AutoWeb, Inc. - Quarter Report: 2014 September (Form 10-Q)

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[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 Code)

Large accelerated filer  [  ]	Accelerated filer  [  ]	Non-accelerated filer  [  ]	Smaller reporting company  [X]
		(Do not check if a smaller reporting company)

As of November 3, 2014, there were 9,028,733 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

 

	INDEX
		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Unaudited Consolidated Condensed Balance Sheets as of September 30, 2014 and December 31, 2013	1
	Unaudited Consolidated Condensed Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and the Three and Nine Months Ended September 30, 2013	2
	Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2014 and the Nine Months Ended September 30, 2013	3
	Notes to Unaudited Consolidated Condensed Financial Statements	4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	22
ITEM 4.	Controls and Procedures	22
	PART II. OTHER INFORMATION
ITEM 1A.	Risk Factors	23
ITEM 5.	Other Information	23
ITEM 6.	Exhibits	25
	Signatures	26

		September 30,				December 31,
		2014					2013*
Assets
Current assets:
Cash and cash equivalents		$	22,316			$	18,930
Accounts receivable, net of allowances for bad debts and customer credits of $711 and $405 at September 30, 2014 and December 31, 2013, respectively			16,793				14,178
Deferred tax asset			2,346				3,517
Prepaid expenses and other current assets			547				506
Total current assets			42,002				37,131
Property and equipment, net			1,892				1,548
Equity investment			2,500				2,500
Intangible assets, net			4,563				1,821
Goodwill			20,948				13,602
Deferred tax asset			31,135				31,135
Other assets			1,232				456
Total assets		$	104,272			$	88,193
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	7,721			$	5,267
Accrued expenses and other current liabilities			7,979				7,648
Convertible note payable			5,000				—
Total current liabilities			20,700				12,915
Convertible note payable			1,000				5,000
Term loan payable			7,313				—
Borrowings under credit facility			5,250				4,250
Other non-current liabilities			550				1,200
Total liabilities			34,813				23,365
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding			—				—
Common stock, $0.001 par value; 55,000,000 shares authorized and 9,028,733 and 8,909,737 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively			9				9
Additional paid-in capital			309,508				307,171
Accumulated deficit			(240,058	)			(242,352	)
Total stockholders’ equity			69,459				64,828
Total liabilities and stockholders’ equity		$	104,272			$	88,193

 

 

(Amounts in thousands, except per-share data)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Revenues:
Lead fees		$	25,880			$	20,653			$	76,727			$	55,013
Advertising			1,093				956				2,531				2,567
Other revenues			391				26				979				88
Total revenues			27,364				21,635				80,237				57,668
Cost of revenues			16,356				12,826				48,828				35,311
Gross profit			11,008				8,809				31,409				22,357
Operating expenses:
Sales and marketing			3,336				2,745				11,078				7,122
Technology support			2,055				1,855				5,971				5,328
General and administrative			3,161				2,526				8,899				6,961
Depreciation and amortization			483				362				1,373				1,196
Litigation settlements			(25	)			(66	)			(118	)			(205	)
Total operating expenses			9,010				7,422				27,203				20,402
Operating income			1,998				1,387				4,206				1,955
Interest and other income (expense), net			(177	)			24				(518	)			331
Income before income tax provision			1,821				1,411				3,688				2,286
Income tax provision			697				138				1,394				292
Net income and comprehensive income		$	1,124			$	1,273			$	2,294			$	1,994
Basic earnings per common share		$	0.12			$	0.14			$	0.26			$	0.22
Diluted earnings per common share		$	0.11			$	0.13			$	0.22			$	0.21

 

		Nine Months Ended September 30,
		2014				2013
Cash flows from operating activities:
Net income		$	2,294			$	1,994
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,650				1,528
Provision for bad debts			236				75
Provision for customer credits			773				437
Share-based compensation			1,025				556
Gain on long-term strategic investment			—				(108)
Change in deferred tax asset			1,171				—
Changes in assets and liabilities:
Accounts receivable			(690	)			(4,728	)
Prepaid expenses and other current assets			3				(54	)
Other assets			(776	)			(33	)
Accounts payable			173				2,273
Accrued expenses and other current liabilities			331				605
Non-current liabilities			(600	)			174
Net cash provided by operating activities			5,590				2,719
Cash flows from investing activities:
Purchases of property and equipment			(925	)			(648	)
Advances on purchase of Advanced Mobile			—				(1,824	)
Investment in AutoWeb			—				(2,500	)
Change in long-term strategic investment			—				108
Investment in SaleMove			—				(150	)
Purchase of AutoUSA			(10,044	)			—
Net cash used in investing activities			(10,969	)			(5,014	)
Cash flows from financing activities:
Borrowings under credit facility			1,000				4,250
Borrowings under term loan			9,000				—
Payments on term loan borrowings			(1,687	)			—
Proceeds from exercise of stock options			502				205
Payment of contingent fee arrangement			(50	)			(83	)
Net cash provided by financing activities			8,765				4,372
Net increase in cash and cash equivalents			3,386				2,077
Cash and cash equivalents, beginning of period			18,930				15,296
Cash and cash equivalents, end of period		$	22,316			$	17,373
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	279			$	83
Cash paid for interest		$	445			$	230

 

 

		(in thousands)
Cash (including a working capital adjustment of $44)		$	10,044
Convertible subordinated promissory note			1,300
Warrant to purchase $1.0 million of Company common stock			510
		$	11,854

 

		(in thousands)
Net identifiable assets acquired		$	758
Definite-lived intangible assets acquired			3,750
Goodwill			7,346
		$	11,854

	Valuation Method		Estimated Fair Value				Estimated Useful Life (1)
			(in thousands)				(years)
Non-compete agreement	Discounted cash flow (2)		$	90				2
Customer relationships	Excess of earnings (3)			2,660				5
Trademark/trade names	Relief from Royalty (4)			1,000				5
Total purchased intangible assets			$	3,750

(1)	Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from such intangible asset. Amortization of intangible assets with definite lives are recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.
(2)	The non-compete agreement fair value was derived by calculating the difference between the present value of the Company's forecasted cash flows with the agreement in place and without the agreement in place.
(3)	The excess of earnings method estimates a purchased intangible asset's value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.
(4)	The relief from royalty method is an earnings approach which assesses the royalty savings an entity realizes since it owns the asset and isn’t required to pay a third party a license fee for its use.

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 discounted present value of anticipated cash flows. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

 

		Three Months Ended September 30, 2013				Nine Months Ended September 30, 2013
		(in thousands)
Unaudited pro forma consolidated results:
Revenues		$	28,547			$	87,176
Net income			1,757				3,114

		(in thousands)
Cash (including working capital adjustment of $70)		$	2,570
Contingent consideration			825
		$	3,395

 

The following table summarizes the fair values of the assets acquired and liabilities assumed at the Advanced Mobile Acquisition Date.  

		(in thousands)
Net identifiable assets acquired		$	90
Definite-lived intangible assets acquired			1,380
Goodwill			1,925
Net assets acquired		$	3,395

	Valuation Method		Estimated Fair Value				Estimated Useful Life (1)
			(in thousands)				(years)
Non-compete agreement	Discounted cash flow (2)		$	110				5
Customer relationships	Excess of earnings (3)			450				2
Developed technology	Excess of earnings (3)			820				5
Total purchased intangible assets			$	1,380

(1)	Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from such intangible asset. Amortization of intangible assets with definite lives are recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.
(2)	The non-compete agreement fair value was derived by calculating the difference between the present value of the Company’s forecasted cash flows with the agreement in place and without the agreement in place.
(3)	The excess of earnings method estimates a purchased intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.

		Three Months Ended September 30,								Nine Months Ended  September 30,
		2014				2013				2014				2013
Basic Shares			9,028,733				8,900,574				8,986,146				8,874,252
Weighted average dilutive securities			2,070,375				1,685,638				2,268,894				1,435,481
Dilutive Shares			11,099,108				10,586,212				11,255,040				10,309,733

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
		(in thousands)
Share-based compensation expense:
Cost of revenues		$	18			$	13			$	52			$	38
Sales and marketing			149				35				400				111
Technology support			62				57				187				173
General and administrative			142				78				389				236
Share-based compensation costs			371				183				1,028				558
Amount capitalized to internal use software			1				1				3				2
Total share-based compensation costs		$	370			$	182			$	1,025			$	556

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
Number of service-based options granted			59,500				13,000				461,250				109,000
Weighted average grant date fair value		$	3.88			$	2.73			$	6.99			$	2.29
Weighted average exercise price		$	8.50			$	5.92			$	15.44			$	4.43

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Dividend yield			—				—				—				—
Volatility			56	%			56	%			56	%			65	%
Risk-free interest rate			1.5	%			1.1	%			1.4	%			0.8	%
Expected life (years)			4.3				4.3				4.3				4.3

 

		September 30,				December 31,
		2014				2013
		(in thousands)
Computer software and hardware and capitalized internal use software		$	12,782			$	11,924
Furniture and equipment			1,271				1,256
Leasehold improvements			957				937
			15,010				14,117
Less – Accumulated depreciation and amortization			(13,118	)			(12,569	)
Property and equipment, net		$	1,892			$	1,548

 

				September 30, 2014												December 31, 2013
Intangible Asset		Estimated Useful Life		Gross				Accumulated Amortization				Net				Gross				Accumulated Amortization					Net
Trademarks/trade names/licenses/domains		5 years		$	6,581			$	(5,495	)		$	1,086			$	5,582			$		(5,209	)		$	373
Software and publications		3 years			1,300				(1,300	)			—				1,300					(1,300	)			—
Customer relationships		2-5 years			5,074				(2,495	)			2,579				2,320					(1,926	)			394
Employment/non-compete agreements		5 years			700				(458	)			242				610					(335	)			275
Developed technology		5 years			820				(164	)			656				820					(41	)			779
				$	14,475			$	(9,912	)		$	4,563			$	10,632				$	(8,811	)		$	1,821

Year		Amortization Expense
		(in thousands)
2014		$	382
2015			1,394
2016			942
2017			926
2018			879
2019			32
		$	4,555

Goodwill as of December 31, 2013		$	13,602
Acquisition of AutoUSA			7,346
Goodwill as of September 30, 2014		$	20,948

		September 30,				December 31,
		2014				2013
		(in thousands)
Compensation and related costs		$	3,533			$	3,540
Professional fees and other accrued expenses			3,526				3,209
Amounts due to customers			250				208
Other current liabilities			670				692
Total accrued expenses and other current liabilities		$	7,979			$	7,649

 

 

 

 

 

 

●	The effect of unemployment on the number of vehicle purchasers;

●	Pricing and purchase incentives for vehicles;

●	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, Dealers 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 competitive impact of consolidation in the online automotive referral industry.

		2014				% of total revenues				2013				% of total revenues				$ Change				% Change
		(Dollar amounts in thousands)
Revenues:
Lead fees		$	25,880				95	%		$	20,653				96	%		$	5,227				25	%
Advertising			1,093				4				956				4				137				14
Other revenues			391				1				26				—				365				1,404
Total revenues			27,364				100				21,635				100				5,729				26
Cost of revenues (excludes depreciation of $7 and $18 for the three months ended September 30, 2014 and 2013, respectively)			16,356				60				12,826				59				3,530				28
Gross profit			11,008				40				8,809				41				2,199				25
Operating expenses:
Sales and marketing			3,336				12				2,745				13				591				22
Technology support			2,055				7				1,855				8				200				11
General and administrative			3,161				12				2,526				12				635				25
Depreciation and amortization			483				2				362				2				121				33
Litigation settlements			(25	)			—				(66	)			—				41				(62	)
Total operating expenses			9,010				33				7,422				35				1,588				21
Operating income			1,998				7				1,387				6				611				44
Interest and other income (expense), net			(177	)			—				24				—				(201	)			(838	)
Income before income tax provision			1,821				7				1,411				6				410				29
Income tax provision			697				3				138				—				559				405
Net income		$	1,124				4	%		$	1,273				6	%		$	(149	)			(12	%)