AutoWeb, Inc. - Quarter Report: 2019 September (Form 10-Q)

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2019

or

For the transition period from                  to                

 

Commission file number 1-34761

 

 AutoWeb, 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)

 400 North Ashley Drive, Suite 300

Tampa, Florida 33602

(Address of principal executive offices) (Zip Code)

 

(949) 225-4500

(Registrant’s telephone number, including area code)

 

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

 

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

 

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 every Interactive Data File required to be submitted 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 such files). Yes [X]  No [  ]

 

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

 

Large accelerated filer  ☐	Accelerated filer  ☐
Non-accelerated filer  ☐	Smaller reporting company  ☒
	Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

As of November 5, 2019, there were 13,146,831 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.

 

 

	INDEX
			Page
	PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018		1
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018		2
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018		3-4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		24
ITEM 4.	Controls and Procedures		24
	PART II. OTHER INFORMATION
ITEM 1A.	Risk Factors		25
ITEM 6.	Exhibits		26
	Signatures		27

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

AUTOWEB, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

	September 30, 2019	December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$1,092	$13,600
Restricted cash	5,038	—
Accounts receivable, net of allowances for bad debts and customer credits of $539 and $566 at September 30, 2019 and December 31, 2018, respectively	22,647	26,898
Prepaid expenses and other current assets	1,409	1,245
Total current assets	30,186	41,743
Property and equipment, net	3,377	3,181
Right-of-use assets	2,919	—
Intangible assets, net	7,964	11,976
Other assets	796	516
Total assets	$45,242	$57,416
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	14,224	17,572
Accrued employee-related benefits	1,196	3,125
Other accrued expenses and other current liabilities	2,092	2,204
Current portion of lease liabilities	1,398	—
Current convertible note payable	—	1,000
Total current liabilities	18,910	23,901
Borrowings under revolving credit facility	1,036	—
Lease liabilities, net of current portion	1,663	—
Total liabilities	21,609	23,901
Commitments and contingencies (Note 10)	—	—
Stockholders’ equity:
Preferred stock, $0.001 par value, 11,445,187 shares authorized
Series A Preferred stock, none issued and outstanding	—	—
Common stock, $0.001 par value; 55,000,000 shares authorized, and 13,146,831 and 12,960,450 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively	13	13
Additional paid-in capital	363,388	361,218
Accumulated deficit	(339,768)	(327,716)
Total stockholders’ equity	23,633	33,515
Total liabilities and stockholders’ equity	$45,242	$57,416

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

AUTOWEB, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(Amounts in thousands, except per-share data)

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Revenues:
Lead generation	$22,564	$24,986	$69,953	$71,277
Digital advertising	5,968	6,606	17,278	21,643
Other revenues	20	103	67	416
Total revenues	28,552	31,695	87,298	93,336
Cost of revenues	22,645	26,278	70,249	74,702
Cost of revenues - impairment	—	9,014	—	9,014
Gross profit (loss)	5,907	(3,597)	17,049	9,620
Operating expenses:
Sales and marketing	2,632	3,333	8,450	10,096
Technology support	1,819	4,303	6,797	10,653
General and administrative	2,112	3,639	10,429	11,980
Depreciation and amortization	1,200	1,172	3,640	3,495
Goodwill impairment	—	—	—	5,133
Long-lived asset impairment	—	1,968	—	1,968
Total operating expenses	7,763	14,415	29,316	43,325
Operating loss	(1,856)	(18,012)	(12,267)	(33,705)
Interest and other income (expense), net	117	(24)	220	178
Loss before income tax provision	(1,739)	(18,036)	(12,047)	(33,527)
Income tax provision	—	—	5	4
Net loss and comprehensive loss	$(1,739)	$(18,036)	$(12,052)	$(33,531)
Basic loss per common share	$(0.13)	$(1.41)	$(0.92)	$(2.64)
Diluted loss per common share	$(0.13)	$(1.41)	$(0.92)	$(2.64)

 

 See accompanying notes to unaudited condensed consolidated financial statements.

 

 

AUTOWEB, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

Three Months Ended September 30, 2018
	Common Stock		Preferred Stock		Additional Paid-In	Accumulated
	Number of Shares	Amount	Number of Shares	Amount	Capital	Deficit	Total
Balance at June 30, 2018	12,947,950	$13	—	$—	$358,898	$(304,396)	$54,515
Share-based compensation	—	—	—	—	1,797	—	1,797
Issuance of common stock upon exercise of stock options	1,000	—	—	—	4	—	4
Net loss	—	—	—	—	—	(18,036)	(18,036)
Balance at September 30, 2018	12,948,950	$13	—	$—	$360,699	$(322,432)	$38,280

 

 

Three Months Ended September 30, 2019
	Common Stock		Preferred Stock		Additional Paid-In	Accumulated
	Number of Shares	Amount	Number of Shares	Amount	Capital	Deficit	Total
Balance at June 30, 2019	13,146,831	$13	—	$—	$362,737	$(338,029)	$24,721
Share-based compensation	—	—	—	—	651	—	651
Net loss	—	—	—	—	—	(1,739)	(1,739)
Balance at September 30, 2019	13,146,831	$13	—	$—	$363,388	$(339,768)	$23,633

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

AUTOWEB, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY CONTINUED

(in thousands, except share data)

 

 

Nine Months Ended September 30, 2018
	Common Stock		Preferred Stock		Additional Paid-In	Accumulated
	Number of Shares	Amount	Number of Shares	Amount	Capital	Deficit	Total
Balance at December 31, 2017	13,059,341	$13	—	$—	$356,054	$(288,900)	$67,167
Share-based compensation	—	—	—	—	4,366	—	4,366
Issuance of common stock upon exercise of stock options	16,967	—	—	—	78	—	78
Cancellation of restricted stock	(188,333)	—	—	—	—	—	—
Issuance of common stock	60,975	—	—	—	200	—	200
Net loss	—	—	—	—	—	(33,531)	(33,531)
Balance at September 30, 2018	12,948,950	$13	—	$—	$360,698	$(322,431)	$38,280

 

 

Nine Months Ended September 30, 2019
	Common Stock		Preferred Stock		Additional Paid-In	Accumulated
	Number of Shares	Amount	Number of Shares	Amount	Capital	Deficit	Total
Balance at December 31, 2018	12,960,450	$13	—	$—	$361,218	$(327,716)	$33,515
Share-based compensation	—	—	—	—	1,762	—	1,762
Issuance of common stock upon exercise of stock options	213,048	—	—	—	408	—	408
Cancellation of restricted stock	(26,667)	—	—	—	—	—	—
Net loss	—	—	—	—	—	(12,052)	(12,052)
Balance at September 30, 2019	13,146,831	$13	—	$—	$363,388	$(339,768)	$23,633

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

 

AUTOWEB, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

 

	Nine Months Ended September 30,
	2019	2018
Cash flows from operating activities:
Net loss	$(12,052)	$(33,531)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	5,256	6,534
Goodwill impairment	—	5,133
Intangible asset impairment	—	9,014
Provision for bad debts	198	216
Provision for customer credits	113	177
Share-based compensation	1,762	4,365
Right-of-use assets	1,306	—
Lease liabilities	(1,309)	—
Gain on sale of investment	(250)	(25)
Long-lived asset impairment	—	1,968
Change in deferred tax asset	—	692
Changes in assets and liabilities:
Accounts receivable	3,940	251
Prepaid expenses and other current assets	(164)	532
Other assets	(280)	(615)
Accounts payable	(3,348)	3,860
Accrued expenses and other current liabilities	(2,006)	686
Net cash used in operating activities	(6,834)	(743)
Cash flows from investing activities:
Payments for property and equipment	(1,330)	(828)
Proceeds from sale of investment	250	125
Net cash used in investing activities	(1,080)	(703)
Cash flows from financing activities:
Borrowings under revolving credit facility	46,740	—
Principal payments on revolving credit facility	(45,704)	(8,000)
Payments on convertible note	(1,000)	—
Proceeds from issuance of common stock	—	200
Proceeds from exercise of stock options	408	77
Net cash provided by (used in) financing activities	444	(7,723)
Net decrease in cash and cash equivalents and restricted cash	(7,470)	(9,169)
Cash and cash equivalents and restricted cash, beginning of period	13,600	24,993
Cash and cash equivalents and restricted cash, end of period	$6,130	$15,824
Reconciliation of cash and cash equivalents and restricted cash
Cash and cash equivalents at beginning of period	$13,600	$24,993
Restricted cash at beginning of period	—	—
Cash and cash equivalents and restricted cash at beginning of period	$13,600	$24,993
Cash and cash equivalents at end of period	$1,092	$15,824
Restricted cash at end of period	5,038	—
Cash and cash equivalents and restricted cash at end of period	$6,130	$15,824
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$1	$—
Cash refunds for income taxes	$124	$—
Cash paid for interest	$101	$103

 

See accompanying notes to unaudited condensed consolidated financial statements. 

  

 

 

AUTOWEB, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Operations

 

AutoWeb, Inc. (“AutoWeb” or the “Company”) is a digital marketing company for the automotive industry that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers by utilizing the Company’s digital sales enhancing products and services.

 

The Company’s consumer-facing automotive websites (“Company Websites”) provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to connect with Dealers regarding purchasing or leasing vehicles (“Leads”). Leads are internally-generated from Company Websites or acquired from third parties that generate Leads from their websites. The Company’s click traffic referral program provides consumers who are shopping for vehicles online with targeted offers based on make, model and geographic location. As these consumers conduct online research on Company Websites or on the site of one of the Company’s 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 the Company’s Dealer, Manufacturer or digital advertising customers.

 

The Company was incorporated in Delaware on May 17, 1996. The Company’s common stock is listed on The NASDAQ Capital Market under the symbol AUTO. Effective August 7, 2019, the Company’s board of directors designated the Company’s office in Tampa, Florida located at 400 North Ashley Drive, Suite 300, Tampa, Florida 33602 as the Company’s principal office for the transaction of business of the Company pursuant to Section 1.02 of the Company’s bylaws and as the Company’s principal executive offices.

 

2. Basis of Presentation

 

 The accompanying unaudited condensed consolidated financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”).  AutoWeb 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 unaudited condensed consolidated statements of operations and comprehensive loss and cash flows for the periods ended September 30, 2019 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2018 Form 10-K.  

 

Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation. References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.

 

Restricted cash primarily consists of cash pledged pursuant to the Credit Agreement (See Note 9).

 

As of September 30, 2019, and for the nine months then ended, the Company had cash and cash equivalents of $1.1 million and a net loss of $12.1 million. The net loss is primarily attributable to operating expenses of $29.3 million during the nine months ended September 30, 2019. The Company used net cash in operations of $6.8 million for the nine months ended September 30, 2019. As of September 30, 2019, the Company had an accumulated deficit of $339.8 million and stockholders' equity of $23.6 million.

 The Company has developed a strategic plan focused on improving operating performance in the future that includes modernizing and upgrading its technology and systems, pursuing business objectives and responding to business opportunities, developing new or improving existing products and services, and enhancing operating infrastructure. The plan's objective is for the Company to generate sustainable profitability throughout 2020. However, there is no assurance that the Company will be able to achieve this objective. Also, the Company entered into the Credit Agreement discussed in Note 9 below that is expected to be used to partially fund operations. However, if the Company continues to experience losses and becomes unable to comply with the financial covenants in the Credit Agreement, the Company may be unable to borrow funds under this credit facility.

 

 

The Company believes that current cash reserves and operating cash flows will be sufficient to sustain operations through at least the third quarter of 2020. If the Company's plans are unsuccessful, it may need to seek to satisfy its future cash needs through private or public sales of securities, debt financings or partnering/licensing transactions. However, there is no assurance that the Company will be successful in satisfying its future cash needs such that the Company will be able to continue operations.

3.  Recent Accounting Pronouncements

 

Issued but not yet adopted by the Company

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”). ASU 2018-15 was issued to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company is currently evaluating the impact of adopting the updated provisions that are effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.

 

 Recently adopted by the Company

 

Accounting Standards Codification 220 “Comprehensive Income.” In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. On January 1, 2019, the Company adopted ASU No. 2018-02 and it did not have a material effect on the consolidated financial statements and related disclosures.

 

Accounting Standards Codification 842 “Leases.” In February 2016, ASU No. 2016-02, “Leases (Topic 842)” (“ASC 842”) was issued. This ASU was issued to increase transparency and comparability among organizations by requiring lessees to (i) recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet to represent the right to use the leased asset for the lease term and the obligation to make lease payments, and (ii) disclose key information about leasing arrangements. Some changes to the lessor accounting guidance were made to align both of the following: (i) the lessor accounting guidance with certain changes made to the lessee accounting guidance, and (ii) key aspects of the lessor accounting model with revenue recognition guidance.

 

The Company adopted the ASU 842 effective January 1, 2019 utilizing the modified retrospective approach for adoption for all leases that existed at or commenced after the date of initial application with an option to use certain practical expedients. The package of practical expedients allowed the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also used (i) hindsight when evaluating contractual lease options, (ii) the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component, and (iii) the portfolio approach which allows similar leased assets to be grouped and accounted for together. In addition, the Company implemented additional internal controls to evaluate future transactions in accordance with the standard.

 

The adoption of ASC 842 had a material impact on the consolidated balance sheet due to the recognition of ROU assets and lease liabilities. The adoption of this ASU did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows. The Company did not recognize a material cumulative effect adjustment to the opening balance sheet retained earnings on January 1, 2019. Because the modified retrospective approach was elected, the ASU was not applied to periods prior to adoption and did not have an impact on previously reported results. At adoption, the Company recognized operating lease ROU assets and lease liabilities that reflect the present value of the future payments. As the rate implicit in the lease could not be determined for any of the Company’s leases, an estimated incremental borrowing rate of 5.5% was used to determine the present value of lease payments. Based on the impact of ASC 842 on the lease population, the Company recorded $4.4 million in lease liabilities and $4.2 million for ROU assets based upon the lease liabilities adjusted for deferred rent. See Note 8 for additional information on leases.

 

 

SEC Release No. 33-10532, Disclosure Update and Simplification. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification,” amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule became effective on November 5, 2018, and the Company adopted the requirements in the first quarter of 2019. See “Unaudited Condensed Consolidated Statements of Stockholders’ Equity.”

 

4.  Revenue Recognition

 

Revenue is recognized upon transfer of control of promised goods or services to the Company’s customers, or when the Company satisfies any performance obligations under contract. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for respective goods or services provided. Further, under ASC 606, “Revenue from Contracts with Customers,” (“ASC 606”) contract assets or contract liabilities that arise from past performance but require a further performance before the obligation can be fully satisfied must be identified and recorded on the balance sheet until respective settlements have been met.

The Company has three main revenue sources – Lead generation, digital advertising, and other revenue. Accordingly, the Company recognizes revenue for each source as described below:

 

 

 

 

Variable Consideration

 

Leads are generally sold with a right-of-return for services that do not meet customer requirements as specified by the relevant contract. Rights-of-return are estimable, and provisions for estimated returns are recorded as a reduction in revenue by the Company in the period revenue is recognized, and thereby accounted for as variable consideration. The Company includes the allowance for customer credits in its net account receivable balances on the Company’s balance sheet at period end. Allowances for customer credits were approximately $88,000 and $121,000 at September 30, 2019 and December 31, 2018, respectively.

 

 

 

Contract Assets and Contract Liabilities

 

Unbilled Revenue

 

Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing. From time-to-time, the Company may have balances on its balance sheet representing revenue that has been recognized by the Company upon satisfaction of performance obligations and earning a right to receive payment. These not-yet invoiced receivable balances are driven by the timing of administrative transaction processing, and are not indicative of partially complete performance obligations, or unbilled revenue. Unbilled revenue represents revenue that is partially earned, whereby control of promised services has not yet transferred to the customer, and for which the Company has not earned the complete right to payment. The Company had zero unbilled revenue included in its consolidated balance sheets as of September 30, 2019 and December 31, 2018.

 

Deferred Revenue

 

The Company defers the recognition of revenue when cash payments are received or due in advance of satisfying its performance obligations, including amounts which are refundable. Such activity is not a common practice of operation for the Company.  The Company had zero deferred revenue included in its consolidated balance sheets as of September 30, 2019 and December 31, 2018. Generally, payment terms within the Company’s customer contracts include a requirement of payment within 30 to 60 days from date of invoice. Typically, customers make payments after receipt of invoice for billed services, and less typically, in advance of rendered services.

 

The Company has not made any significant changes in applying ASC 606 during the nine months ended September 30, 2019.

 

Disaggregation of Revenue

 

The Company disaggregates revenue from contracts with customers by revenue source and has determined that disaggregating revenue into these categories sufficiently depicts the differences in the nature, amount, timing, and uncertainty of revenue streams. The Company has three main sources of revenue: lead generation, digital, advertising, and other revenues.

 

The following table summarizes revenue from contracts with customers, disaggregated by revenue source, for the three and nine months ended September 30, 2019 and 2018. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Lead generation	$22,564	$24,986	$69,953	$71,277
Digital advertising
Clicks	4,948	5,559	14,463	18,020
Display and other advertising	1,020	1,047	2,815	3,623
	5,968	6,606	17,278	21,643
Other revenues	20	103	67	416
Total revenues	$28,552	$31,695	$87,298	$93,336

 

 

 

 5.   Net Loss Per Share and Stockholders’ Equity

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net loss 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 unvested restricted stock and common shares issuable upon the exercise of stock options and warrants.  

 

The following are the share amounts utilized to compute the basic and diluted net loss per share for the three and nine months ended September 30, 2019 and 2018:

 

	Three Months Ended September 30,		Nine Months Ended  September 30,
	2019	2018	2019	2018
Basic Shares:
Weighted average common shares outstanding	13,146,831	12,948,150	13,093,649	12,959,666
Weighted average unvested restricted stock	(32,790)	(161,413)	(43,114)	(249,084)
Basic Shares	13,114,041	12,786,737	13,050,535	12,710,582
Diluted Shares:
Basic shares	13,114,041	12,786,737	13,050,535	12,710,582
Weighted average dilutive securities	—	—	—	—
Diluted Shares	13,114,041	12,786,737	13,050,535	12,710,582

 

For the three and nine months ended September 30, 2019 and 2018, the Company’s basic and diluted numbers of shares are the same because the Company generated a net loss for the period and potentially dilutive securities are excluded from diluted net loss per share because they have an anti-dilutive impact.

 

For the three and nine months ended September 30, 2019, 4.6 million and 4.6 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share, respectively. For the three and nine months ended September 30, 2018, 4.0 million and 4.3 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share, respectively.

 

 6. Share-Based Compensation

 

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

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Share-based compensation expense:
Cost of revenues	$—	$2	$—	$21
Sales and marketing	130	520	268	904
Technology support	52	886	145	1,213
General and administrative	469	388	1,349	2,228
Share-based compensation costs	651	1,796	1,762	4,366
Amount capitalized to internal use software	—	—	—	1
Total share-based compensation costs	$651	$1,796	$1,762	$4,365

 

 

During the three and nine months ended September 30, 2019 and 2018, certain awards were modified or accelerated in connection with the termination of employment of certain former officers of the Company. In accordance with the terms of applicable award agreements and/or consulting agreements, the vesting of certain awards was accelerated, and the terms of certain awards were modified. The Company recorded $0.1 million and $1.2 million of expense related to the acceleration or modification of certain awards during the three months ended September 30, 2019 and 2018, respectively. The Company recorded $0.1 million and $2.1 million of expense related to the acceleration or modification of certain awards during the nine months ended September 30, 2019 and 2018, respectively.

 

Stock Options.  The Company granted the following stock options for the three and nine months ended September 30, 2019 and 2018, respectively:  

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Number of stock options granted	470,000	33,000	1,632,883	1,749,700
Weighted average grant date fair value	$1.68	$1.65	$1.78	$1.83
Weighted average exercise price	$3.15	$3.04	$3.34	$3.29

 

These options are valued using a Black-Scholes option pricing model and generally have service-based vesting that 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, and vesting will be accelerated in the event of a change in control of the Company, termination without cause of an employee, and voluntary termination by an employee with good reason.

 

In August 2019, the Company awarded a total of 455,000 stock options of the Company’s common stock to certain officers under the 2018 Equity Incentive Plan.  In addition to the service-based vesting described above, vesting of these options is subject to the achievement of a performance condition based on the weighted average closing price of the Company’s common stock on The Nasdaq Capital Market reaching Five Dollars ($5.00). The weighted average grant date fair value of these stock options was $1.69.

The grant date fair value of stock options uses the following weighted average assumptions:

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Dividend yield	—	—	—	—
Volatility	66%	66%	65%	68%
Risk-free interest rate	1.5%	2.9%	2.2%	2.6%
Expected life (years)	4.5	4.5	4.4	4.5

 

 

 

Stock option exercises.  The following stock options were exercised during the three and nine months ended September 30, 2019 and 2018, respectively:  

 

	Three Months Ended September 30,		Nine Months Ended September 30,
	2019	2018	2019	2018
Number of stock options exercised	—	1,000	213,048	16,967
Weighted average exercise price	$—	$1.75	$1.92	$4.51

 

 

7. Selected Balance Sheet Accounts

 

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

 

	September 30, 2019	December 31, 2018
Computer software and hardware	$12,475	$11,393
Capitalized internal use software	6,585	6,228
Furniture and equipment	1,743	1,743
Leasehold improvements	1,613	1,613
	22,416	20,977
Less—Accumulated depreciation and amortization	(19,039)	(17,796)
Property and Equipment, net	$3,377	$3,181

 

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 high credit quality financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. Deposits not subject to a controlled account agreement with our lender 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. Approximately 30%, or $6.8 million, of gross accounts receivable at September 30, 2019, and approximately 24% of total revenues for the nine months ended September 30, 2019, are related to Urban Science Applications (which represents Acura, Honda, Nissan, Infiniti, Subaru, Toyota and Volvo) and General Motors. For 2018, approximately 51%, or $13.2 million, of gross accounts receivables at September 30, 2018, and approximately 42% of total revenues for the nine months ended September 30, 2018, is related to Urban Science Applications, Trilogy, General Motors and Media.net Advertising.

 

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

 

 

 

The Company’s intangible assets are amortized over the following estimated useful lives:

 

		September 30, 2019			December 31, 2018
Definite-lived Intangible Asset	Estimated Useful Life	Gross	Accumulated Amortization	Net	Gross	Accumulated Amortization	Net
Trademarks/ trade names/ licenses/ domains	3 - 7 years	$16,589	$(15,312)	$1,277	$16,589	$(14,914)	$1,675
Customer relationships	2 - 5 years	19,563	(18,342)	1,221	19,563	(15,544)	4,019
Developed technology	5 - 7 years	8,955	(5,689)	3,266	8,955	(4,873)	4,082
		$45,107	$(39,343)	$5,764	$45,107	$(35,331)	$9,776

 

 

		September 30, 2019			December 31, 2018
Definite-lived Intangible Asset	Estimated Useful Life	Gross	Accumulated Amortization	Net	Gross	Accumulated Amortization	Net
Domain	Indefinite	$2,200	$—	$2,200	$2,200	$—	$2,200

 

Amortization expense is included in “Cost of revenues” and “Depreciation and amortization” in the Unaudited Condensed Consolidated Statements of Operations.  Total amortization expense was $1.3 million and $4.0 million for the three and nine months ended September 30, 2019, respectively. Amortization expense was $1.6 million and $5.0 million for the three and nine months ended September 30, 2018, respectively.

 

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

 

Year	Amortization Expense
2019	$860
2020	2,371
2021	1,499
2022	902
2023	86
Thereafter	46
	$5,764

 

 

 

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

 

	September 30, 2019	December 31, 2018
Accrued employee-related benefits	$1,196	$3,125
Other accrued expenses and other current liabilities:
Other accrued expenses	933	1,346
Amounts due to customers	444	424
Other current liabilities	715	434
Total other accrued expenses and other current liabilities	2,092	2,204
Total accrued expenses and other current liabilities	$3,288	$5,329

 

Convertible Notes Payable.  In connection with the acquisition of AutoUSA on January 13, 2014, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc., with interest payable at an annual interest rate of 6% in quarterly installments. The entire outstanding balance of the AutoUSA Note plus accrued interest was paid in full on January 31, 2019.

 

8. Leases

 

The Company determines if an arrangement is a lease at inception. The Company leases its facilities and certain office equipment under operating leases which expire on various dates through 2024. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. The ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

Lease Liabilities.  Lease liabilities as of September 30, 2019, consist of the following:

 

Current portion of lease liabilities	$1,398
Long-term lease liabilities, net of current portion	1,663
Total lease liabilities	$3,061

 

The Company’s aggregate lease maturities as of September 30, 2019, are as follows:

 

Year
2019 (remaining 3 months)	$437
2020	1,279
2021	513
2022	459
2023	472
Thereafter	199
Total minimum lease payments	3,359
Less imputed interest	(298)
Total lease liabilities	$3,061

 

 

Rent expense included in operating expenses and cost of revenue was $1.5 million for the nine months ended September 30, 2019. The Company had a weighted average remaining lease term of 2.0 years and a weighted average discount rate of 5.5% as of September 30, 2019. Rent expense included in operating expenses for the nine months ended September 30, 2018 was $1.2 million under ASC 840, the predecessor to ASC 842. In June 2017, the Company subleased one of its buildings to a third party for the remainder of the lease term which expired in February 2019. Rent expense for the nine months ended September 30, 2019 and 2018 is net of sublease income of approximately $26,000 and $114,000, respectively. As of September 30, 2019, the Company did not have any additional operating leases that have not yet commenced.

 

9. Credit Facility

 

On April 30, 2019, the Company entered into a $25.0 million Revolving Credit and Security Agreement ("Credit Agreement" or “Revolving Loan”) with PNC Bank, N.A. (“PNC”) as agent, and the Company’s U.S. subsidiaries Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors (“Company Subsidiaries”). The obligations under the Credit Agreement are guaranteed by the Company Subsidiaries and secured by a first priority lien on all of the Company’s and the Company Subsidiaries’ tangible and intangible assets. The Credit Agreement provides a subfacility of up to $5.0 million for letters of credit. The Credit Agreement expires on April 30, 2022. As of September 30, 2019, the Company had $1.0 million outstanding under its credit facility. Financing costs related to the credit facility, net of accumulated amortization, of approximately $0.3 million, have been deferred over the initial term of the loan and are included in other assets as of September 30, 2019.

 

The interest rates per annum applicable to borrowings under the Credit Agreement will be, at the Company’s option (subject to certain conditions), equal to either a domestic rate (“Domestic Rate Loans”) or a LIBOR rate for one, two, or three-month interest periods chosen by the Company (“LIBOR Rate Loans”), plus the applicable margin percentage of 2% for Domestic Rate Loans and 3% for LIBOR Rate Loans. The domestic rate for Domestic Rate Loans will be the highest of (i) the base commercial lending rate of Lender, (ii) the overnight bank funding rate plus 0.50%, or (iii) the LIBOR rate plus 1.00% so long as the daily LIBOR rate is offered, ascertainable and not unlawful. The Credit Agreement also provides for commitment fees ranging from 0.5% to 1.5% applied to unused funds (with the applicable fee based on quarterly average borrowings), but with the fees fixed at 1.5% until September 30, 2019. Fees for Letters of Credit are equal to 3% for LIBOR Rate Loans, with a fronting fee for each Letter of Credit in an amount equal to 0.5% of the daily average aggregate undrawn amount of all Letters of Credit outstanding.

 

The Credit Agreement contains customary representations and warranties and covenants that restrict the Company and the Company Subsidiaries from engaging in or taking various actions, including, among other things (but except as otherwise permitted by the Credit Agreement): (i) incurring or guaranteeing additional indebtedness; (ii) making any loans, investments or acquisitions; (iii) selling or otherwise transferring or disposing of assets other than in the ordinary course of business; (iv) engaging in transactions with affiliates; and (v) declaring or making distributions on their stock or other equity interests. The Company is also required to maintain a $5.0 million pledged interest-bearing deposit account with Lender until the Company’s consolidated EBITDA is greater than $10.0 million. As of September 30, 2019, the Company had restricted cash related to the credit facility of approximately $5.0 million. The restricted cash accrues interest at a variable rate currently averaging 1.82% per annum.

 

On October 29, 2019, the Company, the Company Subsidiaries and PNC entered into a First Amendment to the Credit Agreement (“Credit Agreement First Amendment”) that provides for an amended financial covenant related to the Company’s minimum required EBITDA (as defined in the Credit Agreement). This amended financial covenant requires the Company to maintain its consolidated EBITDA (as defined in the Credit Agreement) at stated minimum levels (i) of $0.7 million for the quarter ended September 30, 2019; (ii) $250,000 for the month of October 2019; (iii) $600,000 for the two-months ending November 31, 2019; and ranging from $3.6 million to $7.5 million for the later periods set forth in the Credit Agreement First Amendment during the remaining term of the Credit Agreement. In addition, the Credit Agreement First Amendment adds a new financial covenant requiring the Company to maintain at least a 1.20 to 1.00 Fixed Charge Coverage Ratio (as defined in the Credit Agreement First Amendment) for the periods set forth in the Credit Agreement First Amendment. If the Company fails to comply with the minimum EBITDA requirements or the Fixed Charge Coverage Ratio, the Company has the right to cure (“Cure Right”) through the application of the proceeds from the sale of new equity interests in the Company, subject to the conditions set forth in the Credit Agreement First Amendment. The Cure Right may not be exercised more than three times during the term of the Credit Agreement and any proceeds from a sale of equity interests must not be less than the greater of (i) the amount required to cure the applicable default; and (ii) $500,000.

 

 

 

10. Commitments and Contingencies

 

Employment Agreements

 

The Company has employment agreements and severance benefits/retention agreements with certain key employees. A number of these agreements require severance payments and continuation of certain insurance benefits in the event of a termination of the employee’s employment by the Company without cause or by the employee for good reason (as defined in these agreements). Stock option agreements and restricted stock award agreements with some key employees provide for acceleration of vesting of stock options and lapsing of forfeiture restrictions on restricted stock in the event of a change in control of the Company, upon termination of employment by the Company without cause or by the employee for good reason, or upon the employee’s death or disability.

 

Litigation

 

From time to time, the Company may be involved in litigation matters arising from the normal course of its 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 its business, results of operations, financial condition and cash flows.

 

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, adjusted accordingly by the tax effect of certain discrete items that arise during the quarter. As the year progresses, the Company refines its estimated annual effective tax rate based on actual year-to-date results. This process can result in significant changes to the Company's estimated effective tax rate. When such activity occurs, the income tax provision is adjusted during the quarter in which the estimates are refined and adjusted. As such, the Company's year-to-date tax provision reflects the estimated annual effective tax rate. Therefore, these changes along with the adjustments to the Company's deferred taxes and related valuation allowance, may create fluctuations in the overall effective tax rate from period to period.

 

Due to overall cumulative losses incurred in recent years, the Company maintained a valuation allowance against its deferred tax assets as of September 30, 2019 and December 31, 2018.

 

The Company’s effective tax rate for the nine months ended September 30, 2019 differed from the U.S. federal statutory rate primarily due to operating losses that receive no tax benefit as a result of a valuation allowance recorded against the Company's existing tax assets.

 

The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.5 million as of September 30, 2019, all of which, if subsequently recognized, would have affected the Company's tax rate.

 

As of September 30, 2019, and December 31, 2018, there was no balance of accrued interest and penalties related to uncertain tax positions. 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 current liabilities in the Company’s condensed consolidated balance sheets. There were no material interest or penalties included in income tax expenses for the three and nine months ended September 30, 2019 and 2018.

 

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 2015 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 2015 are no longer subject to examination. However, the net operating loss carryforward may be able to be adjusted up to 3 years from when the NOL is utilized for federal income tax purposes and 3-4 years for state income tax purposes. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.

 

 

 

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,” “could,” “may,” “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 significant risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual outcomes or results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2, Part II, Item 1A of this Quarterly Report on Form 10-Q, and under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018 (“2018 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.

 

The following discussion of our results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated 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 2018 Form 10-K.

 

Our corporate website is located at www.autoweb.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,” “AutoWeb,” and “Company” refer to AutoWeb, Inc. and its consolidated subsidiaries.

 

Basis of Presentation and Critical Accounting Policies

 

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

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, 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 2018 Form 10-K. Except as disclosed in Note 8 to the Unaudited Condensed Consolidated Financial Statements, pertaining to our adoption of Accounting Standards Codification 842, Leases, there have been no changes to our critical accounting policies since we filed our 2018 Form 10-K.