AutoWeb, Inc. filed on Thu, May 09 10-Q Form

AutoWeb, Inc. files 10-Q in a filing on Thu, May 09.

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.

The Company has a concentration of credit risk with its automotive industry related accounts receivable balances. Approximately 37%, or $8.6 million, of gross accounts receivable at March 31, 2019, and approximately 28% of total revenues for the quarter ended March 31, 2019, are related to Urban Science Applications (which represents Acura, Honda, Nissan, Infiniti, Subaru, Toyota and Volvo) and General Motors. For 2018, approximately 45%, or $11.6 million, of gross accounts receivables at March 31, 2018, and approximately 38% of total revenues for the quarter ended March 31, 2018, is related to Urban Science Applications, General Motors and Media.net Advertising.

Convertible Notes Payable. In connection with the acquisition of AutoUSA, LLC on January 13, 2014, the Company issued a convertible subordinated promissory note for $1.0 million (“AutoUSA Note”) to AutoNationDirect.com, Inc. with interest is 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.

Rent expense included in operating expenses and cost of revenue was $0.5 million for the three months ended March 31, 2019 with a weighted average remaining lease term of 2.3 years and a weighted average discount rate of 5.5%. Rent expense included in operating expenses for the three months ended March 31, 2018 was $0.4 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 three months ended March 31, 2019 and 2018 is net of sublease income of $26,000 and $37,000, respectively. As of March 31, 2019, the Company did not have any additional operating leases that have not yet commenced.

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%. 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.

Expanding on the automotive industry at large, 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 they have.

Lead fees.  Lead fees revenues increased $1.6 million, or 7%, in the first quarter of 2019 compared to the first quarter of 2018 primarily as a result of a $2.9 million increase in revenue from Manufacturers, offset by declines in retail lead fee revenues.

Advertising. Advertising revenues decreased $2.2 million, or 27%, in the first quarter of 2019 compared to the first quarter of 2018 as a result of a decline in click revenue associated with decreased click volume and pricing.

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. Cost of revenues increased $1.2 million, or 5%, in the first quarter of 2019 compared to the first quarter of 2018 primarily due to increased traffic acquisition costs, offset by a decrease in amortization expense from intangibles written off in the third quarter of 2018 and costs related to a headcount which was shifted to operational roles at the beginning of 2019. The Company analyzed and concluded these roles were no longer directly tied to revenue generation.

Sales and Marketing.  Sales and marketing expense includes costs for developing our brand equity, personnel costs and other costs associated with Dealer sales, website advertising, Dealer support and bad debt expense. Sales and marketing expense in the first quarter of 2019 decreased $0.8 million, or 22%, compared to the first quarter 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.

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 first quarter of 2019 decreased by $0.6 million, or 18%, compared to the first quarter of 2018 due primarily to lower headcount related costs, partially offset by an increase in consulting fees.

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 first quarter of 2019 decreased by $0.3 million, or 6%, from the first quarter 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.