AutoWeb, Inc. - Annual Report: 2016 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-K

 

(Mark One)

 

 

For the fiscal year ended December 31, 2016

or

 

 

For the transition period from              to             

 

Commission File Number 1-34761 

 

               

 

Autobytel Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware		33-0711569
(State of Incorporation)		(I.R.S. Employer Identification No.)

 

18872 MacArthur Boulevard, Suite 200

Irvine, California 92612-1400

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (949) 225-4500

 

 Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.001 per share		The Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

 

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  ☒    No  ☐

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 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  ☒   No  ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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.

 

Large accelerated filer ☐	Accelerated filer ☒	Non-accelerated filer ☐	Smaller reporting company ☐
		(Do not check if a smaller reporting company)

                                                                     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

 

Based on the closing sale price of $13.87 for our common stock on The Nasdaq Capital Market on June 30, 2016, the aggregate market value of outstanding shares of common stock held by non-affiliates was approximately $125 million.

 

As of March 6, 2017, 11,021,490 shares of our common stock were outstanding.

 

Documents Incorporated by Reference

 

Portions of our Definitive Proxy Statement for the 2017 Annual Meeting, expected to be filed within 120 days of our fiscal year end, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 

Autobytel Inc.

 

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

 

			Page Number
Part I
Item 1	Business		1
Item 1A	Risk Factors		9
Item 1B	Unresolved Staff Comments		17
Item 2	Properties		17
Item 3	Legal Proceedings		17
Item 4	Mine Safety Disclosures		17
Part II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
Item 6	Selected Financial Data		19
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		30
Item 8	Financial Statements and Supplementary Data		30
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		30
Item 9A	Controls and Procedures		30
Item 9B	Other Information		30
Part III
Item 10	Directors, Executive Officers and Corporate Governance		31
Item 11	Executive Compensation		31
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		31
Item 13	Certain Relationships and Related Transactions, and Director Independence		31
Item 14	Principal Accountant Fees and Services		31
Part IV
Item 15	Exhibits and Financial Statement Schedules		32
Item 16	Form 10-K Summary		32
	Signatures		33

 

 

 

FORWARD-LOOKING STATEMENTS

 

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K and our proxy statement, parts of which are incorporated herein by reference, contain such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “could,” “may,”  “estimates,” “expects,” “projects,” “intends,” “pending,” “plans,” “believes,” “will” and words of similar substance, or the negative of those words, used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Annual Report on Form 10-K also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual results to differ materially from those reflected in forward-looking statements include but are not limited to, those discussed in “Item 1A. Risk Factors,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.

 

PART I

 

Item 1.                      Business

 

Autobytel Inc. was incorporated in 1996 under the laws of the State of Delaware. Unless specified otherwise, as used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” the “Company” or “Autobytel” refer to Autobytel Inc. and its subsidiaries.

 

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 lead referrals (“Leads”), Dealer marketing products and services, online advertising, consumer traffic referral programs and mobile 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.  Our AutoWeb pay-per-click advertising marketplace program (“AutoWeb Program”) uses proprietary technology to refer in-market consumer traffic to Dealers and Manufacturer websites.  The Company’s mission for consumers is to be “Your Lifetime Automotive Advisor” ® by engaging consumers throughout the entire lifecycle of their automotive needs.

 

Available Information

 

Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Annual Report on Form 10-K. At or through the Investor Relations section of our website we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after this material is electronically filed with or furnished to the SEC and The Nasdaq Stock Market. Our Code of Conduct and Ethics is available at the Corporate Governance link of the Investor Relations section of our website, and a copy of the code may also be obtained, free of charge, by writing to the Corporate Secretary, Autobytel Inc., 18872 MacArthur Boulevard, Suite 200, Irvine, California 92612-1400.

 

Significant Business Developments

 

On December 19, 2016, Autobytel and Car.com, Inc., a wholly owned subsidiary of Autobytel (“Car.com”), entered into an Asset Purchase and Sale Agreement, by and among Autobytel, Car.com, and Internet Brands, Inc., a Delaware corporation (“Internet Brands”), pursuant to which Internet Brands acquired substantially all of the assets of Autobytel’s automotive specialty finance leads group operated under Car.com. The specialty finance leads program was designed to provide consumers who may not be able to secure loans through conventional lending sources the opportunity to obtain vehicle financing and other services from Dealers or financial institutions offering vehicle financing to these consumers. The transaction was completed effective as of December 31, 2016. The transaction consideration consisted of $3.2 million in cash paid at closing of the transaction and $1.6 million to be paid over a five year period pursuant to a Transitional License and Linking Agreement. Revenues from the specialty finance leads group accounted for 4%, 5% and 7% of total revenues in 2016, 2015 and 2014, respectively. The Company recorded a gain on sale of approximately $2.2 million in connection with the transaction in 2016. See Note 10 of the “Notes to Consolidated Financial Statements” in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

 

 

 

 Industry Background

 

   We believe that consumers engaged in the vehicle purchasing process have adopted the internet, primarily because the internet is one of the best methods to easily find the information necessary to make informed buying decisions. Additionally, the internet is a primary tool for consumers to begin communicating with local Dealers regarding vehicle pricing, availability, options and financing. J.D. Power and Associates reported in 2016 that 79% of automotive consumer buyers surveyed use third party websites for vehicle research. In addition, we believe that many Dealers and all major Manufacturers that market their vehicles in the U.S. use the internet as an efficient way to reach consumers through marketing programs.

 

   According to Automotive News, U.S. light vehicle sales were 17.5 million in 2016, flat from 17.5 million vehicles sold in 2015.  J.D. Power / LMC Automotive are forecasting 2017 U.S. total light vehicle sales and retail light-vehicle sales at 17.6 million and 14.1 million, respectively.  J.D. Power reported continuing trends of elevated inventories and increased incentive levels. We believe an increase in automotive incentives should result in increased use of the internet by consumers engaged in the vehicle purchasing process and increased submission of Leads by consumers in 2017.

 

 Products and Services

 

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 sell Internally-Generated Leads and Non-Internally-Generated Leads directly to Dealers and indirectly to Dealers through a wholesale market consisting of Manufacturers and other third parties in the automotive Lead distribution industry.  Our AutoWeb Program links consumers to Dealers and Manufacturer websites when the consumers click on advertisements on Company Websites as well as websites operated by third parties that have contracted with the Company as publishers under the AutoWeb Program. In addition to our Lead and AutoWeb programs, we also offer Dealers and Manufacturers other products and services, including our iControl by Autobytel®, WebLeads+, Email Manager, Payment Pro®, TextShield®, SaleMove and Lead Call products and services, to assist them in capturing online, in-market customers and selling more vehicles by improving conversion of Leads to sale transactions.

 

Lead Programs

 

We provide Dealers and Manufacturers with opportunities to market their vehicles efficiently to potential vehicle buyers.  Dealers participate in our Lead programs, and Manufacturers participate in our Lead programs, our display advertising programs and our direct marketing programs, reaching consumers that are in the market to acquire a vehicle.  For consumers, we provide, at no cost to the consumer, an easy way to obtain valuable information to assist them in their vehicle shopping process. Leads may be submitted by consumers through our Company Websites or through Non-Company Websites. For consumers using our Company Websites, we provide research information, including vehicle specification data, safety data, pricing data, photos, videos, regional rebate and incentive data, and additional tools, such as the compare and configuration tools, to assist them in this process.  We also provide additional content on our Company Websites, including our database of articles, such as consumer and professional reviews, and other analyses.  Additional automotive information is also available on our Company Websites to assist consumers with specific vehicle research, such as the trade-in value of their current vehicle.

 

New Vehicle Lead Program. Our Lead program for new vehicles allows consumers to submit requests for pricing and availability of specific makes and models.  A new vehicle Lead provides information regarding the make and model of a vehicle, and may also include additional data regarding the consumer’s needs, including any vehicle trade-in, whether the consumer wishes to lease or buy, and other options that are important to the vehicle acquisition decision. A Lead will usually also include the consumer’s name, phone number and email address and may include a postal address.

 

  Our Leads are subject to quality verification that is designed to maintain the high quality of our Leads and increase the Lead buy rates for our Lead customers. Quality verification includes the validation of name, phone number, email address and postal address. Our quality verification also involves proprietary systems as well as arrangements with third party vendors specializing in customer validation. After a Lead has been subjected to quality verification, if we have placement coverage for the Lead within our own Dealer network, we send the Lead to Dealers that sell the type of vehicle requested in the consumer’s geographic area. We also send an email message to the consumer with the Dealer’s name and phone number, and if the Dealer has a dedicated internet manager, the name of that manager. Dealers contact the consumer with a price quote and availability information for the requested vehicle. In addition to sales of Leads directly to Dealers in our network, we also sell Leads wholesale to Manufacturers for delivery to their Dealers and to third parties that have placement coverage for the Lead with their own customers.

 

 

 

  Dealers participate in our retail new vehicle Lead program by entering into contracts directly with us or through major Dealer groups. Generally, our Dealer contracts may be terminated by either party on 30 days’ notice and are non-exclusive. The majority of our retail new vehicle Lead revenues consists of either a monthly subscription or a per-Lead fee paid by Dealers in our network; however, under our pay-per-sale program, we offer a limited number of Dealers in states where we are permitted to charge on a per transaction basis the opportunity to pay a flat per transaction fee for a Lead that results in a vehicle sale. We reserve the right to adjust our fees to retail Dealers upon 30 days’ prior notice at any time during the term of the contract. Manufacturers (directly or through their marketing agencies) and other third parties participate in our wholesale new vehicle Lead programs generally by entering into agreements where either party has the right to terminate upon prior notice, with the length of time for the notice varying by contract. Revenues from retail new vehicle Leads accounted for 22%, 27% and 32% of total revenues in 2016, 2015 and 2014, respectively. Revenues from wholesale Leads accounted for 46%, 47% and 44% of total revenues in 2016, 2015 and 2014, respectively.

 

We measure Lead quality by the conversion of Leads to actual vehicle sales, which we refer to as the “buy rate.” Buy rate is the percentage of the consumers submitting Leads that we delivered to our customers represented by the number of these consumers who purchased vehicles within ninety days of the date of the Lead submission.  We rely on detailed feedback from Manufacturers and wholesale customers to confirm the performance of our Leads.  Our Manufacturer and wholesale customers each match the Leads we deliver to our customers against vehicle sales to provide us with information about vehicle purchases by the consumers who submitted Leads that we delivered to these customers.  Autobytel also obtain vehicle registration data from a third party provider. This information, together with our internal analysis allows us to estimate the buy rates for the consumers who submitted the Internally-Generated Leads and Non-Internally Generated Leads that we delivered to our customers, and based on these estimates, to estimate an industry average buy rate. Based on the most current information and our internal analysis, we have estimated that, on average, consumers who submit Internally-Generated Leads that we deliver to our customers have an estimated buy rate of approximately 17%.  Buy rates that individual Dealers may achieve can be impacted by factors such as the strength of processes and procedures within the dealership to manage communications and follow up with consumers.

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 by acquiring Leads from us.  We can now optimize the mix of Leads we deliver to our customers based on multiple sources of quality measurements. Also, by reporting the buying behavior of potential consumers, 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 useful information in the hands of our customers.

 

During 2016, we continued to focus our Dealer acquisition and retention strategies on dealerships to which we could deliver a higher percentage of our Internally-Generated Leads.  We believe this will result in increased vehicle sales for our Dealers and ultimately stronger relationships with us because, based on our evaluation of  the performance data and information discussed above, we believe our Internally-Generated Leads are of  high quality.  

 

Used Vehicle Lead Program. Our used vehicle Lead program allows consumers to search for used vehicles according to specific search parameters, such as the price, make, model, mileage, year and location of the vehicle. The consumer is able to locate and display the description, price and, if available, digital images of vehicles that satisfy the consumer’s search parameters.  The consumer can then submit a Lead for additional information regarding a specific vehicle that we then deliver to the Dealer offering the vehicle. In addition to sending Leads directly to Dealers through our Lead delivery system, consumers may choose to contact the Dealer using a toll free number posted next to the vehicle search results. We charge each Dealer that participates in the used Vehicle Lead program a monthly subscription or per Lead fee.  Revenues from used vehicle Leads accounted for 10%, 11% and 12% of total revenues in 2016, 2015 and 2014, respectively.

 

Other Dealer Products and Services

 

In addition to Lead and AutoWeb programs, we also offer products and services that assist Dealers in connecting with in-market consumers and closing vehicle sales.

 

iControl by Autobytel®  iControl by Autobytel® is our proprietary technology that allows Dealers many options to filter and control the volume and source of their Leads. iControl by Autobytel® can be controlled at the dealership (or by a representative of Autobytel on behalf of the dealership), at the Dealer group level from a web-based, easy-to-use console that makes it quick and simple for dealerships to change their Lead acquisition strategy to adjust for inventory conditions at their stores and broader industry patterns (such as changes in gas prices or changes in consumer demand). From the console, dealerships can easily contract or expand territories and increase, restrict or block specific models and Lead web sources, making it much easier to target inventory challenges and focus marketing resources more efficiently.

 

 

 

We currently have over one-half of our new vehicle Dealers participating in our iControl by Autobytel® product.

 

WebLeads+. Designed to work in connection with a Dealer’s participation in our Lead programs, WebLeads+ offers a Dealer multiple coupon options that display relevant marketing messages to consumers visiting the Dealer’s website.  When a Dealer uses WebLeads+, consumers visiting the Dealer’s website are encouraged to take action in two ways.  First, while interacting with the Dealer website, a consumer is presented with a customized special offer formatted for easy Lead submission. If a vehicle quote is requested, the Lead goes directly into the dealership management tool so a salesperson can promptly address the customer’s questions.  Second, if the consumer leaves the Dealer’s website but remains online, the WebLeads+ product keeps the coupon active in a new browser, providing the Dealer a repeat branding opportunity and giving the consumer an easy way to re-engage with the Dealer’s website through submission of a Lead.  The additional Leads generated by the coupons are seamlessly integrated into our Extranet tool.

 

Email Manager and Lead Call. Email Manager provides, on behalf of the Dealers, timely and relevant follow up emails to consumers who have submitted Leads on scheduled intervals following a consumer’s Lead submission.  After submission of a Lead, Lead Call provides a live phone call to the consumer on behalf of the Dealer and schedules an appointment for the consumer to visit the dealership regarding the specific vehicle the consumer inquired about.

 

Payment Pro®.  Payment Pro® is a Dealer website conversion tool based on a third party product that offers consumers real-time online monthly payment information based on an instant qualification process.  The payments are based on the consumer’s credit, the actual vehicle being researched and the Dealer finance rates without requiring the consumer to provide personal information, such as date of birth or social security number. The Lead goes directly into the dealership management tool so that a salesperson can promptly address the consumer’s inquiry.

 

Mobile Products and Services. We provide Dealers and Manufacturers mobile technologies that facilitate communication between Dealers and car buyers on smart phones and tablets at the time, place and in a manner preferred by many consumers.  At the center of this platform is Autobytel’s unique TextShield® product that offers Dealers the ability to connect with consumers using text communication via a secure platform that protects the consumer’s privacy.  In addition, we offer Dealers mobile websites designed to drive consumer engagement with Dealers as well as mobile apps, text message marketing and the ability for consumers to send information to their mobile devices using our “send to phone” product.

 

SaleMove.   Our arrangement with SaleMove, Inc. (“SaleMove”) allows Autobytel to provide the automotive industry with innovative technology for enhancing communications with consumers.  SaleMove’s technology allows Dealers and Manufacturers to enhance the online shopping experience by interacting with consumers in real time using the method most comfortable to them including live video, audio and text based chat or by phone helping Dealers improve the online car shopping experience for their customers.  Autobytel is providing the tools necessary to capture the opportunities being created as online shopping becomes increasingly popular with in-market car buyers.

 

Advertising Programs

 

Our Company Websites attract an audience of prospective automotive buyers that advertisers can target through display advertising. A primary way advertisers use our Company Websites to reach consumers is through vehicle content targeting. This allows automotive marketers to reach consumers while they are researching one of our comprehensive automotive segments such as mini-vans or SUVs and offer Manufacturers sponsorship opportunities to assist in their efforts both in terms of customer retention and conquest strategies. Our Company Websites also offer Manufacturers the opportunity to feature their makes and models within highly contextual content. Through their advertising placements, Manufacturers can direct consumers to their respective websites for further information. We believe this transfer of consumers from our Company Websites to Manufacturer sites is the most significant action measured by Manufacturers in evaluating our performance and value for the Manufacturer’s marketing programs. Through our agreement with Jumpstart Automotive Group (“Jumpstart”), Jumpstart sells our fixed placement advertising across our Company Websites to automotive advertisers. Jumpstart currently reaches approximately 27 million unique visitors per month and works with every major automotive Manufacturer across its portfolio of digital publishers.  We also offer a direct marketing platform that enables Manufacturers to selectively target in-market consumers during the often-extended vehicle shopping process. Designed to keep a specific automotive brand in consideration, our direct marketing programs allow automotive marketers to deliver specific communication through either email or direct mail formats to in-market consumers during their purchase cycle.

 

 

 

 Our AutoWeb product is our pay-per-click advertising marketplace program. The AutoWeb Program utilizes proprietary technology to offer consumers who are shopping targeted offers based on make, model and geographic location. As these consumers are conducting research on one of Autobytel’s consumer facing websites or on the site of one of our network of automotive publishers, they are presented with relevant offers on a timely basis and, upon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of our Dealer, Manufacturer or advertising customers. The AutoWeb network of publisher websites reaches and engages with millions of potential car buyers each month, and we believe it provides high intent, quality traffic that Dealers and other customers cannot typically reach through their own marketing efforts. The AutoWeb solution is flexible and in addition to driving traffic to a vehicle detail page, it can also send website traffic to new vehicle sales, service, used vehicles or to any other department where a customer wants to engage with in-market consumers. In addition, we believe that the AutoWeb solution can be used to conquest competitive shoppers who are researching another brand more effectively than can typically be done using other search engines. Advertisers only pay for the clicks they receive, and are able to structure campaigns with flexible budgets and no long-term commitments in order to manage spend versus key performance indicators. Ongoing feedback from our customers is that this traffic provides excellent time-on-site, below-average bounce rates, higher-than-average page views and is a valuable tool to help Dealers sell more vehicles.

 

Advertising revenues, including direct marketing, accounted for 16%, 8% and 4% of total revenues in 2016, 2015 and 2014, respectively.

 

Strategy

 

Our goal is to garner a larger share of the billions of dollars spent annually by Dealers and Manufacturers on automotive marketing services.  We plan to achieve this objective through the following principal strategies:

 

Increasing The Supply of High-Quality Leads. High-quality Leads are those Leads that result in high transaction (i.e., purchase) closing rates for our Dealer customers.  Internally-Generated Leads are generally higher quality than Non-Internally-Generated Leads and increase the overall quality of our Lead portfolio. Non-Internally-Generated Leads are of varying quality depending on the source of these Leads. We plan to increase the supply of high-quality Leads generated to sell to our customers primarily by:

 

 

o

SEO and SEM traffic acquisition activities. Traffic to our Company Websites is obtained through a variety of sources and methods, including direct navigation to our Company Websites, natural search (search engine optimization or “SEO”, which is the practice of optimizing keywords in website content to drive traffic to a website), paid search (search engine marketing, or “SEM,” which is the practice of bidding on keywords on search engines to drive traffic to a website), direct marketing and partnering with other website publishers that provide links to our websites.  Our goal is that over time, paid traffic such as SEM will be balanced by greater visitation from direct navigation and SEO, which we expect to result in increased Lead volumes and gross profit margins.

 

o

Continuing to enhance the quality and user experience of our Company Websites.  We continuously make enhancements to our Company Websites, including enhancements of the design and functionality of our Company Websites.  These enhancements are intended to position our Company Websites as comprehensive best in class destinations for automotive purchase research by consumers. By doing so, we believe we will increase the volume of our Internally-Generated Leads.

 

 

 

 

 

Increasing Leads Sales to our Customers. Our principal source of revenue comes from sales of Leads to our retail and wholesale Lead customers. Our goal is to increase sales of Leads to our customers primarily by:

 

 

 

Continuing to develop the AutoWeb targeted pay-per-click marketplace for online automotive advertisers and publishers.  Our merger with AutoWeb allowed us to become the first automotive publisher to benefit from AutoWeb’s pay-per-click platform that uses proprietary technology and a unique pay-per-click business model to analyze web traffic and adjust advertiser costs accordingly based on traffic quality.  This traffic network is targeted to attract high-intent, high-volume publishers and is intended to allow them to monetize traffic that has previously been under-monetized.  In-market car shoppers are presented with highly relevant display advertisements and benefit from an online experience that delivers information that consumers use in making their car buying decisions.  Manufacturers benefit from this high-quality traffic from serious in-market car buyers.  Our AutoWeb program enables Manufacturers and Dealers to optimize their advertising by driving traffic to appropriate areas of their Tier 1 (Manufacturer national advertising), Tier 2 (Manufacturer and advertising associations regional advertising) and Tier 3 (Dealer) websites.  

 

Moving forward we believe that Manufacturers and Dealers will continue to see the measureable attribution from this click traffic and will reallocate marketing spend from traditional channels into this emerging medium. We also plan to grow the size of this addressable marketplace by adding high-quality and high volume automotive publishers to our network, by targeting in market consumers on a variety of social media platforms and by continuing to optimize this advertising platform on our consumer facing websites, whose traffic we believe will continue to scale. In addition, we believe that the flexibility of our solution combined with high quality traffic with automotive purchase intent may allow us to increase the amount charged per click as the network grows and as the level of attribution from this marketplace is understood by advertising partners.

 

Increasing Display Advertising Revenues.  As traffic to, and time spent on, our Company Websites by consumers increases, we will seek to increase our advertising revenues.  Through our agreement with Jumpstart we benefit from Jumpstart's relationships with every major automotive Manufacturer and/or its advertising agencies by increasing revenue for our traditional display advertising.  It is our belief that if the volume of our traffic continues to increase, advertisers will recognize this increased value by agreeing to purchase additional advertising space available on our Company Websites.  Additionally, we believe that our AutoWeb program provides an opportunity to increase Autobytel advertising revenue through additional monetization opportunities for our existing and growing traffic.

 

Focusing on Mobile Products.  As consumers increasingly engage with Internet content using mobile devices, Autobytel will continue to focus on advanced mobile technologies that facilitate communication between Dealers and consumers on smart phones and tablets at the time, place, and in a manner preferred by many consumers.   This focus on the mobile platform is a core part of our strategy moving forward regarding lead generation, automotive research, website advertising and traffic generation.

 

In addition, we will continue to focus on making mobile tools available to Dealer and Manufacturer customers.  Texting is increasingly becoming the communication method of choice for many consumers and Autobytel’s unique TextShield® platform offers Dealers the ability to connect with consumers using text communication via a secure platform that protects the consumer’s privacy.  In addition, this platform offers much of the same oversite and control that is available in traditional email Lead Management Systems and is essentially a Lead Management System for text. We plan to integrate this technology into our consumer facing websites, lead generation and advertising campaigns so that we can continue to facilitate communication between consumers and Dealers utilizing whatever mobile communication platform they choose.

 

 

 

 

Continuing to Expand our Products and Services. We gather significant amounts of data on consumer intent as it relates to purchasing vehicles.  We intend to use these data to create products and services, including direct business database offerings, that we believe will ultimately help Manufacturers and Dealers market and sell more new and used vehicles.  Our objective is to generate revenues from this asset in the most effective and efficient ways possible.

 

Strategic Acquisitions, Investments and Alliances. Our goal is to grow and advance our business. We may do so, in part, through strategic acquisitions, investments and alliances. We continue to review strategic opportunities that may provide opportunities for growth. We believe that strategic acquisitions, investments and alliances may allow us to increase market share, benefit from advancements in technology and strengthen our business operations by enhancing our product and service offerings.

 

Our ability to implement the foregoing strategies and plans is subject to risks and uncertainties, many of which are beyond our control.  Accordingly, there is no assurance that we will successfully implement our strategies and plans.  See “Item 1A. Risk Factors” of this Annual Report on Form 10-K.

 

Seasonality

 

Our quarterly revenues and operating results have fluctuated in the past and may fluctuate in the future due to various factors, including consumer buying trends, changing economic conditions, Manufacturer incentive programs and actual or threatened severe weather events.  Excluding the effect of acquisitions in 2015, Lead volume is typically highest in summer (third quarter) and winter (first quarter) months, followed by spring (second quarter) and fall (fourth quarter) months.

 

Intellectual Property

 

Our intellectual property includes patents and patent applications related to our innovations, products and services; trademarks related to our brands, products and services; copyrights in software and creative content; trade secrets; and other intellectual property rights and licenses of various kinds. We seek to protect our intellectual property assets through patent, copyright, trade secret, trademark and other laws and through contractual provisions. We enter into confidentiality and invention assignment agreements with our employees and contractors, and non-disclosure agreements with third parties with whom we conduct business in order to secure our proprietary rights and additionally limit access to, and disclosure of, our proprietary information.  We have registered trademarks with the United States Patent and Trademark Office, including Autobytel, Autobytel.com, MyGarage, Your Lifetime Automotive Advisor®, iControl by Autobytel®, TextShield®, Payment Pro®, AutoWeb®, AutoWeb.com® and the global highway logo. We have also been issued patents related to methods and systems for managing a Lead in data center systems and a method and system for managing Leads and routing them to one or more destinations. We cannot provide any assurances that any of our patents will be enforceable by us in litigation.

 

Additional information regarding certain risks related to our intellectual property is included in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K.

 

Competition

 

In the automotive-related Lead marketing services and advertising marketplace we compete for Dealer and Manufacturer customers.  Competition with respect to our core Lead referral programs continued to be impacted by changing industry conditions in 2016. We continue to compete with several companies that maintain business models similar to ours, some with greater resources. In addition, competition has increased from larger competitors that traditionally have competed only in the used vehicle market.  Dealers continue to invest in their proprietary websites and traffic acquisition activities, and we expect this trend to continue as Dealers strive to own and control more Lead generating assets under their captive brands.  Additionally, all major Manufacturers that market their vehicles in the U.S. have their own websites that market their vehicles direct to consumers and generate Leads for delivery direct to the Manufacturers’ Dealers.

 

We believe that third party Leads have been the standard in our industry for many years.  However, we continue to observe new and emerging business models, including pay-per-sale and consumer pay models, relating to the generation and delivery of Leads.  From time to time, new products and services are introduced that take the focus away from third party Lead generation, which we believe is a profitable way to sell vehicles to in-market buyers.  Dealers and Manufacturers may decide to pull back on their third party Lead programs to test these new approaches.

 

In the display advertising marketplace, we compete with major internet portals, transaction based websites, automotive related companies, numerous lifestyle websites and emerging entrants in the relatively new automotive click revenue medium. We also compete with traditional marketing channels such as print, radio and television.

 

In the pay-per-click advertising marketplace, we compete with established search engine providers as well as with a growing number of digital marketing platforms focused on generating dealership website traffic from inventory listings and social media campaigns. In addition, some industry providers who have historically specialized in inventory aggregation or on providing SEM agency services to Dealers are now expanding into the area of website traffic generation.

 

 

 

Customers

 

We have a concentration of credit risk with our automotive industry related accounts receivable balances, particularly with Urban Science Applications (which represents several Manufacturer programs), General Motors and Ford Direct. During 2016, approximately 28% of our total revenues were derived from these three customers, and approximately 36% or $12.6 million of gross accounts receivable related to these three customers at December 31, 2016.  In 2016, Urban Science Applications accounted for 16% and 19% of total revenues and accounts receivable as of December 31, 2016, respectively.

 

Operations and Technology

 

We believe that our future success is significantly dependent upon our ability to continue to deliver high-performance, reliable and comprehensive websites, enhance consumer and Dealer product and service offerings, maintain the highest levels of information privacy and ensure transactional security. Our Company Websites are hosted at secure third-party data center facilities and public cloud providers. These data centers and public cloud systems include redundant power infrastructure, redundant network connectivity, fire detection and suppression systems and security systems to prevent unauthorized access. Our network and computer systems are built on industry standard technology.

 

System enhancements are primarily intended to accommodate increased traffic across our Company Websites, improve the speed in which Leads and advertisements are processed and introduce new and enhanced products and services. System enhancements entail the implementation of sophisticated new technology and system processes. We plan to continue to make investments in technology as we believe appropriate.

 

Government Regulation

 

We are subject to laws and regulations generally applicable to providers of advertising and commerce over the internet, including federal and state laws and regulations governing data security and privacy; voice, email and text messaging communications with consumers; unfair and deceptive acts and practices; advertising; contests, sweepstakes and promotions; and content regulation. For additional important information related to government regulation of our business, including governmental regulations relating to the marketing and sale of automobiles, see the information set forth in Part I, Item 1A“Risk Factors” of this Annual Report on Form 10-K.

 

Employees

 

As of March 6, 2017, we had 254 employees.  None of our employees are represented by labor unions.

 

 

Item 1A.     Risk Factors

 

The risks described below are not the only risks that we face. The following risks as well as risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially and adversely affect our business, results of operations, financial condition, earnings per share, cash flow or the trading price of our stock, individually and collectively referred to in these Risk Factors as our “financial performance.”   See also the discussion of “Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

 

We may be unable to increase Lead revenues and could suffer a decline in revenues due to dealer attrition.

 

 We derive more than 94% of our Lead revenues from Lead fees paid by Dealers and Manufacturers participating in our Lead programs. Our ability to increase revenues from sales of Leads is dependent on a mix of interrelated factors that include increasing Vehicle Lead revenues by attracting and retaining Dealers and Manufacturers, increasing the number of high quality Leads we sell to Dealers and Manufacturers, and improving margins by increasing the number of Internally-Generated Leads that we sell to our customers. We are also focused on higher revenue Dealers that are more cost-effective to support. Our sales strategy is intended to result in more profitable relationships with our Dealers both in terms of cost to supply Leads and to support the Dealers. Dealer churn impacts our revenues, and if our sales strategy does not mitigate the loss in revenues by maintaining the overall number of Leads sold by increasing sales to other Dealers or Manufacturers while maintaining the overall margins we receive from the Leads sold, our revenues would decrease. We cannot provide any assurances that we will be able to prevent Dealer attrition or to offset the revenues lost due to Dealer attrition by other means, and our failure to do so could materially and adversely affect our financial performance.

 

We may lose customers or quality Lead supplies to our competitors.

 

Our ability to provide increased numbers of high-quality Leads to our customers is dependent on increasing the number of Internally-Generated Leads and acquiring high-quality Non-Internally-Generated Leads from third parties. Originating Internally-Generated Leads is dependent on our ability to increase consumer traffic to our Company Websites by providing secure and easy to use websites with relevant and quality content for consumers and increasing visibility of our brands to consumers and by our SEM activities. We compete for Dealer and Manufacturer customers and for acquisition of Non-Internally-Generated Leads with companies that maintain automotive Lead referral businesses that are very similar to ours. Several of these competitors are larger than us and may have greater financial resources than we have. If we lose customers or quality Lead supply volume to our competitors, or if our pricing or cost to acquire Leads is impacted, our financial performance will be materially and adversely impacted.

 

Our financial performance could be materially and adversely affected by changes in Internet search engine algorithms and dynamics.

 

We use Google to generate a significant portion of the traffic to our websites, and, to a lesser extent, we use other search engines and meta-search websites to generate traffic to our websites, principally through pay-per-click advertising campaigns. The pricing and operating dynamics on these search engines can experience rapid change commercially, technically and competitively. For example, Google frequently updates and changes the logic that determines the placement and display of results of a consumer's search, such that the placement of links to our websites can be negatively affected and our costs to improve or maintain our placement in search results can increase.

 

We are affected by general economic and market conditions, and, in particular, conditions in the automotive industry.

 

Our financial performance is affected by general economic and market factors, conditions in the automotive industry, and the market for automotive marketing services, including, but not limited to, the following:

 

 

 

 

We may acquire other companies, and there are many risks associated with acquisitions.

 

As part of our business strategy we evaluate potential acquisitions that we believe will complement or enhance our existing business. We currently do not have any definitive agreements to acquire any company or business, and we may not be able to identify or complete any acquisition in the future.  Acquisitions involve numerous risks that include the following, any of which could materially and adversely affect our financial performance:

 

 

Concentration of credit risk and risks due to significant customers could materially and adversely affect our financial performance.

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and accounts receivable. Cash and cash equivalents are primarily maintained with two financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. Generally these deposits may be redeemed upon demand. Accounts receivable are primarily derived from fees billed to Dealers and Manufacturers. We have a concentration of credit risk with our automotive industry related accounts receivable balances, particularly with Urban Science Applications (which represents several Manufacturer programs), General Motors and Ford Direct. During 2016 approximately 28% of the Company’s total revenues were derived from these customers, and approximately 36% or $12.6 million of gross accounts receivable are receivable from them at December 31, 2016. In 2016, Urban Science Applications accounted for 16% and 19% of total revenues and accounts receivable as of December 31, 2016, respectively.  No collateral is required to support our accounts receivables, and we maintain an allowance for bad debts for potential credit losses.  If there is a decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with their services, additional estimated allowances for bad debts and customer credits may be required, and the adverse impact on our financial performance could be material.

 

 

 

We depend on Manufacturers through our third party sales channel for a significant amount of our advertising revenues, and we may not be able to maintain or grow these relationships.

 

We depend on Manufacturers through our third party sales channel for a significant amount of our advertising revenues. A decline in the level of advertising on our websites, reductions in advertising rates or any significant failure to develop additional sources of advertising would cause our advertising revenues to decline, which could have a material adverse effect on our financial performance. We periodically negotiate revisions to existing agreements and these revisions could decrease our advertising revenues in future periods and a number of our advertising agreements with Manufacturers may be terminated at any time without cause. We may not be able to maintain our relationship with Manufacturers on favorable terms or find alternative comparable relationships capable of replacing advertising revenues on terms satisfactory to us. If we cannot do so, our advertising revenues would decline, which could have a material adverse effect on our financial performance.

 

Our ability to maintain and add to our relationships with advertisers and thereby increase advertising revenues is dependent on our ability to attract consumers and acquire traffic to our Company Websites and monetize that traffic at profitable margins with advertisers. Our consumer facing websites compete with offerings from the major internet portals, transaction based sites, automotive-related verticals (websites with content that is primarily automotive in nature) and numerous lifestyle websites. Our advertising business is characterized by minimal barriers to entry, and new competitors may be able to launch competitive services at relatively low costs. If our Company Websites do not provide a compelling, differentiated user experience, we may lose visitors to competing sites, and if our website traffic declines, we may lose relevance to our major advertisers who may reduce or eliminate their advertising buys from us, which could have a material and adverse effect on our financial performance.

 

Uncertainty exists in the application of various laws and regulations to our business. New laws or regulations applicable to our business, or expansion or interpretation of existing laws and regulations to apply to our business, could subject us to licensing, claims, judgments and remedies, including monetary liabilities and limitations on our business practices, and could increase administrative costs or materially and adversely affect our financial performance.

 

We operate in a regulatory climate in which there is uncertainty as to the application of various laws and regulations to our business.  Our business could be significantly affected by different interpretations or applications of existing laws or regulations, future laws or regulations, or actions or rulings by judicial or regulatory authorities.  Our operations may be subjected to adoption, expansion or interpretation of various laws and regulations, and compliance with these laws and regulations may require us to obtain licenses at an undeterminable and possibly significant initial and annual expense. These additional expenditures may increase future overhead, thereby potentially reducing our future results of operations. There can be no assurances that future laws or regulations or interpretations or expansions of existing laws or regulations will not impose requirements on internet commerce that could substantially impair the growth of e-commerce and adversely affect our financial performance. The adoption of additional laws or regulations may decrease the popularity or impede the expansion of e-commerce and internet marketing, restrict our present business practices, require us to implement costly compliance procedures or expose us and/or our customers to potential liability.

 

We may be deemed to “operate” or “do business” in states where our customers conduct their business, resulting in regulatory action. If any state licensing laws were determined to be applicable to us, and if we are required to be licensed and we are unable to do so, or we are otherwise unable to comply with laws or regulations, we could be subject to fines or other penalties or be compelled to discontinue operations in those states.  In the event any state’s regulatory requirements impose state specific requirements on us or include us within an industry-specific regulatory scheme, we may be required to modify our marketing programs in that state in a manner that may undermine the program’s attractiveness to consumers or Dealers. In the alternative, if we determine that the licensing and related requirements are overly burdensome, we may elect to terminate operations in that state. In each case, our financial performance could be materially and adversely affected.  We have identified below areas of government regulation, which if changed or interpreted to apply to our business, we believe could be costly for us.

 

Automotive Dealer/ Broker and Vehicle Advertising Laws. All states comprehensively regulate vehicle sales and lease transactions, including strict licensure requirements for Dealers (and, in some states, brokers) and vehicle advertising. Most of these laws and regulations, we believe, specifically address only traditional vehicle purchase and lease transactions, not internet-based Lead referral programs such as our programs. If we determine that the licensing or other regulatory requirements in a given state are applicable to us or to a particular marketing services program, we may elect to obtain required licenses and comply with applicable regulatory requirements.  However, if licensing or other regulatory requirements are overly burdensome, we may elect to terminate operations or particular marketing services programs in that state or elect to not operate or introduce particular marketing services programs in that state. In some states we have modified our marketing programs or pricing models to reduce uncertainty regarding our compliance with local laws. As we introduce new services, we may need to incur additional costs associated with additional licensing regulations and regulatory requirements.  

 

 Financial Broker and Consumer Credit Laws. We provide a connection through our websites that allows consumers to obtain finance information and, through our display and pay-per-click advertising programs, to be referred to Dealer, Manufacturer and potential lender websites. All online applications for quotes are completed on the respective third party’s websites. We receive marketing fees from financial institutions and Dealers in connection with this marketing activity. We do not demand nor do we receive any fees from consumers for these services. In the event states require us to be licensed as a financial broker or finder, we may be unable to comply with a state’s laws or regulations, or we could be required to incur significant fees and expenses to obtain any financial broker required license and comply with regulatory requirements.  In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act established a new consumer financial protection bureau with broad regulatory powers, which could lead to regulation of our advertising business directly or indirectly through regulation of automotive finance companies and other financial institutions.

 

 

 

Insurance Broker Laws. We provide links on our websites and referrals from call centers enabling consumers to be referred to third parties to receive quotes for insurance from such third parties. All online applications for quotes are completed on the respective insurance carriers’ or other third party websites, and all applications for quotes obtained through call center referrals are conducted by the insurance carrier or other third party. We receive marketing fees from participants in connection with this marketing activity. We do not receive any premiums from consumers nor do we charge consumers fees for our services.

 

Changes in the taxation of internet commerce may result in increased costs.

 

Because our business is dependent on the internet, the adoption of new local, state or federal tax laws or regulations or new interpretations of existing laws or regulations by governmental authorities may subject us to additional local, state or federal sales, use or income taxes and could decrease the growth of internet usage or marketing or the acceptance of internet commerce which could, in turn, decrease the demand for our services and increase our costs.  As a result, our financial performance could be materially and adversely affected. Tax authorities in a number of states are currently reviewing and re-evaluating the tax treatment of companies engaged in internet commerce, including the application of sales taxes to internet marketing businesses similar to ours. We accrue for tax contingencies based upon our estimate of the taxes ultimately expected to be paid, which we update over time as more information becomes available, new legislation or rules are adopted or taxing authorities interpret their existing statutes and rules to apply to internet commerce, including internet marketing businesses similar to ours.  The amounts ultimately paid in resolution of reviews or audits by taxing authorities could differ materially from the amounts we have accrued and result in additional tax expense, and our financial performance could be materially and adversely affected.

 

Data Security and Privacy Risks

 

Our business is subject to various laws, rules and regulations relating to data security and privacy. New data security and privacy laws, rules and regulations may be adopted regarding the internet or other online services that could limit our business flexibility or cause us to incur higher compliance costs.  In each case, our financial performance could be materially and adversely affected.  We have identified below some of these risks that we believe could materially and adversely affect our financial performance.

 

Anti-spam laws, rules and regulations. Various state and federal laws, rules and regulations regulate email communications and internet advertising and restrict or prohibit unsolicited email (commonly known as “spam”). These laws, rules or regulations may adversely affect our ability to market our services to consumers in a cost-effective manner. The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (“CAN-SPAM”) imposes complex and often burdensome requirements in connection with sending commercial emails. In addition, state laws regulating the sending of commercial emails, including California’s law regulating the sending of commercial emails, to the extent found to not be preempted by CAN-SPAM, may impose requirements or conditions more restrictive than CAN-SPAM. Violation of these laws, rules or regulations may result in monetary fines or penalties or damage to our reputation.

 

Data privacy laws, rules and regulations. Various laws, rules and regulations govern the collection, use, retention, sharing and security of data that we receive from our users, advertisers and affiliates. In addition, we have and post on our website our own privacy policies and practices concerning the collection, use and disclosure of user data and personal information. Any failure, or perceived failure, by us to comply with our posted privacy policies, Federal Trade Commission requirements or orders or other federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others. Further, failure or perceived failure by us to comply with our policies, applicable requirements or industry self-regulatory principles related to the collection, use, sharing or security of personal information or other privacy-related matters could result in a loss of user confidence in us, damage to our brands, and ultimately in a loss of users, advertisers or Lead referral and advertising affiliates. We cannot predict whether new legislation or regulations concerning data privacy and retention issues related to our business will be adopted, or if adopted, whether they could impose requirements that may result in a decrease in our user registrations and materially and adversely affect our financial performance.  Proposals that have or are currently being considered include restrictions relating to the collection and use of data and information obtained through the tracking of internet use, including the possible implementation of a “Do Not Track” list, that would allow internet users to opt-out of such tracking.

 

 

 

Security risks associated with online Leads collection and referral, advertising and e-commerce risks associated with other online fraud and scams.  A significant issue for online businesses like ours is the secure transmission of confidential and personal information over public networks. Concerns over the security of transactions conducted on the internet, consumer identity theft and user privacy issues have been significant barriers to growth in consumer use of the internet, online advertising and e-commerce. Despite our implementation of security measures, our computer systems or those of our vendors may be susceptible to electronic or physical computer break-ins, viruses and other disruptive harms and security breaches. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may specifically compromise our security measures. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures on a timely basis. Any perceived or actual unauthorized disclosure of personally identifiable information regarding website visitors, whether through breach of our network by an unauthorized party, employee theft or misuse, or otherwise, could harm our reputation and brands, substantially impair our ability to attract and retain our audiences, or subject us to claims or litigation arising from damages suffered by consumers. If consumers experience identity theft after using any of our websites, we may be exposed to liability, adverse publicity and damage to our reputation. To the extent that identity theft gives rise to reluctance to use our websites or a decline in consumer confidence in financial transactions over the internet, our business could be adversely affected. Alleged or actual breaches of the network of one of our business partners or competitors whom consumers associate with us could also harm our reputation and brands. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information. For example, California law requires companies to inform individuals of any security breaches that result in their personal information being stolen. Because our success depends on the acceptance of online services and e-commerce, we may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by those breaches. Internet fraud has been increasing over the past few years, and the Company has experienced fraudulent use of our name and trademarks on websites in connection with the purported sale of vehicles offered on third party websites, with payments to be handled through an online escrow service purported to be owned and operated by the Company.  These fraudulent online transactions and scams, should they continue to increase in prevalence, could affect our reputation with consumers and give rise to claims by consumers for funds transferred to the fraudulent accounts, which could materially and adversely affect our financial performance.

 

We are insured for some, but not all, of the foregoing risks.  Even for those risks for which we are insured and have coverage under the terms and conditions of the applicable policies, there are no assurances given that the coverage limits would be sufficient to cover all costs, liabilities or losses we might incur or experience.

 

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 financial performance could 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 regulatory changes that may affect our financial performance are the regulations under the Telephone Consumer Protection Act (“TCPA”). Regulations adopted by the Federal Communications Commission under the TCPA 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 these regulations may negatively affect conversion rates of leads, and thus, our revenue or profitability.

 

Technology Risks

 

 Our business is dependent on keeping pace with advances in technology. If we are unable to keep pace with advances in technology, consumers may stop using our services and our revenues will decrease. If we are required to invest substantial amounts in technology, our financial performance will be adversely impacted.  The internet and electronic commerce markets are characterized by rapid technological change, changes in user and customer requirements, frequent new service and product introductions embodying new technologies, including mobile internet applications, and the emergence of new industry standards and practices that could render our existing websites and technology obsolete. These market characteristics are intensified by the emerging nature of the market and the fact that many companies are expected to introduce new internet products and services in the near future. If we are unable to adapt to changing technologies, our financial performance could be materially and adversely affected. Our performance will depend, in part, on our ability to continue to enhance our existing services, develop new technology that addresses the increasingly sophisticated and varied needs of our prospective customers, license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our websites, mobile applications and other proprietary technology entails significant technical and business risks. We may not be successful in using new technologies effectively or adapting our websites or other proprietary technology to customer requirements or to emerging industry standards. In addition, if we are required to invest substantial amounts in technology in order to keep pace with technological advances, our financial performance could be materially and adversely affected.

 

 

 

 Interruptions or failures in our information technology platforms, communication systems or security systems could materially and adversely affect our financial performance.  Our information technology and communications systems are susceptible to outages and interruptions due to fire, flood, earthquake, power loss, telecommunications failures, cyber attacks, terrorist attacks, failure of redundant systems and disaster recovery plans and similar events. Such outages and interruptions could damage our reputation and harm our operating results.  Despite our network security measures, our information technology platforms are vulnerable to computer viruses, worms, physical and electronic break-ins, sabotage and similar disruptions from unauthorized tampering, as well as coordinated denial-of-service attacks. We do not have multiple site capacity for all of our services. In the event of delays or disruptions to services we rely on third party providers to perform disaster recovery planning and services on our behalf. We are vulnerable to extended failures to the extent that planning and services are not adequate to meet our continued technology platform, communication or security systems’ needs.  We rely on third party providers for our primary and secondary internet connections. Our co-location service and public cloud services that provide infrastructure and platform services, environmental and power support for our technology platforms, communication systems and security systems are received from third party providers. We have little or no control over these third party providers. Any disruption of the services they provide us or any failure of these third party providers to effectively design and implement sufficient security systems or plan for increases in capacity could, in turn, cause delays or disruptions in our services. We are insured for some, but not all, of these events.  Even for those events for which we are insured and have coverage under the terms and conditions of the applicable policies, there are no assurances given that the coverage limits would be sufficient to cover all losses we might incur or experience.

 

  We are exposed to risks associated with overseas operations and outsourcing.  We currently maintain website, software development and operations in Guatemala and receive software development and maintenance services for some of our systems from contractors located in Pakistan.  These overseas operations and contractor arrangements are subject to many inherent risks, including but not limited to:

 

  These risks can significantly impact our overseas operations and outsourcing. Increases in the cost, or disruptions, of such operations and outsourcing, could materially and adversely affect our financial performance.  In addition, we are subject to certain anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. If we or any of our employees or agents violates these laws, we could become subject to sanctions or significant penalties that could negatively affect our reputation and financial performance.

 

Securities Market Risks

 

The public market for our common stock may be volatile, especially because market prices for internet-related and technology stocks have often been unrelated to operating performance.  Our common stock is currently listed on The Nasdaq Capital Market under the symbol “ABTL,” but we cannot assure that an active trading market will be sustained or that the market price of the common stock will not decline. The stock market in general periodically experiences significant price fluctuations. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to factors such as:

 

 

Further, the stock markets, and in particular The Nasdaq Capital Market, have experienced price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and have often been unrelated or disproportionate to the operating performance of those companies. These broad market factors have affected and may adversely affect the market price of our common stock. In addition, general economic, political and market conditions, such as recessions, interest rates, energy prices, international currency fluctuations, terrorist acts, political revolutions, military actions or wars, may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against companies with publicly traded securities. This litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our financial performance.

 

 

 

Our common stock could be delisted from The Nasdaq Capital Market if we are not able to satisfy continued listing requirements, in which case the price of our common stock  and our ability to raise additional capital and issue equity-based compensation may be adversely affected, and the ability to buy and sell our stock may be less orderly and efficient. For our common stock to continue to be listed on The Nasdaq Capital Market, the Company must satisfy various continued listing requirements established by The Nasdaq Stock Market LLC. In the event the Company were not able to satisfy these continued listing requirements, we expect that our common stock would be quoted on an over-the-counter market.  These markets are generally considered to be less efficient and less broad than The Nasdaq Capital Market. Investors may be reluctant to invest in the common stock if it is not listed on The Nasdaq Capital Market or another stock exchange. Delisting of our common stock could have a material adverse effect on the price of our common stock and would also eliminate our ability to rely on the preemption of state securities registration and qualification requirements afforded by Section 18 of the Securities Act of 1933 for “covered securities.” The loss of this preemption could result in higher costs for capital raising, could limit resale of our stock in some states, and could adversely impact our ability to issue equity-based compensation to Company employees.

 

No assurances can be given that the Company will continue to be able to meet the continued listing requirements for listing of our common stock on The Nasdaq Capital Market.

 

A significant number of additional shares of our common stock may be issued upon the exercise or conversion of existing securities, which issuances may depress the market price of our common stock.In connection with our acquisition of Autoweb, we issued 168,007 shares of Series B Junior Participating Convertible Preferred Stock (“Series B Preferred Stock”) and warrants to purchase up to 148,240 shares of Series B Preferred Stock. The shares of Series B Preferred Stock are convertible, subject to certain limitations, into ten shares of common stock. All shares of Series B Preferred Stock will be automatically converted into common stock upon stockholder approval. In addition, in connection with the acquisition of AutoUSA, we issued warrants to purchase 69,930 shares of common stock and a convertible subordinated promissory note for $1.0 million that may be converted into shares of common stock at a conversion price of $16.34 per share. The issuance of shares of common stock upon conversion of the Series BPreferred Stock, exercise of the AutoUSA Warrants and conversion of the AutoUSA Note will dilute the proportionate ownership and voting power of existing security holders. In addition the market price of our common stock may be depressed by the issuance or resales of the shares of common stock acquired upon exercise or conversion. See Note 3 of the “Notes to Consolidated Financial Statements” in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

 

Risks Associated with Litigation

 

Misappropriation or infringement of our intellectual property and proprietary rights, enforcement actions to protect our intellectual property and claims from third parties relating to intellectual property could materially and adversely affect our financial performance. Litigation regarding intellectual property rights is common in the internet and technology industries. We expect that internet technologies and software products and services may be increasingly subject to third party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps.  Our ability to compete depends upon our proprietary systems and technology.  While we rely on trademark, trade secret, patent and copyright law, confidentiality agreements and technical measures to protect our proprietary rights, we believe that the technical and creative skills of our personnel, continued development of our proprietary systems and technology, brand name recognition and reliable website maintenance are more essential in establishing and maintaining a leadership position and strengthening our brands. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary rights is difficult and may be expensive. We have no assurance that the steps taken by us will prevent misappropriation of technology or that the agreements entered into for that purpose will be enforceable. Effective trademark, service mark, patent, copyright and trade secret protection may not be available when our products and services are made available online. In addition, if litigation becomes necessary to enforce or protect our intellectual property rights or to defend against claims of infringement or invalidity, this litigation, even if successful, could result in substantial costs and diversion of resources and management attention.  We also have no assurances that our products and services do not infringe on the intellectual property rights of third parties. Claims of infringement, even if unsuccessful, could result in substantial costs and diversion of resources and management attention. If we are not successful, we may be subject to preliminary and permanent injunctive relief and monetary damages which may be trebled in the case willful infringements.

 

Our financial performance could be adversely affected by actions of third parties that could subject us to litigation.  We could face liability for information retrieved or obtained from or transmitted over the internet by third parties and liability for products sold over the internet by third parties. We could be exposed to liability with respect to third party information that may be accessible through our websites, links or vehicle review services. These claims might, for example, be made for defamation, negligence, patent, copyright or trademark infringement, personal injury, breach of contract, unfair competition, false advertising, invasion of privacy or other legal theories based on the nature, content or copying of these materials. These claims might assert, among other things that, by directly or indirectly providing links to websites operated by third parties we should be liable for copyright or trademark infringement or other wrongful actions by such third parties through those websites. It is also possible that, if any third party content provided on our websites contains errors, consumers could make claims against us for losses incurred in reliance on such information. Any claims could result in costly litigation, divert management’s attention and resources, cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements.

 

We also enter into agreements with other companies under which any revenues that results from the purchase or use of services through direct links to or from our websites or on our websites is shared. In addition, we acquire personal information and data in the form of Leads purchased from third party websites involving consumers who submitted personally identifiable information and data to the third parties and not directly to us. These arrangements may expose us to additional legal risks and uncertainties, including disputes with these parties regarding revenue sharing, local, state andfederal government regulation and potential liabilities to consumers of these services, even if we do not provide the services ourselves or have direct contact with the consumer. These liabilities can include liability for violations by these third parties of laws, rules and regulations, including those related to data security and privacy laws and regulations; unsolicited email, text messaging, telephone or wireless voice marketing; and licensing. We have no assurance that any indemnification provided to us in our agreements with these third parties, if available, will be adequate.

 

 

 

Our financial performance could be materially and adversely affected by other litigation.  From time to time, we are involved in litigation or legal matters not related to intellectual property rights and arising from the normal course of our business activities. The actions filed against us and other litigation or legal matters, even if not meritorious, could result in substantial costs and diversion of resources and management attention and an adverse outcome in litigation could materially and adversely affect our financial performance. Our liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could have a material adverse effect on our financial performance.

 

Our certificate of incorporation and bylaws, tax benefit preservation plan and Delaware law contain provisions that could discourage a third party from acquiring us or limit the price third parties are willing to pay for our stock.

 

Provisions of our amended and restated certificate of incorporation and bylaws relating to our corporate governance and provisions in our Tax Benefit Preservation Plan could make it difficult for a third party to acquire us, and could discourage a third party from attempting to acquire control of us. These provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

 

Our amended and restated certificate of incorporation allows us to issue preferred stock with rights senior to those of the common stock without any further vote or action by the stockholders. Our amended and restated certificate of incorporation also provides that the board of directors is divided into three classes, which may have the effect of delaying or preventing changes in control or change in our management because less than a majority of the board of directors are up for election at each annual meeting. In addition, provisions in our amended and restated certificate of incorporation and bylaws:

 

 

These provisions could make it more difficult for stockholders to effect corporate actions such as a merger, asset sale or other change of control of us.

 

Under our Tax Benefit Preservation Plan, rights to purchase capital stock of the Company (“Rights”) have been distributed as a dividend at the rate of five Rights for each share of common stock.  Each Right entitles its holder, upon triggering of the Rights, to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a price of $75.00 (as such price may be adjusted under the Tax Benefit Preservation Plan) or, in certain circumstances, to instead acquire shares of common stock. The Rights will convert into a right to acquire common stock or other capital stock of the Company in certain circumstances and subject to certain exceptions.  The Rights will be triggered upon the acquisition of 4.90% or more of the Company’s outstanding common stock or future acquisitions by any existing holders of 4.90% or more of the Company’s outstanding common stock. If a person or group acquires 4.90% or more of our common stock, all Rights holders, except the acquirer, will be entitled to acquire at the then exercise price of a Right that number of shares of our common stock which, at the time, has a market value of two times the exercise price of the Right.  The Tax Benefit Preservation Plan authorizes our board of directors to exercise discretionary authority to deem a person acquiring common stock in excess of 4.90% not to be an “Acquiring Person” under the Tax Benefit Preservation Plan, and thereby not trigger the Rights, if the Board finds that the beneficial ownership of the shares by the person acquiring the shares will not be likely to directly or indirectly limit the availability to the Company of the net operating loss carryovers and other tax attributes that the plan is intended to preserve or  is otherwise in the best interests of the Company.

 

We are also subject to Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns or did own 15% or more of the corporation’s voting stock. Section 203 could discourage a third party from attempting to acquire control of us.

 

 

 

If our internal controls and procedures fail, our financial condition, results of operations and cash flow could be materially and adversely affected.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. In making its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, management used the criteria described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 

Management determined that we had no material weaknesses in our internal control over financial reporting as of December 31, 2016. Our internal controls may not prevent all potential errors and fraud, because any control system, no matter how well designed, can only provide reasonable and not absolute assurance that the objectives of the control system will be achieved. We have had material weaknesses in our internal control over financial reporting in the past and there is no assurance that we will not have one or more material weaknesses in the future resulting from failure of our internal controls and procedures.  

 

Our ability to report our financial results on a timely and accurate basis could be adversely affected by a failure in our internal control over financial reporting. If our financial statements are not fairly presented, investors may not have an accurate understanding of our operating results and financial condition. If our financial statements are not timely filed with the SEC, we could be delisted from The Nasdaq Capital Market. If either or both of these events occur, it could have a material adverse effect on our ability to operate our business and the market price of our common stock. In addition, a failure in our internal control over financial reporting could materially and adversely affect our financial performance.

 

If we lose our key personnel or are unable to attract, train and retain additional highly qualified sales, marketing, managerial and technical personnel, our business may suffer.

 

Our future success depends on our ability to identify, hire, train and retain highly qualified sales, marketing, managerial and technical personnel.  In addition, as we introduce new services we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary managerial, technical, sales and marketing personnel could have a material adverse effect on our business, results of operations and financial condition.

 

Our business and operations are substantially dependent on the performance of our executive officers and key employees.  Each of these executive officers would be difficult to replace.  There is no guarantee that these or any of our other executive officers and key employees will remain employed with us. The loss of the services of one or more of our executive officers or key employees could have a material adverse effect on our business, results of operations and financial condition.

 

 

Not applicable.

 

 

Our headquarters are located in Irvine, California. Our headquarters consist of approximately 40,000 square feet of leased office space under a lease that expires in July 2017, with two extension options of one-year each (subject to the landlord’s right to terminate the second extension option in the event the premises are to be redeveloped). We are in the process of evaluating a move of our headquarters to new office space located near our current headquarters, and we are currently in negotiations for potential new office space. Our SEM operations located in Tampa, Florida are in leased office space that consists of approximately 2,800 square feet under a lease that currently provides for its expiration in April 2017. Our Tampa SEM operations will be moving in or about April 2017 to new leased office space in Tampa, Florida consisting of approximately 13,000 square feet under a lease that expires seven years after we first occupy the space. Our website development operations located in Guatemala City, Guatemala occupy approximately 10,000 square feet of leased office space under leases that expire in March 2020. We also maintain SEM, direct marketing and software development operations in Cambridge, Massachusetts that occupy approximately 5,500 square feet of leased office space under a lease that expires in November 2017.We believe that our existing facilities are adequate to meet our needs and that existing needs and future growth can be accommodated by leasing alternative or additional space.

 

                   

From time to time, we may be involved in litigation matters arising from the normal course of our business activities.  Such litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention, and an adverse outcome in litigation could materially adversely affect our business, results of operations, financial condition,  cash flows, earnings per share and stock price.

 

 

 Not applicable.

 

 

PART II

 

 

Our common stock, par value $0.001 per share, is listed on The Nasdaq Capital Market and trades under the symbol “ABTL.” The following table sets forth, for the calendar quarters indicated, the range of high and low sales prices of our common stock:

 

Year	High	Low
2015
First Quarter	$14.78	$9.07
Second Quarter	$17.97	$12.68
Third Quarter	$19.79	$14.93
Fourth Quarter	$24.57	$16.30
2016
First Quarter	$21.01	$14.56
Second Quarter	$18.74	$12.34
Third Quarter	$17.80	$13.49
Fourth Quarter	$18.28	$11.04

 

As of March 6, 2017, there were 220 holders of record of our common stock. We have never declared or paid any cash dividends on our common stock and we do not expect to pay any cash dividends in the foreseeable future.  Payment of any future dividends will depend on our earnings, cash flows and financial condition and will be subject to legal and contractual restrictions.  As of March 6, 2017, our common stock closing price was $12.85 per share.

 

Performance Graph

 

The following graph shows a comparison of cumulative total stockholder returns for our common stock, the NASDAQ Composite, the S&P Automobile Manufacturers Index, and the S&P Smallcap 600 Automotive Retail Index.  The comparisons reflected in the graph and table below are not intended to predict the future performance of our stock and may not be indicative of our future performance.  The data regarding our common stock assume an investment in our common stock at the closing price of $3.50 per share of our common stock on December 30, 2011.

	Cumulative Total Return
	12/11	12/12	12/13	12/14	12/15	12/16
Autobytel	$100.00	$113.71	$432.29	$311.43	$644.57	$384.29
NASDAQ Composite	100.00	116.41	165.47	188.69	200.32	216.54
S&P Automobile Manufacturers	100.00	122.60	159.50	154.73	151.44	150.43
S&P Smallcap 600 Automotive Retail	100.00	126.19	184.37	225.83	226.79	213.60

 

 

 

   

The tables below set forth our selected consolidated financial data.  We prepared this information using the consolidated financial statements of Autobytel for the five years ended December 31, 2016.  Certain amounts in the selected consolidated financial data have been reclassified to conform to the current year presentation.  You should read these selected consolidated financial data together with the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements contained in this Annual Report on Form 10-K and also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

	Years ended December 31,
	2016	2015	2014	2013 (1)	2012
	(Amounts in thousands, except per-share data)
RESULTS OF OPERATIONS:
Total revenues	$156,684	$133,226	$106,278	$78,361	$66,802
Income from continuing operations	$3,871	$4,646	$3,411	$38,144	$1,387
Net income	$3,871	$4,646	$3,411	$38,144	$1,387
Basic earnings per common share	$0.36	$0.47	$0.38	$4.29	$0.15
Diluted earnings per common share	$0.29	$0.37	$0.32	$3.61	$0.15
Weighted average diluted shares	13,303	12,662	11,212	10,616	9,204

 

 

	Years ended December 31,
	2016	2015	2014	2013	2012
	(Amounts in thousands)
FINANCIAL POSITION (1):
Cash and cash equivalents	$38,512	$23,993	$20,747	$18,930	$15,296
Total assets	$165,281	$153,588	$104,749	$88,193	$40,767
Non-current liabilities	$16,500	$21,750	$11,061	$10,450	$5,620
Accumulated deficit	$(230,424)	$(234,295)	$(238,941)	$(242,352)	$(280,496)
Stockholders’ equity	$119,609	$108,201	$69,258	$64,828	$25,765

 

 

 

You should read the following discussion of our results of operations and financial condition in conjunction with the “Risk Factors” included in Part I, Item 1A and our Consolidated Financial Statements and related Notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.  See also the discussion of “Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

 

For the year ended December 31, 2016, our business, results of operations and financial condition were affected and may continue to be affected in the future by the events that occurred during or subsequent to year end that are described in Part I, Item 1 “Business – Significant Business Developments” of this Annual report on Form 10-K.

 

 

 

Results of Operations

 

The following table sets forth our results of operations as a percentage of total revenues:

	Years Ended December 31,
	2016	2015	2014
Revenues:
Lead fees	83.4%	90.6%	94.8%
Advertising	15.6	7.9	3.9
Other revenues	1.0	1.5	1.3
Total revenues	100.0	100.0	100.0
Cost of revenues	63.0	61.2	60.7
Gross margin	37.0	38.8	39.3
Operating expenses:
Sales and marketing	11.6	12.0	13.5
Technology support	8.9	8.8	7.5
General and administrative	9.4	9.9	10.9
Depreciation and amortization	3.2	2.3	1.7
Litigation settlements	—	(0.1)	(0.1)
Total operating expenses	33.1	32.9	33.5
Operating income	3.9	5.8	5.8
Interest and other income (expense), net	0.4	0.2	(0.7)
Income tax provision	1.8	2.5	1.9
Net income	2.5%	3.5%	3.2%

 

 

 

Revenues by groups of similar services and gross profits are as follows (dollars in thousands):

 

		Years Ended December 31,												2016 vs. 2015 Change							2015 vs. 2014 Change
		2016			2015				2014					$					%		$						%
Revenues:
Lead fees		$	130,684			$	120,678			$	100,744			$	10,006				8	%		$	19,934				20	%
Advertising			24,508				10,534				4,171				13,974				133				6,363				153
Other revenues			1,492				2,014				1,363				(522	)			(26	)			651				48
Total revenues			156,684				133,226				106,278				23,458				18				26,948				25
Cost of revenues			98,771				81,586				64,465				17,185				21				17,121				27
Gross profit		$	57,913			$	51,640			$	41,813			$	6,273				12	%		$	9,827				24	%

 

2016 Compared to 2015

 

Lead fees. Lead fees increased $10.0 million or 8% in 2016 compared to 2015. The increase in Lead fees was primarily due to increased lead volume associated with the acquisitions of Dealix Corporation and Autotegrity, Inc. (collectively, “Dealix/Autotegrity”) in May 2015.

 

Advertising.  The $14.0 million or 133% increase in advertising revenues in 2016 compared to 2015 was primarily due to an increase in click revenue as a result of both increased click volume and pricing. Increased click volume is a result of increased investments in traffic acquisition activity.

 

Other revenues.  Other revenues decreased $0.5 million or 26% in 2016 compared to 2015.  The decrease in other revenues was primarily due to the discontinuation of a Manufacturer’s brand using other non-Lead products.

 

Cost of Revenues. Cost of revenues consists of Lead and traffic acquisition costs and other costs. Lead and traffic acquisition costs consist of payments made to our third party Lead providers, including internet portals and online automotive information providers, as well as search engine marketing (“SEM”) costs. Other cost of revenues consists of fees paid to third parties for data and content, including search engine optimization (“SEO”) activity, included on our properties, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to the Company Websites. SEM, sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website.

 

The $17.2 million or 21% increase in cost of revenues in 2016 compared to 2015 was primarily due to increased lead volume from the Dealix/Autotegrity acquisition in May 2015 together with increased intangible amortization costs from both the Dealix/Autotegrity and AutoWeb acquisitions, and an increased investment in additional traffic acquisition methodologies.

 

2015 Compared to 2014

 

Lead fees. Lead fees increased $19.9 million or 20% in 2015 compared to 2014. The increase in Lead fees was primarily due to the higher lead volume associated with the increase in incremental and overlapping Dealers from the Dealix/Autotegrity acquisition in May 2015 paired with increased spend by certain OEM/wholesale partners.

 

Advertising.  The $6.4 million or 153% increase in advertising revenues in 2015 compared to 2014 was primarily due to increases in click revenue coupled with increased revenue associated with higher page views as well as increased direct marketing revenue.

 

Other revenues.  Other revenues increased $0.7 million or 48% in 2015 compared to 2014.  The increase in other revenues was due to an increase in mobile product sales as a result of our acquisition of substantially all of the assets of Advanced Mobile, LLC and Advanced Mobile Solutions Worldwide, Inc. (collectively, “Advanced Mobile”).

 

Cost of Revenues. The $17.1 million or 27% increase in cost of revenues in 2015 compared to 2014 was primarily due to a corresponding increase in revenue as a result of the Dealix/Autotegrity acquisition in May 2015.

 

 

 

Operating expenses were as follows (dollars in thousands):

 

		Years Ended December 31,												2016 vs. 2015 Change							2015 vs. 2014 Change
		2016			2015				2014					$					%		$						%
Operating expenses:
Sales and marketing		$	18,118			$	15,956			$	14,404			$	2,162				14	%		$	1,552				11	%
Technology support			13,986				11,740				8,014				2,246				19				3,726				46
General and administrative			14,663				13,189				11,538				1,474				11				1,651				14
Depreciation and amortization			5,068				3,106				1,858				1,962				63				1,248				67
Litigation settlements			(50	)			(108	)			(143	)			58				(54	)			35				(24	)
Total operating expenses		$	51,785			$	43,883			$	35,671			$	7,902				18	%		$	8,212				23	%

 

2016 Compared to 2015

 

Sales and Marketing. Sales and marketing expense includes costs for developing our brand, personnel costs, and other costs associated with Dealer sales, website advertising, Dealer support and bad debt expense.

 

Sales and marketing expense for the year ended December 31, 2016 increased by $2.2 million or 14% compared to the prior year, due to increased headcount related costs associated with the Dealix/Autotegrity and AutoWeb acquisitions coupled with severance expense of $0.6 million and accelerated stock compensation expense of $0.3 million associated with the termination of two executive officers.

 

Technology Support.  Technology support 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 for the year ended December 31, 2016 increased by $2.2 million or 19% compared to the prior year, primarily due to increased headcount related costs associated with the Dealix/Autotegrity and AutoWeb acquisitions coupled with severance expense of $0.3 million and accelerated stock compensation expense of $0.2 million associated with the termination of an executive officer.

 

General and Administrative. General and administrative expense consists of certain executive, financial, human resources, legal and facilities personnel expenses and costs related to being a publicly-traded company.

 

General and administrative expense for the year ended December 31, 2016 increased by $1.5 million or 11% compared to the prior year. The increase was due to increased headcount costs and facility fees, offset with a reduction in professional fees all associated with the Dealix/Autotegrity and AutoWeb acquisitions, together with $0.3 million in severance expense and $0.2 million in accelerated stock compensation expense for a terminated executive officer.

 

Depreciation and Amortization.  Depreciation and amortization expense for the year ended December 31, 2016 increased $2.0 million or 63% from the year ended December 31, 2015 primarily due to the addition of intangible assets associated with the Dealix/Autotegrity and AutoWeb acquisitions.

 

Litigation Settlements. Payments received primarily from 2010 settlements of patent infringement claims against third parties relating to the third parties’ methods of Lead delivery for 2016 were $50,000 compared to $108,000 in 2015. We also paid $41,000 related to settlement of claims alleged under the Controlling the Assault of Non-Solicited Pornography And Marketing Act of 2003 inherited in connection with the acquisition of Dealix/Autotegrity in 2016.

 

Interest and Other Income (Expense), net. Interest and other income was $0.6 million for the year ended December 31, 2016 compared to interest and other income of $0.3 million for the year ended December 31, 2015.  Interest expense was $0.9 million and $0.8 million for the years ended December 31, 2016 and 2015, respectively.  The year ended December 31, 2016 also included gain on disposal of the finance leads product of $2.2 million offset by a $0.8 million reserve related to our investment in GoMoto, Inc (“GoMoto’).

 

Income tax provision.  Income tax expense was $2.8 million for the year ended December 31, 2016 compared to income tax expense of $3.4 million for the year ended December 31, 2015.  The Company’s effective tax rate of 42.1% for the year ended December 31, 2016 differed from the federal statutory rate principally as a result of deferred tax asset adjustments and state income taxes and permanent non-deductible tax items.  The Company’s effective tax rate of 42.5% for the year ended December 31, 2015 differed from the federal statutory rate principally as a result of deferred tax asset adjustments and state income taxes.

 

 

 

2015 Compared to 2014

 

Sales and Marketing. Sales and marketing expense for the year ended December 31, 2015 increased by $1.6 million or 11% compared to the prior year, due to increased headcount related costs associated with the Dealix/Autotegrity acquisition in May 2015 coupled with increased marketing costs.

 

Technology Support.  Technology support expense for the year ended December 31, 2015 increased by $3.7 million or 46% compared to the prior year, primarily due to an increase in headcount related costs associated with the Dealix/Autotegrity acquisition in May 2015.

 

General and Administrative. General and administrative expense for the year ended December 31, 2015 increased by $1.7 million or 14% compared to the prior year. The increase was due to increased professional fees associated with the Dealix/Autotegrity acquisition in May 2015 and AutoWeb acquisition in October 2015.

 

Depreciation and Amortization.  Depreciation and amortization expense for the year ended December 31, 2015 increased $1.2 million or 67% from the year ended December 31, 2014 primarily due to the addition of intangible assets associated with the Dealix/Autotegrity and AutoWeb acquisitions.

 

Litigation Settlements. Litigation settlements decreased to $108,000 for the year ended December 31, 2015 compared to $143,000 for the year ended December 31, 2014.  These payments primarily relate to a settlement of patent infringement claims against third parties relating to the third party’s method of Lead delivery.

 

Interest and Other Income (Expense), net. Interest and other income was $0.3 million for the year ended December 31, 2015 compared to interest and other expense of $0.7 million for the year ended December 31, 2014.  Interest expense was $0.8 million and $0.7 million for the years ended December 31, 2015 and 2014, respectively.  The year ended December 31, 2015 included $0.6 million related to a gain on investment recognized from the acquisition of AutoWeb and $0.5 million related to the Company’s recovery of short-swing profits from a stockholder pursuant to Section 16(b) of the Securities Exchange Act of 1934.

 

Income tax provision.  Income tax expense was $3.4 million for the year ended December 31, 2015 compared to income tax expense of $2.0 million for the year ended December 31, 2014.  The Company’s effective tax rate of 42.5% for the year ended December 31, 2015 differed from the federal statutory rate principally as a result of deferred tax asset adjustments and state income taxes and permanent non-deductible tax items.  The Company’s effective tax rate of 37.4% for the year ended December 31, 2014 differed from the federal statutory rate principally as a result of deferred tax asset adjustments and state income taxes.

 

Segment Information

 

We conduct our business within one business segment, which is defined as providing automotive marketing services.  Our operations are aggregated into a single reportable operating segment based upon similar economic and operating characteristics as well as similar markets.  

 

Liquidity and Capital Resources

 

The table below sets forth a summary of our cash flow for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

 

	Years Ended December31,
	2016	2015	2014
Net cash provided by operating activities	$18,242	$12,200	$7,890
Net cash used in investing activities	(2,774)	(28,105)	(12,548)
Net cash (used in) provided by financing activities	(949)	19,151	6,475

 

 

 

Our principal sources of liquidity are our cash and cash equivalents and accounts receivable balances. Our cash and cash equivalents totaled $38.5 million as of December 31, 2016 compared to $24.0 million as of December 31, 2015.

 

On June 7, 2012, the Company announced that its board of directors had authorized the Company to repurchase up to $2.0 million of Company common stock, and on September 17, 2014 the Company announced that the board of directors had approved the repurchase of up to an additional $1.0 million of Company common stock. The authorization may be increased or otherwise modified, renewed, suspended or terminated by the Company at any time, without prior notice. We may repurchase common stock from time to time on the open market or in private transactions.  Shares repurchased under this program have been retired and returned to the status of authorized and unissued shares. We funded repurchases and anticipate that we would fund future repurchases through the use of available cash. The repurchase authorization does not obligate the Company to repurchase any particular number of shares. The timing and actual number of repurchases of additional shares, if any, under the Company’s stock repurchase program will depend upon a variety of factors, including price, market conditions, release of quarterly and annual earnings and other legal, regulatory and corporate considerations at the Company's sole discretion. The impact of repurchases on the Tax Benefit Preservation Plan and on the Company’s use of its net operating loss carryovers and other tax attributes if the Company were to experience an “ownership change,” as defined in Section 382 of the Internal Revenue Code is also a factor that the Company considers in connection with share repurchases. No repurchases were made in 2016.  As of December 31, 2016, approximately $1.2 million remained available for the repurchase of Company common stock under this program.

 

On June 1, 2016, the Company entered into a Fourth Amendment to Loan Agreement (“Credit Facility Amendment”) with MUFG Union Bank, N.A., formerly Union Bank, N.A. (“Union Bank”), amending the Company’s existing Loan Agreement with Union Bank initially entered into on February 26, 2013, as amended on September 10, 2013, January 13, 2014 and May 20, 2015 (the existing Loan Agreement, as amended to date, is referred to collectively as the “Credit Facility Agreement”).  The Credit Facility Agreement provided for a $9.0 million term loan (“Term Loan 1”).  The Credit Facility Amendment provides for (i) a $15.0 million term loan (“Term Loan 2”); (ii) the amendment of certain financial covenants in the Credit Facility Agreement; and (iii) amendments to the Company’s existing $8.0 million working capital revolving line of credit (“Revolving Loan”).

Term Loan 1 is amortized over a period of four years, with fixed quarterly principal payments of $562,500. Borrowings under Term Loan 1 bear interest at either (i) the bank’s Reference Rate (prime rate) minus 0.50% or (ii) the London Interbank Offering Rate (“LIBOR”) plus 2.50%, at the option of the Company. Interest under Term Loan 1 adjusts (i) at the end of each LIBOR rate period (1, 2, 3, 6 or 12 months terms) selected by the Company, if the LIBOR rate is selected; or (ii) with changes in Union Bank’s Reference Rate, if the Reference Rate is selected.  Borrowings under Term Loan 1 are secured by a first priority security interest on all of the Company’s personal property (including, but not limited to, accounts receivable) and proceeds thereof. Term Loan 1 matures on December 31, 2017.  Borrowing under Term Loan 1 was limited to use for the acquisition of AutoUSA, and the Company drew down the entire $9.0 million of Term Loan 1, together with $1.0 million under the Revolving Loan, in financing this acquisition.  The outstanding balance of Term Loan 1 as of December 31, 2016 was $2.8 million.

Term Loan 2 is amortized over a period of five years, with fixed quarterly principal payments of $750,000. Borrowings under Term Loan 2 bear interest at either (i) LIBOR plus 3.00% or (ii) the bank’s Reference Rate (prime rate), at the option of the Company. Borrowings under the Revolving Loan bear interest at either (i) the LIBOR plus 2.50% or (ii) the bank’s Reference Rate (prime rate) minus 0.50%, at the option of the Company. Interest under both Term Loan 2 and the Revolving Loan adjust (i) at the end of each LIBOR rate period (1, 2, 3, 6 or 12 months terms) selected by the Company, if the LIBOR rate is selected; or (ii) with changes in Union Bank’s Reference Rate, if the Reference Rate is selected. The Company paid an upfront fee of 0.10% of the Term Loan 2 principal amount upon drawing upon Term Loan 2 and also pays a commitment fee of 0.10% per year on the unused portion of the Revolving Loan, payable quarterly in arrears. Borrowings under Term Loan 2 and the Revolving Loan are secured by a first priority security interest on all of the Company’s personal property (including, but not limited to, accounts receivable) and proceeds thereof. Term Loan 2 matures June 30, 2020, and the maturity date of the Revolving Loan was extended from March 31, 2017 to April 30, 2018. Borrowings under the Revolving Loan may be used as a source to finance working capital, capital expenditures, acquisitions and stock buybacks and for other general corporate purposes. Borrowing under Term Loan 2 was limited to use for the acquisition of Dealix/Autotegrity, and the Company drew down the entire $15.0 million of Term Loan 2, together with $2.75 million under the Revolving Loan and $6.76 million from available cash on hand, in financing this acquisition.  The outstanding balances of Term Loan 2 and the Revolving Loan as of December 31, 2016 were $11.3 million and $8.0 million, respectively.

The Credit Facility Agreement contains certain customary affirmative and negative covenants and restrictive and financial covenants, including that the Company maintain specified levels of minimum consolidated liquidity and quarterly and annual earnings before interest, taxes and depreciation and amortization, which the Company was in compliance with as of December 31, 2016.

We believe our current cash and cash equivalent balances together with anticipated cash flows from operations will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next 12 months.

 

 

 

Net Cash Provided by Operating Activities.  Net cash provided by operating activities in 2016 of $18.2 million resulted primarily from net income of $3.9 million, adjustments for non-cash charges of to earnings of $13.4 million and an increase in working capital.

 

Net cash provided by operating activities in 2015 of $12.2 million resulted primarily from net income of $4.6 million, as adjusted for non-cash charges to earnings, offset by a decrease in working capital, primarily from a decrease in accrued expenses and other liabilities of $1.4 million. 

 

Net Cash Used in Investing Activities.  Net cash used in investing activities of $2.8 million in 2016 primarily consisted of a $0.4 million investment in GoMoto, a $0.3 million in a short-term investment and $2.1 million in purchases of property and equipment and expenditures related to capitalized internal use software.

 

Net cash used in investing activities of $28.1 million in 2015 primarily consisted of $25.0 million used to acquire Dealix/Autotegrity, a $0.4 million investment in GoMoto and $2.7 million in purchases of property and equipment and expenditures related to capitalized internal use software.

 

Net Cash (Used in) Provided by Financing Activities. Net cash used in financing activities of $0.9 million in 2016 consisted of payments on term loan borrowings of $3.9 million.  Stock options for 386,001 shares of the Company’s common stock were exercised in the year ended December 31, 2016 resulting in $3.1 million of cash inflow.      

 

Net cash provided by financing activities of $19.2 million in 2015 consisted of borrowings of $15.0 million and $2.8 million against the Term Loan and Revolving Loan, respectively, to fund the purchase of Dealix/Autotegrity in the year ended December 31, 2015.  Stock options for 145,979 shares of the Company’s common stock were exercised in the year ended December 31, 2015 resulting in $1.2 million of cash inflow.    Payments of $3.8 million were made against the Term Loan borrowings in the year ended December 31, 2015.  We also received $1.9 million of proceeds related to the exercise of the Cyber Warrant by Auto Holdings and $2.1 million related to the acquisition of AutoWeb.

 

 

Contractual Obligations

 

The following table provides aggregated information about our outstanding contractual obligations as of December 31, 2016 (in thousands):

 

	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Long-term Debt Obligations (a)	$23,063	$6,563	$15,000	$1,500	$—
Operating Lease Obligations (b)	5,414	1,767	1,669	961	1,017
Total	$28,477	$8,330	$16,669	$2,461	$1,017

 

 

 

Off-Balance Sheet Arrangements

 

We do not have any material off-balance sheet arrangements.

 

 Critical Accounting Policies and Estimates

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe the following critical accounting policies, among others, require significant judgment in determining estimates and assumptions used in the preparation of our consolidated financial statements.  Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations may be affected. For a detailed discussion of the application of these and other accounting policies, see Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

 

 

 

Revenue Recognition. Leads consist of vehicle buying Leads for new and used vehicles and finance request fees.  Fees paid by Dealers and Manufacturers participating in our Lead programs are comprised of monthly transaction and/or subscription fees.  Advertising revenues represent fees for display advertising on our websites.

 

We recognize revenues when evidence of an arrangement exists, pricing is fixed and determinable, collection is reasonably assured, and delivery or performance of service has occurred. Leads are generally recognized as revenues in the period the service is provided. Advertising revenues are generally recognized in the period the advertisements are displayed on our websites. Fees billed prior to providing services are deferred, as they do not satisfy all U.S. GAAP revenue recognition criteria. Deferred revenues are recognized as revenue over the periods services are provided.

 

Investments.  We make strategic investments because we believe that they may allow us to increase market share, benefit from advancements in technology and strengthen our business operations by enhancing our product and service offerings.

 

Allowances for Bad Debt and Customer Credits. We estimate and record allowances for potential bad debts and customer credits based on factors such as the write-off percentages, the current business environment and known concerns within our accounts receivable balances.

 

The allowance for bad debts is our estimate of bad debt expense that could result from the inability or refusal of our customers to pay for our services. Additions to the estimated allowance for bad debts are recorded as an increase in sales and marketing expenses and are based on factors such as historical write-off percentages, the current business environment and the known concerns within the current aging of accounts receivable. Reductions in the estimated allowance for bad debts due to subsequent cash recoveries are recorded as a decrease in sales and marketing expenses. As specific bad debts are identified, they are written-off against the previously established estimated allowance for bad debts and have no impact on operating expenses.

 

The allowance for customer credits is our estimate of adjustments for services that do not meet our customers’ requirements. Additions to the estimated allowance for customer credits are recorded as a reduction in revenues and are based on historical experience of: (i) the amount of credits issued; (ii) the length of time after services are rendered that the credits are issued; (iii) other factors known at the time; and (iv) future expectations. Reductions in the estimated allowance for customer credits are recorded as an increase in revenues. As specific customer credits are identified, they are written-off against the previously established estimated allowance for customer credits and have no impact on revenues.

 

If there is a decline in the general economic environment that negatively affects the financial condition of our customers or an increase in the number of customers that are dissatisfied with our services, additional estimated allowances for bad debts and customer credits may be required and the impact on our business, results of operations or financial condition could be material.  We generally do not require collateral to support our accounts receivables.

 

Contingencies. From time to time we may be subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes of these matters as well as potential ranges of probable losses. We record a loss contingency when an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. The amount of allowances required, if any, for these contingencies is determined after analysis of each individual case. The amount of allowances may change in the future if there are new material developments in each matter.

 

Fair Value of Financial Instruments. We record our financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measure date.  We use valuation techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the instrument’s valuation.

 

Cash equivalents, accounts receivable, net of allowance, accounts payable and accrued liabilities, are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments.

 

Our investments at December 31, 2016 and 2015 consist primarily of investments in SaleMove and GoMoto and are accounted for under the cost method. Although there is no established market for these investments, we evaluated the investments for impairment by comparing them to an estimated fair value and determined that there is no impairment.

 

 

 

 The following table presents the Company’s investment activity for 2016 and 2015(dollars in thousands):

 

	Note	Note
	receivable-	receivable-
Description	long-term	current	Investments
Balance at December 31, 2014	$—	$150	$3,880
Total gains, realized or unrealized	—	—	636
Purchases, (sales), issuances and (settlements), net	375	(150)	(3,836)
Balance at December 31, 2015	375	—	680
Purchases, (sales), issuances and (settlements), net	(375)	750	—
Balance at December 31, 2016	—	750	680
Reserve for notes receivable	—	(750)	—
Net balance at December 31, 2016	$—	$—	$680

 

The Company recorded a reserve against the current notes receivable related to GoMoto as of December 31, 2016 because the Company believes the amounts may not be recoverable.

 

Variable Interest Entities.  We have an investment in an entity that is considered a variable interest entity (“VIE”) under U.S. GAAP.  We have concluded that our investment in SaleMove qualifies as a variable interest and SaleMove is a VIE. VIEs are legal entities in which the equity investors do not have sufficient equity at risk for the entity to independently finance its activities or the collective holders do not have the power through voting or similar rights to direct the activities of the entity that most significantly impacts its economic performance, the obligation to absorb the expected losses of the entity, or the right to receive expected residual returns of the entity. Consolidation of a VIE is considered appropriate if a reporting entity is the primary beneficiary, the party that has both significant influence and control over the VIE. Management periodically performs a qualitative analysis to determine if the Company is the primary beneficiary of a VIE. This analysis includes review of the VIEs’ capital structures, contractual terms, and primary activities, including the Company’s ability to direct the activities of the VIEs and obligations to absorb losses, or the right to receive benefits, significant to the VIEs.  Additionally, changes in our various equity investments have in the past resulted in a reconsideration event

 

Based on our analysis, Autobytel is not the primary beneficiary of SaleMove. Accordingly, SaleMove does not meet the criteria for consolidation. The SaleMove Advances are classified as an other long-term asset on the consolidated balance sheet as of December 31, 2016.  The carrying value and maximum potential loss exposure from SaleMove totaled $0.6 million and $0.7 million as of December 31, 2016 and 2015, respectively.

 

Property and Equipment.  Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets, generally three years. Amortization of leasehold improvements is provided using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements. Repair and maintenance costs are charged to operating expenses as incurred. Gains or losses resulting from the retirement or sale of property and equipment are recorded as operating income or expenses, respectively.

 

Capitalized Internal Use Software and Website Development Costs.  We capitalize costs to develop internal use software in accordance with the Internal-Use Software and the Website Development Costs Topics, which require the capitalization of external and internal computer software costs and website development costs, respectively, incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training and maintenance costs are expensed as incurred while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized internal use software development costs are amortized using the straight-line method over an estimated useful life of three years. Capitalized website development costs, once placed in service are amortized using the straight-line method over the estimated useful lives of the related websites.

 

Share-Based Compensation Expense. We account for our share-based compensation using the fair value method in accordance with the Stock Compensation Topic of the Codification.  Under these provisions, we recognize share-based compensation net of an estimated forfeiture rate and therefore only recognize compensation cost for those shares expected to vest over the service period of the award. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model based on the underlying common stock closing price as of the date of grant, the expected term, expected stock price volatility and expected risk-free interest rates.

 

 

 

Calculating share-based compensation expense requires the input of highly subjective assumptions, including the expected term of the share-based awards, expected stock price volatility and expected pre-vesting option forfeitures. We estimate the expected life of options granted based on historical experience, which we believe is representative of future behavior. We estimate the volatility of the price of our common stock at the date of grant based on historical volatility of the price of our common stock for a period equal to the expected term of the awards. We have used historical volatility because we have a limited number of options traded on our common stock to support the use of an implied volatility or a combination of both historical and implied volatility. The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our share-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our share-based awards that are granted, exercised or cancelled. If our actual forfeiture rate is materially different from our estimate, the share-based compensation expense could be significantly different from what we have recorded in the current period.

 

Income Taxes. We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance, if necessary, to reduce deferred tax assets to an amount we believe is more likely than not to be realized.

 

As of December 31, 2016, we had $0.5 million of unrecognized tax benefits.  There was a reduction of $0.1 million of uncertain tax positions due to the settlement of a prior period tax position during the current period. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2016, we did not accrue interest associated with our unrecognized tax benefits, and no interest expense was recognized in 2016.

 

Goodwill.  Goodwill represents the excess of the purchase price for business acquisitions over the fair value of identifiable assets and liabilities acquired. We evaluate the carrying value of enterprise goodwill for impairment. Testing for impairment of goodwill is a two-step process. The first step requires us to compare the enterprise’s carrying value to its fair value. If the fair value is less than the carrying value, enterprise goodwill is potentially impaired and we then complete the second step to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of enterprise goodwill, an impairment loss is recognized equal to the difference. We evaluate enterprise goodwill, at a minimum, on an annual basis in the fourth quarter of each year or whenever events or changes in circumstances suggest that the carrying amount of goodwill may be impaired.  During 2015 we recognized $22.0 million in goodwill related to the acquisitions of Dealix/Autotegrity and AutoWeb.  As of December 31, 2016, we adjusted goodwill by $82,000 as a result of purchase price allocation adjustments and no goodwill impairment was recorded during the year.

 

Impairment of Long-Lived Assets and Intangible Assets. We periodically review long-lived assets to determine if there is any impairment of these assets. We assess 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. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our long-lived assets and other intangibles. Future events could cause us to conclude that impairment indicators exist and that the assets should be reviewed to determine their fair value. We assess the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the assets and their eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on a valuation process that provides an estimate of a fair value of these assets using a discounted cash flow model, which includes many assumptions and estimates. Once the valuation is determined, we will write-down these assets to their determined fair value, if necessary. Any write-downs could have a material adverse effect on our financial condition and results of operations. We did not record any impairment of long-lived assets in 2016, 2015 and 2014.

 

Indefinite-lived intangible assets. Indefinite-lived intangible assets consists of a domain name, which was acquired as part of the Dealix/Autotegrity acquisition in 2015, which is tested for impairment annually, or more frequently if an event occurs or circumstances changes that would indicate that impairment may exist. When evaluating indefinite-lived intangible assets for impairment, we may first perform a qualitative analysis to determine whether it is more likely than not that the indefinite-lived intangible assets is impaired. If we do not perform the qualitative assessment, or if we determine that it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds its carrying amount, we will calculate the estimated fair value of the indefinite-lived intangible asset. Fair value is the price a willing buyer would pay for the indefinite-lived intangible asset and is typically calculated using an income approach. If the carrying amount of the indefinite-lived intangible asset exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. We did not record any impairment of indefinite-lived intangible assets in 2016 and 2015.

 

 

 

Recent Accounting Pronouncements

 

 Accounting Standards Codification 606 “Revenue from Contracts with Customers.”  In May 2014, Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” was issued.  This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.  Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method.  In August 2015, the Financial Accounting Standards Board voted to defer the effective date and it is now effective for public entities for annual periods ending after December 15, 2017.  Early adoption of the standard is permitted. This update permits the use of either the retrospective or cumulative effect transition method.  In April 2016, ASU No. 2016-10, “Identifying Performance Obligations and Licensing” was issued.  This ASU clarifies 1) the identification of performance obligations and, 2) licensing implementation guidance as it relates to Topic 606, Revenue from Contracts with Customers.  The amendments in this ASU affect the guidance in ASU 2014-09, which is effective for public entities for annual periods ending after December 15, 2017. In May 2016, ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients” was issued.  This ASU addresses certain issues as it relates to assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition as it relates to Topic 606, Revenue from Contracts with Customers.  The amendments in this ASU affect the guidance in ASU 2014-09, which is effective for public entities for annual periods beginning after December 15, 2017. The Company is continuing to evaluate the effect this guidance will have on the consolidated financial statements and related disclosures.

 

Accounting Standards Codification 740 “Income Taxes.”  In November 2015, ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” was issued.  This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.  The amendments in this update apply to all entities that present a classified statement of financial position.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Once adopted, the Company will reclassify $4.7 million of current deferred tax assets to long-term deferred tax assets.

 Accounting Standards Codification 842 “Leases.”  In February 2016, ASU No. 2016-02, “Leases (Topic 842)” was issued.  This ASU will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases of terms more than 12 months.  The ASU will require both capital and operating leases to be recognized on the balance sheet.  Qualitative and quantitative disclosures will also be required to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The ASU will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company continues to assess whether this ASU will be material to the consolidated financial statements. 

Accounting Standards Codification 323 “Investments-Equity Method and Joint Ventures.”  In March 2016, ASU No. 2016-07, “Simplifying the Transition to the Equity Method of Accounting” was issued.  This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment was held.  The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.  Thus, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.  The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company does not believe this ASU will have a material effect on the consolidated financial statements.

Accounting Standards Codification 718 “Compensation-Stock Compensation.”  In March 2016, ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” was issued.  This ASU provides for areas of simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Once adopted, the Company will recognize $1.9 million of deferred tax assets relating to unrealized stock option benefits, resulting in a cumulative $1.9 million adjustment to retained earnings .  The new guidance increases income statement volatility by requiring all excess tax benefits and deficits to be recognized in “Income taxes,” and treated as discrete items in the period in which they occur.  The Company believes this ASU may have a material effect on the consolidated financial statements.

Accounting Standards Codification 230 “Statement of Cash Flows.”  In August 2016, ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” was issued.  This ASU provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice for those issues.  The amendments in this ASU are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  The Company does not believe this ASU will have a material effect on the consolidated financial statements.

Accounting Standards Codification 810 “Consolidation.”  In October 2016, ASU No. 2016-17, “Interests Held through Related Parties That Are Under Common Control” was issued.  This ASU amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE.  The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  The Company does not believe this ASU will have a material effect on the consolidated financial statements.

 

 

Accounting Standards Codification 205-40 “Presentation of Financial Statements – Going Concern.”  In August 2014, ASU No. 2014-15, “Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern” was issued.  This ASU provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  The amendments in this ASU are effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter.  The Company adopted this ASU for the year ended December 31, 2016.  This ASU did not have a material effect on the consolidated financial statements.

 

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

 

The Company does not use financial instruments for trading.  Our primary exposure to market risk is interest rate sensitivity related to our Credit Facility Agreement.  The effect of a hypothetical 10% change in interest rates would have increased our interest expense by $81,000 in the year ended December 31, 2016.

 

Item 8.       Financial Statements and Supplementary Data

 

Our Consolidated Balance Sheets as of December 31, 2016 and 2015 and our Consolidated Statements of Income and Comprehensive Income, Stockholders’ Equity and Cash Flows for each of the years in the three-year period ended December 31, 2016, together with the report of our independent registered public accounting firm, begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.

 

Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A.     Controls and Procedures

 

Disclosure Controls and Procedures

 

We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed by us in the reports that are filed under the Securities Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported in the time periods specified in the SEC’s rules and forms, and that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016. Based on this evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2016.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) under the Exchange Act. Under the supervision and with the participation of management, including the Company’s chief executive officer and chief financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. In making this assessment, management used the criteria set forth in the framework issued by the COSO entitled Internal Control—Integrated Framework (2013). Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2016. Management reviewed the results of its assessment with the audit committee of the board of directors.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 of the Exchange Act that have occurred during the fourth quarter of fiscal year 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2016 has been audited by Moss Adams LLP, the Company’s independent registered public accounting firm, as stated in their report, which is included below.

 

Item 9B.     Other Information

 

 Not applicable.

 

 

PART III

 

Information called for by the Items included under this Part III is incorporated by reference to the sections listed below of our definitive Proxy Statement for our 2017 Annual Meeting of Stockholders that will be filed not later than 120 days after December 31, 2016 (“2017 Proxy Statement”).

 

 

The information called for by this Item 10 is incorporated by reference to the following sections of the 2017 Proxy Statement: “Proposal 1-Nomination and Election of Directors;” “Board of Directors;” “Executive Officers;” “Section 16(a) Beneficial Ownership Reporting Compliance;” and the following paragraphs under the section “Corporate Governance Matters” “--Committees of the Board of Directors—Audit Committee,” and “--Code of Conduct and Ethics.”

 

 

The information called for in this Item 11 is incorporated by reference to the following sections of the 2017 Proxy Statement: “Executive Compensation,” “Corporate Governance Matters--Compensation Committee Interlocks and Insider Participation” and “--Board’s Role in Oversight of Risk,” and “Executive Compensation--Compensation Discussion and Analysis” and “--Compensation Committee Report.”

 

The information called for in this Item 12 is incorporated by reference to the following sections of the 2017 Proxy Statement: “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation-- Equity Compensation Plans.”

 

 

The information called for in this Item 13 is incorporated by reference to the following sections of the 2017 Proxy Statement: “Corporate Governance Matters--Certain Relationships and Related Party Transactions” and “--Director Independence.”

 

 

The information called for in this Item 14 is incorporated by reference to the following sections of the 2017 Proxy Statement: “Independent Registered Public Accounting Firm and Audit Committee Report--Principal Accountant Fees and Services,” “--Audit Fees,” “--Audit Related Fees,” “--All Other Fees,” and “--Pre-Approval Policy for Services.”

 

 

PART IV

 

 

(a) The following documents are filed as a part of this Annual Report on Form 10-K:

 

 

		Page
Index			F-1
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Income and Comprehensive Income			F-4
Consolidated Statements of Stockholders’ Equity			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7

 

 

Schedule II- Valuation Qualifying Accounts

F-28

 

    All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable.

 

 

 The exhibits filed or furnished as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference.

None

 

 

 SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 9th day of March, 2017.

 

	AUTOBYTEL INC.
	By:	/s/ JEFFREY H. COATS
		Jeffrey H. Coats
		President, Chief Executive Officer and Director

 

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each of Autobytel Inc., a Delaware corporation, and the undersigned Directors and Officers of Autobytel Inc. hereby constitute and appoint Jeffrey H. Coats, Kimberly Boren or Glenn E. Fuller as its or his true and lawful attorneys-in-fact and agents, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this report, and to file each such amendment to this report, with all exhibits thereto, and any and all documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in connection therewith, as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature	Title	Date
/s/ MICHAEL J. FUCHS Michael J. Fuchs	Chairman of the Board and Director	March 9, 2017
/s/ JEFFREY H. COATS Jeffrey H. Coats	President, Chief Executive Officer and Director (Principal Executive Officer)	March 9, 2017
/s/ KIMBERLY BOREN Kimberly Boren	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	March 9, 2017
/s/ WESLEY OZIMA Wesley Ozima	Senior Vice President and Controller (Principal Accounting Officer)	March 9, 2017
/s/ MICHAEL A. CARPENTER Michael A. Carpenter	Director	March 9, 2017
/s/ MARK N. KAPLAN Mark N. Kaplan	Director	March 9, 2017
/s/ ROBERT J. MYLOD, JR. Robert J. Mylod, Jr.	Director	March 9, 2017
/s/ JEFFREY M. STIBEL Jeffrey M. Stibel	Director	March 9, 2017
/s/ MATIAS DE TEZANOS Matias de Tezanos	Director	March 9, 2017
/s/ JANET M. THOMPSON Janet M. Thompson	Director	March 9, 2017
/s/ JOSE VARGAS Jose Vargas	Director	March 9, 2017

 

 

AUTOBYTEL INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

			Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets			F-3
Consolidated Statements of Income and Comprehensive Income			F-4
Consolidated Statements of Stockholders’ Equity			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

Autobytel Inc.

 

We have audited the accompanying consolidated balance sheets of Autobytel Inc. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Autobytel Inc. as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Autobytel Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

 

/s/ MOSS ADAMS LLP

 

Los Angeles, CA

March 9, 2017

 

AUTOBYTEL INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except per-share and share data)

 

	December 31, 2016	December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$38,512	$23,993
Short-term investment	251	—
Accounts receivable, net of allowances for bad debts and customer credits of $1,015 and $1,045 at December 31, 2016 and 2015, respectively	33,634	28,091
Deferred tax asset	4,669	3,642
Prepaid expenses and other current assets	901	1,276
Total current assets	77,967	57,002
Property and equipment, net	4,430	4,296
Investments	680	680
Intangible assets, net	23,783	29,515
Goodwill	42,821	42,903
Long-term deferred tax asset	14,799	17,820
Other assets	801	1,372
Total assets	$165,281	$153,588
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$9,764	$7,643
Accrued employee-related benefits	4,530	3,945
Other accrued expenses and other current liabilities	8,315	6,799
Current portion of term loan payable	6,563	5,250
Total current liabilities	29,172	23,637
Convertible note payable	1,000	1,000
Long-term portion of term loan payable	7,500	12,750
Borrowings under revolving credit facility	8,000	8,000
Total liabilities	45,672	45,387
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.001 par value; 11,445,187 shares authorized
Series A Preferred stock, none issued and outstanding	—	—
Series B Preferred stock, 168,007 shares issued and outstanding	—	—
Common stock, $0.001 par value; 55,000,000 shares authorized; 11,012,625 and 10,626,624 shares issued and outstanding at December 31, 2016 and 2015, respectively	11	11
Additional paid-in capital	350,022	342,485
Accumulated deficit	(230,424)	(234,295)
Total stockholders’ equity	119,609	108,201
Total liabilities and stockholders’ equity	$165,281	$153,588