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EX-31.2 - EX-31.2 - LOCAL Corp | a59459exv31w2.htm |
EX-31.1 - EX-31.1 - LOCAL Corp | a59459exv31w1.htm |
EX-32.1 - EX-32.1 - LOCAL Corp | a59459exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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 (State or other jurisdiction of incorporation or organization) |
33-0849123 (I.R.S. Employer Identification Number) |
7555 Irvine Center Drive
Irvine, CA 92618
(Address of principal executive offices, including zip code)
Irvine, CA 92618
(Address of principal executive offices, including zip code)
(949) 784-0800
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
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 þ | Non-accelerated filero | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
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
As of April 30, 2011 there were 21,231,284 shares of the registrants common stock, $0.00001
par value, outstanding.
LOCAL.COM CORPORATION
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
LOCAL.COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 20,213 | $ | 13,079 | ||||
Accounts receivable, net of allowances of
$297 and $297, respectively |
13,094 | 11,912 | ||||||
Notes receivable current portion |
624 | 249 | ||||||
Prepaid expenses and other current assets |
802 | 1,454 | ||||||
Total current assets |
34,733 | 26,694 | ||||||
Property and equipment, net |
7,405 | 7,119 | ||||||
Goodwill |
17,339 | 17,339 | ||||||
Intangible assets, net |
8,360 | 8,989 | ||||||
Long-term portion of note recievable |
706 | 751 | ||||||
Deposits |
52 | 52 | ||||||
Total assets |
$ | 68,595 | $ | 60,944 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,913 | $ | 7,626 | ||||
Accrued compensation |
1,461 | 1,906 | ||||||
Deferred rent |
622 | 641 | ||||||
Warrant liability |
1,281 | 2,840 | ||||||
Other accrued liabilities |
421 | 651 | ||||||
Revolving line of credit |
| 7,000 | ||||||
Deferred revenue |
537 | 699 | ||||||
Total current liabilities |
11,235 | 21,363 | ||||||
Deferred income taxes |
188 | 188 | ||||||
Total liabilities |
11,423 | 21,551 | ||||||
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 21,224 and 16,584, respectively |
| | ||||||
Additional paid-in capital |
113,291 | 94,194 | ||||||
Accumulated deficit |
(56,119 | ) | (54,801 | ) | ||||
Stockholders equity |
57,172 | 39,393 | ||||||
Total liabilities and stockholders equity |
$ | 68,595 | $ | 60,944 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LOCAL.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenue |
$ | 16,795 | $ | 18,631 | ||||
Operating Expenses: |
||||||||
Cost of revenues |
10,988 | 10,802 | ||||||
Sales and marketing |
3,282 | 3,098 | ||||||
General and administrative |
2,610 | 1,914 | ||||||
Research and development |
1,528 | 1,112 | ||||||
Amortization and write-down of intangibles |
1,198 | 1,230 | ||||||
Total operating expenses |
19,606 | 18,156 | ||||||
Operating income (loss) |
(2,811 | ) | 475 | |||||
Interest and other income (expense), net |
(55 | ) | (56 | ) | ||||
Change in fair value of warrant liability |
1,559 | (272 | ) | |||||
Income (loss) before income taxes |
(1,307 | ) | 147 | |||||
Provision for income taxes |
11 | 13 | ||||||
Net income (loss) |
$ | (1,318 | ) | $ | 134 | |||
Per share data: |
||||||||
Basic net income (loss) per share |
$ | (0.07 | ) | $ | 0.01 | |||
Diluted net income (loss) per share |
$ | (0.07 | ) | $ | 0.01 | |||
Basic weighted average shares outstanding |
20,241 | 14,605 | ||||||
Diluted weighted average shares outstanding |
20,241 | 15,918 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LOCAL.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (1,318 | ) | $ | 134 | |||
Adjustments to reconcile net income (loss) to cash (used in) provided by operating
activities: |
||||||||
Depreciation and amortization |
1,847 | 1,476 | ||||||
Stock-based compensation expense |
972 | 624 | ||||||
Change in fair value of warrant liability |
(1,559 | ) | 272 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(1,182 | ) | (1,914 | ) | ||||
Note receivable |
45 | | ||||||
Prepaid expenses and other |
652 | 53 | ||||||
Accounts payable and accrued liabilities |
(1,407 | ) | 1,219 | |||||
Deferred revenue |
(162 | ) | (154 | ) | ||||
Net cash (used in) provided by operating activities |
(2,112 | ) | 1,710 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(935 | ) | (356 | ) | ||||
Issuance of notes receivable |
(375 | ) | | |||||
Purchases of intangible assets |
(520 | ) | (1,216 | ) | ||||
Net cash used in investing activities |
(1,830 | ) | (1,572 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of common stock: |
||||||||
Exercise of options |
74 | 716 | ||||||
Public offering |
18,227 | | ||||||
Payment of financing related costs |
(225 | ) | | |||||
Payment of revolving credit facility |
(7,000 | ) | | |||||
Net cash provided by financing activities |
11,076 | 716 | ||||||
Net increase in cash and cash equivalents |
7,134 | 854 | ||||||
Cash and cash equivalents, beginning of the period |
13,079 | 10,080 | ||||||
Cash and cash equivalents, end of the period |
$ | 20,213 | $ | 10,934 | ||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 31 | $ | 26 | ||||
Income taxes paid |
$ | 9 | $ | 169 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LOCAL.COM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
Nature of operations
We are a local media advertising company that enables local businesses and consumers to find each
other and connect. We operate online businesses that collectively reach over 20 million monthly
unique visitors across over 100,000 websites, and we serve over 37,000 small business customers
with a variety of web hosting and local online advertising products. Our Owned & Operated business
unit (O&O) manages our flagship property, Local.com, and a proprietary network of over 20,000
local websites, which collectively reaches over 15 million monthly unique visitors. Our Network
business unit (Network) operates (i) a leading private label local syndication network of over
1,100 U.S. regional media websites, (ii) 80,000 third-party local websites, and (iii) our own
organic feed of local businesses plus third-party advertising feeds, both of which are focused
primarily on local consumers, to a distribution network of hundreds of websites. Our Sales & Ad
Services business unit (SAS) provides over 37,000 direct monthly subscribers with web hosting or
web listing products. We use patented and proprietary search technologies and systems, to provide
consumers with relevant search results for local businesses, products and services. By providing
our users and those of our network partners with robust, current, local information about
businesses and other offerings in their local area, we have attracted an audience of users that our
direct advertisers and advertising partners desire to reach. In May, 2011, the Company officially
launched Spreebird, the companys new daily deal service, website and brand. Spreebird represents
the companys new Social Buying business unit (Social Buying).
Principles of consolidation and basis of presentation
Our consolidated 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. In April 2010, Local.com PG Acquisition Corporation merged with and
into Local.com Corporation and the separate corporate entity of Local.com PG Acquisition
Corporation ceased to exist. We have evaluated all subsequent events through the date the
consolidated financial statements were issued.
The unaudited interim condensed consolidated financial statements as of March 31, 2011 and for the
three months ended March 31, 2011 and 2010, included herein, have been prepared by us, without
audit, pursuant to rules and regulations of the Securities and Exchange Commission, and, in the
opinion of management, reflect all adjustments (consisting of only normal recurring adjustments),
which are necessary for a fair presentation.
The results of operations for the three months ended March 31, 2011 are not necessarily indicative
of the results for the full year. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2010 included in our Form 10-K/A filed with the Securities and Exchange
Commission on April 29, 2011.
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.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts receivable,
long and short term notes receivable, revolving line of credit and accounts payable. The fair value
of our cash equivalents is determined based on Level 1 inputs, which consist of quoted prices in
active markets for identical assets. The carrying amount of the revolving line of credit
approximates its fair value because the interest rate on these instruments fluctuates with market
interest rates. The long term note receivable has a fixed interest rate considered to be market
related and therefore the carrying value also approximates its fair value. We believe that the
recorded values of all of our other financial instruments approximate their current fair values
because of their nature and respective relatively short maturity dates or durations.
The fair value of the warrant liability is determined using the Black-Scholes valuation method, a
Level 3 input, based on the quoted price of our common stock, volatility based on the historical
market activity of our stock, the expected life based
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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.
Intangible Assets
Intangible assets are amortized over their estimated useful lives, generally on a straight-line
basis over two to four years. The small business subscriber relationships are amortized based on
how we expect the customer relationships to contribute to future cash flows. As a result,
amortization of the small business subscriber relationships intangible assets is accelerated over a
period of approximately four years with the weighted average percentage amortization for all small
business subscriber relationships acquired to date being approximately 60% in year one, 21% in year
two, 14% in year three and 5% in year four.
2. Notes receivable
During 2010 the Company entered into a promissory note and security agreement with one of its
customers related to the sale of domain names and services. The promissory note totaled $1,000,000,
carrying interest at 5% per annum payable in twelve equal quarterly payments of $54,000 beginning
on March 31, 2011, and continuing on the last day of each calendar quarter thereafter until
December 31, 2013, and three additional annual balloon payments of $80,000, $210,000, and $157,238
due on the 31st day of December of 2011, 2012, and 2013, respectively. The Company considered the
credit quality of the customer and determined that no allowance for credit losses is necessary. As
of March 31, 2011, no portion of the note receivable balance was past due. The note receivable is
secured by the domain names sold to the customer.
The Company also entered into five separate short term promissory notes with Digital Post
Interactive, Inc., a Nevada corporation (DGLP) totaling $375,000 at March 31, 2011. Subsequent to
March 31, 2011, DGLP notified the Company that they intend to seek bankruptcy protection. In
conjunction with DGLP filing for bankruptcy, the Company entered into an asset purchase agreement
with DGLP for the acquisition of substantially all of the assets of Rovion, Inc. (Rovion) a
wholly-owned subsidiary of DGLP. As part of the asset purchase agreement, cash paid by the Company
for the acquisition of assets will be used to repay the promissory notes in full. The asset
purchase agreement will be completed upon the satisfaction of certain closing conditions, including
the approval of the transaction by the bankruptcy court. On May 4, 2011 the bankruptcy court
approved the asset purchase agreement.
3. Intangible assets
Intangible assets, net, consisted of the following (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
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 |
$ | 4,488 | $ | (2,584 | ) | $ | 1,904 | 4 | $ | 3,933 | $ | (2,446 | ) | $ | 1,487 | 4 | ||||||||||||||||
Non-compete agreements |
98 | (32 | ) | 66 | 2 | 83 | (25 | ) | 58 | 2 | ||||||||||||||||||||||
Customer-related |
12,939 | (8,556 | ) | 4,383 | 4 | 12,939 | (7,534 | ) | 5,405 | 4 | ||||||||||||||||||||||
Patents |
431 | (431 | ) | | 3 | 431 | (431 | ) | | 3 | ||||||||||||||||||||||
Domain names indefinite life |
1,601 | | 1,601 | 1,601 | | 1,601 | ||||||||||||||||||||||||||
Trademarks and Trade Name |
500 | (94 | ) | 406 | 4 | 500 | (62 | ) | 438 | 4 | ||||||||||||||||||||||
$ | 20,057 | $ | (11,697 | ) | $ | 8,360 | $ | 19,487 | $ | (10,498 | ) | $ | 8,989 | |||||||||||||||||||
4. Acquisition
On January 1, 2011, the Company entered into an asset purchase agreement for the purchase of all
the assets of iTwango. The assets acquired consisted of an early stage group-buying technology
platform that allows advertisers to submit discounted offers to consumers who receive those
geo-targeted offers daily via email and various other sources. The Company made an initial payment
of $300,000 and issued a total of 7,639 shares, worth approximately $50,000, for the assets. The
initial agreement included certain earnout provisions for additional
payments of up to $100,000.
The Company made an initial earnout payment of $10,000 in January 2011. On February 25, 2011 the
Company entered into a modification and release agreement whereby the Company made an additional
payment of $90,000 in exchange for the release of any future liability to the Company as it relates
to the earnout payments noted in the original asset purchase agreement. The assets acquired are
being used in the Companys new social buying business unit. As a result of this transaction, the
Company recognized approximately $450,000 of amortizable intangible assets.
5. Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of the net tangible and
intangible assets arising from acquisitions and purchased domain names are recorded at cost.
Intangible assets, such as goodwill and domain names, which are determined to have an indefinite
life, are not amortized. We perform annual impairment reviews during the fourth
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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 for our indefinite lived
intangible assets, as of December 31, 2010 and determined that the estimated fair value of the
reporting unit substantially exceeded its carrying value and therefore no impairment existed.
Future impairment reviews may result in charges against earnings to write-down the value of
intangible assets.
6. Web site development costs and computer software developed for internal use
Generally accepted accounting principles in the Unites States (U.S. GAAP) require that
development 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 further requires that costs incurred in
the preliminary project and operating stage of web site development be expensed as incurred and
that certain costs incurred in the development stage of web site development be capitalized and
amortized over its useful life. During the three months ended March 31, 2011, we capitalized
$898,000, related to web site development. Amortization of capitalized web site costs was $381,000,
for the three months ended March 31, 2011. During the three months ended March 31, 2010, we
capitalized $212,000 related to web site development. Amortization of capitalized web site costs
was $114,000 for the three months ended March 31, 2010. Capitalized web site costs are included in
property and equipment, net.
7. Net income (loss) per share
Basic net income (loss) per share is calculated using the weighted average shares of common stock
outstanding during the periods. Diluted net income (loss) per share is calculated using the
weighted average number of common and potentially dilutive common shares outstanding during the
period, using the treasury stock method for options and warrants.
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):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Numerator: |
||||||||
Net income (loss) |
$ | (1,318 | ) | $ | 134 | |||
Denominator: |
||||||||
Denominator for historical basic calculation weighted average shares |
20,241 | 14,605 | ||||||
Dilutive common stock equivalents:* |
||||||||
Options |
| 966 | ||||||
Warrants |
| 347 | ||||||
Denominator for historical diluted calculation weighted average shares |
20,241 | 15,918 | ||||||
Net income (loss) per share: |
||||||||
Historical basic net income (loss) per share |
$ | (0.07 | ) | $ | 0.01 | |||
Historical diluted net income (loss) per share |
$ | (0.07 | ) | $ | 0.01 | |||
* | For the three months ended March 31, 2011, potentially dilutive securities, which consist of options to purchase 4,104,161 shares of common stock at prices ranging from $1.28 to $16.59 per share and warrants to purchase 1,477,936 shares of common stock at prices ranging from $4.32 to $8.09 per share were not included in the computation of diluted net income per share because such inclusion would be antidilutive. |
In January 2011, the Company consummated a public offering of 4,600,000 shares of common stock, at
a price of $4.25 per share, for total proceeds, net of issue costs, of $18.2 million.
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8. Composition of certain balance sheet and statement of operations captions
Property and equipment, net, consisted of the following (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Furniture and fixtures |
$ | 852 | $ | 835 | ||||
Office equipment |
399 | 397 | ||||||
Computer equipment |
2,848 | 2,737 | ||||||
Computer software |
7,046 | 6,249 | ||||||
Leasehold improvements |
893 | 886 | ||||||
12,038 | 11,104 | |||||||
Less accumulated depreciation and
amortization |
(4,633 | ) | (3,985 | ) | ||||
Property and equipment, net |
$ | 7,405 | $ | 7,119 | ||||
Interest and other income (expense), net, consisted of the following (in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Interest income |
$ | 17 | $ | 6 | ||||
Interest expense |
(72 | ) | (62 | ) | ||||
Interest and other income (expense), net |
$ | (55 | ) | $ | (56 | ) | ||
9. Credit facility
On June 28, 2010, we entered into a Loan and Security Agreement (the LSA) with Silicon Valley
Bank (SVB). The LSA provides us with a revolving credit facility of up to $30.0 million (the
Revolving Line). The maturity date of the Revolving Line is June 28, 2013.
The LSA allows us to choose whether borrowings made from the Revolving Line bear interest either at
the prime rate announced from time to time by SVB or the prime rate plus 0.5% or 1%, or at LIBOR
plus 2%, 2.5% or 3%, depending in the case of both prime rate and LIBOR rate borrowings on whether
our leverage ratio is less than one, at least one and not greater than two, or greater than two.
The leverage ratio is our consolidated funded indebtedness to our consolidated EBITDA for the
twelve months ending on the date of determination. For the quarter ended March 31, 2011 we elected
the LIBOR rate as the interest rate for the facility.
Our ability to borrow under the Revolving Line is subject to various ongoing conditions precedent,
described in further detail in the LSA. Some of these conditions are subject to SVBs judgment in
its sole discretion as to specified matters such as whether or not there has been any material
impairment in our results of operation or financial condition. The LSA contains customary
representations, warranties, and affirmative and negative covenants for facilities of this type,
including certain restrictions on dispositions of our assets, changes in business, change in
control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and
encumbrances. The LSA also 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, SVB has certain rights and remedies under the LSA, including declaring all outstanding
borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of
set-off.
We must meet certain financial covenants during the term of the Revolving Line, including
maintaining a minimum adjusted quick ratio of 1.25 to 1, which is a ratio of our unrestricted cash
and cash equivalents plus net billed accounts receivable and investments that mature in fewer than
12 months to our current liabilities minus deferred revenue, warrant liability and plus 25% of any
outstanding credit extensions under the Revolving Line. We are also required to maintain a Leverage
Ratio of not greater than 2.5 at the end of each fiscal quarter through June 30, 2012, and 2.0 at
the end of each fiscal quarter thereafter. In
addition, our quarterly adjusted EBITDA must equal at least $1,000,000 (this minimum amount is for
financial covenant purposes only, and does not represent projections of our future financial
results). As of March 31, 2011 we had no balance outstanding on the revolving line of credit and
therefore such financial covenants were not applicable. Should we draw on the revolving line, we
cannot assure you that we will remain in compliance with our financial covenants in the future. If
we are unable to comply with our financial covenants, the lender may declare an event of default
under the loan agreement, in which event all outstanding borrowings would become immediately due
and payable and no further amounts would be available under the Revolving Line. The Companys
results for the first quarter of 2011 are such that the Company did not satisfy the
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quarterly
EBITDA requirement of $1,000,000 under the Revolving Line. As such, we did not have any funds
available under the revolving credit line with Silicon Valley Bank Line at the end of the first
quarter of 2011 and do not expect to have any availability until such time as our quarterly results
satisfy certain covenant requirements.
We paid a facility fee of $75,000 to SVB on June 28, 2010, pursuant to the LSA. Additionally, there
is an annual facility fee of 0.25% of the unused portion of the Revolving Line, calculated as
specified in the LSA. In addition, we paid $225,000 in professional fees related to closing the
LSA.
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 LSA.
The Revolving Line replaced a $10 million credit facility with Square 1 Bank, entered into on June
26, 2009, pursuant to a loan and security agreement . The loan and
security agreement expired by its
terms on June 25, 2010, and we paid off the $3 million balance at that time.
During the first quarter of 2011 the Company repaid the total amount outstanding of $7 million on
the Revolving Line.
10. 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):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenue by geographic region: |
||||||||
United States |
$ | 16,795 | $ | 18,631 | ||||
Revenue by product: |
||||||||
Pay-Per-Click (PPC) |
$ | 12,427 | $ | 14,797 | ||||
Local Promote (Subscription) |
963 | 1,554 | ||||||
Domain Sales and Services |
1,873 | 1,173 | ||||||
Banner Advertisement |
1,532 | 1,095 | ||||||
Local Connect (License) |
| 12 | ||||||
Total revenue |
$ | 16,795 | $ | 18,631 | ||||
11. Stock-based compensation
Stock option activity under the equity incentive plans during the three months ended March 31, 2011
was as follows:
Weighted | Aggregate | |||||||||||
Average | Intrinsic Value | |||||||||||
Shares | Exercise Price | (in thousands) | ||||||||||
Outstanding at December 31, 2010 |
4,037,768 | $ | 5.02 | |||||||||
Granted |
172,300 | 4.43 | ||||||||||
Exercised |
(31,919 | ) | 2.33 | |||||||||
Cancelled |
(73,988 | ) | 4.43 | |||||||||
Outstanding at March 31, 2011 |
4,104,161 | $ | 5.03 | $ | 1,310 | |||||||
Exercisable at March 31, 2011 |
2,038,507 | $ | 4.98 | $ | 868 | |||||||
The weighted-average fair value at grant date for the options granted during the three months
ended March 31, 2011 and 2010 was $3.05 and $5.30 per option, respectively.
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The aggregate intrinsic value of all options exercised during the three months ended March 31, 2011
and 2010 was $87,000 and $585,000, respectively.
The following table summarizes information regarding options outstanding and exercisable at March
31, 2011:
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 |
419,120 | 5.9 years | $ | 1.57 | 303,801 | $ | 1.57 | |||||||||||||
$2.01 - $3.00 |
105,310 | 7.0 years | 2.31 | 44,375 | 2.33 | |||||||||||||||
$3.01 - $4.00 |
726,060 | 6.4 years | 3.69 | 434,790 | 3.71 | |||||||||||||||
$4.01 - $5.00 |
1,221,860 | 7.0 years | 4.57 | 640,197 | 4.63 | |||||||||||||||
$5.01 - $6.00 |
282,591 | 7.4 years | 5.50 | 152,951 | 5.64 | |||||||||||||||
$6.01 - $7.00 |
839,182 | 9.1 years | 6.18 | 119,105 | 6.40 | |||||||||||||||
$7.01 - $8.00 |
221,862 | 5.1 years | 7.49 | 190,112 | 7.51 | |||||||||||||||
$8.01 - $9.00 |
190,000 | 7.7 years | 8.51 | 55,000 | 8.98 | |||||||||||||||
$9.01 - $10.00 |
15,000 | 4.2 years | 9.90 | 15,000 | 9.90 | |||||||||||||||
$10.01 - $16.59 |
83,176 | 3.3 years | 15.62 | 83,176 | 15.62 | |||||||||||||||
4,104,161 | 7.1 years | $ | 5.03 | 2,038,507 | $ | 4.98 | ||||||||||||||
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:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Risk-free interest rate |
2.04 | % | 3.28 | % | ||||
Expected lives (in years) |
5.2 years | 6.1 years | ||||||
Expected dividend yield |
None | None | ||||||
Expected volatility |
85.35 | % | 92.60 | % |
Total stock-based compensation expense recognized for the three months ended March 31, 2011
and 2010 was as follows (in thousands, except per share amount):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cost of revenues |
$ | 86 | $ | 20 | ||||
Sales and marketing |
319 | 156 | ||||||
General and administrative |
448 | 301 | ||||||
Research and development |
119 | 147 | ||||||
Total stock-based compensation expense |
$ | 972 | $ | 624 | ||||
Basic and diluted net stock-based compensation expense per share |
$ | 0.05 | $ | 0.04 | ||||
12. Stock repurchase program
On August 4, 2010, our Board of Directors approved a stock repurchase program of up to $2.0 million
of Local.com Corporation common stock. The share repurchase program is authorized for 12 months 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, 2010, we repurchased
270,400 shares of common stock at an average price of $4.52 per share and an aggregate purchase
price of approximately $1.2 million. During the quarter ended March 31, 2011 the board of directors
terminated the stock repurchase plan.
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13. Warrants
On January 20, 2011, in connection with the completion of the offer and sale to the underwriter of
4,600,000 shares of common stock and in accordance with the anti-dilution provisions contained in
each of the warrants to purchase up to 537,373 shares of common stock at an exercise price of $7.89
per share that were issued in a private placement transaction on August 1, 2007 (the Series A
Warrants) and the warrants to purchase up to 537,373 shares of common stock at an exercise price
of $9.26 per share that were issued in the same private placement transaction on August 1, 2007
(the Series B Warrants), the exercise price of the Series A Warrants and the Series B Warrants
was reduced to $7.02 per share and $8.09 per share, respectively, and the Company issued an
additional 66,207 Series A Warrants at an exercise price of $7.02 per share, which are immediately
exercisable (the New Series A Warrants), and an additional 77,707 Series B Warrants at an
exercise price of $8.09 per share, which are immediately exercisable (the New Series B Warrants
and together with the New Series A Warrants, the New Warrants). The Series A Warrants and the
Series B Warrants are exercisable until February 1, 2013 and February 3, 2014, respectively, and
the New Series A Warrants and the New Series B Warrants are exercisable until February 1, 2013, and
February 3, 2014, respectively.
Warrant activity for the three months ended March 31, 2011 was as follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at December 31, 2010 |
1,334,022 | $ | 7.88 | |||||
Issued |
143,914 | 7.60 | ||||||
Exercised |
| | ||||||
Expired |
| | ||||||
Outstanding at March 31, 2011 |
1,477,936 | $ | 7.11 | |||||
Exercisable at March 31, 2011 |
1,477,936 | $ | 7.11 | |||||
The following table summarizes information regarding warrants outstanding and exercisable at
March 31, 2011:
Warrants Outstanding and Exercisable | ||||||||||||
Average | ||||||||||||
Remaining | Weighted | |||||||||||
Contractual | Average | |||||||||||
Range of Exercise Price | Shares | Life | Exercise Price | |||||||||
$4.00 - $4.99 |
129,638 | 0.9 years | $ | 4.60 | ||||||||
$5.00 - $5.99 |
129,638 | 0.9 years | 5.41 | |||||||||
$7.00 - $7.99 |
603,580 | 1.8 years | 7.02 | |||||||||
$9.00 - $9.99 |
615,080 | 2.8 years | 8.09 | |||||||||
1,477,936 | 2.1 years | $ | 7.11 | |||||||||
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14. 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 March 31, 2011 (in thousands):
As of | Active Markets | Significant | ||||||||||
March 31, | for Identical | Unobservable | ||||||||||
Description | 2011 | Assets (Level 1) | Inputs (Level 3) | |||||||||
Assets: |
||||||||||||
Cash and cash equivalents: |
||||||||||||
Bank deposits and money market funds |
$ | 20,213 | $ | 20,213 | $ | | ||||||
Total financial assets |
$ | 20,213 | $ | 20,213 | $ | | ||||||
Liabilities: |
||||||||||||
Warrant liability |
$ | 1,281 | $ | | $ | 1,281 | ||||||
The following table summarizes our financial assets and liabilities measured at fair value on
a recurring basis as of December 31, 2010 (in thousands):
Quoted Prices in | ||||||||||||
As of | Active Markets | Significant | ||||||||||
December 31, | for Identical | Unobservable | ||||||||||
Description | 2010 | Assets (Level 1) | Inputs (Level 3) | |||||||||
Assets: |
||||||||||||
Cash and cash equivalents: |
||||||||||||
Bank deposits and money market funds |
$ | 13,079 | $ | 13,079 | $ | | ||||||
Total financial assets |
$ | 13,079 | $ | 13,079 | $ | | ||||||
Liabilities: |
||||||||||||
Warrant liability |
$ | 2,840 | $ | | $ | 2,840 | ||||||
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
March 31, 2011, our warrant liability 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 fair value of the warrant liability was estimated at March 31, 2011 grant using a Black-Scholes
option pricing model with the following assumptions:
Exercise Price of | ||||||||
Related Warrants | ||||||||
$8.09 | $7.02 | |||||||
Risk-free interest rate |
1.29 | % | 0.80 | % | ||||
Expected lives (in years) |
2.8 years | 1.8 years | ||||||
Expected dividend yield |
None | None | ||||||
Expected volatility |
81.80 | % | 70.22 | % |
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, 2010 |
$ | 2,840 | ||
Change in fair value of warrant liability |
(1,559 | ) | ||
Balance at March 31, 2011 |
$ | 1,281 | ||
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15. Subsequent Events
Rovion
On February 11, 2011, we entered into an asset purchase agreement with Digital Post Interactive,
Inc., a Nevada corporation, and its wholly-owned subsidiary, Rovion, Inc., a Delaware
corporation, pursuant to which we would acquire substantially all of the assets of
Rovion (the Rovion Agreement). On March 23, 2011, the Company, DGLP and Rovion, agreed to
mutually terminate the Rovion Agreement following notice from DGLP and Rovion to the Company that
they intended to seek bankruptcy protection. Subsequently, the Company, DGLP and Rovion entered
into negotiations to purchase the assets of Rovion in accordance with the bankruptcy proceedings.
On April 4, 2011, the Company entered into an Asset Purchase Agreement (Agreement) with DGLP and
Rovion, pursuant to which the Company acquired substantially all of
the assets of Rovion on May 5,
2011. The assets acquired include:
| A rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including In-Person the online video spokesperson, as well as virtually all other forms of rich media advertisements; | ||
| A rich media advertising toolset, known as the Rovion Ad Management Platform (RAMP), targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RAMP control panel; | ||
| A workflow/tracking toolset that facilitates the schedules and tracking of In-Person ad requests, scheduling of actors and studios and the approval of scripts; and | ||
| Two professional quality green-screen studios and the maintenance of a network of relationships for access to additional professional quality green-screen studios throughout the United States. |
The purchase of the Rovion assets was completed following the satisfaction of all closing
conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion.
In accordance with the terms of the Agreement, the Company paid DGLP and Rovion $2,196,000 less
$485,000 in loans owed by DGLP to Rovion. The transaction was funded from the Companys cash on
hand. Allocation of the purchase price will be determined based on a fair market valuation of the
assets acquired. Except for liabilities arising from certain contracts to be assumed by the Company
from and after the closing of the transaction and accounts payable related to Rovion, no other
liabilities will be assumed by the Company in connection with the transaction.
The initial accounting for the Rovion asset purchase is not yet complete. We are currently
analyzing the fair value of each major class of assets acquired and liabilities assumed. These fair
value calculations and judgments are complex and not yet completed as of the date of this report.
Krillion
On April 29, 2011, the Company entered into a Stock Purchase Agreement (SPA) with Krillion, Inc.,
a Delaware corporation (Krillion), all of the stockholders of Krillion and the stockholders agent to purchase
all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash.
The transaction was funded from the Companys cash on hand. The purchase price was subject to
working capital adjustments as outlined in the SPA.
Krillion provides consumers and its business partners real-time information on where specific
branded products are sold, and which retailer, at a particular retail location, has them in stock.
Krillion aggregates and structures consumer product information in real time, to create an
up-to-the-minute index of products across various brands, at various retailer locations in multiple
cities across the United States. Krillion further provides the following products and services
| patent-pending local product search platform, the Krillion Localization Engine that helps connect customers with in-stock products at local retailers; | ||
| real-time StockCheck tool that enables web-savvy shoppers to find, compare and buy products at particular retail locations near them; | ||
| the ability for consumers to take advantage of in-store pickup and other convenience services offered by multichannel retailers and; | ||
| local product information that is available as a data service that powers the websites and applications of manufacturers and content providers, mobile providers and applications, and the rich media for marketers |
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The Company, Krillion and the Krillion stockholders also agreed to establish a $1.0 million escrow
fund to secure the Companys rights to seek indemnification under the Agreement, as well as any
adjustment to the purchase price that might be required. The escrow fund will terminate the day on
or after all the funds have been paid out of the escrow fund.
The initial accounting for the Krillion stock purchase is not yet complete. We are currently
analyzing the fair value of each major class of assets acquired and liabilities assumed. These fair
value calculations and judgments are complex and not yet completed as of the date of this report.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q or certain information included or incorporated by reference in
this report, contains or may contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact,
are statements that could be deemed forward-looking statements within the meaning of the federal
securities laws. 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, expect, plan,
anticipate, believe, estimate, predict, project, and potential or the negative of such
terms or other comparable terminology. In addition, important factors to consider in evaluating
such forward-looking statements include changes or developments in social, economic, market, legal
or regulatory circumstances, changes in our business or growth strategy or an inability to execute
our strategy due to changes in our industry or the economy generally, the emergence of new or
growing competitors, the actions or omissions of third parties, including customers, competitors
and governmental authorities, and various other factors, including those described or referred to
in Item 1A of Part II of this Quarterly Report. Should any one or more of these risks or
uncertainties materialize, or the underlying estimates or assumptions prove incorrect, our actual
results could differ materially from those expressed in the forward-looking statements and there
can be no assurance that the forward-looking statements contained in this report will in fact
occur.
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with the attached condensed consolidated financial statements and related
notes thereto, and with the audited consolidated financial statements and related notes thereto as
of December 31, 2010 and for the year ended December 31, 2010 included in our Annual Report on Form
10-K/A filed with the Securities and Exchange Commission on April 29, 2011.
Overview
We are a local media advertising company that enables local businesses and consumers to find each
other and connect. We operate online businesses that collectively reach over 20 million monthly
unique visitors across over 100,000 websites, and we serve over 37,000 small business customers
with a variety of web hosting and local online advertising products.
Our Owned & Operated business unit manages our flagship property, Local.com, and a proprietary
network of over 20,000 local websites, which reaches over 15 million monthly unique visitors. Our
Network business unit operates (i) a leading private label local syndication network of over 1,100
U.S. regional media websites, (ii) 80,000 third-party local websites, and (iii) our own organic
feed of local businesses plus third-party advertising feeds, both of which are focused primarily on
local consumers to a distribution network of hundreds of websites. Our Sales & Ad Services business
unit provides over 37,000 direct monthly subscribers with web hosting or web listing products. Our
Octane business, which is a part of our Sales & Ad Services business unit, significantly adds to
the products and services we are able to offer our direct customers, including the sourcing,
registration, development and hosting of geo-category based local website domains. We use patented
and proprietary search technologies and systems, to provide consumers with relevant search results
for local businesses, products and services. By providing our users and those of our network
partners with robust, current, local information about businesses and other offerings in their
local area, we have attracted an audience of users that our direct advertisers and advertising
partners desire to reach.
We launched Local.com in August of 2005, our local syndication network in July 2007, and we
expanded our sales and advertiser services offerings to include a larger number of direct service
subscribers throughout 2009 and 2010. In the third quarter of 2010, we also acquired Octane360. 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 May, 2011, the Company launched Spreebird, the companys new daily deal service, website and
brand. Spreebird represents the companys new Social Buying business unit.
Recent Developments
On January 14, 2011, we entered into an Underwriting Agreement (the Underwriting Agreement) with
respect to the offer and sale (the Offering) of 4,000,000 shares of our common stock at a price
to the public of $4.25 per share. Under the terms of the Underwriting Agreement, we granted the
underwriter an option, exercisable for 30 days, to purchase up to an additional 600,000 shares of
our common stock (the Option Shares) at the same purchase price to cover over-allotments, which
was exercised in full by the underwriter on January 18, 2011. The offering of our common stock was
made pursuant to our effective shelf registration statement on Form S-3 (Registration No.
333-147494) (the Registration Statement), including a related prospectus as supplemented by a
Preliminary Prospectus Supplement dated January 13, 2011 and
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Prospectus Supplement dated January 14, 2011, which we filed with the SEC pursuant to Rule 424(b)
under the Securities Act of 1933, as amended. The Registration Statement was set to expire on
January 15, 2011, but was extended as a result of our filing on January 14, 2011 of a new shelf
registration statement on Form S-3 to register 8,000,000 shares of its common stock in replacement
of the expiring Registration Statement (the New Shelf Registration Statement). While we sold
4,600,000 shares of our common stock in the Offering which reduced the number of available shares
under the New Registration Statement, we intend to increase the number of available shares so that
we will have up to 8,000,000 shares available for future offerings under the replacement
registration statement. Net proceeds to the Company from the sale of shares in the Offering, after
deducting underwriting discounts and commissions and other related expenses, was approximately
$18.2 million.
On January 20, 2011, in connection with the completion of the Offering and in accordance with the
anti-dilution provisions contained in each of the warrants to purchase up to 537,373 shares of
common stock at an exercise price of $7.89 per share that were issued in a private placement
transaction on August 1, 2007 and the warrants to purchase up to 537,373 shares of common stock at
an exercise price of $9.26 per share that were issued in the same private placement transaction on
August 1, 2007, the exercise price of the Series A Warrants and the Series B Warrants was reduced
to $7.02 per share and $8.09 per share, respectively, and the Company issued an additional 66,207
Series A Warrants at an exercise price of $7.02 per share, which are immediately exercisable, and
an additional 77,707 Series B Warrants at an exercise price of $8.09 per share, which are
immediately exercisable. The Series A Warrants and the Series B Warrants are exercisable until
February 1, 2013 and February 3, 2014, respectively, and the New Series A Warrants and the New
Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively.
In January 2011, we entered into an asset purchase agreement with iTwango for the purchase of a
deal-of-the-day technology platform. The purchase price, including earnout payments, totaled
approximately $450,000 paid in a combination of cash and our common stock.
On February 11, 2011, the Company entered into an asset purchase agreement with Digital Post
Interactive, Inc., a Nevada corporation, and its wholly-owned subsidiary, Rovion, Inc., a Delaware
corporation, pursuant to which the Company would acquire substantially all of the assets of Rovion.
On March 23, 2011, the Company, DGLP and Rovion, agreed to mutually terminate the Rovion Agreement
following notice from DGLP and Rovion to the Company that they intended to seek bankruptcy
protection. Subsequently, the Company, DGLP and Rovion entered into negotiations to purchase the
assets of Rovion in accordance with the bankruptcy proceedings.
On April 4, 2011, the Company entered into an Asset Purchase Agreement with DGLP and Rovion,
pursuant to which the Company acquired substantially all of the
assets of Rovion on May 5, 2011.
The purchase of the Rovion assets was completed following the satisfaction of all closing
conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion.
In accordance with the terms of the Agreement, the Company paid DGLP and Rovion $2,196,000 less
$485,000 in loans owed by DGLP to Rovion. The transaction was funded from the Companys cash on
hand. Allocation of the purchase price will be determined based on a fair market valuation of the
assets acquired. Except for liabilities arising from certain contracts to be assumed by the Company
from and after the closing of the transaction and accounts payable related to Rovion, no other
liabilities will be assumed by the Company in connection with the transaction.
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 September 2010 study, The Kelsey Group estimates that the local search market in the
United States will grow from $4.2 billion in 2010 to $8.6 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
O&O and Network business units are designed to serve this market of consumers and advertisers,
which we believe will provide an opportunity for growth from increased local search volumes by
consumers, as well as increased competition by advertisers to display their ad listings in front of
those consumers.
Local search is relatively new, and as a result it is difficult to determine our current market
share or predict our future market share. Our revenue, profitability and future growth depend not
only on our ability to execute our business plan, but also, among other things, on acceptance of
our services, the growth of the paid-search market, our ability to effectively compete with other
providers of local search, and paid-search technologies and services.
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We have also taken steps to diversify our revenue sources, while maintaining our focus on local
offerings, including through the acquisition of Octane360 and more recently the acquisition of the
iTwango deal-of-the-day technology platform and its relaunch as Spreebird. Subsequent to
quarter-end we also acquired all of the outstanding capital stock of Krillion, a
local shopping data and content provider, and substantially all of the assets of Rovion, which
includes a self-service rich media advertising platform.
We intend to continue making significant investments in the Spreebird business and Rovion and
Krillion acquisitions as part of our initiative to diversify our revenue and promote the future
growth of the Company.
As we also continue to invest in our core offerings, while pursuing the acquisitions noted above,
we have increased our operating expenses, mainly related to traffic acquisition costs to bring
users to our Local.com website, the deployment of new features and functionality across business
units and the support of our acquired companies. We also intend to continue to increase our sales
and marketing expenses to promote our Local.com website.
In the fourth quarter of 2010, in connection with Yahoo!s integration of its advertising service
with Microsofts Bing, we experienced a material reduction in the revenue per click (RPC) that
Yahoo! pays for clicks on their advertisements on our sites. The material reduction in RPC from
Yahoo! had a material adverse effect on our revenue and earnings results for the fourth quarter of
2010 and first quarter 2011. We continue to actively work with Yahoo! to improve RPC and have also
been pursuing a number of other strategies, including, but not limited to, optimization of our SEM
campaigns as well as optimization and deployment of advertiser feeds from existing and new
partners. In the first quarter 2011 we normalized our operations to this shift in RPC from Yahoo!
while continuing our efforts to maximize our revenue and earnings opportunities with Yahoo!. These
and other strategies are intended to preserve revenue and net income. This lower level of
monetization from Yahoo! is expected to continue through 2011. We cannot give assurances that our
efforts to improve monetization with Yahoo! or any of the alternative strategies will be
successful.
Sources of Revenue
We generate revenue primarily on our Local.com website and Network 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; | ||
| domain sales and services; and | ||
| web hosting services. |
Operating Expenses
Cost of Revenues
Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to
our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of
campaign costs associated with driving consumers to our Local.com website, including personnel
costs associated with managing traffic acquisition programs. Other cost of revenues consists of
Internet connectivity costs, data center costs, amortization of certain software license fees and
maintenance, depreciation of computer equipment used in providing our paid-search services, and
payment processing fees (credit cards and fees for LEC billings). We advertise on large search
engine websites such as Google, Yahoo!, MSN/Bing and Ask.com, as well as other search
engine websites, by bidding on certain keywords we believe will drive traffic to our Local.com
website. During the three months ended March 31, 2011, approximately 64% of our overall traffic was
purchased from other search engine websites. During the three months ended March 31, 2011,
advertising costs to drive consumers to our Local.com website were $8.1 million of which $6.1
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.
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Sales and Marketing
Sales and marketing expenses consist of sales commissions and salaries for our internal and
outsourced sales force, customer service staff and marketing personnel, advertising and promotional
expenses. We record advertising costs and sales commission in the period in which the expense is
incurred. We expect our sales and marketing expenses will increase in absolute dollars as we
continue to experience growth.
General and Administrative
General and administrative expenses consist of salaries and other costs associated with employment
of our executive, finance, human resources and information technology staff, legal, tax and
accounting, and professional service fees.
Research and Development
Research and development expenses consist of salaries and other costs of employment of our
development staff, outside contractor costs and amortization of capitalized website development
costs.
Critical Accounting Policies
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 also described in more detail in Note 1 to our consolidated financial statements included
in our 2010 Annual Report on Form 10-K, 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, the fulfillment of
subscription listing obligations, or the delivery of Octane360 products to our customers. We enter
into contracts to distribute sponsored listings and banner advertisements with our direct and
indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and
can be cancelled at anytime. Our indirect advertisers provide us with sponsored listings with bid
prices (for example, what their advertisers are willing to pay for each click-through on those
listings). We recognize our portion of the bid price based upon our contractual agreement.
Sponsored listings and banner advertisements are included as search results in response to keyword
searches performed by consumers on our Local.com website and network partner websites. Revenue is
recognized when earned based on click-through and impression activity to the extent that collection
is reasonably assured from credit worthy advertisers. 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.
During the year ended December 31, 2010 we entered into multiple-deliverable arrangements for the
sale of domains and for providing services relating to such domains. We evaluated the agreements in
accordance with the provision of the revenue recognition topic that addresses multiple-deliverable
revenue arrangements as updated in October 2009. Although such updated provisions were only
effective for fiscal periods beginning on or after June 15, 2010, we opted to adopt such provisions
early. The multiple-deliverable arrangements entered into consisted of various units of accounting
such as the sale of domains, website development fees, content delivery and hosting fees. Such
elements were considered separate units of accounting due to each element having value to the
customer on a stand-alone basis. The selling price for each of the units of accounting was
determined using a combination of vendor-specific objective evidence and management estimates.
Revenue relating to domains was recognized with the transfer of title of such domains. Revenue for
website development, content delivery and hosting fees are recognized as such services are
performed or delivered. The agreements did not include any cancellation, termination or refund
provisions that we consider probable.
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Allowance for Doubtful Accounts
Our management estimates the losses that may result from that portion of our accounts receivable
that may not be collectible as a result of the inability of our customers to make required
payments. Management specifically analyzes accounts receivable and historical bad debt, customer
concentration, customer credit-worthiness, current economic trends and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. If we believe that our
customers financial condition has deteriorated such that it impairs their ability to make payments
to us, additional allowances may be required. We review past due accounts on a monthly basis and
record an allowance for doubtful accounts generally equal to any accounts receivable that are over
90 days past due and for which collectability is not reasonably assured.
As of March 31, 2011, two customers, Yahoo! and SuperMedia represented 59% of our total accounts
receivable. These customers have historically paid within the payment period provided for under
their contracts and management believes these customers will continue to do so.
Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of the net tangible and
intangible assets arising from acquisitions and purchased domain names are recorded at cost.
Intangible assets, such as goodwill and domain names, which are determined to have an indefinite
life, are not amortized. We perform annual impairment reviews during the fourth fiscal quarter of
each year or earlier if indicators of potential impairment exist. For goodwill, we engage an
independent appraiser to assist management in the determination of the fair value of our reporting
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 for our indefinite lived
intangible assets, as of December 31, 2010 and determined that the estimated fair value of the
reporting unit substantially exceeded its carrying value and therefore no impairment existed.
Future impairment reviews may result in charges against earnings to write-down the value of
intangible assets.
Stock Based Compensation
Total stock-based compensation expense recognized for the three months ended March 31, 2011 and
2010 is as follows (in thousands, except per share amount):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cost of revenues |
$ | 86 | $ | 20 | ||||
Sales and marketing |
319 | 156 | ||||||
General and administrative |
448 | 301 | ||||||
Research and development |
119 | 147 | ||||||
Total stock-based compensation expense |
$ | 972 | $ | 624 | ||||
Basic and diluted net stock-based compensation expense per share |
$ | 0.05 | $ | 0.04 | ||||
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Results of Operations
The following table sets forth our historical operating results as a percentage of revenue for the
three months ended March 31, 2011 and 2010:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenue |
100.0 | % | 100.0 | % | ||||
Operating expenses: |
||||||||
Cost of revenues |
65.4 | 58.0 | ||||||
Sales and marketing |
19.5 | 16.6 | ||||||
General and administrative |
15.5 | 10.3 | ||||||
Research and development |
9.1 | 6.0 | ||||||
Amortization and write-down of intangibles |
7.1 | 6.6 | ||||||
Total operating expenses |
116.7 | 97.5 | ||||||
Operating income (loss) |
(16.7 | ) | 2.5 | |||||
Interest and other income (expense), net |
(0.3 | ) | (0.3 | ) | ||||
Change in fair value of warrant liability |
9.3 | (1.5 | ) | |||||
Income (loss) before income taxes |
(7.8 | ) | 0.8 | |||||
Provision for income taxes |
0.1 | 0.1 | ||||||
Net income (loss) |
(7.8) | % | 0.7 | % | ||||
Three months ended March 31, 2011 and 2010
Revenue (dollars in thousands)
Three Months Ended March 31, | Percent | |||||||||||||||||||
2011 | (*) | 2010 | (*) | change | ||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||
Owned and operated |
$ | 10,242 | 61.0 | % | $ | 10,717 | 57.5 | % | (4.4 | )% | ||||||||||
Network |
3,723 | 22.2 | % | 5,189 | 27.9 | % | (28.3 | )% | ||||||||||||
Sales and advertiser services |
2,830 | 16.8 | % | 2,725 | 14.6 | % | 3.9 | % | ||||||||||||
Total revenue |
$ | 16,795 | 100.0 | % | $ | 18,631 | 100.0 | % | (9.9 | )% | ||||||||||
Owned and operated revenue for the three months ended March 31, 2011 decreased $0.5 million,
or 4.4%, compared to the same period in 2010. The decrease in revenue is primarily due to decreased
monetization as our revenue per thousand visitors (RKV) decreased to $211 for the three months
ended March 31, 2011 from $260 for the three months ended March 31, 2010 partially offset by an
increase in traffic on our Local.com website. The decrease in RKV was a result of decreased RPC
from Yahoo!, Inc., our largest customer. The decrease in RPC was due to the Yahoo!/Bing alliance,
which resulted in changes to the Yahoo! search and advertising platform. The decline in the revenue
from Yahoo! started during the fourth quarter of 2010. This lower level of monetization from Yahoo!
is expected to continue through 2011.
Network revenue for the three months ended March 31, 2011 decreased $1.5 million, or 28.3%,
compared to the same period in 2010. The decrease is primarily due to a decrease in network
partners on the Companys distribution network due to the decreased RPC caused by the Yahoo!/Bing
alliance.
Sales and advertiser services revenue for the three months ended March 31, 2011 remained relatively
flat compared to the same period in 2010.
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The growth in small business subscribers in prior years was a result of acquisitions of subscriber
bases and internal and outsourced sales efforts. The following table provides the revenue relating
to the acquisition of subscriber bases and revenue relating to internal and outsourced sales
efforts (dollars in thousands):
Three Months Ended March 31, | Percent | |||||||||||||||||||
2011 | (*) | 2010 | (*) | change | ||||||||||||||||
Revenue from internal and outsourced sales |
$ | 824 | 29.1 | % | $ | 825 | 30.3 | % | (0.1 | )% | ||||||||||
Revenue from acquired bases |
2,006 | 70.9 | % | 1,900 | 69.7 | % | 5.6 | % | ||||||||||||
Total sales and advertiser services revenue |
$ | 2,830 | 100.0 | % | $ | 2,725 | 100.0 | % | 3.9 | % | ||||||||||
Sales and advertiser services revenue from acquired subscriber bases for the three months
ended March 31, 2011 increased only 5.6%, compared to the same periods in 2010. Sales and
advertiser services revenue from internal and outsourced sales efforts for the three months ended
March 31, 2011 was consistent compared to the same period in 2010.
The base of small business subscribers decreased to approximately 37,000 on March 31, 2011 from
approximately 48,000 on March 31, 2010. The decreased in the small business subscriber base is due
to the Companys decision to suspend acquisitions of LEC-billed subscriber bases in order to
concentrate resources around the Octane360 product suite powered by our recently acquired Octane360
platform. As a result, we anticipate revenue from our existing subscribers to decline. Initially,
the expected growth in revenue from Octane360 products is not expected to fully offset the decline
in revenue from existing subscribers.
Based on
the above, total revenue for the three months ended March 31, 2011, decreased 9.9%,
compared to the same period in 2010.
The following table identifies 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 | ||||||||
Three Months Ended March 31, | ||||||||
Customer | 2011 | 2010 | ||||||
Yahoo! Inc. |
37.0 | % | 49.4 | % | ||||
SuperMedia Inc. |
22.7 | % | 20.7 | % |
Operating expenses:
Operating expenses were as follows (dollars in thousands):
Three Months Ended March 31, | ||||||||||||||||||||
Percent of | Percent of | |||||||||||||||||||
Total | Total | Percent | ||||||||||||||||||
2011 | Revenue | 2010 | Revenue | Change | ||||||||||||||||
Cost of revenues |
$ | 10,988 | 65.4 | % | $ | 10,802 | 58.0% | 1.7 | % | |||||||||||
Sales and marketing |
3,282 | 19.5 | % | 3,098 | 16.6% | 5.9 | % | |||||||||||||
General and administrative |
2,610 | 15.5 | % | 1,914 | 10.3% | 36.4 | % | |||||||||||||
Research and development |
1,528 | 9.1 | % | 1,112 | 6.0% | 37.4 | % | |||||||||||||
Amortization and write-down of intangibles |
1,198 | 7.1 | % | 1,230 | 6.6% | (2.6 | )% | |||||||||||||
Total operating expenses |
$ | 19,606 | 116.7 | % | $ | 18,156 | 97.5% | 8.0 | % | |||||||||||
Cost of revenues
Cost of revenues expense for the three months ended March 31, 2011 remained relatively flat
compared to the same period in 2010. During the period we had decreased revenue share payments to
distribution network partners due to decrease revenue relating to the distribution network, offset
by increased traffic acquisition costs associated with driving more consumers to our Local.com
website.
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Sales and marketing
Sales and marketing expenses for the three months ended March 31, 2011 remained relatively flat
compared to the same period in 2010 although somewhat higher as a percent of revenue.
General and administrative
General and administrative expenses for the three months ended March 31, 2011 increased by 36.4%
compared to the same periods in 2010. The increase is due to higher personnel-related costs as a
result of increased headcount, partially offset by a decrease in professional fees.
Research and development
Research and development expenses for the three months ended March 31, 2011 increased by 37.4%,
compared to the same periods in 2010. The increase is mainly due to higher personnel-related costs
and consulting fees as we continue to invest in our systems and technology platforms. We
capitalized an additional $898,000 of research and development expenses for website development and
amortized $381,000 during the three months ended March 31, 2011. We capitalized an additional
$212,000 of research and development expenses for website development and amortized $114,000 of
capitalized website development costs during the three months ended March 31, 2010.
Amortization of intangibles
Amortization of intangibles expense was $1,198,000 for the three months ended March 31, 2011,
compared to $1,230,000 for the three months ended March 31, 2010. The majority of the intangible
asset amortization relates to customer-related intangible assets which are amortized over the
expected life of the assets based on the expected cash flow from the customers. As a
result, amortization of the small business subscriber relationships intangible assets is
accelerated over a period of approximately four years with the weighted average percentage
amortization for all small business subscriber relationships acquired to date being approximately
60% in year one, 21% in year two, 14% in year three and 5% in year four.
Interest and other income (expense), net
Interest and other income (expense), net for the three months ended March 31, 2011 remained
relatively flat compared to the same period in 2010. Interest expense increased due to interest on
the Revolving Lines available and outstanding balance and amortization of fees related to the
Revolving Line, offset by an increase in interest income due to interest earned on an outstanding
note receivable.
Provision for income taxes
Provision
for income taxes was $11,000 for the three months ended March 31, 2011 primarily due to anticipated tax amortization on indefinite-lived assets, partially offset by California research
and development credits.
Liquidity and Capital Resources
Liquidity and capital resources highlights (in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 20,213 | $ | 13,079 | ||||
Working capital |
$ | 24,779 | $ | 8,171 | ||||
Cash flow highlights (in thousands):
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net cash (used in) provided by operating activities |
$ | (2,112 | ) | $ | 1,710 | |||
Net cash used in investing activities |
(1,830 | ) | (1,572 | ) | ||||
Net cash provided by financing activities |
11,076 | 716 |
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We have funded our business, to date, primarily from issuances of equity and debt securities;
however, during the years ended December 31, 2010 and 2009, we generated positive cash flow from
operations. Cash and cash equivalents were $20.2 million as of
March 31, 2011 and $13.1 million as
of December 31, 2010. We had working capital of $24.8 million as of March 31, 2011 and $8.1 million
as of December 31, 2010. Additionally, pursuant to the loan and security agreement with Silicon
Valley Bank that we entered into on June 28, 2010, as further discussed below, we have secured a
revolving credit facility of up to $30 million, based on certain formulas as set forth below.
During the three months ended March 31, 2011, we repaid the total balance outstanding of $7 million
to Silicon Valley Bank.
Net cash used in operating activities was $2.1 million for the three months ended March 31, 2011.
Net income adjusted for non-cash charges (adding back depreciation and amortization , stock-based
compensation expense and change in fair value of warrant liability) used was approximately $0.1
million. Changes in operating assets and liabilities used cash of $2.1 million. Net cash provided
by operating activities was $1.7 million for the three months ended March 31, 2010, primarily from
the net income adjusted for non-cash items. The change from net cash provided by operations to net
cash used in operations from the prior year period is primarily due to decreased bottom-line
results driven by lower revenue and decreased operating margins over the same period.
There are four primary drivers that affect cash provided by or (used in) operations: net income
(loss); non-cash adjustments to net income (loss); changes in accounts receivable; and changes in
accounts payable. For the three months ended March 31, 2011 the terms of our accounts receivable
and accounts payable remained unchanged.
The table below substantiates the change in net cash provided by (used in) operating activities for
the three months ended March 31, 2011 and 2010 (in thousands):
Three Months Ended March 31, | ||||||||||||
2011 | 2010 | Change | ||||||||||
Net income (loss) |
$ | (1,318 | ) | $ | 134 | $ | (1,452 | ) | ||||
Non-cash (1) |
1,260 | 2,372 | (1,112 | ) | ||||||||
Subtotal |
(58 | ) | 2,506 | (2,564 | ) | |||||||
AR, AP and Other |
(2,054 | ) | (796 | ) | (1,258 | ) | ||||||
Net cash (used in) provided by operations |
$ | (2,112 | ) | $ | 1,710 | $ | (3,822 | ) | ||||
(1) | Includes depreciation, amortization, change in fair value of warrant liability and non-cash expense related to stock option issuances. |
Net cash used in investing activities was $1.8 million for the three months ended March 31, 2011
and consisted of $935,000 for capital expenditures, $520,000 related to purchases of intangible
assets and $375,000 related to the issuance of notes receivable. Net cash provided by financing
activities was $11.1 million for the three months ended March 31, 2011 and primarily consisted of
$18.2 million from a public offering of the Companys common stock partially offset by the
repayment of the $7.0 million outstanding balance of the revolving credit facility.
Net cash used in investing activities was $1.6 million for the three months ended March 31, 2010
and consisted of $356,000 for capital expenditures and $1.2 million related to purchases of
customer-related intangible assets. Net cash provided by financing activities was $716,000 for the
three months ended March 31, 2010 from the proceeds from exercise of stock options.
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 28, 2010, we entered into a Loan and Security Agreement (the LSA) with Silicon Valley
Bank (SVB). The LSA provides us with a revolving credit facility of up to $30.0 million (the
Revolving Line). The maturity date of the Revolving Line is June 28, 2013.
The LSA allows us to choose whether borrowings made from the Revolving Line bear interest either at
the prime rate announced from time to time by SVB or the prime rate plus 0.5% or 1%, or at LIBOR
plus 2%, 2.5% or 3%, depending in the case of both prime rate and LIBOR rate borrowings on whether
our leverage ratio is less than one, at least one and not greater
than two, or greater than two. The leverage ratio is our consolidated funded indebtedness to our
consolidated EBITDA for the twelve months ending on the date of determination. For the quarter
ended March 31, 2011 we elected the LIBOR rate as the interest rate for the facility.
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Our ability to borrow under the Revolving Line is subject to various ongoing conditions precedent,
described in further detail in the LSA. Some of these conditions are subject to SVBs judgment in
its sole discretion as to specified matters such as whether or not there has been any material
impairment in our results of operation or financial condition. The LSA contains customary
representations, warranties, and affirmative and negative covenants for facilities of this type,
including certain restrictions on dispositions of our assets, changes in business, change in
control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and
encumbrances. The LSA also 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, SVB has certain rights and remedies under the LSA, including declaring all outstanding
borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of
set-off.
We must meet certain financial covenants during the term of the Revolving Line, including
maintaining a minimum adjusted quick ratio of 1.25 to 1, which is a ratio of our unrestricted cash
and cash equivalents plus net billed accounts receivable and investments that mature in fewer than
12 months to our current liabilities minus deferred revenue, warrant liability and plus 25% of any
outstanding credit extensions under the Revolving Line. We are also required to maintain a Leverage
Ratio of not greater than 2.5 at the end of each fiscal quarter through June 30, 2012, and 2.0 at
the end of each fiscal quarter thereafter. In addition, our quarterly adjusted EBITDA must equal at
least $1,000,000 (this minimum amount is for financial covenant purposes only, and does not
represent projections of our future financial results). As of March 31, 2011 we had no balance
outstanding on the revolving line of credit and therefore such financial covenants were not
applicable. Should we draw on the revolving line, we cannot assure you that we will remain in
compliance with our financial covenants in the future. If we are unable to comply with our
financial covenants, the lender may declare an event of default under the loan agreement, in which
event all outstanding borrowings would become immediately due and payable and no further amounts
would be available under the Revolving Line. The Companys results for the first quarter of 2011
are such that the Company did not satisfy the quarterly EBITDA requirement of $1,000,000 under the
Revolving Line. As such, we did not have any funds available under the revolving credit line with
Silicon Valley Bank Line at the end of the first quarter of 2011 and do not expect to have any
availability until such time as our quarterly results satisfy certain covenant requirements.
We paid a facility fee of $75,000 to SVB on June 28, 2010, pursuant to the LSA. Additionally, there
is an annual facility fee of 0.25% of the unused portion of the Revolving Line, calculated as
specified in the LSA. In addition, we paid $225,000 in professional fees related to closing the
LSA.
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 LSA.
The Revolving Line replaced a $10 million credit facility with Square 1 Bank, entered into on June
26, 2009, pursuant to a loan and security agreement. The loan and
security agreement expired by its
terms on June 25, 2010, and we paid off the $3 million balance at that time.
During the first quarter of 2011 the Company repaid the total amount outstanding of $7 million on
the Revolving Line.
Shelf Registration Statement
On January 14, 2011, we filed the New Registration Statement with the Securities and Exchange
Commission pursuant to which we registered 8,000,000 shares of our common stock. On March 23, 2011
we filed an amendment to the New Registration Statement with an effective date of April 12, 2011.
The shelf registration statement is set to expire in April 2014. We may periodically offer all or a
portion of the remaining shares of common stock registered on the New Registration Statement, when
it becomes effective, at prices and on terms to be announced when and if the shares of common stock
are so offered. The specifics of any future offerings, along with the use of proceeds of any common
stock offered, will be described in detail in a prospectus supplement, or other offering materials,
at the time of the offering. Our ability to sell our common stock, including on terms and at prices
that are acceptable to the Company, is subject to market conditions and other factors, such as
contractual commitments of our previously issued warrants.
Stock repurchase program
On August 4, 2010, our Board of Directors approved a stock repurchase program of up to $2.0 million
of Local.com Corporation common stock. The share repurchase program is authorized for 12 months 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, 2010, we repurchased
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270,400 shares of common stock
at an average price of $4.52 per share and an aggregate purchase price of approximately $1.2
million. During the quarter ended March 31, 2011 the board of directors terminated the stock
repurchase plan.
Subsequent events
On April 4, 2011, the Company entered into an Asset Purchase Agreement with DGLP and its
wholly-owned subsidiary Rovion, pursuant to which the Company
acquired on May 5, 2011 substantially
all of the assets of Rovion. The assets acquired include:
| A rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including In-Person the online video spokesperson, as well as virtually all other forms of rich media advertisements; | ||
| A rich media advertising toolset, known as the Rovion Ad Management Platform , targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RAMP control panel; | ||
| A workflow/tracking toolset that facilitates the schedules and tracking of In-Person ad requests, scheduling of actors and studios and the approval of scripts; and | ||
| Two professional quality green-screen studios and the maintenance of a network of relationships for access to additional professional quality green-screen studios throughout the United States. |
The transaction was completed following the satisfaction of certain closing conditions, including
the approval of the bankruptcy court currently hearing the bankruptcy proceedings of Rovion. DGLP
received $2,196,000 in cash of which $485,000 was used to repay certain promissory notes made by
DGLP and held by the Company. The transaction was funded from the Companys cash on hand.
Allocation of the purchase price will be determined based on a fair market valuation of the assets
acquired. Except for liabilities arising from certain contracts to be assumed by the Company from
and after the closing of the transaction and accounts payable related to Rovion, no other
liabilities will be assumed by the Registrant in connection with the transaction.
On April 29, 2011, the Company entered into a Stock Purchase Agreement (SPA) with Krillion, Inc.,
a Delaware corporation, all of the stockholders of Krillion and the stockholders agent to purchase
all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash.
The transaction was funded from the Companys cash on hand. The purchase price was subject to
working capital adjustments as outlined in the SPA.
Krillion provides consumers and its business partners real-time information on where specific
branded products are sold, and which retailer, at a particular retail location, has them in stock.
Krillion aggregates and structures consumer product information in real time, to create an
up-to-the-minute index of products across various brands, at various retailer locations in multiple
cities across the United States. Krillion further provides the following products and services:
| patent-pending local product search platform, the Krillion Localization Engine that helps connect customers with in-stock products at local retailers; | ||
| real-time StockCheck tool that enables web-savvy shoppers to find, compare and buy products at particular retail locations near them; | ||
| the ability for consumers to take advantage of in-store pickup and other convenience services offered by multichannel retailers and; | ||
| local product information that is available as a data service that powers the websites and applications of manufacturers and content providers, mobile providers and applications, and the rich media for marketers |
The Company, Krillion and the Krillion stockholders also agreed to establish a $1.0 million escrow
fund to secure the Companys rights to seek indemnification under the Agreement, as well as any
adjustment to the purchase price that might be required. The escrow fund will terminate the day on
or after all the funds have been paid out of the escrow fund.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Other than the repayment of the $7 million outstanding Revolving Line with SVB, which eliminated
our risk as it relates to fluctuation in interest rates, there have been no material changes in our
disclosures regarding market risk since December 31, 2010. See also Item 7A in our Annual Report on
Form 10-K/A for the year ended December 31, 2010 for further sensitivity analysis regarding our
market risk related to interest rates and derivative liabilities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act), as of
the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with
the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of
the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e)
and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure
controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded
that the disclosure controls and procedures were effective as of the end of the period covered by
this report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be subject to a variety of legal proceedings and claims in the ordinary
course of business, including claims of alleged infringement of intellectual property rights and
claims arising in connection with our services. Other than the GEOTAG discussed below, we are not
currently a party to any material legal proceedings.
GEOTAG Litigation
On July 23, 2010, a lawsuit alleging patent infringement was filed in the United States District
Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a
Delaware corporation with its principal offices in Plano, Texas. The complaint alleges that we
infringe U.S. Patent No. 5,930,474 (hereinafter, the 474 Patent) as a result of the operation
of our website at www.local.com. GEOTAG, Inc. purports to be the rightful assignee of all right,
title and interest in and to the 474 Patent. The complaint seeks unspecified amounts of damages
and costs incurred, including attorney fees, as well as a permanent injunction preventing us from
continuing those activities that are alleged to infringe the 474 Patent. We are investigating the
merits of the claims and intend to vigorously defend ourselves.
Leite Litigation
On March 9, 2011, a putative class action was filed in the Superior Court for the State of
California, County of Orange, against us, DGLP and the directors of DGLP, Michael Sawtell, Steven
Dong, and Brian Goss by Chris Leite, an individual and purported shareholder of DGLP on behalf of
himself and others alleged to be similarly situated. The complaint alleges that DGLP and its
directors have breached their fiduciary duties to DGLPs shareholders and that we aided and abetted
such breach in connection with the proposed acquisition by us of the assets of Rovion, Inc., the
wholly-owned subsidiary of DGLP, pursuant to that certain Asset Purchase Agreement by and between
DGLP and the Company dated February 11, 2011. On April 11, 2011 this putative class action
lawsuit was dismissed.
Item 1A. Risk Factors
Information on risk factors can be found in Part I, Item 1A. Risk Factors in our Annual Report on
Form 10-K/A for the year ended December 31, 2010 filed with the Securities and Exchange Commission
on April 29, 2011. There were no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K/A for the year ended December 31, 2010.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
All issuances of unregistered securities during the quarter ended March 31, 2011 have been
previously disclosed.
Item 3. Defaults Upon Senior Securities
None
Item 4. Removed and Reserved
None
Item 5. Other Information
None
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Item 6. Exhibits
Exhibit | ||
Number | Description | |
1.1(1)
|
Underwriting Agreement dated January 14, 2011, by and between Registrant and Canaccord Genuity Inc. | |
3.1 (2)
|
Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 (3)
|
Amendment to Restated Certificate of Incorporation of the Registrant | |
3.2 (4)
|
Amended and Restated Bylaws of the Registrant | |
3.3 (5)
|
Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation | |
3.4 (6)
|
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation. | |
4.1 (6)
|
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 (7)#
|
Fourth Amended and Restated Employment Agreement by and between the Registrant and Kenneth S. Cragun dated January 5, 2011. | |
10.2 (8)
|
Asset Purchase Agreement by and among the Registrant and DigitalPost Interactive, Inc. dated February 11, 2011. | |
10.3 (9)
|
Promissory note by and among the Registrant and DigitalPost Interactive, Inc. dated March 10, 2011. | |
10.4 (10)
|
Termination of Asset Purchase Agreement dated February 11, 2011 by and among the Registrant and DigitalPost Interactive, Inc. dated March 23, 2011. | |
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 Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2011. | |
(2) | 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. | |
(3) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009 | |
(4) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007. | |
(5) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006. | |
(6) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008. | |
(7) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2011. | |
(8) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 16, 2011. |
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(9) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 15, 2011. | |
(10) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 29, 2011. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LOCAL.COM CORPORATION |
||||
Date May 10, 2011 | /s/ Heath B. Clarke | |||
Heath B. Clarke | ||||
Chief Executive Officer (principal executive officer) and Chairman |
||||
Date May 10, 2011 | /s/ Kenneth S. Cragun | |||
Kenneth S. Cragun | ||||
Chief Financial Officer (principal financial and accounting officer) and Secretary |
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
1.1(1)
|
Underwriting Agreement dated January 14, 2011, by and between Registrant and Canaccord Genuity Inc. | |
3.1 (2)
|
Amended and Restated Certificate of Incorporation of the Registrant | |
3.2 (3)
|
Amendment to Restated Certificate of Incorporation of the Registrant | |
3.2 (4)
|
Amended and Restated Bylaws of the Registrant | |
3.3 (5)
|
Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation | |
3.4 (6)
|
Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation. | |
4.1 (6)
|
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 (7)#
|
Fourth Amended and Restated Employment Agreement by and between the Registrant and Kenneth S. Cragun dated January 5, 2011. | |
10.2 (8)
|
Asset Purchase Agreement by and among the Registrant and DigitalPost Interactive, Inc. dated February 11, 2011. | |
10.3 (9)
|
Promissory note by and among the Registrant and DigitalPost Interactive, Inc. dated March 10, 2011. | |
10.4 (10)
|
Termination of Asset Purchase Agreement dated February 11, 2011 by and among the Registrant and DigitalPost Interactive, Inc. dated March 23, 2011. | |
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 Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2011. | |
(2) | 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. | |
(3) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009 | |
(4) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007. | |
(5) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006. | |
(6) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008. | |
(7) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2011. |
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(8) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 16, 2011. | |
(9) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 15, 2011. | |
(10) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 29, 2011. |
33