by a first priority lien on all of the Company's and the Company Subsidiaries’ tangible and intangible assets. The Credit Agreement provides a subfacility of up to $5.0 million for letters of credit. The Credit Agreement expires on April 30, 2022.
The Credit Agreement contains customary representations and warranties and covenants that restrict the Company and the Company Subsidiaries from engaging in or taking various actions, including, among other things (but except as otherwise permitted by the Credit Agreement): (i) incurring or guaranteeing additional indebtedness; (ii) making any loans, investments or acquisitions; (iii) selling or otherwise transferring or disposing of assets other than in the ordinary course of business; (iv) engaging in transactions with affiliates; and (v) declaring or making distributions on their stock or other equity interests. In addition, the Credit Agreement contains financial covenants that require the Company to maintain its consolidated EBITDA (as defined in the Credit Agreement) at stated minimum levels ranging from ($2.9) million to $7.5 million for various periods during the term of the Credit Agreement. The Company is also required to maintain a $5.0 million pledged interest-bearing deposit account with Lender until the Company’s consolidated EBITDA is greater than $10.0 million.
Restricted cash primarily consists of security deposits and other cash escrowed under the Credit Agreement (Note 9).
3. Recent Accounting Pronouncements
Issued but not yet adopted by the Company
The Company considers the applicability and impact of all Accounting Standards Updates (“ASU”) issued byIn August 2018, the Financial Accounting Standards Board ((““FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”). ASUsASU 2018-15 was issued to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company is currently evaluating the impact of adopting the updated provisions which are effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company does not listed below were assessed and determined to be either not applicable or are expectedexpect the adoption of this guidance to have minimala material impact on the Company’s consolidated result of operations, financial position and cash flows.
Consolidated Financial Statements.
Recently adopted by the Company
Accounting Standards Codification 220 “Comprehensive Income.” In February 2018, the FASB issued ASU No. 2018-02, “Reclassification“Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.Income.” The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”) and will improve the usefulness of information reported to financial statement users. TheOn January 1, 2019, the Company adopted ASU will take effect for all entities for fiscal years,No. 2018-02 and interim periods within those fiscal years, beginning after December 15, 2018. The Company believes this ASU willit did not have a material effect on the consolidated financial statements and related disclosures.
Accounting Standards Codification 842 “Leases.“Leases”(“ASC 842”)In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842), “Leases.” Topic 842 provides guidance on accounting for leases which requireswas issued. This ASU was issued to increase transparency and comparability among organizations by requiring lessees to (i) recognize most leasesright-of-use (“ROU”) assets and lease liabilities on theirthe balance sheetssheet to represent the right to use the leased asset for the rightslease term and obligations created by those leases. Thethe obligation to make lease payments, and (ii) disclose key information about leasing arrangements. Some changes to the lessor accounting guidance requires enhanced disclosures regardingwere made to align both of the amount, timing,following: (i) the lessor accounting guidance with certain changes made to the lessee accounting guidance, and uncertainty(ii) key aspects of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018,the lessor accounting model with early adoption permitted. revenue recognition guidance.
The Company expects to adoptadopted the requirements of the new standardASU effective January 1, 2019 and electutilizing the modified retrospective approach for adoption for all leases that existed at or commenced after the date of initial application with an option to use certain available transitional practical expedients. The package of practical expedients allowed the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also used (i) hindsight when evaluating contractual lease options, (ii) the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component, and (iii) the portfolio approach which allows similar leased assets to be grouped and accounted for together. In addition, the Company implemented additional internal controls to evaluate future transactions in accordance with the standard.
In July 2018,The adoption of ASC 842 had a material impact on the FASB issued updated guidance which allows an additional transition method to adopt the new leases standard at the adoption date, as comparedconsolidated balance sheet due to the beginningrecognition of ROU assets and lease liabilities. The adoption of this ASU did not have a material impact on the earliest period presented andconsolidated statement of operations or the consolidated statement of cash flows. The Company did not recognize a cumulative-effectmaterial cumulative effect adjustment to the beginningopening balance ofsheet retained earnings in the period of adoption. The Company expects to elect this transition method at the adoption date ofon January 1, 2019. TheBecause the modified retrospective approach was elected, the ASU was not applied to periods prior to adoption and did not have an impact on previously reported results. At adoption, the Company continues to analyze itsrecognized operating lease portfolioROU assets and lease liabilities that reflect the present value of the future payments. As the rate implicit in the lease could not be determined for any of the Company’s leases, an estimated incremental borrowing rate of 5.5% was used to determine the present value of lease payments. Based on the impact thatof ASC 842 on the new standard will have on its consolidated financial statements. Further,lease population, the Company isrecorded $4.4 million in lease liabilities and $4.2 million for ROU assets based upon the process of reviewing and updating our business processes, as necessary, to assist in our ongoing lease data collection and analysis. Additionally, the Company is updating its accounting policies and internal controls that would be impacted by the new guidance, to ensure readinessliabilities adjusted for adoption in the first quarter of 2019.
deferred rent. See Note 8 for additional information on leases.
SEC Release No. 33-10532, Disclosure Update and Simplification. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders'stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule isbecame effective on November 5, 2018. The2018, and the Company will adoptadopted the requirements of the new standard for the interim reporting ofin the first quarter of 2019.
Recently adopted by the Company
Accounting Standards Codification 606 “Revenue from Contracts with Customers.” In May 2014, ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” was issued. The new standard sets forth a single comprehensive model for recognizing and reporting revenue and requires the use See “Unaudited Condensed Consolidated Statements of a five-step methodology to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU No. 2014-09 requires enhanced disclosure regarding revenue recognition. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method, which had no material impact on operations, and required no cumulative adjustment to be made to beginning retained earnings on January 1, 2018. Therefore, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted. See Note 4 for further discussion.Stockholders’ Equity.”
Accounting Standards Codification 805 “Business Combinations.” In January 2017, ASU No. 2017-01, “Clarifying the Definition
Accounting Standards Codification 718 “Compensation – Stock Compensation.” In May 2017, ASU No. 2017-09, “Scope of Modification Accounting” was issued. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should apply ASU No. 2017-09 on a prospective basis for an award modified on or after the adoption date for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Additionally, in June 2018, FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The update largely aligns the accounting for share-based payment awards issued to employees and nonemployees, particularly with regards to the measurement date and the impact of performance conditions. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing). The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The Company adopted ASU No. 2017-09 and ASU No. 2018-07 in the current year and, therefore, results for reporting periods beginning after January 1, 2018 are presented under ASU No. 2017-09 and ASU No. 2018-07, while prior period amounts have not been adjusted. See Note 6 for further discussion.
4. Revenue Recognition
Revenue is recognized when the Company transfersupon 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 ASC 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 performs the following steps in order to properly determine revenue recognition and identify relevant contract assets and contract liabilities:
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identify the contract with a customer;
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identify the performance obligations in the contract;
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determine the transaction price;
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allocate the transaction price to the performance obligations in the contract; and
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recognize revenue when, or as, the Company satisfies a performance obligation.
The Company earns revenue by providing leads, advertising, and mobile products and services used by Dealers and Manufacturers in their efforts to market and sell new and used vehicles to consumers. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The Company records revenue on distinct performance obligations at a single point in time, when control is transferred to the customer.
The Company has three main revenue sources – Lead fees, advertising, and other revenue. Accordingly, the Company recognizes revenue for each source as described below:
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Lead fees -– paid by Dealers and Manufacturers participating in the Company’s Lead programs and are comprised of Lead transaction and/or monthly subscription fees. Lead fees are recognized in the period when service is provided.
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Advertising -– fees paid by Dealers and Manufacturers for (i)the Company’s click traffic program and (ii) display advertising on the Company’s websites and (ii) fees from the Company’s click traffic program. websites.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 gross revenue from the delivery of action-based advertisementsadvertisement in the period in which a user takes the action for which the marketer contracted for with the Company. For advertising revenue arrangements where the Company is not the principal, the Company recognizes revenue on a net basis.
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Other revenues -– consists primarily of revenues from the Company’s mobile products and revenues from the Company’s Reseller Agreement with SaleMove, Inc. Revenue is recognized in the period in which products or services are sold.
Variable Consideration
The Company’s products, namely Leads are generally sold with a right-of-return for services that do not meet customer requirements as specified by the relevant contract. Rights-of-return are estimable, and provisions for estimated returns 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. Allowance for customer credits totaled $133,000were approximately $134,000 and $213,000 as of September$121,000 at June 30, 20182019 and December 31, 2017,2018, respectively.
See further discussion below on significant judgments exercised by the Company in regards to variable consideration.
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, or unbilled revenue.revenue. Unbilled revenue represents revenue that is partially earned, whereby control of promised services has not yet transferred to the customer, and for which the Company has not earned the complete right to payment. The Company had zero unbilled revenue included in its consolidated balance sheets as of SeptemberJune 30, 20182019 and December 31, 2017.
2018.
Deferred Revenue
The Company defers the recognition of revenue when cash payments are received or due in advance of satisfying its performance obligations, including amounts which are refundable. Such activity is not a common practice of operation for the Company. The Company had zero deferred revenue included in its consolidated balance sheets as of SeptemberJune 30, 20182019 and December 31, 2017.
Payment terms and conditions can vary by contract type.2018. 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.
Practical Expedients and Exemptions
The Company excludes from the transaction price all sales taxes related to revenue producing transactions collected from the customer for a governmental authority.
The Company applies the new revenue standard requirements to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects of applying the revenue recognition guidance to the portfolio would not differ materially on the financial statements from that of applying the same guidance to the individual contracts (or performance obligations) within that portfolio.
The Company generally expenses incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, marketing, and distribution expense.
Significant Judgments
The Company provides Dealers and Manufacturers with various opportunities to market their vehicles to potential vehicle buyers, namely via consumer lead and click traffic referrals and online advertising products and services. Proper revenue recognition of digital marketing activities, as well as proper recognition of assets and liabilities related to these activities, requires management to exercise significant judgment with the following items:
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Arrangements with Multiple Performance Obligations -
The Company enters into contracts with customers that often include multiple products and services to a customer. Determining whether products and/or services are distinct performance obligations that should be accounted for singularly or separately may require significant judgment.
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Variable Consideration and Customer Credits -
The Company’s products are generally sold with a right-of-return. Additionally, the Company will sometimes provide customer credits or sales incentives. These items are accounted for as variable consideration when determining the allocation of the transaction price to performance obligations under a contract.The allowance for customer credits is an estimate of adjustments for services that do not meet customer requirements. Additions to the estimated allowance for customer credits are recorded as a reduction of revenues and are based on the Company’s historical experience of: (i) the amount of credits issued; (ii) the length of time after services are rendered that the credits are issued; (iii) other factors known at the time; and (iv) future expectations. Reductions in the estimated allowance for customer credits are recorded as an increase in revenues.
As specific customer credits are identified, they are charged against this allowance with no impact on revenues.Returns and credits are measured at contract inception, with respective obligations reviewed each reporting period or as further information becomes available, whichever is earlier, and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. The allowance for customer credits is included in the net accounts receivable balances of the Company’s balance sheets as of September 30, 2018 and December 31, 2017.
The Company has not made any significant changes to judgments in applying ASC 606 during the ninesix months ended SeptemberJune 30, 2018.2019
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 its revenue streams. The Company has three main sources of revenue: lead fees, advertising, and other revenues.
The following table summarizes revenue from contracts with customers, disaggregated by revenue source, for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017.2018. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
| | Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | |
| | | | | | | | | |
| | | |
| Lead fees | $24,986 | $27,711 | $71,277 | $83,149 | $21,691 | $22,211 | $47,389 | $46,291 |
| Advertising | | |
| Clicks | 5,559 | 7,436 | 18,020 | 20,403 | 4,456 | 5,771 | 9,515 | 12,462 |
| Display and other advertising | 1,047 | 1,510 | 3,623 | 4,511 | 976 | 1,179 | 1,795 | 2,575 |
| | | 5,432 | 6,950 | 11,310 | 15,037 |
| | | |
| 103 | 215 | 416 | 741 | 19 | 131 | 47 | 313 |
| Total revenue | $31,695 | $36,872 | $93,336 | $108,804 | |
| Total revenues | | $27,142 | $29,292 | $58,746 | $61,641 |
5. Net Earnings (Loss)Loss Per Share and Stockholders’ Equity
Basic net earnings (loss)loss per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net earnings (loss)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 and common shares issuable upon the exercise of stock options the exercise of warrants, and conversion of convertible notes.warrants.
The Company usedfollowing are the following share amounts utilized to compute the basic and diluted net (loss) earningsloss per share for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017:2018:
| | Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, |
| | | | | | | | | |
| Basic Shares: | | |
| Weighted average common shares outstanding | 12,948,150 | 12,881,812 | 12,959,666 | 11,729,181 | 13,147,741 | 12,920,591 | 13,066,617 | 12,965,520 |
| Weighted average unvested restricted stock | (161,413) | (119,584) | (249,084) | (115,574) | (36,850) | (194,505) | (48,362) | (293,646) |
| Weighted average common shares repurchased | — | (60,230) | — | (20,297) | |
| Basic Shares | 12,786,737 | 12,701,998 | 12,710,582 | 11,593,310 | 13,110,891 | 12,726,086 | 13,018,255 | 12,671,874 |
| | | |
| Diluted Shares: | | |
| Basic shares | 12,786,737 | 12,701,998 | 12,710,582 | 11,593,310 | 13,110,891 | 12,726,086 | 13,018,255 | 12,671,874 |
| Weighted average dilutive securities | — | 498,587 | — | 621,449 | — |
| Incremental shares from convertible preferred stock | — | 1,064,660 | |
| Diluted Shares | 12,786,737 | 13,200,585 | 12,710,582 | 13,279,419 | 13,110,891 | 12,726,086 | 13,018,255 | 12,671,874 |
For the three and ninesix months ended SeptemberJune 30, 2019 and 2018, the Company’s basic and diluted net loss per share are the same since the Company generated a net loss for the period and potentially dilutive securities are excluded from diluted net loss per share because they have an anti-dilutive impact.
For the three and ninesix months ended SeptemberJune 30, 2017, weighted average dilutive securities included dilutive options, restricted stock awards,2019, 4.2 million and shares of common stock issued in June 2017 upon conversion of the Series B Junior Participating Convertible Preferred Stock, $0.001 par value per share, (“Series B Preferred Stock”) that was issued in connection with the acquisition of Autobytel, Inc. (formerly AutoWeb, Inc.) (“AWI”).
For the three and nine months ended September 30, 2018, 4.0 and 4.34.1 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share, respectively. For the three and ninesix months ended SeptemberJune 30, 2017, 3.92018, 4.2 and 3.14.3 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share.
share, respectively.
On September 6, 2017, the Company announced that its board of directors authorized the Company to repurchase up to $3.0 million of the Company’s common stock. Under the repurchase program, the Company may repurchase common stock from time to time on the open market or in private transactions. This authorization does not require the Company to purchase a specific number of shares, and the board of directors may suspend, modify or terminate the program at any time. The Company anticipates that it would fund future repurchases, if any, through the use of available cash. No shares were repurchased during the three and nine months ended September 30, 2018. As of September 30, 2018, $2.3 million remains available for the Company to repurchase common stock.
On June 22, 2017, the Company obtained stockholder approval for the issuance of shares of the Company’s common stock upon (i) the conversion of the Company’s then outstanding Series B Preferred Stock; and (ii) the conversion of shares of Series B Preferred Stock that would be issued upon exercise of the warrant to purchase up to 148,240 shares of Series B Preferred Stock issued in connection with the acquisition of AWI (“AWI Warrant”). Upon obtaining stockholder approval for the conversion, each outstanding share of Series B Preferred Stock was automatically converted into 10 shares of the Company’s common stock, which resulted in the outstanding shares of Series B Preferred Stock being converted into 1,680,070 shares of the Company’s common stock, and the AWI Warrant converted into warrants to acquire up to 1,482,400 shares of the Company’s common stock.
Warrants. The warrant to purchase 69,930 shares of the Company’s common stock issued in connection with the acquisition of AutoUSA was valued at $7.35 per share for a total value of $0.5 million (“AutoUSA Warrant”). The Company used an option pricing model to determine the value of the AutoUSA Warrant. Key assumptions used in valuing the AutoUSA Warrant are as follows: risk-free interest rate of 1.6%, stock price volatility of 65.0% and a term of 5.0 years. The AutoUSA Warrant was valued based on long-term stock price volatilities of the Company. The exercise price of the AutoUSA Warrant is $14.30 per share (as may be adjusted for stock splits, stock dividends, combinations, and other similar events). The AutoUSA Warrant became exercisable on January 13, 2017 and expires on January 13, 2019.
The AWI Warrant was valued at $1.72 per share for a total value of $2.5 million. The Company used an option pricing model to determine the value of the AWI Warrant. Key assumptions used in valuing the AWI Warrant were as follows: risk-free interest rate of 1.9%, stock price volatility of 74.0% and a term of 7.0 years. The AWI Warrant was valued based on long-term stock price volatilities of the Company’s common stock. On June 22, 2017, the Company received stockholder approval which resulted in the automatic conversion of the AWI Warrant into warrants to acquire up to 1,482,400 shares of the Company’s common stock at an exercise price of $18.45 per share of common stock. The AWI Warrant became exercisable on October 1, 2018, subject to the following vesting conditions: (i) with respect to the first one-third (1/3) of the warrant shares, if at any time after the issuance date of the AWI Warrant and prior to the expiration date of the AWI Warrant the weighted average closing price of the Company’s common stock for the preceding 30 trading days (adjusted for any stock splits, stock dividends, reverse stock splits or combinations of the Company’s common stock occurring after the issuance date) (“Weighted Average Closing Price”) is at or above $30.00; (ii) with respect to the second one-third (1/3) of the warrant shares, if at any time after the issuance date of the AWI Warrant and prior to the expiration date the Weighted Average Closing Price is at or above $37.50; and (iii) with respect to the last one-third (1/3) of the warrant shares, if at any time after the issuance date of the AWI Warrant and prior to the expiration date the Weighted Average Closing Price is at or above $45.00. The AWI Warrant expires on October 1, 2022
6. Share-Based Compensation
Share-based compensation expense is included in costs and expenses in the accompanying Unaudited Condensed Consolidated Condensed Statements of Operations and Comprehensive Income (Loss)Loss as follows:
| |
Three Months Ended September 30, |
Nine Months Ended September 30, | Three Months Ended June 30, | |
| | | | | | | | | |
| | | |
| Share-based compensation expense: | | |
| Cost of revenues | $2 | $20 | $21 | $59 | $— | $4 | $— | $19 |
| Sales and marketing | 520 | 409 | 904 | 1,222 | 66 | 159 | 138 | 384 |
| Technology support | 886 | 138 | 1,213 | 401 | 52 | 173 | 93 | 326 |
General and administrative | 388 | 397 | 2,228 | 1,238 | 442 | 607 | 880 | 1,841 |
| Share-based compensation costs | 1,796 | 964 | 4,366 | 2,920 | 560 | 943 | 1,111 | 2,570 |
| | | |
Less amount capitalized to internal use software: | — | 1 | 2 | |
| Amount capitalized to internal use software | | — | 1 |
| Total share-based compensation costs | $1,796 | $963 | $4,365 | $2,918 | $560 | $943 | $1,111 | $2,569 |
| | | |
During the nine months ended September 30, 2018, certainCertain awards were modified or accelerated in connection with the termination of employment of certain former officerstwo of the Company.Company’s former executive officers. In accordance with guidance provided under ASC 718the terms of applicable award agreements and/or consulting agreements, the vesting of certain awards was accelerated, and related ASU No. 2017-09 and ASU No. 2018-07, the terms of certain awards were modified. The Company recognized award modification and acceleration expensesrecorded $0.8 million of expense related to these events in the period incurred. Modificationacceleration of certain awards and expense was determined by usingrelated to the Black-Scholes option pricing model to estimatemodification of awards of approximately $0.1 million during the fair value of the modified awards as of the new measurement date and respective fair value assumptions. As reflected in the table above, the Company recognized award modification and acceleration expense of $1.2 million and $2.1 million in the three and ninesix months ended SeptemberJune 30, 2018, respectively. There were no modification or acceleration expenses recognized in 2017.
2018.
Service-Based Options. The Company granted the following service-based options for the three and ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, respectively:
| | Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | |
| | | | | | | | | |
| | | |
| Number of service-based options granted | 33,000 | 83,850 | 1,749,700 | 457,100 | 140,000 | 1,715,200 | 1,182,883 | 1,716,700 |
| Weighted average grant date fair value | $1.65 | $3.72 | $1.83 | $6.29 | $1.84 | $1.83 | $1.82 | $1.84 |
| Weighted average exercise price | $3.04 | $7.23 | $3.29 | $12.51 | $3.45 | $3.29 | $3.42 | $3.30 |
The Company recognizes compensation expense for stock option grants based on the fair value at the date of grantThese options are valued using thea Black-Scholes option pricing model. The Company uses historical data, among other factors, to estimate the expected option lifemodel and has elected to estimate forfeiture rates. The risk-free rate is based on the United States Treasury Department yield curve in effect at the time of grant for the expected life of the option. The Company assumes an expected dividend yield of zero for all periods. Options 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 maywill be accelerated in the event of a change in control of the Company.
In April 2018, the Company, entered into an Inducement Stock Option Award Agreement with the Company’s CEO, Jared Rowe (“Rowe Option Award Agreement”). Pursuant to the Rowe Option Award Agreement, Mr. Rowe was granted stock options to purchase 1,000,000 shares of common stock (“Rowe Employment Options”), which shall vest monthly in 36 monthly installments on the first day of each calendar month following the date of grant. These options have an exercise price of $3.26 per share and a term of seven years from the date of grant. Upon a change in control of the Company or in the event of a termination of Mr. Rowe’s employment by the Company without cause orof an employee, and voluntary termination by Mr. Rowean employee with good reason, all unvested options will vest. In the event of a termination of Mr. Rowe’s employment with the Company by reason of Mr. Rowe’s death or disability, the lesser of: (i) 1/3rd of the total number of these options and (ii) the total number of unvested options will vest upon the date of termination.
Market Condition Options. On January 21, 2016, the Company granted 100,000 stock options to its former chief executive officer (“FormerCEO”) with an exercise price of $17.09 and grant date fair value of $1.47 per option, using a Monte Carlo simulation model (“FormerCEO Market Condition Options”). The Former CEO Market Condition Options were previously valued at $2.94 per option but were revalued when the requisite stockholder approval for the Company’s Amended and Restated 2014 Equity Incentive Plan was obtained in June 2016. The Former CEO Market Condition Options were subject to both stock price-based and service-based vesting requirements that must be satisfied for the Former CEO Market Condition Options to vest and become exercisable. On April 12, 2018, pursuant to the stock option award agreement, vesting of the Former CEO Market Condition Options was accelerated with the termination of employment of the Former CEO, resulting in the recognition of approximately $0.8 million of non-recurring share-based compensation expense during the first quarter of 2018. The Former CEO Market Condition Options may be exercised at any time on or before April 13, 2020.
Stock option exercises. The following stock options were exercised during the three and nine months ended September 30, 2018 and 2017, respectively:
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | | | | |
| | | | | |
| Number of stock options exercised | 1,000 | 15,000 | 16,967 | 191,074 |
| Weighted average exercise price | $1.75 | $4.20 | $4.51 | $5.58 |
reason.
The grant date fair value of stock options granted during these periods was estimated using the Black-Scholes option pricing model using the following weighted average assumptions listed below:assumptions:
| | Three Months Ended September 30, | Nine Months Ended September 30, |
| | | | | |
| | | | | |
| Dividend yield | — | — | — | — |
| Volatility | 66% | 63% | 68% | 62% |
| Risk-free interest rate | 2.9% | 1.8% | 2.6% | 1.8% |
| Expected life (years) | 4.5 | 4.4 | 4.5 | 4.4 |
Restricted Stock Awards. The Company granted an aggregate of 125,000 restricted stock awards (“RSAs”) on April 23, 2015 in connection with the promotion of one of its executive officers. Of these 125,000 RSAs, 25,000 were service-based and 100,000 were performance-based. The forfeiture restrictions of the service-based RSAs 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. Forfeiture restrictions lapsed on 8,333 shares and 8,333 shares of restricted stock on April 23, 2016 and April 23, 2017, respectively. During the nine months ended September 30, 2018, 8,333 of the foregoing service-based RSAs and 100,000 of the performance-based RSAs were forfeited upon the resignation of this executive officer.
The Company granted an aggregate of 345,000 RSAs on September 27, 2017 to senior officers of the Company. These 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. During the nine months ended September 30, 2018, 80,000 shares of RSAs were forfeited upon the resignation of two executive officers, the forfeiture restrictions on 175,000 shares of RSA lapsed upon the termination of employment of the former CEO and three officers of the Company, and the forfeiture restrictions of 40,000 shares of RSAs were modified upon the entry into a consulting agreement with a former executive officer. During the three months ended September 30, 2018, the forfeiture restrictions on 90,000 shares of RSAs lapsed in connection with the termination of employment of three officers of the Company. Accordingly, the Company recognized expenses of $364,000 and $787,000 related to the acceleration of vesting and modification of RSAs in the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, 60,000 shares of RSAs remain unvested.
7. Investments
The Company’s investments at September 30, 2018 and December 31, 2017 consisted primarily of investments in SaleMove and GoMoto, Inc.,a Delaware corporation (“GoMoto”).
In September 2013, the Company entered into a Convertible Note Purchase Agreement with SaleMove in which AutoWeb invested $150,000 in SaleMove in the form of an interest bearing, convertible promissory note. In November 2014, the Company invested an additional $400,000 in SaleMove in the form of an interest bearing, convertible promissory note. Upon closing of a preferred stock financing by SaleMove in July 2015, these two notes were converted in accordance with their terms into an aggregate of 190,997 Series A Preferred Stock, which shares were previously classified as a long-term investment on the consolidated balance sheet. The Company recorded an impairment charge of $0.6 million in SaleMove in the three months ended December 31, 2017. On June 5, 2018, the Company sold its shares of Series A Preferred stock back to SaleMove for $125,000. The gain of $125,000 is recorded in Interest and other income (expense) on the Unaudited Consolidated Condensed Statement of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2018.
In October 2013, the Company entered into a Reseller Agreement with SaleMove to become a reseller of SaleMove’s technology for enhancing communications with consumers. SaleMove’s technology allows Dealers and Manufacturers to enhance the online shopping experience by interacting with consumers in real-time, including live video, audio, and text-based chat or by phone. The Company and SaleMove share equally in revenues from automotive-related sales of the SaleMove products and services. In connection with this reseller arrangement, the Company advanced $1.0 million to SaleMove to fund SaleMove’s 50% share of various product development, marketing and sales costs and expenses. These previously advanced funds are repaid to the Company from SaleMove’s share of net revenues and expenses from the Reseller Agreement each reporting period. During the three months ended September 30, 2018, the Company performed a qualitative review of the agreement with SaleMove and, based on several factors related to the trend in operating results from this reseller arrangement and costs being incurred by the Company, the parties agreed to allow the arrangement to expire November 30, 2018, one month earlier than the original expiration date of December 31, 2018. Upon expiration of the Reseller Agreement, the remaining outstanding advances are no longer recoverable from SaleMove, and, accordingly, the Company has impaired the remaining balance of $364,000 of advances due from SaleMove. The impairment charge is included in “Long-lived asset impairment” in the Unaudited Consolidated Condensed Statement of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2018.| | Three Months Ended June 30, | |
| | | | | |
| | | | | |
| Dividend yield | — | — | — | — |
| Volatility | 66% | 68% | 65% | 68% |
| Risk-free interest rate | 2.2% | 2.6% | 2.5% | 2.6% |
| Expected life (years) | 4.4 | 4.5 | 4.4 | 4.5 |
In December 2014, the Company entered into a Series Seed Preferred Stock Purchase Agreement with GoMoto in which the Company paid $100,000 for 317,460 shares of Series Seed Preferred Stock, $0.001 par value per share. The $100,000 investment in GoMoto was recorded at cost because the Company does not have significant influence over GoMoto. In October 2015 and May 2016, the Company invested an additional $375,000 and $375,000, respectively, in GoMoto in the form of convertible promissory notes (“option exercisesGoMoto Notes”). The GoMoto Notes accrue interest at an annual rate of 4.0% and are due and payable in full upon demand by the Company or at GoMoto’s option ten days’ written notice unless converted prior to the repayment of the GoMoto Notes. The GoMoto Notes will be converted into preferredfollowing stock of GoMoto in the event of a preferred stock financing by GoMoto of at least $1.0 million prior to repayment of the GoMoto Notes. At September 30, 2018 and 2017, both the GoMoto Notes and related interest receivable are fully reserved on the Unaudited Consolidated Condensed Balance Sheets because the Company believes the amounts are not recoverable. Further, the three months ended September 30, 2018, represented the third consecutive quarter of declining operating results for GoMoto and, as such, the Company performed a qualitative review of its investment in GoMoto. Based on continuing deterioration in GoMoto’s financial position, the Company believes that uncertainty exists in the recoverability of its remaining investment of $100,000 in GoMoto and, accordingly, recognized a loss on the investmentoptions were exercised during the three and six months ended SeptemberJune 30, 2019 and 2018, which has been recorded in “Interest and other income (expense)” on the Unaudited Consolidated Condensed Statement of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2018.respectively:
8.| | Three Months Ended June 30, | |
| | | | | |
| | | | | |
| Number of stock options exercised | 57,036 | 750 | 213,048 | 15,967 |
| Weighted average exercise price | $1.77 | $2.20 | $1.92 | $4.68 |
7. Selected Balance Sheet Accounts
Property and equipmentEquipment. Property and equipment consists of the following:
| | | |
| | | |
| Computer software and hardware | $12,440 | $11,393 |
| Capitalized internal use software | 6,228 | 6,228 |
| Furniture and equipment | 1,743 | 1,743 |
| Leasehold improvements | 1,613 | 1,613 |
| | 22,024 | 20,977 |
| Less—Accumulated depreciation and amortization | (18,619) | (17,796) |
| Property and Equipment, net | $3,405 | $3,181 |
| | |
| |
Computer software and hardware | $11,585 | $11,065 |
Capitalized internal use software | 5,977 | 5,774 |
Furniture and equipment | 1,743 | 1,703 |
Leasehold improvements | 1,605 | 1,539 |
�� | 20,910 | 20,081 |
Less—Accumulated depreciation and amortization | (17,296) | (15,770) |
Property and Equipment, net | $3,614 | $4,311 |
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 two high credit quality financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. These deposits may be redeemed upon demand.
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 automotive industry-related accounts receivable balances, particularly withbalances. Approximately 34%, or $8.0 million, of gross accounts receivable at June 30, 2019, and approximately 27% of total revenues for the six months ended June 30, 2019, are related to Urban Science Applications (which represents Acura, Audi, Honda, Nissan, Infiniti, Subaru, Toyota Volkswagen, and Volvo), Trilogy, and General Motors and Media.net Advertising. During the first nine months ofMotors. For 2018, approximately 42% of the Company’s total revenues was derived from these four customers, and approximately 51%43%, or $13.2$10.7 million, of gross accounts receivables related to these four customers at SeptemberJune 30, 2018. During the first nine months2018, and approximately 37% of 2017, approximately 33% of the Company’s total revenues was derived fromfor the six months ended June 30, 2018, is related to Urban Science Applications, Media.net Advertising and General Motors and Media.net, and approximately 43%, or $12.2 million of gross accounts receivables, related to these three customers at September 30, 2017.
Accrued Expenses and Other Current Liabilities. Accrued expenses and other current liabilities consisted of the following:
| | | |
| | |
| Other accrued expenses | $7,154 | $6,307 |
| Amounts due to customers | 392 | 438 |
| Other current liabilities | 437 | 507 |
| Total other accrued expenses and other current liabilities | $7,983 | $7,252 |
Convertible Notes Payable
. In connection with the acquisition of AutoUSA, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc. The fair value of the AutoUSA Note as of the AutoUSA acquisition date was $1.3 million. This valuation was estimated using a binomial option pricing method. Key assumptions used by the Company’s outside valuation consultants in valuing the AutoUSA Note included a market yield of 1.6% and stock price volatility of 65.0%. As the AutoUSA Note was issued with a substantial premium, the Company recorded the premium as additional paid-in capital. Interest is payable at an annual interest rate of 6% in quarterly installments. The entire outstanding balance of the AutoUSA Note is to be paid in full on January 31, 2019. The holder of the AutoUSA Note may at any time convert all or any part, but at least 30,600 shares, of the then outstanding and unpaid principal of the AutoUSA Note into fully paid shares of the Company’s common stock at a conversion price of $16.34 per share (as adjusted for stock splits, stock dividends, combinations, and other similar events). In the event of default, the entire unpaid balance of the AutoUSA Note will become immediately due and payable and will bear interest at the lower of 8% per year or the highest legal rate permissible under applicable law.
9. Long-Lived Assets and Impairment
Intangible Assets. The Company amortizes the costs of specifically identified definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets.
The Company’s intangible assets are amortized over the following estimated useful lives :lives:
| | | September 30, 2018 (in thousands)
| December 31, 2017 (in thousands)
|
Definite-lived Intangible Asset | | | | | | | |
| Trademarks/trade names/licenses/domains | 3 -7 years | $16,589 | $(14,734) | $1,855 | $16,589 | $(4,037) | $12,552 |
| Software and publications | 3 years | 1,300 | (1,300) | — | 1,300 | (1,300) | — |
| Customer relationships | 2 - 10 years | 19,563 | (14,485) | 5,078 | 19,563 | (10,555) | 9,008 |
| Employment/non-compete agreements | 1 - 5 years | 1,510 | (1,510) | —
| 1,510 | (1,493) | 17 |
| 5 - 7 years | 8,955 | (4,601) | 4,354 | 8,955 | (3,619) | 5,336 |
| | $47,917 | $(36,630) | $11,287 | $47,917 | $(21,004) | $26,913 |
| | | | |
| Definite-lived Intangible Asset | Estimated Useful Life | | | | | | |
| | | | | | | | |
| Trademarks/ trade names/ licenses/ domains | 3 - 7 years | $16,589 | $(15,182) | $1,407 | $16,589 | $(14,914) | $1,675 |
| Customer relationships | 2 - 5 years | 19,563 | (17,417) | 2,146 | 19,563 | (15,544) | 4,019 |
| Developed technology | 5 - 7 years | 8,955 | (5,417) | 3,538 | 8,955 | (4,873) | 4,082 |
| | $45,107 | $(38,016) | $7,091 | $45,107 | $(35,331) | $9,776 |
| | | | | | | |
| | | | | | | |
Indefinite-lived Intangible Asset | | | | | | | | |
| Definite-lived Intangible Asset | | Estimated Useful Life | | | | | | |
| | | | |
| Domain | Indefinite | $2,200 | $— | $2,200 | $— | $2,200 | Indefinite | $2,200 | $— | $2,200 | $— | $2,200 |
Amortization expense on intangible assets with definite lives is included in both Cost“Cost of revenuesrevenues” and Depreciation“Depreciation and amortizationamortization” in the Unaudited Consolidated Condensed Statements of Operations. Total amortization expense was $1.6$1.3 million and $5.0$2.7 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. Amortization expense was $1.3$1.7 million and $4.1$3.4 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively.
Amortization expense for the remainder of the year and for future years is as follows:
| Year | |
| | |
| 2019 | $2,187 |
| 2020 | 2,371 |
| 2021 | 1,499 |
| 2022 | 902 |
| 2023 | 86 |
| Thereafter | 46 |
| | $7,091 |
| | |
Accrued Expenses and Other Current Liabilities. Accrued expenses and other current liabilities consisted of the following:
| | |
| Year | |
| 2018 | $1,511 |
| 2019 | 4,872 |
| 2020 | 2,371 |
| 2021 | 1,499 |
| 2022 | 902 |
| Thereafter | 132 |
| | $11,287 |
| | | |
| | | |
| Accrued employee-related benefits | $2,391 | $3,125 |
| Other accrued expenses and other current liabilities: | | |
| Other accrued expenses | 1,062 | 1,346 |
| Amounts due to customers | 596 | 424 |
| Other current liabilities | 406 | 434 |
| Total other accrued expenses and other current liabilities | 2,064 | 2,204 |
| | | |
| Total accrued expenses and other current liabilities | $4,455 | $5,329 |
Convertible Notes Payable. In connection with the acquisition of AutoUSA on January 13, 2014, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc., with interest payable at an annual interest rate of 6% in quarterly installments. The entire outstanding balance of the AutoUSA Note plus accrued interest was paid in full on January 31, 2019.
8. Leases
The Company determines if an arrangement is a lease at inception. The Company leases its facilities and certain office equipment under operating leases which expire on various dates through 2024. 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. 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 June 30, 2019 consist of the following:
| Current portion of lease liabilities | $1,552 |
| Long term lease liabilities, net of current portion | 1,894 |
| Total lease liabilities | $3,446 |
The Company’s aggregate lease maturities as of June 30, 2019 are as follows:
| Year | |
| 2019 (remaining 6 months) | $872 |
| 2020 | 1,279 |
| 2021 | 513 |
| 2022 | 459 |
| 2023 | 472 |
| Thereafter | 199 |
| Total minimum lease payments | 3,794 |
| Less imputed interest | (348) |
| Total lease liabilities | $3,446 |
Rent expense included in operating expenses and cost of revenue was $1.0 million for the six months ended June 30, 2019. The Company had a weighted average remaining lease term of 2.1 years and a weighted average discount rate of 5.5% as of June 30, 2019. Rent expense included in operating expenses for the six months ended June 30, 2018 was $0.8 million under ASC 840, the predecessor to ASC 842. In June 2017, the Company subleased one of its buildings to a third party for the remainder of the lease term which expired in February 2019. Rent expense for the six months ended June 30, 2019 and 2018 is net of sublease income of approximately $26,000 and $77,000, respectively. As of June 30, 2019, the Company did not have any additional operating leases that have not yet commenced.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill is not amortized and is assessed annually for impairment or earlier, when events or circumstances indicate that the carrying value of such assets may not be recoverable. The Company impaired goodwill by $5.1 million during the nine months ended September 30, 2018.
| |
Goodwill as of December 31, 2017 | $5,133
|
| (5,133)
|
Goodwill as of September 30, 2018
| $—
|
Impairment Testing of Intangible Assets9. Credit Facility
On October 5, 2017,April 30, 2019, the Company and DealerX Partners, LLC, a Florida limited liability company (“DealerX”), entered into a Master License$25.0 million Revolving Credit and ServicesSecurity Agreement ("Credit Agreement" or “Revolving Loan”) with PNC Bank, N.A. (“DealerX License AgreementPNC”) as agent, and the Company’s U.S. subsidiaries Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, (“Company Subsidiaries”). Pursuant The obligations under the Credit Agreement are guaranteed by the Company Subsidiaries and secured by a first priority lien on all of the Company’s and the Company Subsidiaries’ tangible and intangible assets. The Credit Agreement provides a subfacility of up to $5.0 million for letters of credit. The Credit Agreement expires on April 30, 2022. As of June 30, 2019, the Company had no outstanding borrowings under its credit facility. Financing costs related to the termscredit facility, net of the DealerX License Agreement, AutoWeb was granted a perpetual license to accessaccumulated amortization, of approximately $0.3 million, have been deferred and use DealerX’s proprietary platform and technology for targeted, online marketing.are included in other assets as of June 30, 2019.
The transaction consideration consisted of:interest rates per annum applicable to borrowings under the Credit Agreement will be, at the Company’s option (subject to certain conditions), equal to either a domestic rate (“Domestic Rate Loans”) or a LIBOR rate for one, two, or three-month interest periods chosen by the Company (“LIBOR Rate Loans”), plus the applicable margin percentage of 2% for Domestic Rate Loans and 3% for LIBOR Rate Loans. The domestic rate for Domestic Rate Loans will be the highest of (i) $8.0 millionthe base commercial lending rate of Lender, (ii) the overnight bank funding rate plus 0.50%, or (iii) the LIBOR rate plus 1.00% so long as the daily LIBOR rate is offered, ascertainable and not unlawful. The Credit Agreement also provides for commitment fees ranging from 0.5% to 1.5% applied to unused funds (with the applicable fee based on quarterly average borrowings), but with the fees fixed at 1.5% until June 30, 2019. Fees for Letters of Credit are equal to 3% for LIBOR Rate Loans, with a fronting fee for each Letter of Credit in cash paidan amount equal to DealerX upon execution0.5% of the DealerX Licensedaily average aggregate undrawn amount of all Letters of Credit outstanding.
The Credit Agreement contains customary representations and warranties and covenants that restrict the Company and the Company Subsidiaries from engaging in or taking various actions, including, among other things (but except as otherwise permitted by the Credit Agreement): (i) incurring or guaranteeing additional indebtedness; (ii) making any loans, investments or acquisitions; (iii) selling or otherwise transferring or disposing of assets other than in the rightordinary course of business; (iv) engaging in transactions with affiliates; and (v) declaring or making distributions on their stock or other equity interests. In addition, the Credit Agreement contains financial covenants that require the Company to 710,856 sharesmaintain its consolidated EBITDA (as defined in the Credit Agreement) at stated minimum levels ranging from ($2.9) million to $7.5 million for various periods during the term of the Company’s common stock, par value $0.001 per share, representing approximately five percent ofCredit Agreement. The Company is also required to maintain a $5.0 million pledged interest-bearing deposit account with Lender until the Company’s outstanding Common Stock asconsolidated EBITDA is greater than $10.0 million. As of June 30, 2019, the date the parties entered into the DealerX License Agreement (“Market Capitalization Shares”) if on or before October 5, 2022: (i) AutoWeb’s market capitalization averaged at least $225.0 million over a consecutive 90 day period or (ii) there occurred a change in control of AutoWeb that reflected a market capitalization of at least $225.0 million. If the Market Capitalization Shares were issued to DealerX, DealerX’s obligations to continue to support the platform (“Platform Support Obligations”) would continue in perpetuity. Alternatively, upon the occurrence of certain events priorCompany had restricted cash related to the issuancecredit facility of approximately $5.0 million.
As of June 30, 2019, and for the Market Capitalization Shares, AutoWeb could elect to make an additional lump-sum payment of $12.5 million (“Alternative Cash Payment”) in order to extend DealerX’s Platform Support Obligations in perpetuity. If the Alternative Cash payment was made, DealerX’s contingent right to receive the Market Capitalization Shares would be terminated. The fair value of the Market Capitalization Shares was calculated at $2.5 million. At the transaction datesix months then ended, the Company recorded approximately $10.5had cash and cash equivalents of $1.4 million asand a definite-lived intangible asset which was amortized over its expected useful lifenet loss of 7 years.$10.3 million. The net loss is primarily attributable to operating expenses of $2l.6 million during the six months ended June 30, 2019. The Company used net cash in operations of $5.6 million for the six months ended June 30, 2019. As of June 30, 2019, the Company had an accumulated deficit of $338.0 million and stockholders' equity of $24.7 million.
The Company makes judgments about the recoverability of purchased intangible assets with definite lives whenever events or changeshas developed a strategic plan focused on improving operating performance in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets with definite lives is measured by comparing the carrying amount of the asset to the future undiscountedthat includes modernizing and upgrading its technology and systems, pursuing business objectives and responding to business opportunities, developing new or improving existing products and services and enhancing operating infrastructure. The plan's objective is for the Company to generate positive cash flows by the assetfourth quarter of 2019. However, there is no assurance that the Company will be able to achieve this objective. Also, the Company entered into the Credit Agreement discussed above that is expected to generate. Inbe used to partially fund operations. However, if the Company continues to experience losses and becomes unable to comply with the financial covenants in the Credit Agreement, the Company may be unable to borrow funds under this credit facility.
The Company believes that current cash reserves and operating cash flows will be sufficient to sustain operations into at least the third quarter of 2018, the Company performed an analysis of its planned future use of two intangible assets in the licenses and customer relationships asset groups. As a result of realignment activities finalized in the third quarter, the Company made a determination that2020. If the Company's useplans are unsuccessful, it may need to seek to satisfy its future cash needs through private or public sales of certain assets would not be continued as originally planned. Accordingly, the Company performed further analysis to quantitatively determine the amount of impairment for each of these intangible assets as of September 30, 2018.
A structured test was performed with the DealerX license intangible asset, whereby lead generation and acquisition cost, amongst other things, was compare to alternate sources of lead generation available to the Company. As a result of the Company’s analysis, the Company concluded that the effectiveness of the platform was not in-line with the enhanced consumer-to-client matchmakingsecurities, debt financings or partnering/licensing transactions. However, there is no assurance that the Company is seeking and made the decisionwill be successful in the third quarter to terminate DealerX’s Platform Support Obligations, significantly impacting the usability of the asset by the Company. Accordingly,satisfying its future cash needs such that the Company recorded impairment charges of $9.0 million in connection with the impairment of this long-lived asset with the expense recorded in Cost of revenues-impairment on the Company’s Unaudited Consolidated Condensed Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2018.
A quantitative analysis was performed by the Company on its customer relationship intangible assets, whereby it examined available data, namely historical activity and cash flows resulting from the customer relationships of previous acquisitions, in concert with projected future use of acquired customer relationships within the parameters of the Company’s future strategic plans. As a result of this analysis, the Company determined there to be impairment of $1.6 million related to customer relationship intangible assets acquired in a 2015 acquisition for which projected cash flows did not support the carrying values. Additionally, the Company determined that the estimated useful life of these customer relationship intangible assets had changed from 10 years to 5 years. This change in estimate has no impact on the current period but will impact amortization expense in future periods as amortization will be accelerated over the remaining estimated useful life of this asset dueable to the change in estimate.
continue operations.
10. Credit Facility
The Company and MUFG Union Bank, N.A. entered into a Loan Agreement dated February 26, 2013, as amended on September 10, 2013, January 13, 2014, May 20, 2015, June 1, 2016, June 28, 2017, and December 27, 2017 (the original Loan Agreement, as amended, is referred to collectively as the “Credit Facility Agreement”). The Credit Facility Agreement provided for (i) a $9.0 million term loan; (ii) a $15.0 million term loan; and (iii) an $8.0 million working capital revolving line of credit (“Revolving Loan”). The term loans were fully paid as of December 31, 2017. The Revolving Loan was fully paid as of March 31, 2018.
11.10. Commitments and Contingencies
Employment Agreements
The Company has employment agreements and severance benefits/retention 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 isin 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 activities. 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.
12.11. Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA made a number of changes to the federal income tax law that took effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax; (3) a new limitation on deductible interest expense; (4) the Transition Tax; (5) limitations on the deductibility of certain executive compensation; (6) changes to the bonus depreciation rules for fixed asset additions: and (7) limitations on net operating loss carryovers generated after December 31, 2017, to 80% of taxable income.
ASC 740 “Income Taxes” , requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
At September 30, 2018 and December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the TCJA; however, the Company has made a reasonable estimate of the effects of the TCJA’s change in the federal rate and revalued its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. For the year ended December 31, 2017, the Company recorded a decrease in deferred tax assets and deferred tax liabilities of $11.7 million and $0.0 million, respectively, with a corresponding net adjustment to deferred income tax expense of $11.7 million. In addition, in 2017, the Company recognized a deemed repatriation of $0.6 million of deferred foreign income from its Guatemala subsidiary, which did not result in any incremental tax cost after application of foreign tax credits. The Company’s provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon ongoing analysis of data and tax positions along with the new guidance from regulators and interpretations of the law. On an interim basis, the Company estimates anwhat 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 fiscal year progresses, the Company refines its estimated annual effective tax rate based on actual year-to-date results recognized for the 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’sCompany's year-to-date tax provision reflects the estimated annual effective tax rate. TheseTherefore, these changes along with the adjustments to the Company's deferred taxes and related valuation allowance, may create fluctuationfluctuations in the overall effective tax rate from period to period.
During 2017, management assessed available evidenceDue to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was theoverall cumulative losses incurred over the three-year period ended December 31, 2017. The Company was projecting pre-tax income for 2017 until the three months ended December 31, 2017, in whichrecent years, the Company incurredmaintained a significant pre-tax loss due to the impairment of goodwill. The Company experienced increased costs of providing services to its customers, as well as decrease in market share resulting from increased competition. Additionally, the Company also projects that 2018 pre-tax profits, if any, may not offset the cumulative three-year pre-tax loss as of December 31, 2017. Based on this evaluation, the Company recorded an additional valuation allowance of $16.7 million against its deferred tax assets during the year ended December 31, 2017. At Septemberas of June 30, 20182019 and December 31, 2017, the Company has recorded a valuation allowance of $21.3 million against its deferred tax assets.2018.
The Company’s effective tax rate for the ninesix months ended SeptemberJune 30, 20182019 differed from the U.S. federal statutory rate primarily due to operating losses that receive no tax benefit as a result of an existinga valuation allowancesallowance recorded against the Company’sCompany's existing tax assets.
The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.5 million as of June 30, 2019, all of which, if subsequently recognized, would have affected the Company's tax rate.
As of June 30, 2019 and December 31, 2018, there was no balance of 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 current liabilities in the Company’s condensed consolidated balance sheets. There were no material interest or penalties included in income tax expenses for the three and six months ended June 30, 2019 and 2018.
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 2015 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state jurisdictions where the Company does business, periods prior to calendar year 2014 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.
12. Subsequent Event
In December 2014, the Company entered into a Series Seed Preferred Stock Purchase Agreement with GoMoto in which the Company paid $100,000 for 317,460 shares of Series Seed Preferred Stock, $0.001 par value per share. In October 2015 and May 2016, the Company invested an additional $375,000 and $375,000 in each period in the form of convertible promissory notes. At December 31, 2017, both the GoMoto Notes and related interest receivable were fully reserved because the Company believed the amounts were not recoverable. Furthermore, based on continuing deterioration in GoMoto’s financial position, the Company believed that uncertainty existed in the recoverability of its remaining investment of $100,000 in GoMoto and, accordingly, recognized a loss on the investment for the year ended December 31, 2018. On January 29, 2019, the GoMoto Notes were converted into 1,781,047 shares of GoMoto’s Series A-2 Preferred Stock, $0.001 par value per share. The outstanding principal plus accrued interest under the GoMoto Notes was converted in accordance with the terms of the notes upon the closing of a new preferred stock financing and based on a discount to the price paid by the new investor for the investor’s preferred shares. On July 30, 2019, the Company entered into a Repurchase Agreement with GoMoto, pursuant to which GoMoto repurchased these 317,460 shares of Series Seed Preferred Stock and 1,781,047 shares of Series A-2 Preferred Stock from the Company for an aggregate purchase price of $250,000.
Item 2. Management’s DiscMaunssionagement’s Discussion and Analysis of Financial Condition and Results of Operations
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 of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve significant risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual outcomes or results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2, 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 ended December 31, 20172018 (“20172018 Form 10-K”). Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.
You should read theThe following discussion of our results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated condensed 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 20172018 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 the SEC.
Unless the context otherwise requires, the terms “we,” “us,” “our,” “AutoWeb,” and “Company” refer to AutoWeb, Inc. and its consolidated subsidiaries.
Basis of Presentation and Critical Accounting Policies
See Note 2, Basis of Presentation, to the accompanying unaudited condensed consolidated condensed financial statements.
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, (“GAAP”), 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 Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 “Financial Statements and Supplementary Data” in the 20172018 Form 10-K. ThereExcept as disclosed in Note 8 to the Unaudited Condensed Consolidated Financial Statements, pertaining to our adoption of Accounting Standards Codification 842,Leases, there have been no changes to our critical accounting policies since we filed our 20172018 Form 10-K.
Overview
Total revenues in the first six months of 2019 were $58.7 million compared to $61.6 million in the first six months of 2018. The decline in total revenues was primarily due to a traffic acquisition focus on quality and margin as opposed to raw lead volume, a decrease in click revenue caused by lower revenue per click, and a decrease in display advertising revenue. We continue to invest in new traffic acquisition strategies and enhanced mobile consumer experiences. Further, we continue to invest in our pay per click approach, to improve the consumer, customer, and financial performance of that product. We do not expect desktop and mobile display advertising to be a major area of focus for us in the future, as it represents a secondary, not primary, revenue stream.
Overview
We are a digital marketing services company that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers through our programs for online lead referrals, Dealer marketing products and services, online advertising and consumer traffic referral programs, and mobile products.
Our consumer-facing automotive 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 the consumers regarding purchasing or leasing vehicles (“Leads”) . Leads are internally-generated from our Company Websites (“Internally-Generated Leads”) or acquired from third parties (“Non-Internally-Generated Leads”) that generate Leads from their websites. Our AutoWeb® consumer traffic referral product 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 a Company Website or on the site of one of our network of automotive publishers, they are presented with relevant offers on a timely basis and, upon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of our Dealer, Manufacturer or advertising customers.
Our business, results of operations and financial condition are impacted by the volume and quality of our Leads. We measure Lead quality by the conversion of Leads to actual vehicle sales, which we refer to as the “buy rate.” Buy rate is the percentage of the consumers submitting Leads that we delivered to our customers represented by the number of these consumers who purchased vehicles within ninety days of the date of the Lead submission. We rely on detailed feedback from Manufacturers and wholesale customers to confirm the performance of our Leads. Our Manufacturer and other wholesale customers each match the Leads we deliver to our customers against vehicle sales to provide us with information about vehicle purchases by the consumers who submitted Leads that we delivered to these customers. AutoWeb also obtains vehicle registration data from a third-party provider. This information, together with our internal analysis allows us to estimate the buy rate for the consumers who submitted the Internally Generated Leads that we delivered to our customers. Based on the most current information and our internal analysis, we have estimated that, on average, consumers who submit Internally-Generated Leads that we deliver to our customers have an estimated buy rate of approximately 17%. Buy rates that individual Dealers may achieve can be impacted by factors such as the strength of processes and procedures within the dealership to manage communications and follow up with consumers.
Total revenues in the first nine months of 2018 were $93.3 million compared to $108.8 million in the first nine months of 2017. The decline in revenue was primarily due to less efficient traffic acquisition and lower retail dealer count and lead volumes. We believe that a large part of the inefficiency in traffic acquisition was the result of increased traffic acquisition costs as we invest in new traffic acquisition strategies, as well as the consumers shift to mobile and our ability to efficiently convert traffic to leads.
During the third quarter of 2018, we completed a comprehensive review of our products, traffic acquisition, pricing policies, distribution channels, technology infrastructure, strategic positioning and organizational capabilities. This review involved a significant change in key management and organizational structure.
We movemoved into the fourth quarter of 2018 with a plan that will be executed strategically.we began to execute strategically in the first quarter of 2019. We will continue to work with our traffic partners to optimize our search engine marketing (“SEM”) methodologies and rebuild our high-quality traffic streams. We also expect to invest in new product development and technology infrastructure,cloud based technologies, and to continue to restructure our organization to better align with our revised strategy, which will likelystrategy. While these initiatives may result in significant costs. initial material upfront expenses, they are anticipated to reduce costs over the longer term. We have begun to deploy various initiatives to address these issues, which began with addressing our lead generation capabilities to stabilize the declines in the largest part of our business, integrating our products to create a unified solution of leads, clicks and emails, and building out the team to execute on our strategy.
We cannot provide an exact timeframe for resolution of these issues, as we are early in the implementation of our revised strategy. However, our plan is designed to enable us to grow impressions, improve conversion, expand distribution, and increase capacity. ThisWe believe that this focus, along with plans to develop new, innovative products, will create opportunities for improved quality of delivery and strengthen our position for revenue growth. We now have our full senior leadership team in place which we believe will increase the pace of change and improve operational execution. During 2018, we focused on stabilizing the leads business as it comprises the majority of our revenue. For 2019, we are focusing on our click traffic product.
Starting in 2018, we began to mobile-enable our core new car lead generation websites. This is a considerable area of focus for us in 2019 as we evolve our sites to deliver a better experience for consumers to drive conversion. We anticipate that we will mobile-enable the rest of our lead generation sites throughout 2019. We also recently developed an approach to mobile-enable our click traffic product which is a critical step in our mobile enablement plan. The click product allows us to monetize visits more effectively to our websites. Further, it provides our clients with a unique opportunity to engage consumers with relevant messaging in a unique format. We began testing of the mobile enablement of our click traffic product in the first quarter of 2019. Ultimately, mobile optimization of our websites and products is the goal, and we still have significant work to do in this area.
With respect to the automotive industry, we expect total vehicle sales and the seasonally-adjusted annual rate to be down in 2019. LMC Automotive has forecasted 2019 U.S. total light vehicle sales and retail light-vehicle sales at 17.0 million and 13.7 million, respectively, representing declines in U.S. total light vehicle sales and retail light-vehicle sales of 1.9% and 1.5%, respectively, over 2018 sales. AutoNews has reported that light vehicle sales are off to the slowest start for a year since 2014, with year-to-date sales down about 3%. We believe it will be difficult for Manufacturers to maintain their historic volumes due to affordability challenges with interest rates and overall less Manufacturer incentives. However, we continue to believe we can operate well in this environment as we believe Dealers will seek out their highest return on investment marketing channels to drive sales. And with our detailed attribution and product quality improvements, we believe we will continue to have a strong place in their marketing budgets as we believe we are one of the most efficient marketing channels available to them.
Although we are not able at this time to disclose any guidance as to 2019 financial performance with detail or accuracy, we do anticipate volatility in our total revenues, cost of revenues, gross profit, and gross margin for 2019. During the first half of 2019, our cash burn increased as we invested in our people, products and technology. We expect to return to incremental cash generation in the second half of 2019 as those investment initiatives are now largely completed. This further allowed us to reduce our office footprint and eliminate certain other positions to further reduce staffing costs in the second quarter of 2019. We continue to evaluate options to improve our ongoing liquidity and balance sheet through non-dilutive measures, and also continue to have availability under the $25 million revolving credit facility that we entered into on April 30, 2019.
For the three and nine months ended September 30, 2018, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic, employment and market factors, conditions in the automotive industry, the markets for Leads, and online advertising services, including, but not limited to, the following:
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Pricing, interest rates and purchase incentives for vehicles;
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The expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better quality vehicles and longer warranties;
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The impact of fuel prices on demand for the number and types of vehicles;
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Increases or decreases in the number of retail Dealers or in the number of Manufacturers and other wholesale customers in our customer base;
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The effect of changes in search engine algorithms and methodologies on our Lead generation and website advertising activities and margins;
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Volatility in spending by Manufacturers and others in their marketing budgets and allocations;
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The competitive impact of consolidation in the online automotive referral industry;
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The effect of changes in transportation policy, including the potential increase of public transportation options; and
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The effect of fewer vehicles being purchased as a result of new business models and changes in consumer attitudes regarding the need for vehicle ownership.
Results of Operations
Three Months Ended SeptemberJune 30, 20182019 Compared to the Three Months Ended SeptemberJune 30, 20172018
The following table sets forth certain statement of operations data for the three-month periods ended SeptemberJune 30, 20182019 and 20172018 (certain balances and calculations have been rounded for presentation):
| | | | | | | |
| | (Dollar amounts in thousands) | |
| Revenues: | | | | | | |
| Lead fees | $24,986 | 79% | $27,711 | 75% | $(2,725) | (10)% |
| Advertising | 6,606 | 21 | 8,946 | 24 | (2,340) | (26) |
| Other revenues | 103 | — | 215 | 1 | (112) | (52) |
| Total revenues | 31,695 | 100 | 36,872 | 100 | (5,177) | (14) |
| Cost of revenues | 26,278 | 83 | 25,786 | 70 | 492 | 2 |
Cost of revenues - impairment | 9,014 | 28 | — | — | 9,014 | N/A |
| Gross (loss) profit | (3,597) | (11) | 11,086 | 30 | (14,683) | N/A |
| Operating expenses: | | | | | | |
| Sales and marketing | 3,333 | 11 | 3,692 | 10 | (359) | (10) |
| Technology support | 4,303
| 14 | 3,141 | 9 | 1,161 | 37 |
| General and administrative | 3,639 | 11 | 2,818 | 7
| 821 | 29 |
| Depreciation and amortization | 1,172 | 4 | 1,192 | 3 | (20) | (2) |
| Goodwill Impairment | — | — | — | — | — | — |
Long-lived asset impairment | 1,968 | 6 | — | — | 1,968 | N/A |
| 14,415 | 45 | 10,843 | 29
| 3,572 | 33 |
| Operating (loss) income | (18,012) | (57) | 243 | 1 | (18,255) | N/A |
Interest and other income (expense), net | (24) | — | (93) | — | 69 | (74) |
| (Loss) Income before income tax provision | (18,036) | (57) | 150 | — | (18,186) | N/A |
| — | — | 81 | — | (81) | N/A |
| Net (loss) income | $(18,036) | (57)% | $69 | —% | $(18,105) | N/A |
| | | | | | | |
| | (Dollar amounts in thousands) |
|
|
|
| Revenues: | | | | | | |
| Lead fees | $21,691 | 80% | $22,211 | 76% | $(520) | (2)% |
| Advertising | 5,432 | 20 | 6,950 | 24 | (1,518) | (22) |
| Other revenues | 19 | — | 131 | — | (112) | (86) |
| Total revenues | 27,142 | 100 | 29,292 | 100 | (2,150) | (7) |
| Cost of revenues | 21,758 | 80 | 23,765 | 81 | (2,007) | (8) |
| Gross profit | 5,384 | 20 | 5,527 | 19 | (143) | (3) |
| Operating expenses: | | | | | | |
| Sales and marketing | 2,956 | 11 | 3,052 | 10 | (96) | (3) |
| Technology support | 2,182 | 8 | 2,965 | 10 | (783) | (26) |
| General and administrative | 4,026 | 15 | 3,765 | 13 | 261 | 7 |
| Depreciation and amortization | 1,201 | 4 | 1,163 | 4 | 38 | 3 |
| Goodwill impairment | — | — | — | — | — | — |
| Total operating expenses | 10,365 | 38 | 10,945 | 37 | (580) | (5) |
| Operating loss | (4,981) | (18) | (5,418) | (19) | 437 | (8) |
| Interest and other income (expense), net | 33 | — | 201 | 1 | (168) | (84) |
| Loss before income tax provision | (4,948) | (18) | (5,217) | (18) | 269 | (5) |
| Income tax provision | 5 | — | — | — | 5 | — |
| Net loss | $(4,953) | (18)% | $(5,217) | (18)% | $264 | (5)% |
Leads. Lead fees. Lead fees revenues decreased $2.7$0.5 million, or 10%2%, in the thirdsecond quarter of 2019 compared to the second quarter of 2018 compared to the third quarter of 2017 primarily due to less efficient traffic acquisition and lower retail dealer count and lead volumes.
Advertising. Advertising revenues decreased $2.3 million, or 26%, in the third quarter of 2018 compared to the third quarter of 2017 as a result of a decrease in $1.9 millionretail lead fee revenues coupled with a decrease in revenues from automotive manufacturers.
Advertising.Advertising revenues decreased $1.5 million, or 22%, in the second quarter of 2019 compared to the second quarter of 2018 as a result of a decline in click revenuerevenues associated with decreased pricing per click coupled with a $0.4 million decrease in display advertising traffic on our website.
volume and pricing.
Other RevenuesRevenues. . Other revenues consist primarily of revenues from our mobile products and revenues from our Reseller Agreement with SaleMove. SaleMove, which expired in November 2018.Other revenues decreased to $0.1 million$19,000 in the thirdsecond quarter of 20182019 from $0.2 million$131,000 in the thirdsecond quarter of 20172018 primarily due to lower customer utilization of the mobile product and SaleMove product. The SaleMove Reseller Agreement will expire November 30, 2018.
Cost of Revenues.Cost of revenues consists of purchase request and traffic acquisition costs and other cost of revenues. Purchase request and traffic acquisition costs consist of payments made to our purchase request providers, including internet portals and online automotive information providers. Other cost of revenues consists of SEM and fees paid to third parties for data and content, including search engine optimization activity, included on our websites, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation, and technology amortization directly related to the 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 increased $0.5decreased $2.0 million, or 2%8%, in the thirdsecond quarter of 2019 compared to the second quarter of 2018 compared to the third quarter of 2017 primarily due to increaseddecreased traffic acquisition costs, a decrease in click publisher costs and a decrease in amortization expense from intangibles. Further contributing to the decrease was a decrease in costs related to headcount. These costs were shifted to operational roles at the beginning of 2019, as we determined these roles were no longer directly tied to revenue generation. Partially offsetting the decreases was an increase in SEM costs.
Cost of Revenues-Impairment. Cost of revenues-impairment consists of impairment charges on definite-lived intangible assets which are directly related to websites or technology that generate revenue for the Company. The Company makes judgments about the recoverability of purchased intangible assets with definite lives whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets with definite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. In the third quarter of 2018, the Company made a decision to terminate the platform support provision of an existing perpetual license used to support the Company’s websites, significantly impacting the usability of the asset by the Company. As a result, in the quarter ended September 30, 2018, the Company recorded charges of approximately $9.0 million in connection with the impairment of this long-lived asset to cost of revenues-impairment. The Company did not have a comparable charge in the same period for 2017.
Gross Profit. Gross profit in the third quarter of 2018 decreased $14.7 million from the third quarter of 2017 due to decreased revenue and increased cost of revenues as mentioned above. A major contributor to the increased cost of revenues was the one-time impairment charge related to the DealerX license of $9.0 million that was charged to cost of revenues. As a percentage of net revenue, our gross profit was (11%) and 30% for the three months ended September 30, 2018 and 2017, respectively. The decrease was significantly impacted by the $9.0 million impairment charge related to DealerX, which as a percentage of net revenue, was 28%.
Sales and MarketingMarketing.. Sales and marketing expense includes costs for developing our brand equity, personnel costs, and other costs associated with automotive retail (“Dealer”) sales, website advertising, Dealer support, and dealer support.bad debt expense. Sales and marketing expense in the thirdsecond quarter of 20182019 decreased $0.4$0.1 million, or 10%3%, compared to the thirdsecond quarter of 20172018 due primarily to lower media spend, offset by increased head-count costs.a decrease in SEM expense.
Technology SupportSupport.. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company’s websites and related technologies, and to operate the Company’s internal technology infrastructure. Technology support expense in the thirdsecond quarter of 2018 increased2019 decreased by $1.2$0.8 million, or 37%26%, compared to the thirdsecond quarter of 20172018 due primarily to severance and other headcount-related costs coupled with consulting costs associated with the management realignment of the information technology function in September 2018.lower headcount related costs.
General and AdministrativeAdministrative.. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in the thirdsecond quarter of 2019 increased by $0.3 million, or 7%, from the second quarter of 2018 increased by $0.8 million, or 29%, from the third quarter of 2017 due primarily to increased compensation-related costsseverance and increased professional fees.recruiting costs.
Depreciation and AmortizationAmortization. . Depreciation and amortization expense in the thirdsecond quarter of 2019 did not materially change when compared to the second quarter of 2018.
Interest and Other Income (Expense), Net. Interest and other income was approximately $33,000 for the second quarter of 2019 compared to interest and other expense of approximately $0.2 million in the second quarter of 2018. Interest expense increased to $56,000 in the second quarter of 2019 from $15,000 in the second quarter of 2018 decreased $20,000 from the third quarter of 2017 primarily due to normal amortization.
Long-Lived Asset Impairment. The Company records impairment lossesthe Credit Agreement we entered into on long-lived assets when events and circumstances indicate that the assets might be impaired. Events that may indicate that the assets might be impaired include, but are not limited to, a significant downturn in the economy, a loss of a major customer or group of customers or a significant decrease in the market value of an asset.April 30, 2019. During the thirdsecond quarter of 2018,2019, we borrowed $16.9 million on the Company recorded an impairmentrevolving loan, all of approximately $0.4 million related to the impairmentwhich was paid back as of asset advances to SaleMove which were determined to be non-recoverable at SeptemberJune 30, 2018. In addition, approximately $1.6 million was recorded as an impairment2019. Interest expense includes interest on customer relationships acquired in a 2015 acquisition after an analysis showed that a significant percentage of the acquired customers were no longer part of the dealer base.
Other Income (Expense), Net. Other income (expense), net increased $0.1 million from the third quarter of 2017 due to a decrease in interest expense of $0.2 million due to payoff of term loans and revolving line of credit in the fourth quarter of 2017outstanding borrowings and the first quarteramortization of 2018, and the gain on the saledebt issuance costs. Refer to Note 9, “Credit Facility” of our investmentnotes to unaudited condensed consolidated financial statements included elsewhere in SaleMove, offset by the write-down of our GoMoto investment in the third quarter of 2018.this report for further information.
Income Taxes. Income tax expense was $5,000 in the second quarter of 2019 compared to zero in the third quarter of 2018 compared to income tax expense of $81,000 in the third quarter of 2017.2018. Income tax expense for the second quarter over quarterof 2019 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowances placed on accrued tax assetsallowance recorded for such losses.
Nine
Six Months Ended SeptemberJune 30, 20182019 Compared to the NineSix Months Ended SeptemberJune 30, 20172018
The following table sets forth certain statement of operations data for the nine-monthsix-month periods ended SeptemberJune 30, 2019 and 2018 and 2017 (certain balances and calculations have been rounded for presentation)amounts may not calculate due to rounding):
| | | | | | | | | | | | | |
| | (Dollar amounts in thousands) | | (Dollar amounts in thousands) |
|
| Revenues: | | |
| Lead fees | $71,277 | 76% | $83,149 | 76% | $(11,872) | (14)% | $47,389 | 81% | $46,291 | 75% | $1,098 | 2% |
| Advertising | 21,643 | 24 | 24,914 | 23 | (3,271) | (13) | 11,310 | 19 | 15,037 | 24 | (3,727) | (25) |
| 416 | 0 | 741 | 1 | (352) | (44) | 47 | — | 313 | 1 | (266) | (85) |
| Total revenues | 93,336 | 100 | 108,804 | 100 | (15,468) | (14) | 58,746 | 100 | 61,641 | 100 | (2,895) | (5) |
| Cost of revenues | 74,702 | 80 | 74,171 | 68 | 531 | 1 | 47,605 | 81 | 48,423 | 79 | (818) | (2) |
Cost of revenues - impairment | 9,014 | 10 | — | 9,014 | N/A | |
| Gross profit | 9,620 | 10 | 34,633 | 32 | (25,013) | (72) | 11,141 | 19 | 13,218 | 21 | (2,077) | (16) |
| Operating expenses: | | | |
| Sales and marketing | 10,096 | 11 | 10,684 | 10 | (588) | (6) | 5,834 | 10 | 6,764 | 11 | (930) | (14) |
| Technology support | 10,653 | 11 | 9,582 | 9 | 1,071 | 11 | 4,962 | 8 | 6,351 | 10 | (1,389) | (22) |
| General and administrative | 11,980 | 13 | 9,040 | 8 | 2,940 | 33 | 8,316 | 14 | 8,340 | 14 | (24) | — |
| Depreciation and amortization | 3,495 | 4 | 3,623 | 3 | (128) | (4) | 2,440 | 4 | 2,323 | 4 | 117 | 5 |
| Goodwill Impairment | 5,133 | 5 | — | 5,133 | N/A | |
Long-lived asset impairment | 1,968 | 2 | — | 1,968 | N/A | |
| Goodwill impairment | | — | 5,133 | 8 | (5,133) | (100) |
| 43,325 | 46 | 32,929 | 30 | 10,396 | 32
| 21,552 | 37 | 28,911 | 47 | (7,359) | (25) |
| Operating (loss) income | (33,705) | (36) | 1,704 | 2 | (35,409) | N/A | |
| Operating loss | | (10,411) | (18) | (15,693) | (26) | 5,282 | (34) |
Interest and other income (expense), net | 178 | — | (289) | — | 467 | N/A | 103 | — | 201 | 1 | (98) | (49) |
| (Loss) income before income tax provision | (33,527) | (36) | 1,415 | 2 | (34,942) | N/A | |
| Loss before income tax provision | | (10,308) | (18) | (15,492) | (25) | 5,184 | (33) |
| 4 | — | 539 | 1 | (535) | (99) | 5 | — | 4 | — | 1 | 25 |
| Net (loss) income | $(33,531) | (36)% | $876 | 1% | $(34,407) | N/A% | |
| Net loss | | $(10,313) | (18)% | $(15,496) | (25)% | $5,183 | (33)% |
Leads. Lead Fees. Lead fees revenues decreased $11.9increased $1.1 million, or 14%2%, in the first ninesix months of 20182019 compared to the first ninesix months of 20172018 primarily as a result of an increase in revenues from automotive manufacturers offset by declines in retail lead fee revenues.
Advertising.Advertising revenues decreased $3.7 million, or 25%, in the first six months of 2019 compared to the first six months of 2018 due to a decline in click revenues associated with decreased click revenue volume and pricing.
Other Revenues. Other revenues decreased to $47,000 in the first six months of 2019 from $0.3 million in the first six months of 2018 primarily due to less efficientlower customer utilization of the mobile product and SaleMove product.
Cost of Revenues. Cost of revenues decreased $0.8 million, or 2%, in the first six months of 2019 compared to the first six months of 2018 primarily due to decreased traffic acquisition costs, a decrease in click publisher costs and a decrease in amortization expense from intangibles. Further contributing to the decrease was a decrease in costs related to headcount. These costs were shifted to operational roles at the beginning of 2019, as we determined these roles were no longer directly tied to revenue generation. Partially offsetting the decreases was an increase in SEM costs.
lower retail dealer count Sales and lead volumesMarketing.. Sales and marketing expense in the first six months of 2019 decreased $0.9 million, or 14%, compared to the first six months of 2018 due primarily to a decrease in SEM and tradeshow expense, partially offset by compensation and benefits expense related to headcount previously included in cost of revenues. Further, the 2019 period does not include severance related costs which were incurred in the 2018 period.
Advertising.Technology Support. Advertising revenues decreased $3.3 million, or 13%, in the first nine months of 2018 compared to the first nine months of 2017 due to a decrease in click revenue of $2.4 million associated with decreased pricing per click coupled with a decrease of $0.9 million associated with display advertising traffic on our website.
Other Revenues. Other revenues decreased to $0.4 million in the first nine months of 2018 from $0.7 million in the first nine months of 2017 primarily due to lower customer utilization of the mobile product and SaleMove product. The SaleMove Reseller Agreement will expire November 30, 2018.
Cost of Revenues. Cost of revenues increased $0.5 million in the first nine months of 2018 compared to the first nine months of 2017 primarily due to increased traffic acquisition costs associated with both lead and click volume.
Cost of Revenues-Impairment. Cost of revenues-impairment expense of $9.0 million incurred in the nine months ended September 30, 2018 is due to the Company’s decision to terminate the platform support provision of an existing perpetual license used to support the Company’s websites, significantly impacting the usability of the asset by the Company and resulting in an impairment charge to the related intangible asset. The Company did not have a comparable charge in the same period for 2017.
Gross Profit. Gross profit decreased $25.0 million in the first nine months of 2018 compared to the first nine months in 2017 due to decreased revenue and increased cost of revenues as mentioned above. A major contributor to the increased cost of revenues was the one-time impairment charge related to the DealerX license of $9.0 million that was charged to cost of revenues. As a percentage of net revenue, our gross profit was 10% and 32% for the nine months ended September 30, 2018 and 2017, respectively. The decrease was significantly impacted by the $9.0 million impairment charge related to DealerX, which as a percentage of net revenue, was 10%.
Sales and Marketing. Sales and marketing expense in the first nine months of 2018 decreased $0.6 million, or 6%, compared to the first nine months of 2017 due primarily to lower headcount-related costs and media spend, offset by severance costs.
Technology Support. Technology support expense in the first ninesix months of 2018 increased2019 decreased by $1.1$1.4 million, or 11%22%, compared to the first ninesix months of 20172018 due primarily to severance and other headcount-relatedlower headcount related costs, coupled withpartially offset by an increase in consulting costs associated with the management realignment of the information technology function in September 2018.fees.
General and AdministrativeAdministrative.. General and administrative expense in the first ninesix months of 2018 increased $2.9 million,2019 decreased approximately $24,000, or 33%less than 1%, from the first ninesix months of 20172018 due primarily to $1.4 millionseverance costs in severance-related costs associated withthe prior year period related to the termination of the Company’s former CEOchief executive officer, offset by an increase in April 2018, coupled with increased compensation-related costs and professional fees.fees during the current year period.
Depreciation and Amortization.Depreciation and amortization expense in the first ninesix months of 2018 decreasedincreased $0.1 million to $3.5$2.4 million compared to $3.6$2.3 million in the first ninesix months of 2017 primarily due to normal depreciation and amortization.2018.
Goodwill impairment. The Company evaluated enterprise goodwill for impairment in the first ninesix months of 2018 due to the Company’s decreased stock price since its prior annual goodwill impairment analysis on October 1, 2017. As of March 31, 2018, the carrying value of AWIAutoWeb was higher than its fair value based on market capitalization at that date. As a result, a non-cash impairment charge of $5.1 million was recording during the ninesix months ended SeptemberJune 30, 2018.
Long-lived asset impairment. The Company records impairment losses on long-lived assets when eventsInterest and circumstances indicate that the assets might be impaired. Events that may indicate that the assets might be impaired include, but are not limited to, a significant downturn in the economy, a loss of a major customer or group of customers or a significant decrease in the market value of an asset. During the third quarter of 2018, the Company recorded an impairment of approximately $0.4 million related to the impairment of asset advances to SaleMove which were determined to be non-recoverable at September 30, 2018. In addition, approximately $1.6 million was recorded as an impairment on customer relationships acquired in a 2015 acquisition after an analysis showed that a significant percentage of the acquired customers were no longer part of the dealer base.
Other Income (Expense), Net. OtherInterest and other income (expense), net increased $0.5 million to $0.2was $0.1 million for the first ninesix months of 20182019 compared to $(0.3)interest and other income of $0.2 million in the first ninesix months of 2017 primarily to a decrease in2018. Interest expense of $0.5was $0.1 million due to the payoff of term loans and revolving line of credit in the fourth quarterfirst six months of 20172019 and the first quarter of 2018.
Income Taxes. Income tax expense was approximately $5,000 in the first six months of 2019 compared to approximately $4,000 in the first ninesix months of 2018 compared to income tax expense of $0.5 million in the first nine months of 2017.2018. Income tax expense for the first ninesix months of 20182019 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowances placed on tax assetsallowance recorded for such losses.
Liquidity and Capital Resources
The table below sets forth a summary of our cash flows for the ninesix months ended SeptemberJune 30, 20182019 and 2017:2018:
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| Net cash (used in) provided by operating activities | $(5,571) | $1,271 |
| Net cash used in investing activities | (990) | (267) |
| Net cash used in financing activities | (592) | (7,726) |
| | Nine Months Ended September 30, |
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| Net cash provided by (used in) operating activities | $(743) | ��$12,468 |
| Net cash used in investing activities | (703) | (2,218) |
| Net cash used in financing activities | (7,723) | (4,066) |
Our principal sources of liquidity are our cash and cash equivalents balances totaling $15.8and borrowings under the $25 million at SeptemberCredit Agreement. Our cash and cash equivalents and restricted cash totaled $6.4 million as of June 30, 2018,2019 compared to $13.6 million as of December 31, 2018. As of June 30,2019, the Company had a net loss of $10.3 million. The net loss is primarily attributable to operating expenses of $2l.6 million during the six months ended June 30, 2019. The Company used net cash in operations of $5.6 million for the six months ended June 30, 2019. As of June 30, 2019, the Company had an accumulated deficit of $338.0 million and our cashflows generated fromstockholders' equity of $24.7 million.
The Company has developed a strategic plan focused on improving operating performance in the future that includes modernizing and upgrading its technology and systems, pursuing business objectives and responding to business opportunities, developing new or improving existing products and services and enhancing operating infrastructure. The plan's objective is for the Company to generate positive cash flows by the fourth quarter of 2019. However, there is no assurance that the Company will be able to achieve this objective. Also, the Company entered into the Credit Agreement discussed above that is expected to be used to partially fund operations. While we believeHowever, if the Company continues to experience losses and becomes unable to comply with the financial covenants in the Credit Agreement, the Company may be unable to borrow funds under this credit facility.
The Company believes that our existing sources of liquiditycurrent cash reserves and operating cash flows will be sufficient to fund oursustain operations forinto at least the next twelve months, ourthird quarter of 2020. If the Company's plans are unsuccessful, it may need to seek to satisfy its future cash needs through private or public sales of securities, debt financings or partnering/licensing transactions. However, there is no assurance that the Company will be successful in satisfying its future cash needs such that the Company will be able to continue operations.
Our future capital requirements will depend on many factors, including but not limited to, implementing new strategic plans, modernizing and upgrading our technology and systems, pursuing business objectives and responding to business opportunities, challenges or unforeseen circumstances, developing new or improving existing products or services, enhancing our operating infrastructure and acquiring complementary businesses and technologies. To the extent that our existing sources of liquidity isare insufficient to fund our future activities, we may need to engage in equity or additional or alternative debt financings to secure additional funds. However,There can be no assurance that additional funds may notwill be available when we need them,needed from any source or, if available, will be available on terms that are acceptable to us, or at all.
us.
For information concerning the Company’s previously announced share repurchase authorization,our Credit Agreement and revolving bank loan, see Note 5,9, Notes to Unaudited Condensed Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We did not repurchase any shares during the nine months ended September 30, 2018 and 2017.
Credit Facility and Term Loan. For information concerning our term and revolving bank loans, see Note 9, Notes to Unaudited Consolidated Condensed 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 totaled $0.7 million forin the ninesix months ended SeptemberJune 30, 2018, as compared to2019 of $5.6 million resulted primarily from net loss of $10.3 million, offset by depreciation and amortization of $3.5 million, stock compensation expense of $1.1 million and other non-cash charges of $0.2 million, and a $0.1 million net decrease in net working capital.
Net cash provided by operating activities of $12.5 million forin the ninesix months ended SeptemberJune 30, 2017. This decrease2018 of $1.3 million resulted primarily from net loss of $15.5 million, as adjusted for non-cash charges. We also had net increases in cash provided by operating activities wasworking capital, driven by a decrease in gross profit,our accounts receivable balance related to the timing of payments received accompanied by an increase in compensation charges incurred as a resultaccounts payable of organizational headcount changes, and increased payments on technology enhancements, partially offset by a decrease in interest paid$1.8 million and an increase in accrued liabilities of $0.7 million primarily related to accruals of annual incentive compensation accrued which willduring the first six months of 2018, but not be paid until 2019.
Net Cash Used in Investing Activities. Net cash used in investing activities was $0.7approximately $1.0 million in the ninesix months ended SeptemberJune 30, 2019 which primarily related to purchases of property and equipment and expenditures related to capitalized internal use software.
Net cash used in investing activities was $0.3 million in the six months ended June 30, 2018 which primarily related to purchases of property and equipment and expenditures related to capitalized internal use software of $0.8 million, offset by $0.1 million in proceeds from the sale of the SaleMove investment.
Net cash used in investing activities was $2.2 million in the nine months ended September 30, 2017, which primarily related to purchases of property and equipment and expenditures related to capitalized internal use software.
Net Cash Used in Financing Activities. Net cash used in financing activities of $0.6 million in the six months ended June 30, 2019 primarily related to a $1.0 million repayment of the AutoUSA Note, offset by proceeds of $0.4 million from the exercise of stock options.
Net cash used in financing activities of $7.7 million in the ninesix months ended SeptemberJune 30, 2018 primarily related to payments of $8.0 million to pay down the revolving credit facility in March 2018, offset by proceeds from the issuance of common stock and the exercise of stock options.
Net cash used in financing activities of $4.1 million primarily related to payments of $3.9 million made against the term loan borrowings and $1.2 million used to repurchase Company common stock in the first nine months of 2017.facility. In addition, stock options for 191,07415,967 shares of the Company’s common stock were exercised in the first ninesix months of 20172018 resulting in $1.1$0.1 million cash inflow.inflow and $0.2 million related to cash received from the issuance of common stock.
Off-Balance Sheet Arrangements
At SeptemberJune 30, 2018,2019, we had no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(D)(ii).
Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.
Item 4. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Security Exchange Act of 1934, as amended, the “Exchange Act”) as of June 30, 2019, the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities and would be disclosed on a timely basis. The Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed, and are effective, to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission. They have also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2019, there were no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 3. QuantitPAaRtive and Qualitative Disclosures about Market RiskIn the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates and changes in general economic conditions. For the three months ended September 30, 2018, there were no material changes in the information required to be provided under Item 305 of Regulation S-K from the information disclosed in Item 7A of the 2017 Form 10-K.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Disclosure controls and procedures ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act are (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure. Based on this evaluation, our Chief Executive Officer and our Interim Chief Financial Officer believe that, due to the material weakness in internal control over financial reporting previously reported in our 2017 Form 10-K, our disclosure controls and procedures were not effective as of September 30, 2018.
As previously reported in our 2017 Form 10-K, in connection with their attestation report on our internal control over financial reporting as of December 31, 2017, Moss Adams LLP identified what they believed was a material weakness in our evaluation and measurement of goodwill for impairment and valuation of deferred tax assets.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
With respect to the material weakness identified by Moss Adams LLP, we are continuing to take steps to remediate this material weakness in our internal control over financial reporting, including identifying and documenting controls for increased management review of goodwill and valuation of deferred tax assets. We have also dedicated additional external resources to assist in improving internal controls so that they are designed to operate at a sufficient level of precision.
Effective January 1, 2018, we adopted the new revenue guidance under Accounting Standards Codification 606 “Revenue from Contracts with Customers.” The adoption of this guidance requires the implementation of new accounting policies and processes, which changed the Company’s internal controls over financial reporting for revenue recognition and related disclosures.
As of the end of the period covered by this Quarterly Report on Form 10-Q, other than the items mentioned in the above paragraph, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and our Interim Chief Financial Officer, does not expect that our disclosure controls and internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PARTT II. OTHEROTHER INFORMATION
Item 1A. Risk Factors
The following factors, which supplement or update the risk factors set forth in Part I, Item 1A, “Risk Factors” of our 20172018 Form 10-K, may affect our future business, results of operations, financial condition, earnings per share, cash flow or the trading price of our stock, individually and results of operations.collectively referred to in these Risk Factors as our “financial performance.” The risks described below are not the only risks we face. In addition to the risks set forth in the 20172018 Form 10-K, as supplemented or superseded by the risk factors set forth below, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.
We may require additional capital to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances. If capital is not available to us, or is not available on favorable terms, our financial performance could be materially and adversely affected.affected.
Our future capital requirements will depend on many factors, including but not limited to, implementing new strategic plans, modernizing and upgrading our technology and systems, pursuing business objectives and responding to business opportunities, challenges or unforeseen circumstances, developing new or improving existing products or services, enhancing our operating infrastructure and acquiring complementary businesses and technologies. In addition, if we continue to experience losses and cannot comply with financial covenants in the Credit Facility, we may be unable to borrow funds under the Credit Facility. To the extent that our existing sources of liquidity are insufficient to fund our future activities, we may need to engage in equity or additional or alternative debt financings to secure additional funds.
We may require additional capital to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to develop new products or services, improve existing products and services, enhance our operating infrastructure and acquire complementary businesses and technologies. As a result, we may need to engage in equity or debt financings to secure additional funds. However,There can be no assurance that additional funds may notwill be available when we need them,needed from any source or, if available, will be available on terms that are acceptable to us, or at all.us.
Any debt financing that we secure in the future could involveOur Credit Facility contains restrictive covenants that may make it more difficult for us to obtain additional capital.capital, as could any additional debt financing that we may secure in the future that could involve additional restrictive covenants. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our financial performance could be materially and adversely affected.
Data privacy laws, rulesAs of June 30, 2019, and regulations.
Various laws, rulesfor the six months then ended, the Company had cash and regulations govern the collection, use, retention, sharingcash equivalents of $1.4 million and security of data that we receive from our users, advertisers and affiliates. In addition, we have and post on our website our own privacy policies and practices concerning the collection, use and disclosure of user data and personal information. Any failure, or perceived failure, by us to comply with our posted privacy policies, Federal Trade Commission requirements or orders or other federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others. Further, failure or perceived failure by us to comply with our policies, applicable requirements or industry self-regulatory principles related to the collection, use, sharing or security of personal information or other privacy-related matters could result in a net loss of user confidence$10.3 million. The net loss is primarily attributable to operating expenses of $2l.6 million during the six months ended June 30, 2019. The Company used net cash in us, damageoperations of $5.6 million for the six months ended June 30, 2019. As of June 30, 2019, the Company had an accumulated deficit of $338.0 million and stockholders' equity of $24.7 million. The Company has developed a strategic plan with the objective for the Company to our brands, and ultimately in a lossgenerate positive cash flows by the fourth quarter of users, advertisers or Lead referral and advertising affiliates. We cannot predict whether new legislation or regulations concerning data privacy and retention issues related to our business2019. However, there is no assurance that the Company will be adopted,able to achieve this objective. If the Company's plans are unsuccessful, it may need to seek to satisfy its future cash needs through private or if adopted, whether they could impose requirementspublic sales of securities, debt financings or partnering/licensing transactions. However, there is no assurance that may resultthe Company will be successful in a decrease in our user registrations and materially and adversely affect our financial performance. Proposalssatisfying its future cash needs such that have or are currently being considered include restrictions relatingthe Company will be able to the collection and use of data and information obtained through the tracking of internet use, including the possible implementation of a “Do Not Track” list, that would allow internet users to opt-out of such tracking. Other proposals include enhanced rights for consumers to obtain information regarding the sharing or sale of their personal information and rights to opt-out or prevent the sharing or sale of their personal information to third parties, similar to the European Union’s General Data Protection Regulation. The State of California has already enacted AB 375, the California Consumer Privacy Act of 2018, which includes significant new personal data privacy rights for consumers. The law becomes effective on January 1, 2020, but may be subject to various amendments before it becomes effective. Depending on the provisions of the law that become effective, compliance with this law could have a material and adverse effect on our financial performancecontinue operations.
Interruptions or failures in our information technology platforms, communication systems or security systems could materially and adversely affect our financial performance.
Our information technology and communications systems are susceptible to outages and interruptions due to fire, flood, earthquake, power loss, telecommunications failures, cyber-attacks, terrorist attacks, technology operations and development failures, failure of redundant systems and disaster recovery plans and similar events. Our planned technology modernization efforts that began in the third quarter of 2018 and that are anticipated to continue through 2019 may have temporary negative impacts on performance of our systems as our systems are moved to new platforms. Outages and interruptions could damage our reputation and harm our operating results. Despite our network security measures, our information technology platforms are vulnerable to computer viruses, worms, physical and electronic break-ins, sabotage and similar disruptions from unauthorized tampering, as well as coordinated denial-of-service attacks. We do not have multiple site capacity for all of our services. In the event of delays or disruptions to services we rely on third party providers to perform disaster recovery planning and services on our behalf. We are vulnerable to extended failures to the extent that planning, and services are not adequate to meet our continued technology platform, communication or security systems’ needs. We rely on third party providers for our primary and secondary internet connections. Our co-location service and public cloud services that provide infrastructure and platform services, environmental and power support for our technology platforms, communication systems and security systems are received from third party providers. We have little or no control over these third-party providers. Any disruption of the services they provide us or any failure of these third-party providers to effectively design and implement sufficient security systems or plan for increases in capacity could, in turn, cause delays or disruptions in our services. We are insured for some, but not all, of these events. Even for those events for which we are insured and have coverage under the terms and conditions of the applicable policies, there are no assurances given that the coverage limits would be sufficient to cover all losses we might incur or experience.
If we lose our key personnel or are unable to attract, train and retain additional highly qualified sales, marketing, managerial and technical personnel, our business may suffer.
Our future success depends on our ability to identify, hire, train and retain highly qualified sales, marketing, managerial and technical personnel. In addition, as we introduce new services we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary executive, managerial, technical, sales and marketing personnel could have a material adverse effect on our financial performance.
Our business and operations are substantially dependent on the performance of our executive officers and key employees. Each of these executive officers could be difficult to replace. There is no guarantee that these or any of our other executive officers and key employees will remain employed with us. The loss of the services of one or more of our executive officers or key employees could have a material adverse effect on our financial performance.
Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide competitive compensation packages, including cash and stock-based compensation. Our primary forms of stock-based incentive awards are stock options and restricted stock units. If the anticipated value of such stock-based incentive awards does not materialize, if our stock-based compensation otherwise ceases to be viewed as a valuable benefit, or if our total compensation package is not viewed as being competitive, our ability to attract, retain and motivate executives and key employees could be weakened.
Our current executives may view the business differently than prior members of management, and over time may make changes to our strategic focus, operations or business plans with corresponding changes in how we report our results of operations. We can make no assurances that our current executives will be able to properly manage any such shift in focus or that any changes to our business would ultimately prove successful. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees, retaining and motivating existing employees or integrating new executives and employees, our business could be materially and adversely affected.
| Number | Asset Purchase and Sale Agreement dated as of December 19, 2016 by and among AutoWeb, Inc., Car.com, Inc., a Delaware corporation, and Internet Brands, Inc., a Delaware corporation, incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on December 21, 2016 (SEC File No. 001-34761)Description |
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| Sixth Restated Certificate of Incorporation of AutoWeb, Inc., incorporated by reference to Exhibit 3.4to the Current Report on Form 8-K filed with the SEC on October 10, 2017 (SEC File No. 001-34761) (“October 2017 Form 8-K”) |
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| Seventh Amended and Restated Bylaws of AutoWeb, Inc. dated October 9, 2017, incorporated by reference to Exhibit 3.5to the October 2017 Form 8-K |
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| Tax Benefit Preservation Plan dated as of May 26, 2010 between Company and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; and Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Company, incorporated by referenceto Exhibit 4.1 tothe Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239), Amendment No. 1 to Tax Benefit Preservation Plan dated as of April 14, 2014, between Company and Computershare Trust Company, N.A., as rights agent, incorporated by referenceto Exhibit 4.1 tothe Current Report on Form 8-K filed with the SEC on April 16, 2014 (SEC File No. 001-34761), Amendment No. 2 to Tax Benefit Preservation Plan dated as of April 13, 2017, between Company and Computershare Trust Company, N.A., as rights agent, incorporated by referenceto Exhibit 4.1 to theCurrent Report on Form 8-K filed with the SEC on April 14, 2017 (SEC File No. 001-34761) |
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| Certificate of Adjustment Under Section 11(m) of the Tax Benefit Preservation Plan, incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 filed with the SEC on November 8, 2012 (SEC File No. 001-34761) |
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| Offer of EmploymentRevolving Credit and Security Agreement by and among PNC Bank, National Association, as Agent, the Lenders Party thereto, and AutoWeb, Inc., as Borrower, and Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as guarantors, dated as of October 2, 2018 between Company and Sara PartinApril 30, 2019, incorporated by reference toExhibit 10.1to the Current Report on Form 8-K filed with the SEC on May 1, 2019 (SEC File No. 001-34761). |
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| Inducement Stock Option Award Agreement dated as of October 22, 2018 between Company and Sara Partin |
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| Indemnification Agreement dated as of October 22, 2018 between Company and Sara Partin |
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| Severance Benefits Agreement dated October 22, 2018 between Company and Sara Partin |
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| Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer |
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| Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer |
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| Section 1350 Certification by Principal Executive Officer and Principal Financial Officer |
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| 101.INS†† | XBRL Instance Document |
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| 101.SCH†† | XBRL Taxonomy Extension Schema Document |
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| 101.CAL†† | XBRL Taxonomy Calculation Linkbase Document |
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| 101.DEF†† | XBRL Taxonomy Extension Definition Document |
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| 101.LAB†† | XBRL Taxonomy Label Linkbase Document |
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| 101.PRE†† | XBRL Taxonomy Presentation Linkbase Document |
■| †† | Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing. |
Management Contract or Compensatory Plan or Arrangement.
‡
Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K. AutoWeb, Inc. will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that AutoWeb, Inc. may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
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Furnished with this report. In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Date: November 8, 2018August 7, 2019 | By: | /s/ Joseph P. Hannan
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| | | Joseph P. Hannan | |
| | | Executive Vice President, Chief Financial Officer | |
| | | (Principal Financial Officer) | |
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| Date: August 7, 2019 | By: | /s/ Wesley Ozima
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| | | | Wesley Ozima | |
| | | | Senior Vice President, and Interim Chief Financial Officer
Controller | |
| | | | (Principal Financial and Accounting Officer) | |
