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EX-21.1 - EX-21.1 - LOCAL Corp | a58232a1exv21w1.htm |
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EX-23.1 - EX-23.1 - LOCAL Corp | a58232a1exv23w1.htm |
EX-10.29 - EX-10.29 - LOCAL Corp | a58232a1exv10w29.htm |
EX-10.30 - EX-10.30 - LOCAL Corp | a58232a1exv10w30.htm |
EX-10.31 - EX-10.31 - LOCAL Corp | a58232a1exv10w31.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
AMENDMENT NO. 1
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission file number: 001-34197
LOCAL.COM CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 33-0849123 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
7555 Irvine Center Drive
Irvine, CA 92618
(Address of principal executive offices)(Zip Code)
Irvine, CA 92618
(Address of principal executive offices)(Zip Code)
(949) 784-0800
Registrants telephone number, including area code
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $0.00001 | Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File require to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit an post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of voting and non-voting common equity held by non-affiliates of the
issuer was approximately $47.2 million based on the last reported sale price of registrants common
stock on June 30, 2009 as reported by Nasdaq Capital Market.
As of February 28, 2010, the number of shares of the registrants common stock outstanding:
14,620,482
Documents incorporated by reference: Proxy Statement for the 2010 Annual Meeting of
StockholdersPart III Items 10, 11, 12, 13, and 14.
Table of Contents
Explanatory Note
This Amendment No. 1 on Form 10-K/A (this Amendment No. 1) amends the Annual Report on Form 10-K
for the fiscal year ended December 31, 2009 of Local.com
Corporation (the Company, we or us), filed with
the U.S. Securities and Exchange Commission (the SEC) on March 16, 2010 (the Original Form
10-K).
On August 25, 2010 and November 8, 2010, we received comment letters from the staff of the
SEC relating to the staffs review of the Form 10-K. The purpose of this Amendment No. 1 is to
respond to the comment letters. In this Amendment No. 1 we have included the following:
Item 1. Business: Included the duration of our current patents in
accordance with the requirements of Item 101(c)(1)(iv) of Regulation S-K.
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities: We changed the introductory paragraph
of the market information table to be in line with the information displayed in the table.
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations: Adjusted our description of our amortization policy to more
clearly identify the use of an accelerated amortization model to amortize our customer
related intangible assets, disclosing the estimated weighted average percentage amortized
each year for all small business subscriber relationships acquired during the year.
Item 9A(T). Controls and Procedures: Under Change in Internal
Control over Financial Reporting we revised the sentence to include a more detailed
description of the exception noted.
Item 15. Exhibits and Financial Statement Schedules: The
exhibits have been amended to include the employment agreements of Scott Reinke and Michael O.
Plonski.
Except as set forth above, the Form 10-K has not been amended, updated or otherwise modified. This
Amendment No. 1 includes information contained in the Form 10-K, and we have made no attempt in the
Amendment No. 1 to modify or update the disclosures presented in the Form 10-K, except as
identified above. The disclosures in this Amendment No. 1 continue to speak as of the date of the
Form 10-K, and do not reflect events occurring after the filing of the Form 10-K. Accordingly, this
Amendment No. 1 should be read in conjunction with our other filings made with the SEC subsequent
to the filing of the Form 10-K, including any amendments to those filings. The filing of this
Amendment No. 1 shall not be deemed to be an admission that the Form 10-K, when made, included any
untrue statement of a material fact or omitted to state a material fact necessary to make a
statement not misleading.
LOCAL.COM CORPORATION
TABLE OF CONTENTS
TABLE OF CONTENTS
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Table of Contents
PART I
Item 1. Business
References herein to we, us or our refer to Local.com Corporation and its wholly-owned
subsidiaries unless the context specifically states or implies otherwise.
Local.com Overview
We operate a leading local search website, Local.com, with over 15 million monthly unique visitors,
a leading private label local syndication network of approximately 750 U.S. regional media sites, a
local distribution network for our advertising feeds, and a sales and advertiser services operation
for approximately 50,000 direct monthly subscribers. Using patented search technologies, we provide
over 20 million consumers each month 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 created an audience
of users that our direct advertisers and advertising partners desire to reach. Sales of advertising
on Local.com and our local syndication network (LSN) accounted for 91% of our total revenues in
2009.
We launched Local.com in August of 2005, our LSN in July 2007, our local distribution network
(LDN) in the third quarter of 2009, and we expanded our sales and advertiser services offerings
to include a larger number of direct service subscribers throughout 2009. 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.
In 2009, we aligned our operations into three distinct business units: Owned and Operated (O&O),
Network, and Sales and Ad Services (SAS).
O&O
Our O&O business unit is presently comprised of our flagship website Local.com, which accounted for
65% of our total revenues in 2009. Local.com is principally a local business directory site that
provides information on over 14 million local businesses that we have indexed and made findable to
consumers searching for products or services in their local area using our proprietary
technologies. Business listings appearing on Local.com may include photographs, user ratings and
reviews, video, product information, coupons and hours of operation, among other things.
We acquire a majority of our Local.com users through pay-per-click advertising on other search
engines. Users also reach Local.com as a result of direct-to-site visits (also called type-in
traffic), as well as the natural indexing done by other search engines of our content, which we
attempt to augment through search engine optimization (SEO) efforts. As discussed further below,
we believe that by adding additional content to our site in compelling formats, such as our
recently launched Events channel, we can grow the number of users visiting our site, while reducing
our reliance on pay-per-click advertising. We also regularly consider acquiring websites and
technologies to enhance our O&O growth.
Network
Our Network business unit includes both LSN and LDN and accounts for 21% of our 2009 revenue. Our
LSN integrates our geo-targeted small business directories into over 750 websites of our U.S.-based
regional media partners, which include local newspapers and television stations, among others.
These targeted small business directories are displayed on our LSN partners website and indexed by
the major search engines, resulting in users visiting these directories, which we monetize with
advertising, and share a portion of our revenues with our regional media partners. Since we do not
pay to acquire the users to our LSN sites, these users are considered a source of organic traffic
and represent high-margin revenue to us.
Our LDN is comprised of local search and directory partners that take our XML-based advertising
feeds and integrate it in their own look and feel search results. We have over a dozen partners
in our LDN, and use a combination of our ad partners traffic quality scoring systems as well as
third-party systems to ensure high-quality traffic for advertisers.
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SAS
We manage all our advertisers, both direct and indirect, via our SAS business unit. Indirect
advertisers are provided by partners such as Yahoo!, SuperMedia and dozens of other ad providers.
On an increasing basis, we also serve our own direct advertisers on our site with our Local Promote
subscription advertising product. Local Promote provides local businesses with premium placement
within targeted search results in specific categories and geographic regions on Local.com. It
provides subscribing customers with the ability to build their own branded web pages, including
logos, photos, taglines, and special offer links. Subscribers to our Local Promote product also
have their businesses listings automatically submitted to the major search engines. We ended the
year with over 40,000 direct customers who pay us an average of between $35 and $50 per month for
an ad on Local.com or for web hosting services, which we outsource to third party vendors. We
receive payment via their local phone company through a process known as LEC billing and through
direct credit card billing. We acquire these direct subscribers through a combination of internal
and outsourced sales efforts, as well as acquisitions of large blocks of direct subscribers from
third parties.
Local Promote is a subscription advertising product for local businesses.
Industry Overview
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 February 2010
study The Kelsey Group estimates that the local search market in the United States will grow to
approximately $8 billion by 2014. 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 LSN and LDN. 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 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 in 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 Local.com website and our
LSN, provide the following benefits to local advertisers and consumers:
| Access to a Large Number of Local Business Listings and Local Content. With over 14 million local businesses indexed using our proprietary technology, we offer users of Local.com and our LSN partners websites a one-stop resource for local businesses in their area, including in some cases photographs, user ratings and reviews, video, product 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 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 LSN partners and the success of our Local.com website. | ||
| 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 believe the utility of our site is reflected in our user demographics. Approximately 70% of our users on Local.com are comprised of |
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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 DIY projects and consumer product purchases. | |||
| 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, theres competition from third-parties to place their advertiser listings on our site, which along with our direct advertisers, 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
We have adopted an integrated growth strategy that addresses the needs of each of our three
business units, O&O, Network, and SAS, individually, while allowing the growth in one of our
business units to be leveraged by one or both of our other business units.
O&O
Our O&O growth strategy is centered on increasing organic traffic to our sites, which includes
type-in and SEO traffic. We believe that adding more content 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 site by launching verticals
that appeal to our core demographic of soccer moms for example, shopping, education, events and
health & wellness. If we are able to increase the amount of type-in and SEO traffic that our
Local.com site receives, we may be able to reduce our reliance on lower-margin traffic we acquire
from third party search engines.
We also expect to add new brands, products and services to our O&O business unit via acquisitions.
We expect our acquisition focus to be primarily on sites which serve our target demographic, and
who have material type-in traffic to their own sites, 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.
Network
Our Network growth strategy includes adding new sites to our LSN and LDN, 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, attracting new advertisers, which 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.
As with O&O, we expect that we may acquire content channels and products that would be well suited
to deployment throughout our Network. We expect that any acquisitions made primarily for our
Network, will also be able to be leveraged by our O&O sites and could result in additional
advertising and sponsorship opportunities becoming available through our SAS division.
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 via acquisition as well as internal and external sales efforts. We also expect to be
able to offer new and compelling products to our potential customers as we add new content and
functionality to our O&O and Network business units.
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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. 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, 2009, we had 21 employees in product
and technical development.
Our research and development expenses were $3.5 million, $3.1 million and $2.6 million for the
years ended December 31, 2009, 2008 and 2007, 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 paid-search market is intensely competitive. Our competitors include the major
search engines as well as online directories and city guides. We partner with many of our
competitors. Non-paid search engines are beginning to offer paid-search services, and we believe
that additional companies will enter into the local search advertising market. 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 search
services. We believe that the principal competitive factors in our market are network size, revenue
sharing agreements, services, convenience, accessibility, customer service, quality of search
tools, quality of editorial review and reliability and speed of fulfillment of search results and
ad listings 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. 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.
The search 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 search services. If this trend continues,
we may not be able to compete in the local search 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.
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Major Customers
We have two customers that each represents more than 10% of our total revenue. Our advertising
partner, Yahoo! Inc., represented 45%, 54% and 49% of our total revenue for the years ended
December 31, 2009, 2008 and 2007, respectively. Our local advertising partner, SuperMedia Inc.
(formerly known as Idearc Media Corp.), represented 23%, 18% and 15% of our total revenue for the
years ended December 31, 2009, 2008 and 2007, respectively. Our relationships with these and
generally all of customers are short term in nature. There can be no assurance that our agreements
with Yahoo! Inc. and SuperMedia Inc. will be renewed upon their 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 these customers. If those agreements are not renewed, there can be no assurance that we will
be able to find alternative customers on terms as favorable as those we currently have, if at all.
A loss of either of these customers and a failure to find a comparable replacement would have a
material adverse affect on our operating results.
Major Suppliers and Advertising Costs
We advertise on other search engine websites, primarily google.com, but also yahoo.com, msn.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, 2009, approximately 57% of the traffic on our
Local.com website and LSN partner websites was acquired through search engine marketing campaigns
on other search engine websites. During the year ended December 31, 2009, advertising costs to
drive consumers to our Local.com website were $25.9 million of which $17.9 million was paid to
Google, Inc. In prior years, we referred to this cost as traffic acquisition cost (TAC). 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 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, ePilot, 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 four patents by the United States Patent and Trademark Office: 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; 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; 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; and finally,
Methods and Systems for Enhanced Directory Assistance Services in a Telecommunications Network,
which was issued in September of 2009 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 January 3,
2026. 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. 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.
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Government Regulation
Like many companies, we are subject to existing and potential 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 sites, the legality
of sweepstakes, promotions and gaming sites generally, 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 Childrens 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, 2009 we had eighty-six employees, all of which were full-time, twenty of which
were engaged in research and development, fifty in sales and marketing and sixteen 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.
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.
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.
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 (LSN) which provides local search results and local content to our
publisher partners. We have and expect to continue to invest significant amounts of time and
resources investing in our Local.com website, LSN and other similar initiatives, including our
Local Distribution Network (LDN) launched in the third quarter of 2009. 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 our LSN and LDN offerings. If we are unable to
sustain or grow the number of consumers using and/or advertisers advertising with Local.com and our
LSN and LDN, our financial performance may be adversely affected.
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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 $6.3 million for the year ended December 31, 2009
and $8.6 million for the year ended December 31, 2008. We also had an accumulated deficit of $59.0
million at December 31, 2009 and expect to have a net loss for at least the next quarter. We have
significantly increased our operating expenses by expanding our operations 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.
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., 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 LSN and LDN 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, 2009, 81% 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 LSN and LDN 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 LSN and LDN partners to provide us with either local search traffic or
access to local advertisers. Our LSN and LDN partners are very important to our revenue and results
of operations. Any adverse change in our relationships with key LSN and LDN partners could have a
material adverse impact on our revenue and results of operations. In many cases, our agreements
with these LSN and LDN partners are short-term and/or subject to many variables which enable us or
our LSN and LDN to discontinue our relationship or negotiate new terms that are less favorable to
us with little
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or no notice. If we are unable to maintain relationships with our current LSN and
LDN partners or develop relationships with prospective LSN and LDN 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 LSN and LDN 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 LSN and
LDN 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 private placements of our equity to fund our operations. In June
2009 we obtained an up to $10 million credit facility with Square 1 Bank of which $3 million was
outstanding as of December 31, 2009. The current 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,
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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.
If we acquire other businesses, it could adversely affect our operations and result in
unanticipated liabilities.
We have announced that we are likely to make acquisitions and other strategic investments in the
future. Acquisitions and strategic investments both require a substantial commitment of resources
and managements attention. In addition, acquisitions and strategic investments may involve a
number of risks, including:
| The distraction of management and loss of focus on our ongoing business; | ||
| The failure to retain key personnel at the companies we acquire; | ||
| Uncertainty in how the acquisition or strategic investment will impact our financial results; | ||
| Exposure to unknown or unforeseen liabilities or potential liabilities, including intellectual property claims made by third parties against a company we acquire; | ||
| Inability or difficulty integrating technology, administrative systems, personnel, and operations of acquired companies into our services, systems and operations and unanticipated expenses related to such integration; | ||
| The failure of an acquired company to perform as planned and to negatively impact our overall financial results; | ||
| Inability or difficulty in reconciling potentially conflicting or overlapping contractual rights and duties; and | ||
| Disruption of relationships with consumers, partners and employees in connection with the combination of acquired operations and new management personnel; |
If we are unable to successfully address these risks or other problems encountered in connection
with acquisitions and strategic investments, we could fail to realize the anticipated benefits of
such transactions and incur unanticipated liabilities that could harm our business.
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. and the purchase of
subscribers from LiveDeal and LaRoss, 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, 2009 and determined that no
impairment existed. Future impairment reviews may result in charges against earnings to write-down
the value of intangible assets.
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.
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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 LSN and LDN. 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.
Government and legal regulations may damage our business.
We are not currently subject to direct regulation by any government agency, other than regulations
generally applicable to Internet businesses, and 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 of 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.
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
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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 LSN 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 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 must continually add new monthly subscription customers to replace customers who cancelled and
to grow our business beyond our current customer base. We currently acquire new monthly
subscription customers from third party telesales initiatives and the acquisition of blocks of
monthly subscription customers from third parties as those opportunities present themselves. If we
fail to acquire new monthly subscription customers at a rate equal to or greater than our existing
monthly subscription customers are cancelling their subscriptions with us and on the same or better
terms, our monthly subscription customer base will decrease, and our business, financial condition
and operating results will be adversely affected.
If our billing partners lose the ability to bill our monthly subscription customers through Local
Exchange Carriers 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 customers local exchange carrier (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 2009, approximately 92% of our monthly subscription customers
were billed via LEC billing and revenue from LEC billing represented 10% of our total revenue in
fiscal 2009. 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
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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 Local Exchange Carriers, 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 states attorney generals 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 and our Local Connect search and advertising 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 four
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, ePilot, 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.
Two of our advertising partners have provided a substantial portion of our revenue; the loss of
either of these partners may have a material adverse effect on our operating results.
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Our advertising partner, Yahoo! Inc., represented 45% of our total revenue for the year ended
December 31, 2009 and our advertising partner, SuperMedia Inc. (formerly known as Idearc Media
Corp), represented 23% of our total revenue for the year ended December 31, 2009. It is difficult
to predict whether Yahoo! and SuperMedia 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. 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 a
higher revenue share 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 search providers the terms would be as favorable
as those under the current Yahoo! and SuperMedia agreements. Even if we were to enter into an
arrangement with an alternative search provider with terms as or more favorable than those under
the current agreements with Yahoo! and SuperMedia, such arrangements might generate significantly
lower search advertising revenues for us if the alternative search provider is not able to generate
search advertising revenues as successfully as Yahoo! and SuperMedia currently does.
Our advertising partners may unilaterally change how they value our inventory of available
advertising placements, which could materially affect our advertising revenue.
Our advertising partners 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. For instance, if Yahoo! were to change its
formula for rating the quality of advertising placements, our available advertising inventory may
be viewed by them as less valuable and they may accordingly decide to pay us less for it. 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.
One customer accounts for a significant portion of our accounts receivable, and the failure to
collect from that customer would harm our financial condition and results of operations.
While most of our customers pay for our services in advance, some do not. One of our customers that
does not pay in advance, Yahoo!, has and for the foreseeable future will likely continue to account
for a significant portion of our accounts receivable. At December 31, 2009, Yahoo! represented 58%
of our total accounts receivable. Yahoo!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.com and
ask.com, by bidding on certain keywords we believe will drive traffic to our Local.com website.
During the year ending December 31, 2009, approximately 57% of the traffic on our Local.com website
and LSN partner websites was acquired through search engine marketing campaigns on other search
engine websites. During the year ended December 31, 2009, advertising costs to drive consumers to
our Local.com website were $25.9 million of which $17.9 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 LSN and LDN. 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 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
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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.
State and local governments may be able to levy additional taxes on Internet access and electronic
commerce transactions, which could result in a decrease in the level of usage of our services.
Beginning in 1998, the federal government imposed a moratorium on state and local governments
imposition of new taxes on Internet access and eCommerce transactions, which has now expired. State
and local governments may be able to levy additional taxes on Internet access and eCommerce
transactions unless the moratorium is reinstituted. Any increase in applicable taxes may make
eCommerce transactions less attractive for businesses and consumers, which could result in a
decrease in eCommerce activities and the level of usage of our services.
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 managements
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 Childrens 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.
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Failure to comply with federal, state or international privacy laws or regulations, or the
expansion of current or the enactment of new privacy laws or regulations, could adversely affect
our business.
We are subject to a variety of federal, state and international laws and regulations that govern
the collection, retention, use, sharing and security of consumer data. Existing privacy-related
laws and regulations are evolving and subject to potentially differing interpretations.
Additionally, it is possible that existing laws may be expanded upon or new laws passed that would
require our compliance. Any failure to comply with the existing laws, regulations, industry
self-regulatory principles or our own posted privacy policies and practices concerning the
collection, use and disclosure of user data on our websites could result in claims, proceedings or
actions against us by governmental entities or others, which could adversely affect our business.
In addition, any failure or perceived failure by us to comply with industry standards or with our
own privacy policies and procedures could result in a loss of consumers or advertisers and
adversely affect our business.
Any regulation of our use of cookies or similar technologies could adversely affect our business.
We use small text files placed in a consumers 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.
We have had to restate our financial results for the quarters ended March 31, 2009, June 30, 2009
and September 30, 2009 and as a result, have determined that we had a material weakness in our
internal control as of December 31, 2009 over financial reporting and that our disclosure controls
and procedures as of March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009 were
not effective. If we are unable to implement adequate controls and procedures we may not be able to
accurately report our financial results, which could harm our business and operating results.
On February 1, 2010, we announced that during our year-end review, management determined that
warrants we issued in connection with a financing during 2007 contained an anti-dilution feature
that should be reclassified and treated as a derivative liability effective January 1, 2009 per 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. On February 1, 2010, management and our Audit
Committee determined that our financial statements included in our quarterly reports on Form 10-Q
for the periods ended March 31, 2009, June 30, 2009 and September 30, 2009 should no longer be
relied upon. Accordingly, on that date, we filed amendments to our quarterly reports on Form 10-Q
for the periods ended March 31, 2009, June 30, 2009 and September 30, 2009 to restate our financial
statements to include the non-cash charges related to the revaluation of the warrant liability. As
described under Item 9AControls and Procedures in this Annual Report on Form 10-K for the period
ended December 31, 2009, our Chief Executive Officer and Chief Financial Officer have determined
that as of the end of the quarterly periods ended March 31, 2009, June 30, 2009, September 30, 2009
and December 31, 2009, our disclosure controls and procedures and our internal control over
financial reporting were not effective due to a material weakness in our internal control over
financial reporting. We are in the process of implementing controls and procedures to remediate
this material weakness.
We cannot be certain that any remedial measures we take will ensure that we design, implement, and
maintain adequate controls over our financial processes and reporting in the future. Remedying the
material weakness that we have identified could require us to incur significant costs,
hire additional personnel, expend significant time and management resources or make other changes.
Any delay or failure to design and implement new or improved controls, or difficulties encountered
in their implementation or operation, could harm our operating results, cause us to fail to meet
our financial reporting obligations, or prevent us from providing reliable and accurate financial
reports. Any failure to remediate this material weakness in a timely fashion or having or
maintaining ineffective internal controls could cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price of our stock and our
access to capital.
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.
Prior to our initial public offering, which was completed on October 22, 2004, there was no public
trading market for our common stock. We cannot predict the extent to which investor interest will
support an active and liquid trading market for our common stock.
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In addition, 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:
| developments concerning proprietary rights, including patents, by us or a competitor; | ||
| market acceptance of our new and existing services and technologies; | ||
| announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments; | ||
| actual or anticipated fluctuations in our operating results; | ||
| continued growth in the Internet and the infrastructure for providing Internet access and carrying Internet traffic; | ||
| introductions of new services by us or our competitors; | ||
| enactment of new government regulations affecting our industry; | ||
| changes in the number of our advertising partners or the aggregate amount of advertising dollars spent with us; | ||
| seasonal fluctuations in the level of Internet usage; | ||
| loss of key employees; | ||
| institution of litigation, including intellectual property litigation, by or against us; | ||
| publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts; | ||
| short selling of our stock; | ||
| large volumes of sales of our shares of common stock by existing stockholders; | ||
| changes in the market valuations of similar companies; and | ||
| 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 managements 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.
Future sales of shares of our common stock that are eligible for sale by our stockholders may
decrease the price of our common stock.
We had 14,523,161 shares of common stock outstanding on December 31, 2009. Of these shares, 154,653
are held by directors, executive officers and other affiliates and will be subject to volume
limitations under Rule 144 under the Securities Act. In addition, there were outstanding options to
purchase 3,998,790 shares of our common stock and warrants to purchase 2,859,595 shares of our
common stock. Actual sales, or the prospect of sales by our present stockholders or by future
stockholders, may have a negative effect on the market price of our common stock.
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, 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; | ||
| stockholder proposals to be brought before any meeting of our stockholders must comply with advance notice procedures; | ||
| our board of directors is classified into three classes, as nearly equal in number as possible; | ||
| 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; | ||
| 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; | ||
| 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 | ||
| 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.
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.
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 corporations 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
believe that with our initial public offering, our recent private placements and other transactions
that have occurred over the past three years, we have triggered an ownership change limitation.
We have performed an analysis to determine to what extent our ability to utilize our net operating
loss carryforwards is limited. We determined that our Section 382 limitation is $3.7 million a year
of which we have accumulated $14.9 million available for use in the current year. We may also
experience ownership change in the future as a result of subsequent shifts in our stock ownership.
As of December 31, 2009 we have net operating loss carryforwards of approximately $46.0 million and
$40.9 million for federal and state income tax purposes, respectively. However, on September 23,
2008, the State of California suspended the use of net operating loss carryforwards for an
indefinite period of time. As a result of this suspension, we will not be able to make use of net
operating loss carryforwards for state income tax purposes for the indefinite future. There can be
no guarantee that we will ever be able to use these state net operating loss carryforwards in the
future.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2. Properties
Our executive and administrative offices are located at One Technology Drive, Building G, Irvine,
California, where we lease approximately 23,352 square feet of space in a two-story office
building. Our current monthly rent is $32,226, subject to annual increases. Our lease for this
space ends in June 2010. As our current facility lease expires in June 2010 and to accommodate
future anticipated growth, we are planning on moving to a larger facility near our current
location. We have not yet finalized a lease agreement, but anticipate that our rent expense will
increase and that we will incur moving costs in the second half of 2010.
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Item 3. Legal Proceedings
We are not currently a party to any 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.
Item 4. Reserved
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PART II
Item 5. | Market for Registrants 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.
High | Low | |||||||
Year ended December 31, 2008: |
||||||||
First quarter |
$ | 5.45 | $ | 2.77 | ||||
Second quarter |
$ | 5.19 | $ | 3.60 | ||||
Third quarter |
$ | 4.30 | $ | 2.10 | ||||
Fourth quarter |
$ | 3.92 | $ | 1.02 | ||||
Year ended December 31, 2009: |
||||||||
First quarter |
$ | 2.58 | $ | 1.25 | ||||
Second quarter |
$ | 4.00 | $ | 2.15 | ||||
Third quarter |
$ | 5.44 | $ | 3.05 | ||||
Fourth quarter |
$ | 6.57 | $ | 4.69 |
Holders
On February 26, 2010, the closing price of our common stock, as reported by the Nasdaq Capital
Market, was $5.87 per share and the number of stockholders of record of our common stock was 51.
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.
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Item 6. | Selected Financial Data |
Consolidated Statement of Operations Data (in thousands, except per share amounts):
Years Ended December 31, | ||||||||||||||||||||
2009(3) | 2008 | 2007 | 2006(1) | 2005 | ||||||||||||||||
Revenue |
$ | 56,282 | $ | 38,257 | $ | 21,525 | $ | 14,213 | $ | 18,139 | ||||||||||
Operating income (loss) |
$ | (3,101 | ) | $ | (8,873 | ) | $ | (11,171 | ) | $ | (13,573 | ) | $ | (6,684 | ) | |||||
Net income (loss) |
$ | (6,267 | ) | $ | (8,562 | ) | $ | (18,202 | ) | $ | (13,286 | ) | $ | (6,502 | ) | |||||
Basic net income (loss) per share |
$ | (0.44 | ) | $ | (0.60 | ) | $ | (1.58 | ) | $ | (1.44 | ) | $ | (0.75 | ) | |||||
Diluted net income (loss) per share |
$ | (0.44 | ) | $ | (0.60 | ) | $ | (1.58 | ) | $ | (1.44 | ) | $ | (0.75 | ) | |||||
Basic weighted average shares outstanding |
14,388 | 14,313 | 11,500 | 9,250 | 8,658 | |||||||||||||||
Diluted weighted average shares outstanding |
14,388 | 14,313 | 11,500 | 9,250 | 8,658 |
Consolidated Balance Sheet Data (in thousands):
Years Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007(2) | 2006 | 2005 | ||||||||||||||||
Cash and cash equivalents |
$ | 10,080 | $ | 12,142 | $ | 14,258 | $ | 3,264 | $ | 1,075 | ||||||||||
Marketable securities |
$ | | $ | | $ | 1,999 | $ | 1,972 | $ | 13,244 | ||||||||||
Working capital |
$ | 4,765 | $ | 10,837 | $ | 15,002 | $ | 3,377 | $ | 11,618 | ||||||||||
Total assets |
$ | 41,253 | $ | 34,326 | $ | 38,114 | $ | 24,891 | $ | 35,034 | ||||||||||
Revolving line of credit |
$ | 3,000 | $ | | $ | | $ | | $ | | ||||||||||
Stockholders equity |
$ | 22,945 | $ | 27,346 | $ | 32,942 | $ | 20,598 | $ | 30,809 |
(1) | In January 2006, we adopted the accounting pronouncement regarding share-based payment in conformity with accounting principles generally accepted in the United States (U.S. GAAP). Our operating loss and net loss for the year ended December 31, 2006 was higher by $2.5 million than if we had continued to account for stock-based employee compensation under the recognition and measurement principles the prior U.S. GAAP guidance regarding accounting for stock issued to employees. Basic and diluted net loss per share for the year ended December 31, 2006 was $0.27 higher as a result of the adoption of the pronouncement related to accounting for share-based payment. | |
(2) | 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. | |
(3) | 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. |
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Item 7. | Managements 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 provide local search services on the Internet, both on our flagship property, Local.com, as well
as on our associated Local Syndication Network (LSN) of regional media sites, including the
websites for local and regional newspapers, television and radio stations, for which we provide
business directories and associated services. Over 60 million consumers visited Local.com or our
LSN during the fourth quarter, 2009. During the third quarter of 2009 we expanded our Local
Distribution Network (LDN) which distributes our advertising and content feeds to third-party
websites.
A local search is a search request from a consumer that contains a location modifier (for example,
flowers in Irvine, CA). We provide search results on our site and LSN using our proprietary,
patented technologies. We have a total of four patents and an additional twelve patents pending in
various areas of local and mobile search.
Consumers conducting local searches typically convert into buying customers at a higher rate than
other type of online searchers, because the addition of a location modifier within a search request
typically indicates that the consumer is further along in the buying process, and therefore more
apt to complete a transaction. As a result, advertisers are willing to pay to present their
business listings alongside our search results on our site and our LSN and LDN partner sites in
order to direct that consumer and potential transaction towards the advertiser.
The placement of sponsored listings from advertisers alongside our search results provides us with
an effective way to monetize our search traffic. Our sponsored listings are typically comprised of
fixed price subscription from our own direct advertisers, and variable price cost-per-click,
cost-per-call, and display ads from third-party advertiser sources such as Yahoo! and SuperMedia
Inc. (formerly known as Idearc Media Corp), our two largest advertiser partners. A portion of
consumers interact with sponsored listings on our website and LDN and LSN partner sites, which in
turn generates either direct ad revenue for us, or ad revenue for our partners, who in turn share
those revenues with us.
During February 2009, we purchased 11,754 website hosting subscribers from LaRoss Partners, Inc.
During March 2009, we purchased 14,185 local business listing subscribers from LiveDeal, Inc. and
its wholly owned subsidiary, Telco Billing, Inc. During December 2009, we purchased up to an
additional 21,972 website hosting subscribers from LaRoss, an amount that was subsequently reduced
to 18,817 after reduction for website hosting customers that failed to successfully transfer to us.
The acquisition of the website hosting and local business listing subscribers added to our base of
small business customers, and provides us with a new product to offer small businesses, and
diversifies our revenue stream.
On June 26, 2009, we entered into a Loan and Security Agreement with Square 1 Bank, which provides
us with a revolving credit facility of up to $10 million, subject to the particular terms of the
Agreement, including certain formula criteria for determining loan availability. We intend that the
loan facility will primarily be used for expansion via potential acquisitions and to fund expected
strategic growth initiatives. In December 2009, we borrowed $3.0 million from the revolving credit
facility to fund the December 2009 acquisition of small business customers. As of March 16, 2010,
this amount remains outstanding.
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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 February 2010 study, The Kelsey Group estimates that the local search market in the
United States will grow to approximately $8 billion by 2014. 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
Local.com website and LSN 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 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, competition from other providers of local search, and paid-search technologies and
services.
We have increased our operating expenses, mainly sales and marketing expenses to advertise and
bring users (traffic) to our Local.com website. We will also continue to increase our sales and
marketing expenses to promote our Local.com website.
Sources of Revenue
We generate revenue primarily on our Local.com website, LSN and LDN from both direct and indirect
advertiser relationships, via:
| click-throughs on sponsored listings; | ||
| calls to cost-per-call advertiser listings; | ||
| lead generation; | ||
| banner ads; | ||
| subscription advertiser listings; and | ||
| subscription web hosting services. |
Operating Expenses
Search Serving
Search serving expenses consist of revenue-sharing payments that we make to our LSN and LDN
partners, Internet connectivity costs, data center costs, amortization of certain software license
fees and maintenance and depreciation of computer equipment used in providing our paid-search
services. As we continue to experience growth, we expect our search serving expense to increase
proportionally.
Sales and Marketing
Sales and marketing expenses largely consist of advertising costs associated with driving consumers
to our Local.com website, 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.
We advertise on large search engine sites such as Google, Yahoo!, MSN/Bing and Ask.com,
as well as other sites, by bidding on certain keywords we believe will drive traffic to our
Local.com website. During the year ending December 31, 2009, approximately 57% of our overall
traffic was aquired through search engine marketing campaigns on other search engine websites.
During the year ending December 31, 2009, advertising costs to drive consumers to our Local.com
website were
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$25.9 million of which $17.9 million was attributable 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
likely suffer materially.
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, along with processing
fees for our subscription based advertiser sales, legal, tax and accounting, and professional
service fees. We expect our general and administrative costs to increase as we increase the number
of our subscription based advertisers and expand our management team.
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, 2009, 2008 and 2007:
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Operating expenses: |
||||||||||||
Search serving |
10.2 | 13.8 | 17.9 | |||||||||
Sales and marketing |
68.1 | 84.2 | 94.2 | |||||||||
General and administrative |
16.4 | 14.5 | 22.7 | |||||||||
Research and development |
6.3 | 8.0 | 11.9 | |||||||||
Amortization and write-down of intangibles |
4.5 | 2.6 | 5.2 | |||||||||
Total operating expenses |
105.5 | 123.2 | 151.9 | |||||||||
Operating loss |
(5.5 | ) | (23.2 | ) | (51.9 | ) | ||||||
Interest and other income (expense), net |
(0.0 | ) | 0.8 | (32.7 | ) | |||||||
Change in fair value of warrant liability |
(5.3 | ) | | | ||||||||
Loss before income taxes |
(10.9 | ) | (22.4 | ) | (84.6 | ) | ||||||
Provision for income taxes |
0.3 | 0.0 | 0.0 | |||||||||
Net loss |
(11.1 | )% | (22.4 | )% | (84.6 | )% | ||||||
Years ended December 31, 2009 and 2008
Revenue
Year ended December 31, | Percent | |||||||||||||||||||
2009 | (*) | 2008 | (*) | change | ||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Owned and operated |
$ | 36,739 | 65.3 | % | $ | 30,619 | 80.0 | % | 20.0 | % | ||||||||||
Network |
12,059 | 21.4 | % | 6,313 | 16.5 | % | 91.0 | % | ||||||||||||
Sales and advertiser services |
7,484 | 13.3 | % | 1,325 | 3.5 | % | 464.8 | % | ||||||||||||
Total revenue |
$ | 56,282 | 100.0 | % | $ | 38,257 | 100.0 | % | 47.1 | % | ||||||||||
(*) Percent of total revenue. |
Owned and operated revenue for the year ended December 31, 2009 increased 20% compared to the same
period in 2008. The increase in revenue is primarily due to increased traffic at our Local.com
website. A measure of the monetization of the
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traffic on our flagship Local.com website is revenue
per thousand visitors (RKV). RKV increased to $261 for the year ended December 31, 2009 from $258
for the year ended December 31, 2008. The increase in traffic at our website is the result of
higher marketing expense 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
additional ad units per page, optimization of search results to improve page yields, greater
revenue share received from our advertising partners and improved search engine marketing. The
increases in owned and operated revenue were partially offset by a decline in our local
international revenue for the year ended December 31, 2009, which decreased $654,000 compared to
the same period in 2008. International revenue decreased as we shut down our UK site in April 2009.
Network revenue for the year ended December 31, 2009 increased $5.7 million, or 91%, compared to
the same period in 2008. The increase is primarily due to a $2.6 million increase in LDN revenue
and $3.1 million increase in LSN revenue. During the third quarter of 2009 we expanded our LDN,
which distributes our advertising and content feeds to third-party websites. The increase in LSN
revenue is due to the improved monetization of traffic on our network of approximately 750 regional
media sites.
Sales and advertiser services revenue for the year ended December 31, 2009 increased $6.1 million
or 465% as we grew our base of small business subscribers from approximately 5,000 at the end of
2008 to over 40,000 at the end of 2009. The increase in small business subscribers was the result
of acquisitions of subscriber bases during 2009 coupled with our internal and outsourced sales
efforts. During February 2009, we purchased 11,754 website hosting subscribers from LaRoss
Partners, Inc. During March 2009, we purchased 14,185 local business listing subscribers from
LiveDeal, Inc. and its wholly owned subsidiary, Telco Billing, Inc. During December 2009, we
purchased up to an additional 21,972 website hosting subscribers from LaRoss, an amount that was
subsequently reduced to 18,817 after reduction for website hosting customers that failed to
successfully transfer to us.
Based on the above, total revenue for the year ended December 31, 2009, increased to $56.3 million
from $38.3 million for the year ended December 31, 2008 an increase of $18.0 million, or 47%.
The following table identified our major customers across all product lines and on our Local.com
website that represented greater than 10% of our total revenue in the periods presented:
Percentage of Total Revenue | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Across all | Local.com | Across all | Local.com | |||||||||||||
Customer | product lines | website only | product lines | website only | ||||||||||||
Yahoo! Inc. |
45.2 | % | 37.9 | % | 54.0 | % | 44.9 | % | ||||||||
SuperMedia Inc. (formerly known as Idearc Media Corp.) |
22.6 | % | 13.1 | % | 18.4 | % | 15.9 | % |
In March 2009, Idearc Media Corp. announced that it filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. In January 2010, Idearc Media Corp.
announced that it has emerged from bankruptcy and renamed itself SuperMedia Inc.
Operating expenses:
Operating expenses were as follows (dollars in thousands):
Year ended December 31, | Percent | |||||||||||||||||||
2009 | (*) | 2008 | (*) | Change | ||||||||||||||||
Search serving |
$ | 5,757 | 10.2 | % | $ | 5,290 | 13.8 | % | 8.8 | % | ||||||||||
Sales and marketing |
38,340 | 68.1 | % | 32,229 | 84.2 | % | 19.0 | % | ||||||||||||
General and administrative |
9,219 | 16.4 | % | 5,541 | 14.5 | % | 66.4 | % | ||||||||||||
Research and development |
3,543 | 6.3 | % | 3,071 | 8.0 | % | 15.4 | % | ||||||||||||
Amortization and write-down of intangibles |
2,524 | 4.5 | % | 999 | 2.6 | % | 152.7 | % | ||||||||||||
Total operating expenses |
$ | 59,383 | 105.5 | % | $ | 47,130 | 123.2 | % | 26.0 | % | ||||||||||
(*) Percent of total revenue. |
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Search serving
Search serving expenses for the year ended December 31, 2009 increased by 8.8% compared to the same
period in 2008. The increase was primarily due to increased revenue share payments related to
partners affiliated with our new LDN product. During the third quarter of 2009, we expanded our LDN
which distributes our advertising and content feeds to third-party websites.
Sales and marketing
Sales and marketing expenses for the year ended December 31, 2009 increased by 19.0% compared to
the same period in 2008. The increase was primarily due to an increase in advertising costs
associated with driving more consumers to our Local.com website.
Sales and marketing expenses as a percentage of total revenue decreased to 68.1% from 84.2% for the
years ended December 31, 2009 and 2008, respectively. The decrease as a percentage of total revenue
was due to a greater return on our consumer-driving advertising costs and an increase in the amount
of organic traffic we received across our Local.com website and LSN, which typically yields revenue
without sales and marketing costs. Nevertheless, 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 for the year ended December 31, 2009 increased by 66.4%
compared to the same period in 2008. The increase is attributable to higher transaction processing
costs due to higher revenues related to our subscription-based customer relationships and higher
personnel-related costs. The increase was also due to $658,000 of non-recurring charges including
acquisition-related charges and a change in an officer recognized in the first quarter of 2009. The
increases in general and administrative expenses were partially offset by a $138,000 gain on a
contract settlement in the second quarter of 2009.
Research and development
Research and development expenses for the year ended December 31, 2009 increased by 15.4% compared
to the same period in 2008. The increase is mainly due to higher personnel-related costs and
consulting fees. We capitalized an additional $1,219,000 of research and development expenses for
website development and amortized $268,000 during the year ended December 31, 2009. We capitalized
an additional $234,000 of research and development expenses for website development and amortized
$316,000 of capitalized website development costs during the year ended December 31, 2008.
Amortization of intangibles
Amortization of intangibles expense was $2.5 million for the year ended December 31, 2009, compared
to $1.0 million for the year ended December 31, 2008. Amortization increased in 2009 due to the
LaRoss and LiveDeal subscriber acquisitions of customer-related intangible assets. The
customer-related intangible assets of $6.8 million purchased in 2009 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 during the year being approximately 56% in year one, 23% in year two, 11% in year three
and 10% in year four.
Interest and other income (expense), net
Interest and other income (expense), net consisted of the following (in thousands):
Year ended December 31, | ||||||||
2009 | 2008 | |||||||
Interest income |
$ | 15 | $ | 312 | ||||
Interest expense |
(42 | ) | | |||||
Interest and other income (expense), net |
$ | (27 | ) | $ | 312 | |||
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Interest and other income (expense) was ($27,000) and $312,000 for the year ended December 31,
2009 and 2008, respectively. The decrease is due to a decrease in cash over the same period, a
decline in interest rates and amortization of fees related to establishing our revolving credit
facility. On December 29, 2009, we borrowed $3.0 million on our revolving credit facility, which
bears 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%
Change in Fair Value of Warrant Liability
The change in fair value of the warrant liability was $3.0 million for the year ended December 31,
2009. In accordance with updated provisions of U.S. GAAP regarding accounting for derivatives,
adopted effective January 1, 2009, certain warrants previously classified within equity are
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 $158,000 for the year ended December 31, 2009 as we had taxable
income and were required to record a provision primarily for state income tax in California as
state legislation postponed the use of corporate net operating loss carryforwards. Provision for
income taxes was $1,000 for the year ended December 31, 2008 and represented the minimum amounts
required for state income taxes.
Years ended December 31, 2008 and 2007
Revenue
Year ended December 31, | Percent | |||||||||||||||||||
2008 | (*) | 2007 | (*) | change | ||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Owned and operated |
$ | 30,619 | 80.0 | % | $ | 17,588 | 81.7 | % | 74.1 | % | ||||||||||
Network |
6,313 | 16.5 | % | 3,847 | 17.9 | % | 64.1 | % | ||||||||||||
Sales and advertiser services |
1,325 | 3.5 | % | 90 | 0.4 | % | 1372.2 | % | ||||||||||||
Total revenue |
$ | 38,257 | 100.0 | % | $ | 21,525 | 100.0 | % | 77.7 | % | ||||||||||
(*) Percent of total revenue. |
Owned and operated revenue for the year ended December 31, 2008 increased $13.0 million, or 74%,
compared to the same period in 2007. The increase in revenue is primarily due to increased
monetization as our revenue per thousand visitors (RKV) increased to $258 for the year ended
December 31, 2008 from $169 for the year ended December 31, 2007. The increase in RKV was a result
of additional ad units per page, optimization of search results to improve page yields, greater
revenue share received from our advertising partners and improved search engine marketing.
Network revenue for the year ended December 31, 2008 increased $2.5 million, or 64%, compared to
the same period in 2007. The increase is primarily due to a $4.1 million increase in LSN revenue,
partially offset by a $1.6 million decrease in National revenue. The increase in LSN revenue is due
to the acquisition of PremierGuide Inc. in July 2007 coupled with expansion of the syndication
network as we added regional media sites to the network during 2008 growing the network from over
400 sites at the end of 2007 to over 700 sites at the end of 2008. The decrease in National revenue
is primarily due to a decrease in revenue-generating click-throughs as we utilized fewer resources
to operate national search in order to focus on local search.
Sales and advertiser services revenue for the year ended December 31, 2008 increased $1.2 million
or 1,372% as we grew our base of small business subscribers from approximately 1,100 at the end of
2007 to approximately 5,000 at the end of 2008.
Based on the above, total revenue for the year ended December 31, 2008, increased to $38.3 million
from $21.5 million for the year ended December 31, 2007 an increase of $16.7 million, or 77.7%.
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The following table identified our major customers across all product lines and on our
Local.com website that represented greater than 10% of our total revenue in the periods presented:
Percentage of Total Revenue | ||||||||||||||||
Year Ended December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Across all | Local.com | Across all | Local.com | |||||||||||||
Customer | product lines | website only | product lines | website only | ||||||||||||
Yahoo! Inc. |
54.0 | % | 44.9 | % | 48.8 | % | 48.1 | % | ||||||||
SuperMedia Inc. (formerly known as Idearc Media Corp.) |
18.4 | % | 15.9 | % | 14.5 | % | 14.3 | % |
Operating expenses:
Operating expenses were as follows (dollars in thousands):
Year ended December 31, | Percent | |||||||||||||||||||
2008 | (*) | 2007 | (*) | change | ||||||||||||||||
Search serving |
$ | 5,290 | 13.8 | % | $ | 3,862 | 17.9 | % | 37.0 | % | ||||||||||
Sales and marketing |
32,229 | 84.2 | % | 20,268 | 94.2 | % | 59.0 | % | ||||||||||||
General and administrative |
5,541 | 14.5 | % | 4,890 | 22.7 | % | 13.3 | % | ||||||||||||
Research and development |
3,071 | 8.0 | % | 2,555 | 11.9 | % | 20.2 | % | ||||||||||||
Amortization and write-down of intangibles |
999 | 2.6 | % | 1,121 | 5.2 | % | (10.9 | )% | ||||||||||||
Total operating expenses |
$ | 47,130 | 123.2 | % | $ | 32,696 | 151.9 | % | 44.1 | % | ||||||||||
(*) Percent of total revenue. |
Search serving
Search serving expenses for the year ended December 31, 2008 increased by $1.4 million, or 37.0%,
compared to the same period in 2007. The increase was primarily due an increase in our revenue
share payments to our private label network partners and expenses incurred to provide additional
content to our Local.com website.
Sales and marketing
Sales and marketing expenses for the year ended December 31, 2008 increased by $12.0 million, or
59.0%, compared to the same period in 2007. The increase was primarily due to an increase in
advertising costs associated with driving consumers to our Local.com website.
Sales and marketing expenses were 84.2% and 94.2% of total revenue for the years ended December 31,
2008 and 2007, respectively. The decrease in percentage was due to a greater return on our
consumer-driving advertising costs and an increase in the amount organic traffic, which typically
yields revenue without sales and marketing costs.
General and administrative
General and administrative expenses for the year ended December 31, 2008 increased by $651,000, or
13.3%, compared to the same period in 2007. The increase was primarily due to higher non-cash stock
based compensation expense and processing fees for our subscription based advertisers.
Research and development
Research and development expenses for the year ended December 31, 2008 increased by $516,000, or
20.2%, compared to the same period in 2007. The increase was primarily due to an increase in
recruiting fees, an increase in consulting fees and lower capitalized research and development
expenses for website development. We capitalized an additional $234,000 of research and development
expenses for website development and amortized $316,000 during the year ended December 31, 2008. We
capitalized an additional $330,000 of research and development expenses for website development and
amortized $187,000 during the year ended December 31, 2007.
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Amortization and write-down of intangibles
Amortization of intangibles expense was $999,000 and $1.1 million for the years ended December 31,
2008 and 2007, respectively. This includes amortization of developed technology and non-compete
agreements associated with the Inspire acquisition, the amortization of purchased technology and
patent associated with the Atlocal asset purchase and the amortization of the non-compete agreement
and customer-related intangibles association with the PremierGuide acquisition.
Interest and other income (expense), net
Interest and other income (expense), net consisted of the following (in thousands):
Year ended December 31, | ||||||||
2008 | 2007 | |||||||
Interest income |
$ | 312 | $ | 536 | ||||
Interest expense |
| (887 | ) | |||||
Interest expense non-cash |
| (6,679 | ) | |||||
Interest and other income (expense), net |
$ | 312 | $ | (7,030 | ) | |||
Interest and other income (expense) was $312,000 and $(7.0 million) for the years ended
December 31, 2008 and 2007, respectively, representing an increase of $7.3 million. During the year
ended December 31, 2007, holders of our senior secured convertible notes converted all of their
notes into shares of our common stock. As a result, we fully amortized the outstanding balance of
debt discount, recorded as interest expense non-cash, of $6.1 million and prepaid financing
costs, recorded as interest expense, of $526,000 during the year ended December 31, 2007.
Provision for income taxes
Provision for income taxes was $1,000 for the years ended December 31, 2008 and 2007 respectively.
These amounts represent the minimum amounts required for state income taxes.
Liquidity and Capital Resources
Liquidity and capital resources highlights (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Cash and cash equivalents |
$ | 10,080 | $ | 12,142 | ||||
Working capital |
$ | 4,765 | $ | 10,837 | ||||
Cash flow highlights (in thousands):
Year ended December 31, | ||||||||
2009 | 2008 | |||||||
Net cash provided by (used in) operating activities |
$ | 3,424 | $ | (4,264 | ) | |||
Net cash (used in) provided by investing activities |
(8,734 | ) | 1,585 | |||||
Net cash provided by financing activities |
3,248 | 563 |
We have funded our business, to date, primarily from issuances of equity and debt securities;
however, during the year ended December 31, 2009, we generated positive cash flow from operations.
Cash and cash equivalents were $10.1 million as of December 31, 2009 and $12.1 million as of
December 31, 2008. We had working capital of $4.8 million as of December 31, 2009 and $10.8 million
as of December 31, 2008. Additionally, pursuant to the Loan and Security Agreement with Square 1
Bank that we entered into on June 26, 2009, as further discussed below, we have secured a revolving
credit facility of up to $10 million, based on certain formulas. In December 2009, we borrowed $3.0
million from the revolving credit facility to fund the December 2009 acquisition of small business
customers.
Net cash provided by operating activities was $3.4 million for the year ended December 31, 2009.
Net loss adjusted for non-cash charges (adding back depreciation and amortization, provision for
doubtful accounts, stock-based compensation expense and change in fair value of warrant liability)
provided cash of $2.5 million. Changes in operating assets and liabilities provided cash of
$913,000. Net cash used in operating activities was $4.3 million for the year ended December 31,
2008,
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primarily from the net loss adjusted for non-cash items. The improvement in net cash provided
by or used in operations from the prior year period is primarily due to improved bottom-line
results driven by higher revenue and improved operating margins over the same period.
There are four primary drivers that affect cash provided by or used in operations: net loss;
non-cash adjustments to net loss; changes in accounts receivable; and changes in accounts payable.
For the year ended December 31, 2009 the terms of our accounts receivable and accounts payable
remained unchanged.
The table below substantiates the change in net cash used in operating activities for the years
ended December 31, 2009 and 2008 (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | Change | ||||||||||
Net loss |
$ | (6,267 | ) | $ | (8,562 | ) | $ | 2,295 | ||||
Non-cash (1) |
8,778 | 4,263 | 4,515 | |||||||||
Subtotal |
2,511 | (4,299 | ) | 6,810 | ||||||||
AR, AP and Other |
913 | 35 | 878 | |||||||||
Net cash provided by (used in) operations |
$ | 3,424 | $ | (4,264 | ) | $ | 7,688 | |||||
(1) | Includes depreciation, amortization, change in fair value of warrant liability, non-cash expense related to stock option issuances and provision for doubtful accounts. |
Net cash used in investing activities was $8.7 million for the year ended December 31, 2009 and
consisted of capital expenditures of $1.9 million and purchases of customer-related intangible
assets from LaRoss and LiveDeal subscriber acquisitions totaling $6.8 million. Net cash provided by
investing activities was $1.6 million for the year ended December 31, 2008 and consisted primarily
of proceeds from the sale of marketable securities of $2.0 million.
Net cash provided by financing activities was $3.2 million for the year ended December 31, 2009 and
consisted of $3.0 million proceeds from the revolving credit facility, $591,000 proceeds from the
exercise of stock options, partially offset by $337,000 cash used for the repurchase of common
stock. During the year ended December 31, 2008, net cash provided by financing activities was
$563,000 primarily from the proceeds from the exercise of stock options and warrants.
Management believes, based upon projected operating needs, that our working capital is sufficient
to fund our operations for at least the next 12 months.
Credit facility
On June 26, 2009, we entered into a Loan and Security Agreement (the Agreement) with Square 1
Bank. The Agreement provides us with a revolving credit facility of up to $10 million (the
Facility). Subject to the terms of the 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 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 $10 million and we are otherwise in compliance with the terms of the Agreement. The
Facility expires on June 25, 2010. Prior to the expiration of the Facility and subject to meeting
certain conditions set forth in the Agreement, we may convert a portion of the Non-Formula
Revolving Line, up to $3 million, to a two year term loan. In December 2009, we advanced $3.0
million against the revolving credit facility to fund the December 2009 acquisition of small
business customers.
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 Agreement.
Except as otherwise set forth in the 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 paid fees
to Square 1 Bank of approximately $66,000.
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The 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 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 Agreement, including declaring all outstanding borrowings immediately due and
payable, ceasing to advance money or extend credit, and rights of set-off.
We are exposed to the risk of fluctuation in interest rates on our revolving line of credit. During
2009, 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 entering
2010 is $3.0 million. Therefore, a one-percentage point increase in interest rates would result in
an increase in interest expense of approximately $30,000 per annum.
Shelf Registration Statement
At December 31, 2009, we had an effective shelf registration statement on file with the Securities
and Exchange Commission pursuant to which the Company registered 8,000,000 shares of its common
stock. The shelf registration statement is set to expire in January 2011. We may periodically offer
all or a portion of the shares of common stock registered on the shelf registration statement 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 the Company, is subject to market conditions and other factors, such as contractual
commitments in our line of credit agreement with Square 1 Bank and certain of our previously issued
warrants in certain instances.
Stock repurchase program
On October 8, 2008, our Board of Directors approved a stock repurchase program of up to $2 million
of Local.com Corporation common stock. The share repurchase program is authorized through April
2010 and authorizes us to repurchase shares from time to time through open market or privately
negotiated transactions. From time to time, we may enter into a Rule 10b5-1 trading plan that will
allow us to purchase our shares at times when we ordinarily would not be in the market because of
self-imposed trading blackout periods. The number of shares to be purchased and the timing of the
purchases will be based on market conditions, share price and other factors. The stock repurchase
program does not require us to repurchase any specific dollar value or number of shares and may be
modified, extended or terminated by the Board of Directors at any time. Any Rule 10b5-1 trading
plan we enter into in connection with carrying out our stock repurchase program will not, however,
be capable of modification or extension once established. During the year ended December 31, 2009,
we repurchased 131,239 shares of common stock at an average price of $2.56 per share. Total cash
consideration for the repurchased stock was $337,000. The remaining authorization under the stock
repurchase program is approximately $1.7 million.
LaRoss Asset Purchases
On February 18, 2009, we entered into an Asset Purchase and Fulfillment Agreement with LaRoss
Partners, Inc. (LaRoss) whereby we purchased 11,754 website hosting accounts for $1.2 million in
cash from LaRoss. LaRoss will provide ongoing billing services, hosting of the sites and customer
service operations (Fulfillment) for us in exchange for a percentage of future collected billing
revenues. The term of the Fulfillment is for two years with automatic renewal of one year
increments unless cancelled 60 days prior to the expiration of the then-current term.
On December 30, 2009, we entered into an Asset Purchase Agreement with LaRoss whereby we purchased
up to 21,972 website hosting accounts for up to $2.6 million in cash, an amount that was
subsequently reduced to 18,817 after reduction for website hosting customers that failed to
successfully transfer to us. LaRoss will provide ongoing billing services, hosting of the sites.
On February 12, 2010, we entered into an Asset Purchase Agreement with LaRoss whereby we purchased
up to 10,000 website hosting accounts for up to $1,586,000 in cash, which amount will be reduced in
the event any of the subscribers are not successfully transferred to the Company or the subscriber
base fails to achieve a certain performance requirement. The performance requirement relates to the
average settlement rate of billings related to the purchased website hosting accounts over a six
month period. Depending on the actual settlement rate performance, the maximum purchase price per
account is $158.60 or an aggregate $1,586,000 and the minimum purchase price per account is $125.00
or an aggregate $1,250,000,
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based on 10,000 accounts. LaRoss will provide ongoing billing services,
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.
LiveDeal Asset Purchase
On March 9, 2009, we entered into an Asset Purchase Agreement with LiveDeal, Inc. and Telco
Billing, Inc., a wholly owned subsidiary of LiveDeal, whereby we purchased 14,185 local business
advertising subscribers for $3,092,330 in cash.
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 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 or the fulfillment of
subscription listing obligations. 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 as search results in response to keyword searches performed by consumers on our Local.com
website and LSN and LDN partner websites. Revenue is recognized when earned based on click-through
activity to the extent that collection is reasonably assured from credit worthy advertisers. We
have analyzed our revenue recognition and determined that our web hosting revenue will be
recognized net of direct costs. All other 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.
As of December 31, 2009, one customer represented 58% of our total accounts receivable. This
customer has historically paid within the payment period provided for under the contract and
management believes this customer will continue to do so.
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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) |
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, 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 56% in year one, 23% in year two, 11% in year three and 10% 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. 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 10Stock Plans for
additional information.
Total stock-based compensation expense recognized for the years ended December 31, 2009, 2008 and
2007 is as follows (in thousands, except per share amount):
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Sales and marketing |
$ | 677 | $ | 887 | $ | 544 | ||||||
General and administrative |
1,295 | 1,248 | 968 | |||||||||
Research and development |
392 | 267 | 236 | |||||||||
Total stock-based compensation expense |
$ | 2,364 | $ | 2,402 | $ | 1,748 | ||||||
Basic and diluted net stock-based compensation expense per share |
$ | 0.16 | $ | 0.17 | $ | 0.15 | ||||||
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
33
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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, 2009,
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 expect to generate taxable
income 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.
We analyze and quantify the impact of uncertain tax positions in accordance with U.S. GAAP,
pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial
statements from such positions are then measured based on the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement. Per U.S. GAAP companies
should report a liability for tax benefits resulting from uncertain tax positions taken or expected
to be taken in a tax return. U.S. GAAP further requires that a change in judgment related to the
expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of
such change. In addition companies should recognize interest and penalties, if any, related to
unrecognized tax benefits in income tax expense. We have not identified any uncertain tax positions
as of December 31, 2009.
Although we had a net loss for the year ended December 31, 2009, we recorded a provision for income
taxes of $158,000. In spite of our losses, we had taxable income for the period as certain costs
related to stock compensation, amortization of intangibles and change in fair value of warrant
liability were not deductible for tax purposes. In addition, although we have net operating loss
carryforwards, we were required to record a provision primarily for state income tax in California
as state legislation postponed the use of corporate net operating loss carryforwards.
Warrant Liability
As discussed in Note 1The 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 volatilityThe 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. | ||
| Risk-free interest rateWe 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, 2009, a $1 decrease or increase in our
stock price results in a non-cash derivative gain or loss of approximately $823,000 and $852,000,
respectively.
Recent Accounting Pronouncements
See Note 1The 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.
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Contractual Obligations
The following table sets forth certain payments due under contractual obligations with minimum firm
commitments as of December 31, 2009 (in thousands):
Payments due by period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
Operating lease obligations (1) |
$ | 199 | $ | 199 | $ | | $ | | $ | |
(1) | Represents a non-cancelable operating lease agreement for our office that expires in June 2010. |
As our current facility lease expires in June 2010 and to accommodate future anticipated growth, we
are planning on moving to a larger facility near our current location. We have not yet finalized a
lease agreement, but anticipate that our rent expense will increase and that we will incur moving
costs in the second half of 2010.
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. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
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 F-1 immediately following the signature page of
this Report.
Item 9. | Changes in and Disagreements With Accountants on Accounting Issues and Financial Disclosure |
None
Item 9A(T). | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
In designing and evaluating the disclosure controls and procedures, our management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and that our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation,
under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures as of December 31, 2009.
Based on the foregoing, our Chief Executive Officer and Chief Financial Officer determined that a
material weakness exists with respect to our reporting of complex and non-routine transactions. As
a result of this material weakness, on February 1, 2010 we restated our financial statements for
the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009. These restatements had no
impact
35
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on our previously reported revenues, cash flows from operations or total cash and cash
equivalents shown in the condensed consolidated financial statements for the interim periods ended
March 31, 2009, June 30, 2009 and September 30, 2009.
To address this material weakness, we have engaged and will continue to engage outside experts, as
needed, to provide counsel and guidance in areas where we cannot economically maintain the required
expertise internally (e.g., with the appropriate classifications and treatments of complex and
non-routine transactions). Specifically, we have engaged a consulting firm to review our
derivative valuation assumptions and calculations.
We may adopt additional remediation measures related to the identified control deficiency as
necessary as well as to continue to evaluate our internal controls on an ongoing basis and to
upgrade and enhance them as needed.
Our Audit Committee has taken an active role in reviewing and discussing the identified material
weakness with our auditors and financial management. Our management and the Audit Committee will
actively monitor the implementation and effectiveness of the remediation measures taken by the
Companys financial management.
As a result of the material weakness identified with respect to our reporting of complex and
non-routine transactions, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures were not effective as of December 31, 2009 to ensure
that the information required to be disclosed by us in the reports that we file or submit under the
Exchange Act was recorded, processed, summarized and reported within the time periods specified in
the SECs rules and forms and that such information required to be disclosed is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, to
allow timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, our management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and that our management was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Managements 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, 2009. 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, 2009, our internal control over financial reporting was not effective.
This Annual Report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only managements report
in this Annual Report.
Changes in Internal Control over Financial Reporting
Except with respect to the engagement of outside experts, as needed, to provide counsel and
guidance in areas where we cannot economically maintain the required expertise internally (e.g.,
with the appropriate classifications and treatments of complex and non-routine transactions), there
have been no changes in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter
ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
36
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Table of Contents
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the year ended December 31, 2009.
Item 11. | Executive Compensation |
Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the year ended December 31, 2009.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the year ended December 31, 2009.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the year ended December 31, 2009.
Item 14. | Principal Accountant Fees and Services |
Incorporated by reference from our Proxy Statement for our 2010 Annual Meeting of Stockholders to
be filed with the SEC within 120 days after the end of the year ended December 31, 2009.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules |
Exhibit | ||
Number | Description | |
3.1 (1)
|
Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 (2)
|
Amendment to Restated Certificate of Incorporation of the Registrant | |
3.2 (3)
|
Amended and Restated Bylaws of the Registrant | |
3.3 (4)
|
Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation | |
3.4 (5)
|
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation. | |
4.1 (5)
|
Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto). | |
10.1 (6)#
|
1999 Equity Incentive Plan | |
10.2 (6)#
|
2000 Equity Incentive Plan | |
10.3 (1)#
|
2004 Equity Incentive Plan, as amended. | |
10.4 (7)#
|
2005 Equity Incentive Plan. | |
10.5 (8) #
|
2007 Equity Incentive Plan. | |
10.6 (9)#
|
2008 Equity Incentive Plan, as amended. | |
10.7 (10)#
|
Separation and General Release Agreement, dated as of February 23, 2009, by and between Douglas S. Norman and the Registrant | |
10.8 (10)#
|
Employment Agreement, dated as of February 23, 2009, by and between Brenda Agius and the Registrant | |
10.9 (11)#
|
Description of the Material Terms of the Registrants Bonus Program as of July 29, 2009. | |
10.10 (11)#
|
Employment Agreement by and between the Registrant and Heath Clarke dated July 30, 2009. | |
10.11 (11)#
|
Employment Agreement by and between the Registrant and Stanley B. Crair dated July 30, 2009. | |
10.12 (6)
|
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers | |
10.13 (12)#
|
Board of Directors Compensation plan, as amended, dated December 20, 2005 | |
10.14 (13)
|
Lease between the Irvine Company and the Registrant dated March 18, 2005 | |
10.15 (14)
|
License Agreement dated October 17, 2005 by and between the Registrant and Overture Services, Inc. | |
10.16 (14)
|
Yahoo! Publisher Network Service Agreement dated October 17, 2005 by and between the Registrant and Overture Services, Inc. | |
10.17 (15)
|
Amendment No. 3 to Yahoo! Publisher Network Agreement dated August 28, 2007 by and among the Registrant and Overture Services, Inc. | |
10.18 (16)
|
Amended and Restated PFP Advertiser Distribution Agreement dated March 1, 2007 by and among the Registrant and Idearc Media Corp. | |
10.19 (17)
|
First Amendment to Amended and Restated PFP Advertiser Distribution Agreement dated March 7, 2008 by and among the Registrant and Idearc Media Corp. | |
10.20 (18)
|
Asset Purchase and Fulfillment Agreement, dated as of February 18, 2009, by and between LaRoss Partners, Inc. and the Registrant | |
10.21 (19)
|
Second Amendment to Amended and Restated PFP Advertiser Distribution Agreement, dated as of February 27, 2009, by and between Idearc Media Corp. and the Registrant | |
10.22 (20)
|
Asset Purchase Agreement, dated as of March 9, 2009, by and between LiveDeal, Inc., Telco Billing, Inc., a wholly owned subsidiary of LiveDeal, Inc and the Registrant | |
10.23 (21)
|
Amendment No. 4 to Yahoo! Publisher Network Agreement dated April 16, 2009 by and among the Registrant and Yahoo! Inc. | |
10.24 (22)
|
Amendment No. 5 to Yahoo! Publisher Network Agreement dated June 12, 2009 by and among the Registrant and Yahoo! Inc. | |
10.25 (23)
|
Loan and Security Agreement dated June 26, 2009, by and among Registrant, Square 1 Bank, and Local.com PG Acquisition Corporation. | |
10.26 (24)
|
First Amendment dated September 28, 2009 to Loan and Security Agreement dated June 26, 2009, by and among Registrant, Square 1 Bank, and Local.com PG Acquisition Corporation. | |
10.27 (25)
|
Amendment No. 6 to Yahoo! Publisher Network Agreement dated November 12, 2009 by and among the Registrant and Yahoo! Inc. | |
10.28 (26)
|
Google Inc. Advertising Program Terms by and between Company and Google Inc. entered into on or about October 2005. |
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Exhibit | ||
Number | Description | |
10.29*#
|
Employment Agreement by and between the Registrant and Scott Reinke dated April 30, 2009. | |
10.30*#
|
Employment Agreement by and between the Registrant and Michael O. Plonski dated July 27, 2009. | |
10.31*#
|
Amended Employment Agreement by and between the Registrant and Michael O. Plonski dated December 3, 2009 | |
14 (27)
|
Code of Business Conduct and Ethics. | |
21.1*
|
Subsidiaries of Registrant. | |
23.1*
|
Consent of Haskell & White LLP, independent registered public accounting firm. | |
31.1*
|
Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
# | Indicates management contract or compensatory plan. | |
(1) | Incorporated by reference from the Registrants Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004. | |
(2) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009 | |
(3) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007. | |
(4) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006. | |
(5) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008. | |
(6) | Incorporated by reference from the Registrants Registration Statement on Form SB-2, Amendment No. 1, filed with the Securities and Exchange Commission on August 11, 2004. | |
(7) | Incorporated by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 23, 2005. | |
(8) | Incorporate by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on July 3, 2007. | |
(9) | Incorporated by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 24, 2009. | |
(10) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 27, 2009. | |
(11) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 3, 2009. | |
(12) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 22, 2005. | |
(13) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 18, 2005. | |
(14) | Incorporated by reference from the Registrants Registration Statement on Form SB-2, Amendment No. 5, filed with the Securities and Exchange Commission on October 28, 2005. Confidential portions omitted and filed separately |
40
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with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended. | ||
(15) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 1, 2007. 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 Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 7, 2007. 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. | |
(17) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 11, 2008. 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. | |
(18) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 23, 2009. 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. | |
(19) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2009. 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 Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 12, 2009. | |
(21) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 20, 2009. 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 Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 17, 2009. 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 Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 23, 2009. 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. | |
(24) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 29, 2009. | |
(25) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 18, 2009. 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. | |
(26) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2010. | |
(27) | Incorporated by reference from the Registrants Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 2009. |
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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 3rd day of January,
2011.
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.
Signature | Title | Date | ||
/s/ Heath B. Clarke
|
Chairman, Chief Executive Officer and Director | January 3, 2011 | ||
/s/ Kenneth S. Cragun
|
Chief Financial Officer, Principal Accounting Officer and Secretary | January 3, 2011 | ||
/s/ Norman K. Farra Jr.
|
Director | January 3, 2011 | ||
/s/ Philip K. Fricke
|
Director | January 3, 2011 | ||
Philip K. Fricke |
||||
/s/ Theodore E. Lavoie
|
Director | January 3, 2011 | ||
/s/ John E. Rehfeld
|
Director | January 3, 2011 |
42
LOCAL.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
F-2 | ||||
Consolidated Financial Statements: |
||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
Financial Statement Schedule: |
||||
F-25 | ||||
Supplementary Financial Data: |
||||
Selected Quarterly Financial Data for the two years ended December 31, 2009 (Unaudited) |
F-27 |
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Local.com Corporation
Local.com Corporation
We have audited the accompanying consolidated balance sheets of Local.com Corporation (the
Company) as of December 31, 2009 and 2008, 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, 2009. Our audits also included the financial statement schedule listed in the index at F-1.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements 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 audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion of the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Local.com Corporation as of December 31, 2009 and 2008, and the
results of its consolidated operations and its cash flows for each of the years in the three-year
period ended December 31, 2009 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.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2009, the
Company changed its method for classifying derivative financial instruments upon adopting the
revised sections of Accounting Standards Codification No. 815-40, Derivatives and Hedging-Contracts
in Entitys Own Equity.
/s/ HASKELL & WHITE LLP
Irvine, California
March 16, 2010
March 16, 2010
F-2
Table of Contents
LOCAL.COM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 10,080 | $ | 12,142 | ||||
Restricted cash |
35 | 31 | ||||||
Accounts receivable, net of allowances of $205 and $60, respectively |
8,792 | 5,270 | ||||||
Prepaid expenses and other current assets |
439 | 374 | ||||||
Total current assets |
19,346 | 17,817 | ||||||
Property and equipment, net |
2,270 | 1,073 | ||||||
Goodwill |
13,231 | 13,231 | ||||||
Intangible assets, net |
6,406 | 2,158 | ||||||
Long-term restricted cash |
| 35 | ||||||
Deposits |
| 12 | ||||||
Total assets |
$ | 41,253 | $ | 34,326 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,891 | $ | 5,608 | ||||
Accrued compensation |
1,112 | 545 | ||||||
Deferred rent |
69 | 199 | ||||||
Warrant liability |
3,727 | | ||||||
Other accrued liabilities |
876 | 564 | ||||||
Revolving line of credit |
3,000 | | ||||||
Deferred revenue |
633 | 64 | ||||||
Total liabilities, all current |
18,308 | 6,980 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Convertible preferred stock, $0.00001 par value; 10,000 shares authorized;
none issued and outstanding for all periods presented |
| | ||||||
Common stock, $0.00001 par value; 65,000 shares authorized; issued and
outstanding 14,523 and 14,446 at December 31, 2009 and 2008, respectively |
| | ||||||
Additional paid-in capital |
81,968 | 85,141 | ||||||
Accumulated deficit |
(59,023 | ) | (57,795 | ) | ||||
Stockholders equity |
22,945 | 27,346 | ||||||
Total liabilities and stockholders equity |
$ | 41,253 | $ | 34,326 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
F-3
Table of Contents
LOCAL.COM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue |
$ | 56,282 | $ | 38,257 | $ | 21,525 | ||||||
Operating Expenses: |
||||||||||||
Search serving |
5,757 | 5,290 | 3,862 | |||||||||
Sales and marketing |
38,340 | 32,229 | 20,268 | |||||||||
General and administrative |
9,219 | 5,541 | 4,890 | |||||||||
Research and development |
3,543 | 3,071 | 2,555 | |||||||||
Amortization and write-down of intangibles |
2,524 | 999 | 1,121 | |||||||||
Total operating expenses |
59,383 | 47,130 | 32,696 | |||||||||
Operating loss |
(3,101 | ) | (8,873 | ) | (11,171 | ) | ||||||
Interest and other income (expense), net |
(27 | ) | 312 | (7,030 | ) | |||||||
Change in fair value of warrant liability |
(2,981 | ) | | | ||||||||
Loss before income taxes |
(6,109 | ) | (8,561 | ) | (18,201 | ) | ||||||
Provision for income taxes |
158 | 1 | 1 | |||||||||
Net loss |
$ | (6,267 | ) | $ | (8,562 | ) | $ | (18,202 | ) | |||
Per share data: |
||||||||||||
Basic net loss per share |
$ | (0.44 | ) | $ | (0.60 | ) | $ | (1.58 | ) | |||
Diluted net loss per share |
$ | (0.44 | ) | $ | (0.60 | ) | $ | (1.58 | ) | |||
Basic weighted average shares outstanding |
14,388 | 14,313 | 11,500 | |||||||||
Diluted weighted average shares outstanding |
14,388 | 14,313 | 11,500 |
The accompanying notes are an integral part of the consolidated financial statements.
F-4
Table of Contents
LOCAL.COM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
Accumulated | ||||||||||||||||||||||||||||||||
Convertible | Additional | Other | Total | |||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Paid-in | Comprehensive | Accumulated | Stockholders | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Loss | Deficit | Equity | |||||||||||||||||||||||||
Balance at December 31, 2006 |
9,297 | $ | | | $ | | $ | 51,657 | $ | (27 | ) | $ | (31,032 | ) | $ | 20,598 | ||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Conversion of senior secured convertible notes |
1,990 | | | | 8,000 | | | 8,000 | ||||||||||||||||||||||||
Private placement |
2,357 | | | | 12,963 | | | 12,963 | ||||||||||||||||||||||||
Exercise of warrants |
366 | | | | 1,385 | | | 1,385 | ||||||||||||||||||||||||
Exercise of options |
90 | | | | 343 | | | 343 | ||||||||||||||||||||||||
Asset purchase |
104 | | | | 431 | | | 431 | ||||||||||||||||||||||||
Issue of senior secured convertible notes and
warrants |
| | | | 6,679 | | | 6,679 | ||||||||||||||||||||||||
Non-cash equity based expense for services |
| | | | 1,748 | | | 1,748 | ||||||||||||||||||||||||
Financing costs |
| | | | (1,035 | ) | | | (1,035 | ) | ||||||||||||||||||||||
Swing sale profit contribution |
| | | | 5 | | | 5 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net unrealized gain on marketable
securities |
| | | | | 26 | | 26 | ||||||||||||||||||||||||
Net loss |
| | | | | | (18,202 | ) | (18,202 | ) | ||||||||||||||||||||||
Comprehensive loss |
| | | | | | | (18,176 | ) | |||||||||||||||||||||||
Balance at December 31, 2007 |
14,204 | | | | 82,176 | (1 | ) | (49,233 | ) | 32,942 | ||||||||||||||||||||||
Common stock issued: |
||||||||||||||||||||||||||||||||
Exercise of warrants |
55 | | | | 188 | | | 188 | ||||||||||||||||||||||||
Exercise of options |
187 | | | | 397 | | | 397 | ||||||||||||||||||||||||
Non-cash stock based compensation |
| | | | 2,402 | | | 2,402 | ||||||||||||||||||||||||
Financing costs |
| | | | (25 | ) | | | (25 | ) | ||||||||||||||||||||||
Swing sale profit contribution |
| | | | 3 | | | 3 | ||||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net unrealized gain on marketable
securities |
| | | | | 1 | | 1 | ||||||||||||||||||||||||
Net loss |
| | | | | | (8,562 | ) | (8,562 | ) | ||||||||||||||||||||||
Comprehensive loss |
| | | | | | | (8,561 | ) | |||||||||||||||||||||||
14,446 | | | | 85,141 | | (57,795 | ) | 27,346 | ||||||||||||||||||||||||
Balance at December 31, 2008 |
||||||||||||||||||||||||||||||||
Common stock issued for exercise of
options |
208 | | | | 591 | | | 591 | ||||||||||||||||||||||||
Repurchases of common stock |
(131 | ) | | | | (337 | ) | | | (337 | ) | |||||||||||||||||||||
Non-cash stock based compensation |
| | | | 2,364 | | | 2,364 | ||||||||||||||||||||||||
Financing costs |
| | | | (6 | ) | | | (6 | ) | ||||||||||||||||||||||
Cumulative effect of change in
accounting principle |
| | | | (5,785 | ) | | 5,039 | (746 | ) | ||||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net loss |
| | | | | (6,267 | ) | (6,267 | ) | |||||||||||||||||||||||
Comprehensive loss |
| | | | | | (6,267 | ) | ||||||||||||||||||||||||
Balance at December 31, 2009 |
14,523 | $ | | | $ | | $ | 81,968 | $ | | (59,023 | ) | $ | 22,945 | ||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
Table of Contents
LOCAL.COM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (6,267 | ) | $ | (8,562 | ) | $ | (18,202 | ) | |||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
||||||||||||
Depreciation and amortization |
3,258 | 1,812 | 2,206 | |||||||||
Provision for doubtful accounts |
175 | 49 | 14 | |||||||||
Stock-based compensation expense |
2,364 | 2,402 | 1,748 | |||||||||
Non-cash interest expense |
| | 6,803 | |||||||||
Change in fair value of warrant liability |
2,981 | | | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(3,635 | ) | (1,724 | ) | (1,391 | ) | ||||||
Prepaid expenses and other |
(53 | ) | (49 | ) | (84 | ) | ||||||
Accounts payable and accrued liabilities |
4,032 | 1,921 | 873 | |||||||||
Deferred revenue |
569 | (113 | ) | (68 | ) | |||||||
Net cash provided by (used in) operating activities |
3,424 | (4,264 | ) | (8,101 | ) | |||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(1,931 | ) | (447 | ) | (531 | ) | ||||||
Proceeds from sales of marketable securities |
| 2,000 | | |||||||||
Decrease in restricted cash |
31 | 30 | 70 | |||||||||
Purchases of intangible assets |
(6,834 | ) | | | ||||||||
Acquisition, net of cash acquired |
| 2 | (2,042 | ) | ||||||||
Net cash (used in) provided by investing activities |
(8,734 | ) | 1,585 | (2,503 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of common stock: |
||||||||||||
From private placement |
| | 12,963 | |||||||||
Exercise of warrants |
| 188 | 1,385 | |||||||||
Exercise of options |
591 | 397 | 343 | |||||||||
Repurchases of common stock |
(337 | ) | | | ||||||||
Issuance of senior secured convertible notes |
| | 8,000 | |||||||||
Proceeds from revolving credit facility |
3,000 | | (63 | ) | ||||||||
Swing sale profit contribution |
| 3 | 5 | |||||||||
Payment of financing related costs |
(6 | ) | (25 | ) | (1,035 | ) | ||||||
Net cash provided by financing activities |
3,248 | 563 | 21,598 | |||||||||
Net (decrease) increase in cash and cash equivalents |
(2,062 | ) | (2,116 | ) | 10,994 | |||||||
Cash and cash equivalents, beginning of year |
12,142 | 14,258 | 3,264 | |||||||||
Cash and cash equivalents, end of year |
$ | 10,080 | $ | 12,142 | $ | 14,258 | ||||||
Supplemental cash flow information: |
||||||||||||
Interest paid |
$ | 75 | $ | | $ | 279 | ||||||
Income taxes paid |
$ | 1 | $ | 1 | $ | 1 | ||||||
Non-cash investing and financing transactions: |
||||||||||||
Warrant liability recorded as cumulative effect of change in accounting principle |
$ | 746 | ||||||||||
Insurance financing |
$ | 88 | ||||||||||
Debt discount related to issuance of senior secured convertible notes |
$ | 6,221 | ||||||||||
Conversion of senior secured convertible notes into common stock |
$ | 8,000 | ||||||||||
Warrants issued for financing costs |
$ | 458 | ||||||||||
Common stock issued for asset purchase |
$ | 431 | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
F-6
Table of Contents
LOCAL.COM CORPORATION
Notes to Consolidated Financial Statements
1. The Company and Summary of Significant Accounting Policies
Nature of Operations
Local.com Corporation, a Delaware corporation, is a provider of local search services on the
Internet, both on our flagship web property, Local.com, our Local Distribution Network, as well as
on our Local Syndication Network of regional media sites for which we provide business directories
and associated services. A local search is a search request from a consumer that contains a
location modifier (for example, flowers in Irvine, CA). We provide proprietary search results using
our patented technologies, and monetize those search results by placing sponsored listings on the
search results page. Our sponsored listings are typically comprised of subscription,
cost-per-click, cost-per-call, and display ads from our own direct advertisers and third-party
advertiser sources. A portion of these consumers interact with those sponsored listings, thereby
generating ad revenue.
Principles of Consolidation
Our financial statements include the accounts of Local.com Corporation and its wholly-owned
subsidiary, Local.com PG Acquisition Corporation. All intercompany balances and transactions were
eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States (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
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive
evidence of an arrangement; (2) the service 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 or the fulfillment of
subscription listing obligations. 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 the contractual agreement. Sponsored listings and banner advertisements are
included as search results in response to keyword searches performed by consumers on our Local.com
website and LSN and LDN partner websites. Revenue is recognized when earned based on click-through
activity to the extent that collection is reasonably assured from credit worthy advertisers. We
have analyzed our revenue recognition and determined that our web hosting revenue will be
recognized net of direct costs. All other revenue is recognized on a gross basis.
One local advertising partner represented 45%, 54% and 49% of our total revenue for the years ended
December 31, 2009, 2008 and 2007, respectively; another local advertising partner represented 23%,
18% and 15% of our total revenue for the years ended December 31, 2009, 2008 and 2007,
respectively.
Search Serving
Search serving expenses consist primarily of revenue-sharing payments that we make to our LDN and
LSN partners, and to a lesser extent, royalties, Internet connectivity costs, data center costs,
amortization of certain software license fees and maintenance and depreciation of computer
equipment used in providing our paid-search services.
F-7
Table of Contents
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.
Advertising Costs
We advertise on other search engine websites, primarily google.com, but also yahoo.com, msn.com and
ask.com, by bidding on certain keywords we believe will drive consumers to our Local.com website.
During the year ended December 31, 2009, approximately 57% of the traffic on our Local.com website
and LSN partner websites was acquired through search engine marketing campaigns on other search
engine websites. 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 was paid to Google, Inc. During the
year ended December 31, 2008, advertising costs to drive consumers to the Local.com website were
$21.3 million of which $13.8 million was paid to Google, Inc. During the year ended December 31,
2007, advertising costs to drive consumers to the Local.com website were $13.7 million of which
$10.9 million was paid to Google, Inc and such amounts are expensed as incurred and included in
sales and marketing in accompanying consolidated statements of operations. Prior to 2008, we
referred to this cost as traffic acquisition cost (TAC).
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, and the pre-vesting
forfeiture rate of stock awards. 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 10Stock Plans for
additional information.
Sales Commissions
When an advertiser makes a payment or a deposit into its account with us, our applicable
salesperson earns a commission, subject to certain criteria. We record sales commission expense in
the period the payment or deposit is received.
F-8
Table of Contents
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 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.
Comprehensive Income (Loss)
Comprehensive income (loss) refers to revenue, expenses, gains and losses that are not included in
net income (loss) but rather are recorded directly in stockholders equity. For the years ended
December 31, 2009, 2008 and 2007, comprehensive income consisted of net loss plus unrealized gain
on marketable securities.
Supplemental comprehensive income (loss) information (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Unrealized holding gains arising during period |
$ | | $ | 1 | $ | 26 | ||||||
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts receivable 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. 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.
Restricted Cash
We pledged $35,000 of cash for an irrevocable letter of credit related to the lease of office space
that is classified as restricted cash on the balance sheet. The letter of credit will expire on
July 31, 2010.
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
F-9
Table of Contents
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.
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 and accounts 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 two customers that each represents more than 10% of our total revenue. One
local advertising partner represented 45%, 54% and 49% of our total revenue for the years ended
December 31, 2009, 2008 and 2007, respectively. One local advertising partner represented 23%, 18%
and 15% of our total revenue for the years ended December 31, 2009, 2008 and 2007, respectively. As
of December 31, 2009, one customer represented 58% of our total accounts receivable. This customer
has historically paid within the payment period provided for under the contract and management
believes this customer will continue to do so.
We are exposed to the risk of fluctuation in interest rates on our revolving line of credit. During
2009, 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 entering
2010 is $3.0 million. Therefore, a one-percentage point increase in interest rates would result in
an increase in interest expense of approximately $30,000 per annum. See Note 6 Credit Facility.
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:
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.
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 $1,219,000, $234,000 and $330,000
during the years ended December 31, 2009, 2008 and 2007, respectively. The amortization of
capitalized website development costs was $268,000, $316,000 and $187,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. Capitalized website development costs are included
in property and equipment, net.
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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.
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, 2009, 2008 and 2007, management concluded that there was no
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 name are recorded at cost.
Intangible assets, such as goodwill and domain name, 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
unit and compare the resulting fair value to the carrying value of the reporting unit 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, 2009 and
determined that no impairment existed. 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 is recognized as revenue as
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:
| Expected volatilityThe 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. | |
| Risk-free interest rateWe 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, 2009, a $1 decrease or increase in our
stock price results in a non-cash derivative gain or loss of approximately $823,000 and $852,000,
respectively.
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Accounting Standards Adopted
In June 2009, the Financial Accounting Standard Board (FASB) issued authoritative guidance which
establishes the FASB Accounting Standards Codification as the single source of authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities. The FASB Accounting
Standards Codification is effective for interim and annual periods ending after September 15, 2009.
The adoption of the FASB Accounting Standards Codification did not have a material effect on our
financial statements during the year December 31, 2009.
In May 2009, the FASB issued new accounting and disclosure guidance regarding subsequent events,
which establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. We
adopted the provisions of this standard during the second quarter of 2009. The adoption did not
have an impact on our statements of operations or statement of financial position
On January 1, 2009, we adopted new accounting guidance for business combinations as issued by the
Financial Accounting Standards Board (FASB). The new accounting guidance establishes principles and
requirements for how an acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interests
in the acquiree, as well as the goodwill acquired. Significant changes from previous guidance
resulting from this new guidance include the expansion of the definitions of a business and a
business combination. For all business combinations (whether partial, full or step acquisitions),
the acquirer will record 100% of all assets and liabilities of the acquired business, including
goodwill, generally at their fair values; contingent consideration will be recognized at its fair
value on the acquisition date and; for certain arrangements, changes in fair value will be
recognized in earnings until settlement; and acquisition-related transaction and restructuring
costs will be expensed rather than treated as part of the cost of the acquisition. The new
accounting guidance also establishes disclosure requirements to enable users to evaluate the nature
and financial effects of the business combination. The adoption of this accounting guidance did not
have a material impact on our consolidated financial statements.
On January 1, 2009, we adopted new disclosure requirements as issued by the FASB related to
derivative instruments and hedging activities. The new disclosure requirements expand previous
guidance and require qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on derivative instruments,
and disclosures about credit-risk-related contingent features in derivative agreements. The
adoption of this accounting guidance did not have a material impact on our consolidated financial
statements.
On January 1, 2009, we adopted new accounting guidance for assets acquired and liabilities assumed
in a business combination as issued by the FASB. The new guidance amends the provisions previously
issued by the FASB related to the initial recognition and measurement, subsequent measurement and
accounting and disclosures for assets and liabilities arising from contingencies in business
combinations. The new guidance eliminates the distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement. The adoption of this accounting
guidance did not have a material impact on our consolidated financial statements.
During the second quarter of 2009, we adopted new accounting guidance for the determination of the
useful life of intangible assets as issued by the FASB. The new guidance amends the factors that
should be considered in developing the renewal or extension assumptions used to determine the
useful life of a recognized intangible asset. The new guidance also requires expanded disclosure
regarding the determination of intangible asset useful lives. The adoption of this accounting
guidance did not have a material impact on our consolidated financial statements.
In September 2009, the FASB issued new accounting guidance related to the revenue recognition of
multiple element arrangements. The new guidance states that if vendor specific objective evidence
or third party evidence for deliverables in an arrangement cannot be determined, companies will be
required to develop a best estimate of the selling price to separate deliverables and allocate
arrangement consideration using the relative selling price method. The accounting guidance will be
applied prospectively and will become effective during the first quarter of 2011. Early adoption is
allowed. We will adopt this guidance beginning January 1, 2011 and we do not expect this accounting
guidance to materially impact our financial statements.
In September 2009, the FASB issued new accounting guidance related to certain revenue arrangements
that include software elements. The new guidance is to be applied on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010, with earlier application permitted. If a vendor elects earlier application and the first
reporting period of adoption is not the first reporting period in the vendors fiscal year, the
guidance must be applied through retrospective application from the beginning of the vendors
fiscal year and the vendor must disclose
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the effect of the change to those previously reported periods. We will adopt this guidance
beginning January 1, 2011. The adoption of this accounting guidance will not have an impact on our
consolidated financial statements.
In January 2010, the FASB issued new accounting guidance related to the disclosure requirements for
fair value measurements and provides clarification for existing disclosures requirements. More
specifically, this update will require (a) an entity to disclose separately the amounts of
significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the
reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to
be presented separately (i.e. present the activity on a gross basis rather than net) in the
reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs).
This guidance clarifies existing disclosure requirements for the level of disaggregation used for
classes of assets and liabilities measured at fair value and requires disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements using Level 2 and Level 3 inputs. The new disclosures and clarifications of
existing disclosure are effective for fiscal years beginning after December 15, 2009, except for
the disclosure requirements for related to the purchases, sales, issuances and settlements in the
rollforward activity of Level 3 fair value measurements. Those disclosure requirements are
effective for fiscal years ending after December 31, 2010. We do not believe the adoption of this
guidance will have a material impact to our consolidated financial statements.
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):
Additional | ||||||||||||
Paid-in | Warrant | Accumulated | ||||||||||
Capital | Liability | Deficit | ||||||||||
Grant date fair value of previously issued warrants |
$ | 5,785 | $ | (5,785 | ) | $ | | |||||
Change in fair value of previously issued warrants
outstanding as of January 1, 2009 |
| 5,039 | (5,039 | ) | ||||||||
Cumulative effect of change in accounting principle |
$ | 5,785 | $ | (746 | ) | $ | (5,039 | ) | ||||
The fair values of these options were estimated at the January 1, 2009 date of adoption and
the December 31, 2009 balance sheet date using a Black-Scholes option pricing model with the
following weighted average assumptions:
As of December 31, | As of January 1, | |||||||
2009 | 2009 | |||||||
Risk-free interest rate |
1.70 | % | 1.00 | % | ||||
Expected lives (in years) |
3.6 years | 4.6 years | ||||||
Expected dividend yield |
None | None | ||||||
Expected volatility |
100.00 | % | 100.00 | % |
The Company recorded 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 year ended December 31, 2009.
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2. Purchases of Customer-related Intangible Assets
LaRoss Asset Purchases
On February 18, 2009, we entered into an Asset Purchase and Fulfillment Agreement with LaRoss
Partners, Inc. (LaRoss) whereby we purchased 11,754 website hosting accounts for $1.2 million in
cash from LaRoss. LaRoss will provide ongoing billing services, hosting of the sites and customer
service operations (Fulfillment) for us in exchange for a percentage of future collected billing
revenues. The term of the Fulfillment is for two years with automatic renewal in one year
increments unless cancelled 60 days prior to expiration. The purchase price was allocated
$1,098,000 to customer-related intangible assets amortized over four years based on how we expect
the customer relationships to contribute to future cash flows and $77,000 to accounts receivable.
On December 30, 2009, we entered into an Asset Purchase Agreement with LaRoss whereby we purchased
up to 21,972 website hosting accounts for up to $2.6 million in cash, which amount was subject to
reduction in the event any of the subscribers were not successfully transferred to the Company.
After giving effect to certain purchase price and subscriber adjustments, the final purchase price
has been adjusted to $2.2 million and the number of website hosting accounts purchased has been
finalized at 18,817. LaRoss will provide ongoing billing services and hosting of the sites. The
purchase price was allocated to customer-related intangible assets 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 LaRoss.
LiveDeal Asset Purchase
On March 9, 2009 we purchased 14,185 local business listing subscribers from LiveDeal, Inc. and
Telco Billing, Inc., a wholly owned subsidiary of LiveDeal, Inc. for a cash payment of $3,092,000.
The acquisition of this base of advertisers also increased our base of customers, diversified our
revenue stream, and continues to provide a platform for future revenue growth. The purchase price
was allocated to customer-related intangibles assets and is being amortized over four years based
on how we expect the customer relationships to contribute to future cash flows.
3. Intangible Assets
Intangible assets consisted of the following (in thousands):
December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||||||||||
Gross | Net | Weighted | Gross | Net | Weighted | |||||||||||||||||||||||||||
Carrying | Accumulated | Carrying | Average | Carrying | Accumulated | Carrying | Average | |||||||||||||||||||||||||
Amount | Amortization | Amount | Useful Life | Amount | Amortization | Amount | Useful Life | |||||||||||||||||||||||||
(years) | (years) | |||||||||||||||||||||||||||||||
Developed technology |
$ | 2,233 | $ | (2,159 | ) | $ | 74 | 5 | $ | 2,233 | $ | (1,712 | ) | $ | 521 | 5 | ||||||||||||||||
Non-compete agreements |
13 | (13 | ) | | 2 | 13 | (9 | ) | 4 | 2 | ||||||||||||||||||||||
Customer-related |
7,792 | (2,226 | ) | 5,566 | 5 | 1,020 | (296 | ) | 724 | 5 | ||||||||||||||||||||||
Patents |
431 | (366 | ) | 65 | 3 | 431 | (223 | ) | 208 | 3 | ||||||||||||||||||||||
Domain name indefinite life |
701 | | 701 | 701 | | 701 | ||||||||||||||||||||||||||
$ | 11,170 | $ | (4,764 | ) | $ | 6,406 | $ | 4,398 | $ | (2,240 | ) | $ | 2,158 | |||||||||||||||||||
The estimated total amortization expense for intangible asset over the next five years is as
follows (in thousands):
Amortization | ||||
Expense | ||||
For the years ending December 31, |
||||
2010 |
$ | 3,182 | ||
2011 |
1,361 | |||
2012 |
662 | |||
2013 |
294 | |||
2014 |
206 | |||
Total |
$ | 5,705 | ||
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4. Net Loss Per Share
Basic net loss per share is calculated using the weighted average shares of common stock
outstanding during the periods. Diluted net 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, 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.
For the year ended December 31, 2008, potentially dilutive securities, which consist of options to
purchase 3,070,790 share of common stock at prices ranging from $1.28 to $16.59 and warrants to
purchase 3,290,220 shares of common stock at prices ranging from $4.32 to $25.53 were not included
in the computation of diluted net income per share because such inclusion would be antidilutive.
For the year ended December 31, 2007, potentially dilutive securities, which consist of options to
purchase 2,703,850 share of common stock at prices ranging from $0.40 to $16.59 and warrants to
purchase 3,470,278 shares of common stock at prices ranging from $3.00 to $25.53 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):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Numerator: |
||||||||||||
Net loss |
$ | (6,267 | ) | $ | (8,562 | ) | $ | (18,202 | ) | |||
Denominator: |
||||||||||||
Denominator for historical basic calculation weighted average shares |
14,388 | 14,313 | 11,500 | |||||||||
Dilutive common stock equivalents: |
||||||||||||
Options |
| | | |||||||||
Warrants |
| | | |||||||||
Denominator for historical diluted calculation weighted average
shares |
14,388 | 14,313 | 11,500 | |||||||||
Net loss per share: |
||||||||||||
Historical basic net loss per share |
$ | (0.44 | ) | $ | (0.60 | ) | $ | (1.58 | ) | |||
Historical diluted net loss per share |
$ | (0.44 | ) | $ | (0.60 | ) | $ | (1.58 | ) | |||
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5. Composition of Certain Balance Sheet and Statement of Operations Captions
Property and equipment consisted of the following (in thousands):
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
Furniture and fixtures |
$ | 228 | $ | 203 | ||||
Office equipment |
139 | 132 | ||||||
Computer equipment |
2,026 | 1,392 | ||||||
Computer software |
3,023 | 1,760 | ||||||
Leasehold improvements |
585 | 583 | ||||||
6,001 | 4,070 | |||||||
Less accumulated depreciation and amortization |
(3,731 | ) | (2,997 | ) | ||||
Property and equipment, net |
$ | 2,270 | $ | 1,073 | ||||
Interest and other income (expense), net consisted of the following (in thousands):
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Interest income |
$ | 15 | $ | 312 | $ | 536 | ||||||
Interest expense |
(42 | ) | | (887 | ) | |||||||
Interest expense non-cash |
| | (6,679 | ) | ||||||||
Interest and other income (expense), net |
$ | (27 | ) | $ | 312 | $ | (7,030 | ) | ||||
6. Credit Facility
On June 26, 2009, we entered into a Loan and Security Agreement (the Agreement) with Square 1
Bank. The Agreement provides us with a revolving credit facility of up to $10 million (the
Facility). Subject to the terms of the 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 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 $10
million and we are otherwise in compliance with the terms of the Agreement. The Facility expires on
June 25, 2010. Prior to the expiration of the Facility and subject to meeting certain conditions
set forth in the Agreement, we may convert a portion of the Non-Formula Revolving Line, up to $3
million, to a two year term loan.
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 Agreement.
Except as otherwise set forth in the 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 with Square 1 Bank of approximately $66,000.
The 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 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 Agreement, including declaring all outstanding borrowings immediately due and
payable, ceasing to advance money or extend credit, and rights of set-off.
In December 2009, we borrowed $3.0 million under the revolving credit facility to fund the December
2009 acquisition of small business customers.
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7. Income Taxes
The provision for income taxes consists of the following (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 29 | $ | | $ | | ||||||
State |
129 | 1 | 1 | |||||||||
Foreign |
| | | |||||||||
Total current |
158 | 1 | 1 | |||||||||
Deferred: |
||||||||||||
Federal |
| | | |||||||||
State |
| | | |||||||||
Foreign |
| | | |||||||||
Total deferred |
| | | |||||||||
Total provision for income taxes |
$ | 158 | $ | 1 | $ | 1 | ||||||
The provision for income taxes differs from the amount computed by applying the federal income
tax rate as follows:
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Statutory federal tax rate |
34 | % | 34 | % | 34 | % | ||||||
State income taxes, net of federal benefit |
(1 | ) | | | ||||||||
Change in fair value of warrant liability |
(17 | ) | | | ||||||||
Stock option grants |
(13 | ) | (9 | ) | 3 | |||||||
Return to provision |
(12 | ) | (14 | ) | | |||||||
Change in valuation allowance |
7 | (11 | ) | (37 | ) | |||||||
Other |
(1 | ) | | | ||||||||
(3 | )% | | % | | % | |||||||
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):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Deferred income tax assets: |
||||||||||||
Net operating loss carryforwards |
$ | 18,014 | $ | 18,648 | $ | 18,402 | ||||||
Accrued expenses |
2,314 | 2,318 | 1,290 | |||||||||
Fixed assets/depreciation |
368 | 1,752 | 1,440 | |||||||||
Gross deferred tax assets |
20,696 | 22,718 | 21,132 | |||||||||
Valuation allowance |
(20,986 | ) | (21,243 | ) | (20,015 | ) | ||||||
(290 | ) | 1,475 | 1,117 | |||||||||
Deferred income tax liabilities: |
||||||||||||
Acquired intangibles |
358 | (1,460 | ) | (1,102 | ) | |||||||
Fixed assets/depreciation |
(67 | ) | (15 | ) | (15 | ) | ||||||
Other |
(1 | ) | | | ||||||||
290 | (1,475 | ) | (1,117 | ) | ||||||||
Net deferred tax assets (liabilities) |
$ | | $ | | $ | | ||||||
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As of December 31, 2009, we had approximately $2.0 million of valuation allowance attributable
to the tax benefit of exercised stock options and warrants issued for services, which will be
credited directly to paid-in capital when the related deferred tax assets are realized.
As of December 31, 2009, we had $46.0 million and $40.9 million in net operating loss carryforwards
for federal and state income tax purposes, respectively. The losses begin to expire in 2021 for
federal and 2012 for state income tax purposes respectively, and California has temporarily
suspended the utilization of net operating loss carryforwards for 2009. 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
corporations 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 believe that with our initial
public offering, our recent private placements and other transactions that have occurred over the
past three years, we have triggered an ownership change limitation. We have performed an analysis
to determine to what extent our ability to utilize our net operating loss carryforwards is limited.
We determined that our Section 382 limitation is $3.7 million a year of which we have accumulated
$14.9 million available for use in the current 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 meet 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. We adopted the provisions regarding
accounting for uncertainty in income taxes as of January 1, 2007. Based on our analysis, we believe
that our income tax filing positions and deductions will be sustained on audit and do not
anticipate any adjustments that will result in a material change to our financial position
including our effective tax rate. Therefore, no reserves for uncertain income tax positions have
been recorded and we did not record a cumulative effect adjustment related to the adoption of the
related accounting principles. In addition, we have not recorded any accrued interest and penalties
related to income tax. It is our policy to classify interest and penalties related to income tax as
income taxes in our financial statements.
The following tax years that remain subject to examination by major tax jurisdictions are as
follows:
Federal 2006 to 2008;
California (state) 2005 to 2008;
Virginia (state) 2006 to 2008.
8. Commitments and Contingencies
Lease Commitments
We lease office space under an operating lease agreement that expires in June 2010. The future
minimum lease payments under non-cancelable operating leases at December 31, 2009 are as follows
(in thousands):
Operating | ||||
Leases | ||||
Year ending December 31, 2010 |
$ | 199 | ||
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, 2009,
2008 and 2007 was $249,000, $251,000 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 year ending December 31, 2009 we made
a discretionary matching contribution of $66,000. For prior plan years through December 31, 2008,
we made no matching contributions.
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Employment Agreements
We have signed employment agreements with five executive officers and seven key employees. The
agreements provide for the payments of annual salaries totaling $1.9 million and annual bonuses of
up to $0.9 million in the aggregate, based upon current salaries and 2009 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, (iii) the same base salary and benefits that such officer or
key employee received prior to termination, for a period of from 6 months to 12 months following
termination, 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
We are not currently a party to any 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.
9. Stockholders Equity
The Company has authorized 65,000,000 shares of common stock and 10,000,000 shares of convertible
preferred stock.
Warrants
Warrant activity for the years ended December 31, 2007, 2008 and 2009 was as follows:
Weighted Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at December 31, 2006 |
1,043,664 | $ | 9.11 | |||||
Issued |
2,810,070 | 6.22 | ||||||
Exercised |
(365,331 | ) | 3.79 | |||||
Expired |
(18,125 | ) | 7.31 | |||||
Outstanding at December 31, 2007 |
3,470,278 | 7.34 | ||||||
Exercised |
(55,371 | ) | 3.38 | |||||
Expired |
(124,687 | ) | 3.58 | |||||
Outstanding at December 31, 2008 |
3,290,220 | 7.55 | ||||||
Issued |
49,525 | 2.31 | ||||||
Expired |
(480,150 | ) | 15.32 | |||||
Outstanding at December 31, 2009 |
2,859,595 | $ | 6.16 | |||||
Exercisable at December 31, 2009 |
2,859,595 | $ | 6.16 | |||||
The weighted average fair value at grant date of the warrants granted during the years ended
December 31, 2009 and 2007 was $1.21 and $3.83, respectively. No warrants were issued during the
year ended December 31, 2008.
The following table summarizes information regarding warrants outstanding and exercisable at
December 31, 2009:
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Table of Contents
Warrants Outstanding and Exercisable | ||||||||||||
Average | ||||||||||||
Remaining | Weighted | |||||||||||
Contractual | Average | |||||||||||
Range of Exercise Price | Shares | Life | Exercise Price | |||||||||
$2.00 - $3.99 |
49,525 | 1.2 years | $ | 2.31 | ||||||||
$4.00 - $4.99 |
867,662 | 2.1 years | 4.36 | |||||||||
$5.00 - $5.99 |
867,662 | 2.1 years | 5.17 | |||||||||
$7.00 - $7.99 |
537,373 | 3.1 years | 7.89 | |||||||||
$9.00 - $9.99 |
537,373 | 4.1 years | 9.26 | |||||||||
2,859,595 | 2.7 years | $ | 6.16 | |||||||||
Stock Repurchase Program
On October 8, 2008, our Board of Directors approved a stock repurchase program of up to $2 million
of Local.com Corporation common stock. The share repurchase program is authorized through April
2010 and authorizes us to repurchase shares from time to time through open market or privately
negotiated transactions. From time to time, we may enter into a Rule 10b5-1 trading plan that will
allow us to purchase our shares at times when we ordinarily would not be in the market because of
self-imposed trading blackout periods. The number of shares to be purchased and the timing of the
purchases will be based on market conditions, share price and other factors. The stock repurchase
program does not require us to repurchase any specific dollar value or number of shares and may be
modified, extended or terminated by the Board of Directors at any time. Any Rule 10b5-1 trading
plan we enter into in connection with carrying out our stock repurchase program will not, however,
be capable of modification or extension once established. During the year ended December 31, 2009,
we repurchased 131,239 shares of common stock at an average price of $2.56 per share. Total cash
consideration for the repurchased stock was $337,000. The remaining authorization under the stock
repurchase program is approximately $1.7 million.
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 rights 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.
10. 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 49,902 were outstanding and zero were available for future
grant at December 31, 2009.
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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 187,549
were outstanding and 22 were available for future grant at December 31, 2009.
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
431,459 were outstanding and 77 were available for future grant at December 31, 2009.
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 884,112 were outstanding and 170 were available
for future grant at December 31, 2009.
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 972,952 were outstanding and 9,010 were
available for future grant at December 31, 2009.
In June 2008, we adopted and the stockholders approved the 2008 Equity Incentive Plan, which was
subsequently amended pursuant to stockholder approval in August 2009 (2008 Plan). 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 1,472,816 were outstanding and 1,500,713 were available for
future grant at December 31, 2009.
Stock option activity under the plans for the years ended December 31, 2007, 2008 and 2009 is as
follows:
F-21
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Weighted Average | ||||||||||||||||
Remaining | Aggregate | |||||||||||||||
Weighted Average | Contractual Term | Intrinsic Value | ||||||||||||||
Shares | Exercise Price | (in years) | (in thousands) | |||||||||||||
Outstanding at December 31, 2006 |
1,933,363 | $ | 5.10 | |||||||||||||
Granted |
1,001,054 | 4.89 | ||||||||||||||
Exercised (1) |
(90,016 | ) | 3.81 | |||||||||||||
Canceled |
(140,551 | ) | 5.62 | |||||||||||||
Outstanding at December 31, 2007 |
2,703,850 | 5.04 | ||||||||||||||
Granted |
775,404 | 3.31 | ||||||||||||||
Exercised (1) |
(186,626 | ) | 2.13 | |||||||||||||
Canceled |
(221,838 | ) | 3.74 | |||||||||||||
Outstanding at December 31, 2008 |
3,070,790 | 4.87 | ||||||||||||||
Granted |
1,487,493 | 3.10 | ||||||||||||||
Exercised (1) |
(205,252 | ) | 2.82 | |||||||||||||
Canceled |
(354,241 | ) | 4.68 | |||||||||||||
Outstanding at December 31, 2009 |
3,998,790 | $ | 4.33 | 7.6 | $ | 7,603 | ||||||||||
Vested and expected to vest at
December 31, 2009 (2) |
3,567,201 | $ | 4.44 | 7.5 | $ | 6,579 | ||||||||||
Exercisable at December 31, 2009 |
1,840,847 | $ | 5.38 | 6.0 | $ | 2,483 | ||||||||||
(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, 2007, 2008 and 2009 was $4.11, $2.76, and $2.57 per option, respectively.
The aggregate intrinsic value of all options exercised during the years ended December 31, 2007,
2008 and 2009 was $406,000, $353,000 and $515,000, respectively.
The total fair value of options vested during the years ended December 31, 2007, 2008 and 2009 was
$2.1 million, $2.1 million and $1.7 million, respectively.
The following table summarizes information regarding options outstanding and exercisable at
December 31, 2009:
Options Outstanding | ||||||||||||||||||||
Weighted | Options Exercisable | |||||||||||||||||||
Average | Weighted | Weighted | ||||||||||||||||||
Remaining | Average | Average | ||||||||||||||||||
Contractual | Exercise | Exercise | ||||||||||||||||||
Range of Exercise Prices | Shares | Life | Price | Shares | Price | |||||||||||||||
$1.01 - $2.00 |
765,705 | 9.1 years | $ | 1.57 | 105,952 | $ | 1.45 | |||||||||||||
$2.01 - $3.00 |
146,111 | 8.6 years | 2.28 | 27,343 | 2.22 | |||||||||||||||
$3.01 - $4.00 |
980,012 | 6.7 years | 3.65 | 642,296 | 3.73 | |||||||||||||||
$4.01 - $5.00 |
1,326,791 | 8.2 years | 4.58 | 486,267 | 4.64 | |||||||||||||||
$5.01 - $6.00 |
295,136 | 8.3 years | 5.51 | 105,208 | 5.70 | |||||||||||||||
$6.01 - $7.00 |
116,773 | 4.7 years | 6.40 | 107,021 | 6.40 | |||||||||||||||
$7.01 - $8.00 |
190,112 | 5.7 years | 7.51 | 188,610 | 7.51 | |||||||||||||||
$8.01 - $10.00 |
70,000 | 5.4 years | 9.17 | 70,000 | 9.17 | |||||||||||||||
$15.01 - $16.59 |
108,150 | 3.9 years | 15.62 | 108,150 | 15.62 | |||||||||||||||
3,998,790 | 7.6 years | $ | 4.33 | 1,840,847 | $ | 5.38 | ||||||||||||||
Stock-based Compensation
The guidance in U.S. GAAP regarding share-based payment addresses the accounting for employee stock
options 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
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which an employee is required to provide service in exchange for the awardthe requisite service
period (usually the vesting period).
Total stock-based compensation expense recognized for the years ended December 31, 2009, 2008 and
2007 is as follows (in thousands, except per share amount):
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Sales and marketing |
$ | 677 | $ | 887 | $ | 544 | ||||||
General and administrative |
1,295 | 1,248 | 968 | |||||||||
Research and development |
392 | 267 | 236 | |||||||||
Total stock-based compensation expense |
$ | 2,364 | $ | 2,402 | $ | 1,748 | ||||||
Basic and diluted net stock-based compensation expense per share |
$ | 0.16 | $ | 0.17 | $ | 0.15 | ||||||
The fair values of these options were estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
Year ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Risk-free interest rate |
2.79 | % | 3.03 | % | 4.02 | % | ||||||
Expected lives (in years) |
7 | 7 | 7 | |||||||||
Expected dividend yield |
None | None | None | |||||||||
Expected volatility |
100.00 | % | 100.00 | % | 100.00 | % |
As of December 31, 2009, there was $3.3 million of unrecognized stock-based compensation
expense related to outstanding stock options, net of forecasted forfeitures. This amount is
expected to be recognized over a weighted average period of 1.5 years. The stock-based compensation
expense for these awards will be different if the actual forfeiture rate is different from our
forecasted rate.
11. Operating Information
U.S. GAAP regarding disclosures about segments of an enterprise requires that public business
enterprises report entity-wide disclosures. Although we have aligned our operations into three
business units, these business units meet the criteria for aggregation into one reporting segment:
paid-search. The following table presents summary operating geographic and product information as
required by the entity-wide disclosure requirements (in thousands):
Years ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Revenue by geographic region: |
||||||||||||
United States |
$ | 56,151 | $ | 37,472 | $ | 21,116 | ||||||
Europe |
131 | 785 | 409 | |||||||||
Total revenue |
$ | 56,282 | $ | 38,257 | $ | 21,525 | ||||||
Revenue by product: |
||||||||||||
Pay-Per-Click (PPC) |
$ | 45,798 | $ | 34,820 | $ | 18,952 | ||||||
Local Promote (Subscription) |
7,507 | 1,420 | 266 | |||||||||
Banner Advertisement |
2,914 | 1,749 | 1,864 | |||||||||
Local Connect (License) |
63 | 268 | 443 | |||||||||
Total revenue |
$ | 56,282 | $ | 38,257 | $ | 21,525 | ||||||
12. 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, 2009 (in thousands):
F-23
Table of Contents
Quoted Prices in | ||||||||||||
As of | Active Markets | Significant | ||||||||||
December 31, | for Identical | Unobservable | ||||||||||
Description | 2009 | Assets (Level 1) | Inputs (Level 3) | |||||||||
Assets: |
||||||||||||
Cash and cash equivalents: |
||||||||||||
Bank deposits and money market funds |
$ | 10,080 | $ | 10,080 | $ | | ||||||
Restricted cash |
35 | 35 | | |||||||||
Total financial assets |
$ | 10,115 | $ | 10,115 | $ | | ||||||
Liabilities: |
||||||||||||
Warrant liability |
$ | 3,727 | $ | | $ | 3,727 | ||||||
The following table summarizes our financial assets measured at fair value on a recurring
basis as of December 31, 2008 (in thousands):
Quoted Prices in | ||||||||||||
As of | Active Markets | Significant | ||||||||||
December 31, | for Identical | Unobservable | ||||||||||
Description | 2008 | Assets (Level 1) | Inputs (Level 3) | |||||||||
Assets: |
||||||||||||
Cash and cash equivalents: |
||||||||||||
Bank deposits and money market funds |
$ | 12,142 | $ | 12,142 | $ | | ||||||
Restricted cash |
31 | 31 | | |||||||||
Long-term restricted cash |
35 | 35 | | |||||||||
Deposits |
12 | 12 | | |||||||||
Total financial assets |
$ | 12,220 | $ | 12,220 | $ | | ||||||
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):
Level 3 | ||||
Balance at December 31, 2008 |
$ | | ||
Cumulative effect of change in accounting principle |
746 | |||
Change in fair value of warrant liability |
2,981 | |||
Balance at December 31, 2009 |
$ | 3,727 | ||
13. Subsequent Events
As disclosed in Note 2Purchases of Customer-related Intangible Assets, on December 30, 2009, we
entered into an Asset Purchase Agreement with LaRoss whereby we purchased up to 21,972 website
hosting accounts for up to $2.6 million in cash, which amount was subject to reduction in the event
any of the subscribers were not successfully transferred to the Company. After giving effect to
certain purchase price and subscriber adjustments, subsequent to December 31, 2009, the final
purchase price has been adjusted to $2.2 million and the number of website hosting accounts
purchased has been finalized at 18,817.
On February 1, 2010, we announced that during our year-end review, management determined that
warrants we issued in connection with a financing during 2007 contained an anti-dilution feature
that should be reclassified and treated as a derivative liability effective January 1, 2009 per the
amended provisions regarding the accounting for derivatives and
F-24
Table of Contents
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. On February 1, 2010,
management and our Audit Committee determined that our financial statements included in our
quarterly reports on Form 10-Q for the periods ended March 31, 2009, June 30, 2009 and September
30, 2009 should no longer be relied upon. Accordingly, on that date, we filed amendments to our
quarterly reports on Form 10-Q for the periods ended March 31, 2009, June 30, 2009 and September
30, 2009 to restate our financial statements to include the non-cash charges related to the
revaluation of the warrant liability.
On February 12, 2010, we entered into an Asset Purchase Agreement with LaRoss whereby we purchased
up to 10,000 website hosting accounts for up to $1,586,000 in cash, which amount will be reduced in
the event any of the subscribers are not successfully transferred to the Company or the subscriber
base fails to achieve a certain performance requirement. The performance requirement relates to the
average settlement rate of billings related to the purchased website hosting accounts over a six
month period. Depending on the actual settlement rate performance, the maximum purchase price per
account is $158.60 or $1,586,000 and the minimum purchase price per account is $125.00 or
$1,250,000, based on 10,000 website hosing accounts. LaRoss will provide ongoing billing services
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.
Schedule II Valuation and Qualifying Accounts
Years ended December 31, 2009, 2008 and 2007
Balance at | Charges to | Balance at | ||||||||||||||
Beginning | Costs and | End of | ||||||||||||||
of Period | Expenses | Deductions | Period | |||||||||||||
Accounts receivable (in thousands): |
||||||||||||||||
Allowance for doubtful accounts |
||||||||||||||||
2009 |
$ | 60 | $ | 175 | $ | (30 | ) | $ | 205 | |||||||
2008 |
$ | 15 | $ | 49 | $ | (4 | ) | $ | 60 | |||||||
2007 |
$ | 9 | $ | 14 | $ | (8 | ) | $ | 15 |
SELECTED QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)
(Unaudited)
(in thousands, except per share amounts)
(Unaudited)
Quarters Ended | ||||||||||||||||||||||||||||||||
September 30, | June 30, | March 31, | ||||||||||||||||||||||||||||||
December 31, | 2009 | 2009 | 2009 | December 31, | September 30, | June 30, | March 31, | |||||||||||||||||||||||||
2009 | (as amended) | (as amended) | (as amended) | 2008 | 2008 | 2008 | 2008 | |||||||||||||||||||||||||
Revenue |
$ | 16,364 | $ | 15,128 | $ | 13,726 | $ | 11,064 | $ | 9,573 | $ | 10,196 | $ | 9,646 | $ | 8,842 | ||||||||||||||||
Operating income (loss) |
$ | 285 | $ | (194 | ) | $ | (334 | ) | $ | (2,858 | ) | $ | (2,186 | ) | $ | (1,786 | ) | $ | (2,009 | ) | $ | (2,893 | ) | |||||||||
Net loss |
$ | (458 | ) | $ | (1,387 | ) | $ | (1,056 | ) | $ | (3,366 | ) | $ | (2,165 | ) | $ | (1,714 | ) | $ | (1,925 | ) | $ | (2,759 | ) | ||||||||
Basic net loss per share |
$ | (0.03 | ) | $ | (0.10 | ) | $ | (0.07 | ) | $ | (0.23 | ) | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.14 | ) | $ | (0.19 | ) | ||||||||
Diluted net loss per share |
$ | (0.03 | ) | $ | (0.10 | ) | $ | (0.07 | ) | $ | (0.23 | ) | $ | (0.15 | ) | $ | (0.12 | ) | $ | (0.14 | ) | $ | (0.19 | ) |
F-25
Table of Contents
INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
3.1 (1)
|
Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 (2)
|
Amendment to Restated Certificate of Incorporation of the Registrant | |
3.2 (3)
|
Amended and Restated Bylaws of the Registrant | |
3.3 (4)
|
Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation | |
3.4 (5)
|
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation. | |
4.1 (5)
|
Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto). | |
10.1 (6)#
|
1999 Equity Incentive Plan | |
10.2 (6)#
|
2000 Equity Incentive Plan | |
10.3 (1)#
|
2004 Equity Incentive Plan, as amended. | |
10.4 (7)#
|
2005 Equity Incentive Plan. | |
10.5 (8) #
|
2007 Equity Incentive Plan. | |
10.6 (9)#
|
2008 Equity Incentive Plan, as amended. | |
10.7 (10)#
|
Separation and General Release Agreement, dated as of February 23, 2009, by and between Douglas S. Norman and the Registrant | |
10.8 (10)#
|
Employment Agreement, dated as of February 23, 2009, by and between Brenda Agius and the Registrant | |
10.9 (11)#
|
Description of the Material Terms of the Registrants Bonus Program as of July 29, 2009. | |
10.10 (11)#
|
Employment Agreement by and between the Registrant and Heath Clarke dated July 30, 2009. | |
10.11 (11)#
|
Employment Agreement by and between the Registrant and Stanley B. Crair dated July 30, 2009. | |
10.12 (6)
|
Form of Indemnification Agreement between the Registrant and each of its directors and executive officers | |
10.13 (12)#
|
Board of Directors Compensation plan, as amended, dated December 20, 2005 | |
10.14 (13)
|
Lease between the Irvine Company and the Registrant dated March 18, 2005 | |
10.15 (14)
|
License Agreement dated October 17, 2005 by and between the Registrant and Overture Services, Inc. | |
10.16 (15)
|
Yahoo! Publisher Network Service Agreement dated October 17, 2005 by and between the Registrant and Overture Services, Inc. | |
10.17 (15)
|
Amendment No. 3 to Yahoo! Publisher Network Agreement dated August 28, 2007 by and among the Registrant and Overture Services, Inc. | |
10.18 (16)
|
Amended and Restated PFP Advertiser Distribution Agreement dated March 1, 2007 by and among the Registrant and Idearc Media Corp. | |
10.19 (17)
|
First Amendment to Amended and Restated PFP Advertiser Distribution Agreement dated March 7, 2008 by and among the Registrant and Idearc Media Corp. | |
10.20 (18)
|
Asset Purchase and Fulfillment Agreement, dated as of February 18, 2009, by and between LaRoss Partners, Inc. and the Registrant | |
10.21 (19)
|
Second Amendment to Amended and Restated PFP Advertiser Distribution Agreement, dated as of February 27, 2009, by and between Idearc Media Corp. and the Registrant | |
10.22 (20)
|
Asset Purchase Agreement, dated as of March 9, 2009, by and between LiveDeal, Inc., Telco Billing, Inc., a wholly owned subsidiary of LiveDeal, Inc and the Registrant | |
10.23 (21)
|
Amendment No. 4 to Yahoo! Publisher Network Agreement dated April 16, 2009 by and among the Registrant and Yahoo! Inc. | |
10.24 (22)
|
Amendment No. 5 to Yahoo! Publisher Network Agreement dated June 12, 2009 by and among the Registrant and Yahoo! Inc. | |
10.25 (23)
|
Loan and Security Agreement dated June 26, 2009, by and among Registrant, Square 1 Bank, and Local.com PG Acquisition Corporation. | |
10.26 (24)
|
First Amendment dated September 28, 2009 to Loan and Security Agreement dated June 26, 2009, by and among Registrant, Square 1 Bank, and Local.com PG Acquisition Corporation. | |
10.27 (25)
|
Amendment No. 6 to Yahoo! Publisher Network Agreement dated November 12, 2009 by and among the Registrant and Yahoo! Inc. | |
10.28 (26)
|
Google Inc. Advertising Program Terms by and between Company and Google Inc. entered into on or |
Table of Contents
Exhibit | ||
Number | Description | |
about October 2005. | ||
10.29*#
|
Employment Agreement by and between the Registrant and Scott Reinke dated April 30, 2009 | |
10.30*#
|
Employment Agreement by and between the Registrant and Michael O. Plonski dated July 27, 2009. | |
10.31*#
|
Amended Employment Agreement by and between the Registrant and Michael O. Plonski dated December 3, 2009. | |
14 (27)
|
Code of Business Conduct and Ethics. | |
21.1*
|
Subsidiaries of Registrant. | |
23.1*
|
Consent of Haskell & White LLP, independent registered public accounting firm. | |
31.1*
|
Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
# | Indicates management contract or compensatory plan. | |
(1) | Incorporated by reference from the Registrants Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004. | |
(2) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009 | |
(3) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007. | |
(4) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006. | |
(5) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008. | |
(6) | Incorporated by reference from the Registrants Registration Statement on Form SB-2, Amendment No. 1, filed with the Securities and Exchange Commission on August 11, 2004. | |
(7) | Incorporated by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 23, 2005. | |
(8) | Incorporate by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on July 3, 2007. | |
(9) | Incorporated by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 24, 2009. | |
(10) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 27, 2009. | |
(11) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 3, 2009. | |
(12) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 22, 2005. | |
(13) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 18, 2005. | |
(14) | Incorporated by reference from the Registrants Registration Statement on Form SB-2, Amendment No. 5, filed with the Securities and Exchange Commission on October 28, 2005. Confidential portions omitted and |
Table of Contents
filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended. | ||
(15) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 1, 2007. 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 Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 7, 2007. 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. | |
(17) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 11, 2008. 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. | |
(18) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 23, 2009. 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. | |
(19) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 5, 2009. 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 Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 12, 2009. | |
(21) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 20, 2009. 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 Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 17, 2009. 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 Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 23, 2009. 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. | |
(24) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 29, 2009. | |
(25) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 12, 2009. 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. | |
(26) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2010. | |
(27) | Incorporated by reference from the Registrants Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 30, 2009. |