10-Q
 
 

  
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, 2018
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
 
 AutoWeb, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-0711569
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]  No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  [  ]
Accelerated filer  [X]
Non-accelerated filer  [  ]
Smaller reporting company  [X] 
 
Emerging growth company [  ]
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]  No [X]
 
As of November 5, 2018, there were 12,948,950 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.
 
 
 

 
 
 
 
 
 
INDEX
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
2
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
16
 
 
 
 
 
23
 
 
 
 
 
23
 
 
 
 
 
 
 
 
 
 
 
 
25
 
 
 
 
 
27
 
 
 
 
 
 
28
 
 
 
 
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
AUTOWEB, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(Amounts in thousands, except share and per-share data)
 
 
 
September 30,
2018
 
 
December 31,
2017
 
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $15,824 
 $24,993 
Short-term investment
  257 
  254 
Accounts receivable, net of allowances for bad debts and customer credits of $615 and $892 at September 30, 2018 and December 31, 2017, respectively
  25,267 
  25,911 
Prepaid expenses and other current assets
  1,268 
  1,805 
Total current assets
  42,616 
  52,963 
Property and equipment, net
  3,614 
  4,311 
Investments
   
  100 
Intangible assets, net
  13,487 
  29,113 
Goodwill
   
  5,133 
Long-term deferred tax asset
   
  692 
Other assets
  853 
  601 
Total assets
 $60,570 
 $92,913 
 
Liabilities and Stockholders’ Equity
    
    
Current liabilities:
    
    
Accounts payable
 $10,386 
 $7,083 
Accrued employee-related benefits
  2,921 
  2,411 
Other accrued expenses and other current liabilities
  7,983 
  7,252 
Current convertible note payable
  1,000 
   
Total current liabilities
  22,290 
  16,746 
Convertible note payable
   
  1,000 
Borrowings under revolving credit facility
   
  8,000 
Total liabilities
  22,290 
  25,746 
Commitments and contingencies (Note 11)
    
    
Stockholders’ equity:
    
    
Preferred stock, $0.001 par value, 11,445,187 shares authorized
  
  
Series A Preferred stock, none issued and outstanding
   
   
Common stock, $0.001 par value; 55,000,000 shares authorized, and 12,948,950 and 13,059,341 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
  13 
  13 
Additional paid-in capital
  360,698 
  356,054 
Accumulated deficit
  (322,431)
  (288,900)
Total stockholders’ equity
  38,280 
  67,167 
Total liabilities and stockholders’ equity
 $60,570 
 $92,913 
 
 
See accompanying notes to unaudited consolidated condensed financial statements.
 
 
 
 
AUTOWEB, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands, except per-share data)
 
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $24,986 
 $27,711 
 $71,277 
 $83,149 
Advertising
  6,606 
  8,946 
  21,643 
  24,914 
Other revenues
  103 
  215 
  416 
  741 
Total revenues
  31,695 
  36,872 
  93,336 
  108,804 
Cost of revenues
  26,278 
  25,786 
  74,702 
  74,171 
Cost of revenues – impairment
  9,014 
   
  9,014 
   
Gross (loss) profit
  (3,597)
  11,086 
  9,620 
  34,633 
Operating expenses:
    
    
    
    
Sales and marketing
  3,333 
  3,692 
  10,096 
  10,684 
Technology support
  4,303 
  3,141 
  10,653 
  9,582 
General and administrative
  3,639 
  2,818 
  11,980 
  9,040 
Depreciation and amortization
  1,172 
  1,192 
  3,495 
  3,623 
Goodwill impairment
   
   
  5,133 
  
Long-lived asset impairment
  1,968 
   
  1,968 
   
Total operating expenses
  14,415 
  10,843 
  43,325 
  32,929 
 
    
    
    
    
Operating (loss) income
  (18,012)
  243 
  (33,705)
  1,704 
Interest and other income (expense), net
  (24)
  (93)
  178 
  (289)
(Loss) Income before income tax provision
  (18,036)
  150 
  (33,527)
  1,415 
Income tax provision
   
  81 
  4 
  539 
Net (loss) income and comprehensive (loss) income
 $(18,036)
 $69 
 $(33,531)
 $876 
 
    
    
    
    
Basic (loss) earnings per common share
 $(1.41)
 $0.01 
 $(2.64)
 $0.08 
 
    
    
    
    
Diluted (loss) earnings per common share
 $(1.41)
 $0.01 
 $(2.64)
 $0.07 
 
 
 See accompanying notes to unaudited consolidated condensed financial statements.
 
 
 
 

AUTOWEB, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
Cash flows from operating activities:
 
 
 
 
 
 
Net (loss) income and comprehensive (loss) income
 $(33,531)
 $876 
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
    
    
Depreciation and amortization
  6,534 
  5,499 
Goodwill impairment
  5,133 
   
Intangible asset impairment
  9,014 
   
Provision for bad debts
  216 
  294 
Provision for customer credits
  177 
  29 
Share-based compensation
  4,365 
  2,918 
Gain on investment 
  (25)
   
Loss on disposal of assets
   
  7 
Long-lived asset impairment
  1,968 
   
Change in deferred tax asset
  692 
  119 
Changes in assets and liabilities:
    
    
Accounts receivable
  251 
  5,808 
Prepaid expenses and other current assets
  532 
  (392)
Other assets
  (615)
  132 
Accounts payable
  3,303 
  290 
Accrued expenses and other current liabilities
  1,243 
  (3,112)
Net cash (used in) provided by operating activities
  (743)
  12,468 
Cash flows from investing activities:
    
    
Purchases of property and equipment
  (828)
  (1618)
Purchase of intangible asset 
  
 (600)
Proceeds from sale of investment
  125 
   
Net cash used in investing activities
  (703)
  (2,218)
Cash flows from financing activities:
    
    
Payments on term loan borrowings
   
  (3,938)
Payment on revolving credit facility
  (8,000)
   
Repurchase of common stock
   
  (1,196)
Proceeds from issuance of common stock
  200 
   
Proceeds from exercise of stock options
  77 
  1,068 
Net cash used in financing activities
  (7,723)
  (4,066)
Net (decrease) increase in cash and cash equivalents
  (9,169)
  6,184 
Cash and cash equivalents, beginning of period
  24,993 
  38,512 
Cash and cash equivalents, end of period
 $15,824 
 $44,696 
 
    
    
Supplemental disclosure of cash flow information:
    
    
Cash paid for income taxes
 $ 
 $445 
Cash paid for interest
 $103 
 $648 
 
 
See accompanying notes to unaudited consolidated condensed financial statements.
 
 
  
 
 
 
AUTOWEB, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
1. Organization and Operations
 
AutoWeb, Inc. (“AutoWeb” or “Company”) is a digital marketing company for the automotive industry that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers by utilizing the Company’s digital sales enhancing products and services.
 
The Company’s consumer-facing automotive websites (“Company Websites”) provide consumers with information and tools to aid them with their automotive purchase decisions and gives in-market consumers the ability to connect with Dealers regarding purchasing or leasing vehicles. These consumers are connected to Dealers via the Company’s various programs for online lead referrals (“Leads”). The AutoWeb® “click traffic” consumer referral product engages with car buyers from AutoWeb’s network of automotive websites and uses the Company’s proprietary technology to present them with highly relevant offers based on their make and model of interest and their geographic location. The Company then directs these in-market consumers to key areas of a Dealer’s or Manufacturer’s website to maximize conversion for sales or other products or services. 
 
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 AUTO.
 
On October 9, 2017, the Company changed its name from Autobytel Inc. to AutoWeb, Inc., assuming the name of AutoWeb, Inc., which was the name of the company that the Company acquired in October 2015. In connection with this name change, the Company changed its stock ticker symbol from “ABTL” to “AUTO” on The NASDAQ Capital Market.
 
2. Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”).  AutoWeb has made its disclosures in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included.  Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation. The unaudited consolidated condensed statements of operations and comprehensive income (loss) and cash flows for the periods ended September 30, 2018 and 2017 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The Company had no items of comprehensive income or loss for any of the periods presented. The unaudited consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2017 Form 10-K.  
 
3.  Recent Accounting Pronouncements
 
Issued but not yet adopted by the Company
 
The Company considers the applicability and impact of all Accounting Standards Updates (ASU”) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated result of operations, financial position and cash flows.
 
Accounting Standards Codification 220 “Comprehensive Income.” In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”) and will improve the usefulness of information reported to financial statement users. The ASU will take effect for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company believes this ASU will not have a material effect on the consolidated financial statements and related disclosures.
 
Accounting Standards Codification 842 “Leases.”  In February 2016, the FASB issued ASU No. 2016-02 (Topic 842), “Leases.” Topic 842 provides guidance on accounting for leases which requires lessees to recognize most leases on their balance sheets for the rights and obligations created by those leases. The guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases that will be effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt the requirements of the new standard effective January 1, 2019 and elect certain available transitional practical expedients.
 
In July 2018, the FASB issued updated guidance which allows an additional transition method to adopt the new leases standard at the adoption date, as compared to the beginning of the earliest period presented and recognize a cumulative-effect adjustment to the beginning balance of retained earnings in the period of adoption. The Company expects to elect this transition method at the adoption date of January 1, 2019. The Company continues to analyze its lease portfolio to determine the impact that the new standard will have on its consolidated financial statements. Further, the Company is in the process of reviewing and updating our business processes, as necessary, to assist in our ongoing lease data collection and analysis. Additionally, the Company is updating its accounting policies and internal controls that would be impacted by the new guidance, to ensure readiness for adoption in the first quarter of 2019.
 
 
 
 
SEC Release No. 33-10532, Disclosure Update and Simplification. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company will adopt the requirements of the new standard for the interim reporting of the first quarter of 2019.
 
Recently adopted by the Company
 
 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.  The new standard sets forth a single comprehensive model for recognizing and reporting revenue and requires the use of a five-step methodology to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU No. 2014-09 requires enhanced disclosure regarding revenue recognition. On January 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method, which had no material impact on operations, and required no cumulative adjustment to be made to beginning retained earnings on January 1, 2018. Therefore, results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted. See Note 4 for further discussion.
 
Accounting Standards Codification 805 “Business Combinations.”  In January 2017, ASU No. 2017-01, “Clarifying the Definition of a Business” was issued.  ASU No. 2017-01 provides a more robust framework to use in determining when a set of assets and activities is a business.  The Company adopted ASU No. 2017-01 on January 1, 2018, and it did not have a material effect on the consolidated financial statements.  
 
Accounting Standards Codification 718 “Compensation – Stock Compensation.”  In May 2017, ASU No. 2017-09, “Scope of Modification Accounting” was issued.  The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should apply ASU No. 2017-09 on a prospective basis for an award modified on or after the adoption date for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Additionally, in June 2018, FASB issued ASU No. 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” The update largely aligns the accounting for share-based payment awards issued to employees and nonemployees, particularly with regards to the measurement date and the impact of performance conditions. Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing). The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The Company adopted ASU No. 2017-09 and ASU No. 2018-07 in the current year and, therefore, results for reporting periods beginning after January 1, 2018 are presented under ASU No. 2017-09 and ASU No. 2018-07, while prior period amounts have not been adjusted. See Note 6 for further discussion.
 
4.  Revenue Recognition
 
Revenue is recognized when the Company transfers control of promised goods or services to the Company’s customers, or when the Company satisfies any performance obligations under contract. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for respective goods or services provided. Further, under ASC 606, contract assets or contract liabilities that arise from past performance but require further performance before obligation can be fully satisfied must be identified and recorded on the balance sheet until respective settlements have been met.
 
The Company performs the following steps in order to properly determine revenue recognition and identify relevant contract assets and contract liabilities:
 
identify the contract with a customer;
 
identify the performance obligations in the contract;
 
determine the transaction price;
 
allocate the transaction price to the performance obligations in the contract; and
 
recognize revenue when, or as, the Company satisfies a performance obligation.
 
 
 
 
 
The Company earns revenue by providing leads, advertising, and mobile products and services used by Dealers and Manufacturers in their efforts to market and sell new and used vehicles to consumers. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The Company records revenue on distinct performance obligations at a single point in time, when control is transferred to the customer.
 
The Company has three main revenue sources – Lead fees, advertising, and other revenue. Accordingly, the Company recognizes revenue for each source as described below:
 
Lead fees - paid by Dealers and Manufacturers participating in the Company’s Lead programs and are comprised of Lead transaction and/or monthly subscription fees. Lead fees are recognized in the period when service is provided.
 
Advertising - fees paid by Dealers and Manufacturers for (i) display advertising on the Company’s websites and (ii) fees from the Company’s click traffic program. Revenue is recognized in the period advertisements are displayed on the Company’s websites or the period in which clicks have been delivered, as applicable. The Company recognizes gross revenue from the delivery of action-based advertisements in the period in which a user takes the action for which the marketer contracted for with the Company. For advertising revenue arrangements where the Company is not the principal, the Company recognizes revenue on a net basis.
 
Other revenues - consists primarily of revenues from the Company’s mobile products and revenues from the Company’s Reseller Agreement with SaleMove, Inc.  Revenue is recognized in the period in which products or services are sold.
 
Variable Consideration
 
The Company’s products, namely Leads, are generally sold with a right-of-return for services that do not meet customer requirements as specified by the relevant contract. Rights-of-return are estimable, and provisions for estimated returns are recorded as a reduction in revenue by the Company in the period revenue is recognized, and thereby accounted for as variable consideration. The Company includes the allowance for customer credits in its net accounts receivable balances on the Company’s balance sheet at period end. Allowance for customer credits totaled $133,000 and $213,000 as of September 30, 2018 and December 31, 2017, respectively.
 
See further discussion below on significant judgments exercised by the Company in regards to variable consideration.
 
Contract Assets and Contract Liabilities Unbilled Revenue
 
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing. From time-to-time, the Company may have balances on its balance sheet representing revenue that has been recognized by the Company upon satisfaction of performance obligations and earning a right to receive payment. These not-yet invoiced receivable balances are driven by the timing of administrative transaction processing, and are not indicative of partially complete performance obligations, or unbilled revenue. Unbilled revenue represents revenue that is partially earned, whereby control of promised services has not yet transferred to the customer, and for which the Company has not earned the complete right to payment. The Company had zero unbilled revenue included in its consolidated balance sheets as of September 30, 2018 and December 31, 2017.
 
 
 
 
Deferred Revenue
 
The Company defers the recognition of revenue when cash payments are received or due in advance of satisfying its performance obligations, including amounts which are refundable. Such activity is not a common practice of operation for the Company.  The Company had zero deferred revenue included in its consolidated balance sheets as of September 30, 2018 and December 31, 2017.
 
Payment terms and conditions can vary by contract type. Generally, payment terms within the Company’s customer contracts include a requirement of payment within 30 to 60 days from date of invoice. Typically, customers make payments after receipt of invoice for billed services, and less typically, in advance of rendered services.
 
Practical Expedients and Exemptions
 
The Company excludes from the transaction price all sales taxes related to revenue producing transactions collected from the customer for a governmental authority.
 
The Company applies the new revenue standard requirements to a portfolio of contracts (or performance obligations) with similar characteristics for transactions where it is expected that the effects of applying the revenue recognition guidance to the portfolio would not differ materially on the financial statements from that of applying the same guidance to the individual contracts (or performance obligations) within that portfolio.
 
The Company generally expenses incremental costs of obtaining a contract when incurred because the amortization period would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, marketing, and distribution expense.
 
Significant Judgments
 
The Company provides Dealers and Manufacturers with various opportunities to market their vehicles to potential vehicle buyers, namely via consumer lead and click traffic referrals and online advertising products and services. Proper revenue recognition of digital marketing activities, as well as proper recognition of assets and liabilities related to these activities, requires management to exercise significant judgment with the following items:
 
Arrangements with Multiple Performance Obligations -
 
The Company enters into contracts with customers that often include multiple products and services to a customer. Determining whether products and/or services are distinct performance obligations that should be accounted for singularly or separately may require significant judgment.
 
Variable Consideration and Customer Credits -
 
The Company’s products are generally sold with a right-of-return. Additionally, the Company will sometimes provide customer credits or sales incentives. These items are accounted for as variable consideration when determining the allocation of the transaction price to performance obligations under a contract. The allowance for customer credits is an estimate of adjustments for services that do not meet customer requirements. Additions to the estimated allowance for customer credits are recorded as a reduction of revenues and are based on the Company’s historical experience of: (i) the amount of credits issued; (ii) the length of time after services are rendered that the credits are issued; (iii) other factors known at the time; and (iv) future expectations. Reductions in the estimated allowance for customer credits are recorded as an increase in revenues.
 
As specific customer credits are identified, they are charged against this allowance with no impact on revenues. Returns and credits are measured at contract inception, with respective obligations reviewed each reporting period or as further information becomes available, whichever is earlier, and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur. The allowance for customer credits is included in the net accounts receivable balances of the Company’s balance sheets as of September 30, 2018 and December 31, 2017.
 
The Company has not made any significant changes to judgments in applying ASC 606 during the nine months ended September 30, 2018.
 
Disaggregation of Revenue
 
The Company disaggregates revenue from contracts with customers by revenue source and has determined that disaggregating revenue into these categories sufficiently depicts the differences in the nature, amount, timing, and uncertainty of its revenue streams. The Company has three main sources of revenue: lead fees, advertising, and other revenues.
 
 
 
 
The following table summarizes revenue from contracts with customers, disaggregated by revenue source, for the three and nine months ended September 30, 2018 and 2017. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
(in thousands)
 
Lead fees
 $24,986 
 $27,711 
 $71,277 
 $83,149 
Advertising
    
    
    
    
Clicks
  5,559 
  7,436 
  18,020 
  20,403 
Display and other advertising
  1,047 
  1,510 
  3,623 
  4,511 
Other revenues
  103 
  215 
  416 
  741 
   Total revenue
 $31,695 
 $36,872 
 $93,336 
 $108,804 
 
 5.   Net Earnings (Loss) Per Share and Stockholders’ Equity
 
Basic net earnings (loss) per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net earnings (loss) per share is computed using the weighted average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock and if-converted methods, during the period. Potential common shares consist of unvested restricted stock and common shares issuable upon the exercise of stock options, the exercise of warrants, and conversion of convertible notes.  
 
The Company used the following share amounts to compute the basic and diluted net (loss) earnings per share for the three and nine months ended September 30, 2018 and 2017:
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
 September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Basic Shares:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
  12,948,150 
  12,881,812 
  12,959,666 
  11,729,181 
Weighted average unvested restricted stock
  (161,413)
  (119,584)
  (249,084)
  (115,574)
Weighted average common shares repurchased
   
  (60,230)
   
  (20,297)
Basic Shares
  12,786,737 
  12,701,998 
  12,710,582 
  11,593,310 
 
    
    
    
    
Diluted Shares:
    
    
    
    
Basic shares
  12,786,737 
  12,701,998 
  12,710,582 
  11,593,310 
Weighted average dilutive securities
   
  498,587 
   
  621,449 
Incremental shares from convertible preferred stock
   
   
   
  1,064,660 
Diluted Shares
  12,786,737 
  13,200,585 
  12,710,582 
  13,279,419 
 
For the three and nine months ended September 30, 2018, the Company’s basic and diluted net loss per share are the same since the Company generated a net loss for the period and potentially dilutive securities are excluded from diluted net loss per share because they have an anti-dilutive impact. For the three and nine months ended September 30, 2017, weighted average dilutive securities included dilutive options, restricted stock awards, and shares of common stock issued in June 2017 upon conversion of the Series B Junior Participating Convertible Preferred Stock, $0.001 par value per share, (“Series B Preferred Stock”) that was issued in connection with the acquisition of Autobytel, Inc. (formerly AutoWeb, Inc.) (“AWI”).
 
For the three and nine months ended September 30, 2018, 4.0 and 4.3 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share, respectively. For the three and nine months ended September 30, 2017, 3.9 and 3.1 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share.
 
 
 
 
On September 6, 2017, the Company announced that its board of directors authorized the Company to repurchase up to $3.0 million of the Company’s common stock. Under the repurchase program, 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 program at any time. The Company anticipates that it would fund future repurchases, if any, through the use of available cash.  No shares were repurchased during the three and nine months ended September 30, 2018. As of September 30, 2018, $2.3 million remains available for the Company to repurchase common stock.
 
On June 22, 2017, the Company obtained stockholder approval for the issuance of shares of the Company’s common stock upon (i) the conversion of the Company’s then outstanding Series B Preferred Stock; and (ii) the conversion of shares of Series B Preferred Stock that would be issued upon exercise of the warrant to purchase up to 148,240 shares of Series B Preferred Stock issued in connection with the acquisition of AWI (“AWI Warrant”). Upon obtaining stockholder approval for the conversion, each outstanding share of Series B Preferred Stock was automatically converted into 10 shares of the Company’s common stock, which resulted in the outstanding shares of Series B Preferred Stock being converted into 1,680,070 shares of the Company’s common stock, and the AWI Warrant converted into warrants to acquire up to 1,482,400 shares of the Company’s common stock.
 
Warrants.  The warrant to purchase 69,930 shares of the Company’s common stock issued in connection with the acquisition of AutoUSA was valued at $7.35 per share for a total value of $0.5 million (“AutoUSA Warrant”).  The Company used an option pricing model to determine the value of the AutoUSA Warrant.  Key assumptions used in valuing the AutoUSA Warrant are as follows: risk-free interest rate of 1.6%, stock price volatility of 65.0% and a term of 5.0 years.  The AutoUSA Warrant was valued based on long-term stock price volatilities of the Company.  The exercise price of the AutoUSA Warrant is $14.30 per share (as may be adjusted for stock splits, stock dividends, combinations, and other similar events).  The AutoUSA Warrant became exercisable on January 13, 2017 and expires on January 13, 2019.  
 
The AWI Warrant was valued at $1.72 per share for a total value of $2.5 million.  The Company used an option pricing model to determine the value of the AWI Warrant.  Key assumptions used in valuing the AWI Warrant were as follows: risk-free interest rate of 1.9%, stock price volatility of 74.0% and a term of 7.0 years.  The AWI Warrant was valued based on long-term stock price volatilities of the Company’s common stock.  On June 22, 2017, the Company received stockholder approval which resulted in the automatic conversion of the AWI Warrant into warrants to acquire up to 1,482,400 shares of the Company’s common stock at an exercise price of $18.45 per share of common stock. The AWI Warrant became exercisable on October 1, 2018, subject to the following vesting conditions: (i) with respect to the first one-third (1/3) of the warrant shares, if at any time after the issuance date of the AWI Warrant and prior to the expiration date of the AWI Warrant the weighted average closing price of the Company’s common stock for the preceding 30 trading days (adjusted for any stock splits, stock dividends, reverse stock splits or combinations of the Company’s common stock occurring after the issuance date) (“Weighted Average Closing Price”) is at or above $30.00; (ii) with respect to the second one-third (1/3) of the warrant shares, if at any time after the issuance date of the AWI Warrant and prior to the expiration date the Weighted Average Closing Price is at or above $37.50; and (iii) with respect to the last one-third (1/3) of the warrant shares, if at any time after the issuance date of the AWI Warrant and prior to the expiration date the Weighted Average Closing Price is at or above $45.00.  The AWI Warrant expires on October 1, 2022
 
 6. Share-Based Compensation
 
Share-based compensation expense is included in costs and expenses in the accompanying Unaudited Consolidated Condensed Statements of Operations and Comprehensive Income (Loss) as follows:
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
 September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
(in thousands)
 
Share-based compensation expense:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
 $2 
 $20 
 $21 
 $59 
Sales and marketing
  520 
  409 
  904 
  1,222 
Technology support
  886 
  138 
  1,213 
  401 
General and administrative
  388 
  397 
  2,228 
  1,238 
Share-based compensation costs
  1,796 
  964 
  4,366 
  2,920 
 
    
    
    
    
Less amount capitalized to internal use software:
   
  1 
  1 
  2 
Total share-based compensation costs
 $1,796 
 $963 
 $4,365 
 $2,918 
 
 
 
 
During the nine months ended September 30, 2018, certain awards were modified or accelerated in connection with the termination of employment of certain former officers of the Company. In accordance with guidance provided under ASC 718 and related ASU No. 2017-09 and ASU No. 2018-07, the Company recognized award modification and acceleration expenses related to these events in the period incurred. Modification expense was determined by using the Black-Scholes option pricing model to estimate the fair value of the modified awards as of the new measurement date and respective fair value assumptions. As reflected in the table above, the Company recognized award modification and acceleration expense of $1.2 million and $2.1 million in the three and nine months ended September 30, 2018, respectively. There were no modification or acceleration expenses recognized in 2017.
 
 Service-Based Options.  The Company granted the following service-based options for the three and nine months ended September 30, 2018 and 2017, respectively:  
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of service-based options granted
  33,000 
  83,850 
  1,749,700 
  457,100 
Weighted average grant date fair value
 $1.65 
 $3.72 
 $1.83 
 $6.29 
Weighted average exercise price
 $3.04 
 $7.23 
 $3.29 
 $12.51 
 
The Company recognizes compensation expense for stock option grants based on the fair value at the date of grant using the Black-Scholes option pricing model. The Company uses historical data, among other factors, to estimate the expected option life and has elected to estimate forfeiture rates. The risk-free rate is based on the United States Treasury Department yield curve in effect at the time of grant for the expected life of the option. The Company assumes an expected dividend yield of zero for all periods. Options 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 and vesting may be accelerated in the event of a change in control of the Company.
 
In April 2018, the Company entered into an Inducement Stock Option Award Agreement with the Company’s CEO, Jared Rowe (“Rowe Option Award Agreement). Pursuant to the Rowe Option Award Agreement, Mr. Rowe was granted stock options to purchase 1,000,000 shares of common stock (Rowe Employment Options”), which shall vest monthly in 36 monthly installments on the first day of each calendar month following the date of grant. These options have an exercise price of $3.26 per share and a term of seven years from the date of grant. Upon a change in control of the Company or in the event of a termination of Mr. Rowe’s employment by the Company without cause or by Mr. Rowe with good reason, all unvested options will vest. In the event of a termination of Mr. Rowe’s employment with the Company by reason of Mr. Rowe’s death or disability, the lesser of: (i) 1/3rd of the total number of these options and (ii) the total number of unvested options will vest upon the date of termination.
 
Market Condition Options.  On January 21, 2016, the Company granted 100,000 stock options to its former chief executive officer (“Former CEO”) with an exercise price of $17.09 and grant date fair value of $1.47 per option, using a Monte Carlo simulation model (“Former CEO Market Condition Options”).   The Former CEO Market Condition Options were previously valued at $2.94 per option but were revalued when the requisite stockholder approval for the Company’s Amended and Restated 2014 Equity Incentive Plan was obtained in June 2016. The Former CEO Market Condition Options were subject to both stock price-based and service-based vesting requirements that must be satisfied for the Former CEO Market Condition Options to vest and become exercisable. On April 12, 2018, pursuant to the stock option award agreement, vesting of the Former CEO Market Condition Options was accelerated with the termination of employment of the Former CEO, resulting in the recognition of approximately $0.8 million of non-recurring share-based compensation expense during the first quarter of 2018. The Former CEO Market Condition Options may be exercised at any time on or before April 13, 2020.
  
Stock option exercises.  The following stock options were exercised during the three and nine months ended September 30, 2018 and 2017, respectively:  
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of stock options exercised
  1,000 
  15,000 
  16,967 
  191,074 
Weighted average exercise price
 $1.75 
 $4.20 
 $4.51 
 $5.58 
 
 
 
 
-10-
 
 
The grant date fair value of stock options granted during these periods was estimated using the Black-Scholes option pricing model using the weighted average assumptions listed below:
 
 
 
Three Months Ended
September 30,
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend yield
   
   
   
   
Volatility
  66%
  63%
  68%
  62%
Risk-free interest rate
  2.9%
  1.8%
  2.6%
  1.8%
Expected life (years)
  4.5 
  4.4 
  4.5 
  4.4 
 
Restricted Stock Awards.  The Company granted an aggregate of 125,000 restricted stock awards (“RSAs”) on April 23, 2015 in connection with the promotion of one of its executive officers.  Of these 125,000 RSAs, 25,000 were service-based and 100,000 were performance-based. The forfeiture restrictions of the service-based RSAs lapse with respect to one-third of the restricted stock on each of the first, second, and third anniversaries of the date of the award.  Forfeiture restrictions lapsed on 8,333 shares and 8,333 shares of restricted stock on April 23, 2016 and April 23, 2017, respectively. During the nine months ended September 30, 2018, 8,333 of the foregoing service-based RSAs and 100,000 of the performance-based RSAs were forfeited upon the resignation of this executive officer.
 
The Company granted an aggregate of 345,000 RSAs on September 27, 2017 to senior officers of the Company. These RSAs are service- based and the forfeiture restrictions lapse with respect to one-third of the restricted stock on each of the first, second, and third anniversaries of the date of the award. During the nine months ended September 30, 2018, 80,000 shares of RSAs were forfeited upon the resignation of two executive officers, the forfeiture restrictions on 175,000 shares of RSA lapsed upon the termination of employment of the former CEO and three officers of the Company, and the forfeiture restrictions of 40,000 shares of RSAs were modified upon the entry into a consulting agreement with a former executive officer. During the three months ended September 30, 2018, the forfeiture restrictions on 90,000 shares of RSAs lapsed in connection with the termination of employment of three officers of the Company. Accordingly, the Company recognized expenses of $364,000 and $787,000 related to the acceleration of vesting and modification of RSAs in the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, 60,000 shares of RSAs remain unvested.
 
7. Investments
 
The Company’s investments at September 30, 2018 and December 31, 2017 consisted primarily of investments in SaleMove and GoMoto, Inc., a Delaware corporation (“GoMoto”).
 
In September 2013, the Company entered into a Convertible Note Purchase Agreement with SaleMove in which AutoWeb invested $150,000 in SaleMove in the form of an interest bearing, convertible promissory note. In November 2014, the Company invested an additional $400,000 in SaleMove in the form of an interest bearing, convertible promissory note. Upon closing of a preferred stock financing by SaleMove in July 2015, these two notes were converted in accordance with their terms into an aggregate of 190,997 Series A Preferred Stock, which shares were previously classified as a long-term investment on the consolidated balance sheet. The Company recorded an impairment charge of $0.6 million in SaleMove in the three months ended December 31, 2017. On June 5, 2018, the Company sold its shares of Series A Preferred stock back to SaleMove for $125,000. The gain of $125,000 is recorded in Interest and other income (expense) on the Unaudited Consolidated Condensed Statement of Operations and Comprehensive Income (Loss) for the nine months ended September 30, 2018.
 
In October 2013, the Company entered into a Reseller Agreement with SaleMove to become a reseller of SaleMove’s technology for enhancing communications with consumers. SaleMove’s technology allows Dealers and Manufacturers to enhance the online shopping experience by interacting with consumers in real-time, including live video, audio, and text-based chat or by phone. The Company and SaleMove share equally in revenues from automotive-related sales of the SaleMove products and services. In connection with this reseller arrangement, the Company advanced $1.0 million to SaleMove to fund SaleMove’s 50% share of various product development, marketing and sales costs and expenses. These previously advanced funds are repaid to the Company from SaleMove’s share of net revenues and expenses from the Reseller Agreement each reporting period. During the three months ended September 30, 2018, the Company performed a qualitative review of the agreement with SaleMove and, based on several factors related to the trend in operating results from this reseller arrangement and costs being incurred by the Company, the parties agreed to allow the arrangement to expire November 30, 2018, one month earlier than the original expiration date of December 31, 2018. Upon expiration of the Reseller Agreement, the remaining outstanding advances are no longer recoverable from SaleMove, and, accordingly, the Company has impaired the remaining balance of $364,000 of advances due from SaleMove. The impairment charge is included in “Long-lived asset impairment” in the Unaudited Consolidated Condensed Statement of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2018.
 
 
 
-11-
 
 
In December 2014, the Company entered into a Series Seed Preferred Stock Purchase Agreement with GoMoto in which the Company paid $100,000 for 317,460 shares of Series Seed Preferred Stock, $0.001 par value per share.  The $100,000 investment in GoMoto was recorded at cost because the Company does not have significant influence over GoMoto.  In October 2015 and May 2016, the Company invested an additional $375,000 and $375,000, respectively, in GoMoto in the form of convertible promissory notes (“GoMoto Notes”).  The GoMoto Notes accrue interest at an annual rate of 4.0% and are due and payable in full upon demand by the Company or at GoMoto’s option ten days’ written notice unless converted prior to the repayment of the GoMoto Notes.  The GoMoto Notes will be converted into preferred stock of GoMoto in the event of a preferred stock financing by GoMoto of at least $1.0 million prior to repayment of the GoMoto Notes. At September 30, 2018 and 2017, both the GoMoto Notes and related interest receivable are fully reserved on the Unaudited Consolidated Condensed Balance Sheets because the Company believes the amounts are not recoverable. Further, the three months ended September 30, 2018, represented the third consecutive quarter of declining operating results for GoMoto and, as such, the Company performed a qualitative review of its investment in GoMoto. Based on continuing deterioration in GoMoto’s financial position, the Company believes that uncertainty exists in the recoverability of its remaining investment of $100,000 in GoMoto and, accordingly, recognized a loss on the investment during the three months ended September 30, 2018 which has been recorded in “Interest and other income (expense)” on the Unaudited Consolidated Condensed Statement of Operations and Comprehensive (Loss) Income for the three and nine months ended September 30, 2018.
 
8. Selected Balance Sheet Accounts
 
Property and equipment.  Property and equipment consists of the following:  
 
  
 
September 30, 
2018 
 
 
December 31, 
2017  
 
  
 
  (in thousands)  
 
Computer software and hardware 
 $11,585 
 $11,065 
Capitalized internal use software 
  5,977 
  5,774 
Furniture and equipment 
  1,743 
  1,703 
Leasehold improvements 
  1,605 
  1,539 
  
  20,910 
  20,081 
Less—Accumulated depreciation and amortization 
  (17,296)
  (15,770)
 Property and Equipment, net 
 $3,614 
 $4,311 
 
   
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, Subaru, Toyota, Volkswagen, and Volvo), Trilogy, General Motors and Media.net Advertising. During the first nine months of 2018, approximately 42% of the Company’s total revenues was derived from these four customers, and approximately 51%, or $13.2 million of gross accounts receivables related to these four customers at September 30, 2018. During the first nine months of 2017, approximately 33% of the Company’s total revenues was derived from Urban Science Applications, General Motors and Media.net, and approximately 43%, or $12.2 million of gross accounts receivables, related to these three customers at September 30, 2017.
 
Accrued Expenses and Other Current Liabilities. Accrued expenses and other current liabilities consisted of the following:
 
 
 
September 30,
2018
 
 
December 31,
2017
 
 
 
(in thousands)
 
Other accrued expenses
 $7,154 
 $6,307 
Amounts due to customers
  392 
  438 
Other current liabilities
  437 
  507 
Total other accrued expenses and other current liabilities
 $7,983 
 $7,252 
 
 
 
-12-
 
Convertible Notes Payable. In connection with the acquisition of AutoUSA, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc. The fair value of the AutoUSA Note as of the AutoUSA acquisition date was $1.3 million. This valuation was estimated using a binomial option pricing method. Key assumptions used by the Company’s outside valuation consultants in valuing the AutoUSA Note included 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. The holder of the AutoUSA Note may at any time 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). 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 or the highest legal rate permissible under applicable law.
 
9. Long-Lived Assets and Impairment
 
Intangible Assets.  The Company amortizes the costs of specifically identified definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets.
 
The Company’s intangible assets are amortized over the following estimated useful lives :
 
 
 
September 30, 2018
(in thousands)
December 31, 2017
(in thousands)
Definite-lived
Intangible Asset
 
 
Estimated Useful Life
 
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
Trademarks/trade names/licenses/domains
3 -7 years
 $16,589 
 $(14,734)
 $1,855 
 $16,589 
 $(4,037)
 $12,552 
Software and publications
3 years
  1,300 
  (1,300)
   
  1,300 
  (1,300)
   
Customer relationships
2 - 10 years
  19,563 
  (14,485)
  5,078 
  19,563 
  (10,555)
  9,008 
Employment/non-compete agreements
1 - 5 years
  1,510 
  (1,510)
  
  1,510 
  (1,493)
  17 
Developed technology
5 - 7 years
  8,955 
  (4,601)
  4,354 
  8,955 
  (3,619)
  5,336 
 
 $47,917 
 $(36,630)
 $11,287 
 $47,917 
 $(21,004)
 $26,913 
 
 
 
 
September 30, 2018
 
 
December 31, 2017
 
Indefinite-lived
Intangible Asset
 
 
Estimated Useful Life
 
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
 
Gross
 
 
Accumulated Amortization
 
 
 Net
 
Domain
Indefinite
 $2,200 
 $ 
 $2,200 
 $2,200 
 $ 
 $2,200 
 
Amortization expense on intangible assets with definite lives is included in both Cost of revenues and Depreciation and amortization in the Unaudited Consolidated Condensed Statements of Operations. Total amortization expense was $1.6 million and $5.0 million for the three and nine months ended September 30, 2018, respectively. Amortization expense was $1.3 million and $4.1 million for the three and nine months ended September 30, 2017, respectively.
 
Amortization expense for the remainder of the year and for future years is as follows:
 
 
 
Amortization Expense
 
Year
 
(in thousands)
 
2018
 $1,511 
2019
  4,872 
2020
  2,371 
2021
  1,499 
2022
  902 
Thereafter
  132 
 
 $11,287 
 
 
 
 
-13-
 
 
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 impaired goodwill by $5.1 million during the nine months ended September 30, 2018. 
 
 
 
(in thousands)
 
Goodwill as of December 31, 2017
 $5,133 
Impairment charge
  (5,133)
Goodwill as of September 30, 2018
 $ 
 
Impairment Testing of Intangible Assets
 
On October 5, 2017, the Company and DealerX Partners, LLC, a Florida limited liability company (“DealerX”), entered into a Master License and Services Agreement (“DealerX License Agreement”). Pursuant to the terms of the DealerX License Agreement, AutoWeb was granted a perpetual license to access and use DealerX’s proprietary platform and technology for targeted, online marketing.
 
The transaction consideration consisted of: (i) $8.0 million in cash paid to DealerX upon execution of the DealerX License Agreement and (ii) the right to 710,856 shares of the Company’s common stock, par value $0.001 per share, representing approximately five percent of the Company’s outstanding Common Stock as of the date the parties entered into the DealerX License Agreement (“Market Capitalization Shares”) if on or before October 5, 2022: (i) AutoWeb’s market capitalization averaged at least $225.0 million over a consecutive 90 day period or (ii) there occurred a change in control of AutoWeb that reflected a market capitalization of at least $225.0 million. If the Market Capitalization Shares were issued to DealerX, DealerX’s obligations to continue to support the platform (“Platform Support Obligations”) would continue in perpetuity. Alternatively, upon the occurrence of certain events prior to the issuance of the Market Capitalization Shares, AutoWeb could elect to make an additional lump-sum payment of $12.5 million (“Alternative Cash Payment”) in order to extend DealerX’s Platform Support Obligations in perpetuity. If the Alternative Cash payment was made, DealerX’s contingent right to receive the Market Capitalization Shares would be terminated. The fair value of the Market Capitalization Shares was calculated at $2.5 million. At the transaction date the Company recorded approximately $10.5 million as a definite-lived intangible asset which was amortized over its expected useful life of 7 years.
 
The Company makes judgments about the recoverability of purchased intangible assets with definite lives whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets with definite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. In the third quarter of 2018, the Company performed an analysis of its planned future use of two intangible assets in the licenses and customer relationships asset groups. As a result of realignment activities finalized in the third quarter, the Company made a determination that the Company's use of certain assets would not be continued as originally planned. Accordingly, the Company performed further analysis to quantitatively determine the amount of impairment for each of these intangible assets as of September 30, 2018.
 
 A structured test was performed with the DealerX license intangible asset, whereby lead generation and acquisition cost, amongst other things, was compare to alternate sources of lead generation available to the Company. As a result of the Company’s analysis, the Company concluded that the effectiveness of the platform was not in-line with the enhanced consumer-to-client matchmaking that the Company is seeking and made the decision in the third quarter to terminate DealerX’s Platform Support Obligations, significantly impacting the usability of the asset by the Company. Accordingly, the Company recorded impairment charges of $9.0 million in connection with the impairment of this long-lived asset with the expense recorded in Cost of revenues-impairment on the Company’s Unaudited Consolidated Condensed Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2018.
 
A quantitative analysis was performed by the Company on its customer relationship intangible assets, whereby it examined available data, namely historical activity and cash flows resulting from the customer relationships of previous acquisitions, in concert with projected future use of acquired customer relationships within the parameters of the Company’s future strategic plans. As a result of this analysis, the Company determined there to be impairment of $1.6 million related to customer relationship intangible assets acquired in a 2015 acquisition for which projected cash flows did not support the carrying values. Additionally, the Company determined that the estimated useful life of these customer relationship intangible assets had changed from 10 years to 5 years. This change in estimate has no impact on the current period but will impact amortization expense in future periods as amortization will be accelerated over the remaining estimated useful life of this asset due to the change in estimate.
 
 
 
 
-14-
 
 
10. Credit Facility
 
The Company and MUFG Union Bank, N.A. entered into a Loan Agreement dated February 26, 2013, as amended on September 10, 2013, January 13, 2014, May 20, 2015, June 1, 2016, June 28, 2017, and December 27, 2017 (the original Loan Agreement, as amended, is referred to collectively as the “Credit Facility Agreement”).  The Credit Facility Agreement provided for (i) a $9.0 million term loan; (ii) a $15.0 million term loan; and (iii) an $8.0 million working capital revolving line of credit (“Revolving Loan”).  The term loans were fully paid as of December 31, 2017. The Revolving Loan was fully paid as of March 31, 2018.
 
11. Commitments and Contingencies
 
Employment Agreements
 
The Company has employment agreements and severance benefits/retention agreements with certain key employees. A number of these agreements require severance payments and continuation of certain insurance benefits in the event of a termination of the employee’s employment by the Company without cause or by the employee for good reason (as defined is these agreements). Stock option agreements and restricted stock award agreements with some key employees provide for acceleration of vesting of stock options and lapsing of forfeiture restrictions on restricted stock in the event of a change in control of the Company, upon termination of employment by the Company without cause or by the employee for good reason, or upon the employee’s death or disability.
 
Litigation
 
From time to time, the Company may be involved in litigation matters arising from the normal course of its business activities. Such litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention, and an adverse outcome in litigation could materially adversely affect its business, results of operations, financial condition and cash flows.
 
  12. Income Taxes
 
On December 22, 2017, the U.S. government enacted comprehensive tax legislation known as the TCJA. The TCJA made a number of changes to the federal income tax law that took effect in 2018, including, but not limited to (1) reduction of the U.S. federal corporate tax rate from a maximum of 35% to 21%; (2) elimination of the corporate alternative minimum tax; (3) a new limitation on deductible interest expense; (4) the Transition Tax; (5) limitations on the deductibility of certain executive compensation; (6) changes to the bonus depreciation rules for fixed asset additions: and (7) limitations on net operating loss carryovers generated after December 31, 2017, to 80% of taxable income.
 
ASC 740 “Income Taxes” , requires the effects of changes in tax laws to be recognized in the period in which the legislation is enacted. However, due to the complexity and significance of the TCJA's provisions, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the TCJA. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the TCJA for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the TCJA is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.
 
At September 30, 2018 and December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the TCJA; however, the Company has made a reasonable estimate of the effects of the TCJA’s change in the federal rate and revalued its deferred tax assets based on the rates at which they are expected to reverse in the future, which is generally the new 21% federal corporate tax rate plus applicable state tax rate. For the year ended December 31, 2017, the Company recorded a decrease in deferred tax assets and deferred tax liabilities of $11.7 million and $0.0 million, respectively, with a corresponding net adjustment to deferred income tax expense of $11.7 million. In addition, in 2017, the Company recognized a deemed repatriation of $0.6 million of deferred foreign income from its Guatemala subsidiary, which did not result in any incremental tax cost after application of foreign tax credits. The Company’s provisional estimates will be adjusted during the measurement period defined under SAB 118, based upon ongoing analysis of data and tax positions along with the new guidance from regulators and interpretations of the law. On an interim basis, the Company estimates an annual effective tax rate and records a quarterly income tax provision in accordance with the estimated annual rate, adjusted accordingly by the tax effect of certain discrete items that arise during the quarter. As the fiscal year progresses, the Company refines its estimated annual effective tax rate based on actual year-to-date results recognized for the year-to-date. This process can result in significant changes to the Company's estimated effective tax rate. When such activity occurs, the income tax provision is adjusted during the quarter in which the estimates are refined and adjusted. As such, the Company’s year-to-date tax provision reflects the estimated annual effective tax rate. These changes, along with adjustments to the Company's deferred taxes and related valuation allowance, may create fluctuation in the overall effective tax rate from period to period.
 
 
 
-15-
 
 
During 2017, management assessed available evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred over the three-year period ended December 31, 2017. The Company was projecting pre-tax income for 2017 until the three months ended December 31, 2017, in which the Company incurred a significant pre-tax loss due to the impairment of goodwill. The Company experienced increased costs of providing services to its customers, as well as decrease in market share resulting from increased competition. Additionally, the Company also projects that 2018 pre-tax profits, if any, may not offset the cumulative three-year pre-tax loss as of December 31, 2017. Based on this evaluation, the Company recorded an additional valuation allowance of $16.7 million against its deferred tax assets during the year ended December 31, 2017. At September 30, 2018 and December 31, 2017, the Company has recorded a valuation allowance of $21.3 million against its deferred tax assets.
 
The Company’s effective tax rate for the nine months ended September 30, 2018 differed from the U.S. federal statutory rate primarily due to operating losses that receive no tax benefit as a result of an existing valuation allowances recorded against the Company’s existing tax assets.
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Concerning Forward-Looking Statements
 
The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “could,” “may,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “will” and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve significant risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual outcomes or results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2 and under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2017 (“2017 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 2017 Form 10-K.
 
Our corporate website is located at www.autoweb.com. Information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q. At or through the Investor Relations section of our website we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports as soon as practicable after the reports are electronically filed with or furnished to the SEC.
 
Unless the context otherwise requires, the terms “we,” “us,” “our,” “AutoWeb,” and “Company” refer to AutoWeb, Inc. and its consolidated subsidiaries.
 
Basis of Presentation and Critical Accounting Policies
 
See Note 2, Basis of Presentation, to the accompanying unaudited consolidated condensed financial statements.
 
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations may be affected. For a detailed discussion of the application of our critical accounting policies, see Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 “Financial Statements and Supplementary Data” in the 2017 Form 10-K. There have been no changes to our critical accounting policies since we filed our 2017 Form 10-K.
 
 
 
 
-16-
 
 
Overview
 
We are a digital marketing services company that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers through our programs for online lead referrals, Dealer marketing products and services, online advertising and consumer traffic referral programs, and mobile products.
 
Our consumer-facing automotive websites (“Company Websites”) 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 (“Leads”) .  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. Our AutoWeb® consumer traffic referral product provides consumers who are shopping for vehicles online with targeted offers based on make, model and geographic location. As these consumers conduct online research on a Company Website or on the site of one of our network of automotive publishers, they are presented with relevant offers on a timely basis and, upon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of our Dealer, Manufacturer or advertising customers. 
 
Our business, results of operations and financial condition are impacted by the volume and quality of our Leads. We measure Lead quality by the conversion of Leads to actual vehicle sales, which we refer to as the “buy rate.” Buy rate is the percentage of the consumers submitting Leads that we delivered to our customers represented by the number of these consumers who purchased vehicles within ninety days of the date of the Lead submission.  We rely on detailed feedback from Manufacturers and wholesale customers to confirm the performance of our Leads.  Our Manufacturer and other wholesale customers each match the Leads we deliver to our customers against vehicle sales to provide us with information about vehicle purchases by the consumers who submitted Leads that we delivered to these customers.  AutoWeb also obtains vehicle registration data from a third-party provider. This information, together with our internal analysis allows us to estimate the buy rate for the consumers who submitted the Internally Generated Leads that we delivered to our customers. Based on the most current information and our internal analysis, we have estimated that, on average, consumers who submit Internally-Generated Leads that we deliver to our customers have an estimated buy rate of approximately 17%.  Buy rates that individual Dealers may achieve can be impacted by factors such as the strength of processes and procedures within the dealership to manage communications and follow up with consumers.
 
Total revenues in the first nine months of 2018 were $93.3 million compared to $108.8 million in the first nine months of 2017. The decline in revenue was primarily due to less efficient traffic acquisition and lower retail dealer count and lead volumes. We believe that a large part of the inefficiency in traffic acquisition was the result of increased traffic acquisition costs as we invest in new traffic acquisition strategies, as well as the consumers shift to mobile and our ability to efficiently convert traffic to leads.
 
During the third quarter of 2018, we completed a comprehensive review of our products, traffic acquisition, pricing policies, distribution channels, technology infrastructure, strategic positioning and organizational capabilities. This review involved a significant change in key management and organizational structure.
 
We move into the fourth quarter of 2018 with a plan that will be executed strategically. We will continue to work with our traffic partners to optimize our search engine marketing (“SEM”) methodologies and rebuild our high-quality traffic streams. We also expect to invest in new product development and technology infrastructure, and to continue to restructure our organization to better align with our revised strategy, which will likely result in significant costs. We cannot provide an exact timeframe for resolution of these issues, as we are early in the implementation of our revised strategy. However, our plan is designed to enable us to grow impressions, improve conversion, expand distribution, and increase capacity. This focus, along with plans to develop new, innovative products will create opportunities for improved quality of delivery and strengthen our position for revenue growth.
 
 
-17-
 
 
For the three and nine months ended September 30, 2018, our business, results of operations and financial condition were affected, and may continue to be affected in the future, by general economic, employment and market factors, conditions in the automotive industry, the markets for Leads, and online advertising services, including, but not limited to, the following:
 
Pricing, interest rates 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 fuel prices on demand for the number and types of vehicles;
 
Increases or decreases in the number of retail Dealers or in the number of Manufacturers and other wholesale customers in our customer base;
 
The effect of changes in search engine algorithms and methodologies on our Lead generation and website advertising activities and margins;
 
Volatility in spending by Manufacturers and others in their marketing budgets and allocations;
 
The competitive impact of consolidation in the online automotive referral industry;
 
The effect of changes in transportation policy, including the potential increase of public transportation options; and
 
The effect of fewer vehicles being purchased as a result of new business models and changes in consumer attitudes regarding the need for vehicle ownership.
 
Results of Operations
 
 Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017
 
The following table sets forth certain statement of operations data for the three-month periods ended September 30, 2018 and 2017 (certain balances and calculations have been rounded for presentation):
 
 
 
2018
 
 
% of total revenues
 
 
2017
 
 
% of total revenues
 
 
$ Change
 
 
% Change
 
 
 
(Dollar amounts in thousands)
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $24,986 
  79%
 $27,711 
  75%
 $(2,725)
  (10)%
Advertising
  6,606 
  21 
  8,946 
  24 
  (2,340)
  (26)
Other revenues
  103 
   
  215 
  1 
  (112)
  (52)
Total revenues
  31,695 
  100 
  36,872 
  100 
  (5,177)
  (14)
Cost of revenues
  26,278 
  83 
  25,786 
  70 
  492 
  2 
Cost of revenues - impairment
  9,014 
  28 
   
   
  9,014 
  N/A 
Gross (loss) profit
  (3,597)
  (11)
  11,086 
  30 
  (14,683)
  N/A 
Operating expenses:
    
    
    
    
    
    
Sales and marketing
  3,333 
  11 
  3,692 
  10 
  (359)
  (10)
Technology support
  4,303
 
  14 
  3,141 
  9 
  1,161 
  37 
General and administrative
  3,639 
  11 
  2,818 
  7
 
  821 
  29 
Depreciation and amortization
  1,172 
  4 
  1,192 
  3 
  (20)
  (2)
Goodwill Impairment
   
   
   
   
   
   
Long-lived asset impairment
  1,968 
  6 
   
   
  1,968 
  N/A 
Total operating expenses
  14,415 
  45 
  10,843 
  29
 
  3,572 
  33 
Operating (loss) income
  (18,012)
  (57)
  243 
  1 
  (18,255)
  N/A 
Interest and other income (expense), net
  (24)
   
  (93)
   
  69 
  (74)
(Loss) Income before income tax provision
  (18,036)
  (57)
  150 
   
  (18,186)
  N/A 
Income tax provision
   
   
  81 
   
  (81)
  N/A 
Net (loss) income
 $(18,036)
  (57)%
 $69 
  %
 $(18,105)
  N/A 
 
 
 
-18-
 
 
 Lead fees. Lead fees revenues decreased $2.7 million, or 10%, in the third quarter of 2018 compared to the third quarter of 2017 primarily due to less efficient traffic acquisition and lower retail dealer count and lead volumes.
 
Advertising. Advertising revenues decreased $2.3 million, or 26%, in the third quarter of 2018 compared to the third quarter of 2017 as a result of a decrease in $1.9 million decrease in click revenue associated with decreased pricing per click coupled with a $0.4 million decrease in display advertising traffic on our website.
 
Other Revenues. Other revenues consist primarily of revenues from our mobile products and revenues from our Reseller Agreement with SaleMove. Other revenues decreased to $0.1 million in the third quarter of 2018 from $0.2 million in the third quarter of 2017 primarily due to lower customer utilization of the mobile product and SaleMove product. The SaleMove Reseller Agreement will expire November 30, 2018.
 
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 online automotive information providers. Other cost of revenues consists of SEM and fees paid to third parties for data and content, including search engine optimization 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 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 $0.5 million, or 2%, in the third quarter of 2018 compared to the third quarter of 2017 primarily due to increased traffic acquisition costs.
 
Cost of Revenues-Impairment. Cost of revenues-impairment consists of impairment charges on definite-lived intangible assets which are directly related to websites or technology that generate revenue for the Company. The Company makes judgments about the recoverability of purchased intangible assets with definite lives whenever events or changes in circumstances indicate that an impairment may exist. Recoverability of purchased intangible assets with definite lives is measured by comparing the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. In the third quarter of 2018, the Company made a decision to terminate the platform support provision of an existing perpetual license used to support the Company’s websites, significantly impacting the usability of the asset by the Company. As a result, in the quarter ended September 30, 2018, the Company recorded charges of approximately $9.0 million in connection with the impairment of this long-lived asset to cost of revenues-impairment. The Company did not have a comparable charge in the same period for 2017.
 
Gross Profit. Gross profit in the third quarter of 2018 decreased $14.7 million from the third quarter of 2017 due to decreased revenue and increased cost of revenues as mentioned above. A major contributor to the increased cost of revenues was the one-time impairment charge related to the DealerX license of $9.0 million that was charged to cost of revenues. As a percentage of net revenue, our gross profit was (11%) and 30% for the three months ended September 30, 2018 and 2017, respectively. The decrease was significantly impacted by the $9.0 million impairment charge related to DealerX, which as a percentage of net revenue, was 28%.
 
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, and dealer support. Sales and marketing expense in the third quarter of 2018 decreased $0.4 million, or 10%, compared to the third quarter of 2017 due primarily to lower media spend, offset by increased head-count costs.
 
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 2018 increased by $1.2 million, or 37%, compared to the third quarter of 2017 due primarily to severance and other headcount-related costs coupled with consulting costs associated with the management realignment of the information technology function in September 2018.
 
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 2018 increased by $0.8 million, or 29%, from the third quarter of 2017 due primarily to increased compensation-related costs and increased professional fees.
 
Depreciation and Amortization. Depreciation and amortization expense in the third quarter of 2018 decreased $20,000 from the third quarter of 2017 primarily due to normal amortization.
 
 
 
-19-
 
 
Long-Lived Asset Impairment. The Company records impairment losses on long-lived assets when events and circumstances indicate that the assets might be impaired. Events that may indicate that the assets might be impaired include, but are not limited to, a significant downturn in the economy, a loss of a major customer or group of customers or a significant decrease in the market value of an asset. During the third quarter of 2018, the Company recorded an impairment of approximately $0.4 million related to the impairment of asset advances to SaleMove which were determined to be non-recoverable at September 30, 2018. In addition, approximately $1.6 million was recorded as an impairment on customer relationships acquired in a 2015 acquisition after an analysis showed that a significant percentage of the acquired customers were no longer part of the dealer base.
 
Other Income (Expense), Net. Other income (expense), net increased $0.1 million from the third quarter of 2017 due to a decrease in interest expense of $0.2 million due to payoff of term loans and revolving line of credit in the fourth quarter of 2017 and the first quarter of 2018, and the gain on the sale of our investment in SaleMove, offset by the write-down of our GoMoto investment in the third quarter of 2018.
 
Income Taxes. Income tax expense was zero in the third quarter of 2018 compared to income tax expense of $81,000 in the third quarter of 2017.  Income tax expense quarter over quarter differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowances placed on accrued tax assets for such losses. 
 
Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017
 
The following table sets forth certain statement of operations data for the nine-month periods ended September 30, 2018 and 2017 (certain balances and calculations have been rounded for presentation):
 
 
 
2018
 
 
% of total revenues
 
 
2017
 
 
% of total revenues
 
 
$ Change
 
 
% Change
 
 
 
(Dollar amounts in thousands)
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $71,277 
  76%
 $83,149 
  76
 $(11,872
  (14)%
Advertising
  21,643 
  24 
  24,914 
  23 
  (3,271)
  (13)
Other revenues
  416 
  0 
  741 
  1 
  (352)
  (44
Total revenues
  93,336 
  100 
  108,804 
  100 
  (15,468)
  (14)
Cost of revenues
  74,702 
  80 
  74,171 
  68 
  531 
  1 
Cost of revenues - impairment
  9,014 
  10 
   
   
  9,014 
  N/A 
Gross profit
  9,620 
  10 
  34,633 
  32 
  (25,013)
  (72)
Operating expenses:
    
    
    
    
 
 
 
 
 
 
Sales and marketing
  10,096 
  11 
  10,684 
  10 
  (588)
  (6)
Technology support
  10,653 
  11 
  9,582 
  9 
  1,071 
  11 
General and administrative
  11,980 
  13 
  9,040 
  8 
  2,940 
  33 
Depreciation and amortization
  3,495 
  4 
  3,623 
  3 
  (128)
  (4)
Goodwill Impairment
  5,133 
  5 
   
   
  5,133 
  N/A 
Long-lived asset impairment
  1,968 
  2 
   
   
  1,968 
  N/A 
Total operating expenses
  43,325 
  46 
  32,929 
  30 
  10,396 
  32
Operating (loss) income
  (33,705)
  (36)
  1,704 
  2 
  (35,409)
  N/A 
Interest and other income (expense), net
  178 
   
  (289)
   
  467 
  N/A 
(Loss) income before income tax provision
  (33,527)
  (36)
  1,415 
  2 
  (34,942)
  N/A 
Income tax provision
  4 
   
  539 
  1 
  (535)
  (99)
Net (loss) income
 $(33,531)
  (36)%
 $876 
  1
 $(34,407)
  N/A%
 
Lead Fees. Lead fees revenues decreased $11.9 million, or 14%, in the first nine months of 2018 compared to the first nine months of 2017 primarily due to less efficient traffic acquisition and lower retail dealer count and lead volumes.
 
 
 
-20-
 
 
Advertising. Advertising revenues decreased $3.3 million, or 13%, in the first nine months of 2018 compared to the first nine months of 2017 due to a decrease in click revenue of $2.4 million associated with decreased pricing per click coupled with a decrease of $0.9 million associated with display advertising traffic on our website.
 
Other Revenues. Other revenues decreased to $0.4 million in the first nine months of 2018 from $0.7 million in the first nine months of 2017 primarily due to lower customer utilization of the mobile product and SaleMove product. The SaleMove Reseller Agreement will expire November 30, 2018.
 
Cost of Revenues. Cost of revenues increased $0.5 million in the first nine months of 2018 compared to the first nine months of 2017 primarily due to increased traffic acquisition costs associated with both lead and click volume.
 
Cost of Revenues-Impairment. Cost of revenues-impairment expense of $9.0 million incurred in the nine months ended September 30, 2018 is due to the Company’s decision to terminate the platform support provision of an existing perpetual license used to support the Company’s websites, significantly impacting the usability of the asset by the Company and resulting in an impairment charge to the related intangible asset. The Company did not have a comparable charge in the same period for 2017.
 
Gross Profit. Gross profit decreased $25.0 million in the first nine months of 2018 compared to the first nine months in 2017 due to decreased revenue and increased cost of revenues as mentioned above. A major contributor to the increased cost of revenues was the one-time impairment charge related to the DealerX license of $9.0 million that was charged to cost of revenues. As a percentage of net revenue, our gross profit was 10% and 32% for the nine months ended September 30, 2018 and 2017, respectively. The decrease was significantly impacted by the $9.0 million impairment charge related to DealerX, which as a percentage of net revenue, was 10%.
 
Sales and Marketing. Sales and marketing expense in the first nine months of 2018 decreased $0.6 million, or 6%, compared to the first nine months of 2017 due primarily to lower headcount-related costs and media spend, offset by severance costs.
 
Technology Support. Technology support expense in the first nine months of 2018 increased by $1.1 million, or 11%, compared to the first nine months of 2017 due primarily to severance and other headcount-related costs coupled with consulting costs associated with the management realignment of the information technology function in September 2018.
 
General and Administrative. General and administrative expense in the first nine months of 2018 increased $2.9 million, or 33%, from the first nine months of 2017 due primarily to $1.4 million in severance-related costs associated with the termination of the Company’s former CEO in April 2018, coupled with increased compensation-related costs and professional fees.
 
Depreciation and Amortization. Depreciation and amortization expense in the first nine months of 2018 decreased $0.1 million to $3.5 million compared to $3.6 million in the first nine months of 2017 primarily due to normal depreciation and amortization.
 
Goodwill impairment. The Company evaluated enterprise goodwill for impairment in the first nine months of 2018 due to the Company’s decreased stock price since its prior annual goodwill impairment analysis on October 1, 2017. As of March 31, 2018, the carrying value of AWI was higher than its fair value based on market capitalization at that date. As a result, a non-cash impairment charge of $5.1 million was recording during the nine months ended September 30, 2018.
 
Long-lived asset impairment. The Company records impairment losses on long-lived assets when events and circumstances indicate that the assets might be impaired. Events that may indicate that the assets might be impaired include, but are not limited to, a significant downturn in the economy, a loss of a major customer or group of customers or a significant decrease in the market value of an asset. During the third quarter of 2018, the Company recorded an impairment of approximately $0.4 million related to the impairment of asset advances to SaleMove which were determined to be non-recoverable at September 30, 2018. In addition, approximately $1.6 million was recorded as an impairment on customer relationships acquired in a 2015 acquisition after an analysis showed that a significant percentage of the acquired customers were no longer part of the dealer base.
 
Other Income (Expense), Net. Other income (expense), net increased $0.5 million to $0.2 million for the first nine months of 2018 compared to $(0.3) million in the first nine months of 2017 primarily to a decrease in Interest expense of $0.5 million due to the payoff of term loans and revolving line of credit in the fourth quarter of 2017 and the first quarter of 2018.
 
Income Taxes. Income tax expense was $4,000 in the first nine months of 2018 compared to income tax expense of $0.5 million in the first nine months of 2017.  Income tax expense for the first nine months of 2018 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowances placed on tax assets for such losses. 
 
 
 
 
-21-
 
 
Liquidity and Capital Resources
 
The table below sets forth a summary of our cash flows for the nine months ended September 30, 2018 and 2017:
 
 
 
Nine Months Ended
September 30,
 
 
 
2018
 
 
2017
 
 
 
(in thousands)
 
Net cash provided by (used in) operating activities
 $(743)
 $12,468 
Net cash used in investing activities
  (703)
  (2,218)
Net cash used in financing activities
  (7,723)
  (4,066)
 
Our principal sources of liquidity are our cash and cash equivalents balances totaling $15.8 million at September 30, 2018, and our cashflows generated from operations.  While we believe that our existing sources of liquidity will be sufficient to fund our operations for the next twelve months, our future capital requirements will depend on many factors, including but not limited to, implementing new strategic plans, modernizing and upgrading our technology and systems, pursuing business objectives and responding to business opportunities, challenges or unforeseen circumstances, developing new or improving existing products or services, enhancing our operating infrastructure and acquiring complementary businesses and technologies. To the extent that our existing liquidity is insufficient to fund our future activities, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all.
 
For information concerning the Company’s previously announced share repurchase authorization, see Note 5, Notes to Unaudited Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We did not repurchase any shares during the nine months ended September 30, 2018 and 2017.
 
Credit Facility and Term Loan. For information concerning our term and revolving bank loans, see Note 9, Notes to Unaudited Consolidated Condensed Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
Net Cash Provided by Operating Activities Net cash used in operating activities totaled $0.7 million for the nine months ended September 30, 2018, as compared to cash provided by operating activities of $12.5 million for the nine months ended September 30, 2017.  This decrease in cash provided by operating activities was driven by a decrease in gross profit, an increase in compensation charges incurred as a result of organizational headcount changes, and increased payments on technology enhancements, partially offset by a decrease in interest paid and an increase in liabilities accrued which will not be paid until 2019. 
 
Net Cash Used in Investing Activities.  Net cash used in investing activities was $0.7 million in the nine months ended September 30, 2018, which primarily related to purchases of property and equipment and expenditures related to capitalized internal use software of $0.8 million, offset by $0.1 million in proceeds from the sale of the SaleMove investment. 
 
Net cash used in investing activities was $2.2 million in the nine months ended September 30, 2017, which primarily related to purchases of property and equipment and expenditures related to capitalized internal use software.
 
Net Cash Used in Financing Activities.  Net cash used in financing activities of $7.7 million in the nine months ended September 30, 2018, primarily related to payments of $8.0 million to pay down the revolving credit facility in March 2018, offset by proceeds from the issuance of common stock and the exercise of stock options.
 
Net cash used in financing activities of $4.1 million primarily related to payments of $3.9 million made against the term loan borrowings and $1.2 million used to repurchase Company common stock in the first nine months of 2017. In addition, stock options for 191,074 shares of the Company’s common stock were exercised in the first nine months of 2017 resulting in $1.1 million cash inflow.
 
Off-Balance Sheet Arrangements
 
At September 30, 2018, we had no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(D)(ii).
 
 
 
 
-22-
 
 
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, 2018, 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 2017 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 Interim 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”). Disclosure controls and procedures ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act are (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. Based on this evaluation, our Chief Executive Officer and our Interim Chief Financial Officer believe that, due to the material weakness in internal control over financial reporting previously reported in our 2017 Form 10-K, our disclosure controls and procedures were not effective as of September 30, 2018.
 
As previously reported in our 2017 Form 10-K, in connection with their attestation report on our internal control over financial reporting as of December 31, 2017, Moss Adams LLP identified what they believed was a material weakness in our evaluation and measurement of goodwill for impairment and valuation of deferred tax assets.
 
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
With respect to the material weakness identified by Moss Adams LLP, we are continuing to take steps to remediate this material weakness in our internal control over financial reporting, including identifying and documenting controls for increased management review of goodwill and valuation of deferred tax assets. We have also dedicated additional external resources to assist in improving internal controls so that they are designed to operate at a sufficient level of precision.
 
 
 
-23-
 
 
Effective January 1, 2018, we adopted the new revenue guidance under Accounting Standards Codification 606 “Revenue from Contracts with Customers.” The adoption of this guidance requires the implementation of new accounting policies and processes, which changed the Company’s internal controls over financial reporting for revenue recognition and related disclosures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, other than the items mentioned in the above paragraph, 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 Interim Chief Financial Officer, does not expect that our disclosure controls and internal control over financial reporting will prevent all errors 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.
 
 
 
-24-
 
 
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 2017 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 2017 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.
 
We may require additional capital to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances. If capital is not available to us, or is not available on favorable terms, our financial performance could be materially and adversely affected.
 
We may require additional capital to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to develop new products or services, improve existing products and services, enhance our operating infrastructure and acquire complementary businesses and technologies. As a result, we may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when we need them, on terms that are acceptable to us, or at all.
 
Any debt financing that we secure in the future could involve restrictive covenants that may make it more difficult for us to obtain additional capital. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to implement new strategic plans, modernize and upgrade our technology and systems, pursue business objectives and respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our financial performance could be materially and adversely affected.
 
Data privacy laws, rules and regulations.
 
Various laws, rules and regulations govern the collection, use, retention, sharing and security of data that we receive from our users, advertisers and affiliates. In addition, we have and post on our website our own privacy policies and practices concerning the collection, use and disclosure of user data and personal information. Any failure, or perceived failure, by us to comply with our posted privacy policies, Federal Trade Commission requirements or orders or other federal or state privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others. Further, failure or perceived failure by us to comply with our policies, applicable requirements or industry self-regulatory principles related to the collection, use, sharing or security of personal information or other privacy-related matters could result in a loss of user confidence in us, damage to our brands, and ultimately in a loss of users, advertisers or Lead referral and advertising affiliates. We cannot predict whether new legislation or regulations concerning data privacy and retention issues related to our business will be adopted, or if adopted, whether they could impose requirements that may result in a decrease in our user registrations and materially and adversely affect our financial performance.  Proposals that have or are currently being considered include restrictions relating to the collection and use of data and information obtained through the tracking of internet use, including the possible implementation of a “Do Not Track” list, that would allow internet users to opt-out of such tracking. Other proposals include enhanced rights for consumers to obtain information regarding the sharing or sale of their personal information and rights to opt-out or prevent the sharing or sale of their personal information to third parties, similar to the European Union’s General Data Protection Regulation. The State of California has already enacted AB 375, the California Consumer Privacy Act of 2018, which includes significant new personal data privacy rights for consumers. The law becomes effective on January 1, 2020, but may be subject to various amendments before it becomes effective. Depending on the provisions of the law that become effective, compliance with this law could have a material and adverse effect on our financial performance
 
 
 
-25-
 
Interruptions or failures in our information technology platforms, communication systems or security systems could materially and adversely affect our financial performance.
 
Our information technology and communications systems are susceptible to outages and interruptions due to fire, flood, earthquake, power loss, telecommunications failures, cyber-attacks, terrorist attacks, technology operations and development failures, failure of redundant systems and disaster recovery plans and similar events. Our planned technology modernization efforts that began in the third quarter of 2018 and that are anticipated to continue through 2019 may have temporary negative impacts on performance of our systems as our systems are moved to new platforms. Outages and interruptions could damage our reputation and harm our operating results. Despite our network security measures, our information technology platforms are vulnerable to computer viruses, worms, physical and electronic break-ins, sabotage and similar disruptions from unauthorized tampering, as well as coordinated denial-of-service attacks. We do not have multiple site capacity for all of our services. In the event of delays or disruptions to services we rely on third party providers to perform disaster recovery planning and services on our behalf. We are vulnerable to extended failures to the extent that planning, and services are not adequate to meet our continued technology platform, communication or security systems’ needs. We rely on third party providers for our primary and secondary internet connections. Our co-location service and public cloud services that provide infrastructure and platform services, environmental and power support for our technology platforms, communication systems and security systems are received from third party providers. We have little or no control over these third-party providers. Any disruption of the services they provide us or any failure of these third-party providers to effectively design and implement sufficient security systems or plan for increases in capacity could, in turn, cause delays or disruptions in our services. We are insured for some, but not all, of these events. Even for those events for which we are insured and have coverage under the terms and conditions of the applicable policies, there are no assurances given that the coverage limits would be sufficient to cover all losses we might incur or experience.
 
If we lose our key personnel or are unable to attract, train and retain additional highly qualified sales, marketing, managerial and technical personnel, our business may suffer.
 
Our future success depends on our ability to identify, hire, train and retain highly qualified sales, marketing, managerial and technical personnel.  In addition, as we introduce new services we may need to hire additional personnel. We may not be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain the necessary executive, managerial, technical, sales and marketing personnel could have a material adverse effect on our financial performance.
 
Our business and operations are substantially dependent on the performance of our executive officers and key employees.  Each of these executive officers could be difficult to replace.  There is no guarantee that these or any of our other executive officers and key employees will remain employed with us. The loss of the services of one or more of our executive officers or key employees could have a material adverse effect on our financial performance.
 
Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. In order to attract and retain executives and other key employees in a competitive marketplace, we must provide competitive compensation packages, including cash and stock-based compensation. Our primary forms of stock-based incentive awards are stock options and restricted stock units. If the anticipated value of such stock-based incentive awards does not materialize, if our stock-based compensation otherwise ceases to be viewed as a valuable benefit, or if our total compensation package is not viewed as being competitive, our ability to attract, retain and motivate executives and key employees could be weakened.
 
Our current executives may view the business differently than prior members of management, and over time may make changes to our strategic focus, operations or business plans with corresponding changes in how we report our results of operations. We can make no assurances that our current executives will be able to properly manage any such shift in focus or that any changes to our business would ultimately prove successful. We cannot ensure that we will be able to retain the services of any members of our senior management or other key employees. If we do not succeed in attracting well-qualified employees, retaining and motivating existing employees or integrating new executives and employees, our business could be materially and adversely affected.
 
 
 
 
 

 
 
 
 
 
-26-
 
 
Item 6.  Exhibits
 
2.1
Asset Purchase and Sale Agreement dated as of December 19, 2016 by and among AutoWeb, Inc., Car.com, Inc., a Delaware corporation, and Internet Brands, Inc., a Delaware corporation, incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on December 21, 2016 (SEC File No. 001-34761)
 
 
Sixth Restated Certificate of Incorporation of AutoWeb, Inc., incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K filed with the SEC on October 10, 2017 (SEC File No. 001-34761) (“October 2017 Form 8-K”)
 
 
Seventh Amended and Restated Bylaws of AutoWeb, Inc. dated October 9, 2017, incorporated by reference to Exhibit 3.5 to the October 2017 Form 8-K
 
 
Tax Benefit Preservation Plan dated as of May 26, 2010 between Company 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 Company, 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), Amendment No. 1 to Tax Benefit Preservation Plan dated as of April 14, 2014, between Company and Computershare Trust Company, N.A., as rights agent, 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), Amendment No. 2 to Tax Benefit Preservation Plan dated as of April 13, 2017, between Company and Computershare Trust Company, N.A., as rights agent, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on April 14, 2017 (SEC File No. 001-34761)
 
 
Certificate of Adjustment Under Section 11(m) of the Tax Benefit Preservation Plan, 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)
 
 
10.1■*
Offer of Employment dated as of October 2, 2018 between Company and Sara Partin
 
 
10.2■*
Inducement Stock Option Award Agreement dated as of October 22, 2018 between Company and Sara Partin
 
 
10.3■*
Indemnification Agreement dated as of October 22, 2018 between Company and Sara Partin
 
 
10.4■*
Severance Benefits Agreement dated October 22, 2018 between Company and Sara Partin
 
 
Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer
 
 
Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer
 
 
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 herewith.
 
Management Contract or Compensatory Plan or Arrangement.
 
Certain schedules in this Exhibit have been omitted in accordance with Item 601(b)(2) of Regulation S-K. AutoWeb, Inc. will furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request; provided, however, that AutoWeb, Inc. 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.
 
 
 
 
-27-
 
 
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.
 
 
 
 
 
 
 
AutoWeb, Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: November 8, 2018
By:
/s/ Wesley Ozima
 
 
 
 
Wesley Ozima
 
 
 
 
Senior Vice President and
Interim Chief Financial Officer
 
 
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
-28-
Exhibit 10.1
  Exhibit 10.1
 
 
AutoWeb, Inc.
 Glenn E. Fuller
18872 MacArthur Blvd., Suite 200
 Executive Vice President, Chief Legal and Administrative
Irvine, CA 92612-1400
 Officer and Secretary
Phone: (949) 225-4500
 Direct Line: 949.862.1392
www.autoweb.com
 Facsimile: 949.797.0484
 
 glenn.fuller@autoweb.com
 
 
October 2, 2018
 
Sara Partin
[Personal Residence Address Redacted]
 
 
Re: Offer of Employment
 
 
Dear Sara:
 
This letter confirms the terms and conditions upon which AutoWeb, Inc., a Delaware corporation (“Company”) is offering employment to you. Note that this offer of employment and your employment by the Company is contingent upon various conditions and requirements that must be completed prior to commencement of employment, which conditions and requirements are set forth below.
 
1.           Employment.
 
(a)           Effective as of the date you commence employment with the Company (“Commencement Date”), which date is anticipated to be October 22, 2018, the Company will employ you in the capacity set forth on the Exhibit A attached hereto (“Offer Letter Schedule”). In such capacity, you will report to such person or persons as may be designated by the Company from time to time.
 
(b)           Your employment is at will and not for a specified term and may be terminated by the Company or you at any time, with or without cause or good reason and with or without prior, advance notice. This “at-will” employment status will remain in effect throughout the term of your employment by the Company and cannot be modified except by a written amendment to this offer letter that is executed by both parties (which in the case of the Company, must be executed by the Company’s Chief Legal Officer) and that expressly negates the “at-will” employment status.
 
2.           Compensation, Benefits and Expenses. As compensation for the services to be rendered by you pursuant to this agreement, you will receive the payments and be entitled to participate in the benefits set forth below, subject to the terms and conditions set forth below or in such payment or benefit plans or arrangements. If at any time a conflict between anything in this letter and the applicable benefit plan arises, the terms of the benefit plan controls. Your compensation and benefits shall be paid or made available in accordance with the Company’s normal payroll and other practices and policies of the Company.
 
(a)           The Company hereby agrees to pay you a base salary as set forth on the Offer Letter Schedule.
 
 
 
-1-
 
 
(b)           You shall be eligible to participate in annual incentive compensation plans, if any, that may be adopted by the Company from time to time and that are afforded generally to persons employed by the Company at your employment level and position, geographic location and applicable department or operations within the Company (subject to the terms and conditions of any such annual incentive compensation plans). Should such an annual incentive compensation plan be adopted for any annual period, your target annual incentive compensation opportunity will be as established by the Company for each annual period, which may be up to a percentage set forth on the Offer Letter Schedule of your annualized rate (i.e., 24 X Semi-monthly Rate) based on achievement of objectives specified by the Company each annual incentive compensation period (which may include Company-wide performance objectives; divisional, department or operations performance objectives and/or individual performance objectives, allocated between and among such performance objectives as the Company may determine) and subject to adjustment by the Company based on the Company’s evaluation and review of your overall individual job performance in the sole discretion of the Company. Specific annual incentive compensation plan details, target incentive compensation opportunity and objectives for each annual compensation plan period will be established each year. Awards under annual incentive plans may be prorated by the Company in its discretion for a variety of factors, including time employed by the Company during the year, adjustments in base compensation or target award percentage changes during the year, and unpaid time off. You understand that the Company’s annual incentive compensation plans, their structure and components, specific target incentive compensation opportunities and objectives, the achievement of objectives and the determination of actual awards and payouts, if any, thereunder are subject to the sole discretion of the Company. Awards, if any, under any annual incentive compensation plan shall only be earned by you, an payable to you, if you remain actively employed by the Company through the date on which award payouts are made by the Company under the applicable annual incentive compensation plan. You will not earn any such award if your employment ends for any reason prior to that date.
 
(c)           Upon commencement of employment with the Company you will be granted the number of options to acquire shares of the Company’s common stock set forth on the Offer Letter Schedule. The vesting, exercise, termination and other terms and conditions of these options shall be governed by and subject to the terms and conditions of the applicable stock option plan and stock option award agreement. The granting and exercise of such options are also subject to compliance with applicable federal and state securities laws and the Company’s Security Trading Policy.
 
(d)           You shall be entitled to participate in such ordinary and customary benefits plans afforded generally to persons employed by the Company at your employment position and level and geographic location (subject to the terms and conditions of such benefit plans, your enrollment in the plans and making of any required employee contributions required for your participation in such benefits, your ability to qualify for and satisfy the requirements of such benefits plans). Upon commencement of employment with the Company, you will begin accruing vacation under the Company’s vacation accrual policy at the rate set forth on the Offer Letter Schedule. Accrual of vacation is subject to a limitation on accrual as set forth in the Company’s vacation accrual policy.
 
(e)           You are solely responsible for the payment of any tax liability that may result from any compensation, payments or benefits that you receive from the Company. The Company shall have the right to deduct or withhold from the compensation due to you hereunder any and all sums required by applicable federal, state, local or other laws, rules or regulations, including, without limitation federal and state income taxes, social security or FICA taxes, and state unemployment taxes, now applicable or that may be enacted and become applicable during your employment by the Company.
 
 
-2-
 
 
(f)           Upon termination of your employment by either party, whether with or without cause, you will be entitled to receive only that portion of your compensation, benefits, reimbursable expenses and other payments and benefits required by applicable law or by the Company’s compensation or benefit plans, policies or agreements in which you participate and pursuant to which you are entitled to receive the compensation or benefits thereunder under the circumstances of and at the time of such termination (subject to and payable in accordance with the terms and conditions of such plans, policies or agreements).
 
3.            Pre-Hire Conditions and Requirements. You have previously submitted an Application for Employment and a Consent to Conduct a Background Check. This offer of employment and your employment by the Company is contingent upon various conditions and requirements for new hires that must be completed prior to commencement of employment. These conditions and requirements include, among other things, the following:
 
(i)     Successful completion of the Company’s background check.
 
(ii)    Your acceptance, execution and delivery of this offer letter together with the Company’s Employee Confidentiality Agreement and Mutual Agreement to Arbitrate, the forms of which accompany this offer letter and which are hereby incorporated herein by reference. Please sign this offer letter and these other documents and return the signed original documents to Ondria Kernan in the Company’s Human Resources Department.
 
(iii)   Your execution and delivery of your acknowledgment and agreement to the Company’s Employee Handbook and the various policies included therein, Securities Trading Policy, and Code of Conduct and Ethics. Upon your acceptance of this offer letter, you will be provided instructions how to access online, sign and return these documents.
 
(iv)   Your compliance with all applicable federal and state laws, rules, regulation and orders, including (1) your execution and delivery of an I-9 Employment Eligibility Verification together with complying verification documents; and (2) your execution and delivery of a W-4 Employee’s Withholding Allowance Certificate. Upon your acceptance of this offer letter, you will be provided instructions how to access online, sign and return these documents.
 
The documents referenced in Sections 3(ii), (iii) and (iv) above are referred to herein as the “Standard Employee Documents.”
 
4.           Amendments and Waivers. This agreement may be amended, modified, superseded, or cancelled, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties hereto or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power, or privilege hereunder will operate as a waiver thereof, nor will any waiver on the part of any party of any right hereunder, nor any single or partial exercise of any rights hereunder, preclude any other or further exercise thereof or the exercise of any other right hereunder.
 
 
 
 
-3-
 
 
5.           Notices. Any notice required or permitted under this agreement will be considered to be effective in the case of (i) certified mail, when sent postage prepaid and addressed to the party for whom it is intended at its address of record, three (3) days after deposit in the mail; (ii) by courier or messenger service, upon receipt by recipient as indicated on the courier's receipt; or (iii) upon receipt of an Electronic Transmission by the party that is the intended recipient of the Electronic Transmission. The record addresses, facsimile numbers of record, and electronic mail addresses of record for you are set forth on the signature page to this agreement and for the Company as set forth in the letterhead above and may be changed from time to time by notice from the changing party to the other party pursuant to the provisions of this Section 5. For purposes of this Section 5, "Electronic Transmission” means a communication (i) delivered by facsimile, telecommunication or electronic mail when directed to the facsimile number of record or electronic mail address of record, respectively, which the intended recipient has provided to the other party for sending notices pursuant to this Agreement and (ii) that creates a record of delivery and receipt that is capable of retention, retrieval, and review, and that may thereafter be rendered into clearly legible tangible form.
 
6.           Choice of Law. This agreement, its construction and the determination of any rights, duties or remedies of the parties arising out of or relating to this agreement will be governed by, enforced under and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws of such state.
 
7.           Severability. Each term, covenant, condition, or provision of this agreement will be viewed as separate and distinct, and in the event that any such term, covenant, condition or provision will be deemed to be invalid or unenforceable, the arbitrator or court finding such invalidity or unenforceability will modify or reform this agreement to give as much effect as possible to the terms and provisions of this agreement. Any term or provision which cannot be so modified or reformed will be deleted and the remaining terms and provisions will continue in full force and effect.
 
8.            Interpretation. Every provision of this agreement is the result of full negotiations between the parties, both of whom have either been represented by counsel throughout or otherwise been given an opportunity to seek the aid of counsel. No provision of this agreement shall be construed in favor of or against any of the parties hereto by reason of the extent to which any such party or its counsel participated in the drafting thereof. Captions and headings of sections contained in this agreement are for convenience only and shall not control the meaning, effect, or construction of this agreement. Time periods used in this Agreement shall mean calendar periods unless otherwise expressly indicated.
 
9.            Entire Agreement. This Agreement, together with the Standard Employee Documents, is intended to be the final, complete and exclusive agreement between the parties relating to the employment of you by the Company and all prior or contemporaneous understandings, representations and statements, oral or written, are merged herein. No modification, waiver, amendment, discharge or change of this agreement shall be valid unless the same is in writing and signed by the party against which the enforcement thereof is or may be sought.
 
 
 
-4-
 
 
 
10.             Counterparts; Facsimile or PDF Signature. This agreement may be executed in counterparts, each of which will be deemed an original hereof and all of which together will constitute one and the same instrument. This agreement may be executed by facsimile or PDF signature by either party and such signature shall be deemed binding for all purposes hereof, without delivery of an original signature being thereafter required.
 
This offer shall expire five (5) calendar days from the date of this offer letter. Should you wish to accept this offer and its terms and conditions, please confirm your understanding of, agreement to, and acceptance of the foregoing by signing and returning to the undersigned the duplicate copy of this offer letter enclosed herewith.
 
AUTOWEB, INC.
 
 
 
By:/s/ Glenn E. Fuller
Glenn E. Fuller
Executive Vice President, Chief Legal and Administrative Officer and Secretary
Accepted and Agreed
as of the date
first written above:
 
 
 
 
/s/ Sara Partin
Sara Partin 
[Personal Residence Address Redacted]
 
 
 
 
-5-
 
 
 
Exhibit A
Offer Letter Schedule
 
 
 
Employment Capacity/Title: SVP, Chief Human Resources Officer
 
Employment Commencement Date: October 22, 2018
 
Base Salary: Semi-monthly Rate of Eleven Thousand Four Hundred Fifty-eight Dollars and Thirty-four Cents ($11,458.34) which equates to an annualized rate of approximately Two Hundred Seventy-five Thousand Dollars ($275,000).
 
Annual Incentive Compensation Target: 40%
 
Stock Options: 50,000. Priced at closing price of common stock on The Nasdaq Capital Market on employment commencement date. Stock Options shall be granted as inducement options under NASDAQ rules.
 
Vacation Accrual Rate: Vacation accrues at a rate equal to 3 weeks (120 hours for full-time employees) per year (5 hours per pay period).
 

 
SP           
 GEF           
Employee Initials
 Company Initials
 
 
 
A-1
exhibit 10.2
 
Exhibit 10.2
 
AUTOWEB, INC.
 
Inducement Stock Option Award Agreement
 
(Non-Qualified Stock Options)
 
 
THESE OPTIONS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND OTHER APPLICABLE STATE SECURITIES LAWS WITH RESPECT TO SUCH SECURITY IS THEN IN EFFECT, OR SUCH REGISTRATION UNDER THE SECURITIES ACT AND OTHER APPLICABLE SECURITIES LAWS IS NOT REQUIRED DUE TO AVAILABLE EXEMPTIONS FROM SUCH REGISTRATION. SHOULD THERE BE ANY REASONABLE UNCERTAINTY OR GOOD FAITH DISAGREEMENT BETWEEN THE COMPANY AND PARTICIPANT AS TO THE AVAILABILITY OF SUCH EXEMPTIONS, THEN PARTICIPANT SHALL BE REQUIRED TO DELIVER TO THE COMPANY AN OPINION OF COUNSEL (SKILLED IN SECURITIES MATTERS, SELECTED BY PARTICIPANT AND REASONABLY SATISFACTORY TO THE COMPANY) IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH AN AVAILABLE EXEMPTION UNDER THE SECURITIES ACT AND OTHER APPLICABLE SECURITIES LAWS.
 
This Inducement Stock Option Award Agreement (“Agreement”) is entered into effective as of the Grant Date set forth on the signature page to this Agreement (“Grant Date”) by and between AutoWeb, Inc., a Delaware corporation (“Company”), and the person set forth as Participant on the signature page hereto (“Participant”).
 
Participant has not previously been an employee or director of the Company. The Company has determined to offer employment to Participant, and as an inducement material to Participant’s decision to accept such employment offer, the Company determined to grant Participant the Options (as defined herein) under the terms and conditions set forth herein.
 
This Agreement and the stock options granted hereby have not been granted pursuant to The AutoWeb, Inc. 2018 Equity Incentive Plan (“Plan”), but certain capitalized terms identified herein and not defined herein shall have the same meanings as defined in the Plan.
 
1. Grant of Options. The Company hereby grants to Participant non-qualified stock options (“Options”) to purchase the number of shares of common stock of the Company, par value $0.001 per share, set forth on the signature page to this Agreement (“Shares”), at the exercise price per Share set forth on the signature page to this Agreement (“Exercise Price”). The Options are not intended to qualify as incentive stock options under Section 422 of the Code (as such term is defined in the Plan).
 
2. Term of Options. Unless the Options terminate earlier pursuant to the provisions of this Agreement, the Options shall expire on the seventh (7th) anniversary of the Grant Date (“Option Expiration Date”).
 
3. Vesting. The Options shall become vested and exercisable in accordance with the vesting schedule set forth on the signature page to this Agreement (“Vesting Schedule”). No installments of the Options shall vest after Participant’s termination of employment for any reason.
 
 
 
 
 
 
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4. Exercise of Options.
 
(a)           Manner of Exercise. To the extent vested, the Options may be exercised, in whole or in part, by delivering written notice to the Company in accordance with Section 7(f) of this Agreement in such form as the Company may require from time to time, or at the direction of the Company, through the procedures established with the Company’s third party option administration service. Such notice shall specify the number of Shares subject to the Options that are being exercised and shall be accompanied by full payment of the Exercise Price of such Shares in a manner permitted under the terms of Section 5.5 of the Plan (as if these Options had been granted under the Plan) (including same day sales through a broker), except that payment in whole or in part in a manner set forth in clauses (ii), (iii) or (iv) of Section 5.5(b) of the Plan (as if these Options had been granted under the Plan), may only be made with the consent of the Committee (as such term is defined in the Plan). The Options may be exercised only in multiples of whole Shares, and no fractional Shares shall be issued.
 
(b)           Issuance of Shares. Upon exercise of the Options and payment of the Exercise Price for the Shares as to which the Options are exercised and satisfaction of all applicable tax withholding requirements, the Company shall issue to Participant the applicable number of Shares in the form of fully paid and nonassessable Shares.
 
(c)           Withholding. No Shares will be issued on exercise of the Options unless and until Participant pays to the Company or makes satisfactory arrangements with the Company for payment of, any federal, state, local or foreign taxes required by law to be withheld in respect of the exercise of the Options. Participant may remit withholding payment following Option exercise through the use of broker assisted Option exercise. Participant hereby agrees that the Company may withhold from Participant’s wages or other remuneration the applicable taxes. At the discretion of the Company, the applicable taxes may be withheld in kind from the Shares otherwise deliverable to Participant on exercise of the Options, up to Participant’s minimum required withholding rate or such other rate determined by the Committee that will not trigger a negative accounting impact.
 
(d)            Compliance with Securities Trading Policy. Shares issued upon exercise of the Options may only be sold, pledged or otherwise transferred in compliance with the Company’s securities trading policies generally applicable to officers, directors or employees of the Company as long as Participant is subject to such securities trading policy.
 
(e)           Limitation on Number of Resales or Transfers of Shares. The number of Shares that may be resold or transferred to the public or through any public securities trading market at any time may not exceed (i) for any one sale or transfer order, twenty-five percent (25%) of the Average Daily Volume; and (ii) for all sales or transfer volume in any calendar week, twenty-five percent (25%) of the Weekly Volume. For purposes of this Section 4(e), (i) “Average Daily Volume” will be determined once at the beginning of each calendar quarter for application during such quarter based on an averaging of the daily volume of sales of Company Common Stock as reported by The NASDAQ Capital Market (provided that if the Company’s Common Stock is not then listed on The NASDAQ Capital Market, as reported by such trading market on which the Common Stock is traded) for each trading day over the 90-trading day period preceding such determination; and (ii) “Average Weekly Volume” is calculated by multiplying the Average Daily Volume by the number of trading days in the calendar week preceding the proposed sale or transfer of Shares.
 
 

 
 
 
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