Blueprint
 

   
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 June 30, 2019
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)
 
 
 
400 North Ashley Drive, Suite 300
Tampa, Florida 33602
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code: (949) 225-4500
 
18872 MacArthur Boulevard, Suite 200
Irvine, California 92612
(Former Address, if Changed Since Last Report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
AUTO
The Nasdaq Capital Market
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      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      No  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  
Accelerated filer  
Non-accelerated filer  
Smaller reporting company  
 
Emerging growth company  
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  
 
As of August 5, 2019, there were 13,146,831 shares of the Registrant’s Common Stock, $0.001 par value, outstanding.


 
 
 

 
INDEX
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
 
 
 
 
 
 
2
 
 
 
 
 
 
3
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
16
 
 
 
 
 
22
 
 
 
 
 
22
 
 
 
 
 
 
 
 
 
 
 
 
23
 
 
 
 
 
24
 
 
 
 
 
 
25
 
 
 
 
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per-share data)


 
June 30,
2019
 
 
December 31,
2018
 
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $1,431 
 $13,600 
Restricted cash
  5,016 
   
Accounts receivable, net of allowances for bad debts and customer credits of $553 and $566 at June 30, 2019 and December 31, 2018, respectively
  23,331 
  26,898 
Prepaid expenses and other current assets
  1,655 
  1,245 
Total current assets
  31,433 
  41,743 
Property and equipment, net
  3,405 
  3,181 
Right-of-use assets
  3,301 
   
Intangible assets, net
  9,291 
  11,976 
Other assets
  819 
  516 
Total assets
  48,249 
  57,416 
Liabilities and Stockholders’ Equity
    
    
Current liabilities:
    
    
Accounts payable
  15,627 
  17,572 
Accrued employee-related benefits
  2,391 
  3,125 
Other accrued expenses and other current liabilities
  2,064 
  2,204 
Current portion of lease liabilities
  1,552 
   
Current convertible note payable
   
  1,000 
Total current liabilities
  21,634 
  23,901 
Lease liabilities, net of current portion
  1,894 
   
Total liabilities
  23,528 
  23,901 
Commitments and contingencies (Note 10)
   
   
Stockholders’ equity:
    
    
Preferred stock, $0.001 par value, 11,445,187 shares authorized
    
    
Series A Preferred stock, none issued and outstanding
   
   
Common stock, $0.001 par value; 55,000,000 shares authorized and 13,146,831 and 12,960,450 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
  13 
  13 
Additional paid-in capital
  362,737 
  361,218 
Accumulated deficit
  (338,029)
  (327,716)
Total stockholders’ equity
  24,721 
  33,515 
Total liabilities and stockholders’ equity
 $48,249 
 $57,416 
 
    
    
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
 
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Amounts in thousands, except per-share data)
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $21,691 
 $22,211 
 $47,389 
 $46,291 
Advertising
  5,432 
  6,950 
  11,310 
  15,037 
Other revenues
  19 
  131 
  47 
  313 
Total revenues
  27,142 
  29,292 
  58,746 
  61,641 
Cost of revenues
  21,758 
  23,765 
  47,605 
  48,423 
Gross profit
  5,384 
  5,527 
  11,141 
  13,218 
Operating expenses:
    
    
    
    
Sales and marketing
  2,956 
  3,052 
  5,834 
  6,764 
Technology support
  2,182 
  2,965 
  4,962 
  6,351 
General and administrative
  4,026 
  3,765 
  8,316 
  8,340 
Depreciation and amortization
  1,201 
  1,163 
  2,440 
  2,323 
Goodwill impairment
   
   
   
  5,133 
Total operating expenses
  10,365 
  10,945 
  21,552 
  28,911 
 
    
    
    
    
Operating (loss)
  (4,981)
  (5,418)
  (10,411)
  (15,693)
Interest and other income (expense), net
  33 
  201 
  103 
  201 
Loss before income tax provision
  (4,948)
  (5,217)
  (10,308)
  (15,492)
Income tax provision
  5 
   
  5 
  4 
Net loss and comprehensive loss
 $(4,953)
 $(5,217)
 $(10,313)
 $(15,496)
 
    
    
    
    
Basic loss per common share
 $(0.38)
 $(0.41)
 $(0.79)
 $(1.22)
 
    
    
    
    
Diluted loss per common share
 $(0.38)
 $(0.41)
 $(0.79)
 $(1.22)
 
    
    
    
    
 
See accompanying notes to unaudited condensed consolidated financial statements.
 

 
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
 
 
Three Months Ended June 30, 2018
 
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-In-
 
 
 
 Accumulated
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Capital
 
 
  Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2018
 $12,896,225 
  13 
   
 $ 
 $357,754 
 $(299,179)
 $58,588 
Share-based compensation
   
   
   
   
  943 
   
  943 
Issuance of common stock upon exercise of stock options
  750 
   
   
   
  1 
   
  1 
Cancellation of restricted stock
  (10,000)
   
   
   
   
   
   
Issuance of common stock
  60,975 
   
   
   
  200 
   
  200 
Net loss
   
   
   
   
   
  (5,217)
  (5,217)
Balance at June 30, 2018
  12,947,950 
  13 
   
 $ 
 $358,898 
 $(304,396)
 $54,515 
 
 
Three Months Ended June 30, 2019
 
 
 Common Stock
 
 
Preferred Stock
 
 
Additional Paid-In-
 
 
 
 Accumulated
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Capital
 
 
  Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2019
 $13,116,462 
  13 
   
 $ 
 $362,076 
 $(333,076)
 $29,013 
Share-based compensation
   
   
   
   
  560 
   
  560 
Issuance of common stock upon exercise of stock options
  57,036 
   
   
   
  101 
   
  101 
Cancellation of restricted stock
  (26,667)
   
   
   
   
   
   
Net loss
   
   
   
   
   
  (4,953)
  (4,953)
Balance at June 30, 2019
  13,146,831 
  13 
   
 $ 
 $362,737 
 $(338,029)
 $24,721 
 
 
 
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY CONTINUED
(in thousands, except share data)
 
Six Months Ended June 30, 2018
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-In-
 
 
 
 Accumulated
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Capital
 
 
  Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 $13,059,341 
  13 
   
 $ 
 $356,054 
 $(288,900)
 $67,167 
Share-based compensation
   
   
   
   
  2,570 
   
  2,570 
Issuance of common stock upon exercise of stock options
  15,967 
   
   
   
  74 
   
  74 
Cancellation of restricted stock
  (188,333)
   
   
   
   
   
   
Issuance of common stock
  60,975 
   
   
   
  200 
   
  200 
Net loss
   
   
   
   
   
  (15,496)
  (15,496)
Balance at June 30, 2018
  12,947,950 
  13 
   
 $ 
 $358,898 
 $(304,396)
 $54,515 
 
Six Months Ended June 30, 2019
 
 
Common Stock
 
 
Preferred Stock
 
 
Additional Paid-In-
 
 
 
 Accumulated 
 
 
 
 
 
 
Number of Shares
 
 
Amount
 
 
Number of Shares
 
 
Amount
 
 
Capital
 
 
  Deficit
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 $12,960,450 
  13 
   
 $ 
 $361,218 
 $(327,716)
 $33,515 
Share-based compensation
   
   
   
   
  1,111 
   
  1,111 
Issuance of common stock upon exercise of stock options
  213,048 
   
   
   
  408 
   
  408 
Cancellation of restricted stock
  (26,667)
   
   
   
   
   
   
Net loss
   
   
   
   
   
  (10,313)
  (10,313)
Balance at June 30, 2019
  13,146,831 
  13 
   
 $ 
 $362,737 
 $(338,029)
 $24,721 
 
 
 
AUTOWEB, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(10,313)
 $(15,496)
Adjustments to reconcile net loss to net cash provided by operating activities:
    
    
Depreciation and amortization
  3,509 
  4,360 
Goodwill impairment
   
  5,133 
Provision for bad debts
  122 
  146 
Provision for customer credits
  120 
  153 
Share-based compensation
  1,111 
  2,569 
Right-of-use assets
  924 
   
Lease liabilities
  (924)
   
Gain on sale of investment 
   
  (125)
Change in deferred tax asset
   
  692 
Changes in assets and liabilities:
    
    
Accounts receivable
  3,325 
  1,548 
Prepaid expenses and other current assets
  (410)
  428 
Other assets
  (303)
  (632)
Accounts payable
  (1,945)
  2,058 
Accrued expenses and other current liabilities
  (787)
  437 
Net cash (used in) provided by operating activities
  (5,571)
  1,271 
Cash flows from investing activities:
    
    
Payments for property and equipment
  (990)
  (392)
Proceeds from sale of investment 
   
  125 
Net cash used in investing activities
  (990)
  (267)
Cash flows from financing activities:
    
    
Borrowings under revolving credit facility
  16,940 
   
Principal payments on revolving credit facility
  (16,940)
  (8,000)
Payments on convertible note
  (1,000)
   
Proceeds from issuance of common stock
   
  200 
Proceeds from exercise of stock options
  408 
  74 
Net cash used in financing activities
  (592)
  (7,726)
Net decrease in cash and cash equivalents
  (7,153)
  (6,722)
Cash and cash equivalents and restricted cash, beginning of period
  13,600 
  24,993 
Cash and cash equivalents and restricted cash, end of period
 $6,447 
 $18,271 
 
    
    
Reconciliation of cash and cash equivalents and restricted cash
    
    
Cash and cash equivalents at beginning of period
 $13,600 
 $24,993 
Restricted cash at beginning of period
   
   
Cash and cash equivalents and restricted cash at beginning of period
 $13,600 
 $24,993 
 
    
    
Cash and cash equivalents at end of period
 $1,431 
 $18,271 
Restricted cash at end of period
  5,016 
   
Cash and cash equivalents and restricted cash at end of period
 $6,447 
 $18,271 
 
    
    
Supplemental disclosure of cash flow information:
    
    
Cash paid for income taxes
 $1 
 $ 
Cash refunds for income taxes
  124 
   
Cash paid for interest
 $40 
 $88 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
 
AUTOWEB, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Organization and Operations
 
AutoWeb, Inc. (“AutoWeb” or the “Company”) is a digital marketing company for the automotive industry that assists automotive retail dealers (“Dealers”) and automotive manufacturers (“Manufacturers”) market and sell new and used vehicles to consumers by utilizing the Company’s digital sales enhancing products and services.
 
The Company’s consumer-facing automotive websites (“Company Websites”) provide consumers with information and tools to aid them with their automotive purchase decisions and the ability to connect with Dealers regarding purchasing or leasing vehicles (“Leads”). Leads are internally-generated from Company Websites or acquired from third parties that generate Leads from their websites. The Company’s click traffic referral program provides consumers who are shopping for vehicles online with targeted offers based on make, model and geographic location. As these consumers conduct online research on Company Websites or on the site of one of the Company’s network of automotive publishers, they are presented with relevant offers on a timely basis and, upon the consumer clicking on the displayed advertisement, are sent to the appropriate website location of one of the Company’s Dealer, Manufacturer or advertising customers.
 
The Company was incorporated in Delaware on May 17, 1996. The Company’s common stock is listed on the NASDAQ Capital Market under the symbol AUTO. Effective August 7, 2019, the Company’s board of directors designated the Company’s office in Tampa, Florida located at 400 North Ashley Drive, Suite 300, Tampa, Florida 33602 as the Company’s principal office for the transaction of business of the Company pursuant to Section 1.02 of the Company’s bylaws and as the Company’s principal executive offices.
 
2. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements are presented on the same basis as the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) filed with the Securities and Exchange Commission (“SEC”).  AutoWeb has made its disclosures in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation with respect to interim financial statements, have been included. The unaudited condensed consolidated statements of operations and comprehensive loss and cash flows for the periods ended June 30, 2019 are not necessarily indicative of the results of operations or cash flows expected for the year or any other period.  The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the 2018 Form 10-K.  
 
Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation.
 
References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless otherwise specified.
 
On April 30, 2019, the Company entered into a $25.0 million Revolving Credit and Security Agreement ("Credit Agreement" or “Revolving Loan”) with PNC Bank, N.A. (“PNC”) as agent, and the Company’s U.S. subsidiaries Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, (“Company Subsidiaries”). The obligations under the Credit Agreement are guaranteed by the Company Subsidiaries and secured by a first priority lien on all of the Company's and the Company Subsidiaries’ tangible and intangible assets. The Credit Agreement provides a subfacility of up to $5.0 million for letters of credit. The Credit Agreement expires on April 30, 2022.
 
The Credit Agreement contains customary representations and warranties and covenants that restrict the Company and the Company Subsidiaries from engaging in or taking various actions, including, among other things (but except as otherwise permitted by the Credit Agreement): (i) incurring or guaranteeing additional indebtedness; (ii) making any loans, investments or acquisitions; (iii) selling or otherwise transferring or disposing of assets other than in the ordinary course of business; (iv) engaging in transactions with affiliates; and (v) declaring or making distributions on their stock or other equity interests. In addition, the Credit Agreement contains financial covenants that require the Company to maintain its consolidated EBITDA (as defined in the Credit Agreement) at stated minimum levels ranging from ($2.9) million to $7.5 million for various periods during the term of the Credit Agreement. The Company is also required to maintain a $5.0 million pledged interest-bearing deposit account with Lender until the Company’s consolidated EBITDA is greater than $10.0 million. 
 
Restricted cash primarily consists of security deposits and other cash escrowed under the Credit Agreement (Note 9).
 
 
 
3.  Recent Accounting Pronouncements
 
Issued but not yet adopted by the Company
 
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract” (“ASU 2018-15”). ASU 2018-15 was issued to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company is currently evaluating the impact of adopting the updated provisions which are effective for annual periods beginning after December 15, 2019, including interim periods within that reporting period, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the Consolidated Financial Statements.
 
 Recently adopted by the Company
 
Accounting Standards Codification 220 “Comprehensive Income.” In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. On January 1, 2019, the Company adopted ASU No. 2018-02 and it did not have a material effect on the consolidated financial statements and related disclosures.
 
Accounting Standards Codification 842 “Leases” (“ASC 842”) In February 2016, ASU No. 2016-02, “Leases (Topic 842)” was issued. This ASU was issued to increase transparency and comparability among organizations by requiring lessees to (i) recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet to represent the right to use the leased asset for the lease term and the obligation to make lease payments, and (ii) disclose key information about leasing arrangements. Some changes to the lessor accounting guidance were made to align both of the following: (i) the lessor accounting guidance with certain changes made to the lessee accounting guidance, and (ii) key aspects of the lessor accounting model with revenue recognition guidance.
 
The Company adopted the ASU effective January 1, 2019 utilizing the modified retrospective approach for adoption for all leases that existed at or commenced after the date of initial application with an option to use certain practical expedients. The package of practical expedients allowed the Company to not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) lease classification for any expired or existing leases, and (iii) initial direct costs for any expired or existing leases. The Company also used (i) hindsight when evaluating contractual lease options, (ii) the practical expedient that allows lessees to treat lease and non-lease components of leases as a single lease component, and (iii) the portfolio approach which allows similar leased assets to be grouped and accounted for together. In addition, the Company implemented additional internal controls to evaluate future transactions in accordance with the standard.
 
The adoption of ASC 842 had a material impact on the consolidated balance sheet due to the recognition of ROU assets and lease liabilities. The adoption of this ASU did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows. The Company did not recognize a material cumulative effect adjustment to the opening balance sheet retained earnings on January 1, 2019. Because the modified retrospective approach was elected, the ASU was not applied to periods prior to adoption and did not have an impact on previously reported results. At adoption, the Company recognized operating lease ROU assets and lease liabilities that reflect the present value of the future payments. As the rate implicit in the lease could not be determined for any of the Company’s leases, an estimated incremental borrowing rate of 5.5% was used to determine the present value of lease payments. Based on the impact of ASC 842 on the lease population, the Company recorded $4.4 million in lease liabilities and $4.2 million for ROU assets based upon the lease liabilities adjusted for deferred rent. See Note 8 for additional information on leases.
 
SEC Release No. 33-10532, Disclosure Update and Simplification. In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, “Disclosure Update and Simplification”, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule became effective on November 5, 2018, and the Company adopted the requirements in the first quarter of 2019. See “Unaudited Condensed Consolidated Statements of Stockholders’ Equity.”
 
 
 
4.  Revenue Recognition
 
Revenue is recognized upon transfer of control of promised goods or services to the Company’s customers, or when the Company satisfies any performance obligations under contract. The amount of revenue recognized reflects the consideration the Company expects to be entitled to in exchange for respective goods or services provided. Further, under ASC 606, Revenue from Contracts with Customers,” (“ASC 606”) contract assets or contract liabilities that arise from past performance but require a further performance before the obligation can be fully satisfied must be identified and recorded on the balance sheet until respective settlements have been met.
 
The Company has three main revenue sources – Lead 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) the Company’s click traffic program and (ii) display advertising on the Company’s websites. 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 advertisement in the period in which a user takes the action for which the marketer contracted 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
 
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 were approximately $134,000 and $121,000 at June 30, 2019 and December 31, 2018, respectively.
 
Contract Assets and Contract Liabilities
 
Unbilled Revenue
 
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing. From time-to-time, the Company may have balances on its balance sheet representing revenue that has been recognized by the Company upon satisfaction of performance obligations and earning a right to receive payment. These not-yet invoiced receivable balances are driven by the timing of administrative transaction processing, and are not indicative of partially complete performance obligations, or unbilled revenue. Unbilled revenue represents revenue that is partially earned, whereby control of promised services has not yet transferred to the customer, and for which the Company has not earned the complete right to payment. The Company had zero unbilled revenue included in its consolidated balance sheets as of June 30, 2019 and December 31, 2018.
 
Deferred Revenue
 
The Company defers the recognition of revenue when cash payments are received or due in advance of satisfying its performance obligations, including amounts which are refundable. Such activity is not a common practice of operation for the Company.  The Company had zero deferred revenue included in its consolidated balance sheets as of June 30, 2019 and December 31, 2018. Generally, payment terms within the Company’s customer contracts include a requirement of payment within 30 to 60 days from date of invoice. Typically, customers make payments after receipt of invoice for billed services, and less typically, in advance of rendered services.
 
The Company has not made any significant changes in applying ASC 606 during the six months ended June 30, 2019
 
 
 
Disaggregation of Revenue
 
The Company disaggregates revenue from contracts with customers by revenue source and has determined that disaggregating revenue into these categories sufficiently depicts the differences in the nature, amount, timing, and uncertainty of revenue streams. The Company has three main sources of revenue: lead fees, advertising, and other revenues.
 
The following table summarizes revenue from contracts with customers, disaggregated by revenue source, for the three and six months ended June 30, 2019 and 2018. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $21,691 
 $22,211 
 $47,389 
 $46,291 
Advertising
    
    
    
    
Clicks
  4,456 
  5,771 
  9,515 
  12,462 
Display and other advertising
  976 
  1,179 
  1,795 
  2,575 
 
  5,432 
  6,950 
  11,310 
  15,037 
 
    
    
    
    
Other revenues
  19 
  131 
  47 
  313 
   Total revenues
 $27,142 
 $29,292 
 $58,746 
 $61,641 
 
 5.   Net Loss Per Share and Stockholders’ Equity
 
Basic net loss per share is computed using the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock. Diluted net loss per share is computed using the weighted average number of common shares, and if dilutive, potential common shares outstanding, as determined under the treasury stock and if-converted methods, during the period. Potential common shares consist of unvested restricted stock and common shares issuable upon the exercise of stock options and warrants.  
 
The following are the share amounts utilized to compute the basic and diluted net loss per share for the three and six months ended June 30, 2019 and 2018:
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
 June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Basic Shares:
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
  13,147,741 
  12,920,591 
  13,066,617 
  12,965,520 
Weighted average unvested restricted stock
  (36,850)
  (194,505)
  (48,362)
  (293,646)
Basic Shares
  13,110,891 
  12,726,086 
  13,018,255 
  12,671,874 
 
    
    
    
    
Diluted Shares:
    
    
    
    
Basic shares
  13,110,891 
  12,726,086 
  13,018,255 
  12,671,874 
Weighted average dilutive securities
   
   
   
   
Diluted Shares
  13,110,891 
  12,726,086 
  13,018,255 
  12,671,874 
 
For the three and six months ended June 30, 2019 and 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 six months ended June 30, 2019, 4.2 million and 4.1 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 six months ended June 30, 2018, 4.2 and 4.3 million of potentially anti-dilutive securities related to common stock have been excluded from the calculation of diluted net earnings per share, respectively.
 
 
 6. Share-Based Compensation
 
Share-based compensation expense is included in costs and expenses in the accompanying Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss as follows:
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation expense:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
 $ 
 $4 
 $ 
 $19 
Sales and marketing
  66 
  159 
  138 
  384 
Technology support
  52 
  173 
  93 
  326 
General and administrative (1)
  442 
  607 
  880 
  1,841 
Share-based compensation costs
  560 
  943 
  1,111 
  2,570 
 
    
    
    
    
Amount capitalized to internal use software
   
   
   
  1 
Total share-based compensation costs
 $560 
 $943 
 $1,111 
 $2,569 
 
    
    
    
    
 
(1)
Certain awards were modified in connection with the termination of employment of two of the Company’s former executive officers. In accordance with the terms of applicable award agreements and/or consulting agreements, the vesting of certain awards was accelerated, and the terms of certain awards were modified. The Company recorded $0.8 million of expense related to the acceleration of certain awards and expense related to the modification of awards of approximately $0.1 million during the six months ended June 30, 2018.
 
 Service-Based Options.  The Company granted the following service-based options for the three and six months ended June 30, 2019 and 2018, respectively:  
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of service-based options granted
  140,000 
  1,715,200 
  1,182,883 
  1,716,700 
Weighted average grant date fair value
 $1.84 
 $1.83 
 $1.82 
 $1.84 
Weighted average exercise price
 $3.45 
 $3.29 
 $3.42 
 $3.30 
 
These options are valued using a Black-Scholes option pricing model and generally vest one-third on the first anniversary of the grant date and ratably over twenty-four months thereafter.  The vesting of these awards is contingent upon the employee’s continued employment with the Company during the vesting period, and vesting will be accelerated in the event of a change in control of the Company, termination without cause of an employee, and voluntary termination by an employee with good reason.
 
The grant date fair value of stock options granted during these periods was estimated using the Black-Scholes option pricing model using the following weighted average assumptions:
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividend yield
   
   
   
   
Volatility
  66%
  68%
  65%
  68%
Risk-free interest rate
  2.2%
  2.6%
  2.5%
  2.6%
Expected life (years)
  4.4 
  4.5 
  4.4 
  4.5 
 
 
 
-10-
 
Stock option exercises.  The following stock options were exercised during the three and six months ended June 30, 2019 and 2018, respectively:  
 
 
 
Three Months Ended
June 30,
 
 
Six Months Ended
June 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of stock options exercised
  57,036 
  750 
  213,048 
  15,967 
Weighted average exercise price
 $1.77 
 $2.20 
 $1.92 
 $4.68 
 
 7. Selected Balance Sheet Accounts
 
Property and Equipment.  Property and equipment consists of the following:
 
 
June 30,
2019
 
 
December 31,
2018
 
 
 
 
 
 
 
 
Computer software and hardware
 $12,440 
 $11,393 
Capitalized internal use software
  6,228 
  6,228 
Furniture and equipment
  1,743 
  1,743 
Leasehold improvements
  1,613 
  1,613 
 
  22,024 
  20,977 
Less—Accumulated depreciation and amortization
  (18,619)
  (17,796)
 Property and Equipment, net
 $3,405 
 $3,181 
 
Concentration of Credit Risk and Risks Due to Significant Customers.  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are primarily maintained with high credit quality financial institutions in the United States. Deposits held by banks exceed the amount of insurance provided for such deposits. 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. Approximately 34%, or $8.0 million, of gross accounts receivable at June 30, 2019, and approximately 27% of total revenues for the six months ended June 30, 2019, are related to Urban Science Applications (which represents Acura, Honda, Nissan, Infiniti, Subaru, Toyota and Volvo) and General Motors. For 2018, approximately 43%, or $10.7 million, of gross accounts receivables at June 30, 2018, and approximately 37% of total revenues for the six months ended June 30, 2018, is related to Urban Science Applications, Media.net Advertising and General Motors.
 
 
 
-11-
 
Intangible Assets.  The Company amortizes specifically identified definite-lived intangible assets using the straight-line method over the estimated useful lives of the assets.
 
The Company’s intangible assets are amortized over the following estimated useful lives:
 
 
 
 
June 30, 2019
 
 
December 31, 2018
 
Definite-lived Intangible Asset
Estimated Useful Life
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks/ trade names/ licenses/ domains
3 - 7 years
 $16,589 
 $(15,182)
 $1,407 
 $16,589 
 $(14,914)
 $1,675 
Customer relationships
2 - 5 years
  19,563 
  (17,417)
  2,146 
  19,563 
  (15,544)
  4,019 
Developed technology
5 - 7 years
  8,955 
  (5,417)
  3,538 
  8,955 
  (4,873)
  4,082 
 
 $45,107 
 $(38,016)
 $7,091 
 $45,107 
 $(35,331)
 $9,776 
 
    
    
    
    
    
    
 
 
 
 
June 30, 2019
 
 
December 31, 2018
 
Definite-lived Intangible Asset
Estimated Useful Life
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
 
Gross
 
 
Accumulated Amortization
 
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Domain
Indefinite
 $2,200 
 $ 
 $2,200 
 $2,200 
 $ 
 $2,200 
 
Amortization expense is included in “Cost of revenues” and “Depreciation and amortization” in the Unaudited Consolidated Condensed Statements of Operations.  Total amortization expense was $1.3 million and $2.7 million for the three and six months ended June 30, 2019, respectively. Amortization expense was $1.7 million and $3.4 million for the three and six months ended June 30, 2018, respectively.
 
Amortization expense for the remainder of the year and for future years is as follows:
 
Year
 
Amortization Expense
 
 
 
 
 
2019
 $2,187 
2020
  2,371 
2021
  1,499 
2022
  902 
2023
  86 
Thereafter
  46 
 
 $7,091 
 
    
 
 
-12-
 
Accrued Expenses and Other Current Liabilities.  Accrued expenses and other current liabilities consisted of the following:
 
 
 
June 30,
2019
 
 
December 31,
2018
 
 
 
 
 
 
 
 
Accrued employee-related benefits
 $2,391 
 $3,125 
Other accrued expenses and other current liabilities:
    
    
Other accrued expenses
  1,062 
  1,346 
Amounts due to customers
  596 
  424 
Other current liabilities
  406 
  434 
Total other accrued expenses and other current liabilities
  2,064 
  2,204 
 
    
    
Total accrued expenses and other current liabilities
 $4,455 
 $5,329 
 
Convertible Notes Payable.  In connection with the acquisition of AutoUSA on January 13, 2014, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc., with interest payable at an annual interest rate of 6% in quarterly installments. The entire outstanding balance of the AutoUSA Note plus accrued interest was paid in full on January 31, 2019.
 
8. Leases
 
The Company determines if an arrangement is a lease at inception. The Company leases its facilities and certain office equipment under operating leases which expire on various dates through 2024. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. The ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
 
Lease Liabilities.  Lease liabilities as of June 30, 2019 consist of the following:
 
Current portion of lease liabilities
 $1,552 
Long term lease liabilities, net of current portion
  1,894 
Total lease liabilities
 $3,446 
 
The Company’s aggregate lease maturities as of June 30, 2019 are as follows:
 
Year
 
 
 
2019 (remaining 6 months)
 $872 
2020
  1,279 
2021
  513 
2022
  459 
2023
  472 
Thereafter
  199 
Total minimum lease payments
  3,794 
Less imputed interest
  (348)
Total lease liabilities
 $3,446 
 
Rent expense included in operating expenses and cost of revenue was $1.0 million for the six months ended June 30, 2019. The Company had a weighted average remaining lease term of 2.1 years and a weighted average discount rate of 5.5% as of June 30, 2019. Rent expense included in operating expenses for the six months ended June 30, 2018 was $0.8 million under ASC 840, the predecessor to ASC 842. In June 2017, the Company subleased one of its buildings to a third party for the remainder of the lease term which expired in February 2019. Rent expense for the six months ended June 30, 2019 and 2018 is net of sublease income of approximately $26,000 and $77,000, respectively. As of June 30, 2019, the Company did not have any additional operating leases that have not yet commenced.
 
 
 
-13-
 
9. Credit Facility
 
On April 30, 2019, the Company entered into a $25.0 million Revolving Credit and Security Agreement ("Credit Agreement" or “Revolving Loan”) with PNC Bank, N.A. (“PNC”) as agent, and the Company’s U.S. subsidiaries Car.com, Inc., Autobytel, Inc., and AW GUA USA, Inc., as Guarantors, (“Company Subsidiaries”). The obligations under the Credit Agreement are guaranteed by the Company Subsidiaries and secured by a first priority lien on all of the Company’s and the Company Subsidiaries’ tangible and intangible assets. The Credit Agreement provides a subfacility of up to $5.0 million for letters of credit. The Credit Agreement expires on April 30, 2022. As of June 30, 2019, the Company had no outstanding borrowings under its credit facility. Financing costs related to the credit facility, net of accumulated amortization, of approximately $0.3 million, have been deferred and are included in other assets as of June 30, 2019.
 
The interest rates per annum applicable to borrowings under the Credit Agreement will be, at the Company’s option (subject to certain conditions), equal to either a domestic rate (“Domestic Rate Loans”) or a LIBOR rate for one, two, or three-month interest periods chosen by the Company (“LIBOR Rate Loans”), plus the applicable margin percentage of 2% for Domestic Rate Loans and 3% for LIBOR Rate Loans. The domestic rate for Domestic Rate Loans will be the highest of (i) the base commercial lending rate of Lender, (ii) the overnight bank funding rate plus 0.50%, or (iii) the LIBOR rate plus 1.00% so long as the daily LIBOR rate is offered, ascertainable and not unlawful. The Credit Agreement also provides for commitment fees ranging from 0.5% to 1.5% applied to unused funds (with the applicable fee based on quarterly average borrowings), but with the fees fixed at 1.5% until June 30, 2019. Fees for Letters of Credit are equal to 3% for LIBOR Rate Loans, with a fronting fee for each Letter of Credit in an amount equal to 0.5% of the daily average aggregate undrawn amount of all Letters of Credit outstanding.
 
The Credit Agreement contains customary representations and warranties and covenants that restrict the Company and the Company Subsidiaries from engaging in or taking various actions, including, among other things (but except as otherwise permitted by the Credit Agreement): (i) incurring or guaranteeing additional indebtedness; (ii) making any loans, investments or acquisitions; (iii) selling or otherwise transferring or disposing of assets other than in the ordinary course of business; (iv) engaging in transactions with affiliates; and (v) declaring or making distributions on their stock or other equity interests. In addition, the Credit Agreement contains financial covenants that require the Company to maintain its consolidated EBITDA (as defined in the Credit Agreement) at stated minimum levels ranging from ($2.9) million to $7.5 million for various periods during the term of the Credit Agreement. The Company is also required to maintain a $5.0 million pledged interest-bearing deposit account with Lender until the Company’s consolidated EBITDA is greater than $10.0 million. As of June 30, 2019, the Company had restricted cash related to the credit facility of approximately $5.0 million.
 
As of June 30, 2019, and for the six months then ended, the Company had cash and cash equivalents of $1.4 million and a net loss of $10.3 million. The net loss is primarily attributable to operating expenses of $2l.6 million during the six months ended June 30, 2019. The Company used net cash in operations of $5.6 million for the six months ended June 30, 2019. As of June 30, 2019, the Company had an accumulated deficit of $338.0 million and stockholders' equity of $24.7 million.
 
The Company has developed a strategic plan focused on improving operating performance in the future that includes modernizing and upgrading its technology and systems, pursuing business objectives and responding to business opportunities, developing new or improving existing products and services and enhancing operating infrastructure. The plan's objective is for the Company to generate positive cash flows by the fourth quarter of 2019. However, there is no assurance that the Company will be able to achieve this objective. Also, the Company entered into the Credit Agreement discussed above that is expected to be used to partially fund operations. However, if the Company continues to experience losses and becomes unable to comply with the financial covenants in the Credit Agreement, the Company may be unable to borrow funds under this credit facility.
 
The Company believes that current cash reserves and operating cash flows will be sufficient to sustain operations into at least the third quarter of 2020. If the Company's plans are unsuccessful, it may need to seek to satisfy its future cash needs through private or public sales of securities, debt financings or partnering/licensing transactions. However, there is no assurance that the Company will be successful in satisfying its future cash needs such that the Company will be able to continue operations.
   
 
 
-14-
 
10. Commitments and Contingencies
 
Employment Agreements
 
The Company has employment agreements and severance benefits/retention agreements with certain key employees. A number of these agreements require severance payments and continuation of certain insurance benefits in the event of a termination of the employee’s employment by the Company without cause or by the employee for good reason (as defined in these agreements). Stock option agreements and restricted stock award agreements with some key employees provide for acceleration of vesting of stock options and lapsing of forfeiture restrictions on restricted stock in the event of a change in control of the Company, upon termination of employment by the Company without cause or by the employee for good reason, or upon the employee’s death or disability.
 
Litigation
 
From time to time, the Company may be involved in litigation matters arising from the normal course of its business activities. Such litigation, even if not meritorious, could result in substantial costs and diversion of resources and management attention, and an adverse outcome in litigation could materially adversely affect its business, results of operations, financial condition and cash flows.
 
11. Income Taxes
 
On an interim basis, the Company estimates what its anticipated annual effective tax rate will be and records a quarterly income tax provision in accordance with the estimated annual rate, adjusted accordingly by the tax effect of certain discrete items that arise during the quarter. As the year progresses, the Company refines its estimated annual effective tax rate based on actual year-to-date results. This process can result in significant changes to the Company's estimated effective tax rate. When such activity occurs, the income tax provision is adjusted during the quarter in which the estimates are refined and adjusted. As such, the Company's year-to-date tax provision reflects the estimated annual effective tax rate. Therefore, these changes along with the adjustments to the Company's deferred taxes and related valuation allowance, may create fluctuations in the overall effective tax rate from period to period.
 
Due to overall cumulative losses incurred in recent years, the Company maintained a valuation allowance against its deferred tax assets as of June 30, 2019 and December 31, 2018.
 
The Company’s effective tax rate for the six months ended June 30, 2019 differed from the U.S. federal statutory rate primarily due to operating losses that receive no tax benefit as a result of a valuation allowance recorded against the Company's existing tax assets.
 
The total amount of unrecognized tax benefits, excluding associated interest and penalties, was $0.5 million as of June 30, 2019, all of which, if subsequently recognized, would have affected the Company's tax rate.
 
As of June 30, 2019 and December 31, 2018, there was no balance of accrued interest and penalties related to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense, and the accrued interest and penalties are included in deferred and other current liabilities in the Company’s condensed consolidated balance sheets. There were no material interest or penalties included in income tax expenses for the three and six months ended June 30, 2019 and 2018.
 
The Company is subject to taxation in the U.S. and in various foreign and state jurisdictions. Due to expired statutes of limitation, the Company’s federal income tax returns for years prior to calendar year 2015 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state jurisdictions where the Company does business, periods prior to calendar year 2014 are no longer subject to examination. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits within the next twelve months.
 
12. Subsequent Event
 
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. In October 2015 and May 2016, the Company invested an additional $375,000 and $375,000 in each period in the form of convertible promissory notes. At December 31, 2017, both the GoMoto Notes and related interest receivable were fully reserved because the Company believed the amounts were not recoverable. Furthermore, based on continuing deterioration in GoMoto’s financial position, the Company believed that uncertainty existed in the recoverability of its remaining investment of $100,000 in GoMoto and, accordingly, recognized a loss on the investment for the year ended December 31, 2018. On January 29, 2019, the GoMoto Notes were converted into 1,781,047 shares of GoMoto’s Series A-2 Preferred Stock, $0.001 par value per share. The outstanding principal plus accrued interest under the GoMoto Notes was converted in accordance with the terms of the notes upon the closing of a new preferred stock financing and based on a discount to the price paid by the new investor for the investor’s preferred shares. On July 30, 2019, the Company entered into a Repurchase Agreement with GoMoto, pursuant to which GoMoto repurchased these 317,460 shares of Series Seed Preferred Stock and 1,781,047 shares of Series A-2 Preferred Stock from the Company for an aggregate purchase price of $250,000.
 
 
 
-15-
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Cautionary Note Concerning Forward-Looking Statements
 
The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “could,” “may,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” “will” and words of similar substance used in connection with any discussion of future operations or financial performance identify forward-looking statements. In particular, statements regarding expectations and opportunities, industry trends, new product expectations and capabilities, and our outlook regarding our performance and growth are forward-looking statements. This Quarterly Report on Form 10-Q also contains statements regarding plans, goals and objectives. There is no assurance that we will be able to carry out our plans or achieve our goals and objectives or that we will be able to do so successfully on a profitable basis. These forward-looking statements are just predictions and involve significant risks and uncertainties, many of which are beyond our control, and actual results may differ materially from these statements. Factors that could cause actual outcomes or results to differ materially from those reflected in forward-looking statements include, but are not limited to, those discussed in this Item 2, Part II, Item 1A of this Quarterly Report on Form 10-Q, and under the heading “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). Investors are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date on which they were made. Except as may be required by law, we do not undertake any obligation, and expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained herein are qualified in their entirety by the foregoing cautionary statements.
 
The following discussion of our results of operations and financial condition should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the notes thereto in the 2018 Form 10-K.
 
Our corporate website is located at www.autoweb.com. Information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q. At or through the Investor Relations section of our website we make available free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports as soon as practicable after the reports are electronically filed with or furnished to the SEC.
 
Unless the context otherwise requires, the terms “we,” “us,” “our,” “AutoWeb,” and “Company” refer to AutoWeb, Inc. and its consolidated subsidiaries.
 
Basis of Presentation and Critical Accounting Policies
 
See Note 2, Basis of Presentation, to the accompanying unaudited condensed consolidated financial statements.
 
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and our actual results, our financial condition or results of operations may be affected. For a detailed discussion of the application of our critical accounting policies, see Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 “Financial Statements and Supplementary Data” in the 2018 Form 10-K. Except as disclosed in Note 8 to the Unaudited Condensed Consolidated Financial Statements, pertaining to our adoption of Accounting Standards Codification 842, Leases, there have been no changes to our critical accounting policies since we filed our 2018 Form 10-K.
 
Overview
 
Total revenues in the first six months of 2019 were $58.7 million compared to $61.6 million in the first six months of 2018. The decline in total revenues was primarily due to a traffic acquisition focus on quality and margin as opposed to raw lead volume, a decrease in click revenue caused by lower revenue per click, and a decrease in display advertising revenue. We continue to invest in new traffic acquisition strategies and enhanced mobile consumer experiences. Further, we continue to invest in our pay per click approach, to improve the consumer, customer, and financial performance of that product. We do not expect desktop and mobile display advertising to be a major area of focus for us in the future, as it represents a secondary, not primary, revenue stream.
 
 
 
-16-
 
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 moved into the fourth quarter of 2018 with a plan that we began to execute strategically in the first quarter of 2019. 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 cloud based technologies, and to continue to restructure our organization to better align with our revised strategy. While these initiatives may result in initial material upfront expenses, they are anticipated to reduce costs over the longer term. We have begun to deploy various initiatives to address these issues, which began with addressing our lead generation capabilities to stabilize the declines in the largest part of our business, integrating our products to create a unified solution of leads, clicks and emails, and building out the team to execute on our strategy.
 
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. We believe that 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. We now have our full senior leadership team in place which we believe will increase the pace of change and improve operational execution. During 2018, we focused on stabilizing the leads business as it comprises the majority of our revenue. For 2019, we are focusing on our click traffic product.
 
Starting in 2018, we began to mobile-enable our core new car lead generation websites. This is a considerable area of focus for us in 2019 as we evolve our sites to deliver a better experience for consumers to drive conversion. We anticipate that we will mobile-enable the rest of our lead generation sites throughout 2019. We also recently developed an approach to mobile-enable our click traffic product which is a critical step in our mobile enablement plan. The click product allows us to monetize visits more effectively to our websites. Further, it provides our clients with a unique opportunity to engage consumers with relevant messaging in a unique format. We began testing of the mobile enablement of our click traffic product in the first quarter of 2019. Ultimately, mobile optimization of our websites and products is the goal, and we still have significant work to do in this area.
 
With respect to the automotive industry, we expect total vehicle sales and the seasonally-adjusted annual rate to be down in 2019. LMC Automotive has forecasted 2019 U.S. total light vehicle sales and retail light-vehicle sales at 17.0 million and 13.7 million, respectively, representing declines in U.S. total light vehicle sales and retail light-vehicle sales of 1.9% and 1.5%, respectively, over 2018 sales. AutoNews has reported that light vehicle sales are off to the slowest start for a year since 2014, with year-to-date sales down about 3%. We believe it will be difficult for Manufacturers to maintain their historic volumes due to affordability challenges with interest rates and overall less Manufacturer incentives. However, we continue to believe we can operate well in this environment as we believe Dealers will seek out their highest return on investment marketing channels to drive sales. And with our detailed attribution and product quality improvements, we believe we will continue to have a strong place in their marketing budgets as we believe we are one of the most efficient marketing channels available to them.
 
Although we are not able at this time to disclose any guidance as to 2019 financial performance with detail or accuracy, we do anticipate volatility in our total revenues, cost of revenues, gross profit, and gross margin for 2019. During the first half of 2019, our cash burn increased as we invested in our people, products and technology. We expect to return to incremental cash generation in the second half of 2019 as those investment initiatives are now largely completed. This further allowed us to reduce our office footprint and eliminate certain other positions to further reduce staffing costs in the second quarter of 2019. We continue to evaluate options to improve our ongoing liquidity and balance sheet through non-dilutive measures, and also continue to have availability under the $25 million revolving credit facility that we entered into on April 30, 2019.
 
 
 
-17-
 
Results of Operations
 
 Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
 
The following table sets forth certain statement of operations data for the three-month periods ended June 30, 2019 and 2018 (certain balances and calculations have been rounded for presentation):
 
 
 
2019
 
 
% of
Total
Revenues
 
 
2018
 
 
% of
Total
Revenues
 
 
Change
 
 
% Change
 
 
(Dollar amounts in thousands)



Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $21,691 
  80%
 $22,211 
  76%
 $(520)
  (2)%
Advertising
  5,432 
  20 
  6,950 
  24 
  (1,518)
  (22)
Other revenues
  19 
   
  131 
   
  (112)
  (86)
Total revenues
  27,142 
  100 
  29,292 
  100 
  (2,150)
  (7)
Cost of revenues
  21,758 
  80 
  23,765 
  81 
  (2,007)
  (8)
Gross profit
  5,384 
  20 
  5,527 
  19 
  (143)
  (3)
Operating expenses:
    
    
    
    
    
    
Sales and marketing
  2,956 
  11 
  3,052 
  10 
  (96)
  (3)
Technology support
  2,182 
  8 
  2,965 
  10 
  (783)
  (26)
General and administrative
  4,026 
  15 
  3,765 
  13 
  261 
  7 
Depreciation and amortization
  1,201 
  4 
  1,163 
  4 
  38 
  3 
Goodwill impairment
   
   
   
   
   
   
Total operating expenses
  10,365 
  38 
  10,945 
  37 
  (580)
  (5)
Operating loss
  (4,981)
  (18)
  (5,418)
  (19)
  437 
  (8)
Interest and other income (expense), net
  33 
   
  201 
  1 
  (168)
  (84)
Loss before income tax provision
  (4,948)
  (18)
  (5,217)
  (18)
  269 
  (5)
Income tax provision
  5 
   
   
   
  5 
   
Net loss
 $(4,953)
  (18)%
 $(5,217)
  (18)%
 $264 
  (5)%
 
              Leads.  Lead fees revenues decreased $0.5 million, or 2%, in the second quarter of 2019 compared to the second quarter of 2018 primarily as a result of a decrease in retail lead fee revenues coupled with a decrease in revenues from automotive manufacturers.
   
Advertising. Advertising revenues decreased $1.5 million, or 22%, in the second quarter of 2019 compared to the second quarter of 2018 as a result of a decline in click revenues associated with decreased click volume and pricing.
 
Other Revenues.  Other revenues consist primarily of revenues from our mobile products and revenues from our Reseller Agreement with SaleMove, which expired in November 2018. Other revenues decreased to $19,000 in the second quarter of 2019 from $131,000 in the second quarter of 2018 primarily due to lower customer utilization of the mobile product and SaleMove product.
 
 
 
-18-
 
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, technology license fees, server equipment depreciation, and technology amortization directly related to the Company Websites. Cost of revenues decreased $2.0 million, or 8%, in the second quarter of 2019 compared to the second quarter of 2018 primarily due to decreased traffic acquisition costs, a decrease in click publisher costs and a decrease in amortization expense from intangibles. Further contributing to the decrease was a decrease in costs related to headcount. These costs were shifted to operational roles at the beginning of 2019, as we determined these roles were no longer directly tied to revenue generation. Partially offsetting the decreases was an increase in SEM costs.
 
Sales and Marketing.  Sales and marketing expense includes costs for developing our brand equity, personnel costs, and other costs associated with automotive retail (“Dealer”) sales, website advertising, Dealer support, and bad debt expense. Sales and marketing expense in the second quarter of 2019 decreased $0.1 million, or 3%, compared to the second quarter of 2018 due primarily to a decrease in SEM expense.
 
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 second quarter of 2019 decreased by $0.8 million, or 26%, compared to the second quarter of 2018 due primarily to lower headcount related costs.
 
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 second quarter of 2019 increased by $0.3 million, or 7%, from the second quarter of 2018 due primarily to severance and recruiting costs.
 
Depreciation and Amortization.  Depreciation and amortization expense in the second quarter of 2019 did not materially change when compared to the second quarter of 2018.
 
 Interest and Other Income (Expense), Net.  Interest and other income was approximately $33,000 for the second quarter of 2019 compared to interest and other expense of approximately $0.2 million in the second quarter of 2018.  Interest expense increased to $56,000 in the second quarter of 2019 from $15,000 in the second quarter of 2018 primarily due to the Credit Agreement we entered into on April 30, 2019. During the second quarter of 2019, we borrowed $16.9 million on the revolving loan, all of which was paid back as of June 30, 2019. Interest expense includes interest on outstanding borrowings and the amortization of debt issuance costs. Refer to Note 9, “Credit Facility” of our notes to unaudited condensed consolidated financial statements included elsewhere in this report for further information.
 
Income Taxes. Income tax expense was $5,000 in the second quarter of 2019 compared to zero in 2018.  Income tax expense for the second quarter of 2019 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowance recorded for such losses.
 
 
 
-19-
 
 Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
 
The following table sets forth certain statement of operations data for the six-month periods ended June 30, 2019 and 2018 (certain amounts may not calculate due to rounding):
 
 
 
2019
 
 
% of
Total
Revenues
 
 
2018
 
 
% of
Total
Revenues
 
 
Change
 
 
% Change


(Dollar amounts in thousands)



Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lead fees
 $47,389 
  81%
 $46,291 
  75%
 $1,098 
  2%
Advertising
  11,310 
  19 
  15,037 
  24 
  (3,727)
  (25)
Other revenues
  47 
   
  313 
  1 
  (266)
  (85)
Total revenues
  58,746 
  100 
  61,641 
  100 
  (2,895)
  (5)
Cost of revenues
  47,605 
  81 
  48,423 
  79 
  (818)
  (2)
Gross profit
  11,141 
  19 
  13,218 
  21 
  (2,077)
  (16)
Operating expenses:
    
    
    
    
    
    
Sales and marketing
  5,834 
  10 
  6,764 
  11 
  (930)
  (14)
Technology support
  4,962 
  8 
  6,351 
  10 
  (1,389)
  (22)
General and administrative
  8,316 
  14 
  8,340 
  14 
  (24)
   
Depreciation and amortization
  2,440 
  4 
  2,323 
  4 
  117 
  5 
Goodwill impairment
   
   
  5,133 
  8 
  (5,133)
  (100)
Total operating expenses
  21,552 
  37 
  28,911 
  47 
  (7,359)
  (25)
Operating loss
  (10,411)
  (18)
  (15,693)
  (26)
  5,282 
  (34)
Interest and other income (expense), net
  103 
   
  201 
  1 
  (98)
  (49)
Loss before income tax provision
  (10,308)
  (18)
  (15,492)
  (25)
  5,184 
  (33)
Income tax provision
  5 
   
  4 
   
  1 
  25 
Net loss
 $(10,313)
  (18)%
 $(15,496)
  (25)%
 $5,183 
  (33)%
 
Leads.  Lead fees revenues increased $1.1 million, or 2%, in the first six months of 2019 compared to the first six months of 2018 primarily as a result of an increase in revenues from automotive manufacturers offset by declines in retail lead fee revenues.
   
Advertising. Advertising revenues decreased $3.7 million, or 25%, in the first six months of 2019 compared to the first six months of 2018 due to a decline in click revenues associated with decreased click revenue volume and pricing.
 
Other Revenues.   Other revenues decreased to $47,000 in the first six months of 2019 from $0.3 million in the first six months of 2018 primarily due to lower customer utilization of the mobile product and SaleMove product.
 
Cost of Revenues.  Cost of revenues decreased $0.8 million, or 2%, in the first six months of 2019 compared to the first six months of 2018 primarily due to decreased traffic acquisition costs, a decrease in click publisher costs and a decrease in amortization expense from intangibles. Further contributing to the decrease was a decrease in costs related to headcount. These costs were shifted to operational roles at the beginning of 2019, as we determined these roles were no longer directly tied to revenue generation. Partially offsetting the decreases was an increase in SEM costs.
 
 Sales and Marketing.  Sales and marketing expense in the first six months of 2019 decreased $0.9 million, or 14%, compared to the first six months of 2018 due primarily to a decrease in SEM and tradeshow expense, partially offset by compensation and benefits expense related to headcount previously included in cost of revenues. Further, the 2019 period does not include severance related costs which were incurred in the 2018 period.
 
 
 
-20-
 
Technology Support. Technology support expense in the first six months of 2019 decreased by $1.4 million, or 22%, compared to the first six months of 2018 due primarily to lower headcount related costs, partially offset by an increase in consulting fees.
 
General and Administrative. General and administrative expense in the first six months of 2019 decreased approximately $24,000, or less than 1%, from the first six months of 2018 due primarily to severance costs in the prior year period related to the termination of the Company’s former chief executive officer, offset by an increase in professional fees during the current year period.
 
Depreciation and Amortization.  Depreciation and amortization expense in the first six months of 2018 increased $0.1 million to $2.4 million compared to $2.3 million in the first six months of 2018.
 
Goodwill impairment. The Company evaluated enterprise goodwill for impairment in the first six months of 2018 due to the Company’s decreased stock price since its annual goodwill impairment analysis on October 1, 2017. As of March 31, 2018, the carrying value of AutoWeb 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 six months ended June 30, 2018.
 
Interest and Other Income (Expense), Net.  Interest and other income was $0.1 million for the first six months of 2019 compared to interest and other income of $0.2 million in the first six months of 2018.  Interest expense was $0.1 million in the first six months of 2019 and 2018.
 
Income Taxes. Income tax expense was approximately $5,000 in the first six months of 2019 compared to approximately $4,000 in the first six months of 2018.  Income tax expense for the first six months of 2019 differed from the federal statutory rate primarily due to operating losses that receive no tax benefit as a result of valuation allowance recorded for such losses.
 
Liquidity and Capital Resources
 
The table below sets forth a summary of our cash flows for the six months ended June 30, 2019 and 2018:
 
 
Six Months Ended
June 30,