AutoWeb, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 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 or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
18872 MacArthur Boulevard, Suite 200, Irvine, California		92612
(Address of principal executive offices)		(Zip Code)

 

(949) 225-4500

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]  No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  [  ]	Accelerated filer  [X]	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 Exchange Act). Yes [  ]  No [X]

 

As of October 31, 2016, there were 10,962,330 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

 

 

 

			Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Condensed Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015		1
	Unaudited Consolidated Condensed Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015		2
	Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015		3
	Notes to Unaudited Consolidated Condensed Financial Statements		4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		22
ITEM 4.	Controls and Procedures		22
	PART II. OTHER INFORMATION
ITEM 6.	Exhibits		23
	Signatures		25

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AUTOBYTEL INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

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

 

	September 30, 2016	December 31, 2015*
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$32,729	$23,993
Accounts receivable, net of allowances for bad debts and customer credits of $894 and $1,045 at September 30, 2016 and December 31, 2015, respectively	32,127	28,091
Deferred tax asset	3,089	3,642
Prepaid expenses and other current assets	1,094	1,276
Total current assets	69,039	57,002
Property and equipment, net	5,019	4,296
Investments	680	680
Intangible assets, net	25,171	29,515
Goodwill	42,821	42,903
Long-term deferred tax asset	17,820	17,820
Other assets	1,591	1,372
Total assets	$162,141	$153,588
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$11,390	$7,643
Accrued expenses and other current liabilities	10,933	10,744
Current portion of term loan payable	5,250	5,250
Total current liabilities	27,573	23,637
Convertible note payable	1,000	1,000
Long-term portion of term loan payable	8,812	12,750
Borrowings under revolving credit facility	8,000	8,000
Total liabilities	45,385	45,387
Commitments and contingencies	—	—
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 and 10,932,050 and 10,626,624 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	11	11
Additional paid-in capital	348,547	342,485
Accumulated deficit	(231,802)	(234,295)
Total stockholders’ equity	116,756	108,201
Total liabilities and stockholders’ equity	$162,141	$153,588

 

* Amounts were derived from audited financial statements.

 

See accompanying notes to unaudited consolidated condensed financial statements

 

 

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Amounts in thousands, except per-share data)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Revenues:
Lead fees		$	36,202			$	36,459			$	98,706			$	88,480
Advertising			7,371				3,211				16,412				6,846
Other revenues			338				505				1,188				1,479
Total revenues			43,911				40,175				116,306				96,805
Cost of revenues			28,156				24,878				72,995				59,639
Gross profit			15,755				15,297				43,311				37,166
Operating expenses:
Sales and marketing			3,964				4,109				14,026				11,430
Technology support			2,943				3,574				10,775				7,952
General and administrative			3,346				3,600				10,405				9,854
Depreciation and amortization			1,270				720				3,809				1,808
Litigation settlements			(24	)			(25	)			(25	)			(75	)
Total operating expenses			11,499				11,978				38,990				30,969
Operating income			4,256				3,319				4,321				6,197
Interest and other income (expense), net			(206	)			(216	)			(643	)			(546	)
Income before income tax provision			4,050				3,103				3,678				5,651
Income tax provision			1,312				1,488				1,185				2,391
Net income and comprehensive income		$	2,738			$	1,615			$	2,493			$	3,260
Basic earnings per common share		$	0.26			$	0.16			$	0.23			$	0.33
Diluted earnings per common share		$	0.21			$	0.14			$	0.19			$	0.30

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

 

AUTOBYTEL INC.

UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

		Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities:
Net income		$	2,493			$	3,260
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,492				2,262
Provision for bad debts			225				343
Provision for customer credits			411				716
Share-based compensation			3,171				1,889
Change in deferred tax asset			553				5,663
Changes in assets and liabilities:
Accounts receivable			(4,590	)			(1,159	)
Prepaid expenses and other current assets			196				(1,217	)
Other assets			156				(3,627	)
Accounts payable			3,747				1,879
Accrued expenses and other current liabilities			189				(2,137	)
Non-current liabilities			38				(261	)
Net cash provided by operating activities			12,081				7,611
Cash flows from investing activities:
Purchase of Dealix/Autotegrity			—				(25,011	)
Investment in GoMoto			(375	)			—
Purchases of property and equipment			(1,871	)			(1,810	)
Net cash used in investing activities			(2,246	)			(26,821	)
Cash flows from financing activities:
Borrowings under credit facility			—				2,750
Borrowings under term loan			—				15,000
Payments on term loan borrowings			(3,938	)			(2,437	)
Proceeds from exercise of stock options			2,877				113
Proceeds from exercise of warrant			—				1,860
Payment of contingent fee arrangement			(38	)			(25	)
Net cash (used in) provided by financing activities			(1,099	)			17,261
Net increase (decrease) in cash and cash equivalents			8,736				(1,949	)
Cash and cash equivalents, beginning of period			23,993				20,747
Cash and cash equivalents, end of period		$	32,729			$	18,798
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	261			$	329
Cash paid for interest		$	661			$	659

 

See accompanying notes to unaudited consolidated condensed financial statements.

 

 

AUTOBYTEL INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

1. Organization and Operations

 

Autobytel Inc. (“Autobytel” or the “Company”) is an automotive marketing services company that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles through the Company’s programs for online lead referrals (“Leads”), Dealer marketing products and services, online advertising and consumer traffic referral programs and mobile products.

 

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

 

The Company was incorporated in Delaware on May 17, 1996. Its principal corporate offices are located in Irvine, California. The Company’s common stock is listed on The NASDAQ Capital Market under the symbol ABTL.

 

On October 1, 2015 (“AutoWeb Merger Date”), Autobytel entered into and consummated an Agreement and Plan of Merger by and among Autobytel, New Horizon Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Autobytel (“Merger Sub”), AutoWeb, Inc., a Delaware corporation (“AutoWeb”), and Jose Vargas, in his capacity as Stockholder Representative.  On the AutoWeb Merger Date, Merger Sub merged with and into AutoWeb, with AutoWeb continuing as the surviving corporation and as a wholly-owned subsidiary of Autobytel.  AutoWeb was a privately-owned company providing an automotive search engine that enables Manufacturers and Dealers to optimize advertising campaigns and reach car buyers through an auction-based marketplace.  Prior to the acquisition, the Company owned approximately 15% of the outstanding shares of AutoWeb, on a fully converted and diluted basis, and accounted for the investment on the cost basis.  See Note 4.

 

In connection with the AutoWeb acquisition, Autobytel obtained AutoWeb’s Guatemalan software development and operations, which were previously provided as a contract service provider organization through Endine Enterprises Corp., a British Virgin Islands business company effectively controlled by AutoWeb. The Company terminated this arrangement and now provides and maintains the forgoing services and operations under a wholly-owned, indirect Guatemalan subsidiary of Autobytel, with employees located in Guatemala.

 

On May 21, 2015, Autobytel and CDK Global, LLC, a Delaware limited liability company (“CDK”), entered into and consummated a Stock Purchase Agreement in which Autobytel acquired all of the issued and outstanding shares of common stock in Dealix Corporation, a California corporation (“Dealix”) and subsidiary of CDK, and Autotegrity, Inc., a Delaware corporation (“Autotegrity”) and subsidiary of CDK (Dealix and Autotegrity are collectively, “Dealix/Autotegrity”).  Dealix provides new and used car Leads to automotive dealerships, Dealer groups and Manufacturers, and Autotegrity is a consumer Leads acquisition and analytics business.  

 

2. Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”).  Autobytel has made its disclosures in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included.  The consolidated condensed statements of income and comprehensive income and cash flows for the periods ended September 30, 2016 and 2015 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2015 Form 10-K.  

 

 

3.  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 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 (“FASB”) 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, but not before the original effective date of December 15, 2016. 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 ending after December 15, 2017. The Company is evaluating 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.  The Company does not believe this ASU will have a material effect on the consolidated financial statements.

 

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.  Earlier application is permitted. The Company continues to assess whether this ASU will be material to 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.  Early adoption is permitted in any interim or annual period.  The Company continues to assess whether this ASU will be material to the consolidated financial statements.

 

 

 

4.  Acquisitions

 

Acquisition of AutoWeb

 

On the AutoWeb Merger Date, Merger Sub merged with and into AutoWeb, with AutoWeb continuing as the surviving corporation and as a wholly-owned subsidiary of Autobytel. 

 

The AutoWeb Merger Date fair value of the consideration transferred totaled $23.8 million consisting of (i) 168,007 newly issued shares of Series B Junior Participating Convertible Preferred Stock, par value $0.001 per share, of Autobytel (“Series B Preferred Stock”); (ii) warrants to purchase up to 148,240 shares of Series B Preferred Stock (“AutoWeb Warrants”), at an exercise price per share of $184.47 (reflecting 10 times the $16.77 closing price of a share of the Company’s common stock, $0.001 par value per share (“Common Stock”), plus a ten percent (10%) premium) and (iii) $0.3 million in cash to cancel vested, in-the-money options to acquire shares of AutoWeb common stock.  As a result of accounting for the transaction as a business combination achieved in stages, the Company also recorded $0.6 million as a gain to the pre-merger investment in AutoWeb.  The results of operations of AutoWeb have been included in the Company’s results of operations since the AutoWeb Merger Date.

 

		(in thousands)
Series B Preferred Stock		$	20,989
Series B Preferred warrants to purchase 148,240 shares of Series B Preferred Stock			2,542
Cash			279
Fair value of prior ownership in AutoWeb			4,016
		$	27,826

 

The shares of Series B Preferred Stock are convertible, subject to certain limitations, into ten (10) shares of Common Stock.  All shares will automatically convert upon stockholder approval.

 

The AutoWeb Warrants were valued at $1.72 per share for a total value of $2.5 million.  The Company used a Monte Carlo simulation model to determine the value of the AutoWeb Warrants.  Key assumptions used in valuing the AutoWeb Warrants are as follows: risk-free rate of 1.9%, stock price volatility of 74.0% and a term of 7.0 years.  The AutoWeb Warrants become exercisable on October 1, 2018, subject to the following vesting conditions: (i) with respect to the first one-third (1/3) of the warrant shares, if at any time after the issuance date of the AutoWeb Warrants and prior to the expiration date of the AutoWeb Warrants the weighted average closing price of the Common Stock for the preceding 30 trading days (adjusted for any stock splits, stock dividends, reverse stock splits or combinations of the Common Stock occurring after the issuance date) (“Weighted Average Closing Price”) is at or above $30.00; (ii) with respect to the second one-third (1/3) of the warrant shares, if at any time after the issuance date of the AutoWeb Warrants and prior to the expiration date the Weighted Average Closing Price is at or above $37.50; and (iii) with respect to the last one-third (1/3) of the warrant shares, if at any time after the issuance date of the AutoWeb Warrants and prior to the expiration date the Weighted Average Closing Price is at or above $45.00.  The AutoWeb Warrants expire on October 1, 2022.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the AutoWeb Merger Date.  

 

Net identifiable assets acquired:			(in thousands)
Total tangible assets acquired		$	4,456
Total liabilities assumed			543
Net identifiable assets acquired			3,913
Definite-lived intangible assets acquired			17,690
Goodwill			5,954
		$	27,557

 

  

 

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

 

	Valuation Method		Estimated Fair Value				Estimated Useful Life (1)
			(in thousands)				(years)
Customer relationships	Excess of earnings (2)		$	7,470				4
Trademark/trade names	Relief from Royalty (3)			2,600				6
Developed technology	Excess of earnings (4)			7,620				7
Total purchased intangible assets			$	17,690

 

(1)	Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from such intangible asset. Amortization of intangible assets with definite lives is recognized over the shorter of the respective life of the agreement or the period of time the assets are expected to contribute to future cash flows.
(2)	The excess of earnings method estimates a purchased intangible asset's value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.
(3)	The relief from royalty method is an earnings approach which assesses the royalty savings an entity realizes since it owns the asset and isn’t required to pay a third party a license fee for its use.
(4)	The excess of earnings method estimates a purchased intangible asset's value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The method takes into account technological and economic obsolescence of the technology.

 

Additionally, in connection with the acquisition of AutoWeb, the Company entered into non-compete agreements with key executives of AutoWeb.  The fair value of the AutoWeb non-compete agreements was $270,000 and was derived by calculating the difference between the present value of the Company’s forecasted cash flows with the agreements in place and without the agreements in place.  The Company is amortizing the value of the AutoWeb non-compete agreements over two years.

 

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

 

The goodwill recognized of $6.0 million was attributable primarily to expected synergies and the assembled workforce of AutoWeb.  The Company incurred approximately $1.1 million of acquisition-related costs related to the AutoWeb acquisition.

 

Pro forma information

 

The following unaudited pro forma information presents the consolidated results of the Company and AutoWeb for the three and nine months ended September 30, 2015, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact, but excludes the impact of pro forma events that are directly attributable to the acquisition and are one-time occurrences. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of future periods, the results of operations that actually would have been realized had the entities been a single company during the periods presented or the results of operations that the combined company will experience after the acquisition. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters or any anticipated synergies, operating efficiencies or cost savings that may be associated with the acquisition. The unaudited pro forma information also does not include any integration costs or remaining future transaction costs that the companies may incur as a result of the acquisition and combining the operations of the companies.

 

 

The unaudited pro forma consolidated results of operations, assuming the acquisition had occurred on January 1, 2015, are as follows:

 

		Three Months Ended September 30, 2015				Nine Months Ended September 30, 2015
		(in thousands)
Unaudited pro forma consolidated results:
Revenues		$	41,666			$	99,668
Net income		$	1,978			$	2,995

 

 5.  Computation of Basic and Diluted Net Earnings Per Share

 

Basic net earnings per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net earnings per share is computed using the weighted average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock and if-converted methods, during the period. Potential common shares consist of common shares issuable upon the exercise of stock options, common shares issuable upon the exercise of warrants, common shares issuable upon conversion of convertible notes and unvested restricted stock.  The following are the share amounts utilized to compute the basic and diluted net earnings per share for the three and nine months ended September 30, 2016 and 2015:

 

		Three Months Ended September 30,								Nine Months Ended  September 30,
		2016				2015				2016				2015
Basic Shares:
Weighted average common shares outstanding			10,842,853				10,499,719				10,729,802				9,805,056
Weighted average unvested restricted stock			(116,667	)			(125,000	)			(120,134	)			(73,260	)
Basic Shares			10,726,186				10,374,719				10,609,668				9,731,796
Diluted Shares:
Basic shares			10,726,186				10,374,719				10,609,668				9,731,796
Weighted average dilutive securities			2,611,245				1,164,983				2,560,723				985,944
Diluted Shares			13,337,431				11,539,702				13,170,391				10,717,740

 

For the three months ended September 30, 2016, weighted average dilutive securities included dilutive options, restricted stock awards, the warrant and convertible note issued in connection with the acquisition of AutoUSA, LLC (“AutoUSA”) and shares issued in connection with the AutoWeb acquisition.  For the three months ended September 30, 2015, weighted average dilutive securities included dilutive options, restricted stock awards and the warrant and convertible note issued in connection with the AutoUSA acquisition.  

 

For the nine months ended September 30, 2016, weighted average dilutive securities included dilutive options, restricted stock awards, the warrant issued in connection with the acquisition of AutoUSA and shares issued in connection with the AutoWeb acquisition.  For the nine months ended September 30, 2015, weighted average dilutive securities included dilutive options, restricted stock awards and the AutoUSA warrant.  

 

For the three and nine months ended September 30, 2016, 2.0 million and 2.0 million of potentially anti-dilutive shares of common stock have been excluded from the calculation of diluted net earnings per share, respectively.  For the three and nine months ended September 30, 2015, 1.4 million and 1.6 million of potentially anti-dilutive shares of common stock have been excluded from the calculation of diluted net earnings per share, respectively.

 

 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.  The Company 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.  The Company funded repurchases and anticipates that the Company 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 Company’s Tax Benefit Preservation Plan, as amended, 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 shares were repurchased in the three and nine months ended September 30, 2016 and September 30, 2015, respectively.

 

 

 

Warrants.  The warrant to purchase 69,930 shares of Company common stock issued in connection with the acquisition of AutoUSA on January 13, 2014 (“AutoUSA Acquisition Date”) was valued at $7.35 per share for a total value of $0.5 million (“AutoUSA Warrant”).  The Company used an option pricing model to determine the value of the AutoUSA Warrant.  Key assumptions used in valuing the AutoUSA Warrant are as follows: risk-free rate of 1.6%, stock price volatility of 65.0% and a term of 5.0 years.  The AutoUSA Warrant was valued based on long-term stock price volatilities of the Company.  The exercise price of the AutoUSA Warrant is $14.30 per share (as may be adjusted for stock splits, stock dividends, combinations and other similar events).  The AutoUSA Warrant becomes exercisable on January 13, 2017 and expires on January 13, 2019.  The right to exercise the AutoUSA Warrant is accelerated in the event of a change in control of the Company.

 

For information regarding the AutoWeb Warrants, see Note 4.

 

6. Share-Based Compensation

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
		(in thousands)
Share-based compensation expense:
Cost of revenues		$	19			$	43			$	47			$	106
Sales and marketing [1]			384				153				1,358				439
Technology support [2]			83				202				513				429
General and administrative [3]			460				287				1,267				922
Share-based compensation costs			946				685				3,185				1,896
Amount capitalized to internal use software			6				1				14				7
Total share-based compensation costs		$	940			$	684			$	3,171			$	1,889

 

 

 

 

 

Service-Based Options.  The Company granted the following service-based options for the three and nine months ended September 30, 2016 and 2015:  

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Number of service-based options granted			314,000				16,200				805,400				600,750
Weighted average grant date fair value		$	7.40			$	8.12			$	7.73			$	5.69
Weighted average exercise price		$	15.51			$	17.42			$	16.26			$	12.38

 

These options are valued using a Black-Scholes option pricing model and generally vest one-third on the first anniversary of the grant date and ratably over twenty-four months thereafter.  The vesting of these awards is contingent upon the employee’s continued employment with the Company during the vesting period.

 

Market Condition Options.  On January 21, 2016, the Company granted 100,000 stock options to its chief executive officer with an exercise price of $17.09 and grant date fair value of $1.47 per option, using a Monte Carlo simulation model (“CEO Market Condition Options”).   The CEO Market Condition Options were previously valued at $2.94 per option but were revalued when the requisite stockholder approval for the Company’s Amended and Restated 2014 Equity Incentive Plan was obtained in June 2016. The CEO Market Condition Options are subject to both stock price-based and service-based vesting requirements that must be satisfied for the CEO Market Condition Options to vest and become exercisable. The CEO Market Condition Options provide that the stock price-based vesting condition will be met (i) with respect to the first one-third (1/3) of the CEO Market Condition Options, if at any time after the grant date and prior to the expiration date of the CEO Market Condition Options the weighted average closing price of the Company’s common stock on The Nasdaq Capital Market for the preceding thirty (30) trading days (adjusted for any stock splits, stock dividends, reverse stock splits or combinations occurring after the issuance date) (“Weighted Average Closing Price”) is at or above $30.00; (ii) with respect to the second one-third (1/3) of the CEO Market Condition Options, if at any time after the grant date and prior to the expiration date the Weighted Average Closing Price is at or above $37.50; and (iii) with respect to the last one-third (1/3) of the CEO Market Condition Options, if at any time after the grant date and prior to the expiration date the Weighted Average Closing Price is at or above $45.00. With respect to any of the CEO Market Condition Options for which the stock price-based requirements are met, these options are also subject to the following service-based vesting schedule: (i) thirty-three and one-third percent (33 1/3%) of these options will vest and become exercisable on January 21, 2017 and (ii) one thirty-sixth (1/36th) of these options will vest and become exercisable on each successive monthly anniversary thereafter for the following twenty-four months ending on January 21, 2019.

 

Stock option exercises.  The following stock options were exercised for the three and nine months ended September 30, 2016 and 2015, respectively:  

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Number of stock options exercised			176,388				—				334,861				19,074
Weighted average exercise price		$	7.99			$	—			$	8.59			$	5.92

 

The grant date fair value of stock options granted during these periods was estimated using the Black-Scholes option pricing model using the following weighted average assumptions:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Dividend yield			—				—				—				—
Volatility			59	%			57%				58	%			56	%
Risk-free interest rate			1.1	%			1.4%				1.2	%			1.3	%
Expected life (years)			4.4				4.4				4.4				4.4

 

 

 

Restricted Stock Awards.  The Company granted an aggregate of 125,000 restricted stock awards (“RSAs”) on April 23, 2015 in connection with the promotion of one of its executive officers.  Of the 125,000 RSAs, 25,000 were service-based and the forfeiture restrictions lapse with respect to one-third of the restricted stock on each of the first, second and third anniversaries of the date of the award.  This executive officer was also awarded 100,000 shares of the Company’s common stock in the form of performance-based restricted stock.  The shares are subject to forfeiture upon the earlier of (such earliest date being referred to as the “Termination Date”) (i) a termination of the executive officer’s employment with the Company; (ii) March 31, 2018; and (iii) other events of forfeiture set forth in the award agreement, subject to the following: (i) the forfeiture restrictions with respect to 50,000 of the restricted shares will lapse if any time prior to the Termination Date the weighted average closing price of the Company’s common stock for the preceding 30 trading days is at or above $30.00 per share, and (ii) the forfeiture restrictions with respect to any of the restricted shares that remain subject to forfeiture restrictions will lapse if any time prior to the Termination Date the weighted average closing price of the Company’s common stock for the preceding 30 trading days is at or above $45.00 per share.  None of the forfeiture restrictions had lapsed during the nine months ended September 30, 2016.

 

7. Investments

 

 The Company’s investments at September 30, 2016 and December 31, 2015 consisted primarily of investments in privately-held SaleMove, Inc., a Delaware corporation (“SaleMove”), and GoMoto, Inc., a Delaware corporation (“GoMoto”).

 

In September 2013, the Company entered into a Convertible Note Purchase Agreement with SaleMove in which Autobytel invested $150,000 in SaleMove in the form of an interest bearing, convertible promissory note.  In November 2014, the Company invested an additional $400,000 in SaleMove in the form of an interest bearing, convertible promissory note.  Upon closing of a preferred stock financing by SaleMove in July 2015, these two notes were converted in accordance with their terms into an aggregate of 190,997 Series A Preferred Stock, which shares are classified as a long-term investment on the consolidated balance sheet as of September 30, 2016.

 

In October 2013, the Company entered into a Reseller Agreement with SaleMove to become a reseller of SaleMove’s technology for enhancing communications with consumers.  SaleMove’s technology allows Dealers and Manufacturers to enhance the online shopping experience by interacting with consumers in real-time, including live video, audio and text-based chat or by phone. The Company and SaleMove will equally share in revenues from automotive-related sales of the SaleMove products and services. In connection with this reseller arrangement, the Company advanced to  SaleMove $1.0 million to fund SaleMove’s 50% share of various product development, marketing and sales costs and expenses, with the advanced funds to be recovered by the Company from SaleMove’s share of sales revenue.  SaleMove advances are repaid to the Company from SaleMove’s share of net revenues from the Reseller Agreement.  As of September 30, 2016, the net advances due from SaleMove totaled $591,000.

 

In December 2014, the Company entered into a Series Seed Preferred Stock Purchase Agreement with GoMoto in which the Company paid $100,000 for 317,460 shares of Series Seed Preferred Stock, $0.001 par value per share.  The $100,000 investment in GoMoto was recorded at cost because the Company does not have significant influence over GoMoto.  In October 2015 and May 2016, the Company invested an additional $375,000 and $375,000, respectively, in GoMoto in the form of convertible promissory notes (“GoMoto Notes”).  The GoMoto Notes accrue interest at an annual rate of 4.0% and are due and payable in full on or after October 28, 2017 upon demand or at GoMoto’s option ten days’ written notice unless converted prior to the maturity date.  The GoMoto Notes will be converted into preferred stock of GoMoto in the event of a preferred stock financing by GoMoto of at least $1.0 million prior to the maturity date of the convertible note.  The GoMoto Notes are recorded at cost and classified as an other long-term asset on the consolidated balance sheet as of September 30, 2016.

 

8. Selected Balance Sheet Accounts

 

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

 

		September 30,				December 31,
		2016				2015
		(in thousands)
Computer software and hardware and capitalized internal use software		$	17,576			$	15,741
Furniture and equipment			1,450				1,419
Leasehold improvements			1,429				1,424
			20,455				18,584
Less – Accumulated depreciation and amortization			(15,436	)			(14,288	)
Property and equipment, net		$	5,019			$	4,296

 

 

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

 

Concentration of Credit Risk and Risks Due to Significant Customers.  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are primarily maintained with two high credit quality financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. These deposits may be redeemed upon demand.

 

 Accounts receivable are primarily derived from fees billed to Dealers and Manufacturers.  The Company generally requires no collateral to support its accounts receivables and maintains an allowance for bad debts for potential credit losses.

 

The Company has a concentration of credit risk with its automotive industry related accounts receivable balances, particularly with Urban Science Applications (which represents Acura, Audi, Nissan, Scion, Subaru, Toyota, Volkswagen and Volvo), Ford Direct and Trilogy. During the first nine months of 2016, approximately 27% of the Company’s total revenues was derived from these three customers, and approximately 40%, or $13.0 million of gross accounts receivables, related to these three customers at September 30, 2016.

 

During the first nine months of 2015, approximately 28% of the Company’s total revenues was derived from General Motors, Urban Science Applications and Jumpstart Automotive, and approximately 35%, or $10.1 million of gross accounts receivables, related to these three customers at September 30, 2015.

 

Intangible Assets.  The Company amortizes specifically identified intangible assets using the straight-line method over the estimated useful lives of the assets. In connection with the acquisitions of Cyber Ventures, Inc., Advanced Mobile, LLC, AutoUSA, Dealix/Autotegrity and AutoWeb, the Company identified $38.1 million of intangible assets.  The Company’s intangible assets are amortized over the following estimated useful lives:

 

		September 30, 2016			December 31, 2015
Intangible Asset	Estimated Useful Life	Gross	Accumulated Amortization	Net	Gross	Accumulated Amortization	Net
		(in thousands)
Trademarks/trade names/licenses/domains	5 years – Indefinite	$11,494	$(6,586)	$4,908	$11,494	$(6,071)	$5,423
Software and publications	3 years	1,300	(1,300)	—	1,300	(1,300)	—
Customer relationships	2-10 years	19,563	(6,678)	12,885	19,563	(4,341)	15,222
Employment/non-compete agreements	5 years	1,510	(1,172)	338	1,510	(849)	661
Developed technology	1-5 years	8,955	(1,915)	7,040	8,955	(746)	8,209
		$42,822	$(17,651)	$25,171	$42,822	$(13,307)	$29,515

 

 

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

 

Year		Amortization Expense
		(in thousands)
2016		$	1,388
2017			5,366
2018			5,028
2019			3,655
2020			2,224
2021			2,116
		$	19,777

 

Goodwill.  Goodwill represents the excess of the purchase price over the fair value of net assets acquired.  Goodwill is not amortized and is assessed annually for impairment or earlier, when events or circumstances indicate that the carrying value of such assets may not be recoverable.  The Company did not record impairment related to goodwill as of December 31, 2015 and September 30, 2016.

 

Goodwill consisted of the following (in thousands):

 

Goodwill as of December 31, 2015		$	42,903
Current year activity			(82	)
Goodwill as of September 30, 2016		$	42,821

 

During the nine months ended September 30, 2016, the Company made adjustments to the Dealix/Autotegrity purchase price allocation due to changes in accounts receivable and sales tax payable acquired, and adjusted goodwill accordingly.

 

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

 

		September 30,				December 31,
		2016				2015
		(in thousands)
Compensation and related costs and professional fees		$	3,366			$	3,981
Other accrued expenses			6,547				5,715
Amounts due to customers			519				486
Other current liabilities			501				562
Total accrued expenses and other current liabilities		$	10,933			$	10,744

  

Convertible Notes Payable.  In connection with the acquisition of AutoUSA, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc.  The fair value of the AutoUSA Note as of the AutoUSA Acquisition Date was $1.3 million.  This valuation was estimated using a binomial option pricing method.  Key assumptions used by the Company’s outside valuation consultants in valuing the AutoUSA Note include a market yield of 1.6% and stock price volatility of 65.0%.  As the AutoUSA Note was issued with a substantial premium, the Company recorded the premium as additional paid-in capital.  Interest is payable at an annual interest rate of 6% in quarterly installments.  The entire outstanding balance of the AutoUSA Note is to be paid in full on January 31, 2019.  At any time after January 31, 2017, the holder of the AutoUSA Note may convert all or any part, but at least 30,600 shares, of the then outstanding and unpaid principal of the AutoUSA Note into fully paid shares of the Company's common stock at a conversion price of $16.34 per share (as adjusted for stock splits, stock dividends, combinations and other similar events).  The right to convert the AutoUSA Note into common stock of the Company is accelerated in the event of a change in control of the Company.  In the event of default, the entire unpaid balance of the AutoUSA Note will become immediately due and payable and will bear interest at the lower of 8% per year and the highest legal rate permissible under applicable law.

 

 

9. Credit Facility

 

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 new $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 September 30, 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 September 30, 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 September 30, 2016.

 

 

 

 

11. Income Taxes

 

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

 

The Company’s effective tax rate for the three and nine months ended September 30, 2016 differed from the U.S. federal statutory rate primarily due to state income taxes and a nonrecurring remeasurement book gain on an investment reversed for tax purposes.

 

The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.5 million as of September 30, 2016, all of which, if subsequently recognized, would have affected the Company’s tax rate.

 

The total balance of accrued interest and penalties related to uncertain tax positions was $12,000 and $10,000 as of September 30, 2016 and December 31, 2015, respectively.  The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense, and the accrued interest and penalties are included in deferred and other long-term liabilities in the Company’s condensed consolidated balance sheets.  There were no material interest or penalties included in income tax expense for the three and nine months ended September 30, 2016 and 2015.

 

The Company is subject to taxation in the U.S. and in various foreign and state jurisdictions.  Due to expired statutes of limitation, the Company’s federal income tax returns for years prior to calendar year 2013 are not subject to examination by the U.S. Internal Revenue Service.  Generally, for the majority of state jurisdictions where the Company does business, periods prior to calendar year 2012 are no longer subject to examination.  The Company is currently under examination by the State of Michigan for the years 2011 through 2014, but does not anticipate any material adjustments.  The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.  Audit outcomes and the timing of settlements are subject to significant uncertainty.

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Note Concerning Forward-Looking Statements

 

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “will” and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve 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 this Item 2 and under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”). Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.

 

You should read the following discussion of our results of operations and financial condition in conjunction with our unaudited consolidated condensed financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the notes thereto in the 2015 Form 10-K.

 

Our corporate website is located at www.autobytel.com. Information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q. At or through the Investor Relations section of our website we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports as soon as practicable after the reports are electronically filed with or furnished to the SEC.

 

Unless the context otherwise requires, the terms “we”, “us”, “our”, “Autobytel” and “Company” refer to Autobytel Inc. and its consolidated subsidiaries.

 

Basis of Presentation and Critical Accounting Policies

 

See Note 2, Basis of Presentation, to the accompanying unaudited consolidated condensed financial statements.

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations may be affected. For a detailed discussion of the application of our critical accounting policies, see Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 “Financial Statements and Supplementary Data” in the 2015 Form 10-K. There have been no changes to our critical accounting policies since we filed our 2015 Form 10-K.

 

Recent Acquisitions

 

On October 1, 2015 (“AutoWeb Merger Date”), Autobytel entered into and consummated an Agreement and Plan of Merger by and among Autobytel, New Horizon Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Autobytel (“Merger Sub”), AutoWeb, Inc., a Delaware corporation (“AutoWeb”) and Jose Vargas, in his capacity as Stockholder Representative, pursuant to which Merger Sub merged with and into AutoWeb, with AutoWeb continuing as the surviving corporation and as a wholly-owned subsidiary of Autobytel.

 

On May 21, 2015, Autobytel and CDK Global, LLC, A Delaware limited liability company (“CDK”), entered into and consummated a Stock Purchase Agreement in which Autobytel acquired all of the issued and outstanding shares of common stock in Dealix Corporation, a California corporation and subsidiary of CDK, and Autotegrity, Inc., a Delaware corporation and subsidiary of CDK (collectively, “Dealix/Autotegrity”).  Dealix Corporation provides new and used car Leads to automotive dealerships, Dealer groups and Manufacturers, and Autotegrity, Inc. is a consumer Leads acquisition and analytics business.

 

For additional information concerning these acquisitions, see Note 4, Acquisitions, to the accompanying unaudited consolidated financial statements.

 

 

Overview

 

We are an automotive marketing services company that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers through our programs for online purchase request referrals (“Leads”), Dealer marketing products and services, 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 (“Vehicle Leads”).  For consumers who may not be able to secure loans through conventional lending sources, our Company Websites provide these consumers the ability to submit inquiries requesting Dealers or other lenders that may offer vehicle financing to these consumers to contact the consumers regarding vehicle financing (“Finance Leads”).  The Company’s mission for consumers is to be “Your Lifetime Automotive Advisor"® by engaging consumers throughout the entire lifecycle of their automotive needs.