Item 1. Business
References herein to “we”, “us”, “our” or “the Company” refer to Local.com Corporation and its wholly-owned subsidiaries unless the context specifically states or implies otherwise.
Overview
We are a local media advertising company that enables local businesses and consumers to find each other and connect. We operate online businesses that collectively reach over 30 million monthly unique visitors across over 100,000 websites and we serve over 27,000 small business customers with a variety of web hosting and local online advertising products.
Our Owned & Operated business unit manages our flagship property, Local.com, and a proprietary network of over 20,000 local websites, which reaches over 15 million monthly unique visitors. Our Network business unit operates (i) a leading private label local syndication network of over 1,200 U.S. regional media websites; (ii) 80,000 third-party local websites; (iii) our own organic feed of local businesses plus third-party advertising feeds, both of which are focused primarily on local consumers to a distribution network of hundreds of websites; and (iv) our network of owned and third party websites that display our own and third party display advertisements. Our Sales & Ad Services business unit sells and supports products directly to small businesses. These products include our Exact Match product suite, our LocalPremium direct listing products and our Rovion rich media display advertising products. We also provide over 27,000 direct monthly subscribers with web hosting or web listing products. We use patented and proprietary search technologies and systems to provide consumers with relevant search results for local businesses, products and services. By providing our users and those of our network partners with robust, current, local information about businesses and other offerings in their local area, we have attracted an audience of users that our direct advertisers and advertising partners desire to reach.
We launched Local.com in August of 2005, our local syndication network in July 2007, and we expanded our sales and advertiser services offerings to include a larger number of direct service subscribers throughout 2009 and 2010. In the third quarter of 2010, we also acquired Octane360 which included the Exact Match product suite. During the second quarter of 2011, we acquired Krillion, Inc. (“Krillion”) which includes a robust local product search platform that enables consumers to search for products and product availability at local retailers, as well as substantially all of the assets of Rovion, Inc. (“Rovion”), including a rich media advertising platform and toolset that allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers. In the third quarter of 2011, we acquired Screamin Media Group, Inc. (“SMG”), a daily deals business, as part of our efforts to expand our own daily deals business, Spreebird (located at www.spreebird.com), which we launched in May 2011. We have been regularly developing and deploying new features and functionality to each of these channels designed to enhance the experience of our users and increase the value of our audience to our advertisers. With a strategic focus on three key drivers for our business - traffic, technology and advertisers - we believe we can continue to grow through our own efforts and the acquisition of complementary businesses and technologies intended to accelerate our growth.
Owned &Operated (“O&O”)
Our O&O business unit represents our proprietary local search traffic. We serve consumers primarily via our flagship web property, Local.com, and via our proprietary network of over 20,000 local websites, most of which were developed using the Octane360 technology platform. Traffic reaches Local.com organically, which includes both direct-to-site and Search Engine Optimized (“SEO”) search traffic, as well as through our Search Engine Marketing (“SEM”) campaigns. Traffic generally reaches our proprietary network organically via SEO. We monetize our local search traffic by placing a variety of display, performance and subscription ad products
alongside our search results. In November 2010, we relaunched Local.com to include additional content, including coupons, articles and information about local events. These improvements are intended to increase organic traffic to our website and further improve consumer satisfaction with our offerings.
Network
Our Network business unit represents third-party local search traffic. We serve over 1,000 partner websites, such as local newspaper, TV and radio station websites with a hosted geo-targeted small business directory product. This drives SEO traffic to the directories on our partners’ sites, which we monetize with ads. We also serve hundreds of other search engines with our organic and third-party ad feeds. These partners receive an XML feed which contains our advertiser listings as well as our organic search results in some instances. They display those results in their websites’ own look and feel. Additionally, we serve over 150 third party sites with local display advertising from our own advertisers and those of our third party partners. We also host and manage over 80,000 local websites owned by third-parties via our Octane360 platform. We optimize these websites by commissioning unique, targeted category/location-specific content from our “Octane Experts” content marketplace and distributing that content on our domain network. We monetize all our network partners’ local search traffic by placing a variety of performance and subscription ad products alongside the search results, and we share a portion of the ad revenues generated with those partners.
Sales and Advertiser Services (“SAS”)
Our SAS business unit serves, as of December 31, 2011, over 27,000 direct small business customers with subscription advertising and web hosting products, as well as partners who supply us with additional advertiser listings. Since the fourth quarter of 2011, we have focused our direct sales efforts on products from our Exact Match product suite, which we continue to develop and expand. We also are developing channel sales relationships through which our Exact Match products can be sold. In addition to our Exact Match products, we continue to offer our direct customers with our web listing product, which provides our customers with a higher listing on our Local.com search results’ pages. Finally, we still have legacy Local Exchange Carrier (LEC) billed customers that receive web hosting, web listing or website products, which are fulfilled by a third party. In the fourth quarter of 2010, we suspended further, non-contractually obligated acquisitions of LEC billed subscriber bases, in order to concentrate our resources around the Exact Match product suite. As a result, we anticipate revenue from our existing legacy subscribers will continue to decline as the number of legacy subscribers declines, partially offset by the addition of Exact Match product suite customers. Any decline in subscriber revenue and related margin could materially adversely affect our business and financial results. Our SAS partners provide us with various performance ad products including pay per click, pay per call and pay per lead, as well as, display ad units that are paid per thousand impressions, which provide us with an effective way to monetize our search traffic. Google and Yahoo! are our two largest advertiser partners. Included in our SAS business unit are activities related to our Spreebird daily deals business. Spreebird earns revenue through serving hundreds of thousands of subscribers with deals from thousands of local merchants in ten markets throughout the U.S. Spreebird also has a School Rewards Program which allows consumers to donate ten percent of Spreebird’s net proceeds from each deal to a school or non-profit organization chosen by the consumer. We recognize revenue from our daily deals business net of the merchant’s portion of gross billings.
Industry Overview
According to BIA/Kelsey, the U.S. online advertising is an over $29 billion a year industry. “Local search,” that is, searches for products, services and businesses within a geographic region is an increasingly significant segment of the online advertising industry. Local search allows consumers to search for local businesses’ products or services by including geographic area, zip code, city and other geographically targeted search parameters in their search requests. According to a May 2011 study, BIA/Kelsey estimates that the local search market in the United States will grow from $5.1 billion in 2010, to $8.2 billion by 2015. Consumers who conduct local searches on the Internet (“local searchers”) tend to convert into buying customers at a higher rate than other
types of Internet user. As a result, advertisers often pay a significant premium to place their ads in front of local searchers on websites like Local.com or our Network partner websites. Additionally, local small and medium-sized businesses that would not normally compete at the national level for advertising opportunities are increasingly engaging in and competing for local advertising opportunities, including local search, to promote their products and services.
Local online search is still relatively new, and as a result, it is difficult to determine our current market share, or predict our future market share. However, we have a number of competitors that have announced an intention to increase their focus on local search with regard to U.S. online advertising, including some of the leading online advertising companies in the world, including Google, Yahoo!, and Microsoft, among many others, with greater experience and resources than we have.
The U.S. online advertising industry, including the local search segment, is regularly impacted and changed by new and emerging technologies, including, for instance, ad targeting and mobile technologies, as well as the increased fragmentation of the online advertising industry in general, from different technology platforms, to different advertising formats, targeting methodologies and the like. Those companies within our industry that are able to quickly adapt to new technologies, as well as offer innovations of their own, have a better chance of succeeding than those that do not.
The Local.com Solution
We believe our search results and local content delivered on our own websites and our network partner websites provide the following benefits to local advertisers and consumers:
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Access to a Large Number of Local Business Listings and Local Content. With over 12 million local businesses indexed using our proprietary technology, we offer users of our own websites and network partner websites a one-stop resource for local businesses in their area, including, in some cases, photographs, user ratings and reviews, video, product information, inventory information, coupons and hours of operations, among other things. We believe that our ability to amass this content and deliver relevant, targeted results in response to user search queries ensures that a user has a good experience when using our services. When an advertiser’s targeted sponsored listing is combined with a large pool of similarly targeted sponsored listings, we believe our advertisers have a better chance of reaching their target audience. Additionally, we believe the combination of user and advertiser satisfaction with our Local search offering is important to the acceptance of our service by our network partners and the success of our Local.com owned and operated websites.
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Access to a Desirable Demographic of Decision-Makers. Our patented and proprietary technology allows us to consolidate an amalgamated and disparate set of local business listings, information and other data and combine it into a targeted, highly relevant results set that is presented in a useful and compelling manner. We designed the utility of our website to appeal to our target demographic. A majority of users on Local.com are females, aged between 25 and 45, with at least one child at home or so-called “soccer moms,” a demographic that is deemed by many to be highly desirable because they generally have responsibility for 89% of bank accounts, 80% of healthcare decisions, and 50% of do-it-yourself projects and consumer product purchases.
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Targeted Advertising. We believe that search advertising delivers a more relevant list of businesses, products and services for our users because advertisers generally only pay for keywords, categories and regions that are related to the products and services they offer. By providing access to our users via performance, display and subscription ad units, businesses can target consumers at the exact time a consumer has demonstrated an interest in what that business has to offer. As a result of our core demographic, we believe that local and commercial searches performed on Local.com tend to convert into buying customers at a higher rate than many other types of search traffic. As a consequence, there is competition from third-parties to place their advertiser listings on our website, which along with our
direct advertisers and growing local display advertising offerings drives monetization of our traffic. We believe that our users’ propensity to buy correlates with the value of our traffic, and explains, in part, why Local.com monetizes its search traffic at higher levels than other types of search traffic.
Our Strategy
Our growth strategy is to expand our online reach via partnering with, developing, or acquiring websites that have local traffic, and monetizing that traffic with a broader range of local ad products. We have adopted an integrated growth strategy that addresses the needs of each of our business units, O&O, Network and SAS, individually, while allowing the growth in one of our business units to be leveraged by our other business units. In 2010 and 2011, we took steps to diversify our revenue sources, while maintaining our focus on local offerings through the acquisition of Octane360 in the third quarter of 2010, which serves as the technology platform for many of our Exact Match products; Rich Media Services (‘RMS”) by Rovion ad management platform in the second quarter of 2011, which provides us with a self-service rich media advertising development and serving technology that is accessible to local advertisers; Krillion,which provides real time inventory information on thousands of products; and most recently SMG in the third quarter of 2011, which rapidly expanded our deal-of-the-day offerings. Our development and acquisition efforts also represent a point of differentiation from an increasingly crowded field in online advertising. We believe that a diversity of offerings will differentiate us from certain of our competitors that may offer one or two of our services, but not the full suite of our product offerings, which we believe appeals to our customers and partners alike.
O&O
Our O&O growth strategy continues to be focused on increasing organic traffic to our websites, which includes type-in and SEO traffic. We believe that adding more content, such as product pricing and inventory information from Krillion, and presenting that content in a useful way to our users, will ultimately drive more type-in and SEO traffic over time, both of which are our high margin traffic sources. We plan to add more content to the website by launching verticals that appeal to our core demographic of soccer moms - for example, shopping, education and health & wellness. If we are able to increase the amount of type-in and SEO traffic that our Local.com website receives, we may be able to reduce our reliance on lower-margin traffic we acquire from other search engines.
We also expect to add new brands, products and services to our O&O business unit over time. We expect our focus to be primarily on websites which serve our target demographic and have material type-in traffic to their own websites, thereby adding to our O&O proprietary traffic base and to the overall value proposition we offer our SAS direct and indirect advertisers. Additionally, we anticipate that much of the content we develop or acquire for our own O&O properties may also be useful to enhance the product and content offerings we make to our network partners. Our Octane360 acquisition has provided us with some of these attributes including: the ability to quickly create websites focused on particular geographies and categories; and to populate those websites with targeted content that we believe will be useful to both our core demographic and our advertisers.
Network
Our Network growth strategy includes adding new websites, expanding the content and products available to our network partners, growing the user base of our existing products through SEO efforts and content expansion, and improving our overall ad yield per visitor through continued page optimization of our SAS-managed advertising partners. We believe that expanded distribution increases our value in the local search ecosystem, thereby attracting new advertisers. This, in turn, allows us to compete for expanded distribution, creating what we feel is a virtuous cycle, with strategic defensibility originating from our significant base of traffic on our O&O properties. We further believe that over time, any local search network without an accompanying proprietary traffic source will find it increasingly difficult to compete.
In 2011, we developed a number of products utilizing the technology acquired from Octane360, which now comprise the core of our Exact Match product suite. Additionally, we acquired technologies through the Rovion, Krillion and SMG acquisitions that have allowed for the development of additional products. Many of these products are well suited to deployment throughout our Network creating many new opportunities and channels for stronger and more defensible long term relationship with our Network partners.
SAS
Our SAS business unit is closely linked to the expansion of our O&O and Network business units and, as such, our strategy with respect to SAS is also connected. As our overall traffic increases, we believe we can attract more direct and indirect advertisers and, in turn, use our higher monetization to compete for more distribution. We expect to add incrementally to our direct customer base from internal sales efforts as we did in 2011. With the addition of new and compelling products in 2011 that can be offered to our potential customers, we believe those internal sales efforts will be more sustainable and scalable. While we expand our internal sales efforts to sell our new Exact Match products, we expect that we will continue to see a decline in our overall SAS customer base as a result of an anticipated decline in our legacy LEC-billed customer based following our suspension of acquisitions of LEC-billed subscriber bases that were not contractually committed to previously. As a result, we anticipate revenue from our existing legacy subscribers to decline. The expected growth in revenue from sales of our Exact Match products is not expected to fully offset the decline in revenue from existing legacy subscribers.
Technology, Research and Development
We make our services available to advertisers and consumers through a combination of our own proprietary technology and commercially available technology from industry leading providers.
We believe that it is important that our technologies be compatible with the systems used by our partners. In addition to our Exact Match, RMS, Krillion and Spreebird technology platforms, we rely upon third parties to provide hosting services, including hardware support and service and network coordination.
Our research and development efforts are focused on developing new services and enhancing our existing services to provide additional features and functionality that we believe will appeal to our advertisers and consumers. Our research and development efforts also include the development and implementation of business continuity and disaster recovery systems, improvement of data retention, backup and recovery processes. As of December 31, 2011, we had 29 employees in product and technical development.
Our research and development expenses were $6.5 million, $5.1 million and $3.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Keyword DNA™/Web Indexing Technology
Our Keyword DNA and patented web indexing technologies are our proprietary methods for indexing large amounts of data, and are critical to Local.com. Our technology enables consumers to enter into a search engine the particular product or service they are seeking and a given geographic area. Our technology then attempts to locate the appropriate business listings by searching as many different data sources as directed to find the results. Unlike other search engine technologies, our web indexing technology is designed to return only the businesses that supply, or are likely to supply, the appropriate product or service in a given geographic area. Keyword DNA does not return results based upon information that may appear on a website. We believe that our methodology increases the relevancy of geographically targeted search results.
Competition
The online local advertising market is intensely competitive. Our competitors include the major search engines, Google, Yahoo!, and Bing, as well as online directories and city guides, such as Yellowpages.com and
Dex. We partner with many of our competitors. We believe that increasingly more companies will enter into the local advertising market, especially local search. Also, as we enter new business lines, including offerings available as a result of our Rovion, Krillion and SMG acquisitions, we will have new competitors to consider in those business lines, including Groupon and Living Social, among many others. Although we currently pursue a strategy that allows us to partner with a broad range of websites and search engines, our current and future partners may view us as a threat to their own local advertising services. We believe that the principal competitive factors in our local advertising market are network size, revenue sharing agreements, services, convenience, accessibility, customer service, quality of tools, quality of editorial review and reliability and speed of fulfillment of advertising needs and requirements across the Internet infrastructure.
We also compete with other online advertising services as well as traditional offline media such as television, radio and print, for a share of businesses’ total advertising budgets. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may secure more favorable revenue sharing agreements with network distributors, devote greater resources to marketing and promotional campaigns, adopt more aggressive growth strategies and devote substantially more resources to website and systems development than we do.
The online advertising industry has experienced consolidation, including the acquisitions of companies offering local paid-search services. Industry consolidation may result in larger, more established and well-financed competitors with a greater focus on local advertising services. If this trend continues, we may not be able to compete in the local advertising market and our financial results may suffer.
Additionally, larger companies may implement technologies into their search engines or software that make it less likely that consumers will reach, or execute searches on, Local.com and less likely to access our partners’ sponsored listings. If we are unable to successfully compete against current and future competitors, or if our current network partners choose to rely more heavily on their own distribution networks in the future, our operating results will be adversely affected.
Major Customers
We have three customers that each represents more than 10% of our total revenue. Our largest advertising partner, Yahoo! Inc., represented 24%, 43% and 45% of our total revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Our second largest advertising partner, SuperMedia Inc. represented 22%, 24% and 23% of our total revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Our new local advertising partner, Google Inc., represented 18%, 0% and 0% of our total revenue for the years ended December 31, 2011, 2010 and 2009, respectively. Our relationship with Google, which began in August 2011, extends through July 2013. Our relationship with Yahoo! Inc. continues until July 2012, and our relationship with SuperMedia, Inc. is currently set to expire in December 2012. As with each of the above, generally all of our partners are short term in nature. There can be no assurance that our agreements with Google, Inc., Yahoo! Inc., SuperMedia, Inc., or any of our other partners, will be renewed upon, or prior to, their scheduled expiration. If those agreements are renewed, there can be no assurance that it will be on terms as favorably as those we currently have with such partners. If those agreements are not renewed, there can be no assurance that we will be able to find alternative partners on terms as favorable as those we currently have, if at all. The loss of Google, Inc., Yahoo! Inc. and/or SuperMedia, Inc. as a partner and a failure to find a comparable replacement would have a material adverse affect on our operating results.
In the first half of 2011, in connection with Yahoo!’s integration of its advertising service with Microsoft’s Bing, we continued to experience a material reduction in the Revenue Per Click (“RPC”) that Yahoo! pays for clicks on their advertisements on our websites; a reduction which began in 2010. The material reduction in RPC from Yahoo! had a material adverse effect on our revenue and earnings results for the first half of 2011. Beginning in August 2011, we added Google to our mix of advertising partners, which improved our overall
RPC. Throughout 2011, we also launched new products and made acquisitions that we believe will reduce our dependence on search marketing in general. While we continue to pursue strategies that will minimize the impact of lowered RPCs from any of our advertising partners, we cannot give assurances that our efforts will be successful. If we are unable to maintain our anticipated level of RPC from our advertising partners in the near term, or successfully diversify our revenues to sources outside of the search marketing industry in general, our business and financial results may be materially harmed.
Major Suppliers and Advertising Costs
We advertise on other search engine websites, primarily google.com, but also yahoo.com, bing.com, ask.com and others, by bidding on certain keywords we believe will drive consumers to our Local.com website. During the year ending December 31, 2011, approximately 66% of the traffic on our Local.com website and network partner websites was acquired through SEM campaigns on other search engine websites. During the year ended December 31, 2011, advertising costs to drive consumers to our Local.com website were $37.4 million of which $25.6 million was paid to Google, Inc. We are dependent on the advertising we do with other search engines, especially Google, to drive consumers to our Local.com website in order to generate revenue from searches and other actions they may undertake while at Local.com. If we were unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will suffer. While our strategy is to decrease our dependence on advertising with other search engines by diversifying our revenue streams outside of the search engine marketing business, as well as by growing our organic traffic through repeat usage, better content, and increased search engine optimization efforts, we cannot guarantee that these efforts will be successful or that we will not remain dependent on advertising with other search engines to secure the large majority of consumers who visit Local.com.
Intellectual Property
Our success and ability to compete are substantially dependent upon our internally developed technology and data resources. We seek to protect our intellectual property through existing laws and regulations, as well as through contractual restrictions. We rely on trademark, patent and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, partners and others to protect our intellectual property.
We own the registered trademarks for “Local.com,” “Spreebird,” “Krillion,” “Rovion,” “Keyword DNA,” “Local Promote,” “Local Connect” and “Pay Per Connect,” among others, in the United States. We may claim trademark rights in, and apply for registrations in the United States for a number of other marks.
We have been issued eight patents by the United States Patent and Trademark Office:
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Methods and Systems for a Dynamic Networked Commerce Architecture which was issued on June 13, 2006 and the expiration date of which as determined based on patent term adjustment as calculated by the U.S. Patent and Trademark Office (USPTO) is February 26, 2023;
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Methods and Systems for Enhanced Directory Assistance Using Wireless Messaging Protocols which was issued on April 3, 2007 and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is May 25, 2024;
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Methods and Apparatus of Indexing Web Pages of a Web Site for Geographical Searching Based on User Location which was issued on June 12, 2007 the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is May 3, 2025;
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Methods and Systems for Enhanced Directory Assistance Services in a Telecommunications Network, which was issued on September 29, 2009 and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is January 3, 2026;
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Methods and Systems for Enhanced Directory Assistance Using Wireless Messaging Protocols, which was issued on May 11, 2010 and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is December 8, 2023;
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Methods and Apparatus Providing Local Search Engine, which was issued on October 26, 2010 and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is January 25, 2026;
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System and Method for Generating a Search Query Using a Category Menu, which was issued on February 15, 2011 and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is December 4, 2023; and
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System for Providing Localized Shopping Information, which was issued on October 4, 2011 and the expiration date of which as determined based on a patent term adjustment as calculated by the USPTO is May 5, 2030.
We have patent applications pending related to a variety of business and transactional processes associated with paid-search and other cost-per-event advertising models in different environments, as well as applications related to localized shopping data and rich media. We may consolidate some of our current applications and expect to continue to expand our patent portfolio in the future. We cannot assure you, however, that any of these patent applications will be issued as patents, that any issued patents will provide us with adequate protection against competitors with similar technology, that any issued patents will afford us a competitive advantage, that any issued patents will not be challenged by third parties, that any issued patents will not be infringed upon or designed around by others, or that the patents of others will not have a material adverse effect on our ability to do business. Furthermore, our industry has been subject to frequent patent-related litigation by the companies and individuals that compete in it. The outcome of ongoing litigation or any future claims in our industry could adversely affect our business or financial prospects.
Government Regulation
Like many companies, we are subject to existing and potential new government regulation. There are, however, comparatively few laws or regulations specifically applicable to Internet businesses. Accordingly, the application of existing laws to Internet businesses, including ours, is unclear in many instances. There remains significant legal uncertainty in a variety of areas, including, but not limited to: user privacy; the positioning of sponsored listings on search results pages; defamation; taxation; the provision of paid-search advertising to online gaming websites; the legality of sweepstakes; promotions and gaming websites generally; daily deal vouchers; and the regulation of content in various jurisdictions.
Compliance with federal laws relating to the Internet and Internet businesses may impose upon us significant costs and risks, or may subject us to liability, if we do not successfully comply with their requirements, whether intentionally or unintentionally. Specific federal laws that impact our business include: The Digital Millennium Copyright Act of 1998; The Communications Decency Act of 1996; The Children’s Online Privacy Protection Act of 1998 (including related Federal Trade Commission regulations); The Protect Our Children Act of 2008; and The Electronic Communications Privacy Act of 1986, among others. For example, the Digital Millennium Copyright Act, which is in part intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe the rights of others, was adopted by Congress in 1998. If we violate the Digital Millennium Copyright Act, we could be exposed to costly and time-consuming copyright litigation.
There are a growing number of legislative proposals before Congress and various state legislatures regarding privacy issues related to the Internet generally, and some of these proposals apply specifically to paid-search businesses. We are unable to determine if and when such legislation may be adopted. If certain proposals were to be adopted, our business could be harmed by increased expenses or lost revenue opportunities, and other
unforeseen ways. We anticipate that new laws and regulations affecting us will be implemented in the future. Those new laws, in addition to new applications of existing laws, could expose us to substantial liabilities and compliance costs.
Employees
As of December 31, 2011, we had 227 employees, all of whom were full-time employees. 29 were engaged in research and development, 150 in sales and marketing, 6 in cost of revenues and 42 in general and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
Seasonality
Our future results of operations may be subject to fluctuation as a result of seasonality. Historically, the fourth quarter demonstrated seasonal weakness because a larger portion of online consumer traffic and advertising was typically focused on holiday gift purchases resulting in less advertising for locally-focused services. Additionally, as other advertisers significantly increased their bid prices to acquire traffic for the holiday season, we generally kept our bid prices consistent throughout the year, resulting in less traffic to our websites from our SEM efforts. Online consumer traffic will also be lower due to increased holidays and vacation time during this quarter. Revenue would then generally increase during the first quarter, when we expect to benefit from a higher volume of locally-focused traffic and a higher volume of online consumer traffic due to fewer holidays and vacation time. However, due to our advertising partners growing proprietary revenues and increased organic traffic year over year, our seasonality for 2011, and going forward, are more similar to normal advertising industry seasonality where the fourth quarter is typically strong and the first quarter is typically softer.
Corporation Information
We were incorporated in Delaware in March 1999 as eWorld Commerce Corporation. In August 1999, we changed our name to eLiberation.com Corporation. In February 2003, we changed our name to Interchange Corporation. On November 2, 2006, we changed our name to Local.com Corporation. We currently operate under the names Local Corporation, Spreebird and Rovion, all of which are registered tradenames of Local.com Corporation. Our website is located at http://www.local.com. Our investor relations website is located at http://ir.local.com. We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after we have electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings at http://www.sec.gov.
Item 1A.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this Report before making an investment decision. If any of the possible adverse events described below actually occur, our business, results of operations or financial condition would likely suffer. In such an event, the market price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, results of operations or financial condition.
Risks Relating to our Business
If we are not successful with our local search initiative, our future financial performance may be affected.
Since August 9, 2005, we have been operating Local.com, a consumer facing destination website specializing in local search and content. Since the third quarter of 2007, we have been operating our local
syndication network which provides local search results and local content to our publisher partners. Since the third quarter of 2009, we have been operating a distribution network that provides organic and third party advertising feeds to hundreds of websites. We have and expect to continue to invest significant amounts of time and resources in our Local.com website, local syndication network, our distribution network and other similar initiatives, including our Exact Match technology platform launched in the third quarter of 2010, our Spreebird daily deals business launched in May 2011, and our Krillion, Rovion and SMG (now Spreebird) businesses, acquired in April 2011, May 2011 and July 2011, respectively. We cannot assure you that we will continue to sustain or grow our current revenue from these or other local search initiatives. We also cannot assure you that we will sustain or grow the number of consumers or advertisers that use or advertise on Local.com or other network offerings. If we are unable to sustain or grow the number of consumers using and/or advertisers advertising with Local.com, our local syndication and distribution networks, our Exact Match platform, our Krillion, Rovion and Spreebird platforms and services, our financial performance may be adversely affected.
We have historically incurred losses and expect to incur losses in the future, which may impact our ability to implement our business strategy and adversely affect our financial condition.
We have a history of losses. We had a net loss of $14.6 million for the year ended December 31, 2011, and $6.3 million for the year ended December 31, 2009. We also had an accumulated deficit of approximately $69.4 million at December 31, 2011. We have significantly increased our operating expenses by expanding our operations, including through acquisitions, in order to grow our business and further develop and maintain our services. Such increases in operating expense levels may adversely affect our operating results if we are unable to immediately realize benefits from such expenditures. We cannot assure you that we will be profitable or generate sufficient profits from operations in the future. If our revenue does not grow, we may experience a loss in one or more future periods. We may not be able to reduce or maintain our expenses in response to any decrease in our revenue, which may impact our ability to implement our business strategy and adversely affect our financial condition.
Our advertising partners may unilaterally change how they value our inventory of available advertising placements, which could materially affect our advertising revenue. If we are unable to maintain our anticipated RPC rates, it will have a material and adverse effect on our financial results.
Our advertising partners, such as Google and Yahoo!, may unilaterally change how they value our inventory of available advertising placements for any number of reasons, including changes in their services, changes in pricing, algorithms or advertising relationships. We have little control over such decisions. If our advertising partners pay us less for our advertising inventory, our advertising revenue would be materially adversely affected.
We are actively pursuing strategies to mitigate any such changes in RPC we may experience, including through the diversification of our revenue to include non-search related sources and the regular optimization of our SEM campaigns, as well as optimization and deployment of advertiser fees from existing and new partners. These and other strategies are intended to preserve revenue and net income. However, we cannot give assurances that these efforts will be successful. If we are unable to maintain our anticipated RPC rates in the near term, our business and financial results may be materially harmed.
In addition, any decreases in the breadth or depth of advertising available for display or any increase in our traffic acquisitions costs could materially adversely affect our ability to produce revenue and margin that is comparable to our historical results, in which case our business and financial results may be significantly harmed.
If we fail to maintain the number of customers purchasing our monthly subscription products, our revenue and our business could be harmed.
Our monthly subscription customers do not have long-term obligations to purchase our products or services and many will cancel their subscriptions each month. As a result of this customer churn, we continually had to
add new monthly subscription customers to replace customers who cancelled and to grow our business beyond our current customer base.
In the fourth quarter of 2010, we announced that we suspended acquisitions of LEC-billed subscriber bases that were not contractually committed to previously in order to concentrate our resources around our Exact Match product suite. As a result, we anticipate revenue from our existing legacy subscribers to decline as the number of subscribers churns out. As we shift our efforts to focus on the sale of our Exact Match products, we initially do not anticipate that the revenues from those efforts will fully-offset the decline in revenue from existing legacy subscribers as they churn out as anticipated. Any decline in subscriber revenue and related margin could materially adversely affect our business and financial results.
We have recently acquired assets and businesses and may face risks with integration and performance of these assets and businesses.
As part of our business strategy we have undertaken the acquisition of a number of assets and businesses, including Octane360 in July 2010, iTwango in January 2011, Krillion in April 2011, Rovion in May 2011 and SMG in July 2011.
Octane360 is a technology startup providing domain-based local advertising solutions to small businesses, domain portfolio owners, agencies and channel partners. The acquired assets of iTwango LLC include a technology platform that enables group-buying of discounted daily deals by consumers from local businesses. Krillion is a provider of location-based product search that connects online shoppers with products available in stores locally, with current discount, pricing and product information. The acquired assets of Rovion include a rich media advertising platform which sells, creates, delivers and tracks rich media advertising. SMG is a daily deals business that substantially augments our Spreebird (formerly iTwango) daily deals business. We have fully integrated Octane360’s technology into our operations and are continuing to integrate the assets of Rovion, Krillion and SMG with our existing business, products and services. There can be no assurance that we will be able to successfully integrate these businesses into our operations or that our sales of products and services from these acquisitions will be successful.
We may enter into additional acquisitions, business combinations or strategic alliances in the future. Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, incurrence of debt and amortization of expenses related to intangible assets acquired. In addition, the process of integrating an acquired company, business or technology, which requires a substantial commitment of resources and management’s attention, may create unforeseen operating difficulties and expenditures. The acquisition of a company or business is accompanied by a number of risks, including, without limitation:
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the need to implement or remediate controls, procedures and policies appropriate for a public company at companies that prior to the acquisitions may have lacked such controls, procedures and policies;
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the difficulty of assimilating the operations and personnel of the acquired company with and into our operations, which are headquartered in Irvine, California;
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the failure to retain key personnel at the companies we acquire;
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the potential disruption of our ongoing business and distraction of management;
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the difficulty of incorporating acquired technology and rights into our services and unanticipated expenses related to such integration;
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the failure to further successfully develop acquired technology resulting in the impairment of amounts currently capitalized as intangible assets;
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the impairment of relationships with customers of the acquired company or our own customers and partners as a result of any integration of operations;
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the impairment of relationships with employees of our own business as a result of any integration of new management personnel;
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inability or difficulty in reconciling potentially conflicting or overlapping contractual rights and duties;
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the potential unknown liabilities associated with the acquired company, including intellectual property claims made by third parties against the acquired company; and
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the failure of an acquired company to perform as planned and to negatively impact our overall financial results.
We may not be successful in addressing these risks or any other problems encountered in connection our recent acquisitions, or that we could encounter in future acquisitions which would harm our business or cause us to fail to realize the anticipated benefits of our acquisitions.
Three of our advertising partners have provided a substantial portion of our revenue; the loss of any of these partners may have a material adverse effect on our operating results.
For the year ended December 31, 2011, our advertising partners, Google, Inc., Yahoo! Inc., and SuperMedia Inc., represented 18%, 24% and 22% of our total revenue, respectively. It is difficult to predict whether these partners will continue to represent such a significant portion of our revenue in the future. Additionally, our contracts with each of these advertising partners are generally short term in nature, with Google’s contract expiring in July 2013, Yahoo!’s contract expiring in July 2012 and SuperMedia’s contract expiring in December 2012. Upon expiration of these agreements, there can be no assurance that they will be renewed, or if these agreements are renewed, that we would receive the same or better economic benefits as we do under the current agreement, or involve the same amount of use of our paid-search services as currently used, or contain the same rights as they currently do, in which case our business and financial results may be harmed. Additionally, there can be no assurance that if we enter into an arrangement with alternative advertising partners, the terms would be as favorable as those under the current Google, Yahoo! and SuperMedia agreements. Even if we were to enter into an arrangement with alternative advertising partners with terms as or more favorable than those under the current agreements with Google, Yahoo! and SuperMedia, such arrangements might generate significantly lower search advertising revenues for us if the alternative advertising partners are not able to generate advertising revenues as successfully as Google, Yahoo! and SuperMedia currently generate.
Two customers account for a significant portion of our accounts receivable and the failure to collect from these customers would harm our financial condition and results of operations.
Two of our customers that do not pay in advance, Yahoo! and Google, have and for the foreseeable future will likely continue to account for a significant portion of our accounts receivable. At December 31, 2011, Yahoo! and Google represented 47% of our total accounts receivable. Yahoo! and Google’s accounts have been, and will likely continue to be, unsecured and any failure to collect on those accounts would harm our financial condition and results of operations.
A significant portion of the traffic to our Local.com website is acquired from other search engines, mainly google.com, the loss of the ability to acquire traffic could have a material and adverse effect on our financial results.
We advertise on other search engine websites, primarily google.com, but also yahoo.com, MSN/bing.com and ask.com, by bidding on certain keywords we believe will drive traffic to our Local.com website. During the year ended December 31, 2011, approximately 66% of the traffic on our Local.com website and network partner websites was acquired through SEM campaigns on other search engine websites. During the year ended December 31, 2011, advertising costs to drive consumers to our Local.com website were $37.4 million of which $25.6 million was paid to Google, Inc. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will suffer.
Problems with our computer and communication systems may harm our business.
A key element of our strategy is to generate a high volume of traffic across our network infrastructure to and from our advertising partners and local syndication and distribution networks. Accordingly, the satisfactory
performance, reliability and availability of our software systems, transaction-processing systems and network infrastructure are critical to our reputation and our ability to attract and retain advertising customers, as well as maintain adequate customer service levels. We may experience periodic systems interruptions. Any substantial increase in the volume of traffic on our software systems or network infrastructure will require us to expand and upgrade our technology, transaction-processing systems and network infrastructure. We cannot assure you that we will be able to accurately project the rate or timing of increases, if any, in the use of our network infrastructure or timely expand and upgrade our systems and infrastructure to accommodate such increases.
We face intense competition from larger, more established companies, as well as our own advertising partners, and we may not be able to compete effectively, which could reduce demand for our services.
The online paid-search market is intensely competitive. Our primary current competitors include Yahoo! Inc., Microsoft Corporation, Google Inc. and online directories, such as Yellowpages.com. Although we currently pursue a strategy that allows us to partner with a broad range of websites and search engines, our current and future partners may view us as a threat to their own internal paid-search services. Nearly all of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may secure more favorable revenue sharing agreements with network distributors, devote greater resources to marketing and promotional campaigns, adopt more aggressive growth strategies and devote substantially more resources to website and systems development than we do. In addition, the search industry has experienced consolidation, including the acquisitions of companies offering paid-search services. Industry consolidation has resulted in larger, more established and well-financed competitors with a greater focus on paid-search services. If these industry trends continue, or if we are unable to compete in the paid-search market, our financial results may suffer.
We are dependent on third-party products, services and technologies; changes to existing products, services and technologies or the advent of new products, services and technologies could adversely affect our business.
Our business is dependent upon our ability to use and interact with many third-party products, services and technologies, such as browsers, data and search indices, and privacy software. Any changes made by third parties or consumers to the settings, features or functionality of these third-party products, services and technologies or the development of new products, services and technologies that interfere with or disrupt our products, services and technologies could adversely affect our business. For instance, if a major search index were to alter its algorithms in a manner that resulted in our content not being indexed as often or appearing as high in its search results, our consumers might not be able to reach and use our content, products and services and our business could be adversely affected. Similarly, if more consumers were to switch their browsers to higher security settings to restrict the acceptance of cookies from the websites they visit, our ability to effectively use cookies to track consumer behavior in our business could be impacted and our business could be adversely affected.
We rely on our advertising partners to provide us access to their advertisers, and if they do not, it could have an adverse impact on our business.
We rely on our advertising partners to provide us with advertiser listings so that we can distribute these listings to Local.com and our network partners in order to generate revenue when a consumer click-through or other paid event occurs on our advertising partners’ sponsored listings. For the year ended December 31, 2011, 82% of our revenue was derived from our advertising partners. Most of our agreements with our advertising partners are short-term, and, as a result, they may discontinue their relationship with us or negotiate new terms that are less favorable to us, at any time, with little or no notice. Our success depends, in part, on the maintenance and growth of our advertising partners. If we are unable to develop or maintain relationships with these partners, our operating results and financial condition could suffer.
We are dependent on network partners to provide us with local search traffic and access to local advertisers, and if they do not, our business could be harmed.
We have contracts with our network partners to provide us with either local search traffic or access to local advertisers. Our network partners are very important to our revenue and results of operations. Any adverse change in our relationships with key network partners could have a material adverse impact on our revenue and results of operations. In many cases, our agreements with these network partners are short-term and/or subject to many variables which enable us or our network partners to discontinue our relationship or negotiate new terms that are less favorable to us with little or no notice. If we are unable to maintain relationships with our current network partners or develop relationships with prospective network partners on terms that are acceptable to us, our operating results and financial condition could suffer. Any decline in the number and/or quality of our network partners could adversely affect the value of our services.
The effects of the recent global economic crisis may impact our business, operating results, or financial condition.
The recent global economic crisis has caused disruptions and extreme volatility in global financial markets, increased rates of default and bankruptcy, and has impacted levels of consumer spending. These macroeconomic developments could negatively affect our business, operating results, or financial condition in a number of ways. For example, current or potential customers, such as advertisers, may delay or decrease spending with us or may not pay us or may delay paying us for previously performed services. In addition, if consumer spending continues to decrease, this may result in fewer clicks on our advertisers’ ads displayed on our Local.com website or our network partner websites.
The current global financial crisis and uncertainty in global economic conditions may have significant negative effects on our access to credit and our ability to raise capital.
We have historically relied on offerings of our equity to fund our operations. On January 20, 2011, we completed an underwritten public offering of 4,600,000 shares of our common stock at $4.25 per share, resulting in net proceeds to us of $18.2 million. On August 3, 2011, we entered into a Loan and Security Agreement with Square 1 Bank (the “Square 1 Agreement”), replacing our debt facility with Silicon Valley Bank, which we terminated on July 29, 2011. The Square 1 Agreement provides us with a revolving credit facility of up to $12.0 million (the “Facility”). The maturity date of the Facility is August 3, 2013. As of December 31, 2011, we had $8.0 million in borrowings outstanding under the Facility. The borrowing base used to determine loan availability under the Facility is based on a formula equal to 80% of eligible accounts receivable, with account eligibility measured in accordance with standard determinations as more particularly defined in the Square 1 Agreement (the “Formula Revolving Line”). Notwithstanding the foregoing, the Facility allows us to advance up to $3 million from the Facility at any time, irrespective of our borrowing base (the “Non-Formula Revolving Line”). We must meet certain financial covenants during the term of the Facility, including (i) maintaining a minimum liquidity ratio of 1.25 to 1, which is defined as cash on hand plus the most recently reported borrowing base divided by outstanding bank debt, and (ii) certain Adjusted EBITDA covenants, as more particularly described in the Square 1 Agreement (such Adjusted EBITDA amounts are for financial covenant purposes only, and do not represent our projections of financial results). If we are unable to comply with our financial covenants, the lender may declare an event of default under the Square 1 Agreement, in which event all outstanding borrowings would become immediately due and payable. We cannot assure you that we would have sufficient cash on hand to repay such outstanding borrowings if an event of default were declared under the Square 1 Agreement. The recent global financial crisis which has included, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide, and concerns that the worldwide economy may enter into a prolonged recessionary period, may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all.The failure to raise capital or obtain credit when needed, or on acceptable terms, could have a material adverse effect on our business, prospects, financial condition and results of operations.
Our executive officers and certain key personnel are critical to our success, and the loss of these officers and key personnel could harm our business.
Our performance is substantially dependent on the continued services and performance of our executive officers and other key personnel. While we have employment agreements with our five executive officers and certain key personnel, each of these may, however, be terminated with 30 days notice by either party. No key man life insurance has been purchased on any of our executive officers. Our performance also depends on our ability to retain and motivate our officers and key employees. The loss of the services of any of our officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. The failure to attract and retain our officers or the necessary technical, managerial and marketing personnel could have a material adverse effect on our business, prospects, financial condition and results of operations.
The market for Internet and local search advertising services is in the early stages of development, and if the market for our services decreases it will have a material adverse effect on our business, prospects, financial condition and results of operations.
Internet marketing and advertising, in general, and paid-search, in particular, are in the early stages of development. Our future revenue and profits are substantially dependent upon the continued widespread acceptance, growth, and use of the Internet and other online services as effective advertising mediums. Many of the largest advertisers have generally relied upon more traditional forms of media advertising and have only limited experience advertising on the Internet. Local search, in particular, is still in an early stage of development and may not be accepted by consumers for many reasons including, among others, that consumers may conclude that local search results are less relevant and reliable than non-paid-search results, and may view paid-search results less favorably than search results generated by non-paid-search engines. If consumers reject our paid-search services, or commercial use of the Internet generally, and the number of click-throughs on our sponsored listings decreases, the commercial utility of our search services could be adversely affected which could have a material adverse effect on our business, prospects, financial condition and results of operations.
We expect that our anticipated future growth, including through potential acquisitions, may strain our management, administrative, operational and financial infrastructure, which could adversely affect our business.
We anticipate that significant expansion of our present operations will be required to capitalize on potential growth in market opportunities. This expansion has placed, and is expected to continue to place, a significant strain on our management, operational and financial resources. We expect to add a significant number of additional key personnel in the future, including key managerial and technical employees who will have to be fully integrated into our operations. In order to manage our growth, we will be required to continue to implement and improve our operational and financial systems, to expand existing operations, to attract and retain superior management, and to train, manage and expand our employee base. We cannot assure you that we will be able to effectively manage the expansion of our operations, that our systems, procedures or controls will be adequate to support our operations or that our management will be able to successfully implement our business plan. If we are unable to manage growth effectively, our business, financial condition and results of operations could be materially adversely affected.
We may incur impairment losses related to goodwill and other intangible assets which could have a material and adverse effect on our financial results.
As a result of our acquisition of Inspire Infrastructure 2i AB, the purchase of Local.com domain name, the Atlocal asset purchase, the acquisition of PremierGuide, Inc., the acquisitions of Simply Static, LLC (doing business as Octane360), Krillion, Rovion, SMG, the acquisition of the iTwango technology platform, and the
purchase of subscribers from LiveDeal, Inc., LaRoss Partners, LLC (“LaRoss”), Turner Consulting Group, LLC (“Turner”), and Best Click Advertising.com, LLC (“Best Click”), we have recorded substantial goodwill and intangible assets in our consolidated financial statements. We are required to perform impairment reviews of our goodwill and other intangible assets, which are determined to have an indefinite life and are not amortized. Such reviews are performed annually or earlier if indicators of potential impairment exist. We performed our annual impairment analysis as of December 31, 2011, and determined that no impairment existed. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets.
If we are not successful in defending against the patent infringement lawsuit filed against us, our operations could be materially adversely affected.
On July 23, 2010, a lawsuit alleging patent infringement was filed in the United States District Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a Delaware corporation with its principal offices in Plano, Texas. The complaint alleges that we infringe U.S. Patent No. 5,930,474 (hereinafter, the “’474 Patent”) as a result of the operation of our website at www.local.com. GEOTAG, Inc. purports to be the rightful assignee of all right, title and interest in and to the ‘474 Patent. The complaint seeks unspecified amounts of damages and costs incurred, including attorney fees, as well as a permanent injunction preventing us from continuing those activities that are alleged to infringe the ‘474 Patent. If it is determined that we have infringed the ‘474 Patent, we could be subject to damages and a permanent injunction that could have a material adverse effect on us and our operations. In addition, this litigation could have a material adverse effect on our financial condition and results of operations because of defense costs, diversion of management’s attention and resources and other factors.
We may be subject to intellectual property claims that create uncertainty about ownership of technology essential to our business and divert our managerial and other resources.
There has been a substantial amount of litigation in the technology industry regarding intellectual property rights. We cannot assure you that third parties will not, in the future, claim infringement by us with respect to our current or future services, trademarks or other proprietary rights. Our success depends, in part, on our ability to protect our intellectual property and to operate without infringing on the intellectual property rights of others in the process. There can be no guarantee that any of our intellectual property will be adequately safeguarded, or that it will not be challenged by third parties. We may be subject to patent infringement claims or other intellectual property infringement claims that would be costly to defend and could limit our ability to use certain critical technologies.
We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual property suits, interference proceedings and related legal and administrative proceedings is costly and may divert our technical and management personnel from their normal responsibilities. We may not prevail in any of these suits. An adverse determination of any litigation or defense proceedings could cause us to pay substantial damages, including treble damages if we willfully infringe, and, also, could put our patent applications at risk of not being issued.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. If investors perceive these results to be negative, it could have an adverse effect on the trading price of our common stock.
Any patent litigation could negatively impact our business by diverting resources and management attention away from other aspects of our business and adding uncertainty as to the ownership of technology and services
that we view as proprietary and essential to our business. In addition, a successful claim of patent infringement against us and our failure or inability to obtain a license for the infringed or similar technology on reasonable terms, or at all, could have a material adverse effect on our business.
We may be subject to lawsuits for information displayed on our websites and the websites of our advertisers, which may affect our business.
Laws relating to the liability of providers of online services for activities of their advertisers and for the content of their advertisers’ listings are currently unsettled. It is unclear whether we could be subjected to claims for defamation, negligence, copyright or trademark infringement or claims based on other theories relating to the information we publish on our websites or the information that is published across our network of websites and partner websites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We may not successfully avoid civil or criminal liability for unlawful activities carried out by our advertisers. Our potential liability for unlawful activities of our advertisers or for the content of our advertisers’ listings could require us to implement measures to reduce our exposure to such liability, which may require us, among other things, to spend substantial resources or to discontinue certain service offerings. Our insurance may not adequately protect us against these types of claims and the defense of such claims may divert the attention of our management from our operations. If we are subjected to such lawsuits, it may adversely affect our business.
If we do not deliver traffic that converts into revenue for advertisers, then our advertisers and our advertising partners may pay us less for their listing or discontinue listings with us.
For our services to be successful, we need to deliver consumers to advertisers’ websites that convert into sales for the advertiser. If we do not meet advertisers’ expectations by delivering quality traffic, then our advertisers may pay us less for their monthly subscription listings and our advertising partners may pay us less per click or in both cases, cease doing business with us altogether, which may adversely affect our business and financial results. We compete with other web search services, online publishers and high-traffic websites, as well as traditional media such as television, radio and print, for a share of our advertisers’ total advertising expenditures. Many potential advertisers and advertising agencies have only limited experience advertising on the Internet and have not devoted a significant portion of their advertising expenditures to paid-search. Acceptance of our advertising offerings among our advertisers and advertising partners will depend, to a large extent, on its perceived effectiveness and the continued growth of commercial usage of the Internet. If we experience downward pricing pressure for our services in the future, our financial results may suffer.
If we fail to detect click-through fraud, we could lose the confidence of our advertisers and advertising partners, thereby causing our business to suffer.
We are exposed to the risk of fraudulent or illegitimate clicks on our sponsored listings. If fraudulent clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to revenue for the advertisers. As a result, our advertisers and advertising partners may become dissatisfied with our advertising programs, which could lead to loss of advertisers, advertising partners and revenue.
If we do not continue to develop and offer compelling content, products and services, our ability to attract new consumers or maintain the engagement of our existing consumers could be adversely affected.
We believe we must offer compelling content, products and services in order to attract new consumers and maintain the engagement of our existing consumers. Our ability to acquire, develop and offer new content, products and services, as well as new features, functionality and enhanced performance for our existing content, services and products requires substantial costs and efforts. The consumer reception of any new offerings we may make is unknown and subject to consumer sentiment that is difficult to predict. If we are unable to provide content, products, and services that are sufficiently attractive and relevant to consumers (including subscribers to
our monthly subscription listing products), we may not be able to attract new consumers or maintain or increase our existing consumers’ engagement with our Local.com site or our other offerings. Even if we are successful in the development and offering of compelling content, products, features, and services, we may not be able to attract new consumers or maintain or increase our existing consumers’ engagement.
If we cannot continue to develop and offer effective advertising products and services, our advertising revenues could be adversely affected.
We believe that growth in our advertising revenues depends on our ability to continue offering our advertisers and publishers with effective products and services. Developing new and improving upon our existing products and services may require significant effort and expense. If we are unable to develop and improve our advertising products and services, including those that more effectively or efficiently plan, price or target advertising, our advertising revenues could be adversely affected.
If our billing partners lose the ability to bill our monthly subscription customers through LECs on those monthly subscription customers’ telephone bills it would adversely impact our results of operations.
We currently maintain a billing relationship with certain third parties that bill some of our monthly subscription customers for us through each customer’s LEC. These third parties are approved to bill our products and services directly on most of our monthly subscription customers’ local telephone bills through their LEC, commonly referred to as their local telephone company. In fiscal 2011, approximately 83% of our monthly subscription customers were billed via LEC billing and revenue from LEC billing represented 10% of our total revenue in fiscal 2011. The existence of the LECs is the result of federal legislation. As such, Congress could pass future legislation that obviates the existence of or the need for the LECs. Additionally, regulatory agencies could limit or prevent the ability of our third-party partners to use the LECs to bill our monthly subscription customers. Similarly, the introduction of and advancement of new technologies, such as WiFi technology or other wireless-related technologies, could render unnecessary the existence of fixed telecommunication lines, which also could obviate the need for and access to the LECs. Finally, our third-party billing partners have historically been affected by the LECs’ internal policies. With respect to certain LECs, such policies are becoming more stringent. The inability on the part of our third-party billing partners to use the LECs to bill our advertisers through their monthly telephone bills could reduce the rate at which we are able to acquire new monthly subscription customers and increase the churn rate of our existing monthly subscription customers and would have a material adverse impact on our financial condition and results of operations.
Our revenue may decline over time due to the involvement of the alternative telephone suppliers in the local telephone markets.
Due to competition in the telephony industry, many business customers are finding alternative telephone suppliers, such as Competitive LECs, cable companies, VOIP offerings, and the like that offer less expensive alternatives to the LECs. When the LECs effectuate a price increase, many business customers look for an alternative telephone supplier. When our monthly subscription customers switch service providers from the LECs to an alternate telephone supplier, our third-party billing partners may be precluded from billing these monthly subscription customers on their monthly telephone bill and we must instead convert them to alternative billing methods such as credit card. This conversion process can be disruptive to our operations and result in lost revenue. We cannot provide any assurances that our efforts will be successful. The inability on the part of our third-party billing partners to use the LECs to bill our advertisers through their monthly telephone bills could reduce the rate at which we are able to acquire new monthly subscription customers and increase the churn rate of our existing monthly subscription customers and would have a material adverse impact on our financial condition and results of operations.
Our ability to efficiently bill our monthly subscription customers depends upon our third-party billing partners.
We currently depend upon our third-party billing partners to efficiently bill and collect monies through LEC billing. We currently have agreements with two third-party billing partners. Any disruption in these third parties’ ability to perform these functions could adversely affect our financial condition and results of operations.
If our monthly subscription customers file complaints against us or our partners, we could be forced to refund material amounts of monthly subscription revenues and our ability to operate our subscription service could be adversely impacted, which would adversely affect our results of operation.
We have internal and outsourced telesales initiatives that could result in complaints from our monthly subscription customers against us or our third-party partners who dispute that they have agreed to receive and be billed for our monthly subscription services. Monthly subscription customers may also direct their complaints to a state’s attorney general’s office, federal agencies such as the Federal Trade Commission, their LEC and other authorities. If a complaint is directed to an attorney general, a Federal agency, a LEC or other authorities, we may be forced to alter or curtail our sales and billing activity and to refund the monthly subscription fees that have already been collected for services rendered in unknown amounts. If this were to happen, our financial results could be materially impacted.
Failure to adequately protect our intellectual property and proprietary rights could harm our competitive position.
Our success is substantially dependent upon our proprietary technology, which relates to a variety of business and transactional processes associated with our paid-search advertising model, our Keyword DNA technology, our Local Connect search and advertising platform, our Exact Match technology platform, our RMS by Rovion rich media ad production platform, our Krillion product inventory and pricing technology, and our Spreebird daily deals platform. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality agreements and technical measures, to protect our proprietary rights. We have been issued eight patents and although we have filed additional patent applications on certain parts of our technology, much of our proprietary information may not be patentable. We cannot assure you that we will develop proprietary technologies that are patentable or that any pending patent applications will be issued or that their scope is broad enough to provide us with meaningful protection. We own the trademarks for Local.com, Spreebird, Krillion, Rovion, Pay Per Connect, Local Promote, Local Connect and Keyword DNA, among others, in the United States and may claim trademark rights in, and apply for trademark registrations in the United States for a number of other marks. We cannot assure you that we will be able to secure significant protection for these marks. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology or duplicate our services or design around patents issued to us or our other intellectual property rights. If we are unable to adequately protect our intellectual property and proprietary rights, our business and our operations could be adversely affected.
We rely on third-party technology, server and hardware providers, and a failure of service by any of these providers could adversely affect our business and reputation.
We rely upon third-party data center providers to host our main servers and expect to continue to do so. In the event that these providers experience any interruption in operations or cease operations for any reason or if we are unable to agree on satisfactory terms for continued hosting relationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. In the past, we have experienced short-term outages in the service maintained by one
of our current co-location providers. We also rely on third-party providers for components of our technology platform, such as hardware and software providers, credit card processors and domain name registrars. A failure or limitation of service or available capacity by any of these third-party providers could adversely affect our business and reputation.
If we fail to scale and adapt our existing technology architecture to manage the expansion of our offerings our business could be adversely affected.
We anticipate expanding our offerings to consumers, advertisers and publishers. Any such expansion will require substantial expenditures to scale or adapt our technology infrastructure. As usage increases and products and services expand, change or become more complex in the future, our complex technology architectures utilized for our consumer offerings and advertising services may not provide satisfactory support. As a result, we may make additional changes to our architectures and systems to deliver our consumer offerings and services to advertisers and publishers, including moving to completely new technology architectures and systems. Such changes may be challenging to implement and manage, may take time to test and deploy, may cause us to incur substantial costs and may cause us to suffer data loss or delays or interruptions in service. These delays or interruptions in service may cause consumers, advertisers and publishers to become dissatisfied with our offerings and could adversely affect our business.
Our business is subject to a number of natural and man-made risks, including natural disasters such as fires, floods, and earthquakes and problems such as computer viruses or terrorism.
Our systems and operations are vulnerable to damage or interruption from natural disaster and man-made problems, including fires, floods, earthquakes, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. As an example, if we were to experience a significant natural disaster, such as an earthquake, fire or flood, it likely would have a material adverse impact on our business, operating results and financial condition, and our insurance coverage will likely be insufficient to compensate us for all of the losses we incur. Additionally, our servers may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential intellectual property or customer data. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting the Southern California area, and our business interruption insurance may be insufficient to compensate us for losses that may occur. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide customer service, such disruptions could negatively impact our ability to run our business, which could have an adverse affect on our operating results and financial condition.
New tax treatment of companies engaged in internet commerce may adversely affect the commercial use of our services and our financial results.
Due to the global nature of the internet, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in internet commerce. New or revised international, federal, state or local tax regulations may subject us or our Spreebird subscribers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the internet. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
Federal, state or international laws or regulations applicable to our business could adversely affect our business.
We are subject to a variety of existing federal, state and international laws and regulations in the areas of advertising, content regulation, privacy, consumer protection, defamation, child protection, advertising to and collecting information from children, taxation and billing, among others. These laws can change, as can the interpretation and enforcement of these laws. Additionally, new laws and regulations may be enacted at any time. Compliance with laws is often costly and time consuming and may result in the diversion of a significant portion of management’s attention. Our failure to comply with applicable laws and regulations could subject us to significant liabilities which could adversely affect our business. Specific federal laws that impact our business include: The Digital Millennium Copyright Act of 1998; The Communications Decency Act of 1996; The Children’s Online Privacy Protection Act of 1998 (including related Federal Trade Commission regulations); The Protect Our Children Act of 2008; and The Electronic Communications Privacy Act of 1986. Additionally, there are a number of state laws and pending legislation governing the breach of data security in which sensitive consumer information is released or accessed. If we fail to comply with applicable laws or regulations we could be subject to significant liability which could adversely affect our business.
Government and legal regulations with respect to the Internet may damage our business.
There are currently few significant laws or regulations directly applicable to access to or commerce on the Internet. It is possible, however, that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as the positioning of sponsored listings on search results pages. For example, the Federal Trade Commission, or FTC, has in the past reviewed the way in which search engines disclose paid-search practices to Internet users. In 2002, the FTC issued guidance recommending that all search engine companies ensure that all paid-search results are clearly distinguished from non-paid results, that the use of paid- search is clearly and conspicuously explained and disclosed and that other disclosures are made to avoid misleading users about the possible effects of paid-search listings on search results. In February 2009, the FTC issued a staff report titled “Self-Regulatory Principles for Online Behavioral Advertising.” In December 2009, the FTC issued “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”
The adoption of laws, regulations, guidelines and principles relating to online advertising, including behavioral advertising, placement of paid search advertisements or user privacy, defamation or taxation and the like may inhibit the growth in use of the Internet, which in turn, could decrease the demand for our services and increase our cost of doing business or otherwise have a material adverse effect on our business, prospects, financial condition and results of operations. Any new legislation or regulation, or the application of existing laws and regulations to the Internet or other online services, could have a material adverse effect on our business, prospects, financial condition and results of operations.
Any regulation of our use of cookies or similar technologies could adversely affect our business.
We use small text files placed in a consumer’s browser, commonly known as cookies, to facilitate authentication, preference management, research and measurement, personalization and advertisement and content delivery. Several Federal, state and international governmental authorities are regularly evaluating the privacy implications inherent in the use of third-party web “cookies” for behavioral advertising and other purposes. Any regulation of these tracking technologies and other current online advertising practices could adversely affect our business.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes against its post-change income may be limited. We performed a Section 382 study during the fourth quarter of
2010 and determined that it has more likely than not undergone five ownership changes as described in IRC Section 382. The latest ownership change occurred in December 2004. However, due to the relatively large annual limitations based on the value of the Company, the identified ownership changes had no material impact to the amount of net operation loss that can be carried forward to the future years. Any future ownership change may impact our ability to utilize the net operation loss carryforwards in the future year. At December 31, 2011, the Company had federal and state income tax net operating loss carryforwards of approximately $62.2 million and $61.5 million, respectively. The federal and state net operating loss carryforwards will expire through 2029 and 2021, respectively, unless previously utilized.
Our ability to grow our Spreebird daily deals business is dependent upon a number of factors we may not be able to control
We believe that our ability to grow our Spreebird daily deals business is dependent upon a number of factors, including our ability to:
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acquire new subscribers who purchase daily deals;
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retain our existing subscribers and have them continue to purchase daily deals;
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attract new merchants who wish to offer deals through the sale of daily deals;
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retain our existing merchants and have them offer additional deals through our marketplace;
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expand the number, variety and relevance of products and deals we offer each day;
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increase the awareness of our brand across geographies;
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provide our subscribers and merchants with a superior experience;
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respond to changes in consumer access to and use of the internet and mobile devices; and
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react to challenges from existing and new competitors.
However, we cannot assure you that we will successfully implement any of these actions.
The daily deals market, including our recently acquired SMG, has experienced rapid growth over a short period in a new market and we do not know whether this market will continue to develop or whether it can be maintained. If we are unable to successfully respond to changes in the market, our daily deals business, including SMG (now collectively referred to as Spreebird) could be harmed.
Our Spreebird business is part of a new market which has operated at a substantial scale for only a limited period of time. Given the limited history, it is difficult to predict whether this market will continue to grow or whether it can be maintained. For example, as a result of our limited operating history in a new industry and because the majority of our Spreebird subscribers registered for our Spreebird service or made their initial purchase of a daily deal in the past 18 months, it is difficult to discern meaningful or established trends with respect to the purchase activity of our Spreebird subscribers or customers. We expect that the market will evolve in ways which may be difficult to predict. For example, we anticipate that over time we will reach a point in most markets where we have achieved a market penetration such that investments in new Spreebird subscriber acquisition are less productive and the continued growth of our gross profit will require more focus on increasing the rate at which our existing subscribers purchase our Spreebird daily deals. It is also possible that merchants or customers could broadly determine that they no longer believe in the value of our current services or marketplace. In the event of these or any other changes to the market, our continued success will depend on our ability to successfully adjust our strategy to meet the changing market dynamics.
If we are unable to do so, our Spreebird business could be harmed and our results from operations subject to a material negative impact.
If we fail to retain our existing Spreebird subscribers or acquire new Spreebird subscribers, our revenue and Spreebird business will be harmed.
We must continue to retain and acquire Spreebird subscribers that purchase Spreebird daily deals in order to increase revenue and achieve profitability. We cannot assure you that the revenue or gross profit from Spreebird subscribers we acquire will ultimately exceed the cost of acquiring new Spreebird subscribers. If consumers do not perceive our Spreebird daily deal offers to be of high value and quality or if we fail to introduce new and more relevant deals, we may not be able to acquire or retain Spreebird subscribers. If we are unable to acquire new Spreebird subscribers who purchase Spreebird daily deals in numbers sufficient to grow our Spreebird business, or if Spreebird subscribers cease to purchase Spreebird daily deals, the revenue or gross profit we generate may decrease and our operating results will be adversely affected.
We believe that many of our new Spreebird subscribers originate from word-of-mouth and other non-paid referrals from existing subscribers, including our school rewards program, and therefore we must ensure that our existing Spreebird subscribers remain loyal to our service in order to continue receiving those referrals. If our efforts to satisfy our existing Spreebird subscribers are not successful, we may not be able to acquire new Spreebird subscribers in sufficient numbers to continue to grow our Spreebird business or we may be required to incur significantly higher marketing expenses in order to acquire new Spreebird subscribers. Further, we believe that our success is influenced by the level of communication and sharing among Spreebird subscribers. If the level of usage by our Spreebird subscriber base declines or does not grow as expected, we may suffer a decline in subscriber growth or revenue. A significant decrease in the level of usage or Spreebird subscriber growth would have an adverse effect on our business, financial condition and results of operations.
If we fail to retain existing Spreebird merchants or add new Spreebird merchants, our revenue and business will be harmed.
We depend on our ability to attract and retain merchants that are prepared to offer products or services on compelling terms through our Spreebird marketplace. We do not have long-term arrangements to guarantee the availability of deals that offer attractive quality, value and variety to consumers or favorable payment terms to us. We must continue to attract and retain merchants to our Spreebird business in order to increase revenue and achieve profitability. If new Spreebird merchants do not find our marketing and promotional services effective, or if existing Spreebird merchants do not believe that utilizing our products provides them with a long-term increase in customers, revenues or profits, they may stop making offers through our marketplace. In addition, we may experience attrition in our merchants in the ordinary course of business resulting from several factors, including losses to competitors and merchant closures or bankruptcies. If we are unable to attract new merchants in numbers sufficient to grow our Spreebird business, or if too many merchants are unwilling to offer products or services with compelling terms through our Spreebird marketplace or offer favorable payment terms to us, we may sell fewer daily deals and our operating results will be adversely affected.
If our efforts to market, advertise and promote products and services from our existing merchants are not successful, or if our existing merchants do not believe that utilizing our services provides them with a long-term increase in customers, revenues or profits, we may not be able to retain or attract merchants in sufficient numbers to grow our Spreebird business or we may be required to incur significantly higher marketing expenses or accept lower margins in order to attract new Spreebird merchants. A significant increase in Spreebird merchant attrition or decrease in merchant growth would have an adverse effect on our business, financial condition and results of operation.
Our Spreebird business is highly competitive. Competition presents an ongoing threat to the success of our Spreebird business.
We expect competition in e-commerce generally, and daily deals group buying in particular, to continue to increase because there are no significant barriers to entry. We have larger and more established competitors, including Groupon and Living Social in our daily deals business, with substantially more resources to compete
than we have, and there are a substantial number of group buying sites that have similar offerings to our own daily deals offerings. In addition to such competitors, we expect to increasingly compete against other large internet and technology-based businesses, such as Google, which has launched its own daily deal initiative which is directly competitive to our Spreebird business. We also expect to compete against other internet sites that are focused on specific communities or interests and offer coupons or discount arrangements related to such communities or interests. We also compete with traditional offline coupon and discount services, as well as newspapers, magazines and other traditional media companies who provide coupons and discounts on products and services.
We believe that our ability to compete depends upon many factors both within and beyond our control, including the following:
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the size and composition of our Spreebird subscriber base and the number of merchants we feature;
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the timing and market acceptance of daily deals we offer, including the developments and enhancements to those daily deals offered by us or our competitors;
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Spreebird subscriber and merchant service and support efforts;
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selling and marketing efforts;
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ease of use, performance, price and reliability of services offered either by us or our competitors;
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our ability to cost-effectively manage our operations; and
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our reputation and brand strength relative to our competitors.
Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger subscriber bases than we do. These factors may allow our competitors to benefit from their existing customer or subscriber base with lower customer acquisition costs or to respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger subscriber bases or generate revenue from their subscriber bases more effectively than we do. Our competitors may offer deals that are similar to the deals we offer or that achieve greater market acceptance than the deals we offer. This could attract subscribers away from our websites and applications, reduce our market share and adversely impact our gross margin. In addition, we are dependent on some of our existing or potential competitors for banner advertisements and other marketing initiatives to acquire new Spreebird subscribers. Our ability to utilize their platforms to acquire new Spreebird subscribers may be adversely affected if they choose to compete more directly with us.
If we are unable to recover Spreebird subscriber acquisition costs with revenue and gross profit generated from those Spreebird subscribers, our business and operating results will be harmed.
As our subscriber base continues to evolve, it is possible that the composition of our Spreebird subscribers may change in a manner that makes it more difficult to generate revenue and gross profit to offset the costs associated with acquiring new Spreebird subscribers. For example, if we acquire a large number of new Spreebird subscribers who are not viewed as an attractive demographic by merchants, we may not be able to generate compelling products for those Spreebird subscribers to offset the cost of acquiring those Spreebird subscribers. If the cost to acquire Spreebird subscribers is greater than the revenue or gross profit we generate over time from those Spreebird subscribers, our business and operating results will be harmed.
If we are unable to maintain favorable terms with our Spreebird merchants, our gross profit may be adversely affected.
The success of our Spreebird business depends in part on our ability to retain and increase the number of merchants who use our Spreebird service. Currently, when a merchant partners with us to offer a deal for its
products or services, it receives an agreed upon percentage of the revenue from each daily deal sold, and we retain the rest. If merchants decide that utilizing our services no longer provides an effective means of attracting new customers or selling their goods and services, they may demand a higher percentage of the revenue from each daily deal sold. This would adversely affect our gross profit.
In addition, we expect to face increased competition from existing daily deal providers, including Groupon and Living Social, as well as other internet and technology-based businesses that have launched initiatives which are directly competitive to our Spreebird business. We also have seen that some competitors will accept lower margins, or negative margins, to attract attention and acquire new subscribers. If competitors engage in group buying daily deal initiatives in which merchants receive a higher percentage of the revenue than we currently offer, we may be forced to pay a higher percentage of the revenue than we currently offer, which may reduce our gross profit.
Our Spreebird business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or a decrease in subscriber willingness to receive messages could adversely affect our revenue and Spreebird business.
Our Spreebird business is highly dependent upon email and other messaging services. Deals offered through emails and other messages sent by us, or on our behalf by our affiliates, generate a substantial portion of our Spreebird-related revenue. Because of the importance of email and other messaging services to our businesses, if we are unable to successfully deliver emails or messages to our Spreebird subscribers or potential Spreebird subscribers, or if Spreebird subscribers decline to open our emails or messages, our revenue and profitability would be adversely affected. Actions by third parties to block, impose restrictions on, or charge for the delivery of, emails or other messages could also materially and adversely impact our business. From time to time, internet service providers block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third parties. In addition, our use of email and other messaging services to send communications about our website or other matters may result in legal claims against us, which if successful might limit or prohibit our ability to send emails or other messages. Any disruption or restriction on the distribution of emails or other messages or any increase in the associated costs would materially and adversely affect our revenue and profitability.
An increase in our refund rates could reduce our liquidity and profitability.
An increase in our refund rates could significantly reduce our liquidity and profitability. As we do not have control over our merchants and the quality of products or services they deliver, we rely on a combination of our historical experience with each merchant and online and offline research of customer reviews of merchants for the development of our estimate for refund claims. Our actual level of refund claims could prove to be greater than the level of refund claims we estimate. If our refund reserves are not adequate to cover future refund claims, this inadequacy could have a material adverse effect on our liquidity and profitability.
Our standard agreements with our merchants generally limit the time period during which we may seek reimbursement for customer refunds or claims. Our customers may make claims for refunds with respect to which we are unable to seek reimbursement from our merchants. Our inability to seek reimbursement from our merchants for refund claims could have an adverse effect on our liquidity and profitability.
If our merchants do not meet the needs and expectations of our Spreebird subscribers, our Spreebird business could suffer.
Our Spreebird business depends on our reputation for providing high-quality deals, and our brand and reputation may be harmed by actions taken by merchants that are outside our control. Any shortcomings of one or more of our merchants, particularly with respect to an issue affecting the quality of the deal offered or the products or services sold, may be attributed by our Spreebird subscribers to us, thus damaging our reputation, brand value and potentially affecting our results of operations. In addition, negative publicity and Spreebird
subscriber sentiment generated as a result of fraudulent or deceptive conduct by our merchants could damage our reputation, reduce our ability to attract new Spreebird subscribers or retain our current Spreebird subscribers, and diminish the value of our brand.
We may be subject to additional unexpected regulation which could increase our costs or otherwise harm our business.
The application of certain laws and regulations to our Spreebird business, as a new product category, is uncertain. These include laws and regulations such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the CARD Act, and unclaimed and abandoned property laws. In addition, from time to time, we may be notified of additional laws and regulations which governmental organizations or others may claim should be applicable to our business. If we are required to alter our Spreebird business practices as a result of any laws and regulations, our revenue could decrease, our costs could increase and our business could otherwise be harmed. In addition, the costs and expenses associated with defending any actions related to such additional laws and regulations and any payments of related penalties, judgments or settlements could adversely impact our profitability.
The implementation of the CARD Act and similar state and foreign laws may harm our Spreebird business and results of operations.
The certificates issued by Spreebird to customers may be considered gift cards, gift certificates, stored value cards or prepaid cards and therefore governed by, among other laws, the CARD Act, and state laws governing gift cards, stored value cards and coupons. This law contains provisions governing the use of gift cards, gift certificates, stored value cards or prepaid cards, including specific disclosure requirements and prohibitions or limitations on the use of expiration dates and the imposition of certain fees. For example, if Spreebird certificates are subject to the CARD Act and are not included in the exemption for promotional programs, it is possible that the purchase value, which is the amount equal to the price paid for the Spreebird certificate, or the promotional value, which is the add-on value of Spreebird certificate in excess of the price paid, or both, may not expire before the later of (i) five years after the date on which the Spreebird certificate was issued or the date on which the Spreebird subscriber last loaded funds on the Spreebird certificate if the Spreebird certificate has a reloadable feature; (ii) the Spreebird certificate’s stated expiration date (if any); or (iii) a later date provided by applicable state law. Although not directly involved, we are aware of numerous class action lawsuits that have been filed in federal and state court claiming that certificates similar to Spreebird certificates are subject to the CARD Act and various state laws governing gift cards and that the defendants have violated these laws by issuing certificates similar to Spreebird certificates with expiration dates and other restrictions. In the event that it is determined that Spreebird certificates are subject to the CARD Act or any similar state or foreign law or regulation, and are not within various exemptions that may be available to Spreebird under the CARD Act or under some of the various state or foreign jurisdictions, our liabilities with respect to unredeemed Spreebird certificates may be materially higher than the amounts shown in our financial statements and we may be subject to additional fines and penalties. In addition, if federal or state laws require that the face value of Spreebird certificates have a minimum expiration period beyond the period desired by a merchant for its promotional program, or no expiration period, this may affect the willingness of merchants to issue Spreebird certificates in jurisdictions where these laws apply. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected.
If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed Spreebird certificates, our net income could be materially and adversely affected.
In certain states and foreign jurisdictions, Spreebird certificates may be considered a gift card. Some of these states and foreign jurisdictions include gift cards under their unclaimed and abandoned property laws which require companies to remit to the government the value of the unredeemed balance on the gift cards after a specified period of time (generally between one and five years) and impose certain reporting and recordkeeping obligations. We do not remit any amounts relating to unredeemed Spreebird certificates based on our assessment
of applicable laws. The analysis of the potential application of the unclaimed and abandoned property laws to Spreebird is complex, involving an analysis of constitutional and statutory provisions and factual issues, including our relationship with Spreebird subscribers and merchants and our role as it relates to the issuance and delivery of a Spreebird certificate. In the event that one or more states or foreign jurisdictions successfully challenges our position on the application of its unclaimed and abandoned property laws to Spreebird certificates, or if the estimates that we use in projecting the likelihood of Spreebird certificates being redeemed prove to be inaccurate, our liabilities with respect to unredeemed Spreebird certificates may be materially higher than the amounts shown in our financial statements. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected. Moreover, a successful challenge to our position could subject us to penalties or interest on unreported and unremitted sums, and any such penalties or interest would have a further material adverse impact on our net income.
Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business.
A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. For example, recently there have been Congressional hearings and increased attention to the capture and use of location-based information relating to users of smartphones and other mobile devices. We have posted privacy policies and practices concerning the collection, use and disclosure of subscriber data on our websites and applications. Several internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of Spreebird subscribers or merchants and adversely affect our business. Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party web “cookies” for behavioral advertising. The regulation of these cookies and other current online advertising practices could adversely affect our business.
We depend on the continued growth of online commerce.
The business of selling goods and services over the internet, particularly through coupons, is dynamic and relatively new. Concerns about fraud, privacy and other problems may discourage additional consumers and merchants from adopting the internet as a medium of commerce. Additionally, acquiring new Spreebird subscribers for our services may be more difficult and costly than it has been in the past. In order to expand our Spreebird subscriber base, we must appeal to and acquire Spreebird subscribers who historically have used traditional means of commerce to purchase goods and services and may prefer internet analogues to our offerings, such as the retailer’s own website. If these consumers prove to be less active than our earlier Spreebird subscribers, or we are unable to gain efficiencies in our operating costs, including our cost of acquiring new Spreebird subscribers, our Spreebird business could be adversely impacted.
Failure to deal effectively with fraudulent transactions and subscriber disputes would increase our loss rate and harm our Spreebird business.
Spreebird certificates are issued in the form of redeemable coupons with unique identifiers. It is possible that consumers or other third parties will seek to create counterfeit Spreebird certificates in order to fraudulently
purchase discounted goods and services from our merchants. We may incur significant losses from fraud and counterfeit Spreebird certificates. We may incur losses from claims that the consumer did not authorize the purchase, from merchant fraud, from erroneous transmissions, and from consumers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive, they could potentially result in our losing the right to accept credit cards for payment. If we were unable to accept credit cards for payment, we would suffer substantial reductions in revenue, which would cause our Spreebird business to suffer. While we have taken measures to detect and reduce the risk of fraud, these measures need to be continually improved and may not be effective against new and continually evolving forms of fraud or in connection with new product offerings. If these measures do not succeed, our Spreebird business will suffer.
We are subject to payments-related risks.
We accept payments using a variety of methods, including credit card, debit card and gift certificates. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide payment processing services, including the processing of credit cards and debit cards and it could disrupt our Spreebird business if these companies become unwilling or unable to provide these services to us. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from consumers or facilitate other types of online payments, and our Spreebird business and operating results could be adversely affected.
We are also subject to or voluntarily comply with a number of other laws and regulations relating to money laundering, international money transfers, privacy and information security and electronic fund transfers. If we were found to be in violation of applicable laws or regulations, we could be subject to civil and criminal penalties or forced to cease our payments services business.
Federal laws and regulations, such as the Bank Secrecy Act and the USA PATRIOT Act and similar foreign laws, could be expanded to include Spreebird certificates.
Various federal laws, such as the Bank Secrecy Act and the USA PATRIOT Act and foreign laws and regulations, such as the European Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, impose certain anti-money laundering requirements on companies that are financial institutions or that provide financial products and services. For these purposes, financial institutions are broadly defined to include money services businesses such as money transmitters, check cashers and sellers or issuers of stored value cards. Examples of anti-money laundering requirements imposed on financial institutions include subscriber identification and verification programs, record retention policies and procedures and transaction reporting. We do not believe that we are a financial institution subject to these laws and regulations based, in part, upon the characteristics of Spreebird certificates and our role with respect to the distribution of Spreebird certificates to subscribers. However, the Financial Crimes Enforcement Network, a division of the U.S. Treasury Department tasked with implementing the requirements of the Bank Secrecy Act, recently proposed amendments to the scope and requirements for parties involved in stored value or prepaid access cards, including a proposed expansion of financial institutions to include sellers or issuers of prepaid access cards. In the event that this proposal is adopted as proposed, it is possible that a Spreebird certificate could be considered a financial product and that we could be a financial institution. In the event that we become subject to the requirements of the Bank Secrecy Act or any other anti-money laundering law or regulation imposing obligations on us as a money services business, our regulatory compliance costs to meet these obligations would likely increase which could reduce our net income.
State and foreign laws regulating money transmission could be expanded to include Spreebird certificates.
Many states and certain foreign jurisdictions impose license and registration obligations on those companies engaged in the business of money transmission, with varying definitions of what constitutes money transmission. We do not currently believe we are a money transmitter given our role and the product terms of Spreebird. However, a successful challenge to our position or expansion of state or foreign laws could subject us to increased compliance costs and delay our ability to offer Spreebird certificates in certain jurisdictions pending receipt of any necessary licenses or registrations.
Risks Relating to our Common Stock
The market price of our common stock has been and is likely to continue to be highly volatile, which could cause investment losses for our stockholders and result in stockholder litigation with substantial costs, economic loss and diversion of our resources.
The trading price of our common stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations as a result of various factors, many of which are beyond our control, including:
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developments concerning proprietary rights, including patents, by us or a competitor;
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market acceptance of our new and existing services and technologies;
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announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments;
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actual or anticipated fluctuations in our operating results;
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continued growth in the Internet and the infrastructure for providing Internet access and carrying Internet traffic;
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introductions of new services by us or our competitors;
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enactment of new government regulations affecting our industry;
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changes in the number of our advertising partners or the aggregate amount of advertising dollars spent with us;
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seasonal fluctuations in the level of Internet usage;
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loss of key employees;
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institution of litigation, including intellectual property litigation, by or against us;
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publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;
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short selling of our stock;
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large volumes of sales of our shares of common stock by existing stockholders;
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changes in the market valuations of similar companies; and
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changes in our industry and the overall economic environment.
Due to the short-term nature of our advertising partner agreements and the emerging nature of the online advertising market, we may not be able to accurately predict our operating results on a quarterly basis, if at all, which may lead to volatility in the trading price of our common stock. In addition, the stock market in general, and the Nasdaq Capital Market and the market for online commerce companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the listed companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class action litigation has often been instituted against these companies. Litigation
against us, whether or not a judgment is entered against us, could result in substantial costs, and potentially, economic loss, and a diversion of our management’s attention and resources. As a result of these and other factors, you may not be able to resell your shares above the price you paid and may suffer a loss on your investment.
We have never paid dividends on our common stock.
Since our inception, we have not paid cash dividends on our common stock and we do not intend to pay cash dividends in the foreseeable future due to our limited funds for operations. Therefore, any return on your investment would likely come only from an increase in the market value of our common stock.
Certain warrants contain anti-dilution provisions that would be triggered upon an offering of our common stock and the exercise of options and warrants and other issuances of shares of common stock will likely have a dilutive effect on our stock price.
As of December 31, 2011, there were outstanding options to purchase an aggregate of 5,005,584 shares of our common stock at a weighted average exercise price of $4.30 per share, of which options to purchase approximately 2,342,979 shares were exercisable as of such date. As of December 31, 2011, there were outstanding warrants to purchase 1,497,936 shares of our common stock, at a weighted average exercise price of $7.05 per share.
On January 20, 2011, in connection with the completion of the public offering of 4,600,000 shares of our common stock and in accordance with the anti-dilution provisions contained in each of the warrants to purchase up to 537,373 shares of common stock at an exercise price of $7.89 per share that were issued in a private placement transaction on August 1, 2007 (the “Series A Warrants”) and the warrants to purchase up to 537,373 shares of common stock at an exercise price of $9.26 per share that were issued in the same private placement transaction on August 1, 2007 (the “Series B Warrants”), the exercise price of the Series A Warrants and the Series B Warrants was reduced to $7.02 per share and $8.09 per share, respectively, and we issued an additional 66,207 Series A Warrants at an exercise price of $7.02 per share, which are immediately exercisable (the “New Series A Warrants”), and an additional 77,707 Series B Warrants at an exercise price of $8.09 per share, which are immediately exercisable (the “New Series B Warrants”). The Series A Warrants and the Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively, and the New Series A Warrants and the New Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively.
The exercise of options and warrants, and the conversion of convertible securities, at prices below the market price of our common stock could adversely affect the price of shares of our common stock. In addition, the exercise of options and warrants will cause dilution to our existing shareholders. Additional dilution may result from the issuance of shares of our capital stock in connection with collaborations or commercial agreements or in connection with other financing efforts.
The issuance of additional shares of our common stock could be dilutive to stockholders if they do not invest in future offerings. Moreover, to the extent that we issue options or warrants to purchase, or securities convertible into or exchangeable for, shares of our common stock in the future and those options, warrants or other securities are exercised, converted or exchanged (or if we issue shares of restricted stock), stockholders may experience further dilution. Holders of shares of our common stock have no preemptive rights that entitle them to purchase their pro rata share of any offering of shares of any class or series.
Because almost all of our outstanding shares are freely tradable, sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.
As of February 29, 2012, we had outstanding 22,083,005 shares of common stock, of which our directors and executive officers owned 110,212 shares as of February 29, 2012, which are subject to the limitations of Rule 144 under the Securities Act.
In general, Rule 144 provides that any non-affiliate of ours, who has held restricted common stock for at least six months, is entitled to sell their restricted stock freely, provided that we stay current in our filings with the SEC. Because almost all of our outstanding shares are freely tradable and the shares held by our affiliates may be freely sold (subject to the Rule 144 limitations), sales of these shares could cause the market price of our common stock to drop significantly, even if our business is performing well.
Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline.
Our amended and restated certificate of incorporation, as amended, our amended and restated bylaws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our common stock. The following are examples of such provisions in our amended and restated certificate of incorporation and in our amended and restated bylaws:
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special meetings of our stockholders may be called only by our Chief Executive Officer, by a majority of the members of our board of directors or by the holders of shares entitled to cast not less than 10% of the votes at the meeting;
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stockholder proposals to be brought before any meeting of our stockholders must comply with advance notice procedures;
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our board of directors is classified into three classes, as nearly equal in number as possible;
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newly-created directorships and vacancies on our board of directors may only be filled by a majority of remaining directors, and not by our stockholders;
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a director may be removed from office only for cause by the holders of at least 75% of the voting power entitled to vote at an election of directors;
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our amended and restated bylaws may be further amended by our stockholders only upon a vote of at least 75% of the votes entitled to be cast by the holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class; and
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our board of directors is authorized to issue, without further action by our stockholders, up to 10,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by our board of directors.
We implemented a Stockholder Rights Plan, dated October 15, 2008, which may also have the effect of deterring or delaying attempts by our stockholders to affect changes in control. Each Right entitles the registered holder to purchase from our company one one-thousandth (1/1000) of a share of Series A Participating Preferred Stock, par value $0.00001, which we refer to as the preferred shares, of our company at a price of $10.00, which we refer to as the purchase price, subject to adjustment. The number of shares constituting the series of preferred shares is 30,000. The Rights are intended to protect our stockholders in the event of an unfair or coercive offer to acquire us and to provide the Board of Directors with adequate time to evaluate unsolicited offers. The Rights may have anti-takeover effects. The Rights will cause substantial dilution to a person or group that acquires 15% or more of the shares of our outstanding common stock without the approval of our Board of Directors. The Rights, however, should not affect any prospective offer or willingness to make an offer at a fair price as determined by our Board. The Rights should not interfere with any merger or other business combination approved by our Board of Directors. However, because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition.
We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our voting stock, the person is an “interested stockholder” and may not engage in “business combinations” with us for a period of three years from the time the person acquired 15% or more of our voting stock.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2.
Item 2. Properties
Our executive and administrative offices are located at 7555 Irvine Center Drive, Irvine, CA 92618, where we lease approximately 34,612 square feet of space in a two-story office building. Our current monthly rent is $35,304, subject to annual increases. Our lease for this space ends in July 2015. We also lease approximately 4,921 square feet of space located at 840 Apollo Street, El Segundo, CA, a three story building, which we utilize for our Exact Match product fulfillment personnel. We currently pay $9,872 in base rent for the El Segundo office, which is subject to annual increases through February 2015 when the El Segundo lease expires. For our Rovion business, we lease approximately 5,000 square feet of space or the entire 9th floor at 7 Water Street, Boston, MA 02109. Additionally we also lease approximately 2,400 square feet of space located at 76 Summer Street, Boston, MA 02110 for our Rovion business. The combined monthly fixed rent of the Rovion offices is $18,044. The leases for our Rovion business expire on December 31, 2012 and April 30, 2017. Our wholly-owned subsidiary, Krillion, Inc. maintains offices at 607A West Dana Street, Mountain View, CA 94041, with approximately 3,667 square feet. The monthly lease payments for the Krillion offices are $8,333. The Krillion office lease was amended in July 2011, and expires in September 2012.
Item 3.
Item 3. Legal Proceedings
From time to time we may be subject to a variety of legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of intellectual property rights and claims arising in connection with our services. Other than the GEOTAG litigation discussed below, we are not currently a party to any material legal proceedings.
GEOTAG Litigation
On July 23, 2010, a lawsuit alleging patent infringement was filed in the United States District Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a Delaware corporation with its principal offices in Plano, Texas. The complaint alleges that we infringe U.S. Patent No. 5,930,474 (hereinafter, the “ ‘474 Patent”) as a result of the operation of our website at www.local.com. GEOTAG, Inc. purports to be the rightful assignee of all right, title and interest in and to the ‘474 Patent. The complaint seeks unspecified amounts of damages and costs incurred, including attorney fees, as well as a permanent injunction preventing us from continuing those activities that are alleged to infringe the ‘474 Patent. We intend to vigorously defend ourselves from these claims.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market information
Our common stock has traded on the Nasdaq Capital Market under the symbol “LOCM” since November 2, 2006, when we changed the ticker symbol of our common stock in connection with our company name change to Local.com Corporation. Prior to that, our common stock was traded under the symbol “INCX.” The following table sets forth the range of high and low per share sales prices as reported on the Nasdaq Capital Market for each period indicated. These prices reflect inter-dealer prices without retail markup, markdown or commissions and may not represent actual transactions.
Performance Graph
The graph below compares the cumulative 5-year total return of holders of Local.com Corporation’s common stock with the cumulative total returns of the NASDAQ Composite index and the RDG Internet Composite index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from 12/31/2006 to 12/31/2011. The stock price performance included in this graph is not necessarily indicative of future stock price performance. This performance graph shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that section and shall not be deemed to be incorporated by reference into any filing of Local.com Corporation under the Securities Act of 1933, as amended, or the Exchange Act.
Holders
On February 29, 2012, the closing price of our common stock, as reported by the Nasdaq Capital Market, was $2.39 per share and the number of stockholders of record of our common stock was 73.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, and such other factors as our board of directors deems relevant.
Equity Compensation Plans
The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K. See Note 11 to the consolidated financial statements for a description of securities authorized for issuance under equity compensation plans.
Unregistered Securities
On October 31, 2011, the Company issued an unregistered warrant to purchase 20,000 shares of Local.com Corporation common stock at an exercise price of $2.87. This warrant vests on October 31, 2012, and remains exercisable through October 31, 2014, subject to certain early termination provision. The warrant was issued in connection with an asset purchase. The warrant issued in the transaction was not registered under the Securities Act in reliance on Section 4(2) of the Securities Act.
Repurchase of Securities
We did not repurchase any shares of our equity securities during the fourth quarter of the year ended December 31, 2011.
Item 6.
Item 6. Selected Financial Data
Consolidated Statement of Operations Data (in thousands, except per share amounts):
Consolidated Balance Sheet Data (in thousands):
(1) In February 2007, we issued $8.0 million of senior secured convertible notes. During July 2007, the holders converted all of their notes into 1,990,050 shares of our common stock. In August 2007, we completed a private placement in which we sold 2,356,900 shares of our common stock that resulted in net proceeds of $12.1 million.
(2) In January 2009, we adopted the amended provisions of U.S. GAAP on determining what types of instruments held by a company can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception within the provisions. Warrants issued in prior periods with certain anti-dilution provisions for the holder are no longer considered indexed to our stock, and therefore no longer qualify for the scope exception and must be accounted for as derivatives. These warrants are reclassified as liabilities under the caption “Warrant liability” and recorded at estimated fair value at each subsequent reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period are recorded in the Consolidated Statements of Operations under the caption “Change in fair value of warrant liability.” Our operating loss and net loss for the year ended December 31, 2009, was higher by $3.0 million, or $0.21 per basic and diluted share, as a result of the adoption of the amended derivative accounting provisions.
(3) In September 2010, we chose to early adopt the amended guidance for the recognition of multiple deliverable elements as it relates to the sale of domain names and services. In the third and fourth quarter we had two transactions that were accounted for as multiple deliverable elements resulting in the deferral of revenue relating to these sales for portions of the services not yet provided.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Report. In addition to current and historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments, and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue,” the negative of such terms, or other comparable terminology. These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part 1, Item 1A. “Risk Factors” of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Annual Report on Form 10-K to reflect actual results or future events or circumstances.
Overview
We are a local media advertising company that enables local businesses and consumers to find each other and connect. We operate online businesses that collectively reach over 30 million monthly unique visitors across over 100,000 websites, and we serve over 27,000 small business customers with a variety of web hosting and local online advertising products.
Our Owned & Operated business unit manages our flagship property, Local.com, and a proprietary network of over 20,000 local websites, which reaches over 15 million monthly unique visitors. Our Network business unit operates (i) a leading private label local syndication network of over 1,200 U.S. regional media websites, (ii) 80,000 third-party local websites, (iii) our own organic feed of local businesses plus third-party advertising feeds, both of which are focused primarily on local consumers to a distribution network of hundreds of websites, and (iv) our network of owned and third party websites that display our own and third party advertisements. Our Sales & Ad Services business unit sells and supports products directly to small businesses. These products include: our Exact Match product suite; our LocalPremium direct listing products; and our Rovion rich media display advertising products. We also provide over 27,000 direct monthly subscribers with web hosting or web listing products. We use patented and proprietary search technologies and systems, to provide consumers with relevant search results for local businesses, products and services. By providing our users and those of our network partners with robust, current, local information about businesses and other offerings in their local area, we have attracted an audience of users that our direct advertisers and advertising partners desire to reach.
We launched Local.com in August of 2005, our local syndication network in July 2007, and we expanded our sales and advertiser services offerings to include a larger number of direct service subscribers throughout 2009 and 2010. In the third quarter of 2010, we also acquired Octane360 which included the Exact Match product suite. During the second quarter of 2011, we acquired Krillion, which includes a robust local product search platform that enables consumers to search for products and product availability at local retailers, as well as substantially all of the assets of Rovion, including a rich media advertising platform and toolset that allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers. In the third quarter of 2011, we acquired SMG, a daily deals business, as part of our efforts to expand our own daily deals business, Spreebird (located at www.spreebird.com), which we launched in May 2011. We have been regularly developing and deploying new features and functionality to each of these channels designed to enhance
the experience of our users and increase the value of our audience to our advertisers. With a strategic focus on three key drivers for our business - traffic, technology and advertisers - we believe we can continue to grow through our own efforts and the acquisition of complementary businesses and technologies intended to accelerate our growth.
2011 Corporate Highlights
On January 14, 2011, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with respect to the offer and sale (the “Offering”) of 4,000,000 shares of our common stock at a price to the public of $4.25 per share. Under the terms of the Underwriting Agreement, we granted the underwriter an option, exercisable for 30 days, to purchase up to an additional 600,000 shares of our common stock (the “Option Shares”) at the same purchase price to cover over-allotments, which was exercised in full by the underwriter on January 18, 2011. The offering of our common stock was made pursuant to our effective shelf registration statement on Form S-3 (Registration No. 333-147494) (the “Registration Statement”), including a related prospectus as supplemented by a Preliminary Prospectus Supplement dated January 13, 2011, and Prospectus Supplement dated January 14, 2011, which we filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended. The Registration Statement was set to expire on January 15, 2011, but was extended as a result of our filing on January 14, 2011, of a new shelf registration statement on Form S-3 to register 8,000,000 shares of its common stock in replacement of the expiring Registration Statement (the “New Shelf Registration Statement”). While we sold 4,600,000 shares of our common stock in the Offering which reduced the number of available shares under the New Registration Statement, we have subsequently increased the number of available shares so that we once again have up to 8,000,000 shares available for future offerings under the replacement registration statement. Net proceeds to the Company from the sale of shares in the Offering, after deducting underwriting discounts and commissions and other related expenses, was approximately $18.2 million.
On April 4, 2011, the Company entered into an Asset Purchase Agreement with DigitalPost Interactive, Inc. (“DGLP”) and Rovion, pursuant to which the Company acquired substantially all of the assets of Rovion on May 5, 2011. The assets acquired included, among other things, a rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including “In-Person” the online video spokesperson, as well as virtually all other forms of rich media advertisements; and a rich media advertising toolset, known as Rich Media Services (RMS), targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RMS control panel. The purchase of the Rovion assets was completed following the satisfaction of all closing conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion. In accordance with the terms of the Agreement, the Company paid DGLP and Rovion $2,196,000 net of $485,000 in loans owed by DGLP.
On April 29, 2011, the Company entered into a Stock Purchase Agreement with Krillion, all of the stockholders of Krillion and the stockholders’ agent to purchase all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash. The transaction was funded from the Company’s cash on hand. The purchase price was subject to working capital adjustments as outlined in the Stock Purchase Agreement. Krillion provides consumers and its business partner’s real-time information on where specific branded products are sold, and which retailer, at a particular retail location, has them in stock. Krillion aggregates and structures consumer product information in real time, to create an up-to-the-minute index of products across various brands, at various retailer locations in multiple cities across the United States.
On June 30, 2011, the Company entered into a Google Services Agreement. The agreement with Google provides for the implementation by Local.com of certain advertising and search services on certain websites, effective August 1, 2011. The Agreement runs through July 31, 2013, subject to certain early termination provisions.
On July 9, 2011, the Company acquired SMG, as a result of a merger of the Company’s wholly-owned subsidiary with and into SMG, in consideration of $5,000,000 in cash, 727,360 shares of Local.com common stock, $0.00001 par value (the “Shares”), and $5,000,000 in secured promissory notes, which have since been repaid. The merger agreement also provides for additional earn-outs payments of up to $20.0 million payable in a combination of cash and Company stock dependent on certain performance criteria. SMG has moved into the Company’s principal offices in Irvine since the closing of the merger. SMG currently offers daily deals in 10 markets. SMG is now part of the Company’s Spreebird daily deals business and is operated as part of the Company’s Spreebird brand.
On July 29, 2011, the Company entered into Amendment #4 to that certain Yahoo! Publisher Network Agreement with Yahoo! Inc., pursuant to which the Company and Yahoo! agreed to modify implementation, compensation and exclusivity provisions in the Agreement and extend the agreement through July 31, 2012.
On August 3, 2011, the Company entered into a Loan and Security Agreement (the “Security Agreement”) with Square 1 Bank. The Security Agreement provides us with a revolving credit facility of up to $12 million (the “Facility”). Subject to the terms of the Security Agreement, the borrowing base used to determine loan availability under the Facility is based on a formula equal to 80% of eligible accounts receivable, with account eligibility measured in accordance with standard determinations as more particularly defined in the Security Agreement (the “Formula Revolving Line”). Notwithstanding the foregoing, the Security Agreement allows us to advance up to $3 million from the Facility at any time, irrespective of our borrowing base (the “Non-Formula Revolving Line”), provided that total advances under the Facility will not exceed $12 million and we are otherwise in compliance with the terms of the Agreement. The Facility expires on August 3, 2013.
On August 9, 2011, the Company entered into amendment No. 3 to the SuperMedia Superpages Advertising Distribution Agreement, dated April 1, 2010, as amended by Amendment No. 1 dated as of September 30, 2010 and Amendment No. 2 dated as of April 4, 2011, with SuperMedia LLC. The amendment modifies certain compensation structures of the agreement with Supermedia with respect to pay for performance ads distributed by the Company, settles certain disputed matters under the agreement, and provided the Company and SuperMedia with certain additional termination rights, among other things.
Outlook for Our Business
Local search allows consumers to search for local businesses, products or services by including geographic area, zip code, city name, or other geographically targeted search parameters in their search requests.
According to a May 2011 study, BIA/Kelsey estimates that the local search market in the United States will grow from $5.1 billion in 2010 to $8.2 billion by 2015. Local businesses, those that principally serve consumers within a fifty mile radius of their location, are increasingly shifting their newspaper and print yellow pages ad spend to online advertising, some of which is directed towards local search advertising.
We believe that local search will be an increasingly significant segment of the online advertising industry. Although search advertising has been used primarily by businesses that serve the national market, local businesses are increasingly using online advertising to attract local customers. Our O&O and Network business units are designed to serve this market of consumers and advertisers, which we believe will provide an opportunity for growth from increased local search volumes by consumers, as well as increased competition by advertisers to display their ad listings in front of those consumers.
Local online search is relatively new, and as a result it is difficult to determine our current market share or predict our future market share. Our revenue, profitability and future growth depend not only on our ability to execute our business plan, but also, among other things, on acceptance of our services, the growth of the paid-search market, our ability to effectively compete with other providers of local search, and paid-search technologies and services.
We have also taken steps to diversify our revenue sources, while maintaining our focus on local offerings, including through the acquisition of Octane360 and more recently the acquisition of Krillion, a local shopping data and content provider, substantially all of the assets of Rovion, which includes a self-service rich media advertising platform and toolset, and SMG which expands our recently launched daily deals business, Spreebird. With the products and technology acquired in these acquisitions we believe it is able to differentiate itself from other online media companies by assembling a unique range of complimentary advertising products that can, over time, be marketed to a variety of consumers, regional media publishers and local merchants.
We intend to continue making significant investments in the Spreebird business and Rovion and Krillion acquisitions as part of our initiative to diversify our revenue sources and promote the future growth of the Company.
As we continue to invest in our core offerings, while pursuing the acquisitions noted above, we have increased our operating expenses, mainly related to traffic acquisition costs, the deployment of new features and functionality across business units and the support of our acquired companies.
Our entry into the Google Services Agreement in June 2011, and the amendment to our Yahoo! publisher network agreement effective July 29, 2011, reversed the trend of continued decline in the revenue per click (“RPC”) that our advertising partners pay us for clicks on their advertisements on our sites and to diversify our sources of revenue. We cannot give assurances that our efforts to improve monetization through this strategy will continue to be successful.
Sources of Revenue
We generate revenue primarily on our Local.com website and Network from both direct and indirect advertiser relationships, via:
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click-throughs on sponsored listings;
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calls to cost-per-call advertiser listings;
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lead generation;
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banner ads;
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subscription advertiser listings;
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domain sales and services;
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web hosting services;
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rich media advertising services; and
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daily deal offerings.
Operating Expenses
Cost of Revenues
Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards and fees for LEC billings). We advertise on large search engine websites such as Google, Yahoo!, MSN/Bing and Ask.com, as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to our Local.com website.
During the year ended December 31, 2011, approximately 66% of our overall traffic was purchased from other search engine websites. During the year ended December 31, 2011, advertising costs to drive consumers to our Local.com website were $37.4 million of which $25.6 million and $9.3 million was attributable to Google, Inc. and Yahoo!, respectively. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will likely suffer materially.
Sales and Marketing
Sales and marketing expenses consist of sales commissions and salaries for our internal and outsourced sales force, customer service staff and marketing personnel, advertising and promotional expenses. We record advertising costs and sales commission in the period in which the expense is incurred. We expect our sales and marketing expenses will increase in absolute dollars as we continue to experience growth.
General and Administrative
General and administrative expenses consist of salaries and other costs associated with employment of our executive, finance, human resources and information technology staff, legal, tax and accounting, and professional service fees.
Research and Development
Research and development expenses consist of salaries and other costs of employment of our development staff, outside contractor costs and amortization of capitalized website development costs.
Results of Operations
The following table sets forth our historical operating results as a percentage of revenue for the years ended December 31, 2011, 2010 and 2009:
Years ended December 31, 2011 and 2010
Revenue
(*) - Percent of total revenue.
Owned and operated revenue for the year ended December 31, 2011, increased 14.3% compared to the same period in 2010. O&O revenue is affected by fluctuations in traffic at our Local.com website as well as the effectiveness by which we are able to monetize such traffic. A measure of the monetization of the traffic on our flagship Local.com website is revenue per thousand visitors (RKV). RKV increased to $248 for the year ended December 31, 2011, from $237 for the year ended December 31, 2010. Traffic to the Local.com website also increased in 2011, compared to 2010. The increase in traffic at our website is the result of higher cost of revenues to attract users to our Local.com website as well as increased organic search traffic over the same period. On a year-to-date basis, the increase in RKV was a result of increased RPC in the third and fourth quarter due to a new advertising partner relationship. In addition, the company’s third and fourth quarter financial results each included a net financial benefit of approximately $500,000 resulting from the modification of a partner contract. This financial benefit ended December 31, 2011. The increase was partially offset by lower RPC’s experienced in the first and second quarters of the year. The decreased RPC, which began in the fourth quarter of 2010, and continued in the first and second quarter of 2011, was, in part, due to the Yahoo!/Bing alliance, which resulted in changes to the Yahoo! search and advertising platform. Also included in O&O revenue for 2011 is revenue from the newly acquired Krillion business.
Network revenue for the year ended December 31, 2011, decreased 32.9%, compared to the same period in 2010. The decrease is primarily due to a decrease in network partners on our distribution network as we have decreased the advertising feeds to third-party websites. The decrease in our advertising feeds to third-party websites are primarily due to the decrease in RPC as a result of the Yahoo!/Bing alliance. This lower level of monetization related to the distribution portion of the network business is expected to continue through 2012. The decrease in revenue from our distribution network was partially offset by an increase in revenues from our syndication and display advertiser networks.
Sales and advertiser services revenue for the year ended December 31, 2011, decreased 23.7% compared to the same period in 2010, as our base of small business subscribers decreased from over 45,000, as of December 31, 2010, to approximately 27,000, as of December 31, 2011. The decrease in the small business subscriber base is due to the natural attrition of the current legacy subscriber bases, subject to prior contractual commitments, as well as our decision to suspend acquisitions of LEC-billed subscriber bases, subject to prior contractual commitments, in order to concentrate resources around the Exact Match product suite powered by our acquired Octane360 platform and investment in our new Spreebird daily deals business. As a result, we anticipate revenue from our existing legacy subscribers to continue to decline. The expected growth in revenue from Exact Match and Spreebird products is not expected to fully offset the decline in revenue from existing subscribers until 2012. Also included in SAS revenue for 2011 is revenue from the newly acquired Rovion business.
The growth in small business subscribers in prior years was primarily due to acquisitions of subscriber bases. The following table provides the revenue relating to the acquisition of subscriber bases and revenue relating to internal and outsourced sales efforts (dollars in thousands):
(*) - Percent of total revenue.
Based on the above, total revenue for the year ended December 31, 2011, decreased to $78.8 million from $84.1 million for the year ended December 31, 2011, a decrease of $5.3 million, or 6.4%. Included in revenue for 2011 is approximately $2.0 million of revenue relating to 2011 acquisitions.
The following table identifies our major partners that represented greater than 10% of our total revenue in the periods presented (note that we entered into a Google service agreement effective August 1, 2011):
For 2012, we expect SuperMedia’s revenue to decrease significantly due to contract amendments.
Operating expenses:
Operating expenses were as follows (dollars in thousands):
(*) - Percent of total revenue.
Cost of revenues
Cost of revenues expenses for the year ended December 31, 2011, increased by 6.0%, compared to the same period in 2010. The increase was primarily due to increased traffic acquisition costs associated with driving more consumers to our Local.com website. The increase in traffic acquisition cost was partially offset by a decrease in revenue share due to the decrease in network revenues. As a percent of revenue, cost of revenues increased to 62.6% for the year ended December 31, 2011, from 55.3% for the comparable prior year. The increase in cost of revenues as a percent of revenue was attributable to the increase in owned and operated revenue, with a lower margin than network revenue, which decreased during the 2011 year. The decrease in SAS revenues further contributed to the increase in cost of revenues as a percentage of revenue. This was partially offset by high margin revenue from one of our advertising partners. Lower margin is expected to continue through 2012.
Sales and marketing
Sales and marketing expenses for the year ended December 31, 2011, increased by 52.8% compared to the same period in 2010. The increase was primarily due to higher personnel-related costs related to increased headcount. The increased headcount was a result of an increase in sales employees as well as additional employees from the acquisitions that took place during the year.
General and administrative
General and administrative expenses for the year ended December 31, 2011, increased by 40.0% compared to the same period in 2011. The increase is due to higher personnel-related costs as a result of severance costs totaling approximately $462,000 incurred and increased headcount for the year. Headcount increased primarily due to the three acquisitions completed during the year.
Research and development
Research and development expenses for the year ended December 31, 2011, increased by 26.8% compared to the same period in 2010. The increase is mainly due to higher personnel-related costs and consulting fees as we invest in our systems and technology platforms. Also included in research and development expense is approximately $400,000 in severance related cost for the year. We capitalized an additional $3,306,000 of research and development expenses for website development and amortized $2,025,000 of capitalized website development costs during the year ended December 31, 2011. We capitalized an additional $3,085,000 of research and development expenses for website development and amortized $700,000 during the year ended December 31, 2010.
Amortization of intangibles
Amortization of intangibles expense was $5.5 million for the year ended December 31, 2011, compared to $5.7 million for the year ended December 31, 2010. The decrease in amortization expense in 2011 was primarily due to the Company’s decision to suspend subscriber acquisitions of customer-related intangible assets, except where prior contractual commitments exist. The customer-related intangible assets purchased in 2010 are amortized over the expected life of the assets based on the expected cash flow from the customers, resulting in accelerated amortization of the intangible assets over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four. This was partially offset by an increase in other intangible asset amortization expense from the three acquisitions during the year.
Interest and other income (expense), net
Interest and other income (expense), net consisted of the following (in thousands):
Interest and other income (expense) was ($413,000) and ($275,000) for the year ended December 31, 2011 and 2010, respectively. The increase is due to the acceleration of the amortization of deferred finance charges due to the cancellation of the revolving credit facility we had with SVB.
Change in Fair Value of Warrant Liability
The change in fair value of the warrant liability was $2.6 million for the year ended December 31, 2011. In accordance with updated provisions of U.S. GAAP regarding accounting for derivatives, adopted effective January 1, 2009, certain warrants previously classified within equity were reclassified as liabilities. This change in fair value of warrant liability is a result of revaluing the warrant liability based on the Black-Scholes valuation model. This revaluation has no impact on our cash balances.
Provision for income taxes
Provision for income taxes was $181,000 for the year ended December 31, 2011, primarily due to anticipated tax amortization on indefinite-lived assets, partially offset by California research and development credits. Provision for income taxes was $102,000 for the year ended December 31, 2010, primarily relating to state income tax resulting from the California tax law change that suspended the use of corporate net operating loss carryforwards and an increase in the deferred tax liabilities on indefinite-lived assets, partially offset by California research and development credits and prior year actual to provision adjustments.
Years ended December 31, 2010 and 2009
Revenue
(*) - Percent of total revenue.
Owned and operated revenue for the year ended December 31, 2010, increased 20.8% compared to the same period in 2009. O&O revenue is affected by fluctuations in traffic at our Local.com website as well as the effectiveness by which we are able to monetize such traffic. A measure of the monetization of the traffic on our flagship Local.com website is revenue per thousand visitors (RKV). RKV decreased to $237 for the year ended December 31, 2010, from $261 for the year ended December 31, 2009. The decrease in monetization was offset by an increase in traffic to the Local.com website in 2010. The increase in traffic at our website is the result of higher cost of revenues to attract users to our Local.com website as well as increased organic search traffic over
the same period. On a year-to-date basis, the decrease in RKV for the year ended December 31, 2010 was a result of decreased RPC from Yahoo!, Inc., our largest customer. The decrease in RPC was, in part, due to the Yahoo!/Bing alliance, which resulted in changes to the Yahoo! search and advertising platform. The decline in the revenue from Yahoo! occurred during the fourth quarter of 2010. This lower level of monetization from Yahoo! continued into 2011.
Network revenue for the year ended December 31, 2010, increased $13.1 million, or 108.5%, compared to the same period in 2009. The increase was primarily due to a $10.5 million increase in revenue related to our distribution network and the sale of Octane360 products, including domains and websites, of $3.7 million as part of a new revenue component of Network revenue, partially offset by an $802,000 decrease in revenue related to our local syndication network for the year. During the third quarter of 2009, we launched our distribution network, which distributes our advertising and content feeds to third-party websites. The increase in distribution network revenues is mainly due to the expansion of the distribution network being effective for the entire 2010 year. The decrease in local syndication network revenues is due to lower monetization of traffic on our network of over 1,000 regional media websites. The decrease in RPC due to the Yahoo/Bing alliance resulted in a decrease in revenue for us and our network partners which could in turn result in the loss of network partners in the future.
Sales and advertiser services revenue for the year ended December 31, 2010, increased $7.1 million, or 95.3%, as we grew our base of small business subscribers from approximately 40,000 at the end of 2009, to over 45,000 at the end of 2010. The increase in small business subscribers was primarily the result of acquisitions of subscriber bases during 2010, coupled with our internal and outsourced sales efforts. During the year, we purchased approximately 50,000 website hosting subscribers from LaRoss, Turner and BestClick while we lost approximately 45,000 subscribers during the year due to expected attrition. In the fourth quarter of 2010, we announced that we suspended acquisitions of LEC-billed subscriber bases, subject to prior contractual commitments, in order to concentrate our resources around the Octane360 product suite powered by our recently acquired Octane360 platform (now known as our Exact Match platform). As a result, revenue from our existing legacy subscribers declined and the remaining subscriber base was significantly reduced in 2011. The expected growth in revenue from our Exact Match products did not fully offset the decline in revenue from existing legacy subscribers.
The growth in small business subscribers are a result of acquisitions of subscriber bases and internal and outsourced sales efforts. The following table provides the revenue relating to the acquisition of subscriber bases and revenue relating to internal and outsourced sales efforts (dollars in thousands):
(*) - Percent of total revenue.
Based on the above, total revenue for the year ended December 31, 2010, increased to $84.1 million from $56.2 million for the year ended December 31, 2009, an increase of $27.9 million, or 49.5%.
The following table identified our major customers that represented greater than 10% of our total revenue in the periods presented:
Operating expenses:
Operating expenses were as follows (dollars in thousands):
(*) - Percent of total revenue.
Cost of revenues
Cost of revenues expenses for the year ended December 31, 2010, increased by 37.0%, compared to the same period in 2009. The increase was primarily due to increased revenue share payments related to network partners and higher traffic acquisition costs associated with driving more consumers to our Local.com website. As a percent of revenue, cost of revenues declined to 55.3% for the year ended December 31, 2010, from 60.3% for the comparable prior year. The decline in cost of revenues as a percent of revenue was attributable to the high-margin revenue generated during the year ended December 31, 2010, from products related to the recently acquired Octane360 platform.
Sales and marketing
Sales and marketing expenses for the year ended December 31, 2010, increased by 20.0% compared to the same period in 2009. The increase was primarily due to higher personnel-related costs related to increased headcount and higher commissions on higher revenue as well as increased third-party sales expenses related to our outsourced sales efforts.
General and administrative
General and administrative expenses for the year ended December 31, 2010, increased by 17.3% compared to the same period in 2009. The increase is largely attributable to higher personnel-related costs, due to an increase in headcount, and increased office expenses.
Research and development
Research and development expenses for the year ended December 31, 2010, increased by 44.9% compared to the same period in 2009. The increase is mainly due to higher personnel-related costs and consulting fees as
we invest in our systems and technology platforms. We capitalized an additional $3,085,000 of research and development expenses for website development and amortized $700,000 during the year ended December 31, 2010. We capitalized an additional $1,219,000 of research and development expenses for website development and amortized $355,000 of capitalized website development costs during the year ended December 31, 2009.
Amortization of intangibles
Amortization of intangibles expense was $5.7 million for the year ended December 31, 2010, compared to $2.5 million for the year ended December 31, 2009. Amortization increased in 2010 due to the subscriber acquisitions of customer-related intangible assets. The customer-related intangible assets of $5.3 million purchased in 2010 are amortized over the expected life of the assets based on the expected cash flow from the customers, resulting in accelerated amortization of the intangible assets over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four.
Interest and other income (expense), net
Interest and other income (expense), net consisted of the following (in thousands):
Interest and other income (expense) was ($275,000) and ($27,000) for the year ended December 31, 2010 and 2009, respectively. The increase was due to interest expense and amortization of fees related to our revolving credit facility. We had between $3.0 million and $7.0 million of borrowings outstanding on our revolving credit facility during the 2010 year, and no debt outstanding during 2009 other than the three days prior to year end. We expect interest and other income (expense) to continue at current levels.
Change in Fair Value of Warrant Liability
The change in fair value of the warrant liability was $887,000 for the year ended December 31, 2010. In accordance with updated provisions of U.S. GAAP regarding accounting for derivatives, adopted effective January 1, 2009, certain warrants previously classified within equity were reclassified as liabilities. This change in fair value of warrant liability was a result of revaluing the warrant liability based on the Black-Scholes valuation model. This revaluation has no impact on our cash balances.
Provision for income taxes
Provision for income taxes was $102,000 for the year ended December 31, 2010, primarily relating to state income tax resulting from the California tax law change that suspended the use of corporate net operating loss carryforwards and an increase in the deferred tax liabilities on indefinite-lived assets, partially offset by California research and development credits and prior year actual to provision adjustments. Provision for income taxes was $158,000 for the year ended December 31, 2009, primarily relating to state income tax in California as state legislation postponed the use of corporate net operating loss carryfowards.
Liquidity and Capital Resources
Liquidity and capital resources highlights (in thousands):
Working capital is defined as current assets less current liabilities, excluding the non-cash warrant liability.
Cash flow highlights (in thousands):
We have funded our business, to date, primarily from issuances of equity securities as well as through debt facilities; however, during the years ended December 31, 2010 and 2009, we generated positive cash flow from operations. Cash and cash equivalents were $10.4 million as of December 31, 2011, and $13.0 million as of December 31, 2010. We had working capital deficit of ($647,000) as of December 31, 2011, and working capital of $8.1 million as of December 31, 2010. During 2011, we entered into four merger and asset purchases resulting in cash payments totaling approximately $16.8 million. One of the purchases provides for additional consideration of up to $20.0 million subject to the achievement of certain performance criteria set out in the merger agreement. In addition to the four purchases, we also continued to invest in the newly acquired businesses and core technologies resulting in additional cash payments of approximately $4.4 million for the year. These investments were partially offset by net proceeds of $18.2 million from our public offering of common stock in January 2011. Additionally, pursuant to a loan and security agreement with Square 1 Bank that we entered into on August 3, 2011, we have secured a revolving credit facility of up to $12.0 million, based on certain formulas as set in the merger agreement. As of the date of this report, we had a total of $8.0 million outstanding on the revolving credit facility with Square 1 Bank. The decrease in working capital is largely due to a decrease in cash of approximately $2.7 million, an increase in our revolving credit facilities balance of $1.0, which is a results of a draw on the new Square 1 Bank line of credit of $8.0 million partially offset by a repayment of the SVB line of credit of $7.0 million, and an increase in our accounts payable and other accrued liabilities of approximately $6.4 million. This change was partially offset by an increase in accounts receivable of approximately $1.5 million. The decrease in cash is primarily due to our continued funding of businesses acquired during 2011 and continued investments in our technology platforms. The increase in accounts payable and other liabilities are due to the timing of vendor payments as well as additional liabilities assumed in the SMG acquisition. The increase in accounts receivable are due to increased sales in the fourth quarter 2011.
Net cash used in operating activities was $748,000 for the year ended December 31, 2011. Net loss adjusted for non-cash charges (adding back depreciation and amortization, provision for doubtful accounts, changes in deferred income taxes, stock-based compensation expense and change in fair value of warrant liability) used cash of $4.4 million. Changes in operating assets and liabilities provided cash of $3.6 million. Net cash provided by operating activities was $8.3 million for the year ended December 31, 2010. Net income adjusted for non-cash charges (adding back depreciation and amortization, provision for doubtful accounts, changes in deferred income taxes, stock-based compensation expense and change in fair value of warrant liability) provided cash of $13.7 million. Changes in operating assets and liabilities used cash of $5.4 million.
There are four primary drivers that affect cash provided by or used in operations: net income (loss); non-cash adjustments to net income (loss); changes in accounts receivable; and changes in accounts payable. For the year ended December 31, 2011, the terms of our accounts receivable and accounts payable remained unchanged.
The table below detail the change in net cash used in operating activities for the years ended December 31, 2011 and 2010 (in thousands):
(1) Includes depreciation, amortization, change in fair value of warrant liability, non-cash expense related to stock option issuances, changes in deferred income taxes and provision for doubtful accounts.
Net cash used in investing activities was $21.2 million for the year ended December 31, 2011, and consisted of $4.4 million for capital expenditures, $16.0 million related to merger and asset acquisitions, and $762,000 related to purchases of customer-related intangible assets from LaRoss. Net cash used in investing activities was $16.9 million for the year ended December 31, 2010, and consisted of $6.3 million for capital expenditures, $4.9 million related to purchases of customer-related intangible assets from LaRoss, Turner and Best Click subscriber acquisitions, and $5.8 million related to the Octane360 acquisition.
Net cash provided by financing activities was $19.2 million for the year ended December 31, 2011, primarily consisting of $18.2 million from a public offering of our common stock, $8.0 million drawn on the new revolving credit facility with Square 1 Bank, partially offset by the repayment of the $7.0 million outstanding balance of the revolving credit facility with SVB. Net cash provided by financing activities was $11.6 million for the year ended December 31, 2010, primarily from the $8.9 million proceeds from the exercise of warrants and stock options coupled with $4.0 million net proceeds from our credit facilities, partially offset by the repurchase of $1.2 million of the company’s common stock.
During the third and fourth quarter, we were able to reduce our operating losses through the restructuring of agreements with current partners, entering into agreements with new partners and continued efforts to optimize monetization on our O&O and Network properties. These changes resulted in a significant improvement in monetization compared to the prior two quarters. Part of the improvement related to a new significant ad partner which was effective August 1, 2011, and impacted the third quarter of 2011 for two months. The full quarter impact of these improvements was realized in the fourth quarter 2011. We have also been able to increase traffic to our O&O and Network sites resulting in record traffic for the past three quarters. Although we have increased investments in recently acquired businesses, much of the investment will be discretionary marketing spend after the first quarter of 2012, at which point it can then be controlled based on available working capital. Therefore, because of continued improvement in traffic, our recent improvements in monetization and the discretionary nature of new marketing spending, the fourth quarter provided us cash from operations. Management believes that once it is able to control its discretionary marketing spend the trend of cash provided by operating activities will continue. Management further believes that based upon projected operating needs, cash from operations and availability on our revolving credit facility will be sufficient to fund our operations for at least the next 12 months. If the projections and assumptions used by management to form its opinion prove incorrect, then we may require additional capital to fund its operations over the next 12 months.
Shelf Registration Statement
On January 14, 2011, we filed a new shelf registration statement with the SEC pursuant to which we registered 8,000,000 shares of our common stock. On March 23, 2011, we filed an amendment to the new shelf registration statement with an effective date of April 12, 2011. The new shelf registration statement is set to expire in April 2014. We may periodically offer all or a portion of the shares of common stock registered on the new shelf registration statement, when it becomes effective, at prices and on terms to be announced when and if the shares of common stock are so offered. The specifics of any future offerings, along with the use of proceeds of any common stock offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. Our ability to sell our common stock, including on terms and at prices that are acceptable to us, is subject to market conditions and other factors, such as contractual commitments of our previously issued warrants.
Stock repurchase program
On August 4, 2010, our Board of Directors approved a stock repurchase program of up to $2.0 million of Local.com Corporation common stock. The share repurchase program was authorized for 12 months and authorized us to repurchase shares from time to time through open market or privately negotiated transactions. During the year ended December 31, 2010, we repurchased 270,400 shares of common stock at an average price of $4.52 per share and an aggregate purchase price of approximately $1.2 million. The share repurchase program has subsequently been terminated.
Purchase of customer related intangible assets
On May 31, 2011, we acquired approximately 4,617 website hosting accounts for $554,040 in cash from LaRoss. The acquisition was part of a requirement to purchase additional subscribers from LaRoss pursuant to a previously executed sales and services agreement with LaRoss dated July 16, 2010 (the “LaRoss Agreement”). LaRoss will provide ongoing billing services to and hosting of the sites. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
On August 21, 2011, we acquired approximately 1,734 website hosting accounts for $208,080 in cash pursuant to the LaRoss Agreement. LaRoss will provide ongoing billing services to and hosting of the sites. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
Acquisitions
On July 1, 2010, we acquired all of the assets of Octane360. The assets acquired include a technology platform, which can be used to offer targeting and registration of geo-category based local website domains; small business and geo-category website creation, hosting and management; an ad exchange to manage the selection and deployment of ad inventory across all Octane360-controlled domains and websites; and a content marketplace to allow for the management of geo-category content written for advertising customers or our directly owned portfolio properties. Under the terms of the Asset Purchase Agreement, dated July 1, 2010, between us and Octane360, we acquired the assets of Octane360 for $3.5 million in cash, 200,482 shares of our common stock and possible future contingent consideration based on the achievement of certain earnout milestones. On July 28, 2010, Octane360 achieved one of the milestones and received an additional $325,000 in cash and 48,077 shares of our common stock. On September 28, 2010, three additional earnout milestones were achieved resulting in an additional cash payment of $1,950,000 to Octane360. Octane360 may receive up to an additional $3.3 million in a combination of cash and stock based on Octane360 achieving certain milestones and its operating performance during the two year period ending June 30, 2012, as more particularly described in the Octane360 Asset Purchase Agreement.
On April 4, 2011, we entered into an Asset Purchase Agreement with DGLP and Rovion, pursuant to which we acquired substantially all of the assets of Rovion on May 5, 2011. The assets acquired included, a rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including “In-Person” the online video spokesperson, as well as virtually all other forms of rich media advertisements; a rich media advertising toolset, known as Rich Media Services (RMS), targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RMS control panel. The purchase of the Rovion assets was completed following the satisfaction of all closing conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion. In accordance with the terms of the Agreement, we paid DGLP and Rovion $2,196,000 net of $485,000 in loans owed by DGLP.
On April 29, 2011, we entered into a Stock Purchase Agreement with Krillion, all of the stockholders of Krillion and the stockholders’ agent to purchase all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash. The transaction was funded from our cash on hand. The purchase price was subject to working capital adjustments as outlined in the Stock Purchase Agreement. Krillion provides consumers and its business partner’s real-time information on where specific branded products are sold, and which retailer, at a particular retail location, has them in stock. Krillion aggregates and structures consumer product information in real time, to create an up-to-the-minute index of products across various brands, at various retailer locations in multiple cities across the United States.
On July 9, 2011, we acquired SMG as a result of a merger of our wholly-owned subsidiary with and into SMG, in consideration of $5,000,000 in cash, 727,360 shares of our common stock and $5,000,000 in secured promissory notes, which have since been repaid. The merger agreement also provides for additional earn-outs payments of up to $20.0 million payable in a combination of cash and our common stock dependent on certain performance criteria. SMG has moved into our principal offices in Irvine since the closing of the merger. SMG currently offers daily deals in ten markets. SMG is now part of our Spreebird daily deals business and is operated as part of our Spreebird brand.
Critical Accounting Policies, Judgments and Estimates
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenue and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies described in more detail in Note 1 to our consolidated financial statements included in this Report, involve judgments and estimates that are significant to the presentation of our consolidated financial statements.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
We generate revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement, the fulfillment of subscription listing obligations, the sale of deal of the day vouchers, or the delivery of Exact Match products to our customers. We enter into contracts to distribute sponsored listings and banner advertisements with our direct and indirect
advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). We recognize our portion of the bid price based upon our contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on our Local.com website and network partner websites. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Management has analyzed our revenue recognition and determined that our web hosting revenue will be recognized net of direct costs.
During the year ended December 31, 2010, we entered into multiple-deliverable arrangements for the sale of domains and for providing services relating to such domains. Management evaluated the agreements in accordance with the provision of the revenue recognition topic that addresses multiple-deliverable revenue arrangements as updated in October 2009. Although such updated provisions were only effective for fiscal periods beginning on or after June 15, 2010, we opted to adopt such provisions early. The multiple-deliverable arrangements entered into consisted of various units of accounting such as the sale of domains, website development fees, content delivery and hosting fees. Such elements were considered separate units of accounting due to each element having value to the customer on a stand-alone basis. The selling price for each of the units of accounting was determined using a combination of vendor-specific objective evidence and management estimates. Revenue relating to domains was recognized with the transfer of title of such domains. Revenue for website development, content delivery and hosting fees are recognized as such services are performed or delivered. The agreements did not include any cancellation, termination or refund provisions that we consider probable.
We launched our Spreebird daily deals business in May 2011, and had material activity during the third and fourth quarter 2011. Revenue relating to the Spreebird daily deals business will be recorded exclusive of the portion of gross billings paid as merchant revenue share, since we generally act as the agent, rather than the principal, when connecting merchants with online customers. Spreebird deal vouchers are sold primarily through email marketing and our www.spreebird.com website. Revenue for our Spreebird business is recognized when earned. Revenue is considered to be earned once all revenue recognition criteria have been satisfied. All revenue, other than Spreebird daily deals revenue and web hosting revenue, is recognized on a gross basis.
Allowance for Doubtful Accounts
Our management estimates the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If we believe that our customers’ financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.
As of December 31, 2011, two customers, Yahoo! Inc. and Google, Inc. represented 47% of our total accounts receivable. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.
Depreciation of Property and Equipment
Depreciation and amortization of property and equipment are calculated under the straight-line basis over the shorter of the estimated useful lives or the respective assets as follows:
Furniture and fixtures
7 years
Office equipment
5 years
Computer equipment
3 years
Computer software
3 years
Leasehold improvements
5 years (life of lease)
Repairs and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property and equipment are included in the operating results of the related period.
Amortization of Intangible Assets
Intangible assets are amortized over their estimated useful lives, generally on a straight-line basis over two to five years. The small business subscriber relationships are amortized based on how we expect the customer relationships to contribute to future cash flows. As a result, amortization of the small business subscriber relationships intangible assets is accelerated over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four.
Stock Based Compensation
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock options, stock price volatility, and the pre-vesting forfeiture rate of stock awards and in the case of restricted stock units, the fair market values of the underlying stock on the dates of grant. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock on the date of grant based on the historical market activity of our stock. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected pre-vesting award forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted and cancelled before vesting. If our actual forfeiture rate is materially different from the original estimate, the stock-based compensation expense could be significantly different from what we recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. See Note 11 - Stockholders’ Equity for additional information.
Total stock-based compensation expense recognized for the years ended December 31, 2011, 2010 and 2009 is as follows (in thousands, except per share amounts):
Accounting for Income Taxes
We are required to recognize a provision for income taxes based upon the taxable income and temporary differences for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable under currently enacted state and federal tax laws and an analysis of temporary differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences is reported as deferred tax assets and liabilities in our consolidated balance sheet. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that all or some portion or the deferred tax asset will not be realized, we establish a valuation allowance. At December 31, 2011, we had a full valuation allowance on net operating losses based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our tax provision in our consolidated statement of income or against additional paid-in-capital in our consolidated balance sheet to the extent any tax benefits would have otherwise been allocated to equity. In making our judgment regarding the valuation allowance, we considered all evidence, both positive and negative and although we generated taxable income in the current year and expect to do so in future periods, we also considered our history of losses and placed more weight on the historical results in judging our ability to realize the deferred tax asset related to net operating losses.
U.S. GAAP regarding accounting for uncertainty in income taxes defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. As of December 31, 2011, we had total unrecognized tax benefits of approximately $1.3 million. If fully recognized, approximately the total unrecognized tax benefit of $1.3 million would impact our effective tax rate.
Provision for income taxes was $181,000 for the year ended December 31, 2011, primarily due to anticipated tax amortization on indefinite-lived assets, partially offset by California research and development credits. Provision for income taxes was $102,000 for the year ended December 31, 2010, primarily relating to state income tax resulting from the California tax law change that suspended the use of corporate net operating loss carryforwards and increase in the deferred tax liabilities on indefinite-lived assets, partially offset by California research and development credits and prior year actual to provision adjustments.
Warrant Liability
As discussed in Note 1 - The Company and Summary of Significant Accounting Policies, effective January 1, 2009, we adopted the updated guidance of U.S. GAAP regarding accounting for derivatives, which requires that certain of our warrants be accounted for as derivative instruments and that we record the warrant liability at fair value and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrants. We calculate the fair values using the Black-Scholes valuation model.
The use of the Black-Scholes model requires us to make estimates of the following assumptions:
•
Expected volatility - The estimated stock price volatility is derived based upon our actual historic stock prices over the contractual life of the warrants, which represents our best estimate of expected volatility; and
•
Risk-free interest rate - We use the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the warrant contractual life assumption as the risk-free interest rate.
We are exposed to the risk of changes in the fair value of the derivative liability related to outstanding warrants. The fair value of these derivative liabilities is primarily determined by fluctuations in our stock price. As our stock price increases or decreases, the fair value of these derivative liabilities increases or decreases, resulting in a corresponding current period loss or gain to be recognized. Based on the number of outstanding warrants, market interest rates and historical volatility of our stock price as of December 31, 2011, a $1 decrease or increase in our stock price will result in a non-cash derivative gain or loss of approximately $173,000 and $336,000, respectively.
Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For goodwill, we engage an independent appraiser to assist management in the determination of the fair value of our reporting units and compare the resulting fair value to the carrying value of the reporting units to determine if there is goodwill impairment. For other intangible assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment. We performed our annual impairment analysis as of December 31, 2011, and determined that the estimated fair value of the reporting units exceeded its carrying value and therefore no impairment existed. The Spreebird business unit was identified as a separate reporting unit for evaluation of goodwill impairment. As the financial performance of the Spreebird business unit was lower than planned, we conducted an evaluation of goodwill impairment of this reporting unit. Based on the evaluation there was no impairment recorded for the Spreebird business unit. In our evaluation of the Spreebird reporting unit, we determined that the fair value of the reporting unit exceeded the carrying value by approximately 30%. $12 million of goodwill, based on our acquisition of SMG has been allocated to this reporting unit. Our evaluation primarily relied on a market approach using revenue multiples of comparable public companies that operate in the same industry, of which there is limited data. Using a revenue multiplier, we determined the estimated fair value utilizing historic and projected revenues for this reporting unit. Any future fair value calculations used to evaluate goodwill impairment could be negatively affected by the market performance of the comparable public companies utilized in the model and/or lower revenue earned by the reporting unit. We will continue to monitor the indicators of impairment and will periodically review the reporting unit for impairment as required by U.S. GAAP. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets.
Allocation of Purchase Price for Acquisitions
During the year ended December 31, 2011, we acquired several businesses. Upon completion of the purchase, management is required to identify tangible and intangible assets, as well as liabilities and contingent liabilities acquired. As a technology company, our acquisitions typically involve intangible assets with non-readily determinable fair values. Management estimates the fair value of each of the intangible assets and their estimated useful life based on historical experience and comparable data from other similar technology companies (guideline method). The values assigned to each element are subjective and we may not recover the value initially assigned to the individual assets.
Recent Accounting Pronouncements
See Note 1 - The Company and Summary of Significant Accounting Policies to the consolidated financial statements, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.
Contractual Obligations
The following table sets forth certain payments due under contractual obligations with minimum firm commitments as of December 31, 2011 (in thousands):
(1) Represents non-cancelable operating lease agreements for our offices that expire on various dates through April 2017.
(2) Represents revolving line of credit with Square 1 Bank.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk refers to the risk that a change in the level of one or more market factors such as interest rates, foreign currency exchange rates, or equity prices will result in losses for a certain financial instrument or group of instruments. We are exposed to the risk of increased interest rates on our current debt instruments and the risk of loss on credit extended to our customers. We have issued equity instruments, including warrants which contain certain derivatives which fluctuate, primarily as a result of changes in our stock price.
Interest Rate Risk
We are exposed to the risk of fluctuation in interest rates on our debt instruments. During 2011, we did not use interest rate swaps or other types of derivative financial instruments to hedge our interest rate risk. Square 1 Bank borrowings made pursuant to the Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.0%, or (ii) the Prime Rate (as announced by Square 1 Bank), plus 1.75% and borrowings made pursuant to
the Non-Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.25%, or (ii) the Prime Rate (as announced by Square 1 Bank), plus 2.0%. The debt outstanding under the line of credit entering 2012 is $8.0 million. Therefore, a one-percentage point increase in interest rates would result in an increase in interest expense of approximately $80,000 per annum.
Derivative Liability Risk
We adopted the updated U.S. GAAP guidance regarding accounting for derivatives, which requires that certain of our warrants be accounted for as derivative instruments and that we record the warrant liability at fair value and recognize the change in valuation in our statement of operations each reporting period. We are therefore exposed to the risk of change in the fair value of derivative liability related to outstanding warrants. The fair value of these derivative liabilities is primarily determined by fluctuations in our stock price. As our stock price increases or decreases, the fair value of these derivative liabilities increase or decrease, resulting in a corresponding current period loss or gain to be recognized. Based on the number of outstanding warrants, market interest rates and historical volatility of our stock price as of December 31, 2011, a $1 decrease or increase in our stock price will result in a non-cash derivative gain or loss of approximately $173,000 and $336,000, respectively. During 2011 and 2010, we experienced a $2.6 million and $0.9 million non-cash gain, respectively, on the outstanding warrants.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements, including the report of our independent registered public accounting firm, are included beginning at page immediately following the signature page of this Report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting Issues and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we have carried out an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2011, to ensure that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based upon its assessment, management concluded that, as of December 31, 2011, our internal control over financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31, 2011, has been audited by Haskell & White, LLP, an independent registered public accounting firm, as stated in their report on our internal control over financial reporting which is included herein.
Changes in Internal Control over Financial Reporting
During the 2011 year, we had various acquisitions of which most of the newly acquired entities activities were captured by our current control structure. In cases where certain elements of a newly acquired business did not fall under an existing control we designed additional controls to ensure that adequate controls over financial reporting is maintained.
Other than additional controls implemented as part of the SMG acquisition, there were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth, as of December 31, 2011, certain information concerning our executive officers and directors:
(1) Executive officer.
(2) Mr. Plonski’s employment with the Company ended on December 31, 2011.
Executive Officers
Heath B. Clarke has served as our Chairman of the Board since March 1999, as our President from March 1999 to December 2000 and as our Chief Executive Officer since January 2001. From 1998 to February 1999,
Mr. Clarke was the Vice President of eCommerce for LanguageForce, Inc., a language translation software company. Prior to that time, he was a Marketing Manager for Starnet International (Canada), an Internet company. From 1995 to 1998 he held managerial positions with the Berg Group of Companies (Australia), and from 1988 to 1995 he was founder and Chief Executive Officer of Australian Fibre Packaging.
Michael A. Sawtell has served as our President and Chief Operating Officer since December 2011 and our Chief Operating Officer since May 2011. Mr. Sawtell joined us as Sr. Vice President and General Manager, SAS in May 2011 with the acquisition of the Rovion assets from DGLP. From July 2005 to May 2011, Mr. Sawtell was Chief Executive Officer of DGLP. From March 2000 to March 2005, Mr. Sawtell was our President and Chief Operations Officer. Mr. Sawtell’s responsibilities prior to Local.com have included chief executive officer functions at a public company, as well as general oversight of the operations and management of both public and private companies.
Kenneth S. Cragun has served as our Chief Financial Officer since December 2010, as our Secretary since October 2010, as our interim Chief Financial Officer from October 2010 to December 2010, and our Vice President of Finance from April 2009 to October 2010. From June 2006 to March 2009, Mr. Cragun was the Chief Financial Officer of Modtech Holdings, Inc., a supplier of modular buildings. Mr. Cragun received a Bachelors of Science degree in Accounting from Colorado State University-Pueblo. Mr. Cragun’s responsibilities prior to Local.com have included chief financial officer functions at a public company, including preparation of financials for SEC disclosures in accordance with GAAP, audit experience at a nationally recognized certified public accounting firm, and day-to-day management of the financial affairs of both public and private companies.
Peter S. Hutto has served as our Sr. Vice President of Corporate Development since November 2009, our Sr. Vice President of Business Development and Sales from October 2008 to October 2009, and our Vice President of Business Development and Sales from October 2005 to September 2007. Mr. Hutto received a Bachelor of Arts degree in Political Science from the University of North Carolina, Chapel Hill. Mr. Hutto’s responsibilities prior to Local.com have included corporate and business development functions at both public and private companies.
Michael O. Plonski served as our Chief Technology Officer from July 2009 through December 31, 2011. From July 2005 to June 2009, Mr. Plonski served as SVP/Chief Information Officer and Chief Operating Officer Digital of Martha Stewart Living Omnimedia, Inc., an integrated media and merchandising company providing consumers with inspiring lifestyle content and well-designed, high-quality products. Mr. Plonski received a Bachelor of Science degree in Mechanical Engineering from the University of Notre Dame. Mr. Plonski’s responsibilities prior to Local.com included chief information officer and chief technology officer functions at a public company, including oversight of technology development, deployment, maintenance and enhancement, managing multiple technology initiatives, managing corporate infrastructure and integrating the technologies of acquired companies. In the role of chief operating officer digital, his responsibilities included product management, project management, editorial, design, user-experience, web site production and integration of partners and partner digital properties.
Independent Board of Directors
Norman K. Farra Jr. has served as a director since August 2005, and our lead independent director, responsible for overseeing the independence of the board, since November 2011. Mr. Farra is currently a Managing Director, Investment Banking for Aegis Capital, Inc. since January 2012. From December 2009 to December 2011, Mr. Farra served as Managing Director, Investment Banking for R.F. Lafferty & Co. Inc. From May 2008 to December 2009, he served as Director, Investment Banking for Cresta Capital Strategies, LLC. He was an independent financial consultant from September 2007 to May 2008, and served as Managing Director of Investment Banking for GunnAllen Financial Inc. from August 2006 to September 2007. From June 2001 to August 2006, he was Independent contractor acting as Managing Director of Investment Banking for GunnAllen Financial Inc. In the past five years, Mr. Farra has held no other public company directorships. Mr. Farra received a Bachelor of Science degree in Business Administration from Widener University.
The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Farra to serve as a Director of the Company: Over 20 years experience in the finance, capital markets and financial services industry; significant experience in the investment banking and financial consulting industry; certification from the National Association of Corporate Directors.
Philip K. Fricke has served as a director since October 2003. Mr. Fricke is currently President of PKF Financial Consultants, Inc., a private company he founded in March 2001, which provides financial communications services and advisory services to public and private companies. In the past five years, Mr. Fricke has held one other public company directorship with MI Developments Inc. (from August 2003 to May 2009). Mr. Fricke received a Bachelor of Arts degree and a Master of Arts degree in Psychology, as well as, a Master of Business Administration degree in Finance and Economics received from Fairleigh Dickinson University.
The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Fricke to serve as a Director of the Company: Over 25 years experience as a Wall Street financial analyst; significant experience gained as a director of another public company.
Theodore E. Lavoie has served as a director since April 1999. Mr. Lavoie is currently an independent management consultant to the renewable fuel/waste-to-energy market since May 2009. From June 2007 to May 2009, he was Vice President of Strategic Development of Greenline Industries, a biodiesel production equipment manufacturer. From May 2006 to June 2007, he was Chief Executive Officer of Greenline Industries. From January 2005 to May 2006, Mr. Lavoie was an independent financial consultant. In the past five years, Mr. Lavoie has held no other public company directorships, though he has served on the board and executive committee of a private emerging market company and as a director of Financial Executives International, San Francisco (from 2004 to 2007). Mr. Lavoie also serves as an Advisory Board member of The Salvation Army, Golden State Division. Mr. Lavoie received a Masters of Business Administration degree and Bachelor of Science degree in Business Administration from Loyola Marymount University.
The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Lavoie to serve as a Director of the Company: Experience as a chief executive officer in an emerging market industry; experience as a chief financial officer; over 25 years senior execute experience in managing start-ups and high-growth companies; finance experience in the public and private capital markets, global risk and financial services.
John E. Rehfeld has served as a director since August 2005 and was our lead independent director from December 2005 to October 2011. Mr. Rehfeld is currently the adjunct professor of marketing and strategy for the Executive MBA Program at Pepperdine University (since 1998) and the University of San Diego (since 2010). Mr. Rehfeld is currently a Director of Lantronix, Inc. (since May 2010). Mr. Rehfeld was previously a Director of ADC Telecommunication, Inc. (from September 2004 to December 2010) and Primal Solutions, Inc. (from December 2008 to June 2009). Additionally, Mr. Rehfeld currently holds directorships with a number of private companies. Mr. Rehfeld received a Masters of Business Administration degree from Harvard University and a Bachelor of Science degree in Chemical Engineering from the University of Minnesota.
The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Rehfeld to serve as a Director of the Company: Over 30 years executive experience in high growth industries, including prior experience as a chief executive officer of a number of companies; prior and current experience serving as a director of a number of public and private companies; and a distinguished educational background, as well as his current positions as adjunct professor of marketing and strategy for the Executive MBA Programs at Pepperdine and the University of San Diego.
Lowell W. Robinson has served as a director since April 2011 and was our lead independent director from October 2011 to November 2011. Mr. Robinson served as the Chief Financial Officer and Chief Operating
Officer of MIVA, Inc., an online advertising network, from August 2007 through March 2009. He joined MIVA in 2006 as Chief Financial Officer and Chief Administrative Officer. From 2002 to 2006, Mr. Robinson served as President of LWR Advisors. He was also Chief Financial Officer and Chief Administrative Officer of HotJobs and Advo Inc., and held senior financial positions at Citigroup and Kraft. Mr. Robinson has served as a director of The Jones Group Inc. since 2005 and currently serves as a member of both the Audit and Compensation Committees. From 2003 to 2009, Mr. Robinson served on the Board of Directors of International Wire Group, Inc., where he served as chairman of the Audit Committee. Mr. Robinson also previously served on the Board of Directors of Independent Wireless One, Diversified Investment Advisors and Edison Schools Inc. He also serves as Chairman of the Board for two private publishing and digital media companies. In the past five years, Mr. Robinson served on the Board of Advisors for the University of Wisconsin School of Business from 2006 to 2010 and is currently on the Board of Advisors for The Smithsonian Libraries. Mr. Robinson received a Masters of Business Administration degree from Harvard University and a Bachelor of Economics degree from The University of Wisconsin.
The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Robinson to serve as a Director of the Company: Over 30 years executive experience in senior financial positions, including prior experience as a chief financial officer and chief administrative officer of a number of public companies; prior and current experience serving as a director of a number of public and private companies.
Involvement in Certain Legal Proceedings
On October 20, 2008, Modtech Holdings, Inc., a Delaware Corporation, filed a voluntary petition for reorganization under Chapter 11 of the US Bankruptcy Code. Mr. Cragun, our chief financial officer, was chief financial officer of Modtech Holdings, Inc. at the time of filing.
On March 30, 2011, DigitalPost Interactive, Inc., a Nevada Corporation, and its subsidiaries, The Family Post, Inc. and Rovion, Inc., filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Mr. Sawtell, our president and chief operating officer, was chief executive officer of DigitalPost Interactive, Inc. at the time of the filing.
Board of Directors
Our board of directors currently consists of the following six members: Heath B. Clarke (Chairman), Norman K. Farra Jr., Philip K. Fricke, Theodore E. Lavoie, John E. Rehfeld and Lowell W. Robinson. There are no family relationships among any of our current directors and executive officers.
The number of authorized members of our board of directors is determined by resolution of our board of directors. In accordance with the terms of our amended and restated certificate of incorporation, as amended, our board of directors is divided into three classes, with each class serving staggered three-year terms. The membership of each of the three classes is as follows:
•
the class I directors are Messrs. Fricke and Farra, and their term will expire at the annual meeting of stockholders to be held in 2014;
•
the class II directors are Messrs. Lavoie and Rehfeld, and their term will expire at the annual meeting of stockholders to be held in 2012; and
•
the class III directors are Mr. Clarke and Robinson, and their term will expire at the annual meeting of stockholders to be held in 2013.
Our amended and restated bylaws provide that the authorized number of directors may be changed only by resolution of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control or management of our company.
Our board of directors has designated an audit committee and a nominating, compensation and governance committee, and may establish other committees as it deems necessary or appropriate. There were a total of 14 Board of Director meetings held in 2011.
Board Committees
Our Board has two active committees, an Audit Committee and a Nominating, Compensation and Corporate Governance Committee.
Audit Committee
The Audit Committee is currently comprised of Mr. Lavoie as Chairman and Messrs. Fricke, Robinson and Rehfeld, each of whom satisfies the Nasdaq and SEC rules for Audit Committee membership (including rules regarding independence). The Audit Committee held eight meetings during 2011. The Board has determined that Mr. Lavoie is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC and satisfies the financial sophistication requirements of the Nasdaq listing standards.
The Audit Committee operates pursuant to its written charter, which is available on our corporate web site at http://ir.local.com, under the “Corporate Governance” tab, as well as our by-laws and applicable law. In accordance with its charter, the Audit Committee’s purpose is to assist the Board in fulfilling its oversight responsibilities to our stockholders with respect to the integrity of our financial statements and reports and financial reporting process. Specific responsibilities include:
•
reviewing and recommending to the Board approval of the Corporation’s interim and annual financial statements and management’s discussion and analysis of results of operation and financial condition related thereto;
•
being directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm;
•
pre-approving, or establishing procedures and policies for the pre-approval of, the engagement and compensation of the external auditor in respect of the provision of (i) all audit, audit-related, review or attest engagements required by applicable law and (ii) all non-audit services permitted to be provided by the independent registered public accounting firm;
•
reviewing the independence and quality control procedures of the independent registered public accounting firm;
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preparing the Audit Committee report in the Company’s proxy materials in accordance with applicable rules and regulations, when applicable and required;
•
establishing procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal controls, and auditing matters, and (ii) the confidential, anonymous submission of complaints by our employees of concerns regarding questionable accounting or auditing matters; and
•
annually reviewing its charter and recommending any amendments to the Board.
The Audit Committee meets periodically with management to consider the adequacy of our internal controls and the financial reporting process. It also discusses these matters with our independent registered public accounting firm and with appropriate company financial personnel. The Audit Committee reviews our financial statements and discusses them with management and our independent registered public accounting firm before those financial statements are filed with the SEC.
The Audit Committee regularly meets privately with the independent registered public accounting firm. The Audit Committee has the sole authority and direct responsibility for the appointment, compensation, retention, termination, evaluation and oversight of the work of the independent registered public accounting firm engaged by us to perform the audit of our financial statement or related work or other audit, review or attestation services
for us. The Audit Committee periodically reviews the independent registered public accounting firm’s performance and independence from management. The independent registered public accounting firm has access to our records and personnel and reports directly to the Audit Committee.
The Audit Committee is empowered to retain outside legal counsel and other experts at our expense where reasonably required to assist and advise the Audit Committee in carrying out its duties and responsibilities.
Nominating, Compensation and Corporate Governance Committee
A description of the function of our Nominating, Compensation and Corporate Governance Committee is set forth in Item 11
Item 11. Executive Compensation
Compensation Discussion and Analysis
Executive Summary
The Nominating, Compensation and Corporate Governance Committee of our Board of Directors (the “NCCG Committee”) developed our executive compensation programs for 2011, in consideration of the many challenges we faced entering 2011 and our efforts to overcome those challenges. At the beginning of 2011, our revenue and net income were materially adversely impacted by a material drop in RPC from one of our primary search monetization partners. In light of this challenge and the dependency we have on search related revenue in general, we determined that we needed to accelerate our efforts to diversify our business to achieve revenues from sources that were not dependent on the search business and that were more focused on our proprietary products and services. As a consequence, in January of 2011, we undertook a public offering of our common stock for net proceeds to us, after deducting underwriting discounts and commissions and other related expenses, of approximately $18.2 million (the “Offering”). The Offering provided us with the capital we believed we needed to both accelerate our efforts to diversify our business and fund our operations during this period of diversification.
During 2011, we were able to undertake a number of acquisitions intended to diversify our business, including the acquisitions of iTwango in January 2011, Krillion in April 2011, Rovion in May 2011 and SMG in
July 2011. These acquisitions were intended to diversify our business and to produce revenues from sources that were proprietary to us and were not reliant on the search industry in general. During the first half of 2011, we still faced losses as a result of the sustained drop in RPC from our primary search monetization partner. In August 2011, we were able to introduce a new monetization partner that largely reversed this trend of declining RPCs and the resultant lower revenues. However, during the second half of 2011, we were integrating the operations of our new acquisitions into our business. Those integration and growth efforts required additional investment by us in each of those businesses, causing us to continue to have losses in the third quarter 2011, notwithstanding the addition of the new monetization partner. However, we believe those acquisitions and continued investments will be integral to our long term prospects.
In the second half of 2011, we began to see the benefits of our diversification efforts. We expanded our deal of the day business, Spreebird, as a result of the SMG acquisition, and we were able to offer new products and services to existing and new market segments, as a result of our Krillion and Rovion acquisitions. Our diversification efforts are still ongoing and will require additional time, effort and resources to fully realize their potential.
The purpose of the Offering and acquisitions was to accelerate our efforts to diversify our products and services in order to increase our direct customer base, as well as to enter new markets, thereby reducing our dependence on the search ecosystem. These major strategic objectives, along with many tactical efforts to enhance the monetization of our existing search offering, greatly influenced the goals of our executives throughout 2011. Accordingly, many of their goals were related to acquisition, integration and expansion of our business, as fully detailed below. Since many of our executives’ goals were tied to efforts and objectives that we understood would likely not result in immediate lifts in revenue and net income, but which we also viewed as important to our long term prospects, the NCCG Committee determined that it was important to incent our executives to accomplish their goals to the best of their ability and to achieve the best possible results for us and our shareholders. As such, the NCCG Committee determined that it was in our best interests to continue to offer cash bonuses to our executives in accordance with their respective employment contracts for the achievement of the various goals that the NCCG Committee determined was strategic to our long term prospects. The NCCG Committee determined that it was appropriate and in furtherance of the overall goals of building long term shareholder value to offer cash bonuses to our executives during the period in which we were forecasted to face net loses. The executive compensation programs, as developed by the NCCG Committee, have been and will continue to be designed to incentivize and reward sustainable growth.
Nominating, Compensation and Corporate Governance Committee
The Nominating, Compensation and Corporate Governance Committee (the “NCCG Committee”) is currently comprised of Mr. Rehfeld as Chairman and Messrs. Farra, Lavoie and Robinson, each of whom satisfies the Nasdaq and SEC rules for membership to the NCCG Committee (including rules regarding independence). The NCCG Committee held ten meetings and acted twice by unanimous written consent during 2011.
The NCCG Committee operates pursuant to its written charter, which is available on our corporate web site at http://ir.local.com, under the “Corporate Governance” tab, as well as our by-laws and applicable law. In accordance with its charter, the NCCG Committee’s purpose is to assist the Board in discharging the Board’s responsibilities regarding:
•
the identification, evaluation and recommendation to the board of qualified candidates to become Board members;
•
the selection of nominees for election as directors at the next annual meeting of stockholders (or special meeting of stockholders at which directors are to be elected);
•
the selection of candidates to fill any vacancies on the Board;
•
the periodic review of the performance of the Board and its individual members;
•
the making of recommendations to the Board regarding the number, function and composition of the committees of the Board;
•
the compensation of our chief executive officer and other executives, including by designing (in consultation with management or the Board), recommending to the Board for approval, and evaluating our compensation plans, policies and programs on an at least annual basis;
•
the evaluation, on an at least annual basis, of the performance of the chief executive officer and other executive officers in light of corporate goals and objectives, and, based on that evaluation, determine the compensation of the Chief Executive Officer and other executive officers, including individual elements of salary and incentive compensation, which includes equity compensation;
•
the review and approval of employment agreements, separation and severance agreements, and other appropriate management personnel;
•
the review and provision of assistance to the Board in developing succession plans for the executive officers and other appropriate management;
•
the recommendation to the Board of compensation programs for non-employee directors, committee chairpersons, and committee members, consistent with any applicable requirements for the listing standards for independent directors and including consideration of cash and equity components of this compensation;
•
the grant of discretionary awards under our equity incentive plans, and the exercise of authority of the Board with respect to the administration of our incentive compensation plans;
•
the consideration of any recommendations that our executive officers may submit for consideration with respect to executive officer or director compensation;
•
the engagement of such outside consultants as the Committee deems necessary or appropriate in order to establish compensation amounts, types and targets with respect to our executive officers and independent directors;
•
the periodic review of and the making of recommendations to the Board with respect to our equity and incentive compensation plans;
•
producing an annual report on executive compensation for inclusion in our proxy materials in accordance with applicable rules and regulations, when applicable and required;
•
the development and recommendation to the Board of a set of corporate governance guidelines and principles applicable to us (the “Corporate Governance Guidelines”); and
•
oversight of the evaluation of the Board.
In addition to the powers and responsibilities expressly delegated to the NCCG Committee in its charter, the NCCG Committee may exercise other powers and carry out other responsibilities that may be delegated to it by the Board from time to time, consistent with our bylaws.
Compensation Discussion and Analysis
Executive Summary
Executive Compensation Program Objectives and Overview
The NCCG Committee administers our executive compensation arrangements. In conference with the Board of Directors, the NCCG Committee determines the compensation of our Chief Executive Officer. As discussed in more detail below, in determining the compensation for our other Named Executive Officers (as defined below),
the recommendations of our Chief Executive Officer, among other factors, are considered by the NCCG Committee. Nevertheless, the NCCG Committee is solely responsible for making the final decisions on compensation for our Named Executive Officers.
Our general compensation arrangements are guided by the following principles and business objectives:
•
It is our objective to hire and retain top talent in our industry in an exceptionally competitive marketplace, especially for key positions that directly contribute to creating stockholder value;
•
We reward the performance of our top contributors in key positions within our company by focusing our resources on them and their continued performance, while providing compensation at levels within our organization that rewards performance; and
•
We firmly believe that equity compensation is an important means of aligning the interests of our employees with those of our stockholders and focus our equity compensation on the key positions within our Company that we believe have the greatest impact on performance.
We are guided by the above principles in its compensation philosophy for our executive officers, which has been designed to achieve the following two objectives:
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Allow us to attract and retain the key executive talent it needs to achieve its business objectives by providing total compensation arrangements that are competitive and attractive; and
•
Establishing a direct correlation between the total executive compensation paid to our overall performance and improvements in performance, including the creation of shareholder value, and the individual performance and achievements.
The executives listed in the Summary Compensation Table in this annual report on Form 10-K are referred to as the “Named Executive Officers.” Mr. Cragun became our Interim Chief Financial Officer on October 18, 2010, and our Chief Financial Officer on December 29, 2010. Mr. Sawtell became our Chief Operating Officer on May 12, 2011, and our President and Chief Operating Officer on December 9, 2011, following the departure of Stanley B. Crair as our Chief Operating Officer and President on May 11, 2011. Michael O. Plonski resigned as Chief Technology Officer on December 31, 2011.
Overview
We are dependent upon the experience and talents of our executives to successfully manage our highly technical, complex and rapidly evolving business. We are in a rapidly changing industry, one which regularly experiences paradigm shifting technological developments and shifting trends in the businesses and markets in which we compete. We rely on our executives to successfully address these developments and to improve our business and its performance in order to increase shareholder value. We face a highly competitive executive labor market and face competitors for our executives’ skills of our similar size and scale, as well as larger competitors with greater resources than we have and smaller competitors that seek to hire our executives to facilitate and expedite their own businesses that compete with us directly or in the same industry.
Executive Compensation Programs
Our current executive compensation program is comprised of three key components, which collectively are intended to conform to our compensation philosophy and to reward our executives based on individual and company performance. We use (1) base salary, (2) quarterly or semi-annual incentive cash bonuses, and (3) long-term equity awards, in the form of stock options and restricted stock units (“RSUs”), as its primary compensation components. The NCCG Committee considers how each such component of executive compensation promotes retention and rewards performance by the individual and us generally when structuring its executive compensation arrangements.
We seek to provide targeted compensation opportunities above the median of competitive market practice in order to attract, retain, and motivate our executives. However, the NGGC Committee may target an individual executive’s compensation higher or lower than the median based on the individual’s role, experience, and/or performance, among other factors. The NCCG Committee uses certain peer companies (as identified below) to inform it of competitive pay levels and generally intends that base salary levels be consistent with competitive market base salary levels. The NCCG Committee generally targets performance-based compensation, such as bonus and long-term incentive equity opportunities to make up a substantial portion of each executive’s total direct compensation opportunity, as achievement of those are tied to our and individual performance and provide long-term incentives to our executives. The NCCG Committee believes that the cash and long-term equity incentives provided to our executives have been designed to provide an effective and appropriate mix of incentives to ensure our executive performance is focused on building long-term stockholder value. In furtherance of this, the NCCG Committee has designed our compensation arrangements for our executive officers such that the performance based compensation opportunities represent a material portion of the total direct compensation opportunity.
We do not provide any pensions or other retirement benefits for our executives other than our 401(k) plan. Generally, except for payment of up to $1,500 a month in health insurance payments that would otherwise be paid by our executives, we also do not provide any perquisites. We provide our executive officers with certain severance protections as a further means of attracting and retaining our key executives and to preserve the stability of our executive team. These severance protections are described below under “Severance and Change in Control Severance Benefits” and “Potential Payments Upon Termination or Change in Control.”
Independent Consultant and Peer Group
The NCCG Committee has retained Frederic W. Cook & Co., Inc. (“Cook & Co.”) as its independent compensation consultants, to provide advice to the NCCG Committee with respect to our compensation programs. Cook & Co. advised the NCCG Committee with respect to trends in executive compensation, the selection of our peer companies, the determination of pay programs, an assessment of competitive pay levels, and the setting of compensation levels. Cook & Co. provided no other services to us in 2011 beyond the compensation consulting services provided to our Board of Directors and the NCCG Committee, as noted above.
The NCCG Committee considers from time to time peer company data obtained and evaluated by Cook & Co, as well as compensation data compiled by management, in establishing compensation levels. The NCCG Committee utilizes this information when considering executive compensation arrangements, including the reasonableness of such arrangements from a competitive vantage point. For 2011, the NCCG Committee, in consultation with Cook & Co., considered compensation data for the following companies in 2011: InfoSpace, Openwave Systems, the Knot, Saba Software, Travelzoo, Web.com, Marchex, eLoyalty, Double-Take, Innodata, Healthstream, TheStreet.com, Autobytel, Spark Networks, ADAM, and Market Leader. This group of companies is referred to by us hereafter as our “peer group” or our “peer companies for 2011.
The peer group was selected based on objective criteria, taking into account company size and industry. The peers revenue and market capitalizations generally fell within a range of 0.3x to 3x of ours at the time the peer group was chosen, with our revenue and market capitalization in the middle range to avoid distortion from size. The peers are technology and/or media companies that have businesses that are broadly similar to our business.
Shareholder Advisory Vote on Executive Compensation
At our 2011 Annual Meeting of Stockholders, our stockholders voted to approve a resolution approving, on an advisory basis, the compensation of our executive officers, as disclosed in our proxy statement of the 2011 Annual Meeting of Stockholders. The NCCG Committee considered this approval in its consideration of future executive compensation matters and has determined to generally maintain its practices and policies consistent with the prior year, subject to adjustments as are deemed appropriate in the view of the NCCG Committee in light of our present circumstances.
Current Executive Compensation Program Elements
Base Salaries
We provide the Named Executive Officers, along with other employees, with base salary to compensate them for their services throughout the year. The NCCG Committee performs an annual review of the base salaries of our Named Executive Officers. These base salary levels are intended to be generally consistent with competitive market base salary levels, but are not specifically targeted or “bench-marked” against any particular company or group of companies, including our peer group. The NCCG Committee sets base salaries so that a substantial portion of the executives’ total direct compensation remains contingent on performance-based bonuses and long-term incentive equity awards. The NCCG Committee considers and assesses, among other factors, the scope of an executive’s responsibility, prior experience, past performance, advancement potential, impact on results, salary relative to our other executives and relevant competitive data in setting specific salary levels for each of our Named Executive Officers, as well as our other officers.
The annual base salary of each of our Named Executive Officers, except Mr. Sawtell, was increased effective July 1, 2011, to adjust for cost of living increases. The NCCG Committee did not undertake a formal review of relevant market compensation data, as a study was conducted in 2010, and only cost of living increases were contemplated for 2011. Mr. Clarke’s salary was increased from $415,000 to $427,729, effective July 1, 2011. Mr. Cragun’s salary was increased to $280,622 per year from $268,000 per year, effective July 1, 2011. Mr. Plonski’s salary was increased to $279,670 per year from $268,000 per year, effective July 1, 2011. Mr. Hutto’s salary was increased to $229,280 per year from $218,925 per year, effective July 1, 2011.
Cash Bonuses
For 2011, the NCCG Committee approved a cash bonus plan (“Bonus Plan”) under which our Named Executive Officers were eligible to earn cash bonuses based on achievement against pre-determined quarterly performance goals. The cash bonus incentive opportunity is intended to motivate and reward executives by tying a significant portion of their total compensation to the achievement of pre-established performance metrics that are generally short-term, but impact the delivery of long-term stockholder value. The NCCG Committee determined that use of independent quarterly performance and payment periods for 2011 was appropriate in light of the numerous factors that impacted our performance on a short term basis and the difficulty in setting meaningful annual performance goals in light of such variables. The NCCG Committee considered whether the payment of cash bonus incentives was appropriate during a period in which we were expecting net losses and determined that, in light of our efforts to rapidly modify our operations and diversify our revenue sources to eliminate the concentration in search related revenues, that paying such cash bonus incentives was appropriate if performance with respect to the foregoing objectives was satisfactory.
First Quarter 2011 Bonus
For the First Quarter 2011 Bonus period, each of our Named Executive Officers’ target bonuses were defined as a percentage of base salary as set forth in each officer’s employment agreement. Actual earned awards could range between 0% and 135% of target depending on performance. Performance is measured against company-wide financial goals and individual performance goals. The weighting of our and individual goal components ranged from 50% to 80% and 50% to 20%, respectively. In determining the mix of our and individual performance goals for each executive, the NCCG Committee considered each executive’s ability to affect company-wide performance and the importance of individual contributions.
(1) Mr. Sawtell joined us in the Second Quarter of 2011
(2) Mr. Crair served as our President and Chief Operating Officer through May 11, 2011.
First Quarter Bonus: Company Performance Component
Our performance component of the First Quarter period was based equally on Revenue and Adjusted Net Income1. The NCCG Committee believes these metrics, and the related goals, were the key drivers of delivering value to our stockholders for that period. The Revenue and Adjusted Net Income targets were set to our budget for the period. The NCCG Committee also set threshold and maximum performance goals, which corresponded to bonus payouts equal to 90% and 120% of target. For the First Quarter period, our performance was above the target for Revenue and at target for Adjusted Net Income. The resulting bonus payout for our performance component was 101.3% of target. The performance levels and actual performance for First Quarter 2011 are shown in detail below:
(1) Target included the potential bonus expense for the first quarter of 2011.
First Quarter Bonus: Individual Performance Component
The individual performance component of each Named Executive Officer’s bonus, except for Mr. Hutto’s, was determined by the NCCG Committee and actual bonuses could range between 0% and 150% of target. Mr. Hutto was not a Named Executive Officer at the end of 2010, and therefore, our Chief Executive Officer directly oversaw decisions regarding his performance evaluations pursuant to his individual performance component, instead of the NCCG Committee. Except as noted above, the NCCG Committee’s assessment was based on performance against pre-set strategic objectives and for Named Executive Officers, except the Chief Executive Officer, the general recommendations and performance evaluations of the Chief Executive Officer. For the First Quarter period, the NCCG Committee’s bonus decisions were based upon the following individual goals.
Adjusted Net Income (Loss) is defined by us as net income (loss) excluding: provision for income taxes; interest and other income (expense), net; depreciation; amortization; stock based compensation charges, warrant revaluation and non-recurring items. Adjusted Net Income (Loss), as defined above, is not a measurement under GAAP. Adjusted Net Income (Loss) is reconciled to net income (loss) and earnings (loss) per share, which we believe are the most comparable GAAP measures, in our press release dated February 9, 2012, as furnished on our Form 8-K filed with the SEC on February 9, 2012. We believe that Adjusted Net Income (Loss) provides useful information to investors about our performance because it eliminates the effects of period-to-period changes in income from interest on our cash and marketable securities, expense from our financing transactions and the costs associated with income tax expense, capital investments, stock-based compensation expense, warrant revaluation charges, and non-recurring charges which are not directly attributable to the underlying performance of our business operations. Management used Adjusted Net Income (Loss) in evaluating the overall performance of our business operations, making it useful to the NCCG Committee in evaluating management’s performance. A limitation of non-GAAP Adjusted Net Income is that it excludes items that often have a material effect on our net income and earnings per common share calculated in accordance with GAAP. Therefore, management compensates for this limitation by using Adjusted Net Income in conjunction with net income (loss) and net income (loss) per share measures. The non-GAAP measures should be viewed as a supplement to, and not as a substitute for, or superior to, GAAP net income or earnings per share.
Heath B. Clarke - The NCCG Committee awarded Mr. Clarke a bonus equal to 104.6% of target for the individual performance component. In addition to delivering financial performance during the period, Mr. Clarke’s goals were related to achievement of the following key strategic objectives: achievement in growth of organic traffic, implementation of a certain level of Network partner sites with corresponding performance metric increases for our Network business unit, certain M&A goals, establishing the foundation for our social buying business, achieving certain internal reporting enhancements, and development of a definitive IP enforcement strategy. The NCCG Committee determined that most of these objectives were achieved, certain of them, including the organic traffic and the implementation of Network partner sites, were overachieved, while the establishment of a foundation for our social buying business was slightly underachieved.
Kenneth S. Cragun - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Cragun’s individual performance bonus component at 106.25% of target. Mr. Cragun’s goals were tied to achievement of the following key strategic objectives: development and launch of a reporting dashboard for each of our business units, execution of yield optimization testing, achievement of certain corporate organization goals, and undertaking certain M&A due diligence goals. The NCCG Committee’s decision to award an amount above target was based on achievement of most goals satisfactorily and over-performance of the business unit reporting dashboard goal.
Michael O. Plonski - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Plonski’s individual performance bonus component at 97.5% of target. Mr. Plonski’s goals were tied to achievement of the following key strategic objectives: growth of organic traffic, development of proposals for new organizational structures for product development, achievement of certain search engine optimization goals, undertaking certain internal reporting enhancements, and the performance of technical due diligence on acquisition targets. The decision to award Mr. Plonski an amount below target was based on the NCCG Committee’s determination that Mr. Plonski met many or his targets, exceeded others, including growing organic traffic, but underperformed with respect to the search engine optimization goals.
Peter S. Hutto - Based on the Chief Executive Officer’s recommendation, Mr. Hutto’s individual performance bonus component was set at 104.38% of target. Mr. Hutto’s goals were tied to achievement of the following key strategic objectives: achievement of certain M&A targets, including the successful negotiation of the Rovion and Krillion acquisitions, completion of certain financing activities, the development of M&A targets and certain operating activities for our M&A effort. The decision to award an amount above target was based on Mr. Hutto’s overachievement of the Krillion and Rovion goals and the achievement of the other goals, except for the underperformance of goals related to the development of M&A targets and certain operating activities.
Stanley B. Crair - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Crair’s individual performance bonus component at 105% of target. Mr. Crair’s goals were tied to achievement of the following key strategic objectives: growth of organic traffic, implementation of a certain level of Network partner sites with corresponding performance metric increases for our Network business unit, achieving certain SAS sales goals related to our Exact Match products, and establishing the foundation for our social buying business. The NCCG Committee’s decision to award an amount above target was based on the overachievement of the organic traffic and Network growth goals, offset by slight underachievement of SAS sales goals and social buying business development goals.
Total First Quarter bonuses for our Named Executive Officers are summarized in the following table.
Second Quarter 2011 Bonus
For the Second Quarter 2011 Bonus period, each of our Named Executive Officers’ target bonuses were defined as a percentage of base salary as set forth in each officer’s employment agreement. Actual earned awards could range between 0% and 135% of target depending on performance. Performance is measured against company-wide financial goals and individual performance goals. The weighting of our and individual goal components ranged from 50% to 60% and 50% to 40%, respectively. In determining the mix of our and individual performance goals for each executive, the NCCG Committee considered each executive’s ability to affect company-wide performance and the importance of individual contributions for each executive.
(1) Mr. Sawtell was appointed as our Chief Operating Officer on May 12, 2011.
(2) Mr. Crair served as our Company’s President and Chief Operating Officer until May 11, 2011.
Second Quarter Bonus: Company Performance Component
For the second quarter, the Company Performance Component of the Second Quarter period for Messrs. Clarke, Sawtell, Cragun and Plonski, was based on Revenue, Core Business Revenue, Adjusted Net Income, and Core Business Adjusted Net Income. The NCCG Committee distinguished between Core Business Revenue and Core Business Adjusted Net Income on the one hand and overall Revenue and Adjusted Net Income in general on the other to better align our executives’ goals with our long term objectives, which was to diversify and grow our non-search business and related revenues and net income. By distinguishing revenues in this way, the NCCG Committee sought to incent the executives to increase performance of our newly launched products and services and support our recent acquisitions and initiatives. For Mr. Hutto, our performance component of the Second Quarter period was based equally on Revenue and Adjusted Net Income. The NCCG Committee believes these metrics, and the related goals, were the key drivers of delivering value to our stockholders for the period. All of the targets were set to our budget for the period. The NCCG Committee also set threshold and maximum performance goals, which corresponded to bonus payouts equal to 90% and 120% of total target. For the Second Quarter period, our performance was above the target for Adjusted Net Income and below target for Revenue, Core Business Revenue and Core Business Adjusted Net Income. The resulting bonus payout for our performance component was 102% of target for Messrs. Clarke, Sawtell, Cragun and Plonski, and 106% of target for Mr. Hutto. The performance levels and actual performance for Second Quarter 2011 are shown in detail below:
(1) Target included the potential bonus expense for the second quarter of 2011.
As noted above, the NCCG Committee determined that offering cash bonuses in the second quarter 2011 based in part upon the achievement of Adjusted Net Loss was necessary and appropriate in light of the fact that we were undertaking a large-scale diversification effort, including the acquisition of new businesses and that such losses were anticipated and necessary to complete the diversification effort believed by our Board of Directors to be in our best interests and our long term prospects.
Second Quarter Bonus: Individual Performance Component
The individual performance component of each Named Executive Officer’s bonus, except for Mr. Hutto’s, was determined by the NCCG Committee and actual bonuses could range between 0% and 150% of target. Mr. Hutto was not a Named Executive Officer at the end of 2010 and therefore our Chief Executive Officer directly oversaw decisions regarding his performance evaluations pursuant to his individual performance component, instead of the NCCG Committee. Except as noted above, the NCCG Committee’s assessment was based on performance against pre-set strategic objectives and for Named Executive Officers, except the Chief Executive Officer, the general recommendations and performance evaluations of the Chief Executive Officer. For the Second Quarter period, the NCCG Committee’s bonus decisions were based upon the following individual goals.
Heath B. Clarke - The NCCG Committee awarded Mr. Clarke a bonus equal to 100% of target for the individual performance component. Mr. Clarke’s goals were related to achievement of the following key strategic objectives: increasing organic traffic, increasing direct advertisers, launching and integrating Krillion, overseeing the SMG acquisition, and achieving financing for M&A transactions. The NCCG Committee determined that most of these objectives were achieved or overachieved, with the exception of increasing direct advertisers and certain goals with respect to the launch and integration of Krillion, which were partially underachieved.
Michael A. Sawtell - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Sawtell’s individual performance bonus component at 94.63% of target. Mr. Sawtell’s goals were tied to achievement of the following key strategic objectives: increasing organic traffic, increasing direct advertisers, increasing revenues from new initiatives and sources, developing new organizational structures to support the our growth and to increase and improve corporate communications to best of class. The NCCG Committee’s decision to award an amount below target was based on achievement of many goals satisfactorily, partially offset by under achieving the direct advertiser and corporate communications goals.
Kenneth S. Cragun - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Cragun’s individual performance bonus component at 92.63% of target. Mr. Cragun’s goals were tied to achievement of the following key strategic objectives: integration of Krillion and Rovion accounting functions, the development of operational accounting policies, the financing for M&A transactions, the analysis of certain monetization data, and the development of reporting metrics for us, including new acquisitions. The NCCG Committee’s decision to award an amount below target was based on achievement of most goals satisfactorily, partially offset by slightly underachieving the analysis of certain monetization data and the development of reporting metrics for us.
Michael O. Plonski - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Plonski’s individual performance bonus component at 88% of target. Mr. Plonski’s goals were tied to achievement of the following key strategic objectives: increasing organic traffic, increasing direct advertisers, increasing revenues from new initiatives and sources, developing new organizational structures to support our growth and increasing and improving corporate communications. The decision to award Mr. Plonski an amount below target was based on the NCCG Committee’s determination that Mr. Plonski only exceeded the organic traffic goal and otherwise under achieved the other goals to different degrees.
Peter S. Hutto - Based on the Chief Executive Officer’s recommendation, Mr. Hutto’s individual performance bonus component was set at 89.38% of target. Mr. Hutto’s goals were tied to achievement of the following key strategic objectives: the launch and integration of Krillion and Rovion, achievement of certain M&A activities related to the SMG acquisition, and further developing the M&A process, including identification of additional M&A targets. The decision to award an amount below target was based on underachievement of all of the goals to some extent, except with respect to the M&A activities related to the SMG acquisition, which he overachieved.
Total Second Quarter bonuses for our Named Executive Officers are summarized in the following table.
Third Quarter 2011 Bonus
For the Third Quarter 2011 Bonus period, each of our Named Executive Officers’ target bonuses were defined as a percentage of base salary as set forth in each officer’s employment agreement. Actual earned awards could range between 0% and 135% of target depending on performance. Performance is measured against company-wide financial goals and individual performance goals, except in the case of Mr. Clarke, who, beginning in the third quarter 2011, was evaluated solely on company-wide financial goals. The weighting of our and individual goal components ranged from 0% to 100% and 100% to 0%, respectively. In determining the mix of our and individual performance goals for each executive, the NCCG Committee considered each executive’s ability to affect company-wide performance and the importance of individual contributions.
(1) Mr. Sawtell was appointed our Chief Operating Officer on May 12, 2011.
(2) Mr. Crair served as our President and Chief Operating Officer until May 11, 2011.
For the Third Quarter 2011, the NCCG Committee determined that no amount over 100% of the Target Bonus would be paid to any of Messrs. Clarke, Sawtell, Cragun or Plonski unless and until we delivered Adjusted Net Income in any fiscal quarter up to and including the second quarter 2012. Instead, any amounts over 100% of the Target Bonus that would otherwise have been payable to Messrs. Clarke, Sawtell, Cragun or Plonski for the Third Quarter 2011 were held pending either the achievement of Adjusted Net Income by the second quarter 2012, or the forfeiture of such amounts If Adjusted Net Income was not earned by that date. In the Fourth Quarter 2011, and according to the criteria set forth above the Third Quarter of 2011 Bonuses were paid to Messrs. Clarke, Sawtell, Cragun or Plonski.
Third Quarter Bonus: Company Performance Component
The Company Performance Component for the Third Quarter period was based equally on Revenue and Adjusted Net Income. The NCCG Committee believes these metrics, and the related goals, were the key drivers of delivering value to our stockholders for the period. The Revenue and Adjusted Net Income targets were set to our budget for the period. The NCCG Committee also set threshold and maximum performance goals, which corresponded to bonus payouts equal to 90% and 120% of target. For the Third Quarter period, the Company Performance Component was above the target for both the Revenue and Adjusted Net Income goals. The resulting bonus payout for the Company Performance Component was 113.5% of target. The performance levels and actual performance for Third Quarter 2011 are shown in detail below:
(1) Target included the potential bonus expense for the third quarter of 2011.
As noted above, the NCCG Committee determined that offering cash bonuses in third quarter 2011 based in part upon the achievement of Adjusted Net Loss was necessary and appropriate in light of the fact that we were undertaking a large-scale diversification effort, including the acquisition of new businesses and that such losses were anticipated and necessary to complete the diversification effort believed by our Board of Directors to be our best interests and our long term prospects.
Third Quarter Bonus: Individual Performance Component
As noted above, beginning in the third quarter of 2011, Mr. Clarke was evaluated solely on company-wide financial goals. The individual performance component of each other Named Executive Officer’s bonus, except for Mr. Hutto’s, was determined by the NCCG Committee and actual bonuses could range between 0% and 150% of target. Mr. Hutto was not a Named Executive Officer at the end of 2010, and therefore, our Chief Executive Officer directly oversaw decisions regarding his performance evaluations pursuant to his individual performance component, instead of the NCCG Committee. Except as noted above, the NCCG Committee’s assessment was based on performance against pre-set strategic objectives and for Named Executive Officers, except the Chief Executive Officer, the general recommendations and performance evaluations of the Chief Executive Officer. For the Third Quarter period, the NCCG Committee’s bonus decisions were based upon the following individual goals.
Michael A. Sawtell - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Sawtell’s individual performance bonus component at 112% of target. Mr. Sawtell’s goals were tied to achievement of the following key strategic objectives: development of additional business development opportunities for Rovion, preparing and implementing a revised internal telesales plan, increasing the effectiveness of our internal sales process and results, and delivering a completed roadmap for ExactMatch product development. The NCCG Committee’s decision to award an amount above target was based on over achievement of all goals, except for the ExactMatch product development goal, which was under achieved.
Kenneth S. Cragun - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Cragun’s individual performance bonus component at 100% of target. Mr. Cragun’s goals were tied to achievement of the following key strategic objectives: preparing an updated financial model, completion of the financial integration of SMG into our financials, completion of certain tax research, and completion of the audited financial statements for SMG. The NCCG Committee’s decision to award an amount at target was based on achievement of all goals satisfactorily.
Michael O. Plonski - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Plonski’s individual performance bonus component at 93% of target. Mr. Plonski’s goals were tied to achievement of the following key strategic objectives: implementation of certain third party technologies, increasing organic traffic, increasing the monetization of organic traffic with proprietary advertising, and development of certain technology related budgeting processes. The decision to award Mr. Plonski an amount below target was based on the NCCG Committee’s determination that Mr. Plonski satisfactorily achieved two of his goals, offset by underachievement with respect to increasing organic traffic and increasing the monetization of organic traffic with proprietary advertising.
Peter S. Hutto - Based on the Chief Executive Officer’s recommendation, Mr. Hutto’s individual performance bonus component was set at 93.75% of target. Mr. Hutto’s goals were tied to achievement of the following key strategic objectives: completing certain M&A activities related to our Spreebird operations, including establishing additional M&A targets and facilitating the transition and integration of SMG into our Spreebird business, as well as further transition and integration goals with respect to our Rovion and Krillion acquisitions. The decision to award an amount below target was based on overachievement of the establishment of additional M&A targets, offset by underachievement of the integration and transition goals for each of SMG, Rovion and Krillion.
Total Third Quarter bonuses for our Named Executive Officers are summarized in the following table.
(1) For the Third Quarter 2011, the NCCG Committee determined that no amount over 100% of the Target Bonus would be paid to any of Messrs. Clarke, Sawtell, Cragun or Plonski unless and until we delivered Adjusted Net Income in any fiscal quarter up to and including the second quarter 2012. Instead, any amounts over 100% of the Target Bonus that would otherwise have been payable to Messrs. Clarke, Sawtell, Cragun or Plonski for the Third Quarter 2011 were held pending either. the achievement of Adjusted Net Income, or the forfeiture of such amounts. In the Fourth Quarter 2011, we achieved Adjusted Net Income and the amounts withheld in the Third Quarter of 2011 were paid to Messrs. Clarke, Sawtell, Cragun and Plonski.
Fourth Quarter 2011 Bonus
For the Fourth Quarter 2011 Bonus period, each of our Named Executive Officers’ target bonuses were defined as a percentage of base salary as set forth in each officer’s employment agreement. Actual earned awards could range between 90% and 120% of target depending on performance. Performance is measured against company-wide financial goals and individual performance goals. The weighting of our and individual goal components ranged from 0% to 100% and 100% to 0%, respectively. In determining the mix our and individual performance goals for each executive, the NCCG Committee considered each executive’s ability to affect company-wide performance and the importance of individual contributions.
(1) Mr. Sawtell was appointment our Chief Operating Officer on May 12, 2011.
(2) Mr. Crair served as our Company’s President and Chief Operating Officer until May 11, 2011.
Fourth Quarter Bonus: Company Performance Component
Our performance component for the Fourth Quarter period was based 30% on Revenue for our core operations, 20% on Revenue for our recent acquisitions, and 50% on overall Adjusted Net Income for each of our Named Executive Officers, except for Mr. Hutto. The NCCG Committee added a New Acquisition Revenue component to better align our executives’ goals with our long term objectives, which was to diversify and grow our non-search business and related revenues and net income. By adding the New Acquisition Revenue component, the NCCG Committee sought to incent the executives to increase performance of our newly launched products and services and support our recent acquisitions and initiatives. Our performance component for Mr. Hutto for the Fourth Quarter period was based 50% on our Revenue and 50% on our Adjusted Net Income. The NCCG Committee believes these metrics, and the related goals, were the key drivers of delivering value to our stockholders for the period. The targets were set to our budget for the period. The NCCG Committee also set threshold and maximum performance goals, which corresponded to bonus payouts equal to 90% and 120% of target. For the Fourth Quarter period, our performance was above the target for total company Revenue, Revenue from our core operations and overall Adjusted Net Income, but below the target for Revenue from our recent acquisitions. The resulting bonus payout for our performance component was 96% of target for Messrs. Clarke, Sawtell, Cragun and Plonski, and 117.6% of target for Mr. Hutto. The performance levels and actual performance for Fourth Quarter 2011 are shown in detail below:
(1) Target included the potential bonus expense for the Fourth quarter of 2011.
(1) Target included the potential bonus expense for the Fourth quarter of 2011.
As noted above, the NCCG Committee determined that offering cash bonuses in fourth quarter 2011 based in part upon the achievement of Adjusted Net Losses was necessary and appropriate in light of the fact that we were undertaking a large-scale diversification effort, including the acquisition of many new businesses and that such losses were anticipated and necessary to complete the diversification effort believed by our Board of Directors to be in our best interests and our long term prospects.
Fourth Quarter Bonus: Individual Performance Component
As noted above, beginning in the third quarter 2011 Mr. Clarke was evaluated solely on company-wide financial goals. The individual performance component of each other Named Executive Officer’s bonus, except for Mr. Hutto’s, was determined by the NCCG Committee and actual bonuses could range between 0% and 150% of target. Mr. Hutto was not a Named Executive Officer at the end of 2010, and therefore, our Chief
Executive Officer directly oversaw decisions regarding his performance evaluations pursuant to his individual performance component, instead of the NCCG Committee. Except as noted above, the NCCG Committee’s assessment was based on performance against pre-set strategic objectives and for Named Executive Officers, except the Chief Executive Officer, the general recommendations and performance evaluations of the Chief Executive Officer. For the Fourth Quarter period, the NCCG Committee’s bonus decisions were based upon the following individual goals.
Michael A. Sawtell - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Sawtell’s individual performance bonus component at 110% of target. Mr. Sawtell’s goals were tied to achievement of the following key strategic objectives: successfully ramping our telesales efforts, achieving certain revenue goals, and establishing a product roadmap for certain business units. The NCCG Committee’s decision to award an amount above target was based on over achievement of all goals, except for the goal related to product roadmap, which was underachieved.
Kenneth S. Cragun - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Cragun’s individual performance bonus component at 100% of target. Mr. Cragun’s goals were tied to achievement of the following key strategic objectives: enhancing corporate presentation materials, strengthening controls on access to certain reporting functions, implementing certain accounting systems, and analyzing competitor key performance indicators. The NCCG Committee’s decision to award an amount at target was based on achievement of each of these goals satisfactorily.
Michael O. Plonski - Based in part on the Chief Executive Officer’s recommendation, the NCCG Committee approved Mr. Plonski’s individual performance bonus component at 100% of target. Mr. Plonski’s goals were tied to achievement of the following key strategic objectives: improving search relevance, developing our technology organization, developing processes and strategies to meet our future technology needs, enhancing our technology touch points with partners and consumers, and developing certain revenue initiatives. The NCCG Committee’s decision to award an amount at target was based on achievement of each of these goals satisfactorily.
Peter S. Hutto - Based on the Chief Executive Officer’s recommendation, Mr. Hutto’s individual performance bonus component was set at 99% of target. Mr. Hutto’s goals were tied to achievement of the following key strategic objectives: certain M&A initiatives, including a small acquisition, certain revenue and income goals for recently acquired businesses, and development of a go-forward M&A strategy. The decision to award an amount slightly below target was based on achievement of most goals satisfactorily, partially offset by slight underachievement the development of M&A strategy.
Total Fourth Quarter bonuses for our Named Executive Officers are summarized in the following table.
(1) For the Third Quarter 2011, the NCCG Committee determined that no amount over 100% of the Target Bonus would be paid to an Named Executive Officer unless and until we delivered Adjusted Net Income in any fiscal quarter up to and including the second quarter 2012. Instead, any amounts over 100% of the Target Bonus that would otherwise have been payable to the Named Executive Officers for the Third Quarter 2011 were held pending either the achievement of Adjusted Net Income or the forfeiture of such amounts. In the Fourth Quarter 2011, we achieved Adjusted Net Income and the amounts withheld in the Third Quarter of 2011 were paid to the Named Executive Officers.
Discretionary Bonuses
In the first quarter of 2011, the NCCG Committee awarded Mr. Clarke a bonus of $40,278.42 as additional consideration for Mr. Clarke’s exemplary performance.
Retention Bonus
In connection with our acquisition of substantially all of the assets of Rovion from DGLP, we entered into an employment agreement with Mr. Sawtell which provided for, among other things, the payment of a retention bonus equal to $375,000 over a period of 24 months following the closing of the acquisition, subject to the Rovion business achieving certain performance thresholds. In connection with the performance thresholds, we also agreed to certain funding commitments to the Rovion business post-close. In November 2011, we and Mr. Sawtell entered into an amendment to his then-Amended and Restated Employment Agreement which provided for a reduction of his retention bonus to $282,500 and eliminated the performance thresholds in consideration for the termination of our funding obligations. In 2011, Mr. Sawtell received a total of $131,563 in retention bonus payments.
Long-Term Incentive Equity Awards
We rely on long-term incentive equity awards as a key element of compensation for our executive officers so that a substantial portion of their total direct compensation is tied to increasing our market value. We have historically made annual grants of stock options to align the interests of our executives with those of our shareholders, while promoting focus by our executives’ on our long-term financial performance, and, through staggered grants with extended time-based vesting requirements, to enhance long-term retention of our executives.
The NCCG Committee considers competitive grant data for comparable positions as well as various subjective factors primarily relating to the responsibilities of the individual executive, past performance, and the executive’s expected future contributions and our value when determining the size of equity-based awards. Additionally, the NCCG Committee also considers the executive’s historic total compensation, including prior equity grants and value realized from those grants, as well as the number and value of shares owned by the executive, the number and value of shares which continue to be subject to vesting under outstanding equity grants previously made to such executive, and each executive’s tenure, responsibilities, experience and our value. No one fact is given any specific weighting and the NCCG Committee exercises its judgment to determine the appropriate size of awards.
Unlike prior years, our 2011 long-term incentive grants to our Named Executive Officers were not solely in the form of stock options with an exercise price that is equal to the closing price of our common stock on the grant date, but also consisted of a restricted stock unit (RSU) component which utilized the fair market value of our common stock on the grant date when valuing such grants. As a consequence, our Named Executive Officers will realize some actual, delivered compensation regardless of whether our stock price appreciates or not, but will also be highly incentivized to receive additional delivered compensation value only if our shareholders realize value through stock price appreciation after the date of grant of the options. The NCCG Committee decided to grant RSUs in addition to stock options to, among other things, encourage ownership of our equity by our Named Executive Officers. Both the RSUs and the stock options function as a retention incentive for our executives as they generally vest in installments over a period of three years after the date of grant.
2011 and 2012 Annual Equity Grants. In December 2011, the NCCG Committee approved grants of stock options and RSUs to each of the then-employed Named Executive Officers. The NCCG Committee approved a normal grant for 2011 and a partial grant of 50% of the typical equity grant for 2012. The NCCG Committee determined that providing the Named Executive Officers in 2011, with a portion of the grant such Named Executive Officer would typically receive in 2012, would provide additional long term incentive to the Named Executive Officers and serve as a retention tool for such Named Executive Officers during a period of transition for us. The NCCG Committee considered the factors identified above in determining the amounts of these grants. The stock option and RSU awards granted to the Named Executive Officers in December 2011, for the 2011 annual equity grant are scheduled to vest over a three-year period, beginning in December 2012, and January 2013, respectively, contingent on the executive’s continued employment with us through the vesting period, subject to certain earlier vesting in the event of certain severance and change in control scenarios, each as more particularly described below. The stock option and RSU awards granted to the Named Executive Officers in December 2011, for the 2012 annual equity grant are scheduled to vest over a three-year period, beginning in December 201,3 and January 2014, respectively, contingent on the executive’s continued employment with us through the vesting period, subject to certain earlier vesting in the event of certain severance and change in control scenarios, each as more particularly described below. For 2012, the NCCG Committee intends to grant only 25% of the typical equity grant that would be made to the Named Executive Officers in light of the earlier grant of 50% of the typical equity grant made to the Named Executive Officers in 2011, for 2012. As a result, we expect to make total grants of 75% of the typical equity grants that would be made to the Named Executive Officers in 2012, allowing us to retain the remaining 25% of such typical equity grants for later use under our equity plan.
Grant Practices. We do not have any plan, program, or practice to time the grant of equity-based awards to our executives or any of our employees in coordination with the release of material non-public information. All equity grants are made under our stock plans, which have been approved by our stockholders. The per share exercise price of stock options cannot be less than the closing sale price of our common stock on the grant date. The NCCG Committee typically makes annual equity grants in the month of December and when an officer begins employment or is promoted.
Severance and Change in Control Severance Benefits
We provide severance, including change-in-control severance, to each of the Named Executive Officers as well as other members of our management team, as provided for in their respective employment agreements. It is the belief of the NCCG Committee that the severance offered by us helps to retain our management team, including its Named Executive Officers, by providing a stable work environment in which these employees are provided certain economic benefits in the event their employment is actually or constructively terminated, including in connection with a change in control. It also helps to create a mutually beneficial separation as we are able to secure a release from claims. We believe that the occurrence, or potential occurrence, of a change-in-control transaction may create uncertainty regarding continued employment of our executives and other key employees and the change-in-control severance benefits offered by us will alleviate much of that uncertainty. The material terms of the change-in-control severance benefits offered to our Named Executive Officers are described below in the section entitled “Employment Agreements and Change in Control Arrangements with Our Named Executive Officers.”
In providing severance agreements, the NCCG Committee considers best practices. Severance benefits available following a change in control are provided only on a “double-trigger” basis which means that there must be both a change in control and a termination, either actually or constructively, of the eligible employee’s employment in the circumstances described in the “Employment Agreements and Change in Control Arrangements with Our Named Executive Officers” section below. In addition, our amended agreements with our Named Executive Officers do not contain excise tax gross-up provisions or “single-trigger” severance payment provisions. We do not maintain any severance plans beyond the severance benefits provided for in the employment agreements with our Named Executive Officers and other members of our management team.
Under their employment agreements, each of our Named Executive Officers, including Mr. Clarke, would be entitled to severance benefits in the event of his termination by us without cause or by the Named Executive Officer for good reason, or to due to his disability and, to a lesser extent, his death. The NCCG Committee determined that it is appropriate to provide the Named Executive Officers with these severance benefits under these circumstances in light of their positions with us, general competitive practices, and as part of their overall compensation package.
The Named Executive Officers and certain other members of the management team are also entitled to accelerated vesting of all of their respective stock option awards in the event of a change in control or a termination without cause by us or a termination for good reason by the Named Executive Officer within the 120 day period preceding or following a change in control. Further, if accelerated vesting of all stock option awards is not available as described above, the Named Executive Officers and certain other members of the management team are entitled to accelerated vesting of those stock option awards that would vest during the initial period of their employment agreements with us in the event of a termination without cause by us or a termination for good reason by the Named Executive Officer outside of the 120 day period preceding or following a change in control. The NCCG Committee determined that this severance benefit was appropriate for each of its Named Executive Officers and certain of its management team based upon their positions with us, general competitive practices, and as part of their overall package.
Recipients of long-term incentive equity awards are also entitled to limited severance protections with respect to awards granted prior to the applicable severance event. The NCCG Committee determined that these
protections help maximize the retention benefits to us of the long-term incentive equity awards and are consistent with general competitive practices.
Summary Compensation
The following table provides information regarding the compensation earned during the fiscal years ended December 31, 2011, 2010 and 2009 by our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers in 2011. We refer to our Chief Executive Officer, Chief Financial Officer and these other executive officers as the named executive officers in this amendment to our annual report on Form 10-K.
2011 Summary Compensation Table
(1) The fair value of each restricted stock unit award is calculated on the date of grant using the closing price of our common stock as reported by the Nasdaq. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
(2) During 2011, Mr. Clarke received other compensation of $34,752 for payout of accrued vacation. During 2011, Mr. Clarke also received bonuses of $40,278 for certain exemplary performance and $5,584 as a bonus related to cost saving measures at the Company. During 2010, Mr. Clarke received a matching contribution to his 401(k) account from us in the amount of $600.
(3) Mr. Sawtell joined us on May 5, 2011, and was paid his salary from that date. During 2011, Mr. Sawtell received retention payments of $156,563, as was negotiated in connection with our acquisition of the assets of Rovion.
(4) Mr. Cragun was promoted to interim chief financial officer and became a Named Executive Officer in October 2010. As a result, the 2011 Summary Compensation Table only includes his 2011 and 2010 compensation information. During 2011, Mr. Cragun received other compensation of $14,165 for payout of accrued vacation. Mr. Cragun also received a bonus of $3,336 related to cost saving measures at the Company. During 2010, Mr. Cragun received a matching contribution to his 401(k) account from us in the amount of $289.
(5) Mr. Plonski joined us on July 27, 2009, and was paid his salary from that date. During 2009, Mr. Plonski received other compensation of $75,000 for relocation. During 2010, Mr. Plonski received a matching contribution to his 401(k) account from us in the amount of $1,634. During 2011, Mr. Plonski received other compensation of $25,142 for payout of accrued vacation. Mr. Plonski’s employment with the Company ended on December 31, 2011.
(6) Mr. Hutto was not a named executive officer prior to 2011. As a result, the 2011 Summary Compensation Table only includes his 2011 compensation information. During 2011, Mr. Hutto received other compensation of $6,600 for car allowance.
(7) Mr. Crair’s employment with the Company ended on May 11, 2012. During 2010, Mr. Crair received a matching contribution to his 401(k) account from us in the amount of $4,400. During 2011, Mr. Crair received severance payment of $466,743.
Grants of Plan-Based Awards - 2011
The following table provides information regarding grants of plan-based awards that we granted to the named executive officers during the fiscal year ended December 31, 2011. All option awards were granted at the fair market value of our Common Stock on the date of grant, as determined by our Board. Each option award represents the right to purchase one share of our Common Stock. None of the shares subject to option awards are vested at the time of grant and 33.33% of the shares subject to such option grants vest on the date which is one year or two years from the date of grant. The remainder of the shares vests in equal quarterly installments over the eight quarters thereafter. Restricted stock awards vests 33.33 % on January 1 following the one year or two year anniversary from the date of grant. The remainder of the restricted stock award vests in equal annual installments on January 1, over the 2 years thereafter.
2011 Stock Options Granted
(1) 33.33% of total grant vests one year from the date of grant and the remainder vests quarterly over the next eight quarters.
(2) 33.33% of total grant vests two years from the date of grant and the remainder vests quarterly over the next eight quarters.
(3) 33.33% of total grant vests on January 1, 2013 and the remainder vests annually on January 1 over the next two years.
(4) 33.33% of total grant vests of January 1, 2014 and the remainder vests annually on January 1 over the next two years.
Employment Agreements and Change in Control Arrangements with Our Named Executive Officers
Employment Agreements
We entered into amended and restated employment agreements with each of Messrs. Clarke, Cragun, Hutto and Sawtell on December 9, 2011 and with Messrs. Plonski and Crair on April 26, 2010. Each of those employment agreements has a term of one year and automatically renews for additional one year terms unless either party terminates it with at least 30 days notice to the other party.
If we terminate an executive’s employment agreement without cause (the definition of which is summarized below), or if an executive terminates his agreement with good reason (the definition of which is also summarized below), each as defined in the agreement, we are obligated to pay that executive: (i) his annual salary and other benefits earned prior to termination, (ii) his annual salary payable over one year after termination, (iii) an amount equal to all bonuses earned during the four quarters immediately prior to the termination date, payable in accordance with our standard bonus payment practices or immediately if and to the extent such bonus will be used by the executive to exercise stock options, (iv) benefits for 12 months following the date of termination,
(v) the vesting of all options that would have vested had the executive’s employment agreement remained in force through the end of the initial one-year term of the amended and restated agreement will be fully vested immediately prior to such termination, (vi) the right for 12 months from the date of termination to exercise all vested options granted to the executive, and (vii) in the case of Mr. Sawtell only, the unpaid amount of his retention bonus.
Notwithstanding the foregoing, in the event of a change of control or a termination without cause or for good reason by the executive within 120 days of a change of control, all options granted to the executive will be immediately vested and remain exercisable through the end of the option term as if the executive were still employed by us. Furthermore, in the event of a termination without cause of for good reason by the executive in connection with a change of control, we are obligated to pay that executive: (i) his annual salary and other benefits earned prior to termination; (ii) 1.25 times his annual salary payable in a lump sum; (iii) an amount equal to 1.25 times all bonuses earned during the four quarters immediately prior to the termination date or immediately prior the date of the change of control, whichever is greater, payable in a lump sum; and (iv) benefits for 15 months following the date of termination.
Under the terms of the agreements, a change of control is deemed to have occurred generally in the following circumstances:
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The acquisition by any person of 35% or more of our securities, exclusive of securities acquired directly from us;
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The acquisition by any person of 50% or more of the combined voting power of our then outstanding voting securities;
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Certain changes in the composition of our Board of Directors;
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Certain of our mergers and consolidations where certain voting thresholds or ownership thresholds are not maintained; and
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The approval of our plan of liquidation or the consummation of the sale of all or substantially all of our assets where certain voting thresholds are not maintained.
Under the terms of the agreements, “cause” is generally defined as:
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Conviction of a felony involving the crime of theft or a related or similar act of unlawful taking, or a felony involving the federal or California securities or pension laws, or any felony, which results in material economic harm to us;
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Engagement in the performance of the executive’s duties or otherwise to the material and demonstrable detriment to us, in willful misconduct, willful or gross neglect, fraud, misappropriation or embezzlement;
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Failure to adhere to lawful and reasonable directions of our Board of Directors or failure to devote substantially all of the business time and effort to us, upon notice; and
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Material breaches of the agreement by executive.
Under the terms of the agreements, good reason is generally defined as:
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A reduction in salary or failure to pay salary when due;
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A material diminution in the executive’s title, authority, duties, reporting relationship or responsibilities;
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Material breach of the agreement by us;
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Failure to have any successor in interest to us assume the employment agreement;
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A relocation of the executive to offices farther than 25 miles away from the location set forth in the agreement;
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A change in executive’s reporting; and
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The assignment to executive of any duties or responsibilities which are inconsistent with her status, position or responsibilities.
Separation Agreements
On May 11, 2011, we entered into a separation and general release agreement (“Separation Agreement”) with Stanley B. Crair, our former chief operating officer and president. Under the terms of the Separation Agreement, we paid Mr. Crair his unpaid, earned wages and unused vacation pay and are obligated to pay him $287,000, representing one year’s base salary, in equal installments over the twelve month period following his separation. We will also pay Mr. Crair a bonus of $174,962, representing bonus earned over the previous four quarters immediately prior to the Separation Agreement, payable in accordance with our bonus payment structure over the twelve month period following his separation. In addition, we have agreed to pay 100% of Mr. Crair’s health insurance premiums through May 2012 to the extent Mr. Crair elected to continue his health care insurance coverage under COBRA. Mr. Crair has the right to exercise any vested stock option through May 11, 2012.
On December 31, 2011, we entered into a separation and general release agreement (“Separation Agreement”) with Michael O. Plonski, our former chief technology officer. Under the terms of the Separation Agreement, we paid Mr. Plonski his unpaid, earned wages and unused vacation pay and are obligated to pay him $279,670, representing one year’s base salary, in equal installments over the twelve month period following his separation. We will also pay Mr. Plonski a bonus of $120,193, representing bonus earned over the previous four quarters immediately prior to the Separation Agreement, payable in accordance with our bonus payment structure over the twelve month period following his separation. In addition, we have agreed to pay 100% of Mr. Plonksi’s health insurance premiums through December 2012 to the extent Mr. Plonski elected to continue his health care insurance coverage under COBRA. Mr. Plonski has the right to exercise any vested stock option through December 31, 2012.
Outstanding Equity Awards at Fiscal Year-End - 2011
The following table sets forth the number of shares of Common Stock subject to exercisable and unexercisable stock options and number of unvested restricted stock units held as of December 31, 2011, by each of our Named Executive Officers.
2011 Outstanding Equity Awards at Fiscal Year-End
(1) 33.33% of total grant vested on June 3, 2011, and the remainder vests each quarter over the next eight quarters commencing after June 3, 2011.
(2) 33.33% of total grant vested on March 12, 2010, and the remainder vests each quarter over the next eight quarters commencing after March 12, 2010.
(3) 33.33% of total grant vested on December 10, 2011, and the remainder vests each quarter over the next eight quarters commencing after December 10, 2011.
(4) 33.33% of total grant vests on December 9, 2012, and the remainder vests each quarter over the next eight quarters commencing after December 9, 2012.
(5) 33.33% of total grant vests on December 9, 2013, and the remainder vests each quarter over the next eight quarters commencing after December 9, 2013.
(6) 33.33% of total grant vests on January 1, 2013, and the remainder vests each year on January 1 over the next two years commencing after January 1, 2013.
(7) 33.33% of total grant vests on January 1, 2014, and the remainder vests each year on January 1 over the next two years commencing after January 1, 2014.
(8) 33.33% of total grant vests on May 5, 2012, and the remainder vests each quarter over the next eight quarters commencing after May 5, 2012.
(9) 33.33% of total grant vests on May 12, 2012, and the remainder vests each quarter over the next eight quarters commencing after May 12, 2012.
(10) 33.33% of total grant vested on April 1, 2010, and the remainder vests each quarter over the next eight quarters commencing after April 1, 2010.
(11) 33.33% of total grant vested on April 1, 2011, and the remainder vests each quarter over the next eight quarters commencing after April 1, 2011.
(12) 33.33% of total grant vests on April 1, 2012, and the remainder vests each quarter over the next eight quarters commencing after April 1, 2012.
(13) 33.33% of total grant vested on October 18, 2011, and the remainder vests each quarter over the next eight quarters commencing after October 18, 2011.
(14) 33.33% of total grant vests on January 11, 2012, and the remainder vests each quarter over the next eight quarters commencing after January 11, 2012.
(15) 33.33% of total grant vested on July 27, 2011, and the remainder vests each quarter over the next eight quarters commencing after July 27, 2011.
(16) 33.33% of total grant vests on July 27, 2012, and the remainder vests each quarter over the next eight quarters commencing after July 27, 2012.
(17) 33.33% of total grant vests on July 27, 2013, and the remainder vests each quarter over the next eight quarters commencing after July 27, 2013.
(18) 33.33% of total grant vested on April 30, 2010 and the remainder vests each quarter over the next eight quarters commencing after April 30, 2010.
Options Exercises and Stock Vested - 2011
There were no stock options exercised nor stock awards vested during the fiscal year ended 2011 for our Named Executive Officers.
Transactions with Related Persons
Our Audit Committee monitors and reviews issues involving potential conflicts of interest and approves all transactions with related persons as defined in Item 404 of Regulation S-K under the securities laws. Examples of such transactions that must be approved by our Audit Committee include, but are not limited to any transaction, arrangement, relationship (including any indebtedness) in which:
•
the aggregate amount involved is determined to by the Audit Committee to be material;
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we are a participant; and
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any of the following has or will have a direct or indirect interest in the transaction:
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an executive officer, director, or nominee for election as a director;
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a greater than five percent beneficial owner of our Common Stock; or
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any immediate family member of the foregoing.
When reviewing transactions with related person, the Audit Committee applies the standards for evaluating conflicts of interest outlined in the Company’s written Code of Business Conduct and Ethics. There were no reportable transactions during 2011.
Termination and Change of Control Benefits
The table below sets forth estimated payments with respect to our Named Executive Officers upon the termination of employment with us under various circumstances and upon a change in control (“CIC”), calculated as of December 31, 2011.
(1) Includes $150,938 of retention bonus that remained unpaid as of December 31, 2011.
(2) Mr. Crair’s employment with us ended on May 11, 2011. The terms of his severance are set forth above.
Director Compensation
The following table provides information regarding the compensation earned during the fiscal year ended December 31, 2011, by members of our Board, unless the director is also a named executive officer:
2011 Director Compensation
(1) The fair value of each grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
(2) Each of Messrs. Farra, Fricke, Lavoie and Rehfeld received a triple grant of their annual option grant in 2009 and as a result, received no option grants in 2010 and 2011.
(3) As of December 31, 2011, Mr. Farra held options to purchase an aggregate of 138,750 shares of our Common Stock.
(4) As of December 31, 2011, Mr. Fricke held options to purchase an aggregate of 129,750 shares of our Common Stock.
(5) As of December 31, 2011, Mr. Lavoie held options to purchase an aggregate of 98,750 shares of our Common Stock.
(6) As of December 31, 2011, Mr. Rehfeld held options to purchase an aggregate of 124,544 shares of our Common Stock.
(7) As of December 31, 2011, Mr. Robinson held options to purchase an aggregate of 38,750 shares of our Common Stock.
Non-employee members of the Board receive an annual retainer of $30,000 plus $1,500 for each in-person or telephonic Board meeting attended and $750 for each in-person meeting attended telephonically. The Lead Director receives an annual fee of $12,500. The Chairman of the Audit Committee receives an annual fee of $15,000. The Chairman of the Nominating, Compensation and Corporate Governance Committee receives an annual fee of $10,000. Members of committees of the Board receive $1,200 for each committee meeting attended. In addition, all members of the Board receive an annual grant of an option to purchase 15,000 shares of our Common Stock. Other than Mr. Robinson, our directors had all received an earlier grant of options in 2010 that covered the grant they would typically receive in 2011, therefore they received no grant in 2011. New members to the Board receive a grant of an option to purchase 20,000 shares of our Common Stock and a pro-rata amount of the regular annual grant amount of an option to purchase 15,000 shares of our Common Stock. One-half of each of the options granted to the member of the Board are vested at the time of the grant, and the remaining portions vest in equal monthly installments over the following twelve months. Stock option grants have a post-separation exercise period of two years.
Risk Considerations
The NCCG Committee has reviewed our compensation programs for our named executive officers and our employees generally and has concluded that these programs do not create risks that are reasonably likely to have a material adverse effect on the company. The NCCG Committee believes that the design of our annual cash and long-term equity incentives provides an effective and appropriate mix of incentives to help ensure that our performance is focused on long-term results. In general, bonus opportunities for our employees are capped, and we have discretion to reduce bonus payments or pay no bonus at all based on the individual performance component and other factors that we determine are appropriate given the particular circumstances. Similar to our named executive officers, a substantial portion of the compensation for all of our employees generally is delivered in the form of equity awards, that are intended to further align the interests of our employees with those of our stockholders.
With specific regard to our executives, including our named executive officers, the NCCG Committee has determined that the following compensation design features and risk oversight features provide protection against excessive risk-taking:
•
Our board of directors as a whole has responsibility for risk oversight and regularly reviews the areas of focus of our board committees. Our board committees report their deliberations to the full board on a regular basis. Additionally, the board considers the strategic, financial and execution risks that are associated with the operations, financial and capital decisions that impact on determinations of compensation under our compensation programs.
•
Our named executive officers are motivated to carefully assess risks as a majority of their compensation is performance-based, meaning unless they guard against risks, their compensation could also be negatively impacted.
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Our NCCG Committee regularly discusses the reasonable range of future company performance expectations with our CEO, which provides the NCCG Committee with insight into the design and funding of our executive bonus plan.
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In order to ensure a long-term focus by management, we have mitigated the incentives in our annual cash bonus program by capping annual bonus potential to a percentage of base salary, which represents a relatively small percentage of our executives’ total compensation opportunities.
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Given that a high percentage of our overall pay mix for named executive officers is equity-based:
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We provide competitive base salaries to our named executive officers to provide a steady income while allowing them to focus on our long-term performance rather than on short-term stock price fluctuations;
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We design our bonus plan for named executive officers to be focused on financial performance metrics, which in combination with our use of equity awards that are subject to long-term vesting conditions; focuses our executives on driving long-term stockholder value and incentivizes them to avoid decisions that only benefit short-term results that may not be consistent with our long-term interests;
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Our equity grants typically vest over a three-year vesting period to ensure our named executive officers have significant value tied to long-term stock price performance;
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We prohibit speculative and hedging transaction involving our securities, which prevents our executive officers from insulating themselves from the effects of poor company stock price performance; and
•
We have internal controls over financial reporting, the measurement and calculation of compensation goals, and other financial, operational, and compliance policies and practices that are designed to keep our compensation programs from being susceptible to manipulation by any employee, including our named executive officers.
Nominating, Compensation and Corporate Governance Committee Report
The NCCG Committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis Section of this proxy statement. Based upon this review and discussion, the NCCG Committee recommended to the Board of Directors that the Compensation Discussion and Analysis Section be included in this proxy statement.
NCCG Committee of the Board of Directors
John E. Rehfeld (Chairman)
Theodore E. Lavoie
Philip K. Fricke
Lowell W. Robinson
March 12, 2012
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth the beneficial ownership of shares of our Common Stock as of December 31, 2011:
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each person (or group of affiliated persons) known by us to beneficially own more than 5% of our common stock;
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each of our directors and nominees;
•
each named executive officer; and
•
all of our directors and executive officers as a group.
Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our Common Stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of shares beneficially owned by a person listed below and the percentage ownership of such person, shares of Common Stock underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of December 31, 2011, are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.
The percentage of beneficial ownership is based on 22,081,844 shares of Common Stock outstanding as of December 31, 2011.
Except as otherwise noted below, and subject to applicable community property laws, the persons named have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Unless otherwise indicated, the address of the following stockholders is c/o Local.com Corporation, 7555 Irvine Center Drive, Irvine, CA 92618.
* - less than 1%
(1) Includes 380,676 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(2) Includes 81,761 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(3) Includes 133,462 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(4) Includes 143,938 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(5) Includes 384,151 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(6) Includes 100,618 shares issuable upon the exercise of warrants, 132,499 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011 and 4,500 shares with indirect beneficial ownership by Mr. Farra as custodian for his daughter.
(7) Includes 123,499 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(8) Includes 92,499 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(9) Includes 118,293 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(10) Includes 33,957 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011.
(11) Includes 100,618 shares issuable upon the exercise of warrants, 1,624,735 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2011, and 4,500 shares with indirect beneficial ownership.
Securities authorized for issuance under equity compensation plans
The following table provides information as of December 31, 2011, with respect to our compensation plans including our 1999 Plan, 2000 Plan, 2004 Plan, 2005 Plan, 2007 Plan, 2008 Plan and 2011 Plan under which we may issue shares of our common stock.
Equity Compensation Plan Information
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
Our Audit Committee monitors and reviews issues involving potential conflicts of interest and approves all transactions with related persons as defined in Item 404 of Regulation S-K under the securities laws. Examples of such transactions that must be approved by our Audit Committee include, but are not limited to any transaction, arrangement, relationship (including any indebtedness) in which:
•
the aggregate amount involved is determined to by the Audit Committee to be material;
•
the Company is a participant; and
•
any of the following has or will have a direct or indirect interest in the transaction:
•
an executive officer, director, or nominee for election as a director;
•
a greater than five percent beneficial owner of our Common Stock; or
•
any immediate family member of the foregoing.
When reviewing transactions with a related person, the Audit Committee applies the standards for evaluating conflicts of interest outlined in our written Code of Business Conduct and Ethics. There were no reportable transactions during 2011.
Director Independence
(1) The Board has determined that Messrs. Farra, Fricke, Lavoie, Rehfeld and Robinson are “independent” within the meaning of the Nasdaq Capital Market director independence standards, as currently in effect. The Board further determined that Heath B. Clarke is not independent due to his position as our Chief Executive Officer.
Item 14.
Item 14. Principal Accountant Fees and Services
The following table sets forth the aggregate fees for professional audit services rendered by Haskell & White LLP for audit of our annual financial statements for the years ended December 31, 2011 and 2010, and fees billed for other services provided by Haskell & White LLP for the years ended December 31, 2011 and 2010.
Audit Fees
Includes the aggregate fees for the annual audit of our financial statements, review of our quarterly financial statements and the audit of internal controls in order to comply with the Sarbanes-Oxley Act of 2002.
Audit-Related Fees
Includes the aggregate fees for the auditor’s consent for use of our audited financial statements in our S-3 registration statements, S-8 registration statement, and our Form 10-K/A, and review of our Form 8-K/A.
Tax Fees
Includes the aggregate fees for tax preparation, tax advice and tax planning.
All Other Fees
Includes the aggregate fees for services related to our acquisitions. Our audit committee pre-approves all services provided by Haskell & White LLP.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
* Filed herewith.
# Indicates management contract or compensatory plan.
(1) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 14, 2011.
(2) Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.
(3) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
(4) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
(5) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
(6) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.
(7) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2, Amendment No. 1, filed with the Securities and Exchange Commission on August 11, 2004.
(8) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 23, 2005.
(9) Incorporate by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on July 3, 2007.
(10) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 24, 2009.
(11) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on May 31, 2011.
(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2010.
(13) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 27, 2010.
(14) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 12, 2010
(15) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 2, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(16) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 23, 2005.
(17) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 1, 2010.
(18) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 6, 2010.
(19) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 22, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(20) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 31, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(21) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 3, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(22) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 6, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(23) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2011.
(24) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 16, 2011.
(25) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 15, 2011.
(26) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 29, 2011.
(27) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 8, 2011.Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(28) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2011.
(29) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 11, 2011.
(30) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 16, 2011.
(31) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 7, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(32) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 2, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(33) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 4, 2011.
(34) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 15, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(35) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 2, 2011.
(36) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2011.
(37) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 16, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(38) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 6, 2012.
(39) Incorporated by reference from the Registrant’s Current Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 2009.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 15th day of March, 2012.
LOCAL.COM CORPORATION
By:
/s/ Heath B. Clarke
Heath B. Clarke
Chief Executive Officer and Chairman
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
LOCAL.COM CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Local.com Corporation
We have audited the accompanying consolidated balance sheets of Local.com Corporation (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. Our audits also included the financial statement schedule listed in the index at. We also have audited Local.com Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation 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.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Local.Com Corporation as of December 31, 2011 and 2010, and the results of its consolidated operations and its cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ HASKELL & WHITE LLP
Irvine, California
March 15, 2012
LOCAL.COM CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
LOCAL.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
LOCAL.COM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
LOCAL.COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
LOCAL.COM CORPORATION
Notes to Consolidated Financial Statements
1. The Company and Summary of Significant Accounting Policies
Nature of Operations
We are a local media advertising company that enables local businesses and consumers to find each other and connect. We operate online businesses that collectively reach over 30 million monthly unique visitors across over 100,000 websites, and we serve over 27,000 small business customers with a variety of web hosting and local online advertising products. Our Owned & Operated business unit (“O&O”) manages our flagship property, Local.com, our newly acquired shopping content provider Krillion.com, and a proprietary network of over 20,000 local websites, which collectively reaches over 15 million monthly unique visitors. Our Network business unit (“Network”) operates (i) a leading private label local syndication network of over 1,200 U.S. regional media websites, (ii) 80,000 third-party local websites, (iii) our own organic feed of local businesses plus third-party advertising feeds, both of which are focused primarily on local consumers, to a distribution network of hundreds of websites, and (iv) our network of owned and third party websites that display our own and third party display advertisements. Our Sales & Ad Services business unit (“SAS”) sells and supports products directly to small businesses. These products include our Exact Match product suite; our Local Premium direct listing products and our Rovion rich media display advertising products. We also provide over 27,000 direct monthly subscribers with web hosting or web listing products. We use patented and proprietary search technologies and systems, to provide consumers with relevant search results for local businesses, products and services. By providing our users and those of our network partners with robust, current, local information about businesses and other offerings in their local area, we have attracted an audience of users that our direct advertisers and advertising partners desire to reach. In May 2011, the Company officially launched Spreebird, the Company’s new business unit focused on daily deals services (“Spreebird”). In July 2011, the Company acquired Screamin Media Group, Inc. (“SMG”), a daily deals business, as part of its efforts to expand its Spreebird business.
Principles of Consolidation
Our consolidated financial statements include the accounts of Local.com Corporation and its wholly-owned subsidiaries, Local.com PG Acquisition Corporation, Krillion, Inc. and Screamin Media Group, Inc. All intercompany balances and transactions were eliminated. In April 2010, Local.com PG Acquisition Corporation merged with and into Local.com Corporation and the separate corporate entity of Local.com PG Acquisition Corporation ceased to exist. We have evaluated all subsequent events through the date the consolidated financial statements were issued.
During the first quarter of 2010, we began presenting certain costs as cost of revenues. Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards and fees for LEC billings). Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
The Company generates revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement, the fulfillment of subscription listing obligations, the sale of deal of the day vouchers, or the delivery of Exact Match products to our customers. The Company enters into contracts to distribute sponsored listings and banner advertisements with our direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). The Company recognizes our portion of the bid price based upon our contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on our Local.com website and network partner websites. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Management has analyzed our revenue recognition and determined that our web hosting revenue will be recognized net of direct costs.
During the year ended December 31, 2010, the Company entered into multiple-deliverable arrangements for the sale of domains and for providing services relating to such domains. Management evaluated the agreements in accordance with the provision of the revenue recognition topic that addresses multiple-deliverable revenue arrangements as updated in October 2009. Although such updated provisions were only effective for fiscal periods beginning on or after June 15, 2010, we opted to adopt such provisions early. The multiple-deliverable arrangements entered into consisted of various units of accounting such as the sale of domains, website development fees, content delivery and hosting fees. Such elements were considered separate units of accounting due to each element having value to the customer on a stand-alone basis. The selling price for each of the units of accounting was determined using a combination of vendor-specific objective evidence and management estimates. Revenue relating to domains was recognized with the transfer of title of such domains. Revenue for website development, content delivery and hosting fees are recognized as such services are performed or delivered. The agreements did not include any cancellation, termination or refund provisions that we consider probable.
We launched our Spreebird daily deals business in May 2011 and had material activity during the third and fourth quarter 2011. Revenue relating to the Spreebird daily deals business will be recorded exclusive of the portion of gross billings paid as merchant revenue share, since we generally act as the agent, rather than the principal, when connecting merchants with online customers. Spreebird deal vouchers are sold primarily through email marketing and our www.spreebird.com website. Revenue for our Spreebird business is recognized when earned. Revenue is considered to be earned once all revenue recognition criteria have been satisfied. All revenue, other than Spreebird daily deals revenue and web hosting revenue, is recognized on a gross basis.
Cost of Revenues
Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, merchant payments for daily deal vouchers, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards and fees for LEC billings). We advertise on large search engine websites such as Google, Yahoo!, MSN/Bing and Ask.com, as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to
our Local.com website. During the year ended December 31, 2011, approximately 66% of our overall traffic was purchased from other search engine websites. During the year ended December 31, 2011, advertising costs to drive consumers to our Local.com website were $37.4 million of which $25.6 million and $9.3 million was attributable to Google, Inc. and Yahoo!, respectively. During the year ended December 31, 2010, advertising costs to drive consumers to the Local.com website were $30.8 million of which $22.5 million and $5.3 million was paid to Google, Inc. and Yahoo, respectively. During the year ended December 31, 2009, advertising costs to drive consumers to the Local.com website were $25.9 million of which $17.9 million and $1.7 million was paid to Google, Inc. and Yahoo!, respectively, with such amounts expensed as incurred and included in cost of revenues in accompanying consolidated statements of operations.
Research and Development
Research and development expenses consist of expenses incurred by us in the development, creation and enhancement of our paid-search services. Research and development expenses include salaries and other costs of employment of our development staff as well as outside contractors and the amortization of capitalized website development costs.
Stock based compensation
U.S. GAAP requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. That cost is recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period).
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock options, stock price volatility, pre-vesting forfeiture rate of stock awards and in the case of restricted stock units, the fair market values of the underlying stock on the dates of grant. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock on the date of grant based on the historical market activity of our stock. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected pre-vesting award forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted and cancelled before vesting. If our actual forfeiture rate is materially different from the original estimate, the stock-based compensation expense could be significantly different from what we recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. See Note 11-Shareholders’ Equity for additional information.
Sales Commissions
Sales commissions are earned by our applicable salesperson when revenue from an advertiser is recognized, subject to certain criteria. We record sales commission expense in the period the sales commission is earned and the associated revenue is recorded. Adjustments or chargebacks are made for any credits issued to customers or any amounts deemed to be uncollectible.
Refunds
Refunds of any remaining deposits paid by direct advertisers are available to those advertisers upon written request submitted between 30 and 90 days from the date of deposit.
Income Taxes
We follow the provisions of U.S. GAAP regarding accounting for income taxes, which requires recognition of deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements and tax returns. Deferred income tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that deferred income tax assets will not be realized.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts receivable, long and short term notes receivable, revolving line of credit and accounts payable. The fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The carrying amount of the revolving line of credit approximates its fair value because the interest rate on these instruments fluctuates with market interest rates. The long term note receivable has a fixed interest rate considered to be market related and therefore the carrying value also approximates its fair value. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
The fair value of the warrant liability is determined using the Black-Scholes valuation method, a “Level 3” input, based on the quoted price of our common stock, volatility based on the historical market activity of our stock, the expected life based on the remaining contractual term of the warrants and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ contractual life.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.
Accounts Receivable
Our accounts receivable are due primarily from customers located in the United States and are typically unsecured. Our management estimates the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If we believe that our customers’ financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.
Certain Risks and Concentrations
Our revenues are principally derived in the U.S. from online advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying or advertiser spending behavior could adversely affect our operating results.
Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, cash equivalents accounts receivable and notes receivable. Cash equivalents consist primarily of money market funds. Accounts receivable are typically unsecured and are derived from revenues earned from customers located in the U.S. Most of our advertisers and network partners are in the Internet industry. We perform ongoing evaluations to determine customer credit and we limit the amount of credit we extend, but generally we do not require collateral from our customers. We maintain reserves for estimated credit losses and these losses have generally been within our expectations. We have three customers that each represents more than 10% of our total revenue. The following table identified our major partners that represented greater than 10% of our total revenue in the periods presented:
As of December 31, 2011 and 2010, two customers represented 47% and 55%, respectively, of our total accounts receivable. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.
We are exposed to the risk of fluctuation in interest rates on our revolving line of credit. During 2011 we did not use interest rate swaps or other types of derivative financial instruments to hedge our interest rate risk. The amount outstanding under the revolving line of credit at December 31, 2011 was $8.0 million. Therefore, a one-percentage point increase in interest rates would result in an increase in interest expense of approximately $80,000 per annum. See Note 8 - Credit Facilities.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated under the straight-line basis over the shorter of the estimated useful lives or the respective assets as follows:
Repairs and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property and equipment are included in the operating results of the related period.
Website Development Costs and Computer Software Developed for Internal Use
U.S. GAAP regarding accounting for the costs of computer software developed or obtained for internal use requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP regarding accounting for website development costs requires that costs incurred in the preliminary project and operating stage of website development be expensed as incurred and that certain costs incurred in the development stage of website development be capitalized and amortized over the estimated useful life. We capitalized certain website development costs totaling $3,306,000, $3,085,000 and $1,219,000 during
the years ended December 31, 2011, 2010 and 2009, respectively. The amortization of capitalized website development costs was $2,025,000, $700,000 and $268,000 for the years ended December 31, 2011, 2010 and 2009, respectively. Capitalized website development costs are included in property and equipment, net.
Intangible Assets
Intangible assets are amortized over their estimated useful lives, generally on a straight-line basis over two to five years. The small business subscriber relationships are amortized based on how we expect the customer relationships to contribute to future cash flows. As a result, amortization of the small business subscriber relationships intangible assets is accelerated over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four.
Impairment of Long-lived Assets
We account for the impairment and disposition of definite life intangible and long-lived assets in accordance with U.S. GAAP guidance on accounting for the impairment or disposal of long-lived assets. In accordance with the guidance, such assets to be held are reviewed for events, or changes in circumstances, which indicate that their carrying value may not be recoverable. We periodically review related carrying values to determine whether or not impairment to such value has occurred. For the years ended December 31, 2011, 2010 and 2009, management concluded that there was no material impairment.
Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For goodwill, we engage an independent appraiser to assist management in the determination of the fair value of our reporting units and compare the resulting fair value to the carrying value of the reporting units to determine if there is goodwill impairment. For other intangible assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment. We performed our annual impairment analysis as of December 31, 2011, and determined that the estimated fair value of the reporting units exceeded its carrying value and therefore no impairment existed. The Spreebird business unit was identified as a separate reporting unit for evaluation of goodwill impairment. As the financial performance of the Spreebird business unit was lower than planned, we conducted an evaluation of goodwill impairment of this reporting unit. Based on the evaluation there was no impairment recorded for the Spreebird business unit. In our evaluation of the Spreebird reporting unit, we determined that the fair value of the reporting unit exceeded the carrying value by approximately 30%. $12 million in goodwill, based on our acquisition of SMG has been allocated to this reporting unit. Our evaluation primarily relied on a market approach using revenue multiples of comparable public companies that operate in the same industry, of which there is limited data. Using a revenue multiplier, we determined the estimated fair value utilizing historic and projected revenues for this reporting unit. Any future fair value calculations used to evaluate goodwill impairment could be negatively affected by the market performance of the comparable public companies utilized in the model and/or lower revenue earned by the reporting unit. The Company will continue to monitor the indicators of impairment and will periodically review the reporting unit for impairment as required by U.S. GAAP. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets.
Deferred Revenue
Deferred revenue represents deposits from advertising partners and the undelivered component of revenue relating to the sale of domains and services accounted for under the provisions of the revenue recognition topic that addresses multiple-deliverable revenue arrangements. Revenue is recognized in subsequent periods when earned.
Warrant Liability
We adopted the updated U.S. GAAP guidance regarding accounting for derivatives, which requires that certain of our warrants be accounted for as derivative instruments and that we record the warrant liability at fair value and recognize the change in valuation in our statement of operations each reporting period. Determining the warrant liability to be recorded requires us to develop estimates to be used in calculating the fair value of the warrants. We calculate the fair values using the Black-Scholes valuation model.
The use of the Black-Scholes model requires us to make estimates of the following assumptions:
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Expected volatility - The estimated stock price volatility is derived based upon our actual historic stock prices over the contractual life of the warrants, which represents our best estimate of expected volatility.
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Risk-free interest rate - We use the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the warrant contractual life assumption as the risk-free interest rate.
We are exposed to the risk of changes in the fair value of the derivative liability related to outstanding warrants. The fair value of these derivative liabilities is primarily determined by fluctuations in our stock price. As our stock price increases or decreases, the fair value of these derivative liabilities increases or decreases, resulting in a corresponding current period loss or gain to be recognized. Based on the number of outstanding warrants, market interest rates and historical volatility of our stock price as of December 31, 2011, a $1 decrease or increase in our stock price results in a non-cash derivative gain or loss of approximately $173,000 and $336,000, respectively.
Accounting Standards Adopted
Effective January 1, 2009, we adopted the amended provisions regarding the accounting for derivatives and determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception regarding derivative accounting issued by the FASB. Warrants issued in 2007 in connection with a private placement transaction contained certain anti-dilution provisions for the holders and are no longer considered indexed to our stock, and therefore no longer qualify for the scope exception and must be accounted for as derivatives. These warrants are reclassified as liabilities under the caption “Warrant liability” and recorded at estimated fair value at each reporting date, computed using the Black-Scholes valuation method. Changes in the liability from period to period are recorded in the Statements of Operations under the caption “Change in fair value of warrant liability.” On January 1, 2009, we recorded a cumulative effect adjustment based on the grant date fair value of 537,373 warrants with an exercise price of $7.89 and 537,373 warrants with an exercise price of $9.26 issued in August 2007 that were outstanding at January 1, 2009, and the change in fair value of the warrant liability from the issuance date through January 1, 2009.
We have elected to record the change in fair value of the warrant liability as a component of other income and expense on the statement of operations as we believe the amounts recorded relate to financing activities and not as a result of our operations.
We recorded the following cumulative effect of change in accounting principle pursuant to our adoption of the amendment as of January 1, 2009 (in thousands):
The fair values of these options were estimated at the January 1, 2009 date of adoption, and the December 31, 2009, 2010 and 2011 balance sheet dates using a Black-Scholes option pricing model with the following weighted average assumptions:
The Company recorded a total benefit of $2.6 million or $0.12 per diluted share, $0.9 million or $0.05 per diluted share and a total charge of $3.0 million or ($0.21) per share for the change in the fair value of the warrant liability during the years ended December 31, 2011, 2010 and 2009, respectively.
In December 2011, the Financial Accounting Standards Board (“FASB”) issued guidance for new disclosure requirements regarding a company’s rights of offset and related arrangements associated with financial instruments and derivative instruments. The new disclosures are designed to make financial statements that were prepared under U.S. GAAP more comparable to those prepared under International Financial Reporting Standards (“IFRS”). The new disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein. Retrospective application is required.
In May 2011, the FASB issued amended guidance on fair value to largely achieve common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. The new accounting guidance does not extend the use of fair value but rather provides guidance about how fair value should be determined. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Amendments that clarify the intent under existing requirements include: (a) use of the highest and best use and valuation premise concept should be limited to nonfinancial assets; (b) disclosure should include quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy; and (c) the fair value of an instrument classified in an entity’s equity should be valued from the perspective of a market participant that holds that instrument as an asset. The amended guidance changes requirements as follows: (a) disclosures are expanded, particularly those relating to fair value measurements based on unobservable inputs, (b) fair value measurements for financial assets and liabilities based on a net position are permitted if market or credit risks are managed on a net basis and other criteria are met, and (c) premiums and discounts are allowed only if a market participant would also include them in the fair value measurement. This accounting update is effective for public companies for interim or annual periods beginning after December 15, 2011, with early adoption permitted. We expect to make the additional disclosures required in 2012.
In September 2011, the FASB issued an accounting update, which amends the guidance on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of
performing a qualitative assessment before calculating the fair value of the reporting unit. If, based on the qualitative factors, it is more-likely-than not that the fair value of the reporting unit is less than its carrying value, then the unchanged two-step approach previously used would be required. The new accounting guidance does not change how goodwill is calculated, how goodwill is assigned to the reporting unit, or the requirements for testing goodwill annually or when events and circumstances warrant testing. The accounting update is effective for annual and interim periods beginning after December 15, 2011. Early adoption of the update is permitted. At December 31, 2011, the Company performed its annual quantitative goodwill impairment testing, and concluded that the estimated fair value for each reporting unit substantially exceeds its respective carrying value. This new accounting guidance will not have a significant impact on the Company.
2. Note Receivable
During 2010 the Company entered into a promissory note and security agreement with one of its customers related to the sale of domain names and services. The promissory note totaled $1,000,000, carrying interest at 5% per annum payable in twelve equal quarterly payments of $54,000 beginning on March 31, 2011, and continuing on the last day of each calendar quarter thereafter until December 31, 2013, and three additional annual balloon payments of $80,000, $210,000 and $157,238 due on the 31st day of December of 2011, 2012 and 2013, respectively. The Company considered the credit quality of the customer and determined that no allowance for credit losses is necessary. As of December 31, 2011, no portion of the note receivable balance was past due. The note receivable is secured by the domain names sold to the customer.
During 2011 the Company also loaned Digital Post Interactive, Inc., a Nevada corporation (“DGLP”) a total of $485,000 pursuant to seven separate short term promissory notes. The Company entered into an asset purchase agreement with DGLP by which the Company acquired substantially all of the assets of Rovion, Inc. (“Rovion”) a wholly-owned subsidiary of DGLP. As part of the asset purchase agreement, cash paid by the Company for the acquisition of assets was used to repay the promissory notes in full. No interest was collected on these notes. During the second quarter 2011 the Company also loaned Krillion, Inc. (“Krillion”) a total of $100,000 pursuant to a short term promissory note. Subsequently, the Company entered into a stock purchase agreement with Krillion for the acquisition of all of the outstanding stock of Krillion. As part of the stock purchase agreement, cash paid by the Company for the acquisition of the stock was used to repay the promissory note in full. No interest was collected on the note. Also during the second quarter 2011, the Company loaned Screamin Media Group, Inc. (“SMG”) a total of $750,000 pursuant to two short term promissory notes. The $250,000 promissory note was repaid by SMG prior to the acquisition. On July 8, 2011, the Company entered into a merger agreement with SMG. As part of the merger agreement, cash paid by the Company as consideration to the SMG stockholders in the merger was used to repay the $500,000 promissory note in full on August 3, 2011. No interest was collected on the note.
3. Acquisitions
Simply Static, LLC Asset Purchase
On July 1, 2010, we acquired all of the assets of Simply Static, LLC (doing business as Octane360), a Delaware limited liability company.
The assets acquired include a technology platform, which can be used to offer the following services:
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targeting and registration of geo-category based local website domains;
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small business and geo-category website creation, hosting and management;
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an ad exchange to manage the selection and deployment of ad inventory across all Octane360-controlled domains and websites; and
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a content marketplace to allow for the management of geo-category content written for advertising customers or our directly owned portfolio properties.
The total purchase price is summarized as follows (in thousands):
We evaluated the fair value of total consideration transferred, including the contingent consideration related to Octane360 achieving certain milestones and operating performance criteria. On July 28, 2010, Octane360 achieved one of the milestones and received an additional $325,000 in cash and 48,077 shares of our common stock. Stock consideration was determined using the closing share price of the Company on the date of acquisition and when earnout milestones were achieved. On September 28, 2010 three additional earnout milestones were achieved which resulted in a cash payment to Octane360 totaling $1,950,000. The range of undiscounted amounts we could pay, in the form of cash or common stock, as additional contingent consideration ranges from $0 to $900,000. The remaining earnout milestones will be measured on the 12 and 24 month anniversary following the acquisition and will be based on the ability of Octane360 to have met prior earnout milestones and/or certain revenue and income targets achieved as of those dates. Depending on the operating results for the 24 months following the acquisition and the ability of Octane360 to meet prior earnout milestones, additional contingent consideration could range from $0 to $900,000. We have reviewed the projected revenue and income of Octane360 for the 24 months following the acquisition and have determined that it is not probable that such revenue and income milestones will be met. We have therefore determined the fair value of such additional contingent consideration to be $0. This fair value is based on significant inputs not observable in the markets and thus represents a Level 3 measurement.
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Our estimated useful life of the identifiable intangible assets acquired is four years for the developed technology, trademark and tradenames, and customer-related intangibles and three years for the non-compete agreement. The domain names have an indefinite life. We recognized goodwill of $4.1 million. Goodwill is recognized as we expect to be able to realize synergies between the two companies, primarily our ability to sell Exact Match products with our direct sales force and our ability to leverage existing advertiser relationships to sell Exact Match products directly to those advertisers and develop a channel sales strategy with those advertising partners and others. We also consider the assembled workforce as a component of goodwill. Goodwill is expected to be deductible for tax purposes.
The Company incurred approximately $10,000 of legal, accounting and other professional fees related to this acquisition, which were expensed. The operations of Octane360 are not considered significant in relation to the condensed consolidated financial statements taken as a whole and therefore no pro-forma financial information is presented. The results of operations for Octane360 are included in the condensed consolidated financial statements from the date of acquisition. It is impracticable to provide the revenue and earnings for
Octane360 from the date of acquisition as the Octane360 products, services and technology platform are incorporated into the operations and results of our three business units and the combined results of operations related to the acquisition are not tracked in a separate reporting unit.
iTwango LLC Asset Purchase
On January 1, 2011, the Company entered into an asset purchase agreement for the purchase of all the assets of iTwango. The assets acquired consisted of an early stage group-buying technology platform that allows advertisers to submit discounted offers to consumers who receive those geo-targeted offers daily via email and various other sources. The Company made an initial payment of $300,000 and issued a total of 7,639 shares, worth approximately $50,000, for the assets. The initial agreement included certain earnout provisions for additional payments of up to $100,000. The Company made an initial earnout payment of $10,000 in January 2011. On February 25, 2011, the Company entered into a modification and release agreement whereby the Company made an additional payment of $90,000 in exchange for the release of any future liability to the Company as it relates to the earnout payments noted in the original asset purchase agreement. As a result of this transaction, the Company recognized approximately $450,000 of amortizable intangible assets.
Krillion, Inc. Stock Purchase
On April 29, 2011, the Company entered into a Stock Purchase Agreement (“SPA”) with Krillion, Inc., a Delaware corporation, with all of the stockholders of Krillion and the stockholders’ agent to purchase all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash. The transaction was funded from the Company’s cash on hand. The purchase price was subject to working capital adjustments as outlined in the SPA. The Company entered into three separate employee agreements with former employees of Krillion. The employee agreements provides for retention bonuses, contingent upon continued employment with the Company, totaling $750,000 over a period of approximately two years, which contracts were subsequently modified to reduce such amounts to a total of approximately $550,000. We evaluated the fair value of the acquisition’s total consideration, and determined that there is no contingent consideration relating to the acquisition.
Krillion provides consumers and its business partner’s real-time information on where specific branded products are sold, and which retailer, at a particular retail location, has them in stock. Krillion aggregates and structures consumer product information in real time, to create an up-to-the-minute index of products across various brands, at various retailer locations in multiple cities across the United States. Krillion further provides the following products and services:
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patented local product search platform, the Krillion Localization Engine™ that helps connect customers with in-stock products at local retailers;
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real-time StockCheck™ tool that enables web-savvy shoppers to find, compare and buy products at particular retail locations near them;
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the ability for consumers to take advantage of in-store pickup and other convenience services offered by multichannel retailers and;
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local product information that is available as a data service that powers the websites and applications of manufacturers and content providers, mobile providers and applications, and rich media for marketers.
The Company, Krillion and the Krillion stockholders also agreed to establish a $1.0 million escrow fund to secure the Company’s rights to seek indemnification under the SPA, as well as any adjustment to the purchase price that might be required. The escrow fund will terminate the day on or after all the funds have been paid out of the escrow fund.
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Our estimated useful life of the identifiable intangible assets acquired is four years for the developed technology, trademark and tradenames, and customer-related intangibles. We recognized goodwill of $1.9 million. Goodwill is recognized as we expect to be able to realize synergies between the two companies, primarily our ability to provide distribution and reach for the Krillion products and services to a broad base of customers using the Company’s current distribution channels. We also consider the assembled workforce as a component of goodwill. Goodwill is expected to be deductible for tax purposes.
The Company incurred a minimal amount of legal, accounting and other professional fees related to this acquisition, all of which were expensed. The acquisition was not considered significant in relation to the condensed consolidated financial statements taken as a whole and therefore no pro-forma financial information has been presented. The results of operations for the new acquisition are included in the condensed consolidated financial statements from the date of acquisition. It is impracticable to provide their revenue and earnings from the date of acquisition as the products, services and technology platforms are incorporated into the operations and results of our current business units and the combined results of operations related for this acquisition are not tracked in separate reporting units.
Rovion Asset Purchase
On April 4, 2011, the Company entered into an Asset Purchase Agreement (“APA”) with DGLP and Rovion, pursuant to which the Company acquired substantially all of the assets of Rovion on May 5, 2011. The purchase of the Rovion assets was completed following the satisfaction of all closing conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion. In accordance with the terms of the APA, the Company paid DGLP $2,196,000 net of $485,000 in loans owed by DGLP. The transaction was funded from the Company’s cash on hand. The Company entered into five separate employee agreements with former employees of DGLP and Rovion. The employee agreements provide for retention bonuses, contingent upon continued employment with the Company, totaling $1.5 million over a period of approximately two years, which contracts were subsequently modified to reduce such amounts to a total of approximately $1,000,000. We evaluated the fair value of the acquisition’s total consideration, and determined that there is no contingent consideration relating to the acquisition. The assets acquired include, a rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including “In-Person” the online video spokesperson, as well as virtually all other forms of rich media advertisements; a patent pending rich media advertising toolset, known as the Rich Media Services, targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RMS control panel;
The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Our estimated useful life of the identifiable intangible assets acquired is three years for the developed technology and trademark and tradenames and one year for customer-related intangibles. We recognized goodwill of $1.2 million. Goodwill is recognized as we expect to be able to realize synergies between the two companies, primarily through our ability to utilize the Company’s current media relationships and sales channel reach to distribute and sell the rich media advertising platform and toolset. We also consider the assembled workforce as a component of goodwill. Goodwill is expected to be deductible for tax purposes.
The Company incurred a minimal amount of legal, accounting and other professional fees related to this acquisition, of which all were expensed. The acquisition is not considered significant in relation to the condensed consolidated financial statements taken as a whole and therefore no pro-forma financial information is presented. The result of operations for the new acquisition is included in the condensed consolidated financial statements from the date of acquisition. It is impracticable to provide their revenue and earnings from the date of acquisition as the products, services and technology platforms are incorporated into the operations and results of our current business units and the combined results of operations related for this acquisition is not tracked in separate reporting units
Screamin Media Group, Inc Stock Purchase
Effective July 9, 2011, the Company acquired Screamin Media Group, Inc., a Delaware corporation, following the execution on July 8, 2011, of an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Screamin Media Group, Inc, Agile Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Company (“Subcorp”), and Dan Griffith, as Stockholders’ Agent (the “Stockholders’ Agent”) pursuant to which Subcorp was merged with and into SMG and SMG became a wholly-owned subsidiary of the Company (the “Merger”). As consideration for the Merger, the Company paid upfront consideration of $5,000,000 in cash, 727,360 shares of Local.com common stock, $0.00001 par value (the “Shares”), and $5,000,000 in secured promissory notes (the “Notes”) bearing interest at 10% per annum for all amounts outstanding subsequent to August 1, 2011, subject to adjustment as described below (collectively, the “Merger Consideration”). During the third quarter all of the Notes were repaid in full. The cash portion of the Merger Consideration payable to the SMG Stockholders was reduced by $862,500 to repay certain debt obligations of SMG immediately following the closing. The Shares converted to cash at approximately $3.437 per share, which was the twenty day trailing average close price of the Shares prior to July 7, 2011. The aggregate amount of Notes issued was reduced by up to $2,378,000, including $500,000 to repay a promissory note issued by SMG and held by the Company and up to $1,878,000 to establish an escrow fund for indemnification claims asserted by the Company against SMG consistent with the terms of the Merger Agreement (the “Escrow Fund”). The cash portion of the Merger Consideration was funded from the Company’s cash on hand and the payment of the Notes was made from advances made or our line of credit.
At the acquisition date, SMG had approximately 60 employees serving hundreds of thousands of subscribers with deals from thousands of local merchants. SMG also recently launched travel deals. SMG supports local
communities with its school rewards program, which allows consumers to donate ten percent of SMG’s net proceeds from each deal to a school or non-profit organization chosen by the consumer. More than 700 local schools and non-profits have benefitted from this community program.
The purchase price allocations were based upon preliminary valuations, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. The allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
Subject to meeting certain additional financial performance milestones throughout the two year period beginning July 1, 2011, as more particularly described in the Merger Agreement, the SMG Stockholders will be eligible to receive an aggregate of up to an additional $20,000,000 (the “Earn-out”). The Earn-Out may be paid in a combination of cash and Local.com common stock, provided that any such payments are comprised of at least twenty five percent cash and we will not issue twenty percent or more of Local.com common stock outstanding immediately prior to the closing date of the Merger in connection with this transaction.
Purchased identifiable intangible assets are amortized on a straight-line basis over the respective useful lives. Our estimated useful life of the identifiable intangible assets acquired is three years for the developed technology, vendor-related intangibles and subscriber-related intangibles and four years for license agreement. We recognized goodwill of $12.2 million. The factors that contributed to the recognition of goodwill included securing synergies that are specific to the Company’s business and not available to other market participants, which are expected to increase revenues and profits; acquisition of a talented workforce; the strategic benefit of expanding the Company’s presence in the local media advertising markets; and diversifying the Company’s product portfolio. Goodwill is expected to be deductible for tax purposes.
The following supplemental unaudited pro forma information presents the combined operating results of the Company and the acquired business during the year ended December 31, 2011 and 2010, as if the acquisition had occurred at the beginning of each of the periods presented. The pro forma information is based on the historical financial statements of the Company and that of the acquired business. Amounts are not necessarily indicative of the results that may have been attained had the combinations been in effect at the beginning of the periods presented or that may be achieved in the future.
The Company incurred a minimal amount of legal, accounting and other professional fees related to these acquisitions, of which all were expensed.
4. Intangible Assets
Intangible assets consisted of the following (in thousands):
The estimated total amortization expense for intangible asset over the next five years is as follows (in thousands):
On February 12, 2010, we entered into an Asset Purchase Agreement with LaRoss whereby we purchased approximately 10,186 website hosting accounts for up to $1,616,000 in cash. All performance criteria per the Asset Purchase Agreement were met, resulting in the maximum purchase price of $158.60 per account or an aggregate $1,616,000, based on 10,186 accounts. LaRoss will provide ongoing billing services and hosting of the websites. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
On April 20, 2010, we entered into an Asset Purchase Agreement with Turner whereby we acquired up to 8,032 web hosting subscribers for a cash purchase price of up to $803,200. The purchase price was subject to adjustment in our favor if Turner actually transferred fewer than 8,032 web hosting subscribers. After giving effect to these purchase price and subscriber adjustments, the final purchase price was adjusted to $780,300 and the number of website hosting accounts purchased has been finalized at 7,803. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
On May 28, 2010, we entered into an Asset Purchase Agreement with LaRoss whereby we acquired up to 26,000 web hosting subscribers for a cash purchase price of up to $2,210,000. The purchase price was subject to adjustment in our favor if LaRoss actually transferred fewer than 26,000 web hosting subscribers, or in the event some or all of the purchased subscribers are no longer billable once transferred under certain limited
circumstances. After giving effect to these purchase price and subscriber adjustments, the final purchase price was adjusted to $1,890,825 and the number of website hosting accounts purchased has been finalized at 22,245. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
On September 30, 2010, we entered into an Asset Purchase Agreement with BestClick whereby we acquired up to 10,000 web hosting subscribers for a cash purchase price of up to $1,100,000. The Purchase Price is subject to adjustment in our favor if BestClick actually transfers fewer than 10,000 web hosting subscribers, or in the event some or all of the Purchased Subscribers are no longer billable once transferred under certain limited circumstances, as more completely described in the Asset Purchase Agreement. After giving effect to these purchase price and subscriber adjustments the final purchase price was adjusted to $1,021,020 and the number of website hosting accounts has been finalized at 9,282. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
On May 31, 2011, we acquired approximately 4,617 website hosting accounts for $554,040 in cash from LaRoss. The acquisition was part of a requirement to purchase additional subscribers from LaRoss pursuant to a previously executed sales and services agreement with LaRoss dated July 16, 2010 (the “LaRoss Agreement”). LaRoss will provide ongoing billing services to and hosting of the sites. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
On August 21, 2011, we acquired approximately 1,734 website hosting accounts for $208,080 in cash pursuant to the LaRoss Agreement. LaRoss will provide ongoing billing services to and hosting of the sites. The purchase price will be amortized over four years based on how we expect the customer relationships to contribute to future cash flows.
The acquisition of the website hosting accounts added to our base of small business customers and provides a new online service offering. We analyzed our revenue recognition and determined that our web hosting revenue will be recognized net of direct costs paid to third parties.
5. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated using the weighted average shares of common stock outstanding during the periods. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for options and warrants.
For the year ended December 31, 2011, potentially dilutive securities, which consist of options to purchase 5,005,584 share of common stock at prices ranging from $1.41 to $16.59 and warrants to purchase 1,497,936 shares of common stock at prices ranging from $4.32 to $9.26 were not included in the computation of diluted net income per share because such inclusion would be antidilutive.
For the year ended December 31, 2010, potentially dilutive securities, which consist of options to purchase 4,037,768 share of common stock at prices ranging from $1.28 to $16.59 and warrants to purchase 1,334,022 shares of common stock at prices ranging from $2.31 to $9.26 were included in the computation of diluted net income per share.
For the year ended December 31, 2009, potentially dilutive securities, which consist of options to purchase 3,998,790 share of common stock at prices ranging from $1.28 to $16.59 and warrants to purchase 2,859,595 shares of common stock at prices ranging from $2.31 to $9.26 were not included in the computation of diluted net income per share because such inclusion would be antidilutive.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):
6. Property and Equipment
Property and equipment consisted of the following (in thousands):
Depreciation and amortization of property and equipment totaled $3.2 million, $1.4 million and $0.7 million in 2011, 2010 and 2009, respectively.
7. Interest and Other Income, net
Interest and other income (expense), net consisted of the following (in thousands):
8. Credit Facilities
On August 3, 2011, we entered into a Loan and Security Agreement (the “Security Agreement”) with Square 1 Bank. The Security Agreement provides us with a revolving credit facility of up to $12 million (the “Facility”). Subject to the terms of the Security Agreement, the borrowing base used to determine loan availability under the Facility is based on a formula equal to 80% of eligible accounts receivable, with account eligibility measured in accordance with standard determinations as more particularly defined in the Security Agreement (the “Formula Revolving Line”). Notwithstanding the foregoing, we may advance up to $3 million from the Facility at any time, irrespective of our borrowing base (the “Non-Formula Revolving Line”), provided that total advances under the Facility will not exceed $12 million and we are otherwise in compliance with the terms of the Agreement. The Facility expires on August 3, 2013.
All amounts borrowed under the Facility are secured by a general security interest on our assets, except for our intellectual property, which we have instead agreed to remain unencumbered during the term of the Security Agreement.
Except as otherwise set forth in the Security Agreement, borrowings made pursuant to the Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.0% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 1.75% and borrowings made pursuant to the Non-Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.25% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 2.0%. In connection with establishing the Facility, we incurred fees payable to Square 1 Bank of approximately $10,000. Additionally, there is an annual fee of $25,000 and an unused line fee equal to 0.25% of the unused line if less than 40% of the Facility is in use.
The Security Agreement contains customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain restrictions on dispositions of assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The Security Agreement also contains customary events of default, including payment defaults and a breach of representations and warranties and covenants. If an event of default occurs and is continuing, Square 1 Bank has certain rights and remedies under the Security Agreement, including declaring all outstanding borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of set-off.
The Company must meet certain financial covenants during the term of the Facility, including (i) maintaining a minimum liquidity ratio of 1.25 to 1, which is defined as cash on hand plus the most recently reported borrowing base divided by outstanding bank debt, and (ii) certain Adjusted EBITDA covenants, as more particularly described in the Agreement (such Adjusted EBITDA amounts are for financial covenant purposes only, and do not represent projections of the Company’s financial results). As of the date of this report the Company is in compliance with all financial covenants.
At the end of the year the Company had $8,000,000 outstanding on the Facility.
In connection with the anticipated closing of the Security Agreement, on July 29, 2011 we cancelled our Loan and Security Agreement (the “LSA”) with Silicon Valley Bank (“SVB”) which provided us with a revolving credit facility of up to $30.0 million (the “Revolving Line”) , which we entered into on June 28, 2010.
The LSA allowed us to choose whether borrowings made from the Revolving Line bear would interest either at the prime rate announced from time to time by SVB or the prime rate plus 0.5% or 1%, or at LIBOR plus 2%, 2.5% or 3%, depending in the case of both prime rate and LIBOR rate borrowings on whether our leverage ratio was less than one, at least one and not greater than two, or greater than two. The leverage ratio was our consolidated funded indebtedness to our consolidated EBITDA for the twelve months ending on the date of determination.
Our ability to borrow under the Revolving Line was subject to various conditions precedent, described in further detail in the LSA. Some of these conditions were subject to SVB’s judgment in its sole discretion as to specified matters such as whether or not there had been any material impairment in our results of operation or financial condition. The LSA contained customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain restrictions on dispositions of our assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The LSA also contained customary events of default, including payment defaults and a breach of representations and warranties and covenants.
Under the LSA, we were required to meet certain financial covenants, including maintaining a minimum adjusted quick ratio of 1.25 to 1, which was a ratio of our unrestricted cash and cash equivalents plus net billed accounts receivable and investments that mature in fewer than 12 months to our then current liabilities minus deferred revenue, warrant liability and plus 25% of any outstanding credit extensions under the Revolving Line. We were also required to maintain a Leverage Ratio of not greater than 2.5 at the end of each fiscal quarter through June 30, 2012, and 2.0 at the end of each fiscal quarter thereafter. In addition, our quarterly adjusted EBITDA was required to equal at least $1,000,000. As of June 30, 2011 we had no balance outstanding on the revolving line of credit and therefore such financial covenants were not applicable. The Company’s results for the second quarter of 2011 were such that the Company did not satisfy the quarterly EBITDA requirement of $1,000,000 under the Revolving Line. As such, we did not have any funds available under the Revolving Line at the end of the second quarter of 2011.
We paid a facility fee of $75,000 to SVB on June 28, 2010, pursuant to the LSA. Additionally, there was an annual facility fee of 0.25% of the unused portion of the Revolving Line, calculated as specified in the LSA. In addition, we paid $225,000 in professional fees related to closing the LSA.
During the first quarter of 2011, the Company repaid the total amount outstanding of $7 million on the Revolving Line.
9. Income Taxes
The provision for income taxes consists of the following (in thousands):
The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows:
Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities are as follows (in thousands):
The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined it is more likely than not that the assets will not be realized. Due to uncertainties surrounding the realizability of the deferred tax assets, the Company continually maintains a full valuation allowance against its deferred tax assets at fiscal year ended December 31, 2011.
At December 31, 2011, the Company had federal and state income tax net operating loss carryforwards of approximately $62.2 million and $61.5 million, respectively. The federal and state net operating loss carryforwards will expire through 2030 unless previously utilized. Under Section 382 of Internal Revenue Code, if a corporation undergoes an “ownership change” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its post-change income may be limited. The Company performed a Section 382 study during the fourth quarter of 2010 and determined that it
has more likely than not undergone five ownership changes as described in IRC Section 382. The latest ownership change occurred in December 2004. However, due to the relatively large annual limitations based on the value of the Company, the identified ownership changes had no material impact to the amount of net operating losses that can be carried forward to the future years. Other than the public offering in January 2011, the Company had no significant equity transactions during 2011 and does not believe additional ownership has been triggered. However, the Company plans to perform a 382 analysis update in 2012 to assess the equity transitions that took place in 2011. In 2011, the Company acquired approximately $10.4 million of federal and state net operating losses through the two stock acquisitions. No formal 382 analysis has been performed with respect to the acquired net operating losses. The Company plans to perform an analysis and the related deferred tax assets may need to be adjusted. Any future ownership change may impact the Company’s ability to utilize the net operating loss carryforwards in a future year.
U.S. GAAP regarding accounting for uncertainty in income taxes defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. As of December 31, 2011, the Company had total unrecognized tax benefits of approximately $1.3 million. If fully recognized, the total unrecognized tax benefit of approximately $1.3 million would impact the Company’s effective tax rate.
A roll forward of the activity in the gross unrecognized tax benefits for fiscal years 2011 is as follows (in thousands):
The Company does not anticipate that any material change in the total amount of unrecognized tax benefits will occur within the next twelve months.
The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s balance sheets at December 31, 2011, and has not recognized interest and/or penalties in the statement of operations for the period ended December 31, 2011, since the unrecognized tax benefits do not result in a material tax liability.
The Company is subject to taxation in the United States and state jurisdictions of which 2008 and forward is open for the examination by the United States and 2007 and forward is subject to examination by state taxing authorities as applicable.
Recently enacted tax laws may also affect the tax provision on the Company’s financial statements. In 2009, the State of California passed a new law to allow taxpayers to make an election to adopt a single sales factor apportionment formula and the sale apportionment based on market-sourcing rules starting with the 2011 taxable year. Due to the uncertainty in profitability, the Company has not committed to utilizing the single sales factor during the reversal period of deductible temporary differences.
10. Commitments and Contingencies
Lease Commitments
We lease office space under operating lease agreements that expire on various dates through April 2017. The future minimum lease payments under non-cancelable operating leases at December 31, 2011 are as follows (in thousands):
For one of the Company’s leases we recognize rent expense on a straight-line basis over the life of the operating lease as the lease contains a fixed escalation rent clause. Rent expense for the years ended December 31, 2011, 2010 and 2009 was $622,000, $294,000 and $249,000, respectively.
401(k) Plan
We maintain a 401(k) plan for eligible employees. Employees become eligible to participate in the plan at the beginning of each calendar quarter (January, April, July, October) following their hire date. Employees may contribute amounts ranging from 1% to 15% or their annual salary, up to maximum limits set by the Internal Revenue Service. We may make matching contributions at our discretion. Employees immediately vest 100% of their own contributions and 20% of our matching contributions for each year of service. For the plan years ending December 31, 2011, 2010 and 2009 we made a discretionary matching contribution of $90,000, $0 and $66,000, respectively.
Employment Agreements
We have signed employment agreements with our executive officers and certain key employees. The agreements provide for the payments of annual salaries totaling $4.0 million, annual bonuses of up to $1.5 million and retention bonuses of up to $1.9 million, in the aggregate, based upon current salaries and 2011 bonuses earned. The agreements have a term of one year and automatically renew for one year terms unless terminated on at least 30 days notice by either party. If we terminate one of these officers or key employees without cause, we are obligated to pay the terminated officer or key employee (i) his annual salary and other benefits earned prior to termination, (ii) an amount equal to 100% (in the case of executives) and 50% (in the case of our key employees) of the average of all bonuses during the prior four quarters of employment, and 125% (in the case of executives) and 75% (in the case of many of our key employees) of the average of all bonuses during the prior four quarters of employment in the event the termination occurs within 4 months of a change in control, (iii) the same base salary and benefits that such officer or key employee received prior to termination, for a period of 12 months and 6 months, respectively, following termination, and 15 months and 9 months (for many of our key employees), respectively, in the event the termination occurs within 4 months of a change in control and (iv) the right to exercise all vested options, including any as yet unvested options in the case of a change in control, for a period of 12 months following termination.
Legal Proceedings
On July 23, 2010, a lawsuit alleging patent infringement was filed in the United States District Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a Delaware corporation with its
principal offices in Plano, Texas. The complaint alleges patent infringement as a result of the operation of our website at www.local.com. The complaint seeks unspecified amounts of damages and costs incurred, including attorney fees, as well as a permanent injunction preventing us from continuing those activities that are alleged to infringe the patent. We intend to vigorously defend ourselves from these claims.
Other than the previously mentioned lawsuit, we are not currently a party to any other material legal proceedings. From time to time, however, we may be subject to a variety of legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of intellectual property rights and claims arising in connection with our services.
11. Stockholders’ Equity
The Company has authorized 65,000,000 shares of common stock and 10,000,000 shares of convertible preferred stock.
On January 14, 2011, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with respect to the offer and sale (the “Offering”) by the Company of 4,000,000 shares of common stock of the Company at a price to the public of $4.25 per share. Under the terms of the Underwriting Agreement, the Company granted the underwriter an option, exercisable for 30 days, to purchase up to an additional 600,000 shares of Common Stock at the same purchase price to cover over-allotments. On January 18, 2011, the Company received notice that the underwriter exercised the over-allotment option to purchase 600,000 shares (the “Option Shares”) of the Company’s common stock, at a price to the public of $4.25 per share. The offering of the Company’s common stock was made pursuant to the Company’s effective shelf registration statement on Form S-3 (Registration No. 333-147494) (the “Registration Statement”), including a related prospectus as supplemented by a Preliminary Prospectus Supplement dated January 13, 2011 and Prospectus Supplement dated January 14, 2011, which the Company filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended. The Registration Statement was set to expire on January 15, 2011, but was extended as a result of the filing by the Company on January 14, 2011 of a new shelf registration statement on Form S-3 to register 8,000,000 shares of its common stock in replacement of the expiring Registration Statement (the “New Shelf Registration Statement”). Net proceeds to the Company from the sale of shares in the Offering, after deducting underwriting discounts and commissions and other related expenses, was approximately $18.2 million.
On January 20, 2011, in connection with the completion of the offer and sale to the underwriter of 4,600,000 shares of Common Stock (including the Option Shares) and in accordance with the anti-dilution provisions contained in each of the warrants to purchase up to 537,373 shares of common stock at an exercise price of $7.89 per share that were issued in a private placement transaction on August 1, 2007 (the “Series A Warrants”) and the warrants to purchase up to 537,373 shares of common stock at an exercise price of $9.26 per share that were issued in the same private placement transaction on August 1, 2007 (the “Series B Warrants”), the exercise price of the Series A Warrants and the Series B Warrants was reduced to $7.02 per share and $8.09 per share, respectively, and the Company issued an additional 66,207 Series A Warrants at an exercise price of $7.02 per share, which are immediately exercisable (the “New Series A Warrants”), and an additional 77,707 Series B Warrants at an exercise price of $8.09 per share, which are immediately exercisable (the “New Series B Warrants” and together with the New Series A Warrants, the “New Warrants”). The Series A Warrants and the Series B Warrants are exercisable until February 1, 2013 and February 3, 2014, respectively, and the New Series A Warrants and the New Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively.
Warrants
Warrant activity for the years ended December 31, 2009, 2010 and 2011 was as follows:
The weighted average fair value at grant date of the warrants granted during the years ended December 31, 2009 and 2011 was $1.21 and $1.42, respectively. No warrants were issued during the year ended December 31, 2010.
The following table summarizes information regarding warrants outstanding and exercisable at December 31, 2011:
Stock Repurchase Program
On August 4, 2010, our Board of Directors approved a stock repurchase program of up to $2.0 million of Local.com Corporation common stock. The share repurchase program was authorized for 12 months and authorized us to repurchase shares from time to time through open market or privately negotiated transactions. During the year ended December 31, 2010, we repurchased 270,400 shares of common stock at an average price of $4.52 per share and an aggregate purchase price of approximately $1.2 million. The share repurchase program has subsequently been terminated.
Stockholder Rights Plan
On October 14, 2008, our Board of Directors adopted a Stockholder Rights Plan (“Rights Plan”). Under the Rights Plan, a right to purchase 1/1000th of a share of our Series A Participating Preferred Stock, at an exercise price of $10.00, will be distributed for each share of common stock held of record as of the close of business on October 22, 2008. The rights will automatically trade with our underlying common stock and no separate preferred stock purchase rights certificates will be distributed. The right to acquire preferred stock is not
immediately exercisable and will become exercisable only if a person or group acquires 15 percent or more of our common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock. If any person becomes a 15 percent or more stockholder, each right (subject to certain limitations) will entitle its holder to purchase, at the rights’ then-current exercise price, a number of our common shares or of the acquirer having a market value at the time of twice the right’s per share exercise price. If the exercise price is not adjusted, such holders would be able to purchase $20 worth of common stock for $10.
The Board of Directors may redeem the rights for $0.01 per right at any time on or before the fifth day following the acquisition by a person becoming a 15 percent stockholder. Unless the rights are redeemed, exchanged or terminated earlier, they will expire on October 15, 2018.
Stock Plans
In March 1999, we adopted the 1999 Equity Incentive Plan (“1999 Plan”). The 1999 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of our stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant was exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. We have reserved 500,000 shares for issuance under the 1999 Plan, of which 1,914 were outstanding and zero were available for future grant at December 31, 2011.
In March 2000, we adopted the 2000 Equity Incentive Plan (“2000 Plan”). The 2000 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of our stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant was exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. We have reserved 500,000 shares for issuance under the 2000 Plan, of which 34,687 were outstanding and zero were available for future grant at December 31, 2011.
In January 2004, we adopted the 2004 Equity Incentive Plan (“2004 Plan”), in August 2004, we amended the 2004 Plan and in September 2004, the stockholders approved the 2004 Plan, as amended. The 2004 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of our stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant was exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. We have reserved 600,000 shares for issuance under the 2004 Plan, of which 310,431 were outstanding and zero were available for future grant at December 31, 2011.
In August 2005, we adopted and the stockholders approved the 2005 Equity Incentive Plan (“2005 Plan”). The 2005 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of our stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for
exercise at the end of nine months, while the remainder of the grant was exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006 and thereafter, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. We have reserved 1,000,000 shares for issuance under the 2005 Plan, of which 513,354 were outstanding and zero were available for future grant at December 31, 2011.
In August 2007, we adopted and the stockholders approved the 2007 Equity Incentive Plan (“2007 Plan”). The 2007 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of our stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. We have reserved 1,000,000 shares for issuance under the 2007 Plan, of which 793,489 were outstanding and zero were available for future grant at December 31, 2011.
In June 2008, we adopted and the stockholders approved the 2008 Equity Incentive Plan (“2008 Plan”). In April 2009 we amended the 2008 Plan and in August 2009, the stockholders approved the 2008 Plan, as amended. The 2008 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of our stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. We have reserved 3,000,000 shares for issuance under the 2008 Plan, of which 2,287,157 were outstanding and zero were available for future grant at December 31, 2011.
In April 2011, our Board of Directors adopted, and in August 2011, our stockholders approved the 2011 Omnibus Incentive Plan (“2011 Plan”). The 2011 Plan provides for the grant of non-qualified and incentive stock options to purchase shares of our stock and the grant of restricted stock units (“RSU”) to employees, directors and consultants. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Stock options grants vest 33.33% and are available for exercise on the one year anniversary of the date of grant, and the remainder of the grant vests and is exercisable ratably over the next 8 quarters, provided the optionee remains in our service. The options generally expire seven years from the date of grant. RSU grants vest 33.33% on January 1 after the one year anniversary from the date of grant, 33.33% on January 1 after the second year anniversary from the date of grant and 33.34% on January 1 after the third anniversary from the date of grant. We have reserved 1,440,000 shares for issuance under the 2011 Plan, of which 1,176,099 were outstanding and 191,289 were available for future grant at December 31, 2011. In determining the number available for future grants under the 2011 Plan, RSUs issued are equivalent to 1.3 stock options.
Stock option activity under the plans for the years ended December 31, 2009, 2010 and 2011 is as follows:
(1) Our current practice is to issue new shares to satisfy stock option exercises.
(2) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.
The weighted-average fair value at grant date for the options granted during the years ended December 31, 2009, 2010 and 2011 was $2.57, $4.41, and $2.18 per option, respectively.
The aggregate intrinsic value of all options exercised during the years ended December 31, 2009, 2010 and 2011 was $515,000, $2,244,000 and $243,000, respectively.
The total fair value of options vested during the years ended December 31, 2009, 2010 and 2011 was $1.7 million, $2.1 million and $3.2 million, respectively.
The following table summarizes information regarding options outstanding and exercisable at December 31, 2011:
Restricted stock unit activity under the 2011 Omnibus Plan for the year ended December 31, 2011 is as follows:
Stock-based Compensation
Stock-based compensation issued under the various plans consists of employee stock options and restricted stock. The guidance in U.S. GAAP regarding share-based payment addresses the accounting for employee stock options and restricted stock and requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period).
Total stock-based compensation expense recognized for the years ended December 31, 2011, 2010 and 2009 is as follows (in thousands, except per share amount):
The fair values of employee stock options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
As of December 31, 2011, there was $3.4 million of unrecognized stock-based compensation expense related to outstanding stock options and unvested restricted stock units, net of forecasted forfeitures. This amount is expected to be recognized over a weighted average period of 1.36 years. The stock-based compensation expense for these awards will be different if the actual forfeiture rate is different from our forecasted rate.
12. Operating Information
The Company manages its business functionally and has two reportable operating segments: paid search and daily deals. Paid Search consists of the Company’s online businesses that collectively reach customers with a variety of local online advertising products and web hosting. The Company’s Daily Deals segment consists of the Company’s business that reaches its customers with discounted offers for goods and services provided by merchants.
Management relies on an internal management reporting process that provides revenue and segment operating income (loss) for making financial decisions and allocating resources. Management believes that segment revenues and operating income (loss) are appropriate measures of evaluating the operational performance of the Company’s segments.
The following is a summary of operating results from continuing operations and assets by business segment:
The following table presents summary operating geographic and product information as required by the entity-wide disclosure requirements (in thousands):
13. Fair Value Measurement of Assets and Liabilities
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 (in thousands):
The following table summarizes our financial assets measured at fair value on a recurring basis as of December 31, 2010 (in thousands):
Our financial assets are valued using market prices on active markets (Level 1) obtained from real-time quotes for transactions in active exchange markets involving identical assets. As of December 31, our warrant liabilities was based on measurement at fair value without observable market values that required a high level of judgment to determine fair value (Level 3) using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as our stock price, risk-free interest rates and expected volatility.
The following table presents a reconciliation for our warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in thousands):
14. Subsequent Events
None
Schedule Valuation and Qualifying Accounts Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 2011, 2010 and 2009
SELECTED QUARTERLY FINANCIAL DATA SELECTED QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)
INDEX TO EXHIBITS
* Filed herewith.
# Indicates management contract or compensatory plan.
(1) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 14, 2011.
(2) Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.
(3) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
(4) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
(5) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
(6) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.
(7) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2, Amendment No. 1, filed with the Securities and Exchange Commission on August 11, 2004.
(8) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 23, 2005.
(9) Incorporate by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on July 3, 2007.
(10) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 24, 2009.
(11) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on May 31, 2011.
(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2010.
(13) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 27, 2010.
(14) Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 12, 2010
(15) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 2, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(16) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 23, 2005.
(17) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 1, 2010.
(18) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 6, 2010.
(19) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 22, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(20) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 31, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(21) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 3, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(22) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 6, 2010. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(23) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2011.
(24) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 16, 2011.
(25) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 15, 2011.
(26) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 29, 2011.
(27) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 8, 2011.Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(28) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2011.
(29) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 11, 2011.
(30) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 16, 2011.
(31) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 7, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(32) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 2, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(33) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 4, 2011.
(34) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 15, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(35) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 2, 2011.
(36) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2011.
(37) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 16, 2011. Confidential portions omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.
(38) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 6, 2012.
(39) Incorporated by reference from the Registrant’s Current Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 2009.