AutoWeb, Inc. - Quarter Report: 2014 June (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)

 

	INDEX
		Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Unaudited Consolidated Condensed Balance Sheets as of June 30, 2014 and December 31, 2013	1
	Unaudited Consolidated Condensed Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2014 and the Three and Six Months Ended June 30, 2013	2
	Unaudited Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2014 and the Six Months Ended June 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	17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	24
ITEM 4.	Controls and Procedures	24
	PART II. OTHER INFORMATION
ITEM 6.	Exhibits	25
	Signatures	27

 

 

 

(Amounts in thousands, except per-share data)

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Revenues:
Lead fees		$	24,835			$	16,843			$	50,848			$	34,360
Advertising			764				895				1,437				1,611
Other revenues			314				33				588				61
Total revenues			25,913				17,771				52,873				36,032
Cost of revenues			15,597				10,815				32,472				22,485
Gross profit			10,316				6,956				20,401				13,547
Operating expenses:
Sales and marketing			3,725				2,136				7,742				4,376
Technology support			1,993				1,767				3,917				3,473
General and administrative			2,716				2,146				5,738				4,435
Depreciation and amortization			455				409				889				833
Litigation settlements			(25	)			(67	)			(93	)			(138	)
Total operating expenses			8,864				6,391				18,193				12,979
Operating income			1,452				565				2,208				568
Interest and other income (expense), net			(175	)			(96	)			(341	)			307
Income before income tax provision			1,277				469				1,867				875
Income tax provision			476				83				696				154
Net income and comprehensive income		$	801			$	386			$	1,171			$	721
Basic earnings per common share		$	0.09			$	0.04			$	0.13			$	0.08
Diluted earnings per common share		$	0.08			$	0.04			$	0.11			$	0.08

 

 

		Six Months Ended June 30,
		2014				2013
Cash flows from operating activities:
Net income		$	1,171			$	721
Adjustments to reconcile net income to net cash provided by  operating activities:
Depreciation and amortization			1,075				1,061
Provision for bad debts			116				15
Provision for customer credits			448				310
Share-based compensation			655				374
Change in deferred tax asset			566				—
Changes in assets and liabilities:
Accounts receivable			(491	)			(1,867	)
Prepaid expenses and other current assets			182				(283	)
Other assets			(558	)			(43	)
Accounts payable			1,063				2,904
Accrued expenses and other current liabilities			(1,199	)			(2,385	)
Non-current liabilities			(225	)			111
Net cash provided by operating activities			2,803				918
Cash flows from investing activities:
Purchases of property and equipment			(547	)			(404	)
Purchase of AutoUSA			(10,044	)			—
Net cash used in investing activities			(10,591	)			(404	)
Cash flows from financing activities:
Borrowings under credit facility			1,000				—
Borrowings under term loan			9,000				—
Payments on term loan borrowings			(1,125	)			—
Proceeds from exercise of stock options			501				61
Payment of contingent fee arrangement			(38	)			(56	)
Net cash provided by financing activities			9,338				5
Net increase in cash and cash equivalents			1,550				519
Cash and cash equivalents, beginning of period			18,930				15,296
Cash and cash equivalents, end of period		$	20,480			$	15,815
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	168			$	55
Cash paid for interest		$	242			$	150

 

 

 

 

 

 

 

 

 

The accompanying unaudited consolidated condensed financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K, as amended by Amendment No. 1 on Form 10-K/A,  filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2013 (“2013 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 June 30, 2014 and 2013 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 2013 Form 10-K.

 

 

 

 

 

		(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

As part of the consideration paid for the acquisition, the Company issued a convertible subordinated promissory note for $1.0 million ("AutoUSA Note") to the Seller.  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 include 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.  At any time after January 31, 2017, the holder of the AutoUSA Note may 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).  The right to convert the AutoUSA 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 AutoUSA 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.

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

 

 

 

 

		Three Months Ended June 30, 2013				Six Months Ended June 30, 2013
Unaudited pro forma consolidated results:
Revenues		$	24,708			$	50,241
Net income			742				1,358

 

 

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

 

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

		(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 agreements	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 agreements in place and without the agreements 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.

 

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 June 30, 2013				Six Months Ended June 30, 2013
		(in thousands)
Unaudited pro forma consolidated results:
Revenues		$	18,017			$	36,525
Net income			376				707

 

		Three Months Ended June 30,								Six Months Ended  June 30,
		2014				2013				2014				2013
Basic Shares			9,000,202				8,865,407				8,964,500				8,860,873
Weighted average dilutive securities			2,270,593				267,770				2,348,322				243,436
Dilutive Shares			11,270,795				9,133,177				11,312,822				9,104,309

 

 

 

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
		(in thousands)
Share-based compensation expense:
Cost of revenues		$	17			$	12			$	34			$	25
Sales and marketing			142				41				251				76
Technology support			68				57				125				116
General and administrative			142				79				246				158
Share-based compensation costs			369				189				656				375
Amount capitalized to internal use software			1				1				1				1
Total share-based compensation costs		$	368			$	188			$	655			$	374

 

 

		Three months ended June 30,								Six months ended June 30,
		2014				2013				2014				2013
Number of service-based options granted			—				39,000				401,750				96,000
Weighted average grant date fair value			—			$	2.27			$	7.46			$	2.22
Weighted average exercise price			—			$	4.56			$	16.47			$	4.23

 

 

 

 

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Dividend yield			—				—				—				—
Volatility			—				64	%			56	%			70	%
Risk-free interest rate			—				0.9	%			1.3	%			0.7	%
Expected life (years)			—				4.3				4.3				4.3

 

 

		June 30,				December 31,
		2014				2013
		(in thousands)
Computer software and hardware and capitalized internal use software		$	12,420			$	11,924
Furniture and equipment			1,265				1,256
Leasehold improvements			946				937
			14,631				14,117
Less – Accumulated depreciation and amortization			(12,924	)			(12,569	)
Property and equipment, net		$	1,707			$	1,548

 

 

 

 

 

 

 

 

 

				June 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			$	(5,397	)		$	1,184			$	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				(2,294	)			2,780				2,320				(1,926	)			394
Employment/non-compete agreements		5 years			700				(416	)			284				610				(335	)			275
Developed technology		5 years			820				(123	)			697				820				(41	)			779
				$	14,475			$	(9,530	)		$	4,945			$	10,632			$	(8,811	)		$	1,821

 

Year		Amortization Expense
		(in thousands)
2014		$	764
2015			1,394
2016			942
2017			926
2018			879
2019			32
		$	4,937

 

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

 

		June 30,				December 31,
		2014				2013
		(in thousands)
Compensation and related costs		$	2,469			$	3,540
Professional fees and other accrued expenses			3,080				3,209
Amounts due to customers			247				208
Other current liabilities			653				692
Total accrued expenses and other current liabilities		$	6,449			$	7,649

 

Long-term debt.  In connection with the acquisition of Cyber, the Company issued a convertible subordinated promissory note for $5.0 million (“Cyber Convertible Note”) to the sellers.  The fair value of the Cyber 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 by the Company's outside valuation consultants in valuing the Cyber Convertible Note included a market yield of 15.0% and stock price volatility of 77.5%.  As the Cyber 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 Cyber Convertible Note is to be paid in full on September 30, 2015.  At any time after September 30, 2013, the holders of the Cyber Convertible Note may convert all or any part, but in 40,000 minimum share increments, of the then outstanding and unpaid principal of the Cyber 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 Cyber 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 Cyber 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.

 

 

 

9. Income Taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

·	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; and

 

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

 

		2014				% of total revenues				2013				% of total revenues				$ Change				% Change
		(Dollar amounts in thousands)
Revenues:
Lead fees		$	24,835				96	%		$	16,843				95	%		$	7,992				47	%
Advertising			764				3				895				5				(131	)			(15	)
Other revenues			314				1				33				—				281				852
Total revenues			25,913				100				17,771				100				8,142				46
Cost of revenues (excludes depreciation of $8 and $23 for the three months ended June 30, 2014 and 2013, respectively)			15,597				60				10,815				61				4,782				44
Gross profit			10,316				40				6,956				39				3,360				48
Operating expenses:
Sales and marketing			3,725				14				2,136				12				1,589				74
Technology support			1,993				8				1,767				10				226				13
General and administrative			2,716				10				2,146				12				570				27
Depreciation and amortization			455				2				409				2				46				11
Litigation settlements			(25	)			—				(67	)			—				42				(63	)
Total operating expenses			8,864				34				6,391				36				2,473				39
Operating income			1,452				6				565				3				887				157
Interest and other income (expense), net			(175	)			(1	)			(96	)			—				(79	)			82
Income before income tax provision			1,277				5				469				3				808				172
Income tax provision			476				2				83				1				393				473
Net income		$	801				3	%		$	386				2	%		$	415				108	%

 

 
 

 

 

 

 

 

 

 

 

 

		2014				% of total revenues				2013				% of total revenues				$ Change				% Change
		(Dollar amounts in thousands)
Revenues:
Lead fees		$	50,848				96	%		$	34,360				95	%		$	16,488				48	%
Advertising			1,437				3				1,611				5				(174	)			(11	)
Other revenues			588				1				61				—				527				864
Total revenues			52,873				100				36,032				100				16,841				47
Cost of revenues (excludes depreciation of $14 and $51 for the six months ended June 30, 2014 and 2013, respectively)			32,472				61				22,485				62				9,987				44
Gross profit			20,401				39				13,547				38				6,854				51
Operating expenses:
Sales and marketing			7,742				15				4,376				12				3,366				77
Technology support			3,917				7				3,473				10				444				13
General and administrative			5,738				11				4,435				12				1,303				29
Depreciation and amortization			889				2				833				2				56				7
Litigation settlements			(93	)			—				(138	)			—				45				(33	)
Total operating expenses			18,193				34				12,979				36				5,214				40
Operating income			2,208				4				568				2				1,640				289
Interest and other income (expense), net			(341	)			(1	)			307				—				(648	)			(211	)
Income before income tax provision			1,867				3				875				2				992				113
Income tax provision			696				1				154				—				542				352
Net income		$	1,171				2	%		$	721				2	%		$	450				62	%