AutoWeb, Inc. - Quarter Report: 2013 September (Form 10-Q)

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 September 30, 2013

or

For the transition period from                 to                .

Commission file number 1-34761

Autobytel Inc.

(Exact name of registrant as specified in its charter)

(949) 225-4500

(Registrant's telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 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 November 4, 2013, there were 8,909,686 shares of the Registrant's Common Stock, $0.001 par value, outstanding.

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PART I. FINANCIAL INFORMATION

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

See accompanying notes to unaudited consolidated condensed financial statements.

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AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Amounts in thousands, except per-share data)

See accompanying notes to unaudited consolidated condensed financial statements.

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AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

See accompanying notes to unaudited consolidated condensed financial statements.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Autobytel Inc. ("Autobytel" or the "Company") is an automotive marketing services company that assists automotive retail dealers ("Dealers") and automotive manufacturers ("Manufacturers") market and sell new and used vehicles through its programs for online lead referrals ("Leads"), Dealer marketing products and services, and online advertising programs and data products.

The Company's consumer-facing automotive websites ("Company Websites"), including its flagship website Autobytel.com^®, 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 ("Vehicle Leads"). For consumers who may not be able to secure loans through conventional lending sources, the Company Websites provide these consumers the ability to submit inquiries requesting Dealers or other lenders that may offer vehicle financing to these consumers to contact the consumers regarding vehicle financing ("Finance Leads"). The Company's mission for consumers is to be "Your Lifetime Automotive Advisor^®" by engaging consumers throughout the entire lifecycle of their automotive needs.

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 The NASDAQ Capital Market under the symbol ABTL.

Effective October 1, 2013 ("Advanced Mobile Acquisition Date"), the Company acquired substantially all of the assets of privately-held Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation (collectively referred to in this Quarterly Report on Form 10-Q as "Advanced Mobile").  Advanced Mobile provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, text-chat, mobile text marketing, self-service mobile messaging, quick response codes, text messaging, short message service and multimedia service) for the automotive industry.  Text chat provides a web-based portal that allows Dealers to centrally manage text communications.  The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting. As a result of the acquisition, the Company will offer Manufacturers and Dealers the ability to connect with consumers using text communication via a secure platform. In addition, Autobytel will offer Dealers a comprehensive suite of mobile products, including mobile apps, mobile websites, Send2Phone capabilities and text message marketing.

2. Basis of Presentation

The accompanying unaudited consolidated condensed financial statements presented herein are presented on the same basis as the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") for the year ended December 31, 2012 ("2012 Form 10-K").  Autobytel has made its disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles 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.  The statements of income and comprehensive income and cash flows for the periods ended September 30, 2013 and 2012 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2012 Form 10-K.

On July 11, 2012, the Company implemented a 1-for-5 reverse split of the Company's common stock, $0.001 par value per share ("Reverse Stock Split").  Accordingly, each five shares of common stock were reclassified into one share of common stock.  All share and per share amounts and all options and other common stock derivatives, including their exercise/conversion prices, for all periods presented have been adjusted to reflect the Reverse Stock Split as though it had occurred as of the earliest period presented.  Such reclassification did not impact prior period net income or total stockholders' equity.

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Accounting Standards Codification 740 "Income Taxes."  In July 2013, Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" was issued.  The objective of this ASU is to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist.  This ASU is effective for fiscal years beginning after December 15, 2013.  The Company does not believe that adoption of this ASU will have a material impact on the Company's consolidated financial results.

 

Basic net income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock and if-converted method, during the period. Potential common shares consist of common shares issuable upon the exercise of stock options, common shares issuable upon the exercise of the warrant described below and common shares issuable upon conversion of the convertible note described in Note 6.  The following are the share amounts utilized to compute the basic and diluted net income per share for the three and nine months ended September 30, 2013 and 2012 (adjusted for the Reverse Stock Split):

For the three and nine months ended September 30, 2013 and September 30, 2012, weighted average dilutive securities included dilutive options, warrants and convertible debt.

For the three and nine months ended September 30, 2013, 1.1 million and 1.3 million of potentially anti-dilutive shares of common stock have been excluded from the calculation of diluted net income per share, respectively.  For the three and nine months ended September 30, 2012, 1.5 million and 2.5 million anti-dilutive shares of common stock have been excluded from the calculation of diluted net income per share, respectively.

 On February 13, 2012, the Company announced that the Board of Directors had approved a stock repurchase program that authorized the repurchase of up to $1.5 million of Company common stock.  The Board of Directors authorized the Company to repurchase an additional $2.0 million of Company common stock on June 7, 2012.  Under these repurchase programs, 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 programs at any time.  The Company would fund repurchases through the use of available cash. The Company began repurchasing its common stock on March 7, 2012.   During the nine months ended September 30, 2012, the Company repurchased 379,811 shares for an aggregate price of $1.5 million.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

The average price paid for all shares repurchased during the nine months ended September 30, 2012 was $3.83.  No shares were repurchased during 2013.  The shares repurchased in the nine months ended September 30, 2012 were cancelled by the Company and returned to authorized and unissued shares.

Warrant.  On September 17, 2010 ("Cyber Acquisition Date"), the Company acquired substantially all of the assets of privately-held Autotropolis, Inc., a Florida corporation, and Cyber Ventures, Inc., a Florida corporation (collectively referred to in this Quarterly Report on Form 10-Q as "Cyber").   In connection with the acquisition of Cyber, the Company issued to the sellers a warrant to purchase 400,000 shares of Company common stock ("Warrant"). The Warrant was valued at $3.15 per share on the Cyber Acquisition Date using an option pricing model with the following key assumptions: risk-free rate of 2.3 %, stock price volatility of 77.5 % and a term of 8.04 years.  The Warrant was valued based on historical volatilities of the Company and comparable public companies as of the Cyber Acquisition Date.  The exercise price of the Warrant is $4.65 per share (as adjusted for stock splits, stock dividends, combinations and other similar events).  The Warrant became exercisable on September 16, 2013 and expires on the eighth anniversary of the issuance date.

 

5.  Share-Based Compensation

 

Share-based compensation expense is included in costs and expenses in the accompanying Unaudited Consolidated Condensed Statements of Income and Comprehensive Income as follows:

Service-Based Options.  During the three months ended September 30, 2013, the Company granted 13,000 service-based stock options with weighted average grant date fair values of $2.73 and weighted average exercise prices of $5.92.  During the three months ended September 30, 2012, the Company granted 38,000 service-based stock options with weighted average grant date fair values of $2.20 and weighted average exercise prices of $3.68.  During the nine months ended September 30, 2013, the Company granted 109,000 service-based stock options with weighted average grant date fair values of $2.29 and weighted average exercise prices of $4.43.  During the nine months ended September 30, 2012, the Company granted 79,400 service-based stock options with weighted average grant date fair values of $2.31 and weighted average exercise prices of $3.83.  These options are valued using a Black-Scholes option pricing model and 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.

  Performance-based Options.  During the nine months ended September 30, 2013, the Company granted 87,177 performance-based stock options ("2013 Performance Options") to certain employees with a weighted average grant date fair value of $2.19, using a Black-Scholes option pricing model and weighted average exercise price of $4.00.  The 2013 Performance Options are subject to two vesting requirements and conditions: (i) percentage achievement of 2013 revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") goals and (ii) time vesting.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

During the nine months ended September 30, 2013, in connection with the acquisition of Advanced Mobile, the Company granted 88,641 performance-based inducement stock options ("2013 Inducement Options") to one employee with a weighted average grant date fair value of $3.21, using a Black-Scholes option pricing model and weighted average exercise price of $7.17.  The 2013 Inducement Options are subject to two vesting requirements and conditions: (i) percentage achievement of 2014, 2015 and 2016 revenues and gross profit goals for the Advanced Mobile business and (ii) time vesting.

During the nine months ended September 30, 2012, the Company granted 249,199 performance-based stock options ("2012 Performance Options") to certain employees with a weighted average grant date fair value of $2.39, using a Black-Scholes option pricing model and a weighted average exercise price of $3.98.  The 2012 Performance Options are subject to two vesting requirements and conditions: (i) percentage achievement of 2012 revenues and EBITDA goals and (ii) time vesting.  Based on the Company's 2012 revenues and EBITDA performance, 161,394 of the 2012 Performance Options vested under the performance vesting condition, and one-third of these options vested on the first anniversary of the grant date, with the remainder vesting ratably over twenty-four months thereafter.

Market Condition Options.  In 2009, the Company granted 213,650 stock options to substantially all employees at exercise prices equal to the price of the stock on the grant date of $1.75, with a fair market value per option granted of $0.97, using a Black-Scholes option pricing model.  One-third of these options cliff vested on the first anniversary following the grant date and the remaining two-thirds vest ratably over twenty-four months thereafter.  In addition, the remaining two-thirds of the awards were subject to satisfaction of market price conditions for the Company's common stock, which conditions have been satisfied. During the three months ended September 30, 2013 and September 30, 2012, 596 and 2,500 of these market condition stock options were exercised, respectively.  During the nine months ended September 30, 2013 and September 30, 2012, 5,672 and 7,706 of these market condition stock options were exercised, respectively.

During the three and nine months ended September 30, 2013, 30,193 and 51,931 stock options (inclusive of the 596 and 5,672 market condition stock options exercised during the period, respectively) were exercised, with aggregate weighted average exercise prices of $4.37 and $3.91, respectively.  There were 2,738 and 9,482 stock options (inclusive of the 2,500 and 7,706 market condition stock options exercised during the period, respectively) exercised during the three and nine months ended September 30, 2012 with aggregate weighted average exercise prices of $1.87 and $2.00, respectively.

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:

Property and Equipment.  Property and equipment consists of the following:

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

The Company periodically reviews long-lived assets to determine if there are any impairment indicators.  The Company assesses the impairment of these assets, or the need to accelerate amortization, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company's judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our long-lived assets.  If such indicators exist, the Company evaluates the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. Should the carrying amount of an asset exceed its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying amount over its fair value. Fair value is generally determined based on a valuation process that provides an estimate of the fair value of these assets using a discounted cash flow model, which includes assumptions and estimates.

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 with Urban Science Applications (which represents several Manufacturer programs), General Motors and AutoNation. During the first nine months of 2013, approximately 28 % of the Company's total revenues were derived from these three customers, and approximately 37 %, or $5.5 million, of gross accounts receivable related to these three customers at September 30, 2013.

During the first nine months of 2012, approximately 27 % of the Company's total revenues were derived from General Motors, Urban Science Applications (which represents several Manufacturer programs) and AutoNation, and approximately 35 %, or $4.0 million of gross accounts receivables related to these three customers at September 30, 2012.

Investments.  In August 2010 the Company acquired less than a 5% equity interest in privately-held Driverside, Inc. ("Driverside") for $1.0 million.  Driverside provides consumers with a broad set of content, features, tools, technology, systems, products, services and programs related to the efficient ownership of motor vehicles.  The Company received 1,352,082 shares of Series C Preferred Stock in Driverside for the investment.  The Company made an additional investment in Driverside in 2011in the amount of $16,737.  The Company recorded the investments in Driverside at cost because the Company did not have significant influence over Driverside.  In 2011, Driverside merged with another entity, and the Company received a cash payment of $823,000, representing the Company's  pro rata share of the initial merger consideration.  The $823,000 received at closing of the transaction was recorded as a reduction to the Driverside investment on the consolidated balance sheet. In 2012, the Company received $326,000, which represented the pro rata share of contingent payments upon achievement of milestones by Driverside.  Of the $326,000 received in 2012, $194,000 was recorded as a complete reduction to the investment in Driverside and $132,000 was recorded as other income.  In the three months ended September 30, 2013 the Company received $108,000 from Driverside, which represented its pro rata share of amounts released from an escrow account established to satisfy post-closing indemnification claims.  The Company recorded the $108,000 as other income.

In September 2013 the Company entered into a Contribution Agreement with privately-held AutoWeb, Inc., a Delaware corporation ("AutoWeb"), in which the Company contributed to AutoWeb $2.5 million and assigned to AutoWeb all of the Company's ownership interests in the autoweb.com domain name and two registered trademarks related to the AutoWeb name and related goodwill in exchange for 8,000 shares of AutoWeb Series A Preferred Stock, $0.01 par value per share.  The 8,000 shares of AutoWeb Series A Preferred Stock represents 16% of all issued and outstanding capital stock of AutoWeb as of September 18, 2013.  The Company recorded the investment in AutoWeb at cost because the Company does not have significant influence over AutoWeb.

Intangible Assets.  The Company amortizes specifically identified intangible assets using the straight-line method over the estimated useful lives of the assets.

In connection with the acquisition of Cyber on the Cyber Acquisition Date, the Company identified $4.5 million of intangible assets.

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AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS – (continued)

Intangible Asset		Estimated Useful Life
Trademarks/trade names		5 years
Software and publications		3 years
Customer relationships		3 years
Employment/non-compete agreements		5 years

Amortization expense for the remainder of the year and for the next four years is as follows:

 

Goodwill.  The Company recognized $11.7 million in goodwill related to the acquisition of Cyber in 2010.  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.

Accrued Expenses and Other Current Liabilities.  Accrued expenses and other current liabilities consisted of the following:

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Long-term debt.  In connection with the acquisition of Cyber, the Company issued a convertible subordinated promissory note for $5.0 million ("Convertible Note") to the sellers.  The fair value of the Convertible Note as of the Cyber Acquisition Date was $5.9 million.  This valuation was estimated using a binomial option pricing method.  Key assumptions used in valuing the Convertible Note included a market yield of 15.0 % and stock price volatility of 77.5 %.  As the Convertible 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 Convertible Note is to be paid in full on September 30, 2015.  At any time after September 30, 2013, the holders of the Convertible Note may convert all or any part of, but in 40,000 minimum share increments, the then outstanding and unpaid principal of the Convertible Note into fully paid shares of the Company's common stock at a conversion price of $4.65 per share (as adjusted for stock splits, stock dividends, combinations and other similar events).  The right to convert the Convertible Note into common stock of the Company is accelerated in the event of a change in control of the Company.  In the event of default, the entire unpaid balance of the Convertible Note will become immediately due and payable and will bear interest at the lower of 8 % per year and the highest legal rate permissible under applicable law.

Credit Facility.  We entered into an $8.0 million revolving credit facility ("Facility") in February 2013 with Union Bank, N.A.  The Facility may be used as a source to finance capital expenditures, acquisitions, stockholder buyback, and other general corporate purposes.  Borrowings under the Facility will bear interest at either the bank's Reference Rate (prime rate) minus 0.50 % or the London Interbank Offering Rate (LIBOR) plus 1.50 %, at the option of the Company.  We will also pay a commitment fee on the unused Facility of 0.10 % payable quarterly in arrears.  The outstanding balance as of September 30, 2013 was $4.25 million.  The Facility contains certain customary representations and warranties, affirmative and negative covenants and restrictive and financial covenants, including that the Company maintain a minimum consolidated net liquidity, profitability, EBITDA and tangible net worth, with which the Company was in compliance with as of September 30, 2013.  Borrowings under the Facility are secured by a first priority security interest on our accounts receivable and proceeds thereof.  The Facility matures in February 2015.

 

Employment Agreements

The Company has employment agreements and retention agreements with certain key employees. A number of these agreements require severance payments, continuation of certain insurance benefits and acceleration of vesting of stock options in the event of a termination of employment by the Company without cause or by the employee for good reason.

Litigation

From time to time, the Company may be involved in litigation matters arising from the normal course of its business activities. The actions filed against the Company and other litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention, and an adverse outcome in litigation could materially adversely affect its business, results of operations, financial condition and cash flows.

The Company was audited in June 2011 by the New York State Department of Taxation and Finance for sales tax for the period December 1, 2003 through February 28, 2011.  The Company paid $166,000 related to this sales tax audit in April 2013, and the audit is now closed.

 

In March 2013, the Company received a $0.5 million payment related to termination of a license agreement under which the Company had licensed certain rights in the Company's proprietary software, business procedures and brand. The license agreement, originally entered into in 2002, had an original term of 25 years, with the licensee having the right to terminate the agreement early upon two years notice.  The license agreement did not generate any revenue for the Company, other than $250,000 annually which was recorded as other income since inception of the license agreement.  The licensee exercised its right to terminate the license agreement and, in order to terminate the license agreement prior to the end of the notice period, agreed to a pre-payment of the annual license fees that otherwise would have been due during the two-year notice period.

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On an interim basis, the Company estimates what its anticipated annual effective tax rate will be and records a quarterly income tax provision in accordance with the estimated annual rate, plus the tax effect of certain discrete items that arise during the quarter.  As the fiscal year progresses, the Company refines its estimates based on actual events and financial results during the year.  This process can result in significant changes to the Company's estimated effective tax rate.  When this occurs, the income tax provision is adjusted during the quarter in which the estimates are refined so that the year-to-date provision reflects the estimated annual effective tax rate.  These changes, along with adjustments to the Company's deferred taxes and related valuation allowance, may create fluctuations in the overall effective tax rate from quarter to quarter.

 Due to overall cumulative losses incurred in recent years, the Company maintained a valuation allowance against its deferred tax assets as of September 30, 2013 and December 31, 2012. Historically, the Company has been in a position of overall cumulative losses over the trailing twelve quarters.  However, beginning with the quarter ended September 30, 2013, the Company has now achieved a position of overall cumulative income in the trailing twelve quarters.  While this factor does not in and of itself indicate that the valuation allowance or a portion of the allowance should be removed, it is an indicator that needs to be considered in the evaluation of the valuation allowance. Other factors will also need to be assessed including the future projections of taxable income and the Company's ability to accurately project such taxable income. As such, the Company will be continuously reassessing the appropriateness of releasing the valuation allowance.  As the Company prepares to refine their projections of future income during the quarter ended December 31, 2013, and if the Company continues to see a trend of increasing overall cumulative income in the trailing twelve quarters for another quarter, the Company may determine that it is appropriate to release some or all of the valuation allowance in the quarter ended December 31, 2013.

The Company's effective tax rate for the three and nine months ended September 30, 2013 differed from the U.S. federal statutory rate primarily due to the impact of changes in the valuation allowance and to the increase in deferred tax liabilities related to tax deductible indefinite-lived intangible assets.

The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.2 million as of September 30, 2013, of which none would impact the effective tax rate if recognized.  The gross liability for income taxes related to unrecognized tax benefits is included in other long-term liabilities in the Company's condensed consolidated balance sheets.

The total balance of accrued interest and penalties related to uncertain tax positions was $19,000 and $13,000 as of September 30, 2013 and December 31, 2012, respectively.  The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense and the accrued interest and penalties are included in deferred and other long-term liabilities in the Company's condensed consolidated balance sheets.  There were no material interest or penalties included in income tax expense for each of the three and nine months ended September 30, 2013 and September 30, 2012.

The Company is subject to taxation in the U.S. and in various state jurisdictions.  Due to expired statutes of limitation, the Company's federal income tax returns for years prior to calendar year 2010 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 2009 are no longer subject to examination.  The Company is currently under examination by the State of New York for the years 2009 through 2011, but does not anticipate any material adjustments.  The Company has estimated that none of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months.  Audit outcomes and the timing of settlements are subject to significant uncertainty.

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10.  Subsequent Events

Advanced Mobile

As of the Advanced Mobile Acquisition Date, the Company acquired substantially all of the assets of Advanced Mobile.  Advanced Mobile provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, text-chat, mobile text marketing, self-service mobile messaging, quick response codes, text messaging, short message service and multimedia service) for the automotive industry.  The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting.  Advanced Mobile was acquired to enable the Company to offer the automotive industry the mobile technology and resources required to exploit the expanding growth in smart phone and tablet use.

The Advanced Mobile Acquisition Date fair value of the consideration transferred totaled $3.4 million which consisted of the following:

The contingent consideration arrangement ("Contingent Consideration") requires the Company to pay up to $1.5 million (representing quarterly payments of up to $125,000 beginning first quarter 2014 and ending fourth quarter 2016) of additional consideration to Advanced Mobile if certain revenue and gross profit targets are met.  The fair value of the contingent consideration as of the Effective Date was $825,000.  The fair value of the contingent consideration was estimated using a Monte Carlo Simulation.  The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurements and Disclosures.  The key assumptions in applying the Monte Carlo Simulation consisted of volatility inputs for both revenue and gross profit, forecasted gross margin, and a weighted-average cost of capital assumption used to adjust forecasted revenue and gross margin for risk.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the Effective Date.  Because the transaction was completed subsequent to the end of the third quarter of 2013, we have not yet finalized the fair values of the assets and liabilities assumed in connection with the acquisition.

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     The preliminary fair value of the acquired intangible assets was determined using the below valuation approaches. In estimating the preliminary fair value of the acquired intangible assets, the Company utilized the valuation methodology determined to be most appropriate for the individual intangible asset being valued as described below.

The acquired intangible assets include the following:

Some of the more significant estimates and assumptions inherent in the estimate of the fair value of the identifiable purchased intangible assets include all assumptions associated with forecasting cash flows and profitability. The primary assumptions used for the determination of the preliminary fair value of the purchased intangible assets were generally based upon the present value of anticipated cash flows discounted at a rate of 26%. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

The goodwill recognized of $1.9 million is attributable primarily to expected synergies and the assembled workforce of Advanced Mobile.  The full amount is amortizable for income tax purposes. The Company advanced $1.8 million in the quarter ended September 30, 2013 related to the acquisition of Advanced Mobile, which became effective October 1, 2013.

The following unaudited pro forma information presents the consolidated results of the Company and Advanced Mobile for the three and nine months ended September 30, 2013 and 2012, respectively, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact, but exclude the impact of pro forma events that are directly attributable to the acquisition and are one-time occurrences. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods, the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results of operations that the combined company will experience after the acquisition. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs or remaining future transaction costs that the companies may incur as a result of the acquisition and combining the operations of the companies.

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The unaudited pro forma consolidated results of operations, assuming the acquisition had occurred on January 1, 2013, are as follows:

 

SaleMove

On October 30, 2013, the Company entered into an agreement with SaleMove, Inc. ("SaleMove") to become the exclusive provider to the automotive industry of SaleMove's technology for enhancing communications with consumers.  SaleMove's patent-pending 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.

You should read the following discussion of our results of operations and financial condition in conjunction with our unaudited 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 2012 Form 10-K.

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements presented herein are presented on the same basis as the 2012 Form 10-K.  We have made disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles 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.  The statements of income and comprehensive income and cash flows for the periods ended September 30, 2013 and 2012 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2012 Form 10-K.

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Effective October 1, 2013, the Company acquired substantially all of the assets of privately-held Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation (collectively referred to in this Quarterly Report on Form 10-Q as "Advanced Mobile").  Advanced Mobile provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, text-chat, mobile text marketing, self-service mobile messaging, quick response codes, text messaging, short message service and multimedia service) for the automotive industry.  Text chat provides a web-based portal that allows dealers to centrally manage text communications.  This web-based tool includes role-based permissions, a global opt out feature and the ability to monitor all text communications between dealership employees and consumers.  By assisting a dealership with compliance issues surrounding text, this tool opens up a wide array of text-based marketing for dealers and allows consumers to interact with dealers using one of the most preferred methods of mobile communications.  The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting.

On July 11, 2012, the Company implemented a 1-for-5 reverse split of the Company's common stock, $0.001 par value per share ("Reverse Stock Split").  Trading of the Company's common stock on a post-Reverse Stock Split adjusted basis on The NASDAQ Capital Market began on July 12, 2012. Accordingly, each five shares of common stock were reclassified into one share of common stock.  All share and per share amounts and all options and other common stock derivatives, including their exercise/conversion prices, for all periods presented have been adjusted to reflect the Reverse Stock Split as though it had occurred as of the earliest period presented.  Such reclassification did not impact prior period net income or total stockholders' equity.

Overview

We are an automotive 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 purchase request referrals ("Leads"), Dealer marketing products and services, and online advertising programs and data products.  Our consumer-facing automotive websites ("Company Websites"), including our flagship website Autobytel.com^®, 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 ("Vehicle Leads").  For consumers who may not be able to secure loans through conventional lending sources, our Company Websites provide these consumers the ability to submit inquiries requesting Dealers or other lenders that may offer vehicle financing to these consumers to contact the consumers regarding vehicle financing ("Finance Leads").  The Company's mission for consumers is to be "Your Lifetime Automotive Advisor ^®" by engaging consumers throughout the entire lifecycle of their automotive needs.

Lead quality is measured by the conversion of Leads to actual vehicle sales.  Leads are internally-generated from our Company Websites ("Internally-Generated Leads") or acquired from third parties ("Non-Internally-Generated Leads") that generate Leads from their websites ("Non-Company Websites").  We rely on detailed feedback from Manufacturer and wholesale customers to confirm the performance of our Leads.  In addition, in 2011 we started using R.L. Polk & Co. to evaluate the performance quality of both our Internally-Generated Leads as well as Non-Internally-Generated Leads.  Our Manufacturers and wholesale customers and R.L. Polk & Co. match the Leads we deliver to our customers against vehicle sales data to provide us with closing rates for the Leads we deliver to our customers and information that allows us to compare these closing rates to the closing rates of the Leads we acquire from third party suppliers.  Based on the most current Polk data, automotive Leads from consumers shopping on Autobytel.com have a conversion rate of over 25% within 90 days of Lead submission.

In addition, we report a number of key metrics to our customers, allowing them to gain a better understanding of the revenue opportunities that they may realize from acquiring Leads from us.  We can now optimize the mix of Leads we deliver to our Dealers based on multiple sources of quality measurements. Also, by reporting the buying behavior of potential customers, the findings also can help shape improvements to online Lead management; online advertising and dealership sales process training.  By providing actionable data, we are now placing considerable intelligence in the hands of our customers and are seeing increased budget allocations for purchasing Leads from us.

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For the three and nine months ended September 30, 2013, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic and market factors, conditions in the automotive industry, the market for Leads and the market for advertising services, including, but not limited to, the following:

·	The adverse effect of high unemployment on the number of vehicle purchasers;

·	Availability of, and interest rates for, financing for vehicle purchases;

·	Pricing and purchase incentives for vehicles;

·	Disruption in the available inventory of automobiles;

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

·	The impact of gasoline prices on demand for vehicles;

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

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

·	The effect of changes in search engine algorithms and methodologies on our Lead generation and website advertising activities and margins; and

·	The effect of a federal government shutdown on automotive sales.

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Results of Operations

The following table sets forth certain income statement data for the three-month periods ended September 30, 2013 and 2012 (certain amounts may not calculate due to rounding):

 

Leads.  Purchase request revenues increased $4.1 million or 25% in the third quarter of 2013 compared to the third quarter of 2012 primarily due to an increase of 10% and 40% in the supply and demand for automotive Leads delivered to new and used retail Dealers and Manufacturers and other wholesale purchasers, respectively.

Advertising. Advertising revenues increased $72,000 or 8% in the third quarter of 2013 compared to the third quarter of 2012 as a result of an increase in page views resulting in corresponding increased display advertising revenue.

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 on-line automotive information providers. Other cost of revenues consists of search engine marketing ("SEM") and fees paid to third parties for data and content, including search engine optimization ("SEO") activity, included on 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's 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 $2.1 million or 19% in the third quarter of 2013 compared to the third quarter of 2012 primarily due to a corresponding increase in lead volume, coupled with increased investment in the lead acquisition team headcount.

Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, personnel costs and other costs associated with Dealer sales, website advertising, Dealer support and bad debt expense. Sales and marketing expense in the third quarter of 2013 increased by $0.7 million or 35% compared to the third quarter of 2012 due principally to an increase in brand advertising spend.

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Technology Support. 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 third quarter of 2013 increased by $0.2 million or 12% compared to the third quarter of 2012 due to increased headcount-related expense.

General and Administrative. 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 third quarter of 2013 increased by $0.5 million or 27% compared to the third quarter of 2012 due to an increase in headcount-related compensation costs and professional fees associated with increased merger and acquisition activity.

Depreciation and amortization.  Depreciation and amortization expense in the third quarter of 2013 decreased by $0.1 million compared to the third quarter of 2012 primarily due to a portion of the intangible assets related to the Cyber acquisition being fully amortized in the third quarter of 2013.

Litigation settlements.  Payments primarily from settlement of patent infringement claims against third parties relating to the third party's methods of Lead delivery for the third quarter of 2013 were $66,000 and were essentially flat from the third quarter of 2012.

Interest and other income (expense), net.  Interest and other income (expense), net was $24,000 for the third quarter of 2013 compared to $16,000 for the third quarter of 2012.  Interest and other income (expense), net in the third quarter of 2013 included $0.1 million received from our investment in Driverside, Inc ("Driverside").  The $0.1 million represented the Company's pro rata share of amounts released from an escrow account established to satisfy post-closing indemnification claims.  The total internal rate of return on the Driverside investment was 14%.   The third quarter of 2013 also included $81,000 of interest expense.

Income taxes. Income tax expense was $138,000 in the third quarter of 2013 compared to income tax expense of $87,000 in the third quarter of 2012. Both periods included tax expense related to various state taxes and the deferred tax liability related to tax deductible goodwill amortization.

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Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

The following table sets forth certain income statement data for the nine-month periods ended September 30, 2013 and 2012 (certain amounts may not calculate due to rounding):

 

Leads.  Purchase request revenues increased $7.9 million or 17% in the first nine months of 2013 compared to the first nine months of 2012 primarily due to an increase of 13% and 24% in both supply and demand of automotive Leads delivered to new and used retail Dealers and Manufacturers and other wholesale purchasers, respectively.

Advertising. Advertising revenues decreased $0.1 million or 4% in the first nine months of 2013 compared to the first nine months of 2012 due primarily to lower data licensing revenue.

Cost of Revenues.  Cost of revenues increased $5.3 million or 18% in the first nine months of 2013 compared to the first nine months of 2012 primarily due to a corresponding increase in lead volume coupled with increased investment in the lead acquisition personnel.

Sales and Marketing.  Sales and marketing expense in the first nine months of 2013 increased $0.5 million or 7% compared to the first nine months of 2012 due to an increase in brand advertising spend.

Technology Support.  Technology support expense in the first nine months of 2013 increased $0.2 million compared to the first nine months of 2012 due to increased headcount-related costs.  This was offset by decreased computer software and maintenance costs.

General and Administrative. General and administrative expense in the first nine months of 2013 was $7.0 million, an increase of $1.2 million from the first nine months of 2012 due to an increase in headcount related costs, professional fees and one-time personnel relocation expenses.

Depreciation and amortization.  Depreciation and amortization expense decreased $99,000 or 8% in the first nine months of 2013 compared to the first nine months of 2012, primarily due to a portion of the intangible assets related to the Cyber acquisition being fully amortized in the third quarter of 2013.

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Litigation settlements.  Patent infringement settlements for the first nine months of 2013 and 2012 were $205,000.  Payments related primarily from settlement of patent infringement claims against third parties relating to the third party's methods of Lead delivery.

Interest and other income (expense), net.  Interest and other income (expense), net was $0.3 million for the first nine months of 2013 compared to $12,000 for the first nine months of 2012.  Interest and other income (expense), net in the first nine months of 2013 included receipt of a $0.5 million payment related to early termination of a license agreement pursuant to which the Company, as licensor, had licensed certain rights in the Company's proprietary software, business procedures, and brand and $0.1 million received from our investment in Driverside.  The $0.1 million represented the Company's pro rata share of amounts released from an escrow account established to satisfy post-closing indemnification claims.  The total internal rate of return on the Driverside investment was 14%.   The first nine months of 2013 also included $0.2 million of interest expense.

  Income taxes. Income tax expense was $292,000 in the first nine months of 2013 compared to income tax expense of $256,000 in the first nine months of 2012. Both periods' tax expense relates to other state taxes and the deferred tax liability related to tax deductible goodwill amortization.  The prior period included the New York state income tax audit assessment for the period January 1, 2006 through December 31, 2008.

Liquidity and Capital Resources

The table below sets forth a summary of our cash flows for the nine months ended September 30, 2013 and 2012:

 

Our principal sources of liquidity are our cash and cash equivalents balances and positive operating cash flow.  Our cash and cash equivalents totaled $17.4 million as of September 30, 2013 compared to cash and cash equivalents of $15.3 million as of December 31, 2012.

On February 13, 2012, we announced that the Board of Directors had approved a stock repurchase program that authorized the repurchase of up to $1.5 million of Company common stock.  The Board of Directors authorized us to repurchase an additional $2.0 million of Company common stock on June 7, 2012.  Under these repurchase programs, we may repurchase common stock from time to time on the open market or in private transactions. This authorization does not require us to purchase a specific number of shares, and the Board of Directors may suspend, modify or terminate the programs at any time.  We would fund repurchases through the use of available cash. We began repurchasing Company common stock on March 7, 2012.  During the nine months ended September 30, 2012, 379,811 shares were repurchased for an aggregate price of $1.5 million.  The average price paid for all shares repurchased during the nine months ended September 30, 2012 was $3.83.  No shares were repurchased during 2013.  The shares repurchased in the nine months ended September 30, 2012 were cancelled by the Company and returned to authorized and unissued shares.

   

Credit Facility.  We entered into an $8.0 million revolving credit facility ("Facility") in February 2013 with Union Bank, N.A.  The Facility may be used as a source to finance capital expenditures, acquisitions, stockholder buyback, and other general corporate purposes.  Borrowings under the Facility will bear interest at either the bank's Reference Rate (prime rate) minus 0.50% or the London Interbank Offering Rate (LIBOR) plus 1.50%, at the option of the Company.  We will also pay a commitment fee on the unused Facility of 0.10% payable quarterly in arrears.  The outstanding balance as of September 30, 2013 was $4.25 million.  The Facility contains certain customary representations and warranties, affirmative and negative covenants and restrictive and financial covenants, including that the Company maintain a minimum consolidated net liquidity, profitability, EBITDA and tangible net worth, with which the Company was in compliance with as of September 30, 2013.  Borrowings under the Facility are secured by a first priority security interest on our accounts receivable and proceeds thereof.  The Facility matures in February 2015.

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Net Cash Provided by Operating Activities.  Net cash provided by operating activities in the nine months ended September 30, 2013 of $2.7 million resulted primarily from net income of $2.0 million, as adjusted for non-cash charges to earnings. In addition, accounts payable increased $2.3 million offset by a $4.7 million increase in our accounts receivable balance related to the timing of payments received from our customers.  Net cash provided by operating activities in the nine months ended September 30, 2012 of $4.4 million resulted primarily from net income of $1.0 million, as adjusted for non-cash charges to earnings, in addition to a $2.2 million increase in our accounts payable balance offset by a $1.3 million decrease in our accounts receivable balance related to the timing of payments received from our customers.

Net Cash Used in Investing Activities.  Net cash used in investing activities was $5.0 million in the nine months ended September 30, 2013 and was primarily related to $1.8 million in advances on the purchase of Advanced Mobile, a $2.5 million  investment in AutoWeb and a $0.2 million investment in SaleMove in the form of a note receivable.  We also purchased $0.6 million of property and equipment and received $0.1 million related to a final escrow payout related to our investment in Driverside.  Net cash used in investing activities was $0.2 million in the nine months ended September 30, 2012 and was primarily related to net changes in a certificate of deposit used to secure the processing of certain SEM activity offset by purchases of property and equipment.

Net Cash Provided by (Used in) Financing Activities.  Stock options for 51,931 shares of stock were exercised in the nine months ended September 30, 2013 which resulted in $0.2 million cash inflow for the nine months ended September 30, 2013.  Net cash provided by financing activities in the nine months ended September 30, 2013 also included $4.25 million in borrowings under our credit facility and was offset by contingent payments of $83,000 related to the Cyber acquisition.  Stock options for 9,482 shares of stock were exercised in the nine months ended September 30, 2012 resulting in $22,000 cash inflow.  Net cash used in financing activities in the nine months ended September 30, 2012 consisted of contingent payments of $0.2 million related to the Cyber acquisition and $1.5 million used to repurchase 379, 811 shares of our common stock.  Our future cash flows from employee stock options, if any, will depend on the future timing, exercise price, and amount of stock option exercises.

Off-Balance Sheet Arrangements

At September 30, 2013, we had no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(D)(ii).

In 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 nine months ended September 30, 2013 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 2012 Form 10-K.

As of the end of the period covered by this Quarterly Report on Form 10-Q, 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 Chief Financial Officer, does not expect that our disclosure controls and internal control over financial reporting will prevent all error 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.

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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.

 

PART II. OTHER INFORMATION

The following , which supplements or updates the risk factors set forth in Part I, Item 1A, "Risk Factors" of the 2012 Form 10-K may materially and adversely affect our business, prospects, financial condition and results of operations.  The risks described below are not the only risks we face.  In addition to the risks set forth in the 2012 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 are affected by general economic, and market, conditions and, in particular, conditions in the automotive industry.

Our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic and market factors, conditions in the automotive industry, the market for Purchase Requests and the market for advertising services, including, but not limited to, the following:

·	The adverse effect of high unemployment on the number of vehicle purchasers;

·	Availability of, and interest rates for, financing for vehicle purchases;

·	Pricing and purchase incentives for vehicles;

·	Disruption in the available inventory of automobiles;

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

·	The impact of gasoline prices on demand for vehicles;

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

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

·	The effect of changes in search engine algorithms and methodologies on our Lead generation and website advertising activities and margins; and

·	The effect of a federal government shutdown on automotive sales.

Risks associated with integration of acquisitions

 As part of our business strategy we may evaluate potential acquisitions which we believe will complement or enhance our existing business.  Acquisitions involve numerous risks, and acquisition integration issues are often complex, time-consuming and expensive and if not successfully integrated could materially and adversely affect our business, operating results and financial condition. The challenges involved with integration of acquisitions include diversion of management attention to assimilating the acquired business from other business operations and concerns; integration of management information and accounting systems of the acquired business into our systems; and the failure to fully realize all of the anticipated benefits of an acquisition.

Telemarketing Risks

 We are subject to various federal and state laws, rules, regulations and orders regarding telemarketing and privacy, including restrictions on the use of unsolicited emails and restrictions on marketing activities conducted through the use of telephonic communications (including text messaging to mobile telephones). Our business, operating results and financial condition can be adversely affected by newly-adopted or amended laws, rules, regulations and orders relating to telemarketing and increased enforcement of such laws, rules, regulations or orders by governmental agencies or by private litigants. One example of recent regulatory changes that may affect our business, operating results and financial condition are the regulations under the Telephone Consumer Protection Act ("TCPA"). New regulations adopted by the Federal Communications Commission that became effective October 16, 2013 require the prior express written consent of the called party before a caller can initiate telemarketing calls (i) to wireless numbers (including text messaging) using an automatic telephone dialing system or an artificial or prerecorded voice; or (ii) to residential lines using an artificial or prerecorded voice. Failure to comply with the TCPA can result in significant penalties, including statutory damages.  Our efforts to comply with the new regulations may negatively affect conversion rates of leads, and thus, our revenue or profitability.

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*	Filed herewith.

‡

Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K.  Autobytel will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that Autobytel 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.

**

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.

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			AUTOBYTEL INC.
	Date: November 7, 2013		By:	/s/ Curtis E. DeWalt
				Curtis E. DeWalt
				Senior Vice President and Chief Financial Officer
				(Duly Authorized Officer and Principal Financial Officer)

	Date: November 7, 2013		By:	/s/ Wesley Ozima
				Wesley Ozima
				Vice President and Controller
				(Principal Accounting Officer)

 

 

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EXHIBIT INDEX

*	Filed herewith.

‡

Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K.  Autobytel will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that Autobytel 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.

**

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.

 

 

 

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