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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

 

¨ 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 CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0849123

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

7555 Irvine Center Drive

Irvine, CA 92618

(Address of principal executive offices)(Zip Code)

(949) 784-0800

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.00001   Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  x

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File require to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit an post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of voting and non-voting common equity held by non-affiliates of the issuer was approximately $41.6 million based on the last reported sale price of registrant’s common stock on June 30, 2014, as reported by Nasdaq Capital Market.

As of February 28, 2015, the number of shares of the registrant’s common stock outstanding: 23,306,184

Documents incorporated by reference: None

 

 

 


Table of Contents

LOCAL CORPORATION

TABLE OF CONTENTS

 

         Page  
  PART I   

Item 1.

 

Business

     2   

Item 1A.

 

Risk Factors

     9   

Item 1B.

 

Unresolved Staff Comments

     29   

Item 2.

 

Properties

     30   

Item 3.

 

Legal Proceedings

     30   

Item 4.

 

Mine Safety Disclosures

     30   
  PART II   

Item 5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     31   

Item 6.

 

Selected Financial Data

     31   

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

     45   

Item 8.

 

Financial Statements and Supplementary Data

     45   

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     45   

Item 9A.

 

Controls and Procedures

     46   

Item 9B.

 

Other Information

     46   
  PART III   

Item 10.

 

Directors, Executive Officers and Corporate Governance

     47   

Item 11.

 

Executive Compensation

     51   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     59   

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

     60   

Item 14.

 

Principal Accountant Fees and Services

     61   
  PART IV   

Item 15.

 

Exhibits and Financial Statement Schedules

     63   

 

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Table of Contents

PART I

 

Item 1. Business

References herein to “we”, “us”, “our” or “the Company” refer to Local Corporation and its wholly-owned subsidiaries unless the context specifically states or implies otherwise.

Business Overview

We are a leading technology and advertising company that provides our search results to consumers who are searching online for local businesses, products and services. Our search results consist primarily of local business listings that we aggregate, index, normalize and syndicate using our sophisticated technology platforms. We provide our search results through our flagship Local.com website and through other proprietary websites (“Owned and Operated” or “O&O”) and to a network of approximately 1,000 other websites that rely on our search syndication services to provide local search results to their own users (“Network”). We generate revenue from a variety of ad units we place alongside our search results, which include pay-per-click, pay-per-call, and display (banner) ad units, including video.

Our principal products include our Local.com website, which reaches approximately 20 million monthly unique visitors (“MUVs”) each month, and our search syndication services, which provide either hosted business or product directories as well as display and ad fee solutions to a network of partner websites, which reach approximately 5 million MUVs.

We launched Local.com in August of 2005 and our local syndication network in July 2007.

We have developed our intellectual property over many years, and today we consider ourselves experts in the areas of local search, search engine marketing, search engine optimization, search syndication/analysis and reporting at large scale, internet indexing and normalizing. We have been issued fourteen patents and have a number of applications pending.

Our Consumer Properties includes our O&O business and our Network business. O&O accounted for 53% and 47% of our revenue for the years ended December 31, 2014 and 2013, respectively, and Network, our most profitable revenue source, accounted for 47% and 54% of our revenue for the years ended December 31, 2014 and 2013, respectively. At the beginning of 2013, we ceased our direct small and medium sized businesses (“SMB”) sales efforts, recording an immaterial amount of revenue relating to this business unit for fiscal 2013.

We develop and deploy new products, technologies and services across our business in order to enhance the experience of our users, and the value to our partners and our advertisers. Two important performance indicators for our business are our reach to consumers, and the rate at which we monetize that reach using ads. We have had great success in growing our reach, ending 2013 at or near records of mobile search traffic. However, during 2014 we experienced monetization declines due to both declines in revenue per click from our largest ad partner and due to ad policy changes from our largest source of traffic.

Industry Overview

The Local Search Market

According to BIA/Kelsey, U.S. local online advertising revenue is projected to reach $140.7 billion in 2015. “Local search,” that is, searches for products, services and businesses within a geographic region, is an increasingly significant segment of the online advertising industry. Local search allows consumers to search for local businesses’ products or services by including geographic area, zip code, city and other geographically targeted search parameters in their search requests—such as entering “florists in Irvine, CA.” In addition, BIA/Kelsey estimates that the local search market in the U.S. will grow from $6.3 billion in 2013, to $8.6 billion by 2017.

The Mobile Shopping Opportunity

The consumer shift to mobile devices presents a tremendous opportunity for us. Today, consumers are using their mobile devices more than ever before to search for local products and services. In fact, our research says that over 76% of consumers access local retail store information from their smartphones. According to Forrester Research, the online to offline market opportunity is five times greater than everything sold online today. The market for web influenced sales to the retail store is almost $690 billion.

 

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Why Local Search Matters

Consumers who conduct local searches for businesses and products on the Internet (“local searchers”) tend to convert into buying customers at a higher rate than other types of Internet users. As a result, advertisers often pay a significant premium to place their ads in front of local searchers on websites like Local.com, our Network partner websites and other third party partner websites.

Our Local Solution

We believe that our local search results delivered to our Local.com website and app and our Network partners, provide the following benefits to consumers using our services, our Network publishing partners and advertisers (whether our own or our partners):

 

    Access to a Large Number of Local Business Listings and Local Content. With over 12 million local businesses indexed using our proprietary technology, we offer users of our websites and Network partner websites and our third party partners with a resource for local businesses in their area, including various photographs, user ratings and reviews, video, coupons and hours of operations, among other things. We believe that our ability to aggregate this content and deliver relevant, targeted results in response to user search queries ensures our users and those accessing our partner websites with a good experience when using our services. When an advertiser’s targeted ad listing is combined with a large pool of similarly targeted ad listings, we believe our advertisers have a better chance of reaching their target audience. Additionally, we believe the combination of user and advertiser satisfaction with our local search service is important to the acceptance of our service by our Network partners and the success of our Local.com website.

 

    Access to a Desirable Demographic of Decision-Makers. Our patented and proprietary technology allows us to consolidate an amalgamated and disparate set of local business, information and other data and combine it into a targeted, highly relevant results-set, which is presented in a useful and compelling manner.

 

    Targeted Advertising. We believe that search-based advertising delivers a more relevant list of businesses, products and services for our users because advertisers generally only pay for keywords, categories and regions that are related to the products and services they offer. By providing access to our users via performance, display and subscription ad units, businesses can target consumers at the exact time a consumer has demonstrated an interest in what that business has to offer. As a result of our core demographic, we believe that local and commercial searches performed on Local.com tend to convert into buying customers at a higher rate than many other types of search traffic. As a consequence, there is competition from third-parties to place their advertiser listings on our website, which along with our direct advertisers and growing local display advertising offerings drives monetization of our traffic. We believe that our users’ propensity to buy correlates with the value of our traffic, and explains, in part, why Local.com monetizes its search traffic at higher levels than other types of search traffic.

Consumer Properties

O&O, consisting primarily of Local.com, is our largest source of revenue and reaches approximately 20 million MUVs. Our product is our Local.com search engine, which is a top site in the United States by traffic and provides our users with relevant local business listings, product and services, among other things. Consumers reach Local.com by coming directly to our site or via our search engine optimization (“SEO”) efforts, which means they find our listing using the major search engines. The majority of our users find us via search engine marketing (“SEM”) campaigns on the major search engines. We generate ad revenues from those users by placing a variety of ad products alongside the search results we display to our Local.com users, regardless of how our users found us.

Our Network, which reaches over 5 million MUVs, is our second largest source of revenue and is our largest gross margin business by percentage and in real dollars. Our product is a nationwide database of local business and product listings along with ad feeds which monetize those listings. We provide our product in the form of a hosted solution or via an ad feed solution. Our hosted solution is designed to generate SEO traffic to our partners’ sites and this helps those partners to increase their reach to new online users. As with Local.com, we monetize those users with ads placed alongside our content and we share revenue generated from those ads with our partners. Our ad feed solution is provided to sites that prefer to maintain their own look-and-feel and we share revenues in a similar fashion. Our Network consists of approximately 1,000 partner

 

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websites, such as local newspaper, television websites and other third party online publishers. We have twelve month auto-renewing agreement terms with the majority of our partners. Our Network enables us to reach a larger audience than we can reach through our Owned and Operated properties and platforms alone.

Our Strategy

We believe that we are at the forefront of a large and long-term business opportunity presented by the shift of local marketing budgets from traditional media formats to digital media formats and to mobile. Our strategy for pursuing this opportunity includes the following key components:

 

    Increase growth drivers. Key to driving our growth is the expansion of both our reach (the number of MUVs we serve) and the monetization of that reach (how much ad revenue we generate from those users) across desktop and mobile.

 

    Diversify product offerings and revenue sources. Over the last few years, we have taken steps to diversify our revenue sources. We recently launched several new initiatives and ad formats, including our pre-roll video ad network and our increased programmatic efforts to diversify our offerings and revenue sources. We believe our development and acquisition efforts also represent a point of differentiation from an increasingly crowded field in online advertising. We believe that a diversity of offerings will differentiate us from certain of our competitors that may offer only one or two of our services, but not the full suite of our product offerings which we believe appeals to our customers and partners alike.

 

    Increase organic traffic. Our O&O growth strategy continues to be focused on increasing organic traffic to our websites, which includes organic and SEO traffic and expanding the monetization of the users we reach today. We believe that adding more content and presenting that content in a useful way to our users, will ultimately drive more organic and SEO traffic over time, both of which are our high margin traffic sources, compared to SEM sourced traffic. We plan to add more content to the website by launching verticals that appeal to our core demographic—for example: shopping; education; and health & wellness. If we are able to increase the amount of type-in and SEO traffic that our Local.com website receives, we may be able to reduce our reliance on lower-margin traffic we acquire from other search engines.

 

    Add new targeted brands, products and services. We also expect to add new brands, products and services to our O&O business unit over time. Additionally, we anticipate that much of the content we develop or acquire for our own O&O properties may also be useful to enhance the product and content offerings we make to our Network partners. In December 2012, we announced the launch of certain vertical sites that focus on lead generation opportunities and expand our monetization methods and in January 2013, we announced the launch of the United Kingdom (“UK”) version of our Local.com site to expand the geographic footprint of our offering.

 

    Optimize monetization. As an ongoing initiative, we continuously look to optimize the monetization of traffic reaching our domains. In particular, we apply scientific methodology when testing new user experiences that lend to both higher monetization/margin opportunities as well as an enhanced user experience.

 

    Add Network websites and expand Network content. Our Network growth strategy includes: adding new websites; expanding the content and products available to our Network partners; growing the user base of our existing products through SEO efforts and content expansion; and improving our overall monetization per visitor through continued page optimization. We believe that expanded distribution increases our value in the local search ecosystem, thereby attracting new advertisers. This, in turn, allows us to compete for expanded distribution, creating what we feel is a virtuous cycle, with strategic defensibility originating from our significant base of traffic on our O&O properties.

 

    Deploy new products on the Network. We continue to develop new products for our Network partners with the intention of driving additional revenue and creating many new opportunities and channels with the intention of building a stronger and more defensible long term relationship with our Network partners.

Products and Services

We offer a range of local search advertising products and services. Our Consumer Properties products are consumer facing web sites specializing in providing local search results to consumers on the Internet. We use a combination of our proprietary Keyword DNA™ and geographic web indexing technologies to provide relevant search results for local business, products and services and sponsored listings. We generate revenue each time an Internet user initiates a search on our sites and network and clicks-through on a sponsored listing from our advertisers. We also generate revenue from monthly fee arrangements and display advertising (banners).

 

    Local.com Website and App. Local.com reaches approximately 20 million MUVs and provides users with relevant local business listings, product and services, among other things. Consumers reach Local.com by coming directly to our site or via our SEO efforts. The majority of users find Local.com and its app via SEM campaigns on the major search engines. We generate ad revenues from those users by placing a variety of ad products alongside the search results we display to our Local.com users, regardless of how our users found us.

 

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    Hosted Network. Our syndication network consists of approximately 1,000 partner websites and reaches over 5 million MUVs. Our Network product is a nationwide database of local business and product listings along with ad feeds which monetize those listings. We provide our product in the form of a hosted solution designed to generate SEO traffic to our partners’ sites and this helps those partners to increase their reach to new online users. As with Local.com, we monetize those users with ads placed alongside our content, and we share revenue generated from those ads with our partners.

 

    Syndication Network. Our syndication network product is a nationwide database of local business and product listings along with ad feeds which monetize those listings provided via a feed solution. Our ad feed solution is provided to sites that prefer to maintain their own look-and-feel, and we share revenues with those partners based on how consumers on their sites interact with the ad feeds.

 

    Display and Pre-Roll Video Networks. Our display and pre-roll video networks provide advertisers with additional reach and exposure for their brands through distribution of customized display and pre-roll ads through networks of industry-leading content publishers and sites. The growing networks distribute relevant and targeted display and video content from hundreds of advertisers to consumers on hundreds of top sites, including the Company’s flagship Local.com site. The network provides advertisers with impression-level targeted buying, brand-safe inventory access and advanced audience personalization capabilities.

Technology, Research and Development

We make our services available to advertisers and consumers through a combination of our own proprietary technology and commercially available technology from industry leading providers.

We believe that it is important that our technologies be compatible with the systems used by our partners. In addition to our own proprietary technology platforms, we rely upon third parties to provide hosting services, including hardware support and service and network coordination.

Our research and development efforts are focused on developing new services and enhancing our existing services to provide additional features and functionality that we believe will appeal to our advertisers and consumers. Our research and development efforts also include the development and implementation of business continuity and disaster recovery systems, improvement of data retention, backup and recovery processes. As of December 31, 2014, we had 22 employees in product and technical development.

Our research and development expenses were $5.7 million and $6.6 million for the years ended December 31, 2014 and 2013, respectively.

Keyword DNA™/Web Indexing Technology

Our Keyword DNA and patented web indexing technologies are our proprietary methods for indexing large amounts of data, and are critical to Local.com. Our technology enables consumers to search for products and services in their local area. Our technology then attempts to locate the appropriate business listings by searching as many different data sources as directed to provide highly relevant results. Unlike other search engine technologies, our web indexing technology is designed to return only the businesses that supply, or are likely to supply, the appropriate product or service in a given geographic area. Keyword DNA does not return results based upon information that may appear on a website. We believe that our methodology increases the relevancy of geographically targeted search results.

Competition

The online local advertising market is intensely competitive. Our competitors include the major search engines, Google, Yahoo and Microsoft Corporation’s (“Microsoft”) Bing (“Bing”), as well as online directories and city guides, such as Yellowpages.com and Dex. We partner with many of our competitors. We believe that increasingly more companies will

 

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enter into the local advertising market, especially local search. Also, as we enter new business lines, we will have new competitors to consider in those business lines. Although we currently pursue a strategy that allows us to partner with a broad range of websites and search engines, our current and future partners may view us as a threat to their own local advertising services. We believe that the principal competitive factors in our local advertising market are network size, revenue sharing agreements, services, convenience, accessibility, customer service, data quality, quality of tools, quality of editorial review and reliability and speed of fulfillment of advertising needs and requirements across the Internet infrastructure.

We also compete with other online advertising services as well as traditional offline media such as television, radio and print, for a share of businesses’ total advertising budgets. Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. Our competitors may secure more favorable revenue sharing agreements with network distributors, devote greater resources to marketing and promotional campaigns, adopt more aggressive growth strategies and devote substantially more resources to website and systems development than we do.

The online advertising industry has experienced consolidation, including the acquisitions of companies offering local paid-search services. Industry consolidation may result in larger, more established and well-financed competitors with a greater focus on local advertising services. If this trend continues, we may not be able to compete in the local advertising market and our financial results may suffer.

Local online search and more specifically local mobile search is still growing at a fast pace, and as a result, it is difficult to determine our current market share, or predict our future market share. However, we have a number of competitors with greater experience and resources than we have, including Google, Yahoo and Microsoft, among many others, that have announced an intention to increase their focus on local search with regard to U.S. online advertising.

The U.S. online advertising industry, including the local search segment, is regularly impacted and changed by new and emerging technologies, including, for instance, ad targeting and mobile technologies, as well as the increased fragmentation of the online advertising industry in general, from different technology platforms, to different advertising formats, targeting methodologies and the like. Those companies within our industry who are able to quickly adapt to new technologies, as well as offer innovations of their own, have a better chance of succeeding than those that do not.

Additionally, larger companies may implement technologies into their search engines or software that make it less likely that consumers will reach, or execute searches on, Local.com and less likely to access our partners’ sponsored listings. If we are unable to successfully compete against current and future competitors, or if our current network partners choose to rely more heavily on their own distribution networks in the future, our operating results will be adversely affected.

Major Customers

We have two customers that each represents more than 10% of our total revenue. Our largest advertising partner, Yahoo, represented 43% and 46% of our total revenue for the years ended December 31, 2014 and 2013, respectively. Our second largest advertising partner, Google, represented 31% and 26% of our total revenue for the years ended December 31, 2014 and 2013, respectively. Our relationship with Google, which began in August 2011, extends through September 2015 and our relationship with Yahoo continues until October 2017, subject to certain early termination provisions in both cases. As with each of the above, generally all of our partners are short term in nature. There can be no assurance that our agreements with Google, Yahoo or any of our other partners, will be renewed upon, or prior to, their scheduled expiration. If those agreements are renewed, there can be no assurance that it will be on terms as favorably as those we currently have with such partners. If those agreements are not renewed, there can be no assurance that we will be able to find alternative partners on terms as favorable as those we currently have, if at all. The loss of Google and/or Yahoo as a partner and a failure to replace with additional partners would have a material adverse effect on our operating results. See “Risk Factors—Risks Related to our Business—Two of our partners, Google and Yahoo, have historically provided a substantial portion of our revenue and the loss of either Google or Yahoo would have a material adverse effect on our operating results” and “Risk Factors—Risks Related to our Business—A significant portion of the traffic to our Local.com website is acquired from other search engines, mainly google.com. The loss of the ability to acquire traffic or otherwise generate revenues and increases in the amounts paid to acquire such traffic could have a materially adverse effect on our financial results.”

In July 2013, Google made some changes related to bidding for mobile and desktop advertising campaigns and in 2014 Google made additional editorial change requests both of which had a negative impact on our traffic and monetization of such traffic. While we continue to pursue strategies that will minimize the impact of lowered monetization from any of our advertising partners, we cannot give assurances that our efforts will be successful. If we are unable to maintain our anticipated level of monetization from our advertising partners in the near term, or successfully diversify our revenues to sources outside of the search marketing industry in general, our business and financial results may be materially harmed.

 

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Major Suppliers and Advertising Costs

We advertise on other search engine websites, primarily Google.com, but also Yahoo.com and Bing.com and others, by bidding on certain keywords we believe will drive consumers to our Local.com website. Approximately 76% and 57% of the traffic on our Local.com website and network partner websites was acquired through SEM campaigns on other search engine websites during the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, advertising costs to drive consumers to our Local.com website were $36.4 million, of which $28.6 million and $5.1 million was attributable to Google and Yahoo!, respectively. During the year ended December 31, 2013, advertising costs to drive consumers to our Local.com website were $35.9 million, of which $27.4 million and $6.1 million was attributable to Google and Yahoo!, respectively. We are dependent on the advertising we do with other search engines, especially Google and Yahoo, to drive consumers to our Local.com website in order to generate revenue from searches and other actions they may undertake while at Local.com. If we were unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will suffer. While our strategy is to decrease our dependence on advertising with other search engines by diversifying our revenue streams outside of the search engine marketing business, as well as by growing our organic traffic through repeat usage, better content, and increased search engine optimization efforts, we cannot guarantee that these efforts will be successful or that we will not remain dependent on advertising with other search engines to secure the large majority of consumers who visit Local.com.

Intellectual Property

Our success and ability to compete are substantially dependent upon our internally developed technology and data resources. We seek to protect our intellectual property through existing laws and regulations, as well as through contractual restrictions. We rely on trademark, patent and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, partners and others to protect our intellectual property.

We own the registered trademarks for “Local.com,” “Krillion,” “Keyword DNA,” “Local Promote,” “Local Connect” and “Pay Per Connect,” among others, in the United States. We may claim trademark rights in, and apply for registrations in the United States for a number of other marks.

We have been issued fourteen patents by the United States Patent and Trademark Office:

 

    Methods and Systems for a Dynamic Networked Commerce Architecture which was issued on June 13, 2006, and the expiration date of which as determined based on patent term adjustment as calculated by the U.S. Patent and Trademark Office (“USPTO”) is February 26, 2023;

 

    Methods and Systems for Enhanced Directory Assistance Using Wireless Messaging Protocols which was issued on April 3, 2007, and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is May 25, 2024;

 

    Methods and Apparatus of Indexing Web Pages of a Web Site for Geographical Searching Based on User Location which was issued on June 12, 2007, the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is May 3, 2025;

 

    Methods and Systems for Enhanced Directory Assistance Services in a Telecommunications Network, which was issued on September 29, 2009, and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is January 3, 2026;

 

    Methods and Systems for Enhanced Directory Assistance Using Wireless Messaging Protocols, which was issued on May 11, 2010, and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is July 30, 2023;

 

    Methods and Apparatus Providing Local Search Engine, which was issued on October 26, 2010, and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is January 25, 2026;

 

    System and Method for Generating a Search Query Using a Category Menu, which was issued on February 15, 2011, and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is December 4, 2023;

 

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    System for Providing Localized Shopping Information, which was issued on October 4, 2011, and the expiration date of which as determined based on a patent term adjustment as calculated by the USPTO is June 11, 2027;

 

    Search Engine and Indexing Techniques, which was issued on May 8, 2012, and the expiration date of which as determined based on a patent term adjustment as calculated by the USPTO is September 22, 2030;

 

    Enhanced Directory Assistance Services in a Telecommunications Network, which was issued on November 6, 2012, and the expiration date of which as determined based on a patent term adjustment as calculated by the USPTO is July 8, 2023;

 

    System and Method for Bulk Web Domain Generation and Management, which was issued on November 13, 2012, and the expiration date of which as determined based on a patent term adjustment as calculated by the USPTO is March 12, 2030; and

 

    Methods and Systems for Enhanced Directory Assistance Using Wireless Messaging Protocols, which was issued on January 22, 2013, and the expiration date of which was determined based on a patent term adjustment as calculated by the USPTO is April 5, 2027.

 

    Methods and Systems in which semantically related keywords may be utilized to locate relevant fee generating advertisements in the event that no advertisements are associated with the originally submitted keyword(s) in a search query, which was issued on May 13, 2014, and the expiration date of which was determined based on patent term adjustment calculated by the USPTO is August 11, 2030.

 

    Search Engine and Indexing Techniques, which was issued on March 3, 2015, and the expiration date of which as determined based on patent term adjustment as calculated by the USPTO is January 10, 2025.

We have patent applications pending related to a variety of business and transactional processes associated with paid-search and other cost-per-event advertising models in different environments, including pay per call advertising. We may consolidate some of our current applications and expect to continue to expand our patent portfolio in the future. We cannot assure you, however, that any of these patent applications will be issued as patents, that any issued patents will provide us with adequate protection against competitors with similar technology, that any issued patents will afford us a competitive advantage, that any issued patents will not be challenged by third parties, that any issued patents will not be infringed upon or designed around by others, or that the patents of others will not have a material adverse effect on our ability to do business. Furthermore, our industry has been subject to frequent patent-related litigation by the companies and individuals that compete in it. The outcome of ongoing litigation or any future claims in our industry could adversely affect our business or financial prospects. On March 9, 2015, the Company entered into a securities purchase agreement relating to the sale and issuance of senior convertible notes. This agreement obligates us to sell these patents by December 31, 2015. (see Note 9 to consolidated financial statements).

Government Regulation

Like many companies, we are subject to existing and potential new government regulation. There are, however, comparatively few laws or regulations specifically applicable to Internet businesses. Accordingly, the application of existing laws to Internet businesses, including ours, is unclear in many instances. There remains significant legal uncertainty in a variety of areas, including, but not limited to: advertising, content regulation, privacy, consumer protection, defamation, child protection, advertising to and collecting information from children, taxation and billing, among others.

Compliance with federal laws relating to the Internet and Internet businesses may impose upon us significant costs and risks, or may subject us to liability, if we do not successfully comply with their requirements, whether intentionally or unintentionally. Specific federal laws that impact our business include: The Digital Millennium Copyright Act of 1998; The Communications Decency Act of 1996; The Children’s Online Privacy Protection Act of 1998 (including related Federal Trade Commission regulations); The Protect Our Children Act of 2008; and The Electronic Communications Privacy Act of 1986, any amendments to each of the foregoing, among others. For example, the Digital Millennium Copyright Act, which is in part intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe the rights of others, was adopted by Congress in 1998. If we violate the Digital Millennium Copyright Act, we could be exposed to costly and time-consuming copyright litigation.

There are a growing number of legislative proposals before Congress and various state legislatures regarding privacy issues related to the Internet generally, and some of these proposals apply specifically to paid-search businesses. We are unable to determine if and when such legislation may be adopted. If certain proposals were to be adopted, our business could be harmed by increased expenses or lost revenue opportunities, and other unforeseen ways. We anticipate that new laws and regulations affecting us will be implemented in the future. Those new laws, in addition to new applications of existing laws, could expose us to substantial liabilities and compliance costs.

 

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Employees

As of December 31, 2014, we had 70 employees, all of whom were full-time employees: 22 were engaged in research and development; 20 in sales and marketing; 10 in cost of revenues; and 18 in general and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good. Subsequent to year end we had a reduction in force which reduced the amount of employees from 70 to 60. The reduction is expected to result in annual cost savings of approximately $1.1 million.

Seasonality

Our future results of operations may be subject to fluctuation as a result of seasonality. Historically, during the fourth quarter, it is more difficult for us to acquire traffic. During the fourth quarter, other advertisers significantly increase their bid prices to acquire traffic for the holiday season, while we generally keep our bid prices consistent throughout the year. As a result, we typically acquire less traffic to our websites from our SEM efforts during the fourth quarter. The increase in bid prices is offset by an increase in CPM billings during this period. Additionally, online consumer traffic is generally lower in the third quarter, the summer months, as consumers are on vacation and spending less time on the Internet. If we are not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on our financial results.

Corporation Information

We were incorporated in Delaware in March 1999 as eWorld Commerce Corporation. In August 1999, we changed our name to eLiberation.com Corporation. In February 2003, we changed our name to Interchange Corporation. On November 2, 2006, we changed our name to Local.com Corporation. On September 14, 2012, we changed our name to Local Corporation. In addition to Local Corporation, we also currently operate under the name Local.com, which is a registered tradename of Local Corporation. Our corporate offices are located at 7555 Irvine Center Drive, Irvine, CA 92618 and we can be contacted at (949) 784-0800. We maintain a website at http://www.local.com. Our investor relations website is located at http://ir.local.com. The information contained on or connected to our website is not incorporated by reference.

 

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this Report before making an investment decision. If any of the possible adverse events described below actually occur, our business, results of operations or financial condition would likely suffer. In such an event, the market price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, results of operations or financial condition.

Risks Relating to our Business

Although our financial statements have been prepared assuming we will continue as a going concern, our management and our independent registered public accounting firm, in its report accompanying our consolidated financial statements as of and for the year ended December 31, 2014, believe that our recurring net losses from operations and other factors have raised substantial doubt about our ability to continue as a going concern as of December 31, 2014.

Our audited financial statements for the fiscal year ended December 31, 2014, were prepared on a going concern basis in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The going concern basis of presentation assumes that we will continue in operation for the next twelve months and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern. Our need for additional capital and the uncertainties surrounding our ability to raise such funding, raises substantial doubt about our ability to continue as a going concern. In order for us to continue operations beyond the next twelve months and be able to discharge our liabilities and commitments in the normal course of business, we must continue our operations without further disruptions related to our ability to monetize and maintain traffic levels to our O&O and Network sites at present levels or better, realize the expense savings from our cost saving measures, have our new initiatives produce the anticipated revenues, and avoid further unforeseen cash demands, including without limitation traffic acquisition costs, litigation costs, personnel costs and development costs; and potentially raise additional funds, principally through the additional sales of our securities or debt

 

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financings to meet our working capital needs. If we are unable to continue our operations without further disruptions related to our ability to monetize and maintain traffic levels to our O&O and Network sites at present levels or better, realize the expense savings from our recently announced cost saving measures, generate revenues from new initiatives, and avoid further unforeseen cash demands, including without limitation traffic acquisition costs, litigation costs, personnel costs and development costs, further reduce expenses or raise sufficient additional capital, as needed, we may be unable to continue to fund our operations, develop our products or realize value from our assets and discharge our liabilities in the normal course of business. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and might realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock.

Our financial resources are limited and we may need to raise additional capital in the future to continue our business.

As of December 31, 2014, we had cash of $2.4 million. We may be required to raise additional capital to permit us to conduct our business and to achieve our strategic growth opportunities. If we are required to raise additional capital, we cannot ensure that additional funding will be available, or if it is available, that it can be obtained on terms and conditions we will deem acceptable. Our business is subject to risks and uncertainties that may prevent us from raising additional capital or may cause the terms upon which we raise additional capital, if additional capital is available, to be less favorable to us than would otherwise be the case. If we needed to raise additional capital and were unable to do so, we may not be able to continue our business as currently contemplated or may be required to seek protection under United States federal bankruptcy law. If this were to happen our shares could lose all or substantially all of their market value.

If we are unable to raise additional capital as needed, we may not be able to grow our company and satisfy our obligations as they become due.

We have historically relied on offerings of our equity and borrowings under our debt facilities to fund our operations. For example, on April 10, 2013, we completed the offering and sale of $5.0 million of our 7% Notes. As of December 31, 2014, all $5.0 million of the 7% Notes remained outstanding. We redeemed all of our outstanding 7% Notes with the proceeds of the Series A and Series B Notes (collectively “the Notes”), together with the proceeds of the Private Offering, on the Closing Date. See “2014 Corporate Highlights for details of the Private Offering and related Series A and Series B Notes issued.”

On August 3, 2011, we entered into a Loan and Security Agreement with Square 1 Bank (as amended to the date hereof, the “Square 1 Agreement”), replacing our debt facility with Silicon Valley Bank, which we terminated on July 29, 2011. The Square 1 Agreement provides us with a revolving credit facility of up to $12.0 million. The maturity date of the facility is April 2, 2015. Square 1 Bank has notified us that they do not intend to extend our revolving credit facility following its maturity date on April 2, 2015. On March 9, 2015, we entered into a Financing and Security Agreement, amended on March 9, 2015, with Fast Pay Partners LLC (“Fast Pay”) creating an accounts receivable-based credit facility (the “Fast Pay Agreement”). Under the terms of the Fast Pay Agreement, Fast Pay may, at its sole discretion, purchase our eligible accounts receivables. Upon any acquisition of accounts receivable, Fast Pay will advance to us up to 80% of the gross value of the purchased accounts, up to a maximum of $10,000,000 in advances. See “Description of Other Indebtedness—New Credit Facility.” We intend to use borrowings under the Fast Pay Agreement to refinance our indebtedness to Square 1. Fast Pay has not yet made any advances to us, and its willingness to make advances to us by purchasing eligible accounts receivable is subject to customary conditions for financings of this nature. If we are unable to satisfy those conditions, Fast Pay could refrain from providing financing to us, which would have a material adverse effect on our financial condition and results of operations.

As a result, we will need to raise additional capital or obtain additional credit to fund our operations in the future. The failure to raise capital, or obtain credit when needed, on acceptable terms, could have a material adverse effect on our business, prospects, financial condition and results of operations and we may not be able to continue our business as currently contemplated or may be required to seek protection under United States federal bankruptcy law.

Our credit facility with Square 1 Bank and our new accounts receivable facility with Fast Pay impose restrictions. Failure to comply with these restrictions could result in the acceleration of a substantial portion of such debt, which we may not be able to repay or refinance.

Under the Square 1 Agreement, we must meet certain financial covenants during the term of the facility, including certain Adjusted EBITDA covenants, as more particularly described in the Square 1 Agreement (such Adjusted EBITDA

 

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amounts are for financial covenant purposes only, and do not represent our projections of financial results). As of December 31, 2014, we were in compliance with our covenants with Square 1 Bank. However, if we are unable to comply with our financial covenants, the lender may declare an event of default under the Square 1 Agreement, in which event all outstanding borrowings would become immediately due and payable. We do not presently have, and, if we are unable to effect borrowings by selling accounts receivable to Fast Pay we would not have, sufficient cash on hand to repay such outstanding borrowings under the Square 1 Agreement.

The Fast Pay Agreement contains covenants that are customary for accounts receivable-based financing agreements primarily related to our accounts receivable and audit rights. The failure to satisfy covenants under the Fast Pay Agreement or the occurrence of other specified events that constitute an event of default could result in the termination of the Fast Pay Agreement and/or the acceleration of our obligations under that Agreement. The Fast Pay Agreement also contains provisions relating to events of default that are customary for agreements of this type and also include a cross default provision with respect to the Notes. If Fast Pay terminated the facility, we might not have sufficient cash on hand to repay our outstanding obligations to Fast Pay or sufficient capital to fund our ongoing operations. In addition, default under the Fast Pay facility would constitute a default under the Notes.

The assessment of our liquidity is based upon significant judgments or estimates that could prove to be materially incorrect.

In assessing our current financial position and developing operating plans for the future, we have made significant judgments and estimates with respect to the potential financial and liquidity effects of our risks and uncertainties, including but not limited to:

 

    our ability to meet our current projections with respect to our results of operations;

 

    our ability to continue to monetize our O&O and Network sites at present levels or better;

 

    our ability to maintain traffic levels to our O&O and Network sites at present levels or better;

 

    our ability to control expenses effectively, including through any fluctuations in our financial performance;

 

    our ability to comply with our debt covenants to Square 1 Bank, FastPay and our senior convertible noteholders; and

 

    the potential for additional, unforeseen cash demands, including without limitation traffic acquisition costs, litigation costs, personnel costs and development costs.

In our liquidity assessment, we assumed that our operations will continue without further disruptions through the next twelve months, including disruptions of the sort we recently experienced in the first half of 2011, the second half of 2012, throughout 2013 and in the fourth quarter of 2014 in which changes made by our primary search monetization partners, primary traffic acquisition partners, and major search engines that index our content affected the revenue per click (“RPC”) we received for advertisements on our sites, our ability to buy traffic for our sites, and the levels of organic traffic received by our sites. We intend to support operations and repay obligations with one or more of the following: cash on hand; cash from operations; credit line extensions; additional debt; and offerings of our securities.

It is possible that the actual outcome of one or more of our plans could be materially different than expected, or that one or more of our significant judgments, or estimates about the potential effects of these risks and uncertainties could prove to be materially incorrect. If one or more of these possible outcomes is realized and third-party financing is not available, that could have a material adverse impact on our liquidity, financial condition and operations.

If we are not successful with our local search initiative, our future financial performance may be affected.

Since August 9, 2005, we have been operating Local.com, a consumer facing destination website specializing in local search and content. Since the third quarter of 2007, we have been operating our local syndication network which provides local search results and local content to our publisher partners. Since the third quarter of 2009, we have been operating a distribution network that provides organic and third party advertising feeds to hundreds of websites. We have and expect to continue to invest significant amounts of time and resources in our Local.com website, local syndication network, our distribution network and other similar initiatives. We cannot assure you that we will continue to sustain or grow our current revenue from these or other local search initiatives. We also cannot assure you that we will sustain or grow the number of consumers or advertisers that use or advertise on Local.com or other network offerings. If we are unable to sustain or grow the number of consumers using and/or advertisers advertising with Local.com, our local syndication and distribution networks, and our other similar initiatives, our financial performance may be adversely affected.

 

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We have historically incurred losses and expect to incur losses in the future, which may impact our ability to implement our business strategy and adversely affect our financial condition.

We have a history of losses. We had a net loss of $5.5 million for the year ended December 31, 2014. We also had an accumulated deficit of approximately $109 million at December 31, 2014. We cannot assure you that we will be profitable or generate sufficient profits from operations in the future. If our revenue does not grow, we may experience a loss in one or more future periods. We may not be able to reduce or maintain our expenses in response to any decrease in our revenue, which may impact our ability to implement our business strategy and adversely affect our financial condition.

Two of our partners, Google and Yahoo, have historically provided a substantial portion of our revenue and the loss of either Google or Yahoo would have a material adverse effect on our operating results.

For the years ended December 31, 2014 and 2013, we had two customers that each represented more than 10% of our total revenue. Google and Yahoo represented 31% and 43% of our total revenue, respectively, during the year ended December 31, 2014, and 26% and 46% of our total revenue for the year ended December 31, 2013, respectively.

Our contracts with advertising partners are generally short term in nature. For example, Google’s contract expires in September 2015, whereas Yahoo’s contract expires according to its terms in October 2017, subject in both cases to earlier termination rights under certain circumstances. We have received a notice from Yahoo noting that the requirements for early termination of our contract with Yahoo have been met as a result of recent traffic quality issues experienced by us.

Upon expiration or termination of these agreements, there can be no assurance that they will be renewed, or if these agreements are renewed, that we would receive the same or better economic benefits as we do under the current agreement, or involve the same amount of use of our paid-search services as currently used, or contain the same rights as they currently do, in which case our business and financial results may be harmed. Additionally, there can be no assurance that if we enter into an arrangement with alternative advertising partners, the terms would be as favorable as those under the current Google or Yahoo agreements. Even if we were to enter into an arrangement with alternative advertising partners with terms as or more favorable than those under the current agreements with Google and Yahoo, such arrangements might generate significantly lower search advertising revenues for us if the alternative advertising partners are not able to generate advertising revenues as successfully as Google and Yahoo currently generate.

Two customers account for a significant portion of our accounts receivable and the failure to collect from these customers would harm our financial condition and results of operations.

Two of our customers that do not pay in advance, Yahoo and Google, have and for the foreseeable future will likely continue to account for a significant portion of our accounts receivable. Yahoo and Google, on a combined basis, represented 57% and 60% of our total accounts receivable at December 31, 2014 and 2013, respectively.

Yahoo and Google’s accounts have been, and will likely continue to be, unsecured and any failure to collect on those accounts would harm our financial condition and results of operations.

A significant portion of the traffic to our Local.com website is acquired from other search engines, mainly google.com. The loss of the ability to acquire traffic or otherwise generate revenues and increases in the amounts paid to acquire such traffic could have a materially adverse effect on our financial results.

We advertise on other search engine websites, primarily Google.com, but also yahoo.com and msn/bing.com, among others, by bidding on certain keywords we believe will drive traffic to our Local.com website. Approximately 76% and 57% of the traffic on our Local.com website and network partner websites was acquired through SEM campaigns on other search engine websites for the years ended December 31, 2014 and 2013, respectively. During the year ended December 31, 2014, advertising costs to drive consumers to our Local.com website were $36.4 million, of which $28.6 million and $5.1 million was attributable to Google and Yahoo!, respectively. During the year ended December 31, 2013, advertising costs to drive consumers to our Local.com website were $35.9 million, of which $27.4 million and $6.1 million was attributable to Google and Yahoo!, respectively. Any decreases in the breadth or depth of advertising available for display or any increase in our traffic acquisitions costs could materially adversely affect our ability to produce revenue and margin that is comparable to our historical results, in which case our business and financial results may be significantly harmed. If we fail to pay Google or Yahoo for the traffic purchased from them, they could suspend or terminate our ability to purchase traffic from them, which would have a material adverse effect on our business and financial results.

 

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In 2013, we experienced ad policy changes from our largest monetization partner, which negatively impacted the amount of traffic we could acquire and lowered revenue as a result. Additionally, we experienced algorithmic changes from a major search engine that affected organic traffic levels across our Network, which caused a negative financial impact to both our revenue and net income results. In 2014, one of our large advertising partners made additional editorial change requests which had a negative impact on our traffic and monetization of such traffic. We are working to adjust to these changes, but there can be no guarantees that our efforts will be successful or reverse the negative impact of these changes.

Our advertising partners may unilaterally change how they value our inventory of available advertising placements, which could materially affect our advertising revenue. If we are unable to maintain our anticipated RPC rates, it will have a material adverse effect on our financial results.

Our advertising partners, such as Google and Yahoo, may unilaterally change how they value our inventory of available advertising placements for any number of reasons, including changes in their services, changes in pricing, algorithms or advertising relationships. We have little control over such decisions. If our advertising partners pay us less for our advertising inventory, our advertising revenue would be materially adversely affected. For example, in July 2013, Google made some changes related to bidding for mobile and desktop advertising campaigns and in 2014 Google made additional editorial change requests both of which had a negative impact on our traffic and monetization of such traffic.

We are actively pursuing strategies to mitigate any such changes in RPC we may experience, including through the diversification of our revenue to include non-search related sources and the regular optimization of our SEM campaigns, as well as optimization and deployment of advertiser fees from existing and new partners. These and other strategies are intended to preserve revenue and net income. However, we cannot give assurances that these efforts will be successful. If we are unable to maintain our anticipated RPC rates in the near term, our business and financial results may be materially harmed.

We face intense competition from larger, more established companies, as well as our own advertising partners, and we may not be able to compete effectively, which could reduce demand for our services.

The online paid-search market and local search market is intensely competitive. Our primary current competitors include Yahoo, Microsoft, Google and online directories, such as Yellowpages.com. Other competitors in the local search market may emerge. For example, Facebook Inc. now has a Graph Search tool which allows users to access the interests and opinions of friends regarding local places, movies and interests and which may emerge as a significant competitor to our current offerings. We believe that the principal competitive factors in our local advertising market are network size, revenue sharing agreements, services, convenience, accessibility, customer service, quality of tools, quality of editorial review and reliability and speed of fulfillment of advertising needs and requirements across the Internet infrastructure. Although we currently pursue a strategy that allows us to partner with a broad range of websites and search engines, our current and future partners on which our business is substantially dependent may view us as a threat to their own internal paid-search services. We also compete with other online advertising services as well as traditional offline media such as television, radio and print, for a share of businesses’ total advertising budgets. Nearly all of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, sales, personnel and other resources than we do. Our competitors may secure more favorable revenue sharing agreements with network distributors, devote greater resources to marketing and promotional campaigns, adopt more aggressive growth strategies and devote substantially more resources to website and systems development than we do. In addition, the search industry and the online advertising industry has experienced consolidation, including the acquisitions of companies offering paid-search services. Industry consolidation has resulted in larger, more established and well-financed competitors with a greater focus on paid-search services. If these industry trends continue, or if we are unable to compete in the paid-search market, our financial results may suffer.

We rely on our advertising partners to provide us access to their advertisers, and if they do not, it could have an adverse impact on our business.

We rely on our advertising partners to provide us with advertiser listings so that we can distribute these listings to Local.com and our network partners in order to generate revenue when a consumer click-through or other paid event occurs on our advertising partners’ sponsored listings. For the years ended December 31, 2014 and 2013, 99% and 97% of our revenue was derived from our advertising partners, respectively. Some of our agreements with our advertising partners, such as Google, are short-term, and, as a result, they may discontinue their relationship with us or negotiate new terms that are less favorable to us, at any time, with little or no notice. Our success depends, in part, on the maintenance and growth of our advertising partners. If we are unable to develop or maintain relationships with these partners, our operating results and financial condition could suffer.

 

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Our advertising partners may impose editorial restrictions on how we display the advertiser listings they provide to us, including the content and structure of the web pages on which such advertiser listings appear. If we fail to comply with these restrictions, our advertising partners may cease providing us with access to their advertisers, which would have an adverse impact on our business. If we comply with these restrictions, our ability to maximize the monetization of our web pages could be materially adversely affected, which would have an adverse impact on our business.

We rely on our advertising partners to provide us with advertiser listings in order to generate revenue. We must adhere to the restrictions they impose on us with respect to the display of the advertiser listings they provide to us, including restrictions with respect to the content and structure of the web pages on which such advertiser lists appear. This impacts where advertising appears, when it appears, and how much of it appears, among other things. Since advertising is the primary source of revenue on our web pages, the restrictions imposed by our partners can impact our revenue opportunities materially. If we fail to adhere to such restrictions, our advertising partners may cease providing us with access to their advertisers, which would have an adverse impact on our operating results and financial condition. Furthermore, if we adhere to such restrictions, our ability to maximize the monetization of our web pages could be adversely affected, which would have an adverse impact on our operating results and financial condition.

We are dependent on network partners to provide us with local search traffic and access to local advertisers, and if they do not, our business could be harmed.

We have contracts with our network partners to provide us with either local search traffic or access to local advertisers. Our network partners are very important to our revenue and results of operations. Any adverse change in our relationships with key network partners could have a material adverse impact on our revenue and results of operations. In many cases, our agreements with these network partners are short-term and/or subject to many variables which enable us or our network partners to discontinue our relationship or negotiate new terms that are less favorable to us with little or no notice. If we are unable to maintain relationships with our current network partners or develop relationships with prospective network partners on terms that are acceptable to us, our operating results and financial condition could suffer. Any decline in the number and/or quality of our network partners could adversely affect the value of our services.

If we do not deliver quality traffic that delivers value for advertisers, then our advertisers and our advertising partners may pay us less for their listing or discontinue listings with us altogether.

For our services to be successful, we need to deliver consumers to advertisers’ websites that are valuable to such advertisers. If we do not meet advertisers’ expectations by delivering quality traffic, then our advertising partners may pay us less per click or cease doing business with us altogether, which may adversely affect our business and financial results. We compete with other web search services, online publishers and high-traffic websites, as well as traditional media such as television, radio and print, for a share of our advertisers’ total advertising expenditures. Many potential advertisers and advertising agencies have only limited experience advertising on the Internet and have not devoted a significant portion of their advertising expenditures to paid-search. Acceptance of our advertising offerings among our advertisers and advertising partners will depend, to a large extent, on its perceived effectiveness and the continued growth of commercial usage of the Internet. If we experience downward pricing pressure for our services in the future, our financial results may suffer.

More people are using devices other than personal computers to access the Internet and accessing new platforms to make search queries. If we are not successful in developing solutions that generate revenue from our mobile website and other mobile offerings, or those solutions are not widely adopted, our results of operations and business could be materially adversely affected.

The number of people who access the Internet through devices other than personal computers, including mobile phones, smartphones, and handheld computers such as netbooks and tablets, is increasing dramatically. The lower resolution, functionality, and memory associated with some alternative devices make the use and accessibility of our services through such devices more difficult and the versions of our services developed for these devices may not be compelling to consumers, advertisers or retailers. In addition, search queries are increasingly being undertaken via “apps” tailored to particular devices or social media platforms, which could affect our share of the search market over time. As new devices and platforms are continually being released, it is difficult to predict the problems we may encounter in adapting our services and developing competitive new services. We expect to continue to devote significant resources to the creation, support, and maintenance of our services across multiple platforms. If we are unable to develop services that are more compatible with alternative devices and platforms, we will fail to capture the opportunities available as consumers and advertisers transition to a dynamic, multi-screen environment.

 

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At the same time, it is important that any services that we develop do not adversely affect our users’ experience, even if they might result in increased short-term monetization. We have limited experience with mobile advertising. If we fail to develop effective advertising solutions, if our solutions alienate our user base, or if our solutions are not widely adopted or are insufficiently profitable, our business may suffer. Additionally, as alternative devices and platforms are released, it is difficult to predict the problems we may encounter in developing services for these alternative devices and platforms, and we may need to devote significant resources to the creation, support, and maintenance of such products.

If we cannot continue to develop and offer effective advertising products and services, our advertising revenues could be adversely affected.

We believe that growth in our advertising revenues depends on our ability to continue offering our advertisers and publishers with effective products and services. Developing new and improving upon our existing products and services may require significant effort and expense. If we are unable to develop and improve our advertising products and services, including those that more effectively or efficiently plan, price or target advertising, our advertising revenues could be adversely affected.

If we do not continue to develop and offer compelling content, products and services, our ability to attract new consumers or maintain the engagement of our existing consumers could be adversely affected.

We believe we must offer compelling content, products and services in order to attract new consumers and maintain the engagement of our existing consumers. Our ability to acquire, develop and offer new content, products and services, as well as new features, functionality and enhanced performance for our existing content, services and products requires substantial costs and efforts. The consumer reception of any new offerings we may make is unknown and subject to consumer sentiment that is difficult to predict. If we are unable to provide content, products, and services that are sufficiently attractive and relevant to consumers, we may not be able to attract new consumers or maintain or increase our existing consumers’ engagement with our Local.com site or our other offerings. Even if we are successful in the development and offering of compelling content, products, features, and services, we may not be able to attract new consumers or maintain or increase our existing consumers’ engagement.

From time to time, we may acquire businesses or assets, which may not be successful, may negatively impact our results and which pose risks with respect to integration and performance.

In recent years, we have undertaken the acquisition of a number of assets and businesses. We have subsequently exited each of these businesses. There can be no assurance that we will be able to successfully integrate any business we acquire into our operations or that our operation of these acquisitions will be successful.

We may enter into additional acquisitions, business combinations or strategic alliances in the future. Acquisitions may result in dilutive issuances of equity securities, use of our cash resources, incurrence of debt and amortization of expenses related to intangible assets acquired. Any acquisitions or investments we make may not ultimately generate anticipated or any returns. In addition, the process of integrating an acquired company, business or technology, which requires a substantial commitment of resources and management’s attention, may create unforeseen operating difficulties and expenditures. The acquisition of a company or business is accompanied by a number of risks, including, without limitation:

 

    the need to implement or remediate controls, procedures and policies appropriate for a public company at companies that prior to the acquisitions may have lacked such controls, procedures and policies;

 

    the difficulty of assimilating the operations and personnel of the acquired company with and into our operations, which are headquartered in Irvine, California;

 

    the failure to retain key personnel at the companies we acquire;

 

    the potential disruption of our ongoing business and distraction of management;

 

    the difficulty of incorporating acquired technology and rights into our services and unanticipated expenses related to such integration;

 

    the failure to further successfully develop acquired technology resulting in the impairment of amounts currently capitalized as intangible assets;

 

    the impairment of relationships with customers of the acquired company or our own customers and partners as a result of any integration of operations;

 

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    the impairment of relationships with employees of our own business as a result of any integration of new management personnel;

 

    the inability or difficulty in reconciling potentially conflicting or overlapping contractual rights and duties;

 

    the potential unknown liabilities associated with the acquired company, including intellectual property claims made by third parties against the acquired company; and

 

    the failure of an acquired company to perform as planned and to negatively impact our overall financial results.

We may not be successful in addressing these risks or any other problems encountered in connection our recent acquisitions, or that we could encounter in future acquisitions which would harm our business or cause us to fail to realize the anticipated benefits of our acquisitions.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes against its post-change income may be limited. We performed a Section 382 study during the fourth quarter of 2010 and determined that the company has more likely than not undergone five ownership changes as described in IRC Section 382. The latest ownership change occurred in December 2004. We are currently in the process of updating our IRC Section 382 study through the end of December 31, 2014. However, due to the relatively large annual limitations based on the value of the company, the identified ownership changes had no material impact to the amount of net operating loss that can be carried forward to the future years. Any future ownership change may impact our ability to utilize the net operating loss carryforwards in the future year. At December 31, 2014, we had federal and state income tax net operating loss carryforwards of approximately $81.6 million and $78 million, respectively. The federal and state net operating loss carryforwards will expire through 2031 unless previously utilized.

We may incur impairment losses related to goodwill, other intangible assets and other assets which could have a material adverse effect on our financial results.

As a result of our acquisition of Inspire Infrastructure 2i AB, the purchase of Local.com domain name, the Atlocal asset purchase, the acquisition of PremierGuide, Inc., the acquisitions of Simply Static, LLC (doing business as Octane360) and Krillion, we have recorded substantial goodwill and intangible assets in our consolidated financial statements. We are required to perform impairment reviews of our goodwill and other intangible assets, which are determined to have an indefinite life and are not amortized. Such reviews are performed annually or earlier if indicators of potential impairment exist. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets.

During the three months ended June 30, 2012, we recorded an impairment charge of $6.5 million, which consisted of the impairment of goodwill, intangible assets and capitalized software related to the Spreebird business unit. During the three months ended December 31, 2012, we recorded an additional impairment charge of $4.1 million, which consisted of impairment of goodwill related to the Spreebird business unit. With the Company’s decision to sell the assets of its Spreebird business unit in the second quarter of fiscal 2013, the carrying value of the goodwill associated with the Spreebird business was determined to be fully impaired. As a result, the Company recorded an impairment charge of approximately $3.1 million during the second quarter of fiscal 2013, which included goodwill of $2.6 million.

We may have additional impairment charges in the future, which could have a material adverse effect on our financial results and could cause our stock price to decline.

Our business is seasonal and our financial results may vary from period to period.

Our results of operations could vary significantly from quarter to quarter and year to year because of a variety of factors, including seasonality, many of which are outside of our control. Historically, during the fourth quarter, it is more difficult for us to acquire traffic. During the fourth quarter, other advertisers significantly increase their bid prices to acquire traffic for the holiday season, while we generally keep our bid prices consistent throughout the year. As a result, we typically acquire less traffic to our websites from our SEM efforts during the fourth quarter. Additionally, online consumer traffic is generally lower in the third quarter, the summer months, as consumers are on vacation and spending less time on the Internet. Revenue generally increases during the first quarter, when we expect to benefit from a higher volume of locally-focused traffic and a higher volume of online consumer traffic due to fewer holidays and vacation time. If we are not able to appropriately adjust to seasonal or other factors, it could have a material adverse effect on our financial results.

 

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The market for Internet and local search advertising services is in the early stages of development, and if the market for our services decreases it will have a material adverse effect on our business, prospects, financial condition and results of operations.

Internet marketing and advertising, in general, and paid-search, in particular, are in the early stages of development. Our future revenue and profits are substantially dependent upon the continued widespread acceptance, growth, and use of the Internet and other online services as effective advertising mediums. Many of the largest advertisers have generally relied upon more traditional forms of media advertising and have only limited experience advertising on the Internet. Local search, in particular, is still in an early stage of development and may not be accepted by consumers for many reasons including, among others, that consumers may conclude that local search results are less relevant and reliable than non-paid-search results, and may view paid-search results less favorably than search results generated by non-paid-search engines. If consumers reject our paid-search services, or commercial use of the Internet generally, and the number of click-throughs on our sponsored listings decreases, the commercial utility of our search services could be adversely affected which could have a material adverse effect on our business, prospects, financial condition and results of operations.

A downturn or uncertainty in global economic conditions may have a significant negative effect on our access to credit and our ability to raise capital and may impact our business, operating results or financial condition.

A future downturn or uncertainty in global economic conditions, such as was experienced beginning in late 2007, may result in significant reductions in, and heightened credit quality standards for, available capital and liquidity from banks and other providers of credit and substantial reductions and/or fluctuations in equity and currency values worldwide, which may make it difficult for us to raise additional capital or obtain additional credit, when needed, on acceptable terms or at all. Moreover, deteriorated economic conditions, or the threat of a prolonged recessionary period, may cause disruptions and volatility in global financial markets, increased rates of default and bankruptcy and have a negative impact on the levels of consumer spending. These macroeconomic developments could negatively affect our business, operating results or financial condition in a number of ways. For example, current or potential customers, such as advertisers, may delay or decrease spending with us or may not pay us or may delay paying us for previously performed services. In addition, if consumer spending decreases, this may result in fewer clicks on our advertisers’ ads displayed on our Local.com website or our network partner websites.

Our executive officers and certain key personnel are critical to our success, and the loss of these officers and key personnel could harm our business.

Our performance is substantially dependent on the continued services and performance of our executive officers and other key personnel. While we have employment agreements with our key executive officers and certain key personnel, each of these may, however, be terminated with 30 days’ notice by either party. No key man life insurance has been purchased on any of our executive officers. Our performance also depends on our ability to retain and motivate our officers and key employees. The loss of the services of any of our officers or other key employees could have a material adverse effect on our business, prospects, financial condition and results of operations. Our future success also depends on our ability to identify, attract, hire, train, retain and motivate other highly skilled technical, managerial and marketing personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. The failure to attract and retain our officers or the necessary technical, managerial and marketing personnel could have a material adverse effect on our business, prospects, financial condition and results of operations.

We may be subject to intellectual property claims that create uncertainty about ownership of technology essential to our business and divert our managerial and other resources.

There has been a substantial amount of litigation in the technology industry regarding intellectual property rights. We cannot assure you that third parties will not, in the future, claim infringement by us with respect to our current or future services, trademarks or other proprietary rights. Our success depends, in part, on our ability to protect our intellectual property and to operate without infringing on the intellectual property rights of others in the process. There can be no guarantee that any of our intellectual property will be adequately safeguarded, or that it will not be challenged by third parties. We may be subject to patent infringement claims or other intellectual property infringement claims that would be costly to defend and could limit our ability to use certain critical technologies.

We may also become subject to interference proceedings conducted in the patent and trademark offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual property suits, interference proceedings and related legal and administrative proceedings is costly and may divert our technical and

 

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management personnel from their normal responsibilities. We may not prevail in any of these suits. An adverse determination of any litigation or defense proceedings could cause us to pay substantial damages, including treble damages if we willfully infringe, and, also, could put our patent applications at risk of not being issued.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. If investors perceive these results to be negative, it could have an adverse effect on the trading price of our Common Stock.

Any patent litigation could negatively impact our business by diverting resources and management attention away from the operation of our business and adding uncertainty as to the ownership of technology and services that we view as proprietary and essential to our business. In addition, a successful claim of patent infringement against us and our failure or inability to obtain a license for the infringed or similar technology on reasonable terms, or at all, could have a material adverse effect on our business.

We may be subject to lawsuits for information displayed on our websites and the websites of our advertiser partners, which may affect our business.

Laws relating to the liability of providers of online services for activities of their advertisers and for the content of their advertisers’ listings are currently unsettled. It is unclear whether we could be subjected to claims for defamation, negligence, copyright or trademark infringement or claims based on other theories relating to the information we publish on our websites or the information that is published across our network of websites and partner websites. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We may not successfully avoid civil or criminal liability for unlawful activities carried out by our advertisers. Our potential liability for unlawful activities of our advertisers or for the content of our advertisers’ listings could require us to implement measures to reduce our exposure to such liability, which may require us, among other things, to spend substantial resources or to discontinue certain service offerings. Our insurance may not adequately protect us against these types of claims and the defense of such claims may divert the attention of our management from our operations. If we are subjected to such lawsuits, it may adversely affect our business.

We are no longer able to bill our monthly subscription customers through Local Exchange Carriers (“LECs”) on our monthly subscription customers’ telephone bills which has adversely impacted our consolidated results of operations.

By the end of 2012 we were no longer able to bill our legacy monthly subscribers through LEC. This change could impact the collectability and or delay the collection of our LEC related receivables in the future. All or a portion of LEC related receivables may not be collectible in the future. During the three months ended December 31, 2012, we recorded a LEC receivable reserve of $1.4 million and during the three months ended December 31, 2013, we recorded an additional charge of $1.7 million to fully reserve our outstanding LEC related receivable. The reserve was due to the cessation of billing for these services by LECs and the expectation that these receivables will be subject to a longer collection cycle, if they are collectable at all. Any inability to collect LEC related receivables could have a material adverse impact on our financial condition and results of operations.

If our monthly subscription customers file complaints against us or our partners, we could be forced to refund material amounts of monthly subscription revenues and our ability to operate our subscription service could be adversely impacted, which would adversely affect our results of operations.

Until January 2013, we had internal and outsourced telesales initiatives that could result in complaints from our monthly subscription customers against us or our third-party partners who dispute that they have agreed to receive and be billed for our monthly subscription services. Monthly subscription customers may also direct their complaints to a state’s attorney general’s office, federal agencies such as the Federal Trade Commission (“FTC”), their LEC and other authorities. If a complaint is directed to an attorney general, a Federal agency, a LEC or other authorities, then we may be forced to refund the monthly subscription fees that have already been collected for services rendered in unknown amounts regardless of whether or not such complaint is valid. If this were to happen, our financial results could be materially impacted.

 

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Failure to adequately protect our intellectual property and proprietary rights could harm our competitive position.

Our success is substantially dependent upon our proprietary technology, which relates to a variety of business and transactional processes associated with our paid-search advertising model, our Keyword DNA technology, and our Local Connect search and advertising platform. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality agreements and technical measures, to protect our proprietary rights. We have been issued fourteen patents and have a number of patent applications pending related to a variety of business and transactional process associated with paid-search, other cost-per-action advertising models in different environments, and localized shopping data. We cannot assure you that any of the patent applications will be issued as patents, that any issued patents will provide us with adequate protection against competitors with similar technology, that any issued patents will afford us a competitive advantage, that any issued patents will not be challenged by third parties, that any issued patents will not be infringed or designed around by others, or that the patents of others will not have a material adverse effect on our ability to do business. On March 9, 2015, the Company entered into a securities purchase agreement relating to the sale and issuance of senior convertible notes. This agreement obligates us to sell our patent portfolio by December 31, 2015. We own the trademarks for Local.com, Pay Per Connect, Local Promote, Local Connect and Keyword DNA, among others, in the United States and may claim trademark rights in, and apply for trademark registrations in the United States for a number of other marks. We cannot assure you that we will be able to secure significant protection for these marks. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our services or to obtain and use information that we regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology or duplicate our services or design around patents issued to us or our other intellectual property rights. If we are unable to adequately protect our intellectual property and proprietary rights, our business and our operations could be adversely affected.

Problems with our computer and communication systems may harm our business.

A key element of our strategy is to generate a high volume of traffic across our network infrastructure to and from our advertising partners and local syndication and distribution networks. Accordingly, the satisfactory performance, reliability and availability of our software systems, transaction-processing systems and network infrastructure are critical to our reputation and our ability to attract and retain advertising customers, as well as maintain adequate customer service levels. We have in the past and may in the future experience periodic systems interruptions. Any substantial increase in the volume of traffic on our software systems or network infrastructure will require us to expand and upgrade our technology, transaction-processing systems and network infrastructure. We cannot assure you that we will be able to accurately project the rate or timing of increases, if any, in the use of our network infrastructure or timely expand and upgrade our systems and infrastructure to accommodate such increases.

We are dependent on third-party products, services and technologies; changes to existing products, services and technologies or the advent of new products, services and technologies could adversely affect our business.

Our business is dependent upon our ability to use and interact with many third-party products, services and technologies, such as browsers, data and search indices, and privacy software. Any changes made by third parties or consumers to the settings, features or functionality of these third-party products, services and technologies or the development of new products, services and technologies that interfere with or disrupt our products, services and technologies could adversely affect our business. For instance, if a major search index were to alter its algorithms in a manner that resulted in our content not being indexed as often or appearing as high in its search results, our consumers might not be able to reach and use our content, products and services and our business could be adversely affected. Similarly, if more consumers were to switch their browsers to higher security settings to restrict the acceptance of cookies from the websites they visit, our ability to effectively use cookies to track consumer behavior in our business could be impacted and our business could be adversely affected.

If we fail to detect click-through fraud, we could lose the confidence of our advertisers and advertising partners, thereby causing our business to suffer.

We are exposed to the risk of fraudulent or illegitimate clicks on our sponsored listings. If fraudulent clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to revenue for the advertisers. As a result, our advertisers and advertising partners may become dissatisfied with our advertising programs, which could lead to loss of advertisers, advertising partners and revenue.

We rely on third-party technology, server and hardware providers, and a failure of service by any of these providers could adversely affect our business and reputation.

We rely upon third-party data center providers to host our main servers and expect to continue to do so. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to computer viruses, break-ins, sabotage, phishing

 

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attacks, attempts to overload our servers with denial of service or other attacks, intentional acts of vandalism and similar misconduct. Despite any precautions we may take, the occurrence of any disruption of service due to any such misconduct, natural disaster or other unanticipated problems at such facilities, or the failure by such facility to provide our required data communications capacity could result in lengthy interruptions or delays in our services. Any system failure or network disruption that causes an interruption or delay in service could impair our reputation, damage our brand name and have a material adverse effect on our business, results of operations and financial condition. In the event that these providers experience any interruption in operations or cease operations for any reason or if we are unable to agree on satisfactory terms for continued hosting relationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. In the past, we have experienced short-term outages in the service maintained by one of our current co-location providers. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of user questions and complaints that need to be addressed by our customer support personnel. In the event of certain system failures, we may not be able to switch to back-up systems immediately and the time to full recovery could be prolonged. Like many online businesses, we have experienced system failures from time to time. We also rely on third-party providers for components of our technology platform, such as hardware and software providers, credit card processors and domain name registrars. A failure or limitation of service or available capacity by any of these third-party providers could adversely affect our business and reputation.

We process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy. Our actual or perceived failure to comply with such obligations could harm our business.

We receive, store and process personal information and other user data, including credit card information for certain users. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal Information and other user data, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and are subject to the terms of our privacy policies and privacy-related obligations to third parties (including, in certain instances, voluntary third-party certification bodies such as TRUSTe). It is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to users or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation or negative publicity and could cause our users and advertisers to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties with whom we work, such as advertisers, vendors or developers, violate applicable laws or our policies, such violations may also put our users’ information at risk and could have an adverse effect on our business.

Security breaches could expose us to a risk of loss of this information, litigation, remediation costs, increased costs for security measures, loss of revenue, damage to our reputation, and potential liability. Our user data and corporate systems and security measures may be breached due to the actions of outside parties, employee error, malfeasance, or otherwise, and, as a result, an unauthorized party may obtain access to our data or our users’ or customers’ data. Additionally, outside parties may attempt to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to our data or our users’ or customers’ data. We must continuously examine and modify our security controls and business policies to adapt to the rise of social networking, the adoption of new devices and technologies enabling users to share data and communicate in new ways, and the increasing focus by our users and regulators on controlling and protecting user data.

If we fail to scale and adapt our existing technology architecture to manage the expansion of our offerings our business could be adversely affected.

We anticipate expanding our offerings to consumers, advertisers and publishers. Any such expansion will require substantial expenditures to scale or adapt our technology infrastructure. As usage increases and products and services expand, change or become more complex in the future, our complex technology architectures utilized for our consumer offerings and advertising services may not provide satisfactory support. As a result, we may make additional changes to our architectures and systems to deliver our consumer offerings and services to advertisers and publishers, including moving to completely new technology architectures and systems. Such changes may be challenging to implement and manage, may take time to test and deploy, may cause us to incur substantial costs and may cause us to suffer data loss or delays or interruptions in service. These delays or interruptions in service may cause consumers, advertisers and publishers to become dissatisfied with our offerings and could adversely affect our business.

 

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Our business is subject to a number of natural and man-made risks, including natural disasters such as fires, floods, and earthquakes and problems such as computer viruses or terrorism.

Our systems and operations are vulnerable to damage or interruption from natural disaster and man-made problems, including fires, floods, earthquakes, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins and similar events. As an example, if we were to experience a significant natural disaster, such as an earthquake, fire or flood, it likely would have a material adverse impact on our business, operating results and financial condition, and our insurance coverage will likely be insufficient to compensate us for all of the losses we incur. Additionally, our servers may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential intellectual property or customer data. We may not have sufficient protection or recovery plans in certain circumstances, such as natural disasters affecting the Southern California area, and our business interruption insurance may be insufficient to compensate us for losses that may occur. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide customer service, such disruptions could negatively impact our ability to run our business, which could have an adverse effect on our operating results and financial condition.

Tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our services and our financial results.

Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.

Federal, state or international laws or regulations applicable to our business could adversely affect our business.

We are subject to a variety of existing federal, state and international laws and regulations in the areas of advertising, content regulation, privacy, consumer protection, defamation, child protection, advertising to and collecting information from children, taxation and billing, among others. These laws can change, as can the interpretation and enforcement of these laws. Additionally, new laws and regulations may be enacted at any time. Compliance with laws is often costly and time consuming and may result in the diversion of a significant portion of management’s attention. Our failure to comply with applicable laws and regulations could subject us to significant liabilities which could adversely affect our business. Specific federal laws that impact our business include: The Digital Millennium Copyright Act of 1998; The Communications Decency Act of 1996; The Children’s Online Privacy Protection Act of 1998 (including related Federal Trade Commission regulations); The Protect Our Children Act of 2008; the Credit Card Accountability Responsibility and Disclosure Act of 2009; and The Electronic Communications Privacy Act of 1986, and any amendments thereto. Additionally, there are a number of state laws and pending legislation governing the breach of data security in which sensitive consumer information is released or accessed. If we fail to comply with applicable laws or regulations we could be subject to significant liability which could adversely affect our business.

Government and legal regulations with respect to the Internet may damage our business.

There are currently few significant laws or regulations directly applicable to access to or commerce on the Internet. It is possible, however, that a number of laws and regulations may be adopted with respect to the Internet, covering issues such as the positioning of sponsored listings on search results pages. For example, the FTC has in the past reviewed the way in which search engines disclose paid-search practices to Internet users. In 2002, the FTC issued guidance recommending that all search engine companies ensure that all paid-search results are clearly distinguished from non-paid results, that the use of paid search is clearly and conspicuously explained and disclosed and that other disclosures are made to avoid misleading users about the possible effects of paid-search listings on search results. In February 2009, the FTC issued a staff report titled “Self-Regulatory Principles for Online Behavioral Advertising.” In December 2009, the FTC issued “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

The adoption of laws, regulations, guidelines and principles relating to online advertising, including behavioral advertising, placement of paid search advertisements or user privacy, defamation or taxation and the like may inhibit the

 

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growth in use of the Internet, which in turn, could decrease the demand for our services and increase our cost of doing business or otherwise have a material adverse effect on our business, prospects, financial condition and results of operations. Any new legislation or regulation, or the application of existing laws and regulations to the Internet or other online services, could have a material adverse effect on our business, prospects, financial condition and results of operations.

Any regulation of our use of cookies or similar technologies could adversely affect our business.

We use small text files placed in a consumer’s browser, commonly known as cookies, to facilitate authentication, preference management, research and measurement, personalization and advertisement and content delivery. Several Federal, state and international governmental authorities are regularly evaluating the privacy implications inherent in the use of third-party web “cookies” for behavioral advertising and other purposes. There are an increasing number of laws and regulations under consideration in the United States and abroad that have suggested limitations on or eliminations of “cookies” or which propose to regulate commercial and advertising practices on the Internet. Certain privacy advocates and federal, state and local governmental bodies have endorsed these proposals. Any regulation of these tracking technologies and other current online advertising practices could adversely affect our business.

Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business.

A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. For example, recently there have been Congressional hearings and increased attention to the capture and use of location-based information relating to users of smartphones and other mobile devices. We have posted privacy policies and practices concerning the collection, use and disclosure of subscriber data on our websites and applications. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, FTC requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business.

Risks related to the Notes Offering subsequent to the year ended December 31, 2014

We incurred significant indebtedness when we sold the Notes and we may incur additional indebtedness in the future. The indebtedness created by the sale of the Notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.

We incurred $9.25 million aggregate principal amount of senior subordinated unsecured indebtedness when we sold the Notes in March 2015. Although we have repaid all of our $5.0 million aggregate principal amount of outstanding 7% Notes, our remaining indebtedness could have significant negative consequences for our business, results of operation and financial condition, including:

 

    increasing our vulnerability to adverse economic and industry conditions;

 

    limiting our ability to obtain additional financing;

 

    requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash flow available for other purposes;

 

    limiting our flexibility in planning for, or reacting to, changes in our business; and

 

    placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.

We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will generate cash flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our existing indebtedness, the Notes or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the Notes and

 

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such other indebtedness to accelerate the maturity of the Notes and such other indebtedness and could cause defaults under the Notes and such other indebtedness. Any default under the Notes or such other indebtedness could have a material adverse effect on our business, results of operations and financial condition.

We may not have the ability to redeem the Series B Notes upon the occurrence of a change of control or in connection with certain asset sales.

If a change of control occurs, holders of the Series B Notes may require us to repurchase, for cash, all or a portion of their Series B Notes. In addition, if we sell certain “Restricted Assets,” as defined in the Series B Notes, each holder of Series B Notes has the right to require us to redeem a portion of such holders Series B Notes.

Our ability to repurchase or redeem the Series B Notes and to fund working capital needs and planned capital expenditures depends on our ability to generate cash flow in the future. In addition, our ability to repurchase or redeem Series B Notes is subject to certain limitations in the supplemental indentures governing the Notes, including a requirement that, after giving effect to any such repurchase or redemption, we have cash on hand and cash equivalents of at least $500,000. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to repurchase or redeem the Series B Notes or that our cash needs will not increase.

Our failure to make required payments on the Series B Notes would permit holders of the Series B Notes to accelerate our obligations under the Series B Notes. Such default would also lead to a default under the agreements governing our current and our accounts receivable financing facility with Fast Pay. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness.

If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and meet our other needs, we may have to refinance all or a portion of our indebtedness, obtain additional financing, reduce expenditures or sell assets that we deem necessary to our business. We cannot assure you that any of these measures would be possible or that any additional financing could be obtained on favorable terms, or at all. The inability to obtain additional financing on commercially reasonable terms could have a material adverse effect on our financial condition and on our ability to meet our obligations to you under the Series B Notes.

Provisions in the Series B Notes may deter or prevent a business combination that may be favorable to our stakeholders.

If a change of control occurs prior to the maturity date of the Series B Notes, holders of the Series B Notes will have the right, at their option, to require us to repurchase all or a portion of their Series B Notes. In addition, under the terms of the Series B Notes we are prohibited from engaging in certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Series B Notes. These and other provisions could prevent or deter a third party from acquiring us, even where the acquisition could be beneficial to you.

Risks Related to Ownership of Our Common Stock

The market price of our Common Stock has been and is likely to continue to be highly volatile, which could cause investment losses for our stockholders and result in stockholder litigation with substantial costs, economic loss and diversion of our resources.

The trading price of our Common Stock has been and is likely to continue to be highly volatile and could be subject to wide fluctuations as a result of various factors, many of which are beyond our control, including:

 

    developments concerning proprietary rights, including patents, by us or a competitor;

 

    market acceptance of our new and existing services and technologies;

 

    announcements by us or our competitors of significant contracts, acquisitions, commercial relationships, joint ventures or capital commitments;

 

    actual or anticipated fluctuations in our operating results;

 

    continued growth in the Internet and the infrastructure for providing Internet access and carrying Internet traffic;

 

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    introductions of new services by us or our competitors;

 

    enactment of new government regulations affecting our industry;

 

    changes in the number of our advertising partners or the aggregate amount of advertising dollars spent with us;

 

    seasonal fluctuations in the level of Internet usage;

 

    loss of key employees;

 

    institution of litigation, including intellectual property litigation, by or against us;

 

    publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;

 

    short selling of our stock;

 

    large volumes of sales of shares of our Common Stock by existing stockholders;

 

    changes in the market valuations of similar companies; and

 

    changes in our industry and the overall economic environment.

Due to the short-term nature of some of our advertising partner agreements and the emerging nature of the online advertising market, we may not be able to accurately predict our operating results on a quarterly basis, if at all, which may lead to volatility in the trading price of our Common Stock. In addition, the stock market in general, and the NASDAQ Capital Market and the market for online commerce companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the listed companies. These broad market and industry factors may seriously harm the market price of our Common Stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class action litigation has often been instituted against these companies. Litigation against us, whether or not a judgment is entered against us, could result in substantial costs, and potentially, economic loss, and a diversion of our management’s attention and resources. As a result of these and other factors, you may not be able to resell your shares above the price you paid and may suffer a loss on your investment.

Our Common Stock could be delisted from NASDAQ Capital Market.

The quantitative listing standards of the NASDAQ Capital Market require, among other things, that listed companies maintain a minimum closing bid price of $1.00 per share. On March 18, 2015, the last reported sale price of our Common Stock on the NASDAQ Capital Market was $0.45, which violates the listing standard described in the preceding sentence. On February 25, 2015, we received a deficiency letter from The NASDAQ Stock Market LLC (“NASDAQ”) indicating that, based on the closing bid price for our Common Stock for the last 30 consecutive business days, we do not comply with the minimum bid price requirement of $1.00 per share, as set forth in NASDAQ Listing Rule 5550(a)(2). The notification has no immediate effect on the listing of our Common Stock on The NASDAQ Capital Market. In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we have a grace period of 180 calendar days, or until August 24, 2015, to regain compliance with the minimum closing bid price requirement for continued listing. In order to regain compliance, the minimum closing bid price per share of our Common Stock must be at least $1.00 for a minimum of ten consecutive business days. In the event we do not regain compliance by August 24, 2015, the Company may be afforded an additional 180-day compliance period, provided it demonstrates that it meets all other applicable standards for initial listing on The NASDAQ Capital Market (except the bid price requirement), and provides written notice of its intention to cure the minimum bid price deficiency during the second grace period, by effecting a reverse stock split, if necessary.

If we fail to regain compliance after the second grace period, our stock will be subject to delisting by NASDAQ. Regardless of the grace periods provided by the rules of the Nasdaq Capital Market, the Securities Purchase Agreement with the purchasers of the Notes requires that we call and hold a meeting of our stockholders to obtain stockholder approval for a reverse split of our Common Stock at a ratio up to 6 for 1 by June 30, 2015. We can provide no assurance that the stockholders would approve a reverse split or that a reverse split will result in us regaining compliance with the closing bid price requirement. A delisting of our Common Stock would be likely to reduce the liquidity of our Common Stock and inhibit or preclude our ability to raise additional financing. In addition, our failure to list our Common Stock on a major stock exchange would increase the interest rate on the Notes to 18.00%.

 

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We have never paid dividends on our Common Stock.

Since our inception, we have not paid cash dividends on our Common Stock and we do not intend to pay cash dividends in the foreseeable future due to our limited funds for operations. In addition, the Square 1 Agreement restricts the payment of dividends and we expect any replacement credit facility for the Square 1 Agreement to contain similar restrictions. Therefore, any return on your investment would likely come only from an increase in the market value of our Common Stock.

Issuances of shares of Common Stock will likely have a dilutive effect on our stock price.

The conversion price of the Series A Notes was set below the market price of our Common Stock on the issue date and the conversion of the Notes (including Installment Conversions with respect to the Series B Notes), exercise of the Warrants and/or our election to issue additional shares of our Common Stock to pay interest on the Series A Notes will dilute our stockholders, perhaps substantially.

As of December 31, 2014, we have 4,480,856 options to purchase our Common Stock outstanding at a weighted average exercise price of $3.31, 21,117 restricted stock units (“RSUs”) outstanding at a weighted average grant date fair value of $2.29, and 746,268 warrants to purchase our Common Stock outstanding at a weighted average exercise price of $2.01. As of March 18, 2015, we have 4,475,322 options to purchase our Common Stock outstanding at a weighted average exercise price of $3.31, as well as 21,117 restricted stock units (“RSUs”) outstanding at a weighted average grant date fair value of $2.29, and 8,729,888 warrants to purchase our Common Stock outstanding at a weighted average exercise price of $0.75. The exercise of options and warrants at prices below the market price of our Common Stock could adversely affect the price of shares of our Common Stock. In addition, the exercise of options and warrants, and the vesting of RSUs and PSUs, will cause dilution to our existing shareholders. Additional dilution will result from the issuance of shares of our Common Stock in connection with collaborations or commercial agreements or in connection with other financing efforts, including as a result of the anti-dilution provisions of the outstanding Notes and Warrants.

To the extent that we issue options, warrants, RSUs or PSUs to purchase, or securities convertible into or exchangeable for, shares of our common stock in the future and those options, warrants, RSUs, PSUs or other securities are exercised, converted or exchanged (or if we issue shares of restricted stock), stockholders may experience further dilution.

Holders of shares of our Common Stock have no preemptive rights that entitle them to purchase their pro rata share of any offering of shares of any class or series.

If our stockholders do not approve the issuance of our Common Stock issuable upon conversion of the Notes, as payment of interest on the Series A Notes, as payment of the Installment Conversion Amount on the Series B Notes and upon exercise of the Warrants, our Series B Noteholders might not be able to convert the Series B Notes into the full number of shares of our Common Stock issuable upon conversion.

NASDAQ Marketplace Rule 5635(d) requires stockholder approval prior to the issuance of securities in connection with a transaction (other than a public offering) involving the sale, issuance or potential issuance by us of Common Stock (or securities convertible into or exercisable for Common Stock) equal to 20% or more of the Common Stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock. The conversion price of the Notes, the price that will be used to determine the number of shares of Common Stock issued as interest or on an Installment Date, and the exercise price of the Warrants are all less than the market price of our Common Stock. In addition, upon certain issuances of our Common Stock or deemed issuances of our Common Stock at a price below the conversion price of the Notes or the exercise price of the Warrants, as well as the occurrence of certain price reset provisions in the Warrants, the conversion price and the exercise price will be adjusted (down only) to the price at which the Company issued the Common Stock.

Taking into account the use of Common Stock to pay our obligations under the Notes and the potential for conversion and exercise price adjustments to the Notes and the Warrants to be triggered in the circumstances set forth above, our Noteholders could be entitled to convert the Notes and to exercise the Warrants into 20% or more of our Common Stock. Pending our receipt of stockholder approval for the issuance of such Common Stock, the Notes and the Warrants contain provisions which limit the total amount of shares of Common Stock that may be issued upon conversion of the Notes, exercise of the Warrants and as payment of interest or in connection with Installment Dates, to 19.99%, in the aggregate, of the shares of Common Stock outstanding before the issuance of the Notes and Warrants. We intend to seek stockholder approval of the issuance of our Common Stock upon conversion of the Notes, upon exercise of the Warrants and as interest on the Series A Notes and Installment Conversion Amounts on the Series B Notes at our next annual meeting of stockholders, which we expect will be held in June of 2015. In the event that stockholder approval is not obtained and, but for the foregoing cap on total conversion, we will be required to pay cash in exchange for the cancellation of such shares

 

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(“Exchange Cap Shares”) that are in excess of the foregoing cap on total conversion a price equal to the sum of (i) the product of (x) such number of Exchange Cap Shares and (y) the greatest closing sale price of the Common Stock on any trading day during the period commencing on the date a conversion notice is delivered with respect to such Exchange Cap Shares to us and ending on the date of such issuance and payment and (ii) to the extent the holder purchases (in an open market transaction or otherwise) shares of our Common Stock to deliver in satisfaction of a sale by the holder of Exchange Cap Shares, any brokerage commissions and other out-of-pocket expenses, if any, of the holder incurred in connection therewith.

Because almost all of our outstanding shares of Common Stock are freely tradable, sales of these shares could cause the market price of our Common Stock to drop significantly, even if our business is performing well.

As of December 31, 2014, we had outstanding 23,294,566 shares of Common Stock, of which our directors and executive officers owned 181,320 shares as of December 31, 2014, which are subject to the limitations of Rule 144 under the 1933 Act (“Rule 144”).

In general, Rule 144 provides that any non-affiliate of ours, who has held restricted Common Stock for at least six months, is entitled to sell their restricted stock freely, provided that we stay current in our filings with the SEC. Because almost all of our outstanding shares are freely tradable and the shares held by our affiliates may be freely sold (subject to the Rule 144 limitations), sales of these shares could cause the market price of our Common Stock to drop significantly, even if our business is performing well.

In addition, the issuance of our Common Stock upon conversion of the Notes, exercise of the Warrants, or otherwise to fulfill our obligations under the Notes will likely result in substantial dilution of our existing stockholders. Depending on the performance of our Common Stock after issuance of the Notes and the Warrants, the number of shares of Common Stock that we could become obligated to issue to holders of the Notes and Warrants could range from approximately 22.7 million shares to as many as approximately 25.7 million shares. Because these shares are likely to be issued at a conversion or exercise price that will be lower—perhaps significantly lower—than the market price of our Common Stock at the time of issuance of the shares, existing holders of our Common Stock are likely to undergo substantial dilution of the value of their shares.

Our future ability to raise capital may be limited by applicable laws and regulations.

Our capital raising activities have benefited from using a “shelf” registration on Form S-3, which typically enables an issuer to raise additional capital on a more timely and cost effective basis than through other means, such as registration of a securities offering under a Form S-1 registration statement. Our future ability to raise additional capital through the sale and issuance of our equity securities may be limited by, among other things, current SEC rules and regulations. Under current SEC rules and regulations, to be eligible to use a Form S-3 registration statement for primary offerings without restriction as to the amount of securities to be sold and issued, the aggregate market value of our common equity held by non-affiliates (i.e., our “public float”) must be at least $75 million at the time we file the Form S-3 (calculated pursuant to the General Instructions to Form S-3). We do not presently satisfy the $75 million public float requirement and the amount we could raise through primary offerings of our securities in any 12-month period using a Form S-3 registration statement is limited to an aggregate of one-third of our public float. Moreover, the market value of all securities sold by us under our Form S-3 registration statements during the 12-month period prior to any intended sale will be subtracted from that amount to determine the amount we can then raise under our Form S-3 registration statements. We utilized the entire amount of our public float presently available for the offer and sale of the Series B Notes pursuant to the 2015 Notes and Warrants transaction, and we do not expect to be able to utilize Form S-3 to utilize and sell additional securities for the immediately foreseeable future. The lack of availability to use Form S-3 could adversely affect our ability to raise additional capital on an expeditious basis.

Anti-takeover provisions may limit the ability of another party to acquire us, which could cause our stock price to decline.

Our amended and restated certificate of incorporation, as amended, our amended and restated bylaws and Delaware law contain provisions that could discourage, delay or prevent a third party from acquiring us, even if doing so may be beneficial to our stockholders. In addition, these provisions could limit the price investors would be willing to pay in the future for shares of our Common Stock. The following are examples of such provisions in our amended and restated certificate of incorporation and in our amended and restated bylaws:

 

    special meetings of our stockholders may be called only by our Chief Executive Officer, by a majority of the members of our board of directors or by the holders of shares entitled to cast not less than 10% of the votes at the meeting;

 

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    stockholder proposals to be brought before any meeting of our stockholders must comply with advance notice procedures;

 

    our board of directors is classified into three classes, as nearly equal in number as possible;

 

    newly-created directorships and vacancies on our board of directors may only be filled by a majority of remaining directors, and not by our stockholders;

 

    a director may be removed from office only for cause by the holders of at least 75% of the voting power entitled to vote at an election of directors;

 

    our amended and restated bylaws may be further amended by our stockholders only upon a vote of at least 75% of the votes entitled to be cast by the holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class; and

 

    our board of directors is authorized to issue, without further action by our stockholders, up to 10,000,000 shares of undesignated preferred stock with rights and preferences, including voting rights, designated from time to time by our board of directors.

We implemented a Stockholder Rights Plan, dated October 15, 2008, which may also have the effect of deterring or delaying attempts by our stockholders to affect changes in control. Each Right entitles the registered holder to purchase from our company one one-thousandth (1/1000) of a share of Series A Participating Preferred Stock, par value $0.00001, which we refer to as the preferred shares, of our company at a price of $10.00, which we refer to as the purchase price, subject to adjustment. The number of shares constituting the series of preferred shares is 30,000. The Rights are intended to protect our stockholders in the event of an unfair or coercive offer to acquire us and to provide the Board of Directors with adequate time to evaluate unsolicited offers. The Rights may have anti-takeover effects. The Rights will cause substantial dilution to a person or group that acquires 15% or more of the shares of our outstanding Common Stock without the approval of our Board of Directors. The Rights, however, should not affect any prospective offer or willingness to make an offer at a fair price as determined by our Board. The Rights should not interfere with any merger or other business combination approved by our Board of Directors. However, because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition.

We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our voting stock, the person is an “interested stockholder” and may not engage in “business combinations” with us for a period of three years from the time the person acquired 15% or more of our voting stock.

The number of shares issuable upon exercise of the 2013 Warrants and the exercise price of such 2013 Warrants can fluctuate under certain circumstances which, if triggered, can result in potentially material further dilution to our stockholders.

In connection with the 2013 7 % Notes and Warrants Transaction, we sold warrants to purchase 746,268 shares of our Common Stock. The number of shares of our Common Stock for which the 2013 Warrants issued in the 2013 7% Note and Warrant Transaction are exercisable and the price at which such shares of our Common Stock may be purchased upon exercise of the 2013 Warrants may be adjusted in the event (i) we undertake certain stock dividends, split, combinations, distributions, or (ii) we undertake certain issuances of Common Stock or convertible securities at prices lower than the then-current exercise price for such warrants. These provisions are intended to provide the investors in our 2013 Note and Warrant Transaction with partial protection from the effects of actions that dilute their interests in our Company on a fully-converted and fully-exercised basis. These provisions could result in substantial dilution to investors in our Common Stock that purchased our shares at higher prices.

In such instances, the number of shares of our Common Stock for which the 2013 Warrants are exercisable and the price at which such shares of our Common Stock may be purchased upon exercise of the 2013 Warrants can fluctuate materially lower than the current exercise price of $2.01 per share.

 

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In the event of a stock dividend, split or combination, the number of shares of Common Stock acquirable pursuant to such 2013 Warrants would be adjusted in accordance with the following formula:

a x (b/c)

Where:

a= Current total number of shares of Common Stock issuable pursuant to the 2013 Warrant

b= Number of shares of Common Stock outstanding after the event

c= Number of shares of Common Stock outstanding before the event

Simultaneously, the exercise price of such 2013 Warrants would be adjusted in accordance with the following formula:

(a x b)/c

Where:

a= Current 2013 Warrant price

b= Number of shares of Common Stock issuable pursuant to the 2013 Warrant prior to the adjustment above

c= Number of shares of Common Stock issuable pursuant to the 2013 Warrant after such adjustment

In the event of a subsequent issuance of Common Stock by us, the number of shares of Common Stock acquirable pursuant to these 2013 Warrants would be adjusted in accordance with the following formula:

a/(a x ((b+(c/a))/d))

Where:

a= Current exercise price of the 2013 Warrant

b= Number of shares of Common Stock outstanding prior to the issuance

c= Aggregate consideration received by the issuance

d= Number of shares of Common Stock outstanding after the issuance

Simultaneously, the exercise price of the 2013 Warrants would be adjusted in accordance with the following formula:

a x ((b+(c/a))/d)

Where:

a= Current exercise price of the 2013 Warrant

b= Number of shares of Common Stock outstanding prior to the issuance

c= Aggregate consideration received by the issuance

d= Number of shares of Common Stock outstanding after the issuance

By way of illustration, the following table sets forth the impact of a subsequent issuance of Common Stock by us at approximately 25%, 50% and 75% of the current exercise price of these 2013 Warrants of $2.01 in which the total value of such subsequent issuance of Common Stock is valued at $1,000,000, $5,000,000 or $10,000,000:

 

Issuance Value     Issuance Price     Number of Shares Issuable In
Aggregate to 2013 Warrant
Holders
    Exercise Price of Such 2013
Warrants
Post-Subsequent Issuance
 
  $ 1.50        751,668      $ 2.00   
$ 1,000,000      $ 1.00        730,564      $ 1.97   
  $ 0.50        701,196      $ 1.89   
  $ 1.50        771,152      $ 1.95   
$ 5,000,000      $ 1.00        820,186      $ 1.83   
  $ 0.50        967,292      $ 1.55   
  $ 1.50        791,590      $ 1.89   
$ 10,000,000      $ 1.00        880,902      $ 1.70   
  $ 0.50        1,148,838      $ 1.31   

The consummation of the 2015 Notes and Warrants transaction resulted in the triggering of certain of the above described anti-dilution adjustment and the exercise price of the 2013 Warrants will decrease to approximately $1.47. We issued an additional 275,529 warrants as part of the anti-dilution adjustment.

The number of shares issuable upon conversion and exercise of the 2015 Notes and Warrants and the conversion and exercise price of such 2015 Notes and Warrants can fluctuate under certain circumstances which, if triggered, can result in potentially material further dilution to our stockholders.

The number of shares of our Common Stock for which the 2015 Notes and Warrants issued in the 2015 Notes and Warrants Transaction are convertible and exercisable and the price at which such shares of our Common Stock may be

 

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purchased upon conversion and exercise of the 2015 Notes and Warrants may be adjusted in the event (i) we undertake certain stock dividends, split, combinations, distributions, or (ii) we undertake certain issuances of Common Stock or convertible securities at prices lower than the then-current exercise price for such warrants. These provisions are intended to provide the investors in our 2015 Notes and Warrants Transaction with protection from the effects of actions that dilute their interests in our Company on a fully-converted and fully-exercised basis. These provisions could result in substantial dilution to investors in our Common Stock that purchased our shares at higher prices.

In such instances, the number of shares of our Common Stock for which the 2015 Notes and Warrants are exercisable and the price at which such shares of our Common Stock may be purchased upon exercise of the 2015 Notes and Warrants can fluctuate materially lower than the current exercise price of $0.5534, $0.7090 and $0.6510 per share for the Series A Notes, Series B Notes and Warrants, respectively.

In the event of a stock dividend, split or combination, the number of shares of Common Stock acquirable pursuant to the conversion and exercise of such 2015 Notes and Warrants would be adjusted in accordance with the following formula:

a x (b/c)

Where:

a= Current total number of shares of Common Stock issuable pursuant to the 2015 Warrant

b= Number of shares of Common Stock outstanding after the event

c= Number of shares of Common Stock outstanding before the event

Simultaneously, the exercise price of such 2015 Warrants would be adjusted in accordance with the following formula:

(a x b)/c

Where:

a= Current 2015 Warrant price

b= Number of shares of Common Stock issuable pursuant to the 2015 Warrant prior to the adjustment above

c= Number of shares of Common Stock issuable pursuant to the 2015 Warrant after such adjustment

In the event of a subsequent issuance of Common Stock by us, the number of shares of Common Stock acquirable pursuant to the Series A Notes, Series B Notes and Warrants would be adjusted to the new issuance price:

By way of illustration, the following table sets forth the impact of a subsequent issuance of Common Stock by us at $0.50, $0.40, $0.30 and$0.20 per share:

 

Shares Recap

   Current      Issuance at $0.50
per share
     Issuance at $0.40
per share
     Issuance at $0.30
per share
     Issuance at $0.20
per share
 

8% Convertible notes

              

Principal

     8,255,266         9,136,112         11,420,140         15,226,853         22,840,280   

Warrants

     3,675,835         4,705,882         5,982,421         7,843,133         11,764,703   

Interest

     1,981,263         2,192,666         2,740,833         3,654,444         5,481,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  13,912,364      16,034,660      20,143,394      26,724,431      40,086,650   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

10% Partially liquidating debenture

Principal

  6,699,575      9,500,000      11,875,000      15,833,333      23,750,000   

Warrants

  4,032,256      5,250,000      6,562,497      8,750,000      13,125,000   

Interest

  650,731      922,736      1,153,421      1,537,894      2,306,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sub-total

  11,382,562      15,672,736      19,590,918      26,121,227      39,181,842   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  25,294,926      31,707,396      39,734,312      52,845,658      79,268,492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Item 1B. Unresolved Staff Comments

Not applicable.

 

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Item 2. Properties

Our executive and administrative offices are located at 7555 Irvine Center Drive, Irvine, CA 92618, where we lease approximately 34,612 square feet of space in a two-story office building. Our current monthly rent is $42,227, subject to annual increases. Our lease for this space ends in July 2015. We also lease approximately 4,921 square feet of space located at 840 Apollo Street, El Segundo, CA 90245, a three story building. Through December 2012, we utilized this space for our Launch By Local SMB product fulfillment personnel. We paid $10,473 in base rent for the El Segundo office, which is subject to annual increases through February 2015 when the El Segundo lease expires. We have since consolidated all of our operations into our Irvine offices and have entered into a sublease agreement for the El Segundo facility, whereby we receive monthly rental payments of $8,144 through the end of the lease term.

 

Item 3. Legal Proceedings

From time to time we may initiate or be subject to a variety of legal proceedings and claims in the ordinary course of business, including claims seeking to enforce our intellectual property rights, claims that allege we infringe the intellectual property rights of another party and claims arising in connection in the ordinary course of business. Other than the litigations discussed below, we are not currently a party to any material legal proceedings.

Fry’s Electronics Litigation

On June 18, 2012, we filed a lawsuit against Fry’s Electronics, Inc. (“Fry’s”) alleging that Fry’s violates our registered U.S. Patent No. 7,062,453, which is entitled “Methods and systems for dynamic networked commerce architecture.” We settled with Fry’s on August 29, 2014 and Fry’s licensed our patent. We received a one-time patent license fee of $700,000 in August 2014 related to prior infringement of our patent.

Shopping Cheapest Litigation

On April 24, 2014, a lawsuit was filed in the Superior Court of California, County of Orange against Local Corporation by Shopping Cheapest, LLC, a purported UK limited liability company (“Shopping Cheapest”). This lawsuit was dismissed by Shopping Cheapest on August 4, 2014 and our countersuit against Shopping Cheapest was dismissed on September 9, 2014. On November 3, 2014, an individual named Ying Jian Liu filed a lawsuit in the United States District Court for Central District of California purporting to be doing business as Shopping Cheapest, LLC. The complaint alleges that Local Corporation breached its contract with Shopping Cheapest and seeks an award of damages of approximately $1.1 million plus attorney fees. We do not believe this lawsuit has any merit and intend to vigorously defend ourselves.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market information

Our common stock has traded on the Nasdaq Capital Market under the symbol “LOCM” since November 2, 2006, when we changed the ticker symbol of our common stock in connection with our company name change to Local.com Corporation. Prior to that, our common stock was traded under the symbol “INCX.” The following table sets forth the range of high and low per share sales prices as reported on the Nasdaq Capital Market for each period indicated. These prices reflect inter-dealer prices without retail markup, markdown or commissions and may not represent actual transactions.

 

     High      Low  

Year ended December 31, 2013:

     

First quarter

   $ 2.37       $ 1.55   

Second quarter

   $ 1.96       $ 1.53   

Third quarter

   $ 2.30       $ 1.44   

Fourth quarter

   $ 2.07       $ 1.56   

Year ended December 31, 2014:

     

First quarter

   $ 2.10       $ 1.52   

Second quarter

   $ 2.23       $ 1.63   

Third quarter

   $ 2.16       $ 1.57   

Fourth quarter

   $ 2.02       $ 0.95   

Holders

On February 28, 2015, the closing price of our common stock, as reported by the Nasdaq Capital Market, was $0.68 per share and the number of stockholders of record of our common stock was 56.

Dividends

We have never declared or paid any cash dividends on our capital stock. In addition, our agreements with Square One Bank and our subordinated convertible note holders restrict the payment of dividends. We currently intend to retain any future earnings to finance the growth and development of our business and therefore do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, and such other factors as our board of directors deems relevant.

Equity Compensation Plans

The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K. See Note 12 to the consolidated financial statements for a description of securities authorized for issuance under equity compensation plans.

Unregistered Securities

None.

Repurchase of Securities

We did not repurchase any shares of our equity securities during the fourth quarter of the year ended December 31, 2014.

 

Item 6. Selected Financial Data

Not required for smaller reporting companies.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Report. In addition to current and historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments, and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue,” the negative of such terms, or other comparable terminology. These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part 1, Item 1A. “Risk Factors” of this Annual Report on Form 10-K. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Annual Report on Form 10-K to reflect actual results or future events or circumstances.

Overview

We are a leading local advertising technology company that provides our search results to consumers who are searching online for local businesses, products and services. Our search results consist primarily of local business listings and product listings that we aggregate, index, normalize and syndicate using our sophisticated technology platforms. We provide our search results through our flagship Local.com website and platform and through other proprietary websites (“Owned and Operated” or “O&O”) and to a network of websites that rely on our search syndication services to provide local search results to their own users (“Network”). We generate revenue from a variety of ad units we place alongside our search results, which include pay-per-click, pay-per-call, and display (banner) ad units, including video.

We use patented and proprietary technologies and systems to provide users of our O&O websites and Network with relevant search results for local businesses, products and services, event information, ratings and reviews, driving directions and more into our search results. By distributing this information across our O&O websites and Network, we are able to reach users that our direct advertisers and advertising partners desire to reach.

2014 Corporate Highlights

On January 10, 2014, we entered into a separation and general release agreement with our former chief executive officer, Heath B. Clarke. In accordance with the Separation and General Release Agreement we agreed to pay our former chief executive officer a severance amount of $772,000 over a period of ten months starting in January 2014, all of which was expensed in the first quarter of 2014.

On March 27, 2014, we entered into the Eighth Amendment to the Loan and Security Agreement with Square 1 Bank. In accordance with the Eighth Amendment, we paid in full our term loan with Square 1 Bank using credit available under our Formula Revolving Line. The Eighth Amendment also extended the term of the Loan Agreement through April 2015 and removed the liquidity ratio covenant requirement.

On May 7, 2014, we announced the appointment of Fred Thiel, the chairman of the board, as our new chief executive officer. On June 10, 2014, we also announced the appointment of two new board members, David M. Hughes and John M. Payne, to our board of directors.

On May 8, 2014, we entered into a separation and general release agreement with our former chief operating officer, Michael Sawtell. Under the terms of the separation and general release agreement, we recognized a severance cost due to Michael Sawtell of $563,000, representing one year’s base salary and all of the bonus payments received by Michael Sawtell in the four fiscal quarters immediately preceding the date of separation, payable, over one year, in accordance with the schedule set forth in the separation and general release agreement. The total amount of severance was expensed in the second quarter of 2014 of which, $219,000 remains in accrued compensation in the accompanying consolidated balance sheets.

On September 3, 2014, we reached a settlement agreement in the patent infringement action against Fry’s Electronics, Inc. As part of the settlement agreement, we received a one-time patent license fee payment of $700,000 related to prior infringement of our patent.

 

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On March 9, 2015, we entered into a Securities Purchase Agreement relating to the sale and issuance of New Senior Convertible Notes, comprising $4.57 million aggregate principal amount of new 8% Senior Convertible Notes (“Series A Notes”) maturing in April 2018 and initially convertible at $0.5534 per share, $250,000 of which was invested by certain management and board members, and $4.75 million aggregate principal amount of 10% Partially Liquidating Debentures (“Series B Notes”) maturing August 2016, initially convertible at $0.7090 per share. Note that conversion prices are subject to adjustment. Both transactions included issuance of five-year warrants with 50% coverage with an exercise price at market price, defined as the preceding 5 day volume weighted average price. We issued the Series B Notes pursuant to our effective shelf registration statement. We have agreed to file a registration statement covering the resale of the common stock issuable upon conversion of the Series A Notes and upon issuance of the warrants. We used $6.4 million of the proceeds to repay our outstanding 7% Notes and associated fees.

On March 9, 2015, we entered into a Financing and Security Agreement, amended on March 9, 2015, with Fast Pay Partners LLC (“Fast Pay”) creating an accounts receivable-based credit facility (the “Fast Pay Agreement”). Under the terms of the Fast Pay Agreement, Fast Pay may, at its sole discretion, purchase our eligible accounts receivables. Upon any acquisition of accounts receivable, Fast Pay will advance us up to 80% of the gross value of the purchased accounts, up to a maximum of $10.0 million in advances. Each account receivable purchased by Fast Pay will be subject to a factoring fee rate specified in the Fast Pay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over thirty days. The all-in interest cost to us under the Fast Pay Agreement will not exceed the limit on our permitted senior indebtedness under the Notes. We will be obligated to repurchase accounts remaining uncollected after a specified deadline, and Fast Pay will generally have full recourse against us in the event of nonpayment of any purchased accounts. The Fast Pay Agreement has an initial term ending April 9, 2016, automatically renewing for successive one year terms thereafter. Our obligations under the credit facility are secured by substantially all of the Company’s assets.

Outlook for Our Business

According to BIA/Kelsey, U.S. local online advertising revenue is projected to reach $140.7 billion in 2015. “Local search,” that is, searches for products, services and businesses within a geographic region, is an increasingly significant segment of the online advertising industry. Local search allows consumers to search for local businesses’ products or services by including geographic area, zip code, city and other geographically targeted search parameters in their search requests—such as entering “florists in Irvine, CA.” In addition, BIA/Kelsey estimates that the local search market in the U.S. will grow from $6.3 billion in 2013, to $8.6 billion by 2017.

Consumers who conduct local searches for businesses and products on the Internet (“local searchers”) tend to convert into buying customers at a higher rate than other types of Internet users. As a result, advertisers often pay a significant premium to place their ads in front of local searchers on websites like Local.com, our Network partner websites and other third party partner websites.

Local online search and more specifically local mobile search is still growing at a fast pace, and as a result, it is difficult to determine our current market share, or predict our future market share. However, we have a number of competitors that have announced an intention to increase their focus on local search with regard to U.S. online advertising, including some of the leading online advertising companies in the world, including Google, Yahoo, and Microsoft, among many others, with greater experience and resources than we have.

The U.S. online advertising industry, including the local search segment, is regularly impacted and changed by new and emerging technologies, including, for instance, ad targeting and mobile technologies, as well as the increased fragmentation of the online advertising industry in general, from different technology platforms, to different advertising formats, targeting methodologies and the like. Those companies within our industry who are able to quickly adapt to new technologies, as well as offer innovations of their own, have a better chance of succeeding than those that do not.

We believe that local search and more specifically local mobile 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 product offerings are all designed to serve this market of consumers, advertisers and publishers, which we believe will provide an opportunity for growth from increased local search and local mobile search volumes by consumers, as well as increased competition, by advertisers to display their ad listings in front of those consumers.

 

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Our revenue, profitability and future growth depend not only on our ability to execute our business plan, but also, the growth of the paid-search market and our ability to effectively compete with other providers of local and paid-search technologies and services among other things.

As we continue to diversify our technologies and traffic sources, we remain focused on technology and advertising offerings that will improve the experience for our end users, and allow our network and other third party partners to enhance their service offerings and lower their costs. While we are still very focused on the local search industry, we believe there are additional opportunities in technology and advertising that we and our customers can benefit from, while diversifying our revenue sources. We intend to continue making significant investments in initiatives to diversify our revenue sources and promote our future growth.

As we continue to invest in our core offerings, we have increased our operating expenses, mainly related to traffic acquisition costs, the deployment of new features and functionality across our business and the support of our new initiatives. We cannot give assurances that our efforts to improve our results of operations through this strategy will be successful.

The consumer shift to mobile devices presents a tremendous opportunity for us. Today, consumers are using their mobile devices more than ever before to search for local products and services. In fact, our research says that over 76% of consumers access local retail store information from their smartphones. According to Forrester Research, the online to offline market opportunity is five times greater than everything sold online today. The market for web influenced sales to the retail store is almost $690 billion.

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 O&O websites, 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). We advertise on large search engine websites such as Google, Yahoo, and Microsoft/Bing, as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to our O&O websites. During the year ended December 31, 2014, approximately 76% of our overall traffic was purchased from other search engine websites. During the year ended December 31, 2014, advertising costs to drive consumers to our Local.com website were $36.4 million of which $28.6 million and $5.1 million was attributable to Google and Yahoo, respectively. During the year ended December 31, 2013, approximately 57% of our overall traffic was purchased from other search engine websites. During the year ended December 31, 2013, advertising costs to drive consumers to our Local.com website were $35.9 million of which $27.4 million and $6.1 million was attributable to Google and Yahoo, respectively. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will likely suffer materially.

Sales and Marketing

Sales and marketing expenses consist of sales commissions and salaries for our internal and outsourced sales force, customer service staff and marketing personnel, advertising and promotional expenses. We record advertising costs and sales commission in the period in which the expense is incurred. We expect our sales and marketing expenses will increase in absolute dollars in line with any growth we may experience.

 

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General and Administrative

General and administrative expenses consist of salaries and other costs associated with employment of our executive, finance, human resources and information technology staff, legal, tax and accounting, and professional service fees.

Research and Development

Research and development expenses consist of salaries and other costs of employment of our development staff, outside contractor costs and amortization of capitalized website development costs.

Results of Operations

The following table sets forth our historical operating results as a percentage of revenue for the years ended December 31, 2014 and 2013:

 

     Years ended December 31,  
     2014     2013  

Revenue

     100.0     100.0
  

 

 

   

 

 

 

Operating expenses:

Cost of revenues

  76.5      72.6   

Sales and marketing

  9.6      10.6   

General and administrative

  12.9      14.4   

Research and development

  6.8      6.9   

Amortization of intangibles

  0.8      1.0   

Income from settlement of patent licensing

  (0.8   —     
  

 

 

   

 

 

 

Total operating expenses

  105.8      105.6   
  

 

 

   

 

 

 

Operating income (loss)

  (5.8   (5.6

Interest and other income (expense), net

  (2.6   (2.5

Change in fair value of conversion option warrant liability

  1.1      1.2   
  

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  (7.3   (6.9

Provision for income taxes

  (0.2   (0.1
  

 

 

   

 

 

 

Net income (loss) from continuing operations

  (7.5   (7.0

Income (loss) from discontinued operations (net of taxes)

  0.9      (4.0
  

 

 

   

 

 

 

Net income (loss)

  (6.6 )%    (11.0 )% 
  

 

 

   

 

 

 

Years ended December 31, 2014 and 2013

Revenue

 

     Year ended December 31,     Percent
change
 
     2014      (*)     2013      (*)    
     (in thousands)            (in thousands)               

Owned and operated

   $ 44,137         53.1   $ 43,879         46.5     0.6

Network

     38,983         46.9     50,517         53.5     -22.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

$ 83,120      100.0 $ 94,396      100.0   -11.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(*) – Percent of total revenue.

 

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Owned and Operated revenue for the year ended December 31, 2014, was consistent compared to the year ended December 31, 2013, increasing 0.6% year over year. The increase in monetization as our revenue per thousand visitors (“RKV”) increased from $194 for 2013 to $196 for 2014 was partially offset by a slight decrease in traffic year over year. During October 2012, our largest traffic provider made certain changes to their policies and guidelines. These changes had a negative impact on our fiscal 2013 O&O revenue and results of operations. This advertising partner also made some changes beginning in July 2013 related to bidding for mobile and desktop advertising campaigns, which further had a negative impact on our traffic and monetization of such traffic. We continue to work closely with this traffic provider to refine our traffic acquisition approach and user experience on our search results pages.

 

     RKV  

Year ended December 31, 2013:

  

First quarter

   $ 215   

Second quarter

   $ 199   

Third quarter

   $ 180   

Fourth quarter

   $ 178   

Full year

   $ 194   

Year ended December 31, 2014:

  

First quarter

   $ 189   

Second quarter

   $ 204   

Third quarter

   $ 201   

Fourth quarter

   $ 186   

Full year

   $ 196   

Network revenue for the year ended December 31, 2014, decreased 22.8% compared to the year ended December 31, 2013. The decrease is primarily due to a reduction in the amount of traffic we accepted from our network partners as we continue to apply increasingly more stringent traffic filters to ensure our advertising partners continue to receive traffic that converts for our advertisers, which resulted in a reduction in network revenue in 2014. There was also a decrease in organic traffic to existing partner websites due to algorithmic changes made by a large search engine in 2013, affecting the way in which the search engine indexes our network partner websites, which resulted in a further decrease of our network revenue in 2014.

As previously noted, a large portion of Network revenue is based on traffic from other websites to which we provide our organic and third-party ad feeds. We continue to experience fluctuations in this portion of our Network revenue related to changes in the partners’ traffic levels, traffic quality and market conditions for paid search. We expect that this portion of our Network revenue will continue to be subject to significant fluctuations. If we experience a reduction in the number of Network partner websites receiving our organic and third-party ad feeds, or if the overall traffic levels derived from our Network partner websites is reduced, or if the quality of traffic derived from those Network partner websites is diminished, we expect that our Network revenue would decrease materially. During fiscal year 2014, we substantially reduced the total number of Network partners to which we provide organic and third-party ad feeds in order to focus on the implementation of increased monitoring and filtering tools to prevent questionable or fraudulent traffic. This has materially impacted the level of Network revenue we were able to achieve. This trend has continued into the first quarter of 2015. We have recently launched new tools that we believe could reverse this trend, but the launch is too recent to be certain as to its long term revenue impact, if any.

Based on the above, total revenue for the year ended December 31, 2014, decreased to $83.1 million from $94.4 million for the year ended December 31, 2013, a decrease of $11.3 million, or 11.9%.

The following table identifies our major partners that represented greater than 10% of our total revenue in the periods presented:

 

     Percentage of Total Revenue
Years Ended December 31,
 

Customer

   2014     2013  

Yahoo! Inc.

     43     46

Google Inc.

     31     26

 

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Operating expenses:

Operating expenses were as follows (dollars in thousands):

 

     Year ended December 31,     Percent
Change
 
     2014     (*)     2013      (*)    

Cost of revenues

   $ 63,580        76.5   $ 68,541         72.6     (7.2 )% 

Sales and marketing

     7,984        9.6     10,029         10.6     (20.4 )% 

General and administrative

     10,708        12.9     13,633         14.4     (21.5 )% 

Research and development

     5,677        6.8     6,554         6.9     (13.4 )% 

Amortization of intangibles

     688        0.8     912         1.0     (24.5 )% 

Income from settlement of patent license

     (700     (0.8 )%      —           —       NM   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

$ 87,937      105.8 $ 99,669      105.6   (11.8 )% 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(*) – Percent of total revenue.

Cost of revenues

Cost of revenues for the year ended December 31, 2014, decreased by 7.2% compared to the year ended December 31, 2013. The decrease in 2014 is due to a decrease in the revenue share as network revenue continued to decrease. The decrease in revenue share is partially offset by an increase in traffic acquisition cost.

Sales and marketing

Sales and marketing expenses for the year ended December 31, 2014, decreased 20.4% compared to the year ended December 31, 2013. The decrease is mainly due to a decrease in personnel-related costs as part of our continued cost savings efforts. The reduction in personnel related costs was partially offset by severance costs. In January 2013, we made a decision to eliminate our direct sales efforts of our SMB product suite to small and medium size businesses.

General and administrative

General and administrative expenses for the year ended December 31, 2014, decreased by 21.5% compared to the year ended December 31, 2013. The decrease in general and administrative expenses are due to a decrease in personnel related costs, consulting and professional fees. During the prior year, we incurred consulting and legal expenses relating to our efforts to secure financing as well as legal costs relating to litigation and the accrual of a legal settlement of $550,000. The decrease was partially offset by a severance charge of $1.5 million of which the majority related to the departure of our Chief Executive Officer and Chief Operating Officer during the first half of 2014.

Research and development

Research and development expenses for the year ended December 31, 2014, decreased by 13.4% compared to the year ended December 31, 2013. The decrease is due to a reduction in consulting fees as part of our continued operating efficiency improvements.

Amortization of intangibles

Amortization of intangibles expense was $688,000 for the year ended December 31, 2014, compared to $912,000 for the year ended December 31, 2013. The decrease in amortization of intangible assets is due to the decrease in the intangible asset balance as we have not acquired any new intangible assets since fiscal 2012.

 

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Interest and other income (expense), net

Interest and other income (expense), net consisted of the following (in thousands):

 

     Years ended December 31,  
     2014      2013  

Interest income

   $ —         $ 12   

Interest expense

     (2,183      (2,333
  

 

 

    

 

 

 

Interest and other income (expense), net

$ (2,183 $ (2,321
  

 

 

    

 

 

 

Interest and other income (expense) was ($2.2) million and ($2.3) million for the years ended December 31, 2014 and 2013, respectively. In 2013 we recorded a loss on exchange of warrants of $723,000, partially offset by an increase in interest expense related to the 7% Notes the Company entered into in April 2013. The interest relating to the 7% Notes include cash and non-cash interest expense for both 2014 and 2013.

Change in Fair Value of Conversion Option and Warrant Liability

The change in fair value of the conversion option and warrant liabilities was income of $918,000 for the year ended December 31, 2014, compared to income of $1.1 million for the year ended December 31, 2013.

Provision for income taxes

Provision for income taxes was $129,000 and $139,000 for the years ended December 31, 2014 and 2013, respectively. The provision for income taxes is 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):

 

     December 31,
2014
     December 31,
2013
 

Cash

   $ 2,438       $ 5,069   
  

 

 

    

 

 

 

Working capital (deficit)

$ (5,878 $ (2,304
  

 

 

    

 

 

 

Working capital is defined as current assets less current liabilities, excluding the warrant liability and assets and liabilities held for sale.

Cash flow highlights (in thousands):

 

     Year ended December 31,  
     2014      2013  

Net cash provided by operating activities

   $ 4,715       $ 1,203   

Net cash used in investing activities

     (3,072      (3,538

Net cash (used in) provided by financing activities

     (4,274      3,708   

We have funded our business, to date, primarily from issuances of equity securities as well as through debt facilities. Cash was $2.4 million as of December 31, 2014, and $5.1 million as of December 31, 2013. We had a working capital deficit of $5.9 million as of December 31, 2014, and $2.3 million as of December 31, 2013. As of December 31, 2014, we had a total of $4.9 million outstanding on the revolving credit facility with Square 1 Bank, $5.0 million outstanding on the 7% Convertible Notes issued in the second quarter of fiscal 2013, and no availability under the revolving credit facility. On March 27, 2014, we entered into an Amendment with Square 1 Bank, pursuant to which we paid off the entire term loan with Square 1 Bank using the availability under our revolving credit facility. The increase in the working capital deficit is largely due to a decrease in accounts receivable due to the decrease in revenue, partially offset by a decrease in the Square 1 Bank line of credit and accounts payable and accrued liabilities

Net cash provided by operating activities was $4.7 million for the year ended December 31, 2014. Net loss adjusted for non-cash charges (adding back depreciation and amortization, stock-based compensation expense, change in fair value of

 

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warrant and conversion option liabilities, non-cash interest expense, provision for doubtful accounts, and changes in deferred income taxes) provided cash of $1.1 million. Changes in operating assets and liabilities provide cash of $3.7 million. Net cash provided by operating activities was $1.2 million for the year ended December 31, 2013. Net loss adjusted for non-cash charges (adding back depreciation and amortization, stock-based compensation expense, change in fair value of warrant and conversion option liabilities, non-cash interest expense, loss on exchange of warrants, provision for doubtful accounts, changes in deferred income taxes and asset impairment) provided cash of $2.1 million. Changes in operating assets and liabilities used cash of $933,000.

There are four primary drivers that affect cash provided by or used in operations: net income (loss); non-cash adjustments to net income (loss); changes in accounts receivable; and changes in accounts payable. For the year ended December 31, 2014, the terms of our accounts receivable and accounts payable remained unchanged.

The table below details the change in net cash used in operating activities for the years ended December 31, 2014 and 2013 (in thousands):

 

     Years ended December 31,         
     2014      2013      Change  

Net Income (loss)

   $ (5,501    $ (10,362    $ 4,861   

Non-cash (1)

     6,559         12,498         (5,939
  

 

 

    

 

 

    

 

 

 

Subtotal

  1,058      2,136      (1,078

AR, AP and Other

  3,657      (933   4,590   
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operations

$ 4,715    $ 1,203    $ 3,512   
  

 

 

    

 

 

    

 

 

 

 

(1) Includes depreciation and amortization, change in fair value of conversion option and warrant liability, non-cash expense related to stock option issuances, changes in deferred income taxes, provision for doubtful accounts, impairment of goodwill and intangible assets, non-cash interest expense, loss on exchange of warrants and gain on disposal of property and equipment.

Net cash used in investing activities was $3.1 million for the year ended December 31, 2014, and consisted of $3.5 million used for capital expenditures partially offset by proceeds from an escrow payout of $390,000. Net cash used in investing activities was $3.5 million for the year ended December 31, 2013, and consisted of $3.6 million used for capital expenditures.

Net cash used by financing activities was $4.3 million for the year ended December 31, 2014, primarily consisting of a repayment of $4.3 million of the outstanding balance on the Square 1 Bank term loan and a portion of the revolving credit facility with Square 1 Bank. Net cash provided by financing activities was $3.7 million for the year ended December 31, 2013, primarily consisting of proceeds of $5.0 million from the issuance of 7% Notes and proceeds of $342,000 related to the Square 1 Bank line of credit offset by the $1.1 million repayment of a portion of the outstanding balance on the Square 1 Bank term loan and $534,000 of financing related cost.

On January 30, 2013, the Loan Agreement with Square 1 Bank was amended to temporarily revise the terms under which we were allowed to draw the maximum amount on the Non-Formula Revolving Line.

On February 13, 2013, we executed the Fifth Amendment to the Loan Agreement with Square 1 Bank, extending the maturity date through February 3, 2015. On March 28, 2013, we executed the Sixth Amendment to the Loan Agreement with Square 1 Bank. The Sixth Amendment waives any and all violations of the Liquidity Ratio covenants prior to the Sixth Amendment, terminates the Non-Formula Advances under the Agreement and requires monthly payments of the outstanding Non-Formula principal, plus all accrued interest, over 24 months beginning on April 28, 2013. On April 10, 2013, we entered into the Seventh Amendment to the Loan Agreement. The Seventh Amendment provided for us to add as security for our obligations under the Loan Agreement all of our intellectual property and to undertake certain reporting obligations to Square 1 Bank with respect to such intellectual property. On March 27, 2014, we entered into the Eighth Amendment to the Loan Agreement. In accordance with the Eighth Amendment, we paid in full our term loan with Square 1 Bank using credit available under our revolving credit facility. The Amendment also extends the Agreement until April 2, 2015. As of December 31, 2014, we are in compliance with all covenants relating to the Square 1 Bank revolving credit facility and term loan.

In connection with the sale of the assets of the Spreebird business we obtained a release from Square 1 Bank and the holders of the 7% Senior Secured Convertible Notes to allow us to sell such assets.

 

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On April 10, 2013, we entered into a Convertible Note and Warrant Purchase Agreement (“Agreement”). Pursuant to this Agreement, the investors purchased an aggregate of $5.0 million of 7% subordinated convertible notes (“7% Notes”) and warrants to purchase shares of our common stock. In connection with the issuance of the 7% Notes, we received a cash payment of $4.6 million net of $356,000 in placement agent fees. The 7% Notes are subordinate to the Square 1 Bank line of credit facility.

On March 9, 2015, we entered into a Securities Purchase Agreement relating to the sale and issuance of Senior Convertible Notes, comprising $4.57 million aggregate principal amount of new 8% Senior Convertible Notes (“Series A Notes”) maturing in April 2018 and initially convertible at $0.5534 per share, $250,000 of which was invested by certain management and board members, and $4.75 million aggregate principal amount of 10% Partially Liquidating Debentures (“Series B Notes”) maturing August 2016, initially convertible at $0.7090 per share (collectively “the Notes”). Note that conversion prices are subject to adjustment. Both transactions included issuance of five-year warrants with 50% coverage with an exercise price at market price, defined as the preceding 5 day volume weighted average price. We will issue the Partially Liquidating Debentures pursuant to its effective shelf registration statement. We have agreed to file a registration statement covering the resale of the common stock issuable upon conversion of the Series A Notes and upon issuance of the warrants. We used a portion of the proceeds to repay its outstanding 7% Notes due April 2015 and associated fees.

On March 9, 2015, we entered into a Financing and Security Agreement, amended on March 9, 2015, with Fast Pay Partners LLC (“Fast Pay”) creating an accounts receivable-based credit facility (the “Fast Pay Agreement”). Under the terms of the Fast Pay Agreement, Fast Pay may, at its sole discretion, purchase our eligible accounts receivables. Upon any acquisition of accounts receivable, Fast Pay will advance us up to 80% of the gross value of the purchased accounts, up to a maximum of $10.0 million in advances. Each account receivable purchased by Fast Pay will be subject to a factoring fee rate specified in the Fast Pay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over thirty days. The all-in interest cost to us under the Fast Pay Agreement will not exceed the limit on our permitted senior indebtedness under the Notes. We will be obligated to repurchase accounts remaining uncollected after a specified deadline, and Fast Pay will generally have full recourse against us in the event of nonpayment of any purchased accounts. Our obligations under the credit facility are secured by substantially all of the Company’s assets.

Subsequent to the year-ended December 31, 2014, we had a reduction in workforce, reducing the amount of employees from 70 as of December 31, 2014 to 60. The reduction is expected to result in annual cost savings of approximately $1.1 million.

Our need for additional capital and the uncertainties surrounding our ability to raise such funding, among others, raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. In 2015, we completed the 2015 Notes offering, closed a new accounts receivable credit facility with Fast Pay and implemented a reduction in workforce and related cost savings. In addition, we announced projected revenue growth from our run rate of the fourth quarter of 2014; however, should the projections and assumptions used by management to prepare the operating plan prove incorrect, then we may require additional capital to fund our operations over the next 12 months. Management cannot provide assurances that, if required, any additional equity or debt arrangements will be available to us in the future or that the required capital would be available on terms acceptable to us, if at all, or that any such activity would not be dilutive to our stockholders.

Shelf Registration Statement

In June 2014, we filed a new shelf registration statement with the SEC pursuant to which we registered $40,000,000 of our securities. Our capital raising activities have benefited from using this shelf registration on Form S-3, which typically enables an issuer to raise additional capital on a more timely and cost effective basis than through other means, such as registration of a securities offering under a Form S-1 registration statement. Our future ability to raise additional capital through the sale and issuance of our equity securities may be limited by, among other things, current SEC rules and regulations. Under current SEC rules and regulations, to be eligible to use a Form S-3 registration statement for primary offerings without restriction as to the amount of securities to be sold and issued, the aggregate market value of our common equity held by non-affiliates (i.e., our “public float”) must be at least $75 million at the time we file the Form S-3 (calculated pursuant to the General Instructions to Form S-3). We do not presently satisfy the $75 million public float requirement and the amount we could raise through primary offerings of our securities in any 12-month period using a Form S-3 registration statement is limited to an aggregate of one-third of our public float. Moreover, the market value of all securities sold by us under our Form S-3 registration statements during the 12-month period prior to any intended sale will be subtracted from that amount to determine the amount we can then raise under our Form S-3 registration statements. We utilized the entire amount of our public float presently available for the offer and sale of the Series B Notes pursuant to our 2015 Notes and Warrants

 

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transaction, and we do not expect to be able to utilize Form S-3 to utilize and sell additional securities for the immediately foreseeable future. The lack of availability to use Form S-3 could adversely affect our ability to raise additional capital on an expeditious basis.

Critical Accounting Policies, Judgments and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 materially from these estimates under different assumptions or conditions. Our significant accounting policies described in more detail in Note 1 to our consolidated financial statements included in this Report, involve judgments and estimates that are significant to the presentation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

We generate revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement and the fulfillment of subscription listing obligations. We enter into contracts to distribute sponsored listings and banner advertisements with direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at any time. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). We recognize our portion of the bid price based upon the contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on its O&O websites and Network. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Revenue recognized is net of estimated adjustments for traffic screening. Management has analyzed revenue recognition and determined that web hosting revenue is recognized net of direct costs.

We evaluate whether it is appropriate to record the gross amount of sales and related costs or the net amount earned as revenue. Generally, when we are primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross sales price. We generally record the net amounts as revenue earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. All revenue is recognized on a gross basis.

Allowance for Doubtful Accounts

Our management estimates the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If we believe that our customers’ financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.

During the fourth quarter 2013, the Company fully reserved its long-term receivable resulting in an additional charge to the income statement of $1.7 million. The long-term receivable relates to legacy subscribers that were billed via their phone bills from local exchange carriers.

 

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As of December 31, 2014, two customers, Yahoo and Google, represented 57% of our total accounts receivable. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.

Depreciation of Property and Equipment

Depreciation and amortization of property and equipment are calculated under the straight-line basis over the shorter of the estimated useful lives of the respective assets as follows:

 

Furniture and fixtures 7 years
Office equipment 5 years
Computer equipment 3 years
Computer software 3 years
Leasehold improvements 5 years (life of lease)

Repairs and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property and equipment are included in the operating results of the related period.

Impairment of Long-lived Assets

We account for the impairment and disposition of definite life intangible and long-lived assets in accordance with U.S. GAAP guidance on accounting for the impairment or disposal of long-lived assets. In accordance with the guidance, such assets to be held are reviewed for events, or changes in circumstances, which indicate that their carrying value may not be recoverable. We periodically review related carrying values to determine whether or not impairment to such value has occurred. During the second quarter of fiscal 2013, we recorded impairment charges for certain capitalized software assets and intangible assets with a book value of $300,000 and $182,000, respectively, related to its Spreebird business unit. The impairment charges were due to our sale of the assets of its Spreebird business and the cessation of its Spreebird business operations. Such impairment charges are included in discontinued operations in the accompanying consolidated statements of operations.

Amortization of Intangible Assets

Definite-lived intangible assets represent developed technology, non-compete agreements, customer related intangible assets, patents, trademark and trade names and are amortized over their estimated useful lives, generally on a straight-line basis over two to four years. Indefinite lived intangible assets relate to domain names owned by us.

Stock Based Compensation

Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock options, stock price volatility, and the pre-vesting forfeiture rate of stock awards and in the case of restricted stock units, the fair market values of the underlying stock on the dates of grant. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We estimate the volatility of our common stock on the date of grant based on the historical market activity of our stock. The assumptions used in calculating the fair value of stock-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected pre-vesting award forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted and cancelled before vesting. If our actual forfeiture rate is materially different from the original estimate, the stock-based compensation expense could be significantly different from what we recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. See Note 12—Stockholders’ Equity for additional information.

 

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Accounting for Income Taxes

We are required to recognize a provision for income taxes based upon the taxable income and temporary differences for each of the tax jurisdictions in which we operate. This process requires a calculation of taxes payable under currently enacted state and federal tax laws and an analysis of temporary differences between the book and tax bases of our assets and liabilities, including various accruals, allowances, depreciation and amortization. The tax effect of these temporary differences is reported as deferred tax assets and liabilities in our consolidated balance sheets. We also assess the likelihood that our net deferred tax assets will be realized from future taxable income. To the extent we believe that it is more likely than not that all or some portion or the deferred tax asset will not be realized, we establish a valuation allowance. At December 31, 2014, we continue to maintain a full valuation allowance on net operating loss carryforwards based on our assessment that it is more likely than not that the deferred tax asset will not be realized. To the extent we establish a valuation allowance or change the allowance in a period, we reflect the change with a corresponding increase or decrease in our tax provision in our consolidated statements of operations or against additional paid-in-capital in our consolidated balance sheets to the extent any tax benefits would have otherwise been allocated to equity. In making our judgment regarding the valuation allowance, we considered all evidence, both positive and negative, considering our history of losses and placing more weight on the historical results in judging our ability to realize the deferred tax asset related to net operating losses.

U.S. GAAP regarding accounting for uncertainty in income taxes defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. As of December 31, 2014, we had total unrecognized tax benefits of approximately $1.8 million. If fully recognized, approximately the total unrecognized tax benefit of $1.8 million would impact our effective tax rate.

Conversion Option and Warrant Liability

Current guidance of U.S. GAAP regarding accounting for derivatives requires that certain of our warrants and the conversion option related to our convertible notes be accounted for as derivative instruments and that we record the conversion option and warrant liabilities at fair value and recognize the change in valuation in our statement of operations each reporting period. Determining the liabilities to be recorded requires us to develop estimates to be used in calculating the fair value of the derivatives. We calculate the fair values using the Black-Scholes valuation model.

The use of the Black-Scholes model requires us to make estimates of the following assumptions:

Expected volatility—The estimated stock price volatility is derived based upon our actual historic stock prices over the contractual life of the derivatives, which represents our best estimate of expected volatility; and

Risk-free interest rate—We use the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the derivatives’ contractual life assumption as the risk-free interest rate.

We are exposed to the risk of changes in the fair value of the derivative liability related to warrants and conversion option. The fair value of these derivative liabilities is primarily determined by fluctuations in our stock price. As our stock price increases or decreases, the fair value of these derivative liabilities increases or decreases, resulting in a corresponding current period loss or gain to be recognized. Based on the number of outstanding warrants, market interest rates and historical volatility of our stock price as of December 31, 2014, a $1 decrease or increase in our stock price will result in a non-cash derivative gain or loss of approximately $156,000 and $443,000, respectively, as it relates to the warrant liability. Based on the number of shares to be issued upon conversion, market interest rates and historical volatility of our stock price as of December 31, 2014, a $1 decrease or increase in our stock price will result in a non-cash derivative gain or loss of approximately $13,000 and $711,000, respectively, as it relates to the conversion option liability.

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. The first step in determining if there is any goodwill impairment is a comparison of the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference.

 

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We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. 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. Our indefinite lived intangible assets consist of domain names for which the fair value is determined by using a third party valuation site which calculates the value of domain names using internal algorithms. 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 an impairment.

We performed our annual impairment analysis as of December 31, 2014, 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.

Recent Accounting Pronouncements

See Note 1—The Company and Summary of Significant Accounting Policies to the consolidated financial statements, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.

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 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the risk that a change in the level of one or more market factors such as interest rates, foreign currency exchange rates, or equity prices will result in losses for a certain financial instrument or group of instruments. We are exposed to the risk of increased interest rates on our current debt instruments and the risk of loss on credit extended to our customers. We have issued equity instruments, including warrants and a conversion option, which contain certain derivatives which fluctuate, primarily as a result of changes in our stock price.

Interest Rate Risk

We are exposed to the risk of fluctuation in interest rates on our debt instruments. During 2014, we did not use interest rate swaps or other types of derivative financial instruments to hedge our interest rate risk. Square 1 Bank borrowings made pursuant to the Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.0%, or (ii) the Prime Rate (as announced by Square One Bank), plus 1.75%. As of March 27, 2014, no amounts are outstanding and no further credit extensions are available under the Non-Formula Line or term loan. The debt outstanding under the formula line entering 2015 was $4.9 million. Therefore, a one-percentage point increase in interest rates would result in an increase in interest expense of approximately $49,000 per annum. During fiscal 2013, we entered into an agreement to sell an aggregate of $5.0 million of 7% Notes bearing interest at a fixed annual rate of 7%. Because the interest rate for the 7% Notes is fixed, this transaction had no impact on our interest rate risk.

On March 9, 2015, we entered into an agreement with Fast Pay, creating an accounts receivable-based credit facility. Each account receivable purchased by Fast Pay will be subject to a fixed factoring fee rate specified in the Fast Pay Agreement calculated as a percentage of the gross value of the account outstanding and fixed additional fees for accounts outstanding over thirty days. The all-in interest cost to us under the Fast Pay Agreement will not exceed the limit on our permitted senior indebtedness under the Notes. On March 9, 2015, we also entered into a Securities Purchase Agreement relating to the sale and issuance of Senior Convertible Notes, comprising $4.57 million aggregate principal amount of new Series A Notes maturing in April 2018 and $4.75 million aggregate principal amount of Series B Notes maturing August 2016. As with the original 7% Notes, the additional financing arrangements entered into on March 9, 2015 are all at a fixed interest rate and therefore had no impact on our interest rate risk.

Derivative Liability Risk

Current guidance regarding accounting for derivatives requires that certain of our warrants and a conversion option relating to our convertible debt be accounted for as derivative instruments and that we record the conversion option and warrant liabilities at fair value and recognize the change in valuation in our statement of operations each reporting period. We are therefore exposed to the risk of change in the fair value of derivative liability related to outstanding warrants and the conversion option. The fair value of these derivative liabilities is primarily determined by fluctuations in our stock price. As our stock price increases or decreases, the fair value of these derivative liabilities increase or decrease, resulting in a corresponding current period loss or gain to be recognized. Based on the number of outstanding warrants, market interest rates and historical volatility of our stock price as of December 31, 2014, a $1 decrease or increase in our stock price will result in a non-cash derivative gain or loss of approximately $156,000 and $443,000, respectively. Based on the number of shares to be issued upon conversion, market interest rates and historical volatility of our stock price as of December 31, 2014, a $1 decrease or increase in our stock price will result in a non-cash derivative gain or loss of approximately $13,000 and $711,000, respectively, as it relates to the conversion option liability.

 

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements, including the report of our independent registered public accounting firm, are included beginning at page F-1 immediately following the signature page of this Report.

 

Item 9. Changes in and Disagreements with Accountants on Accounting Issues and Financial Disclosure

None.

 

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Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of management, including our principal executive officer and our principal financial officer, we have carried out an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2014, to ensure that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based upon its assessment, management concluded that, as of December 31, 2014, our internal control over financial reporting was effective.

This report does not include an attestation report on internal control over financial reporting by the Company’s independent registered public accounting firm since the Company is a smaller reporting company under the rules of the SEC.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

The following table sets forth, as of December 31, 2014, certain information concerning our executive officers and directors:

 

Name

   Age     

Position

Frederick G. Thiel (1)

     54       Chief Executive Officer and Chairman of the Board

Kenneth S. Cragun (1)

     54       Chief Financial Officer and Secretary

Scott Reinke (1)

     41       Chief Legal Officer

Heath B. Clarke (1) (2)

     46       Former Chief Executive Officer

Michael A. Sawtell (1) (3)

     56       Former President and Chief Operating Officer

Norman K. Farra Jr.

     46       Lead Director

John E. Rehfeld

     74       Director

John M. Payne

     58       Director

David M. Hughes

     45       Director

 

(1) Executive officer.
(2) Mr. Clarke’s employment was terminated without Cause on January 10, 2014 and he received a severance package totaling $772,375 in accordance with the terms of that certain Separation and General Release Agreement dated January 10, 2014.
(3) Mr. Sawtell’s employment was terminated without Cause on May 8, 2014 and he received a severance package totaling $563,165 in accordance with the terms of that certain Separation and General Release Agreement dated May 7, 2014.

Executive Officers

Frederick G. Thiel has served as Chief Executive Officer since May 2014 and Chairman of the Board since January 2014. Mr. Thiel served as the Managing Partner of the Software IT Group at Triton Pacific Capital Partners, a private equity firm making equity investments on behalf of itself and its investors in lower middle market companies, from January 2007 until the end of 2012. As part of his role at Triton Pacific Capital Partners, Mr. Thiel served on the boards of four of its portfolio companies: Custom Credit Systems, LP, an enterprise software company providing commercial lending automation solutions to major banks; DB Technology, LLC, an enterprise content management software company providing solutions to healthcare providers; Assetpoint, LLC, an enterprise software company providing enterprise asset management solutions to major corporations; and Vayan Marketing Group, LLC, an internet media marketing company providing customer acquisition services to major consumer brands. Mr. Thiel has been an Operating Partner with Graham Partners, a mid-market private equity firm since 2008. From January 2004 to December 2006, Mr. Thiel was founder and managing partner of TechStarter Ventures, a venture capital and technology incubator focused on developing Web 2.0 technologies and social media, human resources and project management related web properties. Prior to TechStarter, Mr. Thiel was CEO of GameSpy Industries from January 2002 through January 2003. Mr. Thiel is presently a director of three private companies, including Predixion Software, Inc., B&B Electronics, Inc., and OCTANe LLC. Mr. Thiel attended classes at the Stockholm School of Economics in Europe.

Kenneth S. Cragun has served as our Chief Financial Officer since December 2010, as our Secretary since October 2010, as our interim Chief Financial Officer from October 2010 to December 2010, and our Vice President of Finance from April 2009 to October 2010. From June 2006 to March 2009, Mr. Cragun was the Chief Financial Officer of Modtech Holdings, Inc., a supplier of modular buildings. Mr. Cragun received a Bachelors of Science degree in Accounting from Colorado State University-Pueblo. Mr. Cragun’s responsibilities prior to Local Corporation have included chief financial officer functions at a public company, including preparation of financials for SEC disclosures in accordance with GAAP, audit experience at a nationally recognized certified public accounting firm, and day-to-day management of the financial affairs of both public and private companies.

Scott Reinke has served as our Chief Legal Officer since July 2014 and our General Counsel since April 2009. From October 2006 to April 2009, Mr. Reinke served as executive vice president and general counsel of Emerging Media Group, Inc., parent company of TRAFFIQ, Inc., a digital advertising exchange and a self-service media management and planning platform. From March 2004 to October 2006, Mr. Reinke served as assistant general counsel and vice president — legal of MIVA, Inc., an online advertising and media company. Mr. Reinke received a Juris Doctorate from Georgetown University Law Center and a Bachelors of Arts degree in English and Political Science from Boston College. Mr. Reinke’s

 

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responsibilities prior to Local.com have included executive management and general counsel functions at a private technology company, day-to-day management of the legal affairs of both public and private companies, including securities law compliance, contract management, merger, acquisition and capital fundraising related matters and risk assessment.

Board of Directors

Norman K. Farra Jr. has served as a director since August 2005. He served as our lead director from November 2011 to January 2014. Mr. Farra is currently an Independent Banker and Advisor with Merriman Capital, FEP (Financial Entrepreneurs Program) since October 2012. Mr. Farra served as a Managing Director, Investment Banking for Aegis Capital, Inc. from January 2012 to September 2012. From December 2009 to December 2011, Mr. Farra served as Managing Director, Investment Banking for R.F. Lafferty & Co. Inc. From May 2008 to December 2009, he served as Director, Investment Banking for Cresta Capital Strategies, LLC. He was an independent financial consultant from September 2007 to May 2008, and served as Managing Director of Investment Banking for GunnAllen Financial Inc. from August 2006 to September 2007. From June 2001 to August 2006, he was independent contractor acting as Managing Director of Investment Banking for GunnAllen Financial Inc. In the past five years, Mr. Farra has held no other public company directorships. Mr. Farra received a Bachelor of Science degree in Business Administration from Widener University.

The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Farra to serve as a Director of the Company: Over 20 years experience in the finance, capital markets and financial services industry; significant experience in the investment banking and financial consulting industry; certification from the National Association of Corporate Directors.

John E. Rehfeld has served as a director since August 2005 and was our lead director from December 2005 to October 2011. Mr. Rehfeld is currently the adjunct professor of marketing and strategy for the Executive MBA Program at Pepperdine University (since 1998) and the University of San Diego (since 2010). Mr. Rehfeld was previously a Director of Lantronix, Inc. (from May 2010 to November 2012), ADC Telecommunication, Inc. (from September 2004 to December 2010) and Primal Solutions, Inc. (from December 2008 to June 2009). Additionally, Mr. Rehfeld currently holds directorships with a number of private companies. Mr. Rehfeld received a Masters of Business Administration degree from Harvard University and a Bachelor of Science degree in Chemical Engineering from the University of Minnesota.

The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Rehfeld to serve as a Director of the Company: Over 30 years executive experience in high growth industries, including prior experience as a chief executive officer of a number of companies; prior and current experience serving as a director of a number of public and private companies; and a distinguished educational background, as well as his current positions as adjunct professor of marketing and strategy for the Executive MBA Programs at Pepperdine and the University of San Diego.

John M. Payne has served as a director since June 2014. Mr. Payne has served as the Chairman and President of SimpleAir, Inc., a technology licensing company which has licensed patents across the smartphone industry since April of 2004. Mr. Payne is the lead Inventor for such patents. Since June of 2013, he has also served as a Managing Director of Outset Ventures, a startup studio for the development of early stage SaaS, mobile and financial services companies. Since June of 2013, he has served as the Executive Chairman of LOANZ, Inc., an Outset portfolio company which is an emerging leader in marketplace lending. Mr. Payne has served as chief executive officer of a number of technology companies, including CircleUp, Inc., the leading group messaging platform for payments and messaging services, Preventsys, an enterprise regulatory compliance and Security Risk Management Company, Day Software (SWX: DAYN) a publicly traded leading provider of global enterprise content management solutions, and Stamps.com (NASDAQ: STMP), a leading provider of postage over the Internet from the US Postal Service.

The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Payne to serve as a Director of the Company: Over 15 years executive experience in high tech industries, including current experience as a chief executive officer and prior and current experience serving as a director of private and public companies.

David M. Hughes has served as a director since June 2014. Mr. Hughes has served as Chief Executive Officer of The Search Agency, a global digital marketing company providing a suite of Managed Marketing Services to mid-size companies as well as a SaaS Marketing suite for SMBs and Local businesses. Prior to joining The Search Agency, Mr. Hughes served as Senior Vice-President, Corporate Development for United Online, Inc., from 1999 to 2004. Mr. Hughes was a Management Consultant with the Boston Consulting Group from 1997 to 1999 and an Associate with Mercer Management Consulting from 1993 to 1995. Mr. Hughes received his Bachelor of Arts, with Honors, from the University of Western Ontario, and a Masters of Business Administration from Harvard University’s Graduate School of Business Administration.

 

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The Board of Directors has concluded that the following experience, qualifications and skills qualify Mr. Hughes to serve as a Director of the Company: Over 20 years experience in senior executive positions, including chief executive officer experience; and a strong educational background, including a Masters of Business Administration from Harvard University’s Graduate School of Business Administration.

Involvement in Certain Legal Proceedings

On October 20, 2008, Modtech Holdings, Inc., a Delaware Corporation, filed a voluntary petition for reorganization under Chapter 11 of the US Bankruptcy Code. Mr. Cragun, our chief financial officer, was chief financial officer of Modtech Holdings, Inc. at the time of filing.

On March 30, 2011, DigitalPost Interactive, Inc., a Nevada Corporation, and its subsidiaries, The Family Post, Inc. and Rovion, Inc., filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Mr. Sawtell, our former president and chief operating officer, was chief executive officer of DigitalPost Interactive, Inc. at the time of the filing.

Board of Directors

Our board of directors currently consists of the following five members: Frederick G. Thiel (CEO and Chairman), Norman K. Farra Jr. (Lead Director), John E. Rehfeld, John M. Payne, David M. Hughes. There are no family relationships among any of our current directors and executive officers.

The number of authorized members of our board of directors is determined by resolution of our board of directors. In accordance with the terms of our amended and restated certificate of incorporation, as amended, our board of directors is divided into three classes, with each class serving staggered three-year terms. The membership of each of the three classes is as follows:

 

    the class I director is Mr. Farra, and his term will expire at the annual meeting of stockholders to be held in 2017;

 

    the class II directors are Mr. Thiel and Mr. Rehfeld and their terms will expire at the annual meeting of stockholders to be held in 2015; and

 

    the class III directors are Messrs. Payne and Hughes, and their service will expire at the annual meeting of stockholders to be held in 2016.

Our amended and restated bylaws provide that the authorized number of directors may be changed only by resolution of our board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control or management of our company.

Our board of directors has designated an audit committee, a compensation committee and a nominating and governance committee, and may establish other committees as it deems necessary or appropriate. There were a total of 12 Board of Director meetings held in 2014. During 2014, no incumbent director attended fewer than 75% of the meetings of the Board of Directors and its committees on which he served that were held during the period in which he was a director.

Board Committees

Our Board has three active committees, an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee.

Audit Committee

The Audit Committee is currently comprised of Mr. Hughes as Chairman and Messrs. Rehfeld and Payne, each of whom satisfies the Nasdaq and SEC rules for Audit Committee membership (including rules regarding independence). The Audit Committee held seven meetings during 2014. The Board has determined that Mr. Hughes is an “audit committee financial expert” within the meaning of the rules and regulations of the SEC and satisfies the financial sophistication requirements of the Nasdaq listing standards.

 

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The Audit Committee operates pursuant to its written charter, which is available on our corporate web site at http://ir.local.com, under the “Corporate Governance” tab, as well as our by-laws and applicable law. In accordance with its charter, the Audit Committee’s purpose is to assist the Board in fulfilling its oversight responsibilities to our stockholders with respect to the integrity of our financial statements and reports and financial reporting process. Specific responsibilities include:

 

    reviewing and recommending to the Board approval of the Corporation’s interim and annual financial statements and management’s discussion and analysis of results of operation and financial condition related thereto;

 

    being directly responsible for the appointment, compensation, retention and oversight of the work of the independent registered public accounting firm;

 

    pre-approving, or establishing procedures and policies for the pre-approval of, the engagement and compensation of the external auditor in respect of the provision of (i) all audit, audit-related, review or attest engagements required by applicable law and (ii) all non-audit services permitted to be provided by the independent registered public accounting firm;

 

    reviewing the independence and quality control procedures of the independent registered public accounting firm;

 

    preparing the Audit Committee report in the Company’s proxy materials in accordance with applicable rules and regulations, when applicable and required;

 

    establishing procedures for (i) the receipt, retention and treatment of complaints received by us regarding accounting, internal controls, and auditing matters, and (ii) the confidential, anonymous submission of complaints by our employees of concerns regarding questionable accounting or auditing matters; and

 

    annually reviewing its charter and recommending any amendments to the Board.

The Audit Committee meets periodically with management to consider the adequacy of our internal controls and the financial reporting process. It also discusses these matters with our independent registered public accounting firm and with appropriate company financial personnel. The Audit Committee reviews our financial statements and discusses them with management and our independent registered public accounting firm before those financial statements are filed with the SEC.

The Audit Committee regularly meets privately with the independent registered public accounting firm. The Audit Committee has the sole authority and direct responsibility for the appointment, compensation, retention, termination, evaluation and oversight of the work of the independent registered public accounting firm engaged by us to perform the audit of our financial statement or related work or other audit, review or attestation services for us. The Audit Committee periodically reviews the independent registered public accounting firm’s performance and independence from management. The independent registered public accounting firm has access to our records and personnel and reports directly to the Audit Committee.

The Audit Committee is empowered to retain outside legal counsel and other experts at our expense where reasonably required to assist and advise the Audit Committee in carrying out its duties and responsibilities.

Compensation Committee

A description of the function of our Compensation Committee is set forth in Item 11 below.

Nominating and Corporate Governance Committee

The Nominating and Corporate Governance Committee (the “NCG Committee”) is currently comprised of Mr. Rehfeld as Chairman and Messrs. Payne and Hughes, each of whom satisfies the Nasdaq and SEC rules for membership to the NCG Committee (including rules regarding independence). The NCG Committee held nine meetings during 2014.

 

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The NCG Committee operates pursuant to its written charter, which is available on our corporate web site at http://ir.local.com, under the “Corporate Governance” tab, as well as our by-laws and applicable law. In accordance with its charter, the NCG Committee’s purpose is to assist the Board in discharging the Board’s responsibilities regarding:

 

    the identification, evaluation and recommendation to the board of qualified candidates to become Board members;

 

    the selection of nominees for election as directors at the next annual meeting of stockholders (or special meeting of stockholders at which directors are to be elected);

 

    the selection of candidates to fill any vacancies on the Board;

 

    the periodic review of the performance of the Board and its individual members;

 

    the making of recommendations to the Board regarding the number, function and composition of the committees of the Board;

 

    the evaluation, on an at least annual basis, of the performance of the chief executive officer and other executive officers in light of corporate goals and objectives;

 

    the review and provision of assistance to the Board in developing succession plans for the executive officers and other appropriate management;

 

    the recommendation to the Board of compensation programs for non-employee directors, committee chairpersons, and committee members, consistent with any applicable requirements for the listing standards for independent directors and including consideration of cash and equity components of this compensation;

 

    the development and recommendation to the Board of a set of corporate governance guidelines and principles applicable to us (the “Corporate Governance Guidelines”); and

 

    oversight of the evaluation of the Board.

In addition to the powers and responsibilities expressly delegated to the NCG Committee in its charter, the NCG Committee may exercise other powers and carry out other responsibilities that may be delegated to it by the Board from time to time, consistent with our bylaws.

Code of Ethics, Governance Guidelines and Committee Charters

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees. Our Code of Business Conduct and Ethics are posted on our website at http://ir.local.com. We will post any amendments to or waivers from the Code of Business Conduct and Ethics at that location.

We have also adopted a written committee charter for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, each of which are available on our website at http://ir.local.com.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act of 1934, as amended, requires our directors and officers, and persons who own more than 10% of a registered class of our equity securities, to file with the SEC reports of ownership and changes in ownership of our equity securities. Copies of the reports filed with the SEC are required by SEC Regulation to be furnished to Local. Based solely on our review of the copies of such reports furnished to us and written representations from certain insiders that no other reports were required, we believe each reporting person has complied with the disclosure requirements with respect to transactions made during 2014, except that due to an administrative oversight, each of Kenneth Cragun, Scott Reinke and Carlos Caponera failed to timely report on Form 4 the grant to each such individual of stock options on December 12, 2014. Such filing was made on December 30, 2014.

 

Item 11. Executive Compensation

Compensation Committee

The Compensation Committee (the “Compensation Committee”) is currently comprised of Mr. Rehfeld as Chairman and Mr. Payne, each of whom satisfies the Nasdaq and SEC rules for membership to the Compensation Committee (including rules regarding independence). The Compensation Committee held eight meetings during 2014.

 

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The Compensation Committee operates pursuant to its written charter, which is available on our corporate web site at http://ir.local.com, under the “Corporate Governance” tab, as well as our by-laws and applicable law. In accordance with its charter, the Compensation Committee’s purpose is to assist the Board in discharging the Board’s responsibilities regarding:

 

    reviewing, at least annually, and making recommendations to the Board with respect to executive compensation strategies, benefits, incentive-compensation plans and equity-based plans to ensure management is properly rewarded for its contribution and that management is properly aligned with the interests of our shareholders;

 

    reviewing the corporate goals and objectives with respect to the compensation of the Chief Executive Officer, including an evaluation of the Chief Executive Officer’s performance in light of these goals and objects and, based upon such evaluation, set the salary, bonus, incentive and equity compensation for our Chief Executive Officer;

 

    reviewing the evaluation process of and compensation structure for our other senior executive officers and reviewing the performance of our other senior executive officers, as well as approving the compensation of such senior executive officers;

 

    the periodic review of and the making of recommendations to the Board with respect to our long term incentive plans and grants thereunder to the Chief Executive Officer and other senior executive officers, including with consideration to our performance, relative shareholder return, awards at comparable companies and other factors;

 

    the review and approval of employment agreements, separation and severance agreements, and other appropriate management personnel;

 

    the grant of discretionary awards under our equity incentive plans, and the exercise of authority of the Board with respect to the administration of our incentive compensation plans;

 

    consider the results of the most recent stockholder advisory vote on executive compensation (“Say on Pay Vote”) required by Section 14A of the Securities Exchange Act of 1934, as amended;

 

    Review and discuss with management the “Compensation Discussion and Analysis” section of our annual proxy statement or annual report on Form 10-K;

 

    Reviewing the adequacy of its charter at least annual;

 

    Reviewing the Compensation Committee’s own performance on at least an annual basis; and

 

    Review whether a compensation consultant needs to be retained and, if so, to retain a compensation consultant free of any conflict of interest.

In addition to the powers and responsibilities expressly delegated to the Compensation Committee in its charter, the Compensation Committee may exercise other powers and carry out other responsibilities that may be delegated to it by the Board from time to time, consistent with our bylaws.

 

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Summary Compensation

The following table provides information regarding the compensation earned during the fiscal years ended December 31, 2014 and 2013, by our Named Executive Officers (our Chief Executive Officer, Chief Financial Officer, and Chief Legal Officer), and our former Chief Executive Officer, and Chief Operating Officer/President.

2014 Summary Compensation Table

 

Name and Principal Position

   Year      Salary
($)
     Bonus
($)
     Stock
Awards
($)
     Option
Awards
($) (1)
     Non-Equity
Incentive Plan
Compensation
($)
     All Other
Compensation
($)
     Total
($)
 

Fred Thiel
Chief Executive Officer and Chairman of the Board

     2014        296,625        —           —           563,072        —           —           859,697   
                       
                       

Kenneth S. Cragun
Chief Financial Officer and Secretary

     2014        304,125        —           —           57,434        —           —           361,559   
     2013         295,983         62,616         —           —           122,562         667         481,828   
                       

Scott Reinke
Chief Legal Officer

     2014        283,750        —           —           43,612        —           —           327,362   
     2013         261,504         46,805            —           75,157         —           383,465   

Heath B. Clarke (2)
Former Chief Executive Officer and Former Chairman of the Board

     2014        53,167        —           —           17,591        —           772,375        843,133   
     2013         450,309         211,419         88,922         —           225,453         721         976,824   
                       

Michael A. Sawtell (3)
Former President and Former Chief Operating Officer

     2014        147,623        —           —           —           —           563,165        710,788   
     2013         313,818         83,775         45,694         —           133,543         87,649         664,480   
                       

 

(1) The fair value of each performance and restricted stock unit award is calculated on the date of grant using the closing price of our common stock as reported by the Nasdaq. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

Year Option Granted

   Expected
Life
   Volatility     Risk Free
interest rate
    Dividend
yield

2014

   3.5 years      67.80     1.12   None

2013

   None      None        None      None

 

(2) During 2014, Mr. Clarke received a severance package totaling $772,375 in accordance with the terms of that certain Separation and General Release Agreement dated January 10, 2014.
(3) During 2014, Mr. Sawtell received a severance package totaling $563,165 in accordance with the terms of that certain Separation and General Release Agreement dated May 7, 2014.

Employment Agreements and Change in Control Arrangements with Our Named Executive Officers

Employment Agreements

We entered into amended and restated employment agreements with each of Mr. Cragun and Mr. Reinke on December 9, 2011. We entered into an employment agreement with Mr. Thiel on May 7, 2014. The employment agreements of our Named Executive Officers had automatically renewing terms of one year terms unless either party terminates it with at least 30 days’ notice to the other party.

If we terminate the executive employment agreements of our Named Executive Officers without cause (the definition of which is summarized below), or if the foregoing executive terminates his agreement with good reason (the definition of which is also summarized below), each as defined in the agreement, we are obligated to pay that executive: (i) his annual salary and other benefits earned prior to termination, (ii) his annual salary payable over one year after termination, (iii) an amount equal to all bonuses earned during the four quarters immediately prior to the termination date, payable in accordance with our standard bonus payment practices or immediately if and to the extent such bonus will be used by the executive to exercise stock options, (iv) benefits for 12 months following the date of termination, (v) the vesting of all options that would have vested had the executive’s employment agreement remained in force through the end of the initial one-year term of the amended and restated agreement will be fully vested immediately prior to such termination, (vi) the right for 12 months from the date of termination to exercise all vested options granted to the executive. In the event of a termination without cause or for good reason by either Kenneth Cragun or Scott Reinke in connection with a change of control, we are obligated to pay that executive: (i) his annual salary and other benefits earned prior to termination; (ii) 1.25 times his annual salary payable in a lump sum; (iii) an amount equal to 1.25 times all bonuses earned during the four quarters immediately prior to the termination date or immediately prior the date of the change of control, whichever is greater, payable in a lump sum; and (iv) benefits for 15 months following the date of termination.

 

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In the event of a change of control or a termination without cause or for good reason by any of our Named Executive Officers within 120 days of a change of control, all options granted to such executive will be immediately vested and remain exercisable through the end of the option term as if the executive were still employed by us.

Under the terms of the agreements, a change of control is deemed to have occurred generally in the following circumstances:

 

    The acquisition by any person of 35% or more of our securities, exclusive of securities acquired directly from us;

 

    The acquisition by any person of 50% or more of the combined voting power of our then outstanding voting securities;

 

    Certain changes in the composition of our Board of Directors;

 

    Certain of our mergers and consolidations where certain voting thresholds or ownership thresholds are not maintained; and

 

    The approval of our plan of liquidation or the consummation of the sale of all or substantially all of our assets where certain voting thresholds are not maintained.

Under the terms of the agreements, “cause” is generally defined as:

 

    Conviction of a felony involving the crime of theft or a related or similar act of unlawful taking, or a felony involving the federal or California securities or pension laws, or any felony, which results in material economic harm to us;

 

    Engagement in the performance of the executive’s duties or otherwise to the material and demonstrable detriment to us, in willful misconduct, willful or gross neglect, fraud, misappropriation or embezzlement;

 

    Failure to adhere to lawful and reasonable directions of our Board of Directors or failure to devote substantially all of the business time and effort to us, upon notice; and

 

    Material breaches of the agreement by executive.

Under the terms of the agreements, good reason is generally defined as:

 

    A reduction in salary or failure to pay salary when due;

 

    Material breach of the agreement by us;

 

    Failure to have any successor in interest to us assume the employment agreement;

 

    A relocation of the executive to offices a set distance away from the location set forth in the agreement;

 

    A material diminution in the executive’s title, authority, duties, reporting relationship or responsibilities;

 

    A change in executive’s reporting; and

 

    The assignment to executive of any duties or responsibilities which are inconsistent with her status, position or responsibilities.

 

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Termination and Change of Control Benefits

The table below sets forth estimated payments with respect to our Named Executive Officers upon the termination of employment with us under various circumstances and upon a change in control (“CIC”), calculated as of December 31, 2014.

 

     Involuntary
For Cause or
Without Good
Reason
     Involuntary
Without
Cause or For
Good Reason
     Death/
Disability
     Involuntary
Without Cause

or For Good
Reason In
Connection
With CIC
 

Frederick Thiel

           

Cash Severance

   $ —         $ 455,000       $ 750,750       $ 568,750   

Kenneth S. Cragun

           

Cash Severance

   $ —         $ 309,000       $ 448,050       $ 386,250   

Scott Reinke

           

Cash Severance

   $ —         $ 300,000       $ 420,000       $ 375,000   

Outstanding Equity Awards at Fiscal Year-End – 2014

The following table sets forth the number of shares of Common Stock subject to exercisable and unexercisable stock options and number of unvested restricted stock units held as of December 31, 2014, by each of our Named Executive Officers.

 

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2014 Outstanding Equity Awards at Fiscal Year-End

 

     Equity Incentive Plan Awards      Stock Awards  
     Number of
Securities
Underlying
Unexercised
Options (#)
     Number of
Securities
Underlying
Unexercised
Options (#)
    Option
Exercise
Price
     Option
Exercise
Price
     Number of
Shares or
Units of
Stock That
Have Not
Vested
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
     Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares Units
or Other
Rights That
Have Not
Vested
     Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares Units
or Other
Rights That
Have Not
Vested
 

Name

   Exercisable      Unexercisable     ($)      Date      (#)     ($)      (#)      ($)  

Frederick Thiel

     15,000         —          2.48         10/27/2019         —          —           —           —     
     20,000         —          2.10         1/16/2020         —          —           —           —     
     62,979         —          1.56         1/17/2021         —          —           —           —     
     2,021         —          1.56         1/17/2021         —          —           —           —     
     —           200,000  (1)      1.83         5/7/2021         —          —           —           —     
     —           200,000  (2)      1.83         5/7/2021         —          —           —           —     
     —           181,000  (3)      1.83         5/7/2021         —          —           —           —     

Kenneth S. Cragun

     46,000         —          2.31         4/1/2019         —          —           —           —     
     19,167         —          2.31         4/1/2019         —          —           —           —     
     19,166         —          2.31         4/1/2019         —          —           —           —     
     25,000         —          4.85         10/18/2020         —          —           —           —     
     13,000         —          6.01         12/10/2020         —          —           —           —     
     42,000         —          5.14         1/11/2021         —          —           —           —     
     30,335         —          2.29         12/9/2018         —          —           —           —     
     7,221         3,612  (4)      2.29         12/9/2018         —          —           —           —     
     —           —          —           —           1,733  (5)      1,802         —           —     
     —           —          —           —           2,888  (6)      3,004         —           —     
     7,221         3,612  (7)      2.34         12/7/2019         —          —           —           —     
        43,333  (8)      1.56         1/17/2021              
        43,333  (9)      1.18         12/21/2021              

Scott R. Reinke

     37,504         —          3.38         4/30/2019         —          —           —           —     
     50,000         —          4.21         8/11/2019         —          —           —           —     
     25,000         —          6.01         12/10/2020         —          —           —           —     
     2,917         —          2.29         12/9/2018         —          —           —           —     
     1,458         —          2.29         12/9/2018         —          —           —           —     
     4,166         2,084  (4)      2.29         12/9/2018         —          —           —           —     
     —           —          —           —           250  (5)      260         —           —     
     —           —          —           —           1,666  (6)      1,732         —           —     
     4,166         2,084  (7)      2.34         12/7/2019         —          —           —           —     
        25,000  (8)      1.56         1/17/2021              
        43,333  (9)      1.18         12/21/2021              

Heath B. Clarke

     29,676         —          16.59         1/4/2015         —          —           —           —     
     10,331         —          5.53         5/8/2015         —          —           —           —     
     15,000         —          9.90         6/3/2015         —          —           —           —     
     26,512         —          6.79         11/15/2015         —          —           —           —     
     29,642         —          4.21         3/9/2016         —          —           —           —     
     67,500         —          4.74         12/13/2017         —          —           —           —     
     67,500         —          4.74         12/13/2017         —          —           —           —     
     67,500         —          4.70         6/3/2018         —          —           —           —     
     35,419         —          1.57         3/12/2019         —          —           —           —     
     110,000         —          6.01         12/10/2020         —          —           —           —     
     77,000         —          2.29         12/9/2018         —          —           —           —     
     18,332         9,167  (4)      2.29         12/9/2018         —          —           —           —     
     —           —          —           —           4,400  (5)      4,576         —           —     
     —           —          —           —           7,333  (6)      7,626         —           —     
     18,333         9,167  (7)      2.34         12/7/2019         —          —           —           —     

Michael A. Sawtell

     75,000         —          3.58         5/7/2015         —          —           —           —     
     109,999         —          3.65         5/7/2015         —          —           —           —     
     40,894         —          2.29         5/7/2015         —          —           —           —     
     6,770         —          2.34         5/7/2015         —          —           —           —     

 

(1) 33.33% of total grant vest on May 7, 2015, and the remainder vests each quarter over the next eight quarters commencing after May 7, 2015.
(2) 33.33% of total grant vest on May 7, 2016, and the remainder vests each quarter over the next eight quarters commencing after May 7, 2016.

 

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(3) 33.33% of total grant vest on May 7, 2017, and the remainder vests each quarter over the next eight quarters commencing after May 7, 2017.
(4) 33.33% of total grant vested on December 9, 2013, and the remainder vests each quarter over the next eight quarters commencing after December 9, 2013.
(5) 33.33% of total grant vested on January 1, 2013 and 33.33% vested on January 1, 2014, and the remainder vests on January 1, 2015.
(6) 33.33% of total grant vested on January 1, 2014, and the remainder vests each year on January 1 over the next two years commencing after January 1, 2014.
(7) 33.33% of total grant vested on December 7, 2013, and the remainder vests each quarter over the next eight quarters commencing after December 7, 2013.
(8) 33.33% of total grant vest on January 17, 2015, and the remainder vests each quarter over the next eight quarters commencing after January 17, 2015.
(9) 33.33% of total grant vest on December 12, 2015, and the remainder vests each quarter over the next eight quarters commencing after December 12, 2015.

Director Compensation

The following table provides information regarding the compensation earned during the fiscal year ended December 31, 2014, by members of our Board, unless the director is also a named executive officer:

2014 Director Compensation

 

Name

   Fees Earned or
Paid in Cash
($)
     Option
Awards ($)
     Total ($)  

Norman K. Farra Jr. (1)

     85,050         52,191         137,241   

John E. Rehfeld (2)

     103,498         52,191         155,689   

John Payne (3)

     29,800         22,035         51,835   

David Hughes (4)

     29,800         22,035         51,835   

 

(1) As of December 31, 2014, Mr. Farra held options to purchase an aggregate of 185,416 shares of our Common Stock.
(2) As of December 31, 2014, Mr. Rehfeld held options to purchase an aggregate of 181,210 shares of our Common Stock.
(3) As of December 31, 2014, Mr. Payne held options to purchase an aggregate of 16,666 shares of our Common Stock.
(4) As of December 31, 2014, Mr. Hughes held options to purchase an aggregate of 16,666 shares of our Common Stock.

Non-employee members of the Board receive an annual retainer of $30,000 plus $1,500 for each in-person or telephonic Board meeting attended and $750 for each in-person meeting attended telephonically. The Lead Director receives an annual fee of $15,000. The Chairman of the Audit Committee receives an annual fee of $15,000. The Chairman of the Compensation Committee receives an annual fee of $7,000. The Chairman of the Nominating and Corporate Governance Committee receives an annual fee of $5,000. Members of committees of the Board receive $1,200 for each committee meeting attended. In addition, all members of the Board receive an annual grant of an option to purchase 25,000 shares of our Common Stock. Non-employee members of the Board received their option grant for 2013 Board service in January 2014.

 

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Also, in light of additional service required of all Board members during 2013 and continuing in 2014, members of the Board received a one-time supplemental grant of an option to purchase 15,000 shares of our Common Stock in January 2014. New members to the Board receive a pro-rata amount of the regular annual grant amount of an option to purchase 25,000 shares of our Common Stock. One-half of each of the options granted to the member of the Board are vested at the time of the grant, and the remaining portions vest in equal monthly installments over the following twelve months. Stock option grants have a post-separation exercise period of two years.

Risk Considerations

The Compensation Committee has reviewed our compensation programs for our named executive officers and our employees generally and has concluded that these programs do not create risks that are reasonably likely to have a material adverse effect on the company. The Compensation Committee believes that the design of our annual cash and long-term equity incentives provides an effective and appropriate mix of incentives to help ensure that our performance is focused on long-term results. In general, bonus opportunities for our employees are capped, and we have discretion to reduce bonus payments or pay no bonus at all based on the individual performance component and other factors that we determine are appropriate given the particular circumstances. Similar to our named executive officers, a substantial portion of the compensation for all of our employees generally is delivered in the form of equity awards, which are intended to further align the interests of our employees with those of our stockholders.

With specific regard to our executives, including our named executive officers, the Compensation Committee has determined that the following compensation design features and risk oversight features provide protection against excessive risk-taking:

 

    Our board of directors as a whole has responsibility for risk oversight and regularly reviews the areas of focus of our board committees. Our board committees report their deliberations to the full board on a regular basis. Additionally, the board considers the strategic, financial and execution risks that are associated with the operations, financial and capital decisions that impact on determinations of compensation under our compensation programs;

 

    Our named executive officers are motivated to carefully assess risks as a majority of their compensation is performance-based, meaning unless they guard against risks, their compensation could also be negatively impacted;

 

    Our Compensation Committee regularly discusses the reasonable range of future company performance expectations with our principal executive officer, which provides the Compensation Committee with insight into the design and funding of our executive bonus plan;

 

    In order to ensure a long-term focus by management, we have mitigated the incentives in our annual cash bonus program by capping annual bonus potential to a percentage of base salary, which represents a relatively small percentage of our executives’ total compensation opportunities; and

 

    Given that a high percentage of our overall pay mix for named executive officers is equity-based:

 

    We provide competitive base salaries to our named executive officers to provide a steady income while allowing them to focus on our long-term performance rather than on short-term stock price fluctuations;

 

    We design our bonus plan for named executive officers to be focused on financial performance metrics, which in combination with our use of equity awards that are subject to long-term vesting conditions; focuses our executives on driving long-term stockholder value and incentivizes them to avoid decisions that only benefit short-term results that may not be consistent with our long-term interests;

 

    Our equity grants typically vest over a three-year vesting period to ensure our named executive officers have significant value tied to long-term stock price performance;

 

    We prohibit speculative and hedging transaction involving our securities, which prevents our executive officers from insulating themselves from the effects of poor company stock price performance; and

 

    We have internal controls over financial reporting, the measurement and calculation of compensation goals, and other financial, operational, and compliance policies and practices that are designed to keep our compensation programs from being susceptible to manipulation by any employee, including our named executive officers.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth the beneficial ownership of shares of our Common Stock as of December 31, 2014:

 

    each person (or group of affiliated persons) known by us to beneficially own more than 5% of our common stock;

 

    each of our directors and nominees;

 

    each named executive officer; and

 

    all of our directors and executive officers as a group.

Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our Common Stock. Beneficial ownership is determined in accordance with the rules of the SEC and generally requires that such person have voting or investment power with respect to securities. In computing the number of shares beneficially owned by a person listed below and the percentage ownership of such person, shares of Common Stock underlying options, warrants or convertible securities held by each such person that are exercisable or convertible within 60 days of December 31, 2014, are deemed outstanding, but are not deemed outstanding for computing the percentage ownership of any other person.

The percentage of beneficial ownership is based on 23,294,566 shares of Common Stock outstanding as of December 31, 2014.

Except as otherwise noted below, and subject to applicable community property laws, the persons named have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Unless otherwise indicated, the address of the following stockholders is c/o Local Corporation, 7555 Irvine Center Drive, Irvine, CA 92618.

 

Name and Address of Beneficial Owner

   Number of Shares
of Common Stock
Beneficially Held
     Percentage
of Shares
Beneficially
Owned
 

John E. Rehfeld (1)

     290,293         1.2

Kenneth S. Cragun (2)

     242,090         1.0

Norman K. Farra Jr. (3)

     233,968         1.0

Frederick G. Thiel (4)

     100,000         *

Scott D. Reinke (5)

     149,659         *

David M. Hughes (6)

     38,208         *

John M. Payne (7)

     18,749         *

All directors and executive officers as a group (7 persons) (8)

     1,072,967         4.4

 

* - less than 1%

 

(1) Includes 183,293 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014.
(2) Includes 223,552 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014, 3,177 shares issuable upon the vesting of restricted stock units within 60 days of December 31, 2014.
(3) Includes 193,750 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014.

 

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(4) Includes 100,000 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014.
(5) Includes 133,544 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014, 1,083 shares issuable upon the vesting of restricted stock units within 60 days of December 31, 2014.
(6) Includes 18,749 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014.
(7) Includes 18,749 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014.
(8) Includes 878,957 shares issuable upon the exercise of options that are exercisable within 60 days of December 31, 2014, 5,704 shares issuable upon the vesting of restricted stock units within 60 days of December 31, 2014, and 15,750 shares with indirect beneficial ownership.

Securities authorized for issuance under equity compensation plans

The following table provides information as of December 31, 2014, with respect to our compensation plans including our 1999 Plan, 2000 Plan, 2004 Plan, 2005 Plan, 2007 Plan, 2008 Plan and 2011 Plan (as each are defined in Note 12 to our Notes to Consolidated Financial Statements) under which we may issue shares of our common stock.

Equity Compensation Plan Information

 

Plan Category

  Number of securities to
be issued upon exercise of
outstanding options,
warrants and  rights

(a)
    Weighted-average exercise
price of outstanding
options, warrants and

rights
(b)
    Number of securities
remaining available for
future issuance under
equity compensation  plans
(excluding securities
reflected in column (a))

(c)
 

Equity compensation plans approved by security holders

    4,480,856      $ 3.31        589,944   

Equity compensation plans not approved by security holders

    —          —          —     
 

 

 

     

 

 

 

Total

  4,480,856    $ 3.31      589,944   
 

 

 

     

 

 

 

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

Our Audit Committee or in certain instances, a special committee of our Board of Directors, monitors and reviews issues involving potential conflicts of interest and approves all transactions with related persons as defined in Item 404 of Regulation S-K under the securities laws. Examples of such transactions that must be approved by our Audit Committee or a special committee of our Board include, but are not limited to any transaction, arrangement, relationship (including any indebtedness) in which:

 

    the aggregate amount involved is determined to by the Audit Committee to be material;

 

    we are a participant; and

 

    any of the following has or will have a direct or indirect interest in the transaction:

 

    an executive officer, director, or nominee for election as a director;

 

    a greater than five percent beneficial owner of our Common Stock; or

 

    any immediate family member of the foregoing.

 

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When reviewing transactions with a related person, the Audit Committee or any special committee of the Board formed for that purpose applies the standards for evaluating conflicts of interest outlined in our written Code of Business Conduct and Ethics. In 2013, we entered into an engagement letter with Merriman Capital, Inc., in order to assist us with certain financing activities. Mr. Norman K. Farra Jr., one of our directors, is FEP Advisor for Merriman Capital, Inc. In April 2013, the Company announced that it had entered into a definitive agreement to sell $5 million in convertible subordinated notes and warrants to purchase common stock. Merriman Capital, Inc. acted as the lead Placement Agent for this transaction. Mr. Farra received compensation from Merriman Capital, Inc. related to this transaction. A special committee of the Board was formed for purposes of evaluating potential financial advisors and made the selection of Merriman Capital, Inc. The special committee of the Board was comprised entirely of independent Board members. In connection with the engagement of Merriman Capital, Inc., Mr. Farra resigned as a member of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee in light of the potential for a conflict of interest.

Director Independence

 

     As of December 31, 2014
     Independent (1)    Audit
Committee
Member
   Nominating and Corporate
Governance Committee
Member
   Compensation
Committee
Member

Director

                   

Frederick G. Thiel

   No         

Norman K. Farra Jr.

   No         

John E. Rehfeld

   Yes    X    X    X

John M. Payne

   Yes    X    X    X

David M. Hughes

   Yes    X    X   

 

(1) The Board determined that Messrs. Rehfeld, Payne and Hughes were “independent” for the year ended December 31, 2014 within the meaning of the Nasdaq Capital Market director independence standards, as currently in effect. The Board further determined that Frederick G. Thiel and Norm K. Farra Jr. were not independent due to Mr. Thiel’s position as our Chief Executive Officer and Mr. Farra’s relationship with Merriman Capital, Inc.

 

Item 14. Principal Accountant Fees and Services

The following table sets forth the aggregate fees for professional audit services rendered by BDO USA, LLP for the audit of our annual consolidated financial statements for the years ended December 31, 2014 and 2013, and fees billed for other services provided by BDO USA, LLP for the years ended December 31, 2014 and 2013.

 

     Years Ended December 31,  
     2014      2013  

Audit Fees

   $ 221,404       $ 229,461   

Audit-Related Fees

     —           —     

Tax Fees

     47,072         50,484   

All Other Fees

     —           —     
  

 

 

    

 

 

 

Total Fees Paid

$ 268,476    $ 279,945   
  

 

 

    

 

 

 

Audit Fees

Includes the fees for the annual audit of our consolidated financial statements, review of our quarterly financial statements, and review and consent of documents filed with the SEC.

Audit-Related Fees

None.

 

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Tax Fees

Includes the aggregate fees for tax return preparation, tax advice and tax planning.

All Other Fees

None.

Our audit committee pre-approves all services provided by BDO USA, LLP.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

Exhibit
Number
  Description
    3.1 (1)   Amended and Restated Certificate of Incorporation of the Registrant.
    3.2 (2)   Amendment to Restated Certificate of Incorporation of the Registrant.
    3.3 (3)   Amended and Restated Bylaws of the Registrant.
    3.4 (4)   Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation.
    3.5 (5)   Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.
    3.6 (6)   Certificate of Ownership and Merger Merging Wide Out Corporation Into Local.com Corporation.
    4.1 (5)   Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto).
  10.1 (8)#   2011 Omnibus Incentive Plan., as amended.
  10.2 (7)   Form of Indemnification Agreement between the Registrant and each of its directors and executive officers.
  10.4 (10)#   Description of material Terms of the Registrant’s Bonus Program as of January 16, 2013.
  10.5 (10)#   Description of material Terms of the Registrant’s Retention Program as of January 16, 2013.
  10.6 (11)   Fourth Amendment dated January 30, 2013, to Loan and Security Agreement dated August 3, 2011, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.
  10.7 (12)   Form of Repricing Letter.
  10.8 (13)   Fifth Amendment dated February 13, 2013, to Loan and Security Agreement dated August 3, 2011, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.
  10.9 (14)   Sixth Amendment dated March 28, 2013, to Loan and Security Agreement dated August 3, 2011, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.
  10.10 (15)#   Separation and General Release Agreement by and between the Registrant and Peter Hutto dated March 31, 2013.
  10.11 (16)   Convertible Note and Warrant Purchase Agreement dated April 10, 2013, by and among the Registrant and certain institutional investors.
  10.12 (16)   Form of 7% Convertible Note.
  10.13 (16)   Form of Common Stock Purchase Warrant.
  10.14 (16)   Form of Investor Rights Agreement.
  10.15 (16)   Form of Subsidiary Guarantee.
  10.16 (16)   Seventh Amendment, dated April 10, 2013, to Loan and Security Agreement dated August 3, 2011, by and among Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square One Bank.
  10.17 (17)   Google, Inc. Advertising Program Terms entered into April 13, 2013.
  10.18 (18)+   AOL Advertising Insertion Order dated May 31, 2013, by and between the Registrant and AOL Advertising Inc.
  10.19 (19)   Amendment Number Five to Google Services Agreement with an effective date of August 1, 2013, by and between the Registrant and Google Inc.
  10.20 (20)+   Dual Distribution Agreement, effective July 1, 2013, by and between the Registrant and Yellowpages.com LLC.
  10.21 (21)   Asset Purchase Agreement by and among the Registrant, Screamin Media Group, Inc. and nCrowd, Inc., dated July 22, 2013.
  10.22 (22)+   AOL Advertising Insertion Order dated August 7, 2013, by and between the Registrant and AOL Advertising Inc.
  10.23 (23)+   Amendment Number Six to Google Services Agreement dated October 3, 2013, by and between the Registrant and Google Inc.
  10.24 (24)   Local Network Master Services Agreement, dated October 16, 2013, by and between the Registrant and Allview Networks, LLC.
  10.25 (25)   Settlement and Patent License Agreement by and between Registrant and Geotag, Inc. dated November 11, 2013.
  10.26 (26)#   Separation and General Release Agreement by and between the Registrant and Heath Clarke dated January 10, 2014.
  10.27 (26)   Consulting Services Agreement by and between the Registrant and Heath Clarke dated January 11, 2014.
  10.28 (27)   Eighth Amendment, dated March 27, 2014, to Loan and Security Agreement dated August 3, 2011, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.
  10.29 (26)#   Description of the Material Terms of the Registrant’s Bonus Program as of January 14, 2014.

 

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Exhibit
Number
  Description
  10.30 (28)+   Amendment Number 9 dated March 19, 2014, to Yahoo! Publisher Network Contract, as amended, dated August 30, 2010, by and among the Registrant, Yahoo! Inc., and Yahoo! SARL.
  10.31 (29)   Employment Agreement by and between the Registrant and Fred Thiel dated May 7, 2014.
  10.32 (29)   Separation Agreement by and between the Registrant and Michael Sawtell dated May 8, 2014.
  10.33 (30)   Amendment Number 1 dated May 9, 2014, to Yahoo Publisher Network Contract, dated November 1, 2012, by and among the Registrant, Yahoo! Inc., and Yahoo! EMEA Limited.
  10.34 (31)   Ninth Amendment, dated September 2, 2014, to Loan and Security Agreement dated August 3, 2011, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.
  10.35 (32)   Securities Purchase Agreement, dated March 9, 2015, between Local Corporation and the Investors named therein.
  10.36 (32)   Form of Base Indenture between Local Corporation and U.S. Bank National Association.
  10.37 (32)   Form of First Supplemental Indenture and Second Supplemental Indenture.
  10.38 (32)   Form of Series A Notes and Series B Notes.
  10.39 (32)   Form of Warrant.
  10.40 (32)   Form of Registration Rights Agreement.
  10.41 (32)   Tenth Amendment, dated March 9, 2015, to Loan and Security Agreement, dated August 3, 2011, by and among Local Corporation, Krillion, Inc., Screamin’ Media Group, Inc. and Square 1 Bank.
  10.42+*   Financing and Security Agreement by and among the Registrant, Fast Pay Partners LLC, Krillion, Inc. and Screamin Media Group, Inc. dated March 9, 2015.
  10.43+*   First Amendment, dated March 9, 2015, to Financing and Security Agreement, dated March 9, 2015, by and among Local Corporation, Krillion, Inc., Screamin’ Media Group, Inc. and Fast Pay Partners LLC.
  14 (9)   Code of Business Conduct and Ethics.
  21*   Subsidiaries of the Registrant.
  23.1*   Consent of BDO USA, LLP, independent registered public accounting firm.
  31.1*   Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*   Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1*   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document.
101.SCH*   XBRL Taxonomy Extension Schema Document.
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Filed herewith.
# Indicates management contract or compensatory plan.
+ Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.
(1) Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.
(2) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
(3) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
(4) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
(5)

Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.

 

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(6) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 19, 2012.
(7) Incorporated by reference from the Registrant’s Registration Statement on Form SB-2, Amendment No. 1, filed with the Securities and Exchange Commission on August 11, 2004.
(8) Incorporated by reference from the Registrant’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on May 31, 2011
(9) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 23, 2012.
(10) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 23, 2013.
(11) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 1, 2013.
(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 11, 2013.
(13) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 14, 2013.
(14) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 2, 2013
(15) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 3, 2013.
(16) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 11, 2013.
(17) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 18, 2013.
(18) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 6, 2013.
(19) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 25, 2013.
(20) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 16, 2013.
(21) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 23, 2013.
(22) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 13, 2013.
(23) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 7, 2013.
(24)

Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 22, 2013.

 

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(25) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 12, 2013.
(26) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2014.
(27) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 28, 2014.
(28) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 21, 2014.
(29) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 9, 2014.
(30) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 14, 2014.
(31) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 5, 2014.
(32) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 10, 2015.

 

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SIGNATURES

In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of the 27th day of March, 2015.

 

LOCAL CORPORATION
By:  

/s/ Fred Thiel

Frederick G. Thiel
Chief Executive Officer
(principal executive officer) and Chairman

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Frederick G. Thiel

  

Chairman and Chief Executive Officer

  March 27, 2015

 

Frederick G. Thiel

    

/s/ Kenneth S. Cragun

  

Chief Financial Officer, Principal Accounting Officer and Secretary

  March 27, 2015

 

Kenneth S. Cragun

    

/s/ Norman K. Farra Jr.

  

Director

  March 27, 2015

 

Norman K. Farra Jr.

    

/s/ John E. Rehfeld

  

Director

  March 27, 2015

 

John E. Rehfeld

    

/s/ David Hughes

  

Director

  March 27, 2015

 

David Hughes

    

/s/ John Payne

  

Director

  March 27, 2015

 

John Payne

    

 

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LOCAL CORPORATION

INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

  F-2   

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2014 and 2013

  F-3   

Consolidated Statements of Operations for the years ended December 31, 2014 and 2013

  F-4   

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014 and 2013

  F-5   

Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013

  F-6   

Notes to Consolidated Financial Statements

  F-7   

Financial Statement Schedule:

Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2014 and 2013

  F-28   

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Local Corporation

Irvine, California

We have audited the accompanying consolidated balance sheets of Local Corporation (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Local Corporation at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a working capital deficiency and other factors that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ BDO USA, LLP
Costa Mesa, CA
March 27, 2015

 

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LOCAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

     December 31,
2014
    December 31,
2013
 
ASSETS     

Current assets:

    

Cash

   $ 2,438      $ 5,069   

Accounts receivable, net of allowances of $508 and $533, respectively

     8,426        17,298   

Escrow receivable

     —          390   

Prepaid expenses and other current assets

     449        957   
  

 

 

   

 

 

 

Total current assets

  11,313      23,714   

Property and equipment, net

  5,650      6,073   

Goodwill

  19,281      19,281   

Intangible assets, net

  1,752      2,439   

Long-term receivable, net of allowances of $3,431 and $3,431, respectively

  —        —     

Deposits

  72      72   
  

 

 

   

 

 

 

Total assets

$ 38,068    $ 51,579   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$ 9,669    $ 12,786   

Accrued compensation

  940      1,462   

Deferred rent

  116      323   

Warrant liability

  156      537   

Other accrued liabilities

  1,474      2,403   

Revolving line of credit

  4,883      7,342   

Current portion of term loan

  —        1,500   

Deferred revenue

  109      202   
  

 

 

   

 

 

 

Total current liabilities

  17,347      26,555   
  

 

 

   

 

 

 

Long-term portion of term loan

  —        375   

Senior secured convertible notes, net of discount of $383 and $1,533, respectively

  4,630      4,017   

Deferred income taxes

  480      347   
  

 

 

   

 

 

 

Total liabilities

  22,457      31,294   
  

 

 

   

 

 

 

Commitments, contingencies and subsequent events

Stockholders’ equity (deficit):

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 23,294 and 23,038 at December 31, 2014 and 2013, respectively

  —        —     

Additional paid-in capital

  125,076      124,249   

Accumulated deficit

  (109,465   (103,964
  

 

 

   

 

 

 

Stockholders’ equity

  15,611      20,285   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 38,068    $ 51,579   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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LOCAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

     Years ended December 31,  
     2014     2013  

Revenue

   $ 83,120      $ 94,396   
  

 

 

   

 

 

 

Operating Expenses:

Cost of revenues

  63,580      68,541   

Sales and marketing

  7,984      10,029   

General and administrative

  10,708      13,633   

Research and development

  5,677      6,554   

Amortization of intangibles

  688      912   

Income from settlement of patent licensing

  (700   —     
  

 

 

   

 

 

 

Total operating expenses

  87,937      99,669   
  

 

 

   

 

 

 

Operating income (loss)

  (4,817   (5,273

Interest and other income (expense), net

  (2,183   (2,321

Change in fair value of conversion option and warrant liability

  918      1,100   
  

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  (6,082   (6,494

Provision for income taxes

  129      139   
  

 

 

   

 

 

 

Net income (loss) from continuing operations

  (6,211   (6,633

Income (loss) from discontinued operations (net of taxes)

  710      (3,729
  

 

 

   

 

 

 

Net income (loss)

$ (5,501 $ (10,362
  

 

 

   

 

 

 

Per share data:

Basic net income (loss) per share from continuing operations

$ (0.27 $ (0.29
  

 

 

   

 

 

 

Basic net income (loss) per share from discontinued operations

$ 0.03    $ (0.16
  

 

 

   

 

 

 

Basic net income (loss) per share

$ (0.24 $ (0.45
  

 

 

   

 

 

 

Diluted net income (loss) per share from continuing operations

$ (0.27 $ (0.29
  

 

 

   

 

 

 

Diluted net income (loss) per share from discontinued operations

$ 0.03    $ (0.16
  

 

 

   

 

 

 

Diluted net income (loss) per share

$ (0.24 $ (0.45
  

 

 

   

 

 

 

Basic weighted average shares outstanding

  23,243      22,862   

Diluted weighted average shares outstanding

  23,243      22,862   

The accompanying notes are an integral part of the consolidated financial statements.

 

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LOCAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

     Common Stock      Convertible
Preferred Stock
     Additional
Paid-in

Capital
    Accumulated
Deficit
    Total
Stockholders’

Equity
(Deficit)
 
     Shares      Amount      Shares      Amount         

Balance at January 1, 2013

     22,172       $ —           —         $ —         $ 122,036      $ (93,602   $ 28,434   

Common stock issued for exercise of options

     17         —           —           —           26        —          26   

Common stock issued for restricted stock

     418         —           —           —           —          —          —     

Stock based compensation

     —           —           —           —           1,638        —          1,638   

Loss on exchange of warrants

     431         —           —           —           723        —          723   

Financing costs

     —           —           —           —           (174     —          (174

Net loss

     —           —           —           —           —          (10,362     (10,362
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

  23,038      —        —        —        124,249      (103,964   20,285   

Common stock issued for exercise of options

  67      —        —        —        106      —        106   

Common stock issued for restricted stock

  189      —        —        —        —        —        —     

Stock based compensation

  —        —        —        —        767      —        767   

Financing costs

  —        —        —        —        (46   —        (46

Net loss

  —        —        —        —        —        (5,501   (5,501
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

  23,294    $ —        —      $ —      $ 125,076    $ (109,465 $ 15,611   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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LOCAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Years ended December 31,  
     2014     2013  

Cash flows from operating activities:

    

Net loss

   $ (5,501   $ (10,362

Adjustments to reconcile net loss to cash provided by operating activities:

    

Depreciation and amortization

     4,572        5,077   

Provision for doubtful accounts

     855        2,330   

Stock-based compensation expense

     767        1,638   

Non-cash interest expense

     1,150        649   

Loss on exchange of warrants

     —          723   

Change in fair value of conversion option and warrant liability

     (918     (1,100

Deferred income taxes

     133        130   

Impairment of goodwill and intangible assets

     —          3,051   

Changes in operating assets and liabilities:

    

Accounts receivable

     8,017        (7,078

Note receivable

     —          319   

Long-term receivable

     —          (137

Prepaid expenses and other

     508        51   

Other non-current assets

     —          (14

Accounts payable and accrued liabilities

     (4,775     5,927   

Deferred revenue

     (93     (1
  

 

 

   

 

 

 

Net cash provided by operating activities

  4,715      1,203   
  

 

 

   

 

 

 

Cash flows from investing activities:

Capital expenditures

  (3,462   (3,580

Decrease in restricted cash

  —        42   

Proceeds from escrow payout

  390      —     
  

 

 

   

 

 

 

Net cash used in investing activities

  (3,072   (3,538
  

 

 

   

 

 

 

Cash flows from financing activities:

Proceeds from the exercise of options

  106      5   

Proceeds from issuance of senior secrued convertible notes and warrants

  —        5,000   

Proceeds from the issuance of common stock

  —        20   

(Payments) proceeds from revolving credit facility, net

  (2,459   342   

Payment of term loan

  (1,875   (1,125

Payment of financing related costs

  (46   (534
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

  (4,274   3,708   
  

 

 

   

 

 

 

Net increase (decrease) in cash

  (2,631   1,373   

Cash, beginning of year

  5,069      3,696   
  

 

 

   

 

 

 

Cash, end of year

$ 2,438    $ 5,069   
  

 

 

   

 

 

 

Supplemental cash flow information:

Interest paid

$ 729    $ 626   
  

 

 

   

 

 

 

Income taxes paid

$ 7    $ 7   
  

 

 

   

 

 

 

Non-cash financing activities:

Derivative liabilities recorded in connection with the issuance of senior secured convertible notes

$ —      $ 2,182   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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LOCAL CORPORATION

Notes to Consolidated Financial Statements

 

1. The Company and Summary of Significant Accounting Policies

Nature of Operations

Local Corporation (the “Company”) is a leading local advertising technology company that provides its search results to consumers who are searching online for local businesses, products and services. The Company’s search results consist primarily of local business listings and product listings that it aggregates, indexes, normalizes and syndicates using its sophisticated technology platforms. The Company provides its search results through its flagship Local.com website and platform and through other proprietary websites (“Owned and Operated” or “O&O”) and to a network of websites that rely on its search syndication services to provide local search results to their own users (“Network”). The Company generates revenue from a variety of ad units it places alongside its search results, which include pay-per-click, pay-per-call, and display (banner) ad units, including video.

The Company uses patented and proprietary technologies and systems to provide users of its O&O websites and Network with relevant search results for local businesses, products and services, event information, ratings and reviews, driving directions and more into its search results. By distributing this information across its O&O websites and Network, the Company is able to reach users that its direct advertisers and advertising partners desire to reach.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Krillion, Inc. and Screamin Media Group, Inc. (“SMG”). All intercompany balances and transactions were eliminated.

Certain comparative prior year amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current year presentation. The Company reclassified the escrow receivable and conversion option liability of $390,000 and $550,000, respectively as of December 31, 2013 from non-current to current. This reclassification increased 2013 working capital by $940,000. These reclassifications had no effect on previously reported net income (loss), equity or cash flow from operations.

Future Operations, Liquidity and Capital Resources

The Company has experienced substantial net losses from operations for the years ended December 31, 2014 and 2013, totaling $5.5 million and $10.4 million, respectively. As of December 31, 2014, the Company had a working capital deficit of $6.0 million, which included $4.9 million relating to the line of credit with Square 1 Bank. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements have been prepared assuming that the Company will continue to operate as a going concern, which contemplates that the Company will realize its assets and satisfy its liabilities and commitments in the ordinary course of business. The Company’s future is highly dependent on its ability to monetize its search traffic at a profit and its ultimate return to profitability.

Although the Company has been able to generate positive cash flows from operations of $4.7 million during the year ended December 31, 2014, the decrease in the Company’s revenue during the second half of fiscal 2014 resulted in a decrease in the Company’s borrowing base on the Square 1 Bank line of credit. As a result, the Company was required to make payments on the line of credit with Square 1 Bank of approximately $4.3 million during the second half of fiscal 2014.

The Company also continues to focus on generating new revenue streams through various initiatives. However, if our revenue does not grow, we may continue to experience losses in one or more future periods. We may not be able to reduce or maintain our expenses in response to any decrease in our revenue, which may impact our ability to implement our business strategy and adversely affect our financial condition. The Company continues to evaluate its operating plan and manage its costs in line with estimated revenues and has recently undertaken cost reductions to better manage its costs in light of recent revenue trends.

 

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On March 9, 2015, the Company entered into multiple financing agreements, resulting in additional cash flow to the Company of approximately $3.0 million and extended the due date of repayments. See Note 15 – Subsequent Events.

Subsequent to the year ended December 31, 2014, the Company had a reduction in workforce, reducing the amount of employees from 70 as of December 31, 2014 to 60.

Discontinued Operations

As a result of the Company’s decision to sell all of the assets and liabilities relating to its Spreebird business in 2013, the Company has presented all related historical financial information as it relates to this business as “discontinued operations” in the accompanying consolidated statements of operations. In addition, all related activities have been excluded from footnote disclosures unless specifically referenced.

Use of Estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for allowance for doubtful accounts, reserve for long term receivable, impairment of goodwill, intangible assets and long-lived assets, capitalization of web development cost, tax provision, including estimates related to recovery of deferred tax assets and uncertain tax obligations and share-based compensation.

Revenue Recognition

The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

The Company generates revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement and the fulfillment of subscription listing obligations. The Company enters into contracts to distribute sponsored listings and banner advertisements with direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at any time. The Company’s indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). The Company recognizes its portion of the bid price based upon the contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on its O&O websites and Network. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Revenue recognized is net of estimated adjustments for traffic screening.

The Company evaluates whether it is appropriate to record the gross amount of sales and related costs or the net amount earned as revenue. Generally, when the Company is primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross sales price. The Company generally records the net amounts as revenue earned if it is not primarily obligated and does not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. All revenue is recognized on a gross basis.

Cost of Revenues

Cost of revenues consists of traffic acquisition costs, revenue sharing payments that the Company makes to its network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to its O&O websites, 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 paid-search services, and payment processing fees (credit cards). The Company advertises on large search engine websites such as

 

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Google, Yahoo, and Microsoft/Bing, as well as other search engine websites, by bidding on certain keywords the Company believes will drive traffic to its O&O websites. During the year ended December 31, 2014, approximately 76% of overall traffic was purchased from other search engine websites. During the year ended December 31, 2014, advertising costs to drive consumers to the Local.com website were $36.4 million of which $28.6 million and $5.1 million was attributable to Google and Yahoo, respectively. During the year ended December 31, 2013, approximately 57% of overall traffic was purchased from other search engine websites. During the year ended December 31, 2013, advertising costs to drive consumers to the Local.com website were $35.9 million of which $27.4 million and $6.1 million was attributable to Google and Yahoo, respectively.

Research and Development

Research and development expenses consist of the Company’s expenses incurred in the development, creation and enhancement of its paid-search services. Research and development expenses include salaries and other costs of employment of the Company’s development staff as well as outside contractors and the amortization of capitalized website development costs.

Stock based compensation

The cost of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the financial statements based on the estimated fair value of the awards. That cost is recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period).

Calculating stock-based compensation expense requires the input of assumptions, including the expected term of the stock options, stock price volatility, pre-vesting forfeiture rate of stock awards and in the case of restricted stock units, the fair market values of the underlying stock on the dates of grant. The Company estimates the expected life of options granted based on historical exercise patterns, which it believes are representative of future behavior. The Company estimates the volatility of common stock on the date of grant based on the historical market activity of the Company’s stock. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, The Company is required to estimate the expected pre-vesting award forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of stock-based awards that are granted and cancelled before vesting. If actual forfeiture rate is materially different from the original estimate, the stock-based compensation expense could be significantly different from what the Company recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. See Note 12—Stockholders’ Equity for additional information.

Sales Commissions

Sales commissions are earned by the Company’s applicable salesperson when revenue from an advertiser is recognized, subject to certain criteria. The Company records sales commission expense in the period the sales commission is earned and the associated revenue is recorded. Adjustments or chargebacks are made for any credits issued to customers or any amounts deemed to be uncollectible.

Refunds

Refunds of any remaining deposits paid by direct advertisers are available to those advertisers upon written request submitted between 30 and 90 days from the date of deposit and included in deferred revenue in the accompanying consolidated balance sheets.

 

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Income Taxes

The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements and tax returns. Deferred income tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that deferred income tax assets will not be realized.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of accounts receivable, revolving line of credit, accounts payable, the conversion option liability, warrant liability, term loan, and senior secured convertible notes. The carrying amounts of the revolving line of credit and term loan approximate their fair values because the interest rate on these instruments fluctuates with market interest rates. The senior secured convertible notes have a fixed interest rate considered to be at market rates and therefore the carrying value also approximates its fair value. The Company believes that the recorded values of all of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

The fair values of the conversion option and warrant liability are determined using the Black-Scholes valuation model, a “Level 3” fair value measurement, based on the quoted price of common stock, volatility based on the historical market activity of the Company’s stock, the expected life based on the remaining contractual term of the conversion option and 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’ and conversion options’ contractual life.

Accounts Receivable

The Company’s accounts receivable are due primarily from customers located in the United States and are typically unsecured. The Company’s management estimates the losses that may result from that portion of its accounts receivable that may not be collectible as a result of the inability of its 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 the Company believes that its customers’ financial condition has deteriorated such that it impairs their ability to make payments, additional allowances may be required. The Company reviews 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.

During the fourth quarter of 2013, the Company reserved $1.7 million of its long-term receivable. The reserves were recorded in general and administrative expenses in the accompanying consolidated statements of operations. The long-term receivable relates to the Company’s remaining LEC receivables. The Company has determined that the collection of the remaining LEC receivable is doubtful, and therefore the Company has fully reserved for the LEC receivable balance as of December 31, 2014 and 2013.

Certain Risks and Concentrations

The Company’s revenues are principally derived in the U.S. from online advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying or advertiser spending behavior could adversely affect operating results.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable, long term receivable and revolving line of credit. Accounts receivable are typically unsecured and are derived from revenues earned from customers located in the U.S. Most advertisers and network partners are in the Internet industry. The Company performs ongoing evaluations to determine customer credit and the Company limits the amount of credit it extends, but generally the Company does not require collateral from its customers. The Company maintains reserves for estimated credit losses and these losses have generally been within our expectations. The Company has two customers that each represents more than 10% of total revenue. The following table identified our major partners that represented greater than 10% of total revenue in the periods presented:

 

     Percentage of Total Revenue  
     Years Ended December 31,  

Customer

   2014     2013  

Yahoo! Inc.

     43     46

Google Inc.

     31     26

 

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As of December 31, 2014 and 2013, two customers represented 57% and 60%, respectively, of the Company’s 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. The loss of either of these two customers will have a material adverse effect on the business and operations of the Company.

The Company is exposed to the risk of fluctuation in interest rates on the revolving line of credit. During 2014, the Company did not use interest rate swaps or other types of derivative financial instruments to hedge interest rate risk. See Note 8 – Credit Facilities.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are calculated under the straight-line basis over the shorter of the estimated useful lives or the respective assets as follows:

 

Furniture and fixtures 7 years
Office equipment 5 years
Computer equipment 3 years
Computer software 3 years
Leasehold improvements 5 years (life of lease)

Repairs and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property and equipment are included in the operating results of the related period.

Website Development Costs and Computer Software Developed for Internal Use

U.S. GAAP guidance regarding accounting for the costs of computer software developed or obtained for internal use requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP guidance regarding accounting for website development costs requires that costs incurred in the preliminary project and operating stage of website development be expensed as incurred and that certain costs incurred in the development stage of website development be capitalized and amortized over the estimated useful life. Capitalized website development costs, including internally developed software, are included in property and equipment, net.

Intangible Assets

Definite-lived intangible assets represent developed technology, non-compete agreements, customer related intangible assets, patents, trademark and trade names and are amortized over their estimated useful lives, generally on a straight-line basis over two to four years. Indefinite lived intangible assets relate to domain names owned by the Company.

Impairment of Long-lived Assets

The Company accounts for the impairment and disposition of definite life intangible and long-lived assets in accordance with U.S. GAAP guidance on accounting for the impairment or disposal of long-lived assets. In accordance with the guidance, such assets to be held are reviewed for events, or changes in circumstances, which indicate that their carrying value may not be recoverable. The Company periodically reviews related carrying values to determine whether or not impairment to such value has occurred. During the second quarter of fiscal 2013, management recorded impairment charges for certain capitalized software assets and intangible assets with a book value of $300,000 and $182,000, respectively, related to its Spreebird business unit. The impairment charges were due to the Company’s sale of the assets of its Spreebird business and the cessation of its Spreebird business operations. Such impairment charges are included in discontinued operations in the accompanying consolidated statements of operations.

 

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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. The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. For reporting units where the Company performs the two-step process, the first step requires a comparison of the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference.

The Company performs annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible assets with indefinite lives, the Company either performs a qualitative assessment or compares the fair value of related assets to the carrying value to determine if there is impairment. The Company’s indefinite lived intangible assets consist of domain names for which the fair value is determined by using a third party valuation site which calculates the value of domain names using internal algorithms. For other intangible assets with definite lives, the Company compares future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment.

With the Company’s decision to sell the assets of its Spreebird business unit, the carrying value of the goodwill associated with the Spreebird business was determined to be fully impaired. As a result, the Company recorded an impairment charge of approximately $3.1 million during the second quarter of fiscal 2013, which included goodwill of $2.6 million. Such impairment charge is included in discontinued operations in the accompanying consolidated statements of operations.

The Company performed its annual impairment analysis as of December 31, 2014 and 2013, and determined that the estimated fair value of the reporting unit 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.

Deferred Revenue

Deferred revenue represents deposits from advertising partners and the undelivered component of revenue relating to the sale of domains and services accounted for under the provisions of the revenue recognition topic that addresses multiple-deliverable revenue arrangements. Revenue is recognized in subsequent periods when earned.

Conversion Option and Warrant Liability

U.S. GAAP guidance regarding accounting for derivatives requires that certain of the Company’s warrants and the conversion option relating to the Company’s convertible notes be accounted for as derivative instruments and that the Company records the conversion option and warrant liability at fair value and recognize the change in valuation in its statement of operations each reporting period. Determining the liabilities to be recorded requires the Company to develop estimates to be used in calculating the fair value of the derivatives. The Company calculates the fair values using the Black-Scholes valuation model.

The fair values of warrants were estimated using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

     As of December 31,
2014
    As of December 31,
2013
 

Risk-free interest rate

     1.10     1.75

Actual lives (in years)

     3.25 years        4.2 years   

Expected dividend yield

     None        None   

Expected volatility

     54.66     65.11

 

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The fair values of the conversion option were estimated using a Black-Scholes option pricing model with the following weighted-average assumptions:

 

     As of December 31,
2014
    As of December 31,
2013
 

Risk-free interest rate

     0.04     0.13

Expected lives (in years)

     0.25 years        1.2 years   

Expected dividend yield

     None        None   

Expected volatility

     68.58     50.75

The use of the Black-Scholes model requires the Company to make estimates of the following assumptions:

Expected volatility—The estimated stock price volatility is derived based upon the Company’s actual historic stock prices over the contractual life of the derivatives, which represents the Company’s best estimate of expected volatility.

Risk-free interest rate—The Company uses the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the derivatives’ contractual life assumption as the risk-free interest rate.

The Company is exposed to the risk of changes in the fair value of the derivative liabilities. The fair value of these derivative liabilities is primarily determined by fluctuations in the Company’s stock price. As the Company’s stock price increases or decreases, the fair value of these derivative liabilities increases or decreases, resulting in a corresponding current period loss or gain to be recognized.

Recent Accounting Pronouncements

In April 2014, the FASB issued guidance that provides a narrower definition of discontinued operations than under previous guidance. It requires that only disposals of components of an entity (or groups of components) that represent a strategic shift that has or will have a major effect on the reporting entity’s operations are to be reported in the financial statements as discontinued operations. It also provides guidance on the financial statement presentations and disclosures of discontinued operations. This guidance is effective prospectively for disposals (or classifications of held-for-sale) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The impact of this guidance is dependent on whether or not future disposals occur.

In May 2014, the FASB issued guidance that will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early application is not permitted. The Company is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In August 2014, the FASB issued guidance on presentation of financial statements – going concern, which applies to all companies. It requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Upon adoption, the Company will use this guidance to assess going concern.

 

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In November 2014, the FASB issued guidance on hybrid financial instruments. The guidance does not change the current criteria for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The guidance clarifies that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

 

2. Discontinued Operations

As a result of the decision by the Company to sell all of the assets related to the Spreebird business in 2013, the results of operations relating to this business have been presented in discontinued operations in the consolidated statements of operations for all periods presented.

Revenue and pretax income (loss) related to discontinued operations are as follows: (in thousands):

 

     Years ended December 31,  
     2014      2013  

Revenue

   $ —         $ 551   
  

 

 

    

 

 

 

Pretax income (loss)

$ 710    $ (3,729

Provision (benefit) for income taxes

  —        —     
  

 

 

    

 

 

 

Income (loss) from discontinued operations (net of taxes)

$ 710    $ (3,729
  

 

 

    

 

 

 

 

3. Intangible Assets

Intangible assets consisted of the following (in thousands):

 

     December 31, 2014    December 31, 2013
     Gross
Carrying
Amount
     Accumulated
Amortization
and
impairment
    Net
Carrying
Amount
     Weighted
Average
Useful Life
   Gross
Carrying
Amount
     Accumulated
Amortization
and
impairment
    Net
Carrying
Amount
     Weighted
Average
Useful Life
                         (years)                        (years)

Developed technology

   $ 5,623       $ (5,490   $ 133       4    $ 5,623       $ (4,855   $ 768       4

Non-compete agreements

     —           —          —         2      83         (83     —         2

Customer-related

     1,240         (1,239     1       4      1,240         (1,237     3       4

Patents

     431         (431     —         3      431         (431     —         3

Domain names - indefinite life

     1,601         —          1,601            1,601         —          1,601      

Trademarks and Trade Name

     700         (683     17       4      700         (633     67       4
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    
$ 9,595    $ (7,843 $ 1,752    $ 9,678    $ (7,239 $ 2,439   
  

 

 

    

 

 

   

 

 

       

 

 

    

 

 

   

 

 

    

The estimated total amortization expense for intangible assets over the next five years is as follows (in thousands):

 

     Amortization
Expense
 

For the years ending December 31,

  

2015

   $ 151   
  

 

 

 

Total

$ 151   
  

 

 

 

 

4. Website development costs and computer software developed for internal use

During the second quarter of fiscal 2013, the Company recorded an impairment charge of $300,000 relating to capitalized software of the Spreebird business unit. Such impairment charge is included in discontinued operations in the accompanying consolidated statements of operations.

 

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The following table sets forth the additional capitalized website development costs and the amortization of capitalized website development costs for the period indicated (in thousands):

 

     Years Ended December 31,  
     2014      2013  

Additional capitalized website development costs

   $ 1,980       $ 2,719   

Amortization of capitalized website development costs

   $ (2,634    $ (2,742

 

5. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated using the weighted average shares of common stock outstanding during the periods. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for options and warrants.

For the year ended December 31, 2014, potentially dilutive securities, which consist of options to purchase 4,480,856 shares of common stock at prices ranging from $1.17 to $16.59 warrants to purchase 746,268 shares of common stock at a price of $2.01 and a conversion option to purchase 2,487,562 shares of common stock at a price of $2.01, were not included in the computation of diluted net income per share because such inclusion would be antidilutive.

For the year ended December 31, 2013, potentially dilutive securities, which consist of options to purchase 3,375,473 shares of common stock at prices ranging from $1.41 to $16.59, warrants to purchase 766,268 shares of common stock at prices ranging from $2.01 and a conversion option to purchase 2,487,562 shares of common stock at a price of $2.01, to $2.87 were not included in the computation of diluted net income per share because such inclusion would be antidilutive.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):

 

     Years ended December 31,  
     2014      2013  

Numerator:

     

Net income (loss) per share from continuing operations

   $ (6,211    $ (6,633
  

 

 

    

 

 

 

Net income (loss) per share from discontinued operations

$ 710    $ (3,729
  

 

 

    

 

 

 

Net income (loss)

$ (5,501 $ (10,362
  

 

 

    

 

 

 

Denominator:

Denominator for historical basic calculation weighted average shares

  23,243      22,862   

Dilutive common stock equivalents:

Options

  —        —     

Warrants

  —        —     
  

 

 

    

 

 

 

Denominator for historical diluted calculation weighted average shares

  23,243      22,862   
  

 

 

    

 

 

 

Net loss per share:

Basic net income (loss) per share from continuing operations

$ (0.27 $ (0.29
  

 

 

    

 

 

 

Basic net income (loss) per share from discontinued operations

$ 0.03    $ (0.16
  

 

 

    

 

 

 

Basic net income (loss) per share

$ (0.24 $ (0.45
  

 

 

    

 

 

 

Diluted net income (loss) per share from continuing operations

$ (0.27 $ (0.29
  

 

 

    

 

 

 

Diluted net income (loss) per share from discontinued operations

$ 0.03    $ (0.16
  

 

 

    

 

 

 

Diluted net income (loss) per share

$ (0.24 $ (0.45
  

 

 

    

 

 

 

 

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6. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

     December 31,
2014
     December 31,
2013
 

Furniture and fixtures

   $ 993       $ 981   

Office equipment

     549         529   

Computer equipment

     4,782         3,772   

Computer software

     16,687         14,277   

Leasehold improvements

     916         905   
  

 

 

    

 

 

 
  23,927      20,464   

Less accumulated depreciation and amortization

  (18,277   (14,391
  

 

 

    

 

 

 

Property and equipment, net

$ 5,650    $ 6,073   
  

 

 

    

 

 

 

Depreciation and amortization of property and equipment totaled $3.9 million in 2014 and 2013, respectively.

 

7. Interest and Other Income, net

Interest and other income (expense), net consisted of the following (in thousands):

 

     Years ended December 31,  
     2014      2013  

Interest income

   $ —         $ 12   

Interest expense

     (2,183      (2,333
  

 

 

    

 

 

 

Interest and other income (expense), net

$ (2,183 $ (2,321
  

 

 

    

 

 

 

 

8. Credit Facilities

On August 3, 2011, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Square 1 Bank, as amended. The Loan Agreement provides the Company with a revolving credit facility of up to $12.0 million (the “Facility”). The Loan Agreement maturity date is April 2, 2015. Subject to the terms of the Loan Agreement, the borrowing base used to determine loan availability under the Facility is based on a formula equal to 80% of eligible accounts receivable, with account eligibility measured in accordance with standard determinations as more particularly defined in the Loan Agreement (the “Formula Revolving Line”). Prior to March 28, 2013, the Company was allowed to borrow $3.0 million, irrespective of the formula noted above and had borrowed $3.0 million from the Facility (the “Non-Formula Advance”). On April 10, 2013, the date of the Seventh Amendment, Square 1 Bank added as security under the Loan Agreement all of the Company’s intellectual property and to undertake certain reporting obligations to Square 1 Bank with respect to such intellectual property. All amounts borrowed under the Facility are secured by a general security interest on the assets. On March 27, 2014, we entered into the Eighth Amendment to the Loan Agreement. In accordance with the Eighth Amendment, we paid in full our term loan with Square 1 Bank using credit available under our Formula Revolving Line. As of March 27, 2014, no amounts are outstanding and no further credit extensions are available under the Non-Formula Advance.

Except as otherwise set forth in the Loan Agreement, borrowings made pursuant to the Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.0% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 1.75%. Additionally, there is an annual fee of $25,000 and an unused line fee equal to 0.25% of the unused line if less than 40% of the Facility is in use. In connection with the Eighth Amendment to the Loan Agreement, we paid an additional $5,000 fee.

The Loan Agreement contains customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain restrictions on dispositions of assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The Loan Agreement also contains customary events of default, including payment defaults and a breach of representations and warranties and covenants. If an event of default occurs and is continuing, Square 1 Bank has certain rights and remedies under the Loan Agreement, including declaring all outstanding borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of set-off.

 

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The Company must meet certain financial covenants during the term of the Facility, which included certain Adjusted EBITDA covenants, as defined, in the Agreement and amendments to the Agreement (such Adjusted EBITDA amounts are for financial covenant purposes only, and do not represent projections of the Company’s financial results). As of December 31, 2014, the Company was in compliance with all of its financial covenants. The Eighth Amendment to the Loan Agreement removed the financial covenant that required the Company to maintain a minimum liquidity ratio.

At December 31, 2014, the Company had a total of $4.9 million outstanding under the Facility with no amount available to draw upon.

On March 9, 2015, the Company entered into a Financing and Security Agreement, amended on March 9, 2015, with Fast Pay Partners LLC (“Fast Pay”) creating an accounts receivable-based credit facility (the “Fast Pay Agreement”). Under the terms of the Fast Pay Agreement, Fast Pay may, at its sole discretion, purchase the Company’s eligible accounts receivables. Upon any acquisition of accounts receivable, Fast Pay will advance the Company up to 80% of the gross value of the purchased accounts, up to a maximum of $10.0 million in advances. Each account receivable purchased by Fast Pay will be subject to a factoring fee rate specified in the Fast Pay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over thirty days. The all-in interest cost to us under the Fast Pay Agreement will not exceed the limit on our permitted senior indebtedness under the Notes. The Company will be obligated to repurchase accounts remaining uncollected after a specified deadline, and Fast Pay will generally have full recourse against the Company in the event of nonpayment of any purchased accounts. The Company’s obligations under the credit facility are secured by substantially all of the Company’s assets.

 

9. Senior secured convertible notes

On April 10, 2013, the Company entered into a Convertible Note and Warrant Purchase Agreement (“Agreement”) with two investors. Pursuant to this agreement, the investors purchased an aggregate of $5.0 million of 7% subordinated convertible notes (“7% Notes”) and warrants to purchase shares of the Company’s common stock. Interest is payable quarterly in cash or registered shares of the Company’s common stock at the Company’s option. Stock payments will be at a 7% discount to the lower of the closing price on the trading day immediately preceding or the average of the daily Volume Weighted Average Price (“VWAP”) for the 20 trading days preceding the payment date. The 7% Notes are secured by the Company’s assets and are due on April 10, 2015. Each 7% Note holder has the right, at any time, to convert their Note into shares of the Company’s common stock at an initial conversion ratio of one share of common stock for each $2.01 of principal amount of their note. The Company has the option to force conversion of all or part of the 7% Notes provided the Company’s common stock price exceeds 200% of the conversion price for 90 consecutive trading days.

The Company determined that the conversion option should be bifurcated and accounted for as a derivative liability. Using the Black-Scholes valuation model the Company determined the fair value of the conversion option liability to be $1.4 million at the date of the Agreement. The Company also issued warrants to purchase an aggregate of 746,268 shares of common stock at an exercise price of $2.01 per share that expire five years from the date of issuance. The warrants were required to be recorded as a liability. The fair value of these warrants, using the Black-Scholes valuation model at the date of grant, was $768,000. The fair value of the conversion option and warrant liability was recorded as convertible debt discount and is amortizing into interest expense over the life of the notes using the effective interest rate method. The conversion option liability and warrant liability are recorded at fair value each reporting period with changes in the fair value recorded in the consolidated statements of operations. The fair value of the conversion option liability was $13,000 and $550,000 as of December 31, 2014 and 2013, respectively, and included in the 7% Notes in the accompanying consolidated balance sheets. The fair value of the warrant liability was $156,000 and $537,000 at December 31, 2014 and 2013, respectively.

The 7% Notes are subordinate to the Square 1 Bank revolving line of credit.

In connection with the issuance of the 7% Notes, the Company paid $356,000 in cash for placement agent fees of which $127,500 was paid to a director of the Company. The Company also incurred legal and other consulting fees totaling $244,000 related to the issuance of the 7% Notes. Fees related to the issuance of the 7% Notes are recorded in prepaid expenses and are amortized into interest expense over the life of the 7% Notes, using the effective interest method.

 

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Future maturities of debt as of December 31, 2014, which include the 7% convertible notes and the Formula Revolving Line with Square 1 Bank, are shown in the following table, net of debt discount:

 

     Debt payments  

For the year ending December 31,

  

2015

   $ 9,883   

Plus conversion option liability

     13   

Less debt discount

     (383
  

 

 

 

Total

$ 9,513   
  

 

 

 

On March 9, 2015, the Company entered into a Securities Purchase Agreement relating to the sale and issuance of Senior Convertible Notes, comprising $4.57 million aggregate principal amount of new 8% Senior Convertible Notes (“Series A Notes”) maturing in April 2018 and initially convertible at $0.5534 per share, $250,000 of which was invested by certain management and board members, and $4.75 million aggregate principal amount of 10% Partially Liquidating Debentures (“Series B Notes”) maturing August 2016, initially convertible at $0.7090 per share (collectively “the Notes”). Note that conversion prices are subject to adjustment. Both transactions included issuance of five-year warrants with 50% coverage with an exercise price at market price, defined as the preceding 5 day volume weighted average price. The Company will issue the Partially Liquidating Debentures pursuant to its effective shelf registration statement. The Company has agreed to file a registration statement covering the resale of the common stock issuable upon conversion of the Series A Notes and upon issuance of the warrants. The Company used a portion of the proceeds to repay its outstanding 7% Convertible Notes due April 2015 and associated fees.

 

10. Income Taxes

The provision for income taxes for continuing operations consists of the following (in thousands):

 

     Years ended December 31,  
     2014      2013  

Current:

     

State

   $ (4    $ 9   
  

 

 

    

 

 

 

Total current

  (4   9   
  

 

 

    

 

 

 

Deferred:

Federal

  133      130   
  

 

 

    

 

 

 

Total deferred

  133      130   
  

 

 

    

 

 

 

Total provision for income taxes

$ 129    $ 139   
  

 

 

    

 

 

 

The provision for income taxes differs from the amount computed by applying the federal income tax rate as follows:

 

     Years ended December 31,  
     2014     2013  

Statutory federal tax rate

     34     34

Change in fair value of derivatives

     6       4  

Stock option grants

     (3 )     (2 )

Goodwill impairment

     —          (9 )

Non-cash interest expense

     —          (2 )

Loss on exchange of warrants

     —          (2 )

Change in valuation allowance

     (39 )     (24 )
  

 

 

   

 

 

 
  (2 )%    (1 )% 
  

 

 

   

 

 

 

 

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Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities are as follows (in thousands):

 

     Years ended December 31,  
     2014      2013  

Deferred income tax assets:

     

Net operating loss carryforwards

   $ 34,645       $ 31,619   

Research and development credits

     1,650         1,059   

Acquired intangibles

     2,573         2,934   

Share based compensation

     2,438         2,479   

Accrued expenses

     559         682   

Other reserves

     1,688         1,698   
  

 

 

    

 

 

 

Gross deferred tax assets

  43,553      40,471   

Valuation allowance

  (40,146   (37,089
  

 

 

    

 

 

 
  3,407      3,382   
  

 

 

    

 

 

 

Deferred income tax liabilities:

Deferred state taxes

  (2,676   (2,344

Fixed assets/depreciation

  (1,398   (1,576
  

 

 

    

 

 

 

Gross deferred tax liabilities

  (4,074   (3,920
  

 

 

    

 

 

 

Net deferred tax assets (liabilities)

$ (667 $ (538
  

 

 

    

 

 

 

The current portion of net deferred tax liability is included in other accrued liabilities in the accompanying consolidated balance sheets.

The Company has evaluated the available evidence supporting the realization of its gross deferred tax assets, including the amount and timing of future taxable income, and has determined it is more likely than not that the assets will not be realized. Due to uncertainties surrounding the realizability of the deferred tax assets, the Company continues to maintain a full valuation allowance against its deferred tax assets at December 31, 2014. The current portion of the deferred tax liabilities is included in other accrued liabilities in the accompanying consolidated balance sheets.

At December 31, 2014, the Company had federal and state income tax net operating loss carryforwards of approximately $81.6 million and $78 million, respectively. The federal and state net operating loss carryforwards will expire through 2034 unless previously utilized. Under Section 382 of Internal Revenue Code, if a corporation undergoes an “ownership change” generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its post-change income may be limited. The Company performed a Section 382 study during the fourth quarter of 2010 and determined that it has more likely than not undergone five ownership changes as described in IRC Section 382. The latest ownership change occurred in December 2004. However, due to the relatively large annual limitations based on the value of the Company, the identified ownership changes had no material impact to the amount of net operating losses that can be carried forward to the future years. The Company is currently performing a Section 382 analysis update and the related deferred tax assets may need to be adjusted. In 2011, the Company acquired approximately $11.8 million of

 

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federal and state net operating losses through the two stock acquisitions. No formal Section 382 analysis has been performed with respect to the acquired net operating losses. Any future ownership change may impact the Company’s ability to utilize the net operating loss carryforwards in a future year.

U.S. GAAP guidance regarding accounting for uncertainty in income taxes defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax position that meets the “more-likely-than-not” criterion shall be measured at the largest amount of benefit that is more than 50% likely of being realized upon ultimate settlement. As of December 31, 2014, the Company had total unrecognized tax benefits of approximately $1.8 million. If fully recognized, the total unrecognized tax benefit of approximately $1.8 million would impact the Company’s effective tax rate.

A roll forward of the activity in the gross unrecognized tax benefits is as follows (in thousands):

 

     Unrecognized
tax benefit
 

Balance at January 1, 2013

   $ 1,395   

Additions during the prior year

     42   
  

 

 

 

Balance at December 31, 2013

$ 1,437   

Additions during the current year

  354   
  

 

 

 

Balance at December 31, 2014

$ 1,791   
  

 

 

 

The Company does not anticipate that any material change in the total amount of unrecognized tax benefits will occur within the next twelve months.

The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties on the Company’s consolidated balance sheets at December 31, 2014 and 2013, and has not recognized interest and/or penalties in the consolidated statements of operations for the years ended December 31, 2014 and 2013, since the unrecognized tax benefits do not result in a material tax liability.

The Company is subject to taxation in the United States and state jurisdictions of which 2011 and forward is open for the examination by the United States and 2010 and forward is subject to examination by state taxing authorities as applicable.

Recently enacted tax laws may also affect the tax provision on the Company’s financial statements. The state of California passed a new law which mandates the use of single sales factor apportionment formula for tax years beginning on or after January 1, 2013. As there is a full valuation allowance against the state deferred tax asset, there will be no balance sheet or income tax effect.

The Company is currently undergoing a California examination for research and development credits claimed in its 2010 tax year. The Company believes there will be no material adjustment as a result of this examination and that it has sufficient amount of reserve reflected in the credit amounts.

 

11. Commitments and Contingencies

Lease Commitments

The Company leases office space under operating lease agreements that expire on various dates through July 2015. The future minimum lease payments under non-cancelable operating leases at December 31, 2014, are as follows (in thousands):

 

     Operating
Leases
 

Year ending December 31,

  

2015

     317   
  

 

 

 

Total minimum lease payments

$ 317   
  

 

 

 

 

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The Company recognizes rent expense on a straight-line basis over the life of the operating lease as the lease contains a fixed escalation rent clause. Rent expense for the years ended December 31, 2014 and 2013 was $322,000 and $438,000, respectively. Rent expense is net of sublease income of $97,000 and $41,000 for the years ended December 31, 2014 and 2013, respectively.

401(k) Plan

The Company maintains a 401(k) plan for eligible employees. Employees become eligible to participate in the plan at the beginning of each calendar quarter (January, April, July, October) following their hire date. Employees may contribute amounts ranging from 1% to 15% or their annual salary, up to maximum limits set by the Internal Revenue Service. The Company may make matching contributions at its discretion. Employees immediately vest 100% of their own contributions and 20% of matching contributions for each year of service. For the plan years ended December 31, 2014 and 2013, the Company made no discretionary matching contributions.

Employment Agreements

The Company has signed employment agreements with its executive officers and certain key employees. The agreements provide for the payments of annual salaries totaling $2.0 million and annual bonuses of up to $50,000, in the aggregate, based upon current salaries.

Legal Proceedings

On June 18, 2012, the Company filed a lawsuit against Fry’s Electronics, Inc. (“Fry’s”) alleging that Fry’s violated a patent of the Company relating to methods and systems for dynamic networked commerce architecture. The Company settled with Fry’s on August 29, 2014 and Fry’s licensed the Company’s patent. The Company received a one-time patent license fee of $700,000 in August 2014 related to prior infringement of the Company’s patent.

On April 24, 2014, a lawsuit was filed against the Company by Shopping Cheapest, LLC, a purported UK limited liability company (“Shopping Cheapest”) and subsequently dismissed. On November 3, 2014, an individual related to Shopping Cheapest filed a lawsuit alleging that the Company breached its contract with Shopping Cheapest and seeks an award of damages of approximately $1.1 million plus attorney fees. We do not believe this lawsuit has any merit and intend to vigorously defend ourselves.

Other than the previously mentioned lawsuit, the Company is not currently a party to any other material legal proceedings. From time to time, however, the Company 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 its services.

 

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12. Stockholders’ Equity

The Company has authorized 65,000,000 shares of common stock and 10,000,000 shares of convertible preferred stock.

On February 7, 2013, the Company repriced warrants to purchase 615,080 shares of the Company’s common stock with an exercise price of $8.09 per share to an exercise price of $2.10 per share. The warrants were issued in connection with a private placement transaction consummated on August 1, 2007, including warrants to purchase 537,373 shares of the Company’s common stock issued on August 1, 2007 (the “Series B Warrants”) and warrants to purchase 77,707 shares of the Company’s common stock issued on January 20, 2011, as a result of the anti-dilution provisions contained in each of the Series B Warrants (the “New Series B Warrants” and together with the Series B Warrants, the “Warrants”).

On February 28, 2013, the Company entered into separate Exchange Agreements with each of the holders (collectively the “Investors”) of all of these outstanding Warrants.

In the Exchange Agreements, the Investors agreed to surrender for cancellation all of their Warrants in exchange for an aggregate of 430,561 shares of the Company’s common stock. As a result of the modification and exchange, the Company recorded a loss on warrant exchange of $723,000 during the year ended December 31, 2013. The loss on warrant exchange has been included in interest income and other income (expense), net in the accompanying consolidated statements of operations.

See Note 9 - Senior secured convertible notes footnote, relating to warrants issued in the second quarter fiscal 2013 as part of the issuance of the senior secured convertible notes. Also see Note 15 – subsequent events footnote, relating to warrants issued subsequent to the year ended December 31, 2014.

Warrants

Warrant activity for the years ended December 31, 2013 and 2014 was as follows:

 

     Shares      Weighted Average
Exercise Price
 

Outstanding at January 1, 2013

     1,238,660       $ 7.05   

Expired

     (603,580      2.10   

Exchanged

     (615,080      7.02   

Issued

     746,268         2.01   
  

 

 

    

Outstanding and exercisable at December 31, 2013

  766,268      2.03   

Expired

  (20,000   2.87   
  

 

 

    

Outstanding and exercisable at December 31, 2014

  746,268    $ 2.01   
  

 

 

    

 

 

 

The weighted average fair value at grant date of the warrants granted during the year ended December 31, 2013 was $2.01. No warrants were issued during the year ended December 31, 2014.

The following table summarizes information regarding warrants outstanding and exercisable at December 31, 2014:

 

     Warrants Outstanding and Exercisable  

Range of Exercise Price

   Shares      Weighted
Average
Remaining
Contractual
Life
     Weighted
Average
Exercise Price
 

$ 2.01

     746,268         3.3 years       $ 2.01   
  

 

 

       
  746,268      3.3 years      2.01