abtl10qsept302014.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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  [  ]
Non-accelerated filer  [  ]
Smaller reporting company  [X]
   
(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 November 3, 2014, there were 9,028,733 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.
 


 

 
 
   
   
Page
 
PART I. FINANCIAL INFORMATION
 
     
ITEM 1.
 
     
 
1
     
 
2
     
 
3
     
 
4
     
ITEM 2.
15
     
ITEM 3.
22
     
ITEM 4.
22
     
 
PART II. OTHER INFORMATION
 
     
ITEM 1A.
23
     
ITEM 5.
23
     
ITEM 6.
25
     
 
26

 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
AUTOBYTEL INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except share and per-share data)
 
   
September 30,
   
December 31,
 
   
2014
     
2013*
 
Assets
             
Current assets:
             
        Cash and cash equivalents
 
$
22,316
   
$
18,930
 
        Accounts receivable, net of allowances for bad debts and customer credits of $711 and $405 at September 30, 2014 and December 31, 2013, respectively
   
16,793
     
14,178
 
        Deferred tax asset
   
2,346
     
3,517
 
        Prepaid expenses and other current assets
   
547
     
506
 
               Total current assets
   
42,002
     
37,131
 
Property and equipment, net
   
1,892
     
1,548
 
Equity investment
   
2,500
     
2,500
 
Intangible assets, net
   
4,563
     
1,821
 
Goodwill
   
20,948
     
13,602
 
Deferred tax asset
   
31,135
     
31,135
 
Other assets
   
1,232
     
456
 
Total assets
 
$
104,272
   
$
88,193
 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
        Accounts payable
 
$
7,721
   
$
5,267
 
        Accrued expenses and other current liabilities
   
7,979
     
7,648
 
        Convertible note payable
   
5,000
     
 
Total current liabilities
   
20,700
     
12,915
 
        Convertible note payable
   
1,000
     
5,000
 
        Term loan payable
   
7,313
     
 
        Borrowings under credit facility
   
5,250
     
4,250
 
        Other non-current liabilities
   
550
     
1,200
 
Total liabilities
   
34,813
     
23,365
 
Commitments and contingencies
   
     
 
Stockholders’ equity:
               
        Preferred stock, $0.001 par value; 11,445,187 shares authorized; none outstanding
   
     
 
        Common stock, $0.001 par value; 55,000,000 shares authorized and 9,028,733 and 8,909,737 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
   
9
     
9
 
        Additional paid-in capital
   
309,508
     
307,171
 
        Accumulated deficit
   
(240,058
)
   
(242,352
)
Total stockholders’ equity
   
69,459
     
64,828
 
Total liabilities and stockholders’ equity
 
$
104,272
   
$
88,193
 
 
* Amounts 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,
 
   
2014
   
2013
   
2014
   
2013
 
Revenues:
                       
Lead fees
 
$
25,880
   
$
20,653
   
$
76,727
   
$
55,013
 
Advertising
   
1,093
     
956
     
2,531
     
2,567
 
Other revenues
   
391
     
26
     
979
     
88
 
Total revenues
   
27,364
     
21,635
     
80,237
     
57,668
 
Cost of revenues
   
16,356
     
12,826
     
48,828
     
35,311
 
Gross profit
   
11,008
     
8,809
     
31,409
     
22,357
 
Operating expenses:
                               
Sales and marketing
   
3,336
     
2,745
     
11,078
     
7,122
 
Technology support
   
2,055
     
1,855
     
5,971
     
5,328
 
General and administrative
   
3,161
     
2,526
     
8,899
     
6,961
 
Depreciation and amortization
   
483
     
362
     
1,373
     
1,196
 
Litigation settlements
   
(25
)
   
(66
)
   
(118
)
   
(205
)
Total operating expenses
   
9,010
     
7,422
     
27,203
     
20,402
 
                                 
Operating income
   
1,998
     
1,387
     
4,206
     
1,955
 
Interest and other income (expense), net
   
(177
)
   
24
     
(518
)
   
331
 
Income before income tax provision
   
1,821
     
1,411
     
3,688
     
2,286
 
Income tax provision
   
697
     
138
     
1,394
     
292
 
Net income and comprehensive income
 
$
1,124
   
$
1,273
   
$
2,294
   
$
1,994
 
                                 
Basic earnings per common share
 
$
0.12
   
$
0.14
   
$
0.26
   
$
0.22
 
                                 
Diluted earnings per common share
 
$
0.11
   
$
0.13
   
$
0.22
   
$
0.21
 
 
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,
 
   
2014
   
2013
 
Cash flows from operating activities:
           
    Net income
 
$
2,294
   
$
1,994
 
    Adjustments to reconcile net income to net cash provided by operating activities:
               
        Depreciation and amortization
   
1,650
     
1,528
 
        Provision for bad debts
   
236
     
75
 
        Provision for customer credits
   
773
     
437
 
        Share-based compensation
   
1,025
     
556
 
        Gain on long-term strategic investment
   
     
(108)
 
        Change in deferred tax asset
   
1,171
     
 
    Changes in assets and liabilities:
               
        Accounts receivable
   
(690
)
   
(4,728
)
        Prepaid expenses and other current assets
   
3
     
(54
)
        Other assets
   
(776
)
   
(33
)
        Accounts payable
   
173
     
2,273
 
        Accrued expenses and other current liabilities
   
331
     
605
 
        Non-current liabilities
   
(600
)
   
174
 
               Net cash provided by operating activities
   
5,590
     
2,719
 
Cash flows from investing activities:
               
        Purchases of property and equipment
   
(925
)
   
(648
)
        Advances on purchase of Advanced Mobile
   
     
(1,824
)
        Investment in AutoWeb
   
     
(2,500
)
        Change in long-term strategic investment
   
     
108
 
        Investment in SaleMove
   
     
(150
)
        Purchase of AutoUSA
   
(10,044
)
   
 
               Net cash used in investing activities
   
(10,969
)
   
(5,014
)
Cash flows from financing activities:
               
        Borrowings under credit facility
   
1,000
     
4,250
 
        Borrowings under term loan
   
9,000
     
 
        Payments on term loan borrowings
   
(1,687
)
   
 
        Proceeds from exercise of stock options
   
502
     
205
 
        Payment of contingent fee arrangement
   
(50
)
   
(83
)
               Net cash provided by financing activities
   
8,765
     
4,372
 
Net increase in cash and cash equivalents
   
3,386
     
2,077
 
Cash and cash equivalents, beginning of period
   
18,930
     
15,296
 
Cash and cash equivalents, end of period
 
$
22,316
   
$
17,373
 
                 
Supplemental disclosure of cash flow information:
               
        Cash paid for income taxes
 
$
279
   
$
83
 
        Cash paid for interest
 
$
445
   
$
230
 
 
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 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 January 13, 2014 (“AutoUSA Acquisition Date”), Autobytel and AutoNation, Inc., a Delaware corporation (“Seller Parent”), and AutoNationDirect.com, Inc., a Delaware corporation and subsidiary of Seller Parent (“Seller”), entered into and consummated a Membership Interest Purchase Agreement in which Autobytel acquired all of the issued and outstanding membership interests in AutoUSA, LLC, a Delaware limited liability company and a subsidiary of Seller (“AutoUSA”).  AutoUSA was a (i) lead aggregator purchasing internet-generated automotive consumer leads from third parties and reselling those consumer leads to automotive vehicle Dealers; and (ii) reseller of third party products and services to automotive Dealers.  See Note 4.
 
Effective October 1, 2013 (“Advanced Mobile Acquisition Date”), the Company acquired substantially all of the assets of privately-held Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation (collectively referred to in this Quarterly Report on Form 10-Q as “Advanced Mobile”).  Advanced Mobile (now Autobytel Mobile) provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, TextShield®, mobile text marketing, quick response codes, text messaging, short message service and multimedia service) for the automotive industry.  TextShield® provides a web-based portal that allows Dealers to centrally manage text communications.  The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting. As a result of the acquisition, the Company offers Manufacturers and Dealers the ability to connect with consumers using text communication via a secure platform. In addition, Autobytel offers Dealers a comprehensive suite of mobile products, including mobile apps, mobile websites, Send2Phone capabilities and text message marketing.  See Note 4.
 
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, as amended by Amendment No. 1 on Form 10-K/A,  filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2013 (“2013 Form 10-K”).  Autobytel has made its disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included.  The statements of income and comprehensive income and cash flows for the periods ended September 30, 2014 and 2013 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2013 Form 10-K.

 
3.  Recent Accounting Pronouncements
 
Accounting Standards Codification 205-40 “Presentation of Financial Statements – Going Concern.”  In August 2014, Accounting Standards Update (“ASU”) No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” was issued.  This ASU provides guidance in generally accepted accounting principles ("GAAP") about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  This ASU (1) provides a definition of the term “substantial doubt,” (2) requires an evaluation every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plans, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).  This ASU is effective for the annual reporting period after December 15, 2016, and for annual periods and interim periods thereafter.  Early application is permitted.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial results.

Accounting Standards Codification 606 “Revenue from Contracts with Customers.”  In May 2014, ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” was issued.  This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on the ongoing financial reporting.

4.  Acquisitions
 
Acquisition of AutoUSA

On the AutoUSA Acquisition Date, Autobytel acquired all of the issued and outstanding membership interests in AutoUSA.  The Company acquired AutoUSA to expand its reach and influence in the industry by increasing its Dealer network.
 
The AutoUSA Acquisition Date fair value of the consideration transferred totaled $11.9 million, which consisted of the following:

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

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

 
The warrant to purchase 69,930 shares of Company common stock issued in connection with the acquisition ("AutoUSA Warrant") was valued as of the AutoUSA Acquisition Date at $7.35 per share for a total value of $0.5 million.  The Company used an option pricing model to determine the value of the AutoUSA Warrant.  Key assumptions used by the Company's outside valuation consultants 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 adjusted for stock splits, stock dividends, combinations and other similar events).  The AutoUSA Warrant becomes exercisable on the third anniversary of the issuance date and expires on the fifth anniversary of the issuance date.  The right to exercise the AutoUSA Warrant is accelerated in the event of a change in control of the Company.

The following table summarizes the fair values of the assets acquired and liabilities assumed as of September 30, 2014.  Because the transaction was completed in the three months ended March 31, 2014, the Company has not yet finalized the fair values of the assets and liabilities assumed in connection with the acquisition.  

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

The preliminary fair value of the acquired intangible assets was determined using the below valuation approaches. In estimating the preliminary 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 acquired intangible assets include the following:
 
 
 
Valuation Method
 
Estimated
Fair Value
   
Estimated
Useful Life (1)
 
     
(in thousands)
   
(years)
 
               
Non-compete agreement
Discounted cash flow (2)
 
$
90
     
2
 
Customer relationships
Excess of earnings (3)
   
2,660
     
5
 
Trademark/trade names
Relief from Royalty (4)
   
1,000
     
5
 
     Total purchased intangible assets
   
$
3,750
         
 
(1)  
Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from such intangible asset. Amortization of intangible assets with definite lives are recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.
 
 
(2)
The non-compete agreement fair value was derived by calculating the difference between the present value of the Company's forecasted cash flows with the agreement in place and without the agreement in place.
 
 
(3)
The excess of earnings method estimates a purchased intangible asset's value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.
 
 
(4)
The relief from royalty method is an earnings approach which assesses the royalty savings an entity realizes since it owns the asset and isn’t required to pay a third party a license fee for its use.
 
 
Some of the more significant estimates and assumptions inherent in the estimate of the fair value of the identifiable purchased intangible assets include all assumptions associated with forecasting cash flows and profitability. The primary assumptions used for the determination of the preliminary fair value of the purchased intangible assets were generally based upon the discounted present value of anticipated cash flows. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.
 
The goodwill recognized of $7.3 million is attributable primarily to expected synergies and the assembled workforce of AutoUSA.  The full amount is expected to be amortizable for income tax purposes.  
 
The Company incurred approximately $1.1 million of acquisition-related costs related to AutoUSA in the nine months ended September 30, 2014, all of which were expensed. There were no acquisition-related costs related to AutoUSA in the three months ended September 30, 2014.

The following unaudited pro forma information presents the consolidated results of the Company and AutoUSA for the three and nine months ended September 30, 2013, 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, 2013, are as follows:

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

Acquisition of Advanced Mobile
 
As of the Advanced Mobile Acquisition Date, the Company acquired substantially all of the assets of Advanced Mobile.  Advanced Mobile provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, TextShield®, mobile text marketing, quick response codes, text messaging, short message service and multimedia service) for the automotive industry.  The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting.  Advanced Mobile was acquired to enable the Company to offer the automotive industry the mobile technology and resources required to exploit the expanding growth in smart phone and tablet use.
 
The Advanced Mobile Acquisition Date fair value of the consideration transferred totaled $3.4 million, which consisted of the following:

   
(in thousands)
 
       
Cash (including working capital adjustment of $70)
 
$
2,570
 
Contingent consideration
   
825
 
   
$
3,395
 
 
The contingent consideration arrangement (“Contingent Consideration”) requires the Company to pay up to $1.5 million of additional consideration to Advanced Mobile if certain revenue and gross profit targets are met.  The fair value of the contingent consideration as of the Advanced Mobile Acquisition Date was $825,000.  The fair value of the contingent consideration was estimated using a Monte Carlo Simulation.  The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurements and Disclosures.  The key assumptions used by the Company's outside valuation consultants in applying the Monte Carlo Simulation consisted of volatility inputs for both revenue and gross profit, forecasted gross margin and a weighted-average cost of capital assumption used to adjust forecasted revenue and gross margin for risk.

 
The following table summarizes the fair values of the assets acquired and liabilities assumed at the Advanced Mobile Acquisition Date.  
   
(in thousands)
 
Net identifiable assets acquired
 
$
90
 
Definite-lived intangible assets acquired
   
1,380
 
Goodwill
   
1,925
 
Net assets acquired
 
$
3,395
 

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 acquired intangible assets include the following:

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

(1)
 
Determination of the estimated useful lives of the individual categories of purchased intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from such intangible asset. Amortization of intangible assets with definite lives are recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows.
 
(2)
The non-compete agreement fair value was derived by calculating the difference between the present value of the Company’s forecasted cash flows with the agreement in place and without the agreement in place.
 
(3)
The excess of earnings method estimates a purchased intangible asset’s value based on the present value of the prospective net cash flows (or excess earnings) attributable to it. The value attributed to these intangibles was based on projected net cash inflows from existing contracts or relationships.
 
Some of the more significant estimates and assumptions inherent in the estimate of the fair value of the identifiable purchased intangible assets include all assumptions associated with forecasting cash flows and profitability. The primary assumptions used for the determination of the preliminary fair value of the purchased intangible assets were generally based upon the discounted present value of anticipated cash flows. Estimated years of projected earnings generally follow the range of estimated remaining useful lives for each intangible asset class.

The goodwill recognized of $1.9 million is attributable primarily to expected synergies and the assembled workforce of Advanced Mobile.  The full amount is amortizable for income tax purposes.  
 
The Company incurred $0.3 million of acquisition-related costs related to Advanced Mobile, all of which were expensed in 2013.
  
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. 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 and common shares issuable upon conversion of convertible notes.  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, 2014 and 2013:

   
Three Months Ended
September 30,
   
Nine Months Ended
 September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Basic Shares
   
9,028,733
     
8,900,574
     
8,986,146
     
8,874,252
 
Weighted average dilutive securities
   
2,070,375
     
1,685,638
     
2,268,894
     
1,435,481
 
Dilutive Shares
   
11,099,108
     
10,586,212
     
11,255,040
     
10,309,733
 
 
For the three and nine months ended September 30, 2013 and 2014, weighted average dilutive securities included dilutive options and the warrant and convertible note issued in connection with the acquisition of Autotropolis, Inc. and Cyber Ventures, Inc. (collectively referred to in this Quarterly Report on Form 10-Q as “Cyber”) described below.  
 
For the three and nine months ended September 30, 2014, 1.3 million and 1.1 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, 2013, 1.1 million and 1.3 million of potentially anti-dilutive shares of common stock have been excluded from the calculation of diluted net earnings per share.
 
 On February 13, 2012, the Company announced that the Board of Directors had approved a stock repurchase program that authorized the repurchase of up to $1.5 million of Company common stock.  On June 7, 2012, the Board of Directors authorized the Company to repurchase an additional $2.0 million of Company common stock.  The Board of Directors approved an additional $1.0 million stock repurchase program on September 16, 2014.  As of September 30, 2014, the Company is authorized to repurchase up to $3.0 million in Company common stock.  Under these repurchase programs, the Company may repurchase common stock from time to time on the open market or in private transactions. This authorization does not require the Company to purchase a specific number of shares, and the Board of Directors may suspend, modify or terminate the programs at any time.  The Company would fund repurchases through the use of available cash. The Company began repurchasing its common stock on March 7, 2012.   No shares have been repurchased since 2012.  Shares repurchased in 2012 were cancelled by the Company and returned to authorized and unissued shares.

Warrants.  On September 17, 2010 (“Cyber Acquisition Date”), the Company acquired substantially all of the assets of Cyber.   In connection with the acquisition of Cyber, the Company issued to the sellers a warrant to purchase 400,000 shares of Company common stock (“Cyber Warrant”). The Cyber Warrant was valued at $3.15 per share on the Cyber Acquisition Date using an option pricing model with the following key assumptions: risk-free rate of 2.3%, stock price volatility of 77.5% and a term of 8.04 years.  The Cyber Warrant was valued based on historical stock price volatilities of the Company and comparable public companies as of the Cyber Acquisition Date.  The exercise price of the Cyber Warrant is $4.65 per share (as adjusted for stock splits, stock dividends, combinations and other similar events).  The Cyber Warrant became exercisable on September 16, 2013 and expires on the eighth anniversary of the issuance date.   The Cyber Warrant had not been exercised as of September 30, 2014.

The AutoUSA Warrant issued in connection with the acquisition described in Note 4 was valued at $7.35 per share for a total value of $0.5 million.  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 adjusted for stock splits, stock dividends, combinations and other similar events).  The AutoUSA Warrant becomes exercisable on the third anniversary of the issuance date and expires on the fifth anniversary of the issuance date.  The right to exercise the AutoUSA Warrant is accelerated in the event of a change in control of the Company.
 
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,
 
   
2014
   
2013
   
2014
   
2013
 
   
(in thousands)
 
Share-based compensation expense:
                       
   Cost of revenues
 
$
18
   
$
13
   
$
52
   
$
38
 
   Sales and marketing
   
149
     
35
     
400
     
111
 
   Technology support
   
62
     
57
     
187
     
173
 
   General and administrative
   
142
     
78
     
389
     
236
 
   Share-based compensation costs
   
371
     
183
     
1,028
     
558
 
                                 
Amount capitalized to internal use software
   
1
     
1
     
3
     
2
 
Total share-based compensation costs
 
$
370
   
$
182
   
$
1,025
   
$
556
 
 
 
Service-Based Options.  The Company granted the following service-based options for the three and nine months ended September 30, 2014 and 2013.  

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Number of service-based options granted
   
59,500
     
13,000
     
461,250
     
109,000
 
Weighted average grant date fair value
  $
3.88
   
$
2.73
   
$
6.99
   
$
2.29
 
Weighted average exercise price
  $
8.50
   
$
5.92
   
$
15.44
   
$
4.43
 
 
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.
 
Performance-based Options.  During the nine months ended September 30, 2014, the Company granted 40,000 performance-based inducement stock options in connection with the acquisition of AutoUSA (“AutoUSA Inducement Options”), with a weighted average grant date fair value of $6.08, using a Black-Scholes option pricing model and weighted average exercise price of $13.62.  The AutoUSA Inducement Options are subject to two vesting requirements and conditions: (i) level of achievement of performance goals based on revenue and gross margin of the Company’s retail dealer services group and (ii) time vesting.  No performance options were granted during the three months ended September 30, 2014.
 
During the nine months ended September 30, 2013, the Company granted 87,117 performance-based stock options (“2013 Performance Options”) to certain employees with a weighted average grant date fair value of $2.19, using a Black-Scholes option pricing model and a weighted average exercise price of $4.00.  The 2013 Performance Options were subject to two vesting requirements and conditions: (i) percentage achievement of 2013 revenues and earnings before taxes, depreciation and amortization (“EBITDA”) goals and (ii) time vesting.  Based on the Company’s 2013 revenues and EBITDA performance, 83,398 of the 2013 Performance Options vested under the performance vesting condition, and one-third of these options vested on the first anniversary of the grant date, with the remainder vesting ratably over twenty-four months thereafter.
 
During the nine months ended September 30, 2013, in connection with the acquisition of Advanced Mobile, the Company granted 88,641 performance-based inducement stock options (“2013 Inducement Options”) to one employee with a weighted average grant date fair value of $3.21, using a Black-Scholes option pricing model and weighted average exercise price of $7.17.  The 2013 Inducement Options are subject to two vesting requirements and conditions: (i) percentage achievement of 2014, 2015 and 2016 revenues and gross profit goals for the Advanced Mobile business and (ii) time vesting.
 
Market Condition Options.  In 2009, the Company granted 213,650 stock options to substantially all employees with an exercise price of $1.75 and grant date fair value of $0.97, using a Black-Scholes option pricing model.  One-third of these options cliff vested on the first anniversary following the grant date and the remaining two-thirds vest ratably over twenty-four months thereafter.  In addition, the remaining two-thirds of the awards were subject to satisfaction of market price conditions for the Company’s common stock, which conditions have been satisfied. During the nine months ended September 30, 2014, 15,793 of these market condition stock options were exercised.  No market condition options were exercised in the three months ended September 30, 2014.  During the three and nine months ended September 30, 2013, 596 and 5,672 of these market condition stock options were exercised, respectively.  
 
During the nine months ended September 30, 2014, 118,996 stock options (inclusive of the 15,793 market condition stock options exercised during the period) were exercised, with aggregate weighted average exercise prices of $4.20.  No stock options were exercised in the three months ended September 30, 2014.  There were 30,193 and 51,931 stock options (inclusive of the 596 and 5,672 market condition stock options exercised during the period) exercised during the three and nine months ended September 30, 2013, with aggregate weighted average exercise prices of $4.37 and $3.91, respectively.  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,
 
   
2014
   
2013
   
2014
   
2013
 
Dividend yield
   
     
     
     
 
Volatility
   
56
%
   
56
%
   
56
%
   
65
%
Risk-free interest rate
   
1.5
%
   
1.1
%
   
1.4
%
   
0.8
%
Expected life (years)
   
4.3
     
4.3
     
4.3
     
4.3
 
 
 
7. Selected Balance Sheet Accounts
 
Property and Equipment.  Property and equipment consists of the following:
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
   
(in thousands)
 
Computer software and hardware and capitalized internal use software
 
$
12,782
   
$
11,924
 
Furniture and equipment
   
1,271
     
1,256
 
Leasehold improvements
   
957
     
937
 
     
15,010
     
14,117
 
Less – Accumulated depreciation and amortization
   
(13,118
)
   
(12,569
)
Property and equipment, net
 
$
1,892
   
$
1,548
 
 
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 our 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 a discounted 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, Honda, Nissan, Infiniti, Mercedes Benz, Smart, Subaru, Toyota, Volkswagen and Volvo), General Motors and Trilogy Smartleads (which represents Hyundai, Toyota, BMW and MINI). During the first nine months of 2014, approximately 28% of the Company’s total revenues were derived from these three customers, and approximately 36%, or $6.4 million of gross accounts receivable, related to these three customers at September 30, 2014.
 
During the first nine months of 2013, approximately 28% of the Company’s total revenues were derived from General Motors, Urban Science Applications and AutoNation, and approximately 37%, or $5.5 million of gross accounts receivables, related to these three customers at September 30, 2013.

Equity Investments.  In September 2013, the Company entered into a Contribution Agreement with privately-held AutoWeb, Inc., a Delaware corporation ("AutoWeb"), in which Autobytel contributed to AutoWeb $2.5 million and assigned to AutoWeb all the ownership interests in the autoweb.com domain name and two registered trademarks related to the AutoWeb name and related goodwill in exchange for 8,000 shares of AutoWeb Series A Preferred Stock, $0.01 par value per share. The 8,000 shares of AutoWeb Series A Preferred Stock are convertible into AutoWeb Common Stock on a one-for-one basis (subject to adjustments for stock splits, stock dividends, combinations and recapitalizations) and represented 16% of all issued and outstanding common stock of AutoWeb as of September 18, 2013, on a fully diluted basis, as of this date. The Company also obtained an option to acquire an additional 5,000 shares of AutoWeb Series A Preferred Stock at a per share exercise price of $500, which option expires September 30, 2015. In connection with this investment, the Company also entered into arrangements with AutoWeb to use the AutoWeb pay-per-click, auction-driven automotive marketplace technology platform as both a publisher and as an advertiser. Upon the occurrence of a liquidation event (i.e., a liquidation, dissolution or winding up of AutoWeb; a consolidation or merger where AutoWeb is not the surviving entity; a consolidation or merger where AutoWeb is the surviving entity and either (i) the rights of the Series A Preferred Stock are changed, or (ii) the Series A Preferred Stock is exchanged for cash, securities or property; or a sale or transfer of all or substantially all of AutoWeb's assets), the Series A Preferred Stock is entitled to a liquidation preference of the greater of (i) $1,000 per share (subject to adjustments for stock splits, stock dividends, combinations and recapitalizations); and (ii) the amount that would be distributed with respect to AutoWeb's Common Stock, assuming full conversion of the Series A Preferred Stock into Common Stock.
 
 
In September 2013, the Company invested $150,000 in SaleMove, Inc., a Delaware corporation ("SaleMove"), in the form of a convertible promissory note. The convertible promissory note accrues interest at an annual rate of 6.0% and is due and payable in full on August 14, 2015 unless converted prior to the maturity date. The convertible note will be converted into preferred stock of SaleMove in the event of a preferred stock financing by SaleMove of at least $1.0 million prior to the maturity date of the convertible note. The Company recorded the $150,000 note as an other long-term asset on the Consolidated Balance Sheet as of September 30, 2014.
 
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, Advanced Mobile and AutoUSA the Company identified $9.7 million of intangible assets.  The Company’s intangible assets will be amortized over the following estimated useful lives (in thousands):
 
       
September 30, 2014
   
December 31, 2013
 
Intangible Asset
 
Estimated Useful Life
 
Gross
   
Accumulated Amortization
   
Net
   
Gross
   
Accumulated Amortization
   
Net
 
Trademarks/trade names/licenses/domains
 
5 years
 
$
6,581
   
$
(5,495
)
 
$
1,086
   
$
5,582
   
$
(5,209
)
 
$
373
 
Software and publications
 
3 years
   
1,300
     
(1,300
)
   
     
1,300
     
(1,300
)
   
 
Customer relationships
 
2-5 years
   
5,074
     
(2,495
)
   
2,579
     
2,320
     
(1,926
)
   
394
 
Employment/non-compete agreements
 
5 years
   
700
     
(458
)
   
242
     
610
     
(335
)
   
275
 
Developed technology
 
5 years
   
820
     
(164
)
   
656
     
820
     
(41
)
   
779
 
       
$
14,475
   
$
(9,912
)
 
$
4,563
   
$
10,632
   
$
(8,811
)
 
$
1,821
 
 
Amortization expense for the remainder of the year and for the next five years is as follows:

Year
 
Amortization Expense
 
   
(in thousands)
 
2014
 
$
382
 
2015
   
1,394
 
2016
   
942
 
2017
   
926
 
2018
   
879
 
2019
   
32
 
   
$
4,555
 
 
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 September 30, 2014 and 2013.

As of September 30, 2014, goodwill consisted of the following (in thousands):

Goodwill as of December 31, 2013
 
$
13,602
 
Acquisition of AutoUSA
   
7,346
 
Goodwill as of September 30, 2014
 
$
20,948
 
 
Accrued Expenses and Other Current Liabilities.  Accrued expenses and other current liabilities consisted of the following:
 
   
September 30,
   
December 31,
 
   
2014
   
2013
 
   
(in thousands)
 
Compensation and related costs
 
$
3,533
   
$
3,540
 
Professional fees and other accrued expenses
   
3,526
     
3,209
 
Amounts due to customers
   
250
     
208
 
Other current liabilities
   
670
     
692
 
Total accrued expenses and other current liabilities
 
$
7,979
   
$
7,649
 
 
 
Convertible notes payable.  In connection with the acquisition of Cyber, the Company issued a convertible subordinated promissory note for $5.0 million (“Cyber Convertible Note”) to the sellers.  The fair value of the Cyber Convertible Note as of the Cyber Acquisition Date was $5.9 million.  This valuation was estimated using a binomial option pricing method.  Key assumptions used by the Company's outside valuation consultants in valuing the Cyber Convertible Note included a market yield of 15.0% and stock price volatility of 77.5%.  As the Cyber Convertible Note was issued with a substantial premium, the Company recorded the premium as additional paid-in capital.  Interest is payable at an annual interest rate of 6% in quarterly installments.  The entire outstanding balance of the Cyber Convertible Note is to be paid in full on September 30, 2015.  At any time after September 30, 2013, the holders of the Cyber Convertible Note may convert all or any part, but in 40,000 minimum share increments, of the then outstanding and unpaid principal of the Cyber Convertible Note into fully paid shares of the Company’s common stock at a conversion price of $4.65 per share (as adjusted for stock splits, stock dividends, combinations and other similar events).  The right to convert the Cyber Convertible Note into common stock of the Company is accelerated in the event of a change in control of the Company.  In the event of default, the entire unpaid balance of the Cyber Convertible Note will become immediately due and payable and will bear interest at the lower of 8% per year and the highest legal rate permissible under applicable law.

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

Credit Facility and Term Loan.  On January 13, 2014, the Company entered into a Credit Facility Amendment with Union Bank, amending the Company's existing Loan Agreement with Union Bank initially entered into on February 26, 2013, and amended on September 10, 2013 (the existing Loan Agreement, as amended to date, is referred to herein collectively as the "Credit Facility Agreement"). The Credit Facility Amendment provides for (i) a new $9.0 million term loan (“Term Loan”); and (ii) amendments to the Company’s existing $8.0 million revolving line of credit (“Revolving Loan”).

The Term Loan is amortized over a period of four years, with fixed quarterly principal payments of $562,500. Borrowings under the Term Loan or under the Revolving Loan bear interest at either (i) the bank's Reference Rate (prime rate) minus 0.50% or (ii) the LIBOR plus 2.50%, at the option of the Company. Interest under both the Term Loan 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 pays a commitment fee of 0.10% per year on the unused portion of the Revolving Loan payable quarterly in arrears. Borrowings under the Term Loan 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. The Term Loan matures December 31, 2017, and the maturity date of the Revolving Loan is March 31, 2017. Borrowings under the Revolving Loan may be used as a source to finance capital expenditures, acquisitions and stock buybacks and for other general corporate purposes. Borrowing under the Term Loan was limited to use for the acquisition of AutoUSA, and the Company drew down the entire $9.0 million of the Term Loan, together with $1.0 million under the Revolving Loan, in financing this acquisition.  The outstanding balances of the Term Loan and Revolving Loan as of September 30, 2014 were $7.3 million and $5.25 million, respectively.
 
8. Commitments and Contingencies
 
Employment Agreements

The Company has employment agreements and retention agreements with certain key employees. A number of these agreements require severance payments, continuation of certain insurance benefits and acceleration of vesting of stock options in the event of a termination of employment by the Company without cause or by the employee for good reason.

 
Litigation
 
As of September 30, 2014, the Company was not the subject of any litigation as a defendant in any action or proceeding. From time to time, the Company may be involved in litigation matters arising from the normal course of its business activities. The actions filed against the Company and other 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.

9. 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, 2014 differed from the U.S. federal statutory rate primarily due to state income taxes and permanent non-deductible tax items.
 
The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.6 million as of September 30, 2014, of which $0.1 million would impact the effective tax rate if recognized.
 
The total balance of accrued interest and penalties related to state uncertain tax positions was $26,000 and $20,000 as of September 30, 2014 and December 31, 2013, respectively.  The Company recognizes interest and penalties related to state 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 each of the three and nine months ended September 30, 2014 and September 30, 2013.
 
The Company is subject to taxation in the U.S. and in various state jurisdictions.  Due to expired statutes of limitation, the Company’s federal income tax returns for years prior to calendar year 2011 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 2010 are no longer subject to examination.  The Company is currently under examination by the State of Colorado for the years 2009 through 2012, but does not anticipate any material adjustments.  The Company has estimated that $0.1 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation 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
 
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, as amended by Form 10-K/A,  for the year ended December 31, 2013 (“2013 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 2013 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. 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

The accompanying unaudited consolidated condensed financial statements presented herein are presented on the same basis as the 2013 Form 10-K.  We have made disclosures in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included.  The statements of income and comprehensive income and cash flows for the periods ended September 30, 2014 and 2013 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2013 Form 10-K.
 
On January 13, 2014 (“AutoUSA Acquisition Date”), Autobytel and AutoNation, Inc., a Delaware corporation (“Seller Parent”), and AutoNationDirect.com, Inc., a Delaware corporation and subsidiary of Seller Parent (“Seller”), entered into and consummated a Membership Interest Purchase Agreement in which Autobytel acquired all of the issued and outstanding membership interests in AutoUSA, LLC, a Delaware limited liability company and a subsidiary of Seller (“AutoUSA”).  AutoUSA was a (i) lead aggregator purchasing internet-generated automotive consumer leads from third parties and reselling those consumer leads to automotive vehicle dealers; and (ii) reseller of third party products and services to automotive Dealers.  The integration of AutoUSA was completed during the three months ended June 30, 2014, and we believe we will see benefits from the synergies associated with the AutoUSA acquisition throughout the remainder of 2014.

 
Effective October 1, 2013, the Company acquired substantially all of the assets of privately-held Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation (collectively referred to in this Quarterly Report on Form 10-Q as “Advanced Mobile”).  Advanced Mobile provides mobile marketing solutions (e.g., mobile applications, mobile portals, mobile websites, TextShield®, mobile text marketing, quick response codes, text messaging, short message service and multimedia service) for the automotive industry.  TextShield® provides a web-based portal that allows Dealers to centrally manage text communications.  This web-based tool includes role-based permissions, a global opt out feature and the ability to monitor all text communications between dealership employees and consumers.  By assisting a dealership with compliance issues surrounding text, this tool opens up a wide array of text-based marketing for dealers and allows consumers to interact with dealers using one of the most preferred methods of mobile communications.  The acquired assets consisted primarily of customer contracts, technology license rights and rights in domain names and short codes used for SMS texting.
 
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 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.
 
Lead quality is measured by the conversion of Leads to actual vehicle sales.  Leads are internally-generated from our Company Websites (“Internally-Generated Leads”) or acquired from third parties (“Non-Internally-Generated Leads”) that generate Leads from their websites (“Non-Company Websites”).  We rely on detailed feedback from Manufacturer and wholesale customers to confirm the performance of our Leads.  Since 2011 we have been using IHS Automotive (which acquired R.L. Polk & Co. in 2013) to evaluate the performance quality of both our Internally-Generated Leads as well as Non-Internally-Generated Leads.  Our Manufacturers and wholesale customers and IHS Automotive match the Leads we deliver to our customers against vehicle sales data to provide us with buy rates (rate at which consumers who submit a new vehicle lead purchase a new vehicle within 90 days) for the Leads we deliver to our customers and information that allows us to compare these buy rates to the buy rates of the Leads we acquire from third party suppliers.  Based on the most current IHS Automotive data, automotive Leads from consumers shopping on Autobytel.com have a buy rate of approximately 21% within 90 days of Lead submission.
 
In addition, we report a number of key metrics to our customers, allowing them to gain a better understanding of the revenue opportunities that they may realize from acquiring Leads from us.  We can now optimize the mix of Leads we deliver to our Dealers based on multiple sources of quality measurements. Also, by reporting the buying behavior of potential customers, the findings also can help shape improvements to online Lead management; online advertising and dealership sales process training.  By providing actionable data, we place considerable intelligence in the hands of our customers.
 
 
For the three and nine months ended September 30, 2014, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic and market factors, conditions in the automotive industry, the market for Leads and the market for advertising services, including, but not limited to, the following:
 
The effect of unemployment on the number of vehicle purchasers;
 
Pricing and purchase incentives for vehicles;
 
The expectation that consumers will be purchasing fewer vehicles overall during their lifetime as a result of better quality vehicles and longer warranties;
 
The impact of gasoline prices on demand for vehicles;
 
Increases or decreases in the number of retail Dealers or in the number of Manufacturers and other wholesale customers in our customer base;
 
Volatility in spending by Manufacturers, Dealers and others in their marketing budgets and allocations;
 
The effect of changes in search engine algorithms and methodologies on our Lead generation and website advertising activities and margins; and

The competitive impact of consolidation in the online automotive referral industry.

Results of Operations
 
 Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

The following table sets forth certain income statement data for the three-month periods ended September 30, 2014 and 2013 (certain amounts may not calculate due to rounding):

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

 
Leads.  Purchase request revenues increased $5.2 million, or 25%, in the third quarter of 2014 compared to the third quarter of 2013 primarily due to a 20% increase in Lead volume as a result of strong demand across nearly all programs, with a major Manufacturer starting a Lead program with Autobytel as a primary supplier, as well as additional revenues from the acquisition of AutoUSA.
  
Advertising. Advertising revenues increased $0.1 million, or 14%, in the third quarter of 2014 compared to the third quarter of 2013 as a result of increased page views and click revenue.

Other Revenues.  Other revenues increased $0.4 million in the third quarter of 2014 compared to the third quarter of 2013 due to increased sales of the Company’s mobile products as a result of the Advanced Mobile acquisition in the fourth quarter of 2013.

Cost of Revenues.  Cost of revenues consists of purchase request and traffic acquisition costs and other cost of revenues. Purchase request and traffic acquisition costs consist of payments made to our purchase request providers, including internet portals and on-line automotive information providers. Other cost of revenues consists of search engine marketing (“SEM”) and fees paid to third parties for data and content, including search engine optimization (“SEO”) activity, included on our websites, connectivity costs, development costs related to our websites, compensation related expense and technology license fees, server equipment depreciation and technology amortization directly related to the Company’s websites. SEM, sometimes referred to as paid search marketing, is the practice of bidding on keywords on search engines to drive traffic to a website.  
 
Cost of revenues increased $3.5 million, or 28%, in the third quarter of 2014 compared to the third quarter of 2013 primarily due to a corresponding increase in lead volume.
 
Sales and Marketing. Sales and marketing expense includes costs for developing our brand equity, personnel costs and other costs associated with Dealer sales, website advertising, Dealer support and bad debt expense. Sales and marketing expense in the third quarter of 2014 increased by $0.6 million, or 22%, compared to the third quarter of 2013 due principally to an increase in headcount-related expenses associated with the acquisitions of AutoUSA and Advanced Mobile.
 
Technology Support. Technology support expense includes compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, maintain, support, monitor and operate the Company’s websites and related technologies, and to operate the Company’s internal technology infrastructure. Technology support expense in the third quarter of 2014 increased by $0.2 million, or 11%, compared to the third quarter of 2013 due to increased headcount-related expense associated with the acquisitions of AutoUSA and Advanced Mobile.
 
General and Administrative. General and administrative expense consists of executive, financial and legal personnel expenses and costs related to being a public company. General and administrative expense in the third quarter of 2014 increased by $0.6 million, or 25%, compared to the third quarter of 2013 due to an increase in headcount-related compensation costs and professional fees associated with increased merger and acquisition activity.
 
Depreciation and amortization.  Depreciation and amortization expense in the third quarter of 2014 increased $0.1 million to $0.5 million compared to the third quarter of 2013 primarily due to the addition of intangible assets related to the acquisitions of Advanced Mobile and AutoUSA offset by a portion of the intangible assets related to the acquisition of Autotropolis, Inc. and Cyber Ventures, Inc. (collectively, “Cyber”) being fully amortized in 2013.
 
Litigation settlements.  Payments primarily from 2010 settlements of patent infringement claims against third parties relating to the third parties’ methods of Lead delivery for the third quarter of 2014 were $25,000.
 
Interest and other income (expense), net.  Interest and other expense was $0.2 million for the third quarter of 2014 compared to interest and other income of $24,000 for the third quarter of 2013.  The third quarter of 2014 included interest expense of $0.2 million compared to $81,000 in the third quarter of 2013.
 
Income taxes. Income tax expense was $0.7 million in the third quarter of 2014 compared to income tax expense of $0.1 million in the third quarter of 2013.  Income tax expense for the third quarter of 2014 differed from the federal statutory rate primarily due to state income taxes and permanent non-deductible tax items, while income tax for the third quarter of 2013 differed from the federal statutory rate primarily due to various state minimum taxes and the deferred tax liability related to tax deductible goodwill amortization.
 
 
Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013

The following table sets forth certain income statement data for the nine-month periods ended September 30, 2014 and 2013 (certain amounts may not calculate due to rounding):

   
2014
   
% of total revenues
   
2013
   
% of total revenues
   
$ Change
   
% Change
 
   
(Dollar amounts in thousands)
       
Revenues:
                                   
Lead fees
 
$
76,727
     
96
%
 
$
55,013
     
95
%
 
$
21,714
     
39
%
Advertising
   
2,531
     
3
     
2,567
     
5
     
(36
)
   
(1
)
Other revenues
   
979
     
1
     
88
     
     
891
     
1,013
 
Total revenues
   
80,237
     
100
     
57,668
     
100
     
22,569
     
39
 
Cost of revenues (excludes depreciation of $21 and $70 for the nine months ended September 30, 2014 and 2013, respectively)
   
48,828
     
61
     
35,311
     
61
     
13,517
     
38
 
Gross profit
   
31,409
     
39
     
22,357
     
39
     
9,052
     
40
 
Operating expenses:
                                               
Sales and marketing
   
11,078
     
14
     
7,122
     
12
     
3,956
     
56
 
Technology support
   
5,971
     
7
     
5,328
     
9
     
643
     
12
 
General and administrative
   
8,899
     
11
     
6,961
     
12
     
1,938
     
28
 
Depreciation and amortization
   
1,373
     
2
     
1,196
     
2
     
177
     
15
 
Litigation settlements
   
(118
)
   
     
(205
)
   
     
87
     
(42
)
Total operating expenses
   
27,203
     
34
     
20,402
     
35
     
6,801
     
33
 
Operating income
   
4,206
     
5
     
1,955
     
4
     
2,251
     
115
 
       Interest and other income (expense), net
   
(518
)
   
     
331
     
     
(849
)
   
(256
)
Income before income tax provision
   
3,688
     
5
     
2,286
     
4
     
1,402
     
61
 
       Income tax provision
   
1,394
     
2
     
292
     
1
     
1,102
     
377
 
Net income
 
$
2,294
     
3
%
 
$
1,994
     
3
%
 
$
300
     
15
%
 
Leads.  Purchase request revenues increased $21.7 million, or 39%, in the first nine months of 2014 compared to the first nine months of 2013 primarily due to a 34% increase in Lead volume as a result of strong demand across nearly all programs, with a major Manufacturer starting a Lead program with Autobytel as a primary supplier, as well as additional revenues from the acquisition of AutoUSA.
 
Advertising. Advertising revenues decreased $36,000, or 1%, in the first nine months of 2014 compared to the first nine months of 2013 as a result of fewer direct email campaigns coupled with the timing of website advertising display revenue.

Other Revenues.  Other revenues increased $0.9 million in the first nine months of 2014 compared to the first nine months of 2013 due to increased sales of the Company’s mobile products as a result of the Advanced Mobile acquisition in the fourth quarter of 2013.

Cost of Revenues.  Cost of revenues increased $13.5 million, or 38%, in the first nine months of 2014 compared to the first nine months of 2013 primarily due to a corresponding increase in lead volume.
 
Sales and Marketing.  Sales and marketing expense in the first nine months of 2014 increased by $4.0 million, or 56%, compared to the first nine months of 2013 due principally to an increase in headcount-related expenses associated with the acquisitions of AutoUSA and Advanced Mobile.
 
Technology Support. Technology support expense in the first nine months of 2014 increased by $0.6 million, or 12%, compared to the first nine months of 2013 due to increased headcount-related expense associated with the acquisitions of AutoUSA and Advanced Mobile.
 
 
General and Administrative. General and administrative expense in the first nine months of 2014 increased by $1.9 million, or 28%, compared to the first nine months of 2013 due to an increase in headcount-related compensation costs and professional fees associated with increased merger and acquisition activity.
 
Depreciation and amortization.  Depreciation and amortization expense in the first nine months of 2014 increased to $1.4 million compared to $1.2 million for the first nine months of 2013 primarily due to the addition of intangible assets related to the acquisitions of Advanced Mobile and AutoUSA offset by a portion of the intangible assets related to the Cyber acquisition being fully amortized in 2013.
 
Litigation settlements.  Payments primarily from 2010 settlements of patent infringement claims against third parties relating to the third parties’ methods of Lead delivery for the first nine months of 2014 were $118,000.
 
Interest and other income (expense), net.  Interest and other expense was $0.5 million for the first nine months of 2014 compared to interest and other income of $0.3 million for the first nine months of 2013.  The first nine months of 2014 included interest expense of $0.5 million compared to $0.2 million in the first nine months of 2013.  The first nine months of 2013 also included receipt of $0.5 million related to early termination of a license agreement pursuant to which the Company, as licensor, had licensed certain rights in the Company’s proprietary software, business procedures, and brand.
 
Income taxes. Income tax expense was $1.4 million in the first nine months of 2014 compared to income tax expense of $0.3 million in the first nine months of 2013.  Income tax expense for the first nine months of 2014 differed from the federal statutory rate primarily due to state income taxes and permanent non-deductible tax items, while income tax for the first nine months of 2013 differed from the federal statutory rate primarily due to various state minimum taxes and the deferred tax liability related to tax deductible goodwill amortization.
 
Liquidity and Capital Resources
 
The table below sets forth a summary of our cash flows for the nine months ended September 30, 2014 and 2013:
 
   
Nine Months Ended September 30,
 
   
2014
   
2013
 
   
(in thousands)
 
Net cash provided by operating activities
 
$
5,590
   
$
2,719
 
Net cash used in investing activities
   
(10,969
)
   
(5,014
)
Net cash provided by financing activities
   
8,765
     
4,372
 
 
Our principal sources of liquidity are our cash and cash equivalents balances and positive operating cash flow.  Our cash and cash equivalents totaled $22.3 million as of September 30, 2014 compared to cash and cash equivalents of $18.9 million as of December 31, 2013.

On February 13, 2012, we announced that the Board of Directors had approved a stock repurchase program that authorized the repurchase of up to $1.5 million of Company common stock.  The Board of Directors authorized us to repurchase an additional $2.0 million of Company common stock on June 7, 2012.  The Board of Directors approved an additional $1.0 million stock repurchase program on September 16, 2014.  As of September 30, 2014, we are authorized to repurchase up to $3.0 million in Company common stock.  Under these repurchase programs, we may repurchase common stock from time to time on the open market or in private transactions. This authorization does not require us to purchase a specific number of shares, and the Board of Directors may suspend, modify or terminate the programs at any time.  We would fund repurchases through the use of available cash. We began repurchasing Company common stock on March 7, 2012.  No shares have been repurchased since 2012.  The shares repurchased in 2012 were cancelled by the Company and returned to authorized and unissued shares.  

Credit Facility and Term Loan.  On January 13, 2014, the Company entered into a Credit Facility Amendment with Union Bank, amending the Company's existing Loan Agreement with Union Bank initially entered into on February 26, 2013, and amended on September 10, 2013 (the existing Loan Agreement, as amended to date, is referred to herein collectively as the "Credit Facility Agreement"). The Credit Facility Amendment provides for (i) a new $9.0 million term loan (“Term Loan”); and (ii) amendments to the Company’s existing $8.0 million revolving line of credit (“Revolving Loan”).

 
The Term Loan is amortized over a period of four years, with fixed quarterly principal payments of $562,500. Borrowings under the Term Loan or under the Revolving Loan bear interest at either (i) the bank's Reference Rate (prime rate) minus 0.50% or (ii) the LIBOR plus 2.50% (an increase under the existing Revolving Loan from 1.50%), at the option of the Company. Interest under both the Term Loan 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 also pays a commitment fee of 0.10% per year on the unused portion of the Revolving Loan payable quarterly in arrears. Borrowings under the Term Loan 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. The Term Loan matures December 31, 2017, and the maturity date of the Revolving Loan is March 31, 2017. Borrowings under the Revolving Loan may be used as a source to finance capital expenditures, acquisitions and stock buybacks and for other general corporate purposes. Borrowing under the Term Loan was limited to use for the acquisition of AutoUSA, and the Company drew down the entire $9.0 million of the Term Loan, together with $1.0 million under the Revolving Loan, in financing this acquisition.  The outstanding balances of the Term Loan and Revolving Loan as of September 30, 2014 were $7.3 million and $5.25 million, respectively.

Net Cash Provided by Operating Activities.  Net cash provided by operating activities in the nine months ended September 30, 2014 of $5.6 million resulted primarily from net income of $2.3 million, as adjusted for non-cash charges to earnings, in addition to cash used to reduce accrued liabilities of $0.3 million primarily related to the payment of annual incentive compensation amounts and severance accrued in 2013 and paid in the first three months of 2014 and a $0.2 million increase in our accounts payable balance related to the timing of payments made.  This was offset by a $0.7 million increase in our accounts receivable balance related to the timing of payments received from our customers as well as a $0.8 million change in other assets.

Net cash provided by operating activities in the nine months ended September 30, 2013 of $2.7 million resulted primarily from net income of $2.0 million, as adjusted for non-cash charges to earnings.  In addition accounts payable increased $2.3 million offset by a $4.7 million increase in our accounts receivable balance related to the timing of payments received from our customers.
 
Net Cash Used in Investing Activities.  Net cash used in investing activities was $11.0 million in the nine months ended September 30, 2014 primarily related to the acquisition of AutoUSA.
 
Net cash used in investing activities was $5.0 million in the nine months ended September 30, 2013 and was primarily related to $1.8 million in advances on the purchase of Advanced Mobile, a $2.5 million investment in AutoWeb and a $0.2 million investment in SaleMove in the form of a note receivable.  We also purchased $0.6 million of property and equipment and received $0.1 million related to a final escrow payment related to our investment in Driverside.
 
Net Cash Provided by Financing Activities.  Stock options for 118,996 shares of the Company’s common stock were exercised in the nine months ended September 30, 2014 resulting in $0.5 million cash inflow.  We also borrowed $9.0 million and $1.0 million against the Term Loan and Revolving Loan, respectively, to fund the purchase of AutoUSA in the nine months ended September 30, 2014.  Payments of $1.7 million were made against the Term Loan borrowings in the nine months ended September 30, 2014.
 
Stock options for 51,931 shares of stock were exercised in the nine months ended September 30, 2013, which resulted in $0.2 million cash inflow for the nine months ended September 30, 2013.  Net cash provided by financing activities in the nine months ended September 30, 2013 also included $4.25 million in borrowings under the credit facility and was offset by contingent payments of $83,000 related to the Cyber acquisition.  Our future cash flows from employee stock options, if any, will depend on the future timing, exercise price and amount of stock options exercised.
 
Off-Balance Sheet Arrangements
 
At September 30, 2014, we had no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(D)(ii).

 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates and changes in general economic conditions.  For the three months ended September 30, 2014 there were no material changes in the information required to be provided under Item 305 of Regulation S-K from the information disclosed in Item 7A of the 2013 Form 10-K.

 Item 4.  Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on the evaluation, our Chief Executive Officer and our Chief Financial Officer believe that, as of the end of the period covered by this Quarterly Report on Form  10-Q, our disclosure controls and procedures were effective at ensuring that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
 
As of the end of the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control.
 
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 
PART II. OTHER INFORMATION
 
Item 1A.  Risk Factors

The following factors, which supplement or update the risk factors set forth in Part I, Item 1A, “Risk Factors” of our 2013 Form 10-K, may affect our future financial condition and results of operations.  The risks described below are not the only risks we face.  In addition to the risks set forth in the 2013 Form 10-K, as supplemented or superseded by the risk factors set forth below, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.

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

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

Item 5.  Other Information
 
On October 30, 2014, the Company’s Board of Directors approved the Company’s Fourth Amended and Restated Bylaws, effective immediately.
 
 
The Fourth Amended and Restated Bylaws add new Article X which provides that, unless the Company consents in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for any stockholder (including any beneficial owner, within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended) to bring (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or employee of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the General Corporation Law of Delaware or the Certificate of Incorporation or Bylaws (as either may be amended from time to time) or (iv) any action asserting a claim governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware or if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants. In addition, if any such action is filed in a court other than the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another state court located within the State of Delaware or if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware) (a “Foreign Action”) in the name of any stockholder (including any beneficial owner, within the meaning of Section 13(d) of the Exchange Act), such stockholder shall be deemed to have consented to (i) the personal jurisdiction of the state and federal courts located within the State of Delaware in connection with any action brought in any such court to enforce the foregoing provisions of the bylaws and (ii) having service of process made upon such stockholder in any such action by service upon such stockholder’s counsel in the Foreign Action as agent for such stockholder.  New Article X also adds a severability provision.

The foregoing summary is subject to, and qualified in its entirety by, the full text of the Fourth Amended and Restated Bylaws, a copy of which is filed as Exhibit 3.2 to this Quarterly Report on Form 10-Q and is incorporated by reference into this Item 5.

 
Item 6.  Exhibits
 
2.1‡
Asset Purchase Agreement dated as of  September 16, 2010, by and among Autotropolis, Inc., a Florida corporation, Cyber Ventures, Inc., a Florida corporation, William Ferriolo, Ian Bentley and the Ian Bentley Revocable Trust created U/A/D 3/1/2005, Autobytel Inc., a Delaware corporation, and Autobytel Acquisition Subsidiary, Inc., a Delaware corporation, which is incorporated herein by reference to Exhibit 2.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010 filed with the SEC on November 12, 2010 (SEC File No. 001-34761)
   
2.2‡
Asset Purchase Agreement dated as of September 30, 2013, by and among Autobytel Inc., a Delaware corporation, Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation, which is incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on October 3, 2013 (SEC File No. 001-34761)
   
2.3‡
Membership Interest Purchase Agreement dated as of January 13, 2014 by and among Autobytel Inc., a Delaware corporation, AutoNation, Inc., a Delaware corporation, and AutoNationDirect.com, Inc., a Delaware corporation, which is incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 17, 2014 (SEC File No. 001-34761) (“January 17, 2014 Form 8-K”)
   
3.1
Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. (formerly Autobytel.com Inc. (“Autobytel” or the “Company”)) certified by the Secretary of State of Delaware (filed December 14, 1998), as amended by Certificate of Amendment dated March 1, 1999, Second Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated July 22, 1999, Third Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated August 14, 2001, Certificate of Designation of Series A Junior Participating Preferred Stock dated July 30, 2004, and Amended Certificate of Designation of Series A Junior Participating Preferred Stock dated April 24, 2009, which is incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239), as amended by the Fourth Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel effective as of July 11, 2012, which is incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on July 12, 2012 (SEC File No. 001-34761), and as amended by Fifth Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. dated July 3, 2013, which is incorporated by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed with the SEC on August 1, 2013 (SEC File No. 001-34761)
   
3.2*
Fourth Amended and Restated Bylaws of Autobytel dated October 30, 2014
   
4.1
Form of Common Stock Certificate of Autobytel, which is incorporated herein by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 filed with the SEC on November 14, 2001 (SEC File No. 000-22239)
   
4.2
Tax Benefit Preservation Plan dated as of May 26, 2010, between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; and Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Autobytel Inc., which is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)
 
4.3
 
Certificate of Adjustment Under Section 11(m) of the Tax Benefit Preservation Plan dated July 12, 2012, which is incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 filed with the SEC on November 8, 2012 (SEC File No. 001-34761)
   
4.4
Amendment No. 1 to Tax Benefit Preservation Plan dated as of April 14, 2014 between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, which is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 16, 2014 (SEC File No. 001-34761)
   
31.1*
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer
   
31.2*
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer
   
32.1*
Section 1350 Certification by Principal Executive Officer and Principal Financial Officer
   
101.INS††
XBRL Instance Document
   
101.SCH††
XBRL Taxonomy Extension Schema Document
   
101.CAL††
XBRL Taxonomy Calculation Linkbase Document
   
101.DEF††
XBRL Taxonomy Extension Definition Document
   
101.LAB††
XBRL Taxonomy Label Linkbase Document
   
101.PRE††
XBRL Taxonomy Presentation Linkbase Document

*
Filed or furnished herewith.
Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K.  Autobytel will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that Autobytel may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
††
Furnished with this report.  In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
           
   
AUTOBYTEL INC.
 
           
 
Date: November 5, 2014
 
By:
/s/ Curtis E. DeWalt
 
       
Curtis E. DeWalt
 
       
Senior Vice President and Chief Financial Officer
 
       
(Duly Authorized Officer and Principal Financial Officer)
 
 
           
           
 
Date: November 5, 2014
 
By:
/s/ Wesley Ozima
 
       
Wesley Ozima
 
       
Vice President and Controller
 
       
(Principal Accounting Officer)
 
 
 
EXHIBIT INDEX

2.1‡
Asset Purchase Agreement dated as of  September 16, 2010, by and among Autotropolis, Inc., a Florida corporation, Cyber Ventures, Inc., a Florida corporation, William Ferriolo, Ian Bentley and the Ian Bentley Revocable Trust created U/A/D 3/1/2005, Autobytel Inc., a Delaware corporation, and Autobytel Acquisition Subsidiary, Inc., a Delaware corporation, which is incorporated herein by reference to Exhibit 2.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010 filed with the SEC on November 12, 2010 (SEC File No. 001-34761)
   
2.2‡
Asset Purchase Agreement dated as of September 30, 2013, by and among Autobytel Inc., a Delaware corporation, Advanced Mobile, LLC, a Delaware limited liability company, and Advanced Mobile Solutions Worldwide, Inc., a Delaware corporation, which is incorporated herein by reference to Exhibit 99.1 of the Current Report on Form 8-K filed with the SEC on October 3, 2013 (SEC File No. 001-34761)
   
2.3‡
Membership Interest Purchase Agreement dated as of January 13, 2014 by and among Autobytel Inc., a Delaware corporation, AutoNation, Inc., a Delaware corporation, and AutoNationDirect.com, Inc., a Delaware corporation, which is incorporated by reference to the Current Report on Form 8-K filed with the SEC on January 17, 2014 (SEC File No. 001-34761) (“January 17, 2014 Form 8-K”)
   
3.1
Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. (formerly Autobytel.com Inc. (“Autobytel” or the “Company”)) certified by the Secretary of State of Delaware (filed December 14, 1998), as amended by Certificate of Amendment dated March 1, 1999, Second Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated July 22, 1999, Third Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel dated August 14, 2001, Certificate of Designation of Series A Junior Participating Preferred Stock dated July 30, 2004, and Amended Certificate of Designation of Series A Junior Participating Preferred Stock dated April 24, 2009, which is incorporated herein by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 filed with the SEC on April 24, 2009 (SEC File No. 000-22239), as amended by the Fourth Certificate of Amendment of the Fifth Amended and Restated Certificate of Incorporation of Autobytel effective as of July 11, 2012, which is incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K filed with the SEC on July 12, 2012 (SEC File No. 001-34761), and as amended by Fifth Certificate of Amendment to Fifth Amended and Restated Certificate of Incorporation of Autobytel Inc. dated July 3, 2013, which is incorporated by reference to Exhibit 3.3 of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 filed with the SEC on August 1, 2013 (SEC File No. 001-34761)
   
3.2*
Fourth Amended and Restated Bylaws of Autobytel dated October 30, 2014
   
4.1
Form of Common Stock Certificate of Autobytel, which is incorporated herein by reference to Exhibit 4.1 of the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 filed with the SEC on November 14, 2001 (SEC File No. 000-22239)
   
4.2
Tax Benefit Preservation Plan dated as of May 26, 2010, between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, together with the following exhibits thereto: Exhibit A – Form of Right Certificate; and Exhibit B – Summary of Rights to Purchase Shares of Preferred Stock of Autobytel Inc., which is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on June 2, 2010 (SEC File No. 000-22239)
   
4.3
 
Certificate of Adjustment Under Section 11(m) of the Tax Benefit Preservation Plan dated July 12, 2012, which is incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 filed with the SEC on November 8, 2012 (SEC File No. 001-34761)

4.4
Amendment No. 1 to Tax Benefit Preservation Plan dated as of April 14, 2014 between Autobytel Inc. and Computershare Trust Company, N.A., as rights agent, which is incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 16, 2014 (SEC File No. 001-34761)
   
31.1*
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer
   
31.2*
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer
   
32.1*
Section 1350 Certification by Principal Executive Officer and Principal Financial Officer
   
101.INS††
XBRL Instance Document
   
101.SCH††
XBRL Taxonomy Extension Schema Document
   
101.CAL††
XBRL Taxonomy Calculation Linkbase Document
   
101.DEF††
XBRL Taxonomy Extension Definition Document
   
101.LAB††
XBRL Taxonomy Label Linkbase Document
   
101.PRE††
XBRL Taxonomy Presentation Linkbase Document
 
*
Filed or furnished herewith.
Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K.  Autobytel will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that Autobytel may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
††
Furnished with this report.  In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
ex3-2.htm
Exhibit 3.2
 

 

 

 

 

 

 

 
FOURTH AMENDED AND RESTATED BYLAWS
 
of
 
Autobytel Inc.
 
(a Delaware corporation)
 


 
 

 

TABLE OF CONTENTS
 
 
ARTICLE I OFFICES
 1
 
Section 1.01.  REGISTERED OFFICE 
 1
 
Section 1.02.  PRINCIPAL OFFICE
1
 
Section 1.03.  OTHER OFFICES
1
 
 
ARTICLE II  MEETINGS OF STOCKHOLDERS
 1
 
Section 2.01.  ANNUAL MEETINGS
 1
 
Section 2.02.  SPECIAL MEETINGS
 1
 
Section 2.03.  PLACE OF MEETINGS
1
 
Section 2.04.  NOTICE OF MEETINGS
 2
 
Section 2.05.  QUORUM
 2
 
Section 2.06.  VOTING
2
 
Section 2.07.  LIST OF STOCKHOLDERS
 3
 
Section 2.08.  INSPECTOR OF ELECTION
 4
 
Section 2.09.  STOCKHOLDER ACTION WITHOUT MEETINGS
 4
 
Section 2.10.  ADVANCE NOTICE PROVISION FOR NOMINATION OF DIRECTORS
 4
 
Section 2.11.  ADVANCE NOTICE PROVISION FOR PROPOSING BUSINESS AT A STOCKHOLDERS’ MEETING
 6
 
Section 2.12.  ORGANIZATION
 8
 
 
ARTICLE III  BOARD OF DIRECTORS
 8
 
Section 3.01.  GENERAL POWERS
 8
 
Section 3.02.  NUMBER
 8
 
Section 3.03.  ELECTION OF DIRECTORS
 8
 
Section 3.04.  RESIGNATIONS
8
 
Section 3.05.  VACANCIES
 9
 
Section 3.06.  PLACE OF MEETING; TELEPHONE CONFERENCE MEETING
 9
 
Section 3.07.  FIRST MEETING
 9
 
Section 3.08.  REGULAR MEETINGS
 9
 
Section 3.09.  SPECIAL MEETINGS
 9
 
Section 3.10.  QUORUM AND ACTION
 10
 
Section 3.11.  ACTION BY CONSENT
 10
 
Section 3.12.  COMPENSATION
 10
 
Section 3.13.  COMMITTEES
 11
 
Section 3.14.  MEETINGS AND ACTIONS OF COMMITTEES
 11
 
Section 3.15.  CHAIRMAN OF THE BOARD
 11
 
 
ARTICLE IV  OFFICERS
 
Section 4.01.  OFFICERS
 11
 
Section 4.02.  ELECTION
 11

 
 
 

 

 
Section 4.03.  SUBORDINATE OFFICERS
 12
 
Section 4.04.  REMOVAL AND RESIGNATION
 12
 
Section 4.05.  VACANCIES
 12
 
Section 4.06.  CHIEF EXECUTIVE OFFICER
 12
 
Section 4.07.  PRESIDENT
 12
 
Section 4.08.  CHIEF OPERATING OFFICER
 12
 
Section 4.09.  CHIEF FINANCIAL OFFICER
 13
 
Section 4.10.  VICE PRESIDENT
 13
 
Section 4.11.  SECRETARY
 13
 
Section 4.12.  ASSISTANT SECRETARY
 13
 
 
ARTICLE V  CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC
 14
 
Section 5.01.  EXECUTION OF CONTRACTS
 14
 
Section 5.02.  CHECKS, DRAFTS, ETC
 14
 
Section 5.03.  DEPOSIT
 14
 
Section 5.04.  GENERAL AND SPECIAL BANK ACCOUNTS
 14
 
 
ARTICLE VI  SHARES AND THEIR TRANSFER
 14
 
Section 6.01.  CERTIFICATES FOR STOCK
 14
 
Section 6.02.  TRANSFER OF STOCK
 15
 
Section 6.03.  REGULATIONS
15
 
Section 6.04.  LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES
 15
 
Section 6.05.  RECORD DATE
 16
 
Section 6.06.  REPRESENTATION OF SHARES OF OTHER CORPORATIONS
16
 
Section 6.07.  SPECIAL DESIGNATION ON CERTIFICATES
17
 
 
ARTICLE VII  INDEMNIFICATION
 17
 
Section 7.01.  ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION
17
 
Section 7.02.  ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
18
 
Section 7.03.  DETERMINATION OF RIGHT OF INDEMNIFICATION
18
 
Section 7.04.  INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY
18
 
Section 7.05.  ADVANCE OF EXPENSES
 18
 
Section 7.06.  OTHER RIGHTS AND REMEDIES
 18
 
Section 7.07.  INSURANCE
18
 
Section 7.08.  CONSTITUENT CORPORATIONS
 19
 
Section 7.09.  EMPLOYEE BENEFIT PLANS
 19
 
Section 7.10.  TERM
 19
 
Section 7.11.  SEVERABILITY
 19
 
Section 7.12.  AMENDMENTS
 19

 
 
 

 
 
 
ARTICLE VIII  RECORDS AND REPORTS
 19
 
Section 8.01.  MAINTENANCE OF RECORDS
 19
 
Section 8.02.  INSPECTION BY DIRECTORS
 19
 
 
ARTICLE IX  MISCELLANEOUS
 20
 
Section 9.01.  SEAL
 20
 
Section 9.02.  WAIVER OF NOTICES
 20
 
Section 9.03.  LOANS AND GUARANTIES
20
 
Section 9.04.  GENDER
 20
 
Section 9.05.  AMENDMENTS
 20
 
 
ARTICLE X  FORUM FOR ADJUDICATION OF DISPUTES
  20
 
Section 10.01 FORUM
 20
 
Section 10.02 PERSONAL JURISDICTION
 21
 
Section 10.03 ENFORCEABILITY
21
 
 
CERTIFICATE OF SECRETARY
22

 
 
 

 

FOURTH AMENDED AND RESTATED BYLAWS
 
of
 
Autobytel Inc.
 
(a Delaware corporation)
 
ARTICLE I
 
OFFICES
 
Section 1.01                      REGISTERED OFFICE.  The registered office of Autobytel Inc. (hereinafter called the “Corporation”) shall be at such place in the State of Delaware as shall be designated by the Board of Directors (hereinafter called the “Board”).
 
Section 1.02                      PRINCIPAL OFFICE.  The principal office for the transaction of the business of the Corporation shall be at such location, within or without the State of Delaware, as shall be designated by the Board.
 
Section 1.03                      OTHER OFFICES.  The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or as the business of the Corporation may require.
 
ARTICLE II
 
MEETINGS OF STOCKHOLDERS
 
Section 2.01                      ANNUAL MEETINGS.  Annual meetings of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings shall be held each year at such time, date and place, if any, as the Board shall determine by resolution.  In the absence of such designation, the annual meeting of stockholders shall be held at 3:00 p.m., on the third Thursday in June at the principal office of the Corporation.  However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day.
 
Section 2.02                      SPECIAL MEETINGS.  Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Board, or by a committee of the Board which has been duly designated by the Board and whose powers and authority, as provided in a resolution of the Board or in these Bylaws, include the power to call such meetings, or by the Chairman of the Board, or by the President, but such special meetings may not be called by any other person or persons; provided, however, that if and to the extent that any special meeting of stockholders may be called by any other person or persons specified in any provision of the Corporation’s certificate of incorporation (“Certificate of Incorporation”) or any amendment thereto or any certificate filed under Section 151(g) of the General Corporation Law of the State of Delaware (or its successor statute as in effect from time to time hereafter) (“General Corporation Law of Delaware”), then such special meeting may also be called by, or at the direction of, the person or persons, in the manner, at the time and for the purposes so specified.
 
Section 2.03                      PLACE OF MEETINGS.  All meetings of the stockholders shall be held at such places, if any, within or without the State of Delaware, as designated by the Board and specified in the respective notices or waivers of notice thereof.  In the absence of any such designation, stockholders’ meetings shall be held at the principal executive office of the Corporation.
 
 
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Section 2.04                      NOTICE OF MEETINGS.  Except as otherwise required by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting.  Notice may be given (i) by delivering a typewritten or printed notice thereof to such stockholder personally, (ii) by depositing such notice in the United States mail or nationally recognized overnight courier, in a postage prepaid envelope, directed to such stockholder at such stockholder’s address furnished by such stockholder to the Secretary of the Corporation for such purpose or, if such stockholder shall not have furnished to the Secretary such stockholder’s address for such purpose, then at such stockholder’s address as it appears on the records of the Corporation, or (iii) subject to the prior consent of the stockholder to whom the notice is to be given, by email or other form of electronic transmission as permitted by Section 232 of the General Corporation Law of Delaware.  Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required.  Every notice of a meeting of the stockholders shall state the place, if any, date and hour of the meeting, the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting), the means of remote communication, if any, by which stockholders may be deemed present and, in the case of a special meeting, the purpose or purposes for which the meeting is called (no business other than that specified in the notice of special meeting may be transacted).  The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the Board intends to present for election.
 
An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the Secretary, Assistant Secretary or any transfer agent of the Corporation giving the notice, shall, in the absence of fraud, be prima facie evidence of the giving of such notice.
 
Section 2.05                      QUORUM.  Except as otherwise provided by statute or by the certificate of incorporation, the holders of record of a majority in voting power of the shares of stock of the Corporation issued and outstanding and entitled to be voted, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders of the Corporation or any adjournment thereof.  The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.  In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting power of the shares of stock present in person or by proxy and entitled to vote thereat, or any officer entitled to preside at or to act as secretary of such meeting, may adjourn such meeting from time to time.  Notice need not be given of any such adjourned meeting if the time and place, if any, thereof and the means of remote communications, if any, by which stockholders and proxy holders may be deemed present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken.  At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called.  If the adjournment is for more than thirty (30) days, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.  If after the adjournment a new record date for stockholders entitled to vote is fixed for the adjourned meeting, the Board shall fix a new record date for notice of such adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of record entitled to vote at such adjourned meeting as of the record date for notice of such adjourned meeting.
 
Section 2.06                      VOTING.
 
At each meeting of the stockholders, each stockholder shall be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation which has voting rights on the matter in question and which shall have been held by such stockholder and registered in such stockholder’s name on the books of the Corporation on the record date for the determination of stockholders entitled to vote at such meeting.
 
 
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Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes.  Notwithstanding the foregoing, persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock.  Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation the pledgor shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or the pledgee’s proxy, may represent such stock and vote thereon.  Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship respecting the same shares, shall be voted in accordance with the provisions of the General Corporation Law of Delaware.
 
Any such voting rights may be exercised by the stockholder entitled thereto in person or by such stockholder’s proxy appointed in accordance with the General Corporation Law of Delaware; provided, however, that no proxy shall be voted or acted upon after three (3) years from its date unless said proxy shall provide for a longer period.  A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the Corporation a revocation of the proxy or a new proxy bearing a later date.  At any meeting of the stockholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws, the rules or regulations of any stock exchange applicable to the Corporation, applicable law or pursuant to any regulation applicable to the Corporation or its securities, shall be decided by the vote of a majority in voting power of the shares present in person or by proxy and entitled to vote thereat and thereon.  The vote at any meeting of the stockholders on any question need not be by ballot, unless so directed by the chairman of the meeting.  On a vote by ballot, each ballot shall be signed by the stockholder voting, or by such stockholder’s proxy if there be such proxy, and it shall state the number of shares voted.  The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware.
 
Section 2.07                      LIST OF STOCKHOLDERS.  The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (provided, however, if the record date for determining the stockholders entitled to vote is less than ten (10) days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date), arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.  Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of meeting or (ii) during ordinary business hours at the principal place of business of the Corporation.  The list of stockholders must also be open to examination at the meeting as required by applicable law.  If the meeting is to be held at a place, then a list of stockholders entitled to vote at the meeting shall be produced and kept at the time and place of the meeting during the whole time thereof and may be examined by any stockholder who is present.  If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting.  Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the list of stockholders required by this Section 2.07 or to vote in person or by proxy at any meeting of stockholders.
 
 
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Section 2.08                      INSPECTOR OF ELECTION.  The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof.  The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act.  In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting.  Each inspector, before entering upon the discharge of such inspector’s duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of the inspector’s ability.  The inspector or inspectors so appointed or designated sh