Item 1. Financial Statements.
LOCAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in
thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,676
|
|
|
$
|
5,069
|
|
Accounts receivable, net of allowances of $297 and $533, respectively
|
|
|
12,769
|
|
|
|
17,298
|
|
Escrow receivable
|
|
|
|
|
|
|
390
|
|
Prepaid expenses and other current assets
|
|
|
567
|
|
|
|
957
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
20,012
|
|
|
|
23,714
|
|
Property and equipment, net
|
|
|
6,343
|
|
|
|
6,073
|
|
Goodwill
|
|
|
19,281
|
|
|
|
19,281
|
|
Intangible assets, net
|
|
|
1,989
|
|
|
|
2,439
|
|
Long-term receivable, net of allowances of $3,431 and $3,431, respectively
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
72
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
47,697
|
|
|
$
|
51,579
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
12,289
|
|
|
$
|
12,786
|
|
Accrued compensation
|
|
|
2,013
|
|
|
|
1,462
|
|
Deferred rent
|
|
|
224
|
|
|
|
323
|
|
Warrant liability
|
|
|
743
|
|
|
|
537
|
|
Other accrued liabilities
|
|
|
1,681
|
|
|
|
2,403
|
|
Revolving line of credit
|
|
|
8,867
|
|
|
|
7,342
|
|
Current portion of term loan
|
|
|
|
|
|
|
1,500
|
|
Deferred revenue
|
|
|
192
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,009
|
|
|
|
26,555
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of term loan
|
|
|
|
|
|
|
375
|
|
Senior secured convertible notes, net of debt discount of $999 and $1,533, respectively
|
|
|
4,743
|
|
|
|
4,017
|
|
Deferred income taxes
|
|
|
444
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,196
|
|
|
|
31,294
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
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 23,230 and 23,038, respectively
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
124,623
|
|
|
|
124,249
|
|
Accumulated deficit
|
|
|
(108,122
|
)
|
|
|
(103,964
|
)
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
16,501
|
|
|
|
20,285
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
47,697
|
|
|
$
|
51,579
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
LOCAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
22,514
|
|
|
$
|
22,656
|
|
|
$
|
48,694
|
|
|
$
|
44,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
16,512
|
|
|
|
16,452
|
|
|
|
36,917
|
|
|
|
32,046
|
|
Sales and marketing
|
|
|
2,166
|
|
|
|
2,009
|
|
|
|
4,516
|
|
|
|
5,189
|
|
General and administrative
|
|
|
3,238
|
|
|
|
2,845
|
|
|
|
6,556
|
|
|
|
5,791
|
|
Research and development
|
|
|
1,252
|
|
|
|
1,500
|
|
|
|
2,811
|
|
|
|
3,236
|
|
Amortization of intangibles
|
|
|
225
|
|
|
|
231
|
|
|
|
450
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,393
|
|
|
|
23,037
|
|
|
|
51,250
|
|
|
|
46,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(879
|
)
|
|
|
(381
|
)
|
|
|
(2,556
|
)
|
|
|
(2,604
|
)
|
Interest and other income (expense), net
|
|
|
(564
|
)
|
|
|
(420
|
)
|
|
|
(1,107
|
)
|
|
|
(1,262
|
)
|
Change in fair value of conversion option and warrant liability
|
|
|
(64
|
)
|
|
|
638
|
|
|
|
(398
|
)
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(1,507
|
)
|
|
|
(163
|
)
|
|
|
(4,061
|
)
|
|
|
(3,224
|
)
|
Provision for (benefit from) income taxes
|
|
|
(177
|
)
|
|
|
159
|
|
|
|
97
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(1,330
|
)
|
|
|
(322
|
)
|
|
|
(4,158
|
)
|
|
|
(3,454
|
)
|
Loss from discontinued operations (net of taxes)
|
|
|
|
|
|
|
(3,264
|
)
|
|
|
|
|
|
|
(3,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,330
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
(4,158
|
)
|
|
$
|
(6,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share from continuing operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share from discontinued operations
|
|
$
|
|
|
|
$
|
(0.14
|
)
|
|
$
|
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
23,228
|
|
|
|
22,877
|
|
|
|
23,226
|
|
|
|
22,721
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
LOCAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,158
|
)
|
|
$
|
(6,939
|
)
|
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,253
|
|
|
|
2,569
|
|
Provision for doubtful accounts
|
|
|
450
|
|
|
|
350
|
|
Stock-based compensation expense
|
|
|
416
|
|
|
|
1,077
|
|
Non-cash interest expense
|
|
|
534
|
|
|
|
186
|
|
Loss on exchange of warrants
|
|
|
|
|
|
|
723
|
|
Change in fair value of conversion option and warrant liability
|
|
|
398
|
|
|
|
(642
|
)
|
Impairment of goodwill and intangible assets
|
|
|
|
|
|
|
3,051
|
|
Deferred income taxes
|
|
|
97
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,079
|
|
|
|
(3,162
|
)
|
Long term receivable
|
|
|
|
|
|
|
(137
|
)
|
Note receivable
|
|
|
|
|
|
|
101
|
|
Prepaid expenses and other
|
|
|
390
|
|
|
|
(752
|
)
|
Accounts payable and accrued liabilities
|
|
|
(767
|
)
|
|
|
2,469
|
|
Deferred revenue
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,682
|
|
|
|
(1,115
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,073
|
)
|
|
|
(1,397
|
)
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
42
|
|
Proceeds from escrow
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,683
|
)
|
|
|
(1,355
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior secured convertible notes and warrants
|
|
|
|
|
|
|
5,000
|
|
Proceeds from the exercise of options
|
|
|
4
|
|
|
|
21
|
|
Proceeds from (payment of) revolving credit facility, net
|
|
|
1,525
|
|
|
|
(1,333
|
)
|
Payment of term loan
|
|
|
(1,875
|
)
|
|
|
|
|
Payment of financing related costs
|
|
|
(46
|
)
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(392
|
)
|
|
|
3,580
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
1,607
|
|
|
|
1,110
|
|
Cash, beginning of the period
|
|
|
5,069
|
|
|
|
3,696
|
|
|
|
|
|
|
|
|
|
|
Cash, end of the period
|
|
$
|
6,676
|
|
|
$
|
4,806
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
411
|
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
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 these condensed consolidated financial statements.
5
LOCAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Companys 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, its Krillion.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 also aggregates and distributes product search results to third party partners through its proprietary Krillion
®
local shopping platform. 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 and basis of presentation
The Companys condensed consolidated financial statements include the accounts of Local Corporation and its wholly-owned subsidiaries: Krillion, Inc. and
Screamin Media Group, Inc (SMG). All intercompany balances and transactions were eliminated. The Company has evaluated all subsequent events through the date the condensed consolidated financial statements were issued.
Certain comparative prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the
current period presentation.
The unaudited interim condensed consolidated financial statements as of June 30, 2014, and for the three and six months
ended June 30, 2014 and 2013, included herein, have been prepared by the Company, without audit, pursuant to rules and regulations of the Securities and Exchange Commission, and, in the opinion of management, reflect all adjustments (consisting
of only normal recurring adjustments), which are necessary for a fair presentation.
The consolidated results of operations for the three and six months
ended June 30, 2014, are not necessarily indicative of the results for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 2013, included in the Companys Form 10-K filed with the Securities and Exchange Commission on March 28, 2014.
Discontinued Operations
As a result of the
Companys decision to sell all of the assets and liabilities relating to its Spreebird business, the Company has reclassified and presented all related historical financial information as it relates to this business as discontinued
operations in the accompanying condensed consolidated statements of operations. In addition, all related activities have been excluded from footnote disclosures unless specifically referenced. These reclassifications have no effect on
previously reported net income (loss).
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. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable (including long-term receivable) and sales allowances, fair values of financial instruments, intangible assets
and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards and warrants, income taxes, and contingent liabilities, among others. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could materially differ from those estimates.
6
Fair Value of Financial Instruments
The Companys 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 Companys 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.
Intangible Assets
Intangible assets, excluding domain names, are amortized over their estimated useful lives, generally on a straight-line basis over two to four years.
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.
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 Companys 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. Management has analyzed revenue recognition and determined that web hosting revenue is recognized net of direct costs.
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, other than web hosting 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
7
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. The Company advertises on large search engine websites such as Google, Inc. (Google), Yahoo!, Inc. (Yahoo), and Microsoft Inc./Bing (Microsoft), as well as other search
engine websites, by bidding on certain keywords we believe will drive traffic to its O&O websites. During the three and six months ended June 30, 2014, approximately 77%, of our overall traffic were purchased from other search engine
websites. During the three and six months ended June 30, 2014, advertising costs to drive consumers to our Local.com website were $9.8 million and $19.2 million respectively. Of the total advertising cost for the three and six months ended
June 30, 2014, $7.5 million and $15.1 million were attributable to Google and $1.2 million and $2.6 million were attributable to Yahoo, respectively. During the three and six months ended June 30, 2013, approximately 54%, of our overall
traffic were purchased from other search engine websites. During the three and six months ended June 30, 2013, advertising costs to drive consumers to our Local.com website were $8.7 million and $18.9 million respectively. Of the total
advertising cost for the three and six months ended June 30, 2013, $6.3 million and $13.7 million were attributable to Google and $1.6 million and $3.6 million were attributable to Yahoo, respectively.
Updated accounting guidance not yet adopted
In May 2014,
the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity should recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity would be required to
apply the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the
contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted.
Entities will have the option to apply the final standard retrospectively or use a modified retrospective method, recognizing the cumulative effect of the ASU in retained earnings at the date of initial application. An entity will not restate prior
periods if it uses the modified retrospective method, but will be required to disclose the amount by which each financial statement line item is affected in the current reporting period by the application of the ASU as compared to the guidance in
effect prior to the change, as well as reasons for significant changes. The Company will adopt the updated standard in the first quarter of 2017. The Company is currently evaluating the impact that implementing this ASU will have on its financial
statements and disclosures, as well as whether it will use the retrospective or modified retrospective method of adoption.
Intangible assets, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization/
Impairment
|
|
|
Net
Carrying
Amount
|
|
|
Weighted
Average
Useful
Life
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization/
Impairment
|
|
|
Net
Carrying
Amount
|
|
|
Weighted
Average
Useful Life
|
|
|
|
|
|
|
|
|
|
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
(years)
|
|
Developed technology
|
|
$
|
5,623
|
|
|
$
|
(5,278
|
)
|
|
$
|
345
|
|
|
|
4
|
|
|
$
|
5,623
|
|
|
$
|
(4,855
|
)
|
|
$
|
768
|
|
|
|
4
|
|
Non-compete agreements
|
|
|
83
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
2
|
|
|
|
83
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
2
|
|
Customer-related
|
|
|
1,240
|
|
|
|
(1,238
|
)
|
|
|
2
|
|
|
|
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
|
|
|
|
(659
|
)
|
|
|
41
|
|
|
|
4
|
|
|
|
700
|
|
|
|
(633
|
)
|
|
|
67
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,678
|
|
|
$
|
(7,689
|
)
|
|
$
|
1,989
|
|
|
|
|
|
|
$
|
9,678
|
|
|
$
|
(7,239
|
)
|
|
$
|
2,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
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. When 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.
8
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 Companys 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 an impairment. The Company did not identify any
indicators of potential impairment during the second quarter of fiscal 2014 and therefore no impairment review was performed.
4.
|
Website development costs and computer software developed for internal use
|
U.S. GAAP requires that development costs incurred in the preliminary project and post-implementation stages of an internal use software
project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP further requires that costs incurred in the preliminary project and operating stage of website development be
expensed as incurred and that certain costs incurred in the development stage of website development be capitalized and amortized over its useful life. Capitalized website costs are included in property and equipment, net.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Additional capitalized website development costs
|
|
$
|
485
|
|
|
$
|
563
|
|
|
$
|
1,050
|
|
|
$
|
1,065
|
|
Amortization of capitalized website development costs
|
|
$
|
614
|
|
|
$
|
638
|
|
|
$
|
1,221
|
|
|
$
|
1,244
|
|
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.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(1,330
|
)
|
|
$
|
(322
|
)
|
|
$
|
(4,158
|
)
|
|
$
|
(3,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
$
|
|
|
|
$
|
(3,264
|
)
|
|
$
|
|
|
|
$
|
(3,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for historical basic calculation weighted average shares
|
|
|
23,228
|
|
|
|
22,877
|
|
|
|
23,226
|
|
|
|
22,721
|
|
Dilutive common stock equivalents:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for historical diluted calculation weighted average shares
|
|
|
23,228
|
|
|
|
22,877
|
|
|
|
23,226
|
|
|
|
22,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical basic and diluted net loss from continuing operations per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical basic and diluted net loss from discontinued operations per share
|
|
$
|
|
|
|
$
|
(0.14
|
)
|
|
$
|
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical basic and diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
For the three and six months ended June 30, 2014, potentially dilutive securities, which consist of options to purchase 4,362,247 shares of common stock at prices ranging from $1.41 to $16.59 per share, warrants to
purchase 766,268 shares of common stock at prices ranging from $2.01 to $2.87 per share, secured convertible notes that could convert into 2,487,562 shares of common stock were not included in the computation of diluted net income (loss) per share
because such inclusion would be antidilutive.
|
*
|
For the three and six months ended June 30, 2013, potentially dilutive securities, which consist of options to purchase 3,636,352 shares of common stock at prices ranging from $1.41 to $16.59 per share, warrants to
purchase 766,268 shares of common stock at prices ranging from $2.01 to $2.87 per share, secured convertible notes that could convert into 2,487,562 shares of common stock were not included in the computation of diluted net income (loss) per share
because such inclusion would be antidilutive.
|
9
6.
|
Property and equipment
|
Property and equipment, net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
Furniture and fixtures
|
|
$
|
986
|
|
|
$
|
981
|
|
Office equipment
|
|
|
549
|
|
|
|
529
|
|
Computer equipment
|
|
|
4,511
|
|
|
|
3,772
|
|
Computer software
|
|
|
15,576
|
|
|
|
14,277
|
|
Leasehold improvements
|
|
|
916
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,538
|
|
|
|
20,464
|
|
Less accumulated depreciation and amortization
|
|
|
(16,195
|
)
|
|
|
(14,391
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
6,343
|
|
|
$
|
6,073
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three and six months ended June 30, 2014 was $924,000 and $1.8 million, respectively.
Depreciation expense for the three and six months ended June 30, 2013 was $934,000 and $1.8 million, respectively.
7.
|
Interest and other income (expense), net
|
Interest and other income (expense), net, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Interest income
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
7
|
|
Interest expense
|
|
|
(564
|
)
|
|
|
(423
|
)
|
|
|
(1,107
|
)
|
|
|
(546
|
)
|
Loss on exchange of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
$
|
(564
|
)
|
|
$
|
(420
|
)
|
|
$
|
(1,107
|
)
|
|
$
|
(1,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
10
The Company must meet certain financial covenants during the term of the Facility, which included certain
Adjusted EBITDA covenants, as defined, as more particularly described 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 Companys
financial results). As of June 30, 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 June 30, 2014, the Company had a total of $8.9 million outstanding and $0.7 million available under the Facility.
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 (Notes) and warrants to purchase shares of the Companys common stock. Interest is payable quarterly in
cash or registered shares of the Companys common stock at the Companys 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 Notes are secured by the Companys assets and are due on April 10, 2015. Each Note holder has the right, at any time, to convert their Note into
shares of the Companys 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 Notes provided the
Companys 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 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 condensed consolidated statements of operations. The fair value of the conversion option liability was
$742,000 and $550,000 as of June 30, 2014 and December 31, 2013, respectively, and included in the senior secured convertible notes in the accompanying condensed consolidated balance sheets. The fair value of the warrant liability was
$743,000 and $537,000 at June 30, 2014 and December 31, 2013, respectively.
The Notes are subordinate to the Square 1 Bank revolving line of
credit.
In connection with the issuance of the 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 Notes. Fees related to the issuance of the Notes are recorded in prepaid expenses and are amortized into interest expense over
the life of the Notes, using the effective interest method.
10.
|
Operating information
|
The Company manages its business functionally and has historically had two reportable operating segments: Paid Search and Daily Deals. Paid
Search consists of the Companys online businesses that collectively reach customers with a variety of local online advertising products and web hosting. The Companys Daily Deals segment consisted of the Companys business that
reaches its customers with discounted offers for goods and services provided by merchants. During the second quarter of fiscal 2013, the Company decided to sell the assets relating to the Daily Deals segment. The Spreebird Business, which comprises
the entire Daily Deals segment, was deemed to be discontinued operations; and therefore, the Company has one reporting segment going forward.
11
U.S. GAAP regarding disclosures about segments of an enterprise requires that public business enterprises report
entity-wide disclosures. The following table presents summary operating geographic and product information as required by the entity-wide disclosure requirements (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenue by geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
22,514
|
|
|
$
|
22,656
|
|
|
$
|
48,694
|
|
|
$
|
44,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay-Per-Click (PPC)
|
|
|
19,178
|
|
|
|
19,626
|
|
|
|
39,205
|
|
|
|
37,162
|
|
Subscription Advertising Products
|
|
|
50
|
|
|
|
203
|
|
|
|
147
|
|
|
|
552
|
|
Domain Sales and Services
|
|
|
51
|
|
|
|
66
|
|
|
|
78
|
|
|
|
150
|
|
Display and Banner Advertising Services
|
|
|
3,116
|
|
|
|
2,693
|
|
|
|
9,013
|
|
|
|
6,156
|
|
Other
|
|
|
119
|
|
|
|
68
|
|
|
|
251
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
22,514
|
|
|
$
|
22,656
|
|
|
$
|
48,694
|
|
|
$
|
44,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Stock-based compensation
|
Stock option activity under the equity incentive plans during the six months ended June 30, 2014, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding at December 31, 2013
|
|
|
3,375,473
|
|
|
$
|
4.17
|
|
|
|
|
|
Granted
|
|
|
1,483,105
|
|
|
|
1.69
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(494,331
|
)
|
|
|
3.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
4,364,247
|
|
|
$
|
3.44
|
|
|
$
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
2,993,551
|
|
|
$
|
4.19
|
|
|
$
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value at grant date for the options granted during the six months ended June 30, 2014 and 2013,
was $0.81 and $1.06 per option, respectively.
The aggregate intrinsic value of all options exercised during the six months ended June 30, 2014 and
2013, was $0 and $2,800, respectively.
The following table summarizes information regarding options outstanding and exercisable at June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
$0.00 - $2.00
|
|
|
1,623,752
|
|
|
|
6.2 years
|
|
|
$
|
1.68
|
|
|
|
427,251
|
|
|
$
|
1.58
|
|
$2.01 - $3.00
|
|
|
821,390
|
|
|
|
4.2 years
|
|
|
|
2.37
|
|
|
|
648,446
|
|
|
|
2.37
|
|
$3.01 - $4.00
|
|
|
534,429
|
|
|
|
3.2 years
|
|
|
|
3.49
|
|
|
|
533,178
|
|
|
|
3.49
|
|
$4.01 - $5.00
|
|
|
598,444
|
|
|
|
3.6 years
|
|
|
|
4.69
|
|
|
|
598,444
|
|
|
|
4.69
|
|
$5.01 - $6.00
|
|
|
164,524
|
|
|
|
3.6 years
|
|
|
|
5.59
|
|
|
|
164,524
|
|
|
|
5.59
|
|
$6.01 - $7.00
|
|
|
416,032
|
|
|
|
4.2 years
|
|
|
|
6.18
|
|
|
|
416,032
|
|
|
|
6.18
|
|
$7.01 - $8.00
|
|
|
70,000
|
|
|
|
1.7 years
|
|
|
|
7.18
|
|
|
|
70,000
|
|
|
|
7.18
|
|
$8.01 - $9.00
|
|
|
55,000
|
|
|
|
0.9 years
|
|
|
|
8.98
|
|
|
|
55,000
|
|
|
|
8.98
|
|
$9.01 - $10.00
|
|
|
15,000
|
|
|
|
0.9 years
|
|
|
|
9.90
|
|
|
|
15,000
|
|
|
|
9.90
|
|
$10.01 - $16.59
|
|
|
65,676
|
|
|
|
0.5 years
|
|
|
|
15.76
|
|
|
|
65,676
|
|
|
|
15.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,364,247
|
|
|
|
4.6 years
|
|
|
$
|
3.44
|
|
|
|
2,993,551
|
|
|
$
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The fair values of these options were estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Risk-free interest rate
|
|
|
1.03
|
%
|
|
|
0.68
|
%
|
|
|
1.02
|
%
|
|
|
0.63
|
%
|
Expected lives (in years)
|
|
|
3.5 years
|
|
|
|
4.5 years
|
|
|
|
3.5 years
|
|
|
|
4.5 years
|
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Expected volatility
|
|
|
67.80
|
%
|
|
|
77.35
|
%
|
|
|
67.80
|
%
|
|
|
77.35
|
%
|
Restricted stock unit activity under the 2011 Omnibus Plan for the six months ended June 30, 2014, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
|
|
|
|
Unvested at December 31, 2013
|
|
|
247,855
|
|
|
$
|
2.14
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(214,704
|
)
|
|
|
2.12
|
|
Cancelled
|
|
|
(8,773
|
)
|
|
|
2.29
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2014
|
|
|
24,378
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense recognized for the three and six months ended June 30, 2014 and 2013, was as
follows (in thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Cost of revenues
|
|
$
|
11
|
|
|
$
|
31
|
|
|
$
|
23
|
|
|
$
|
59
|
|
Sales and marketing
|
|
|
25
|
|
|
|
116
|
|
|
|
53
|
|
|
|
250
|
|
General and administrative
|
|
|
110
|
|
|
|
306
|
|
|
|
306
|
|
|
|
596
|
|
Research and development
|
|
|
17
|
|
|
|
73
|
|
|
|
34
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
163
|
|
|
$
|
526
|
|
|
$
|
416
|
|
|
$
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net stock-based compensation expense per share*
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On February 7, 2013, the Company repriced warrants to purchase 615,080 shares of the Companys 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 Companys common
stock issued on August 1, 2007 (the Series B Warrants) and warrants to purchase 77,707 shares of the Companys 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
Companys common stock. As a result of the exchange, the Company recorded a loss on warrant exchange of $723,000 for the six months ended June 30, 2013. The loss on warrant exchange has been included in interest income and other income
(expense), net in the accompanying condensed 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.
13
Warrant activity for the six months ended June 30, 2014, was as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2013
|
|
|
766,268
|
|
|
$
|
2.03
|
|
Issued
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
Exchanged
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2014
|
|
|
766,268
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
766,268
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding warrants outstanding and exercisable at June 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Outstanding and Exercisable
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
$ 2.01
|
|
|
746,268
|
|
|
|
3.8 years
|
|
|
$
|
2.01
|
|
$ 2.87
|
|
|
20,000
|
|
|
|
0.3 years
|
|
|
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766,268
|
|
|
|
3.7 years
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Discontinued Operations
|
As a result of the decision by the Company to sell all of the assets related to the Spreebird business, the results of operations relating
to this business have been reclassified to 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
$
|
|
|
|
$
|
225
|
|
|
$
|
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
|
|
|
$
|
(3,296
|
)
|
|
$
|
|
|
|
$
|
(3,517
|
)
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations (net of taxes)
|
|
$
|
|
|
|
$
|
(3,264
|
)
|
|
$
|
|
|
|
$
|
(3,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
Fair Value Measurement of Financial Assets and Liabilities
|
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2014 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
Unobservable
|
|
Description
|
|
2014
|
|
|
Inputs (Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Convertible option liability
|
|
$
|
742
|
|
|
$
|
742
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
743
|
|
|
$
|
743
|
|
|
|
|
|
|
|
|
|
|
14
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis
as of December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Unobservable
|
|
Description
|
|
2013
|
|
|
Inputs (Level 3)
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Convertible option liability
|
|
$
|
550
|
|
|
$
|
550
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
537
|
|
|
$
|
537
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014, our conversion option and warrant liabilities were based on measurement at fair value without
observable market values that required a high level of judgment to determine fair value (Level 3) using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as our stock price, risk-free interest
rates and expected volatility.
The fair value of the financial liabilities was estimated at June 30, 2014, using a Black-Scholes option pricing
model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
Conversion
option
|
|
Risk-free interest rate
|
|
|
1.62
|
%
|
|
|
0.11
|
%
|
Expected lives (in years)
|
|
|
3.8 years
|
|
|
|
0.8 years
|
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
Expected volatility
|
|
|
62.16
|
%
|
|
|
37.10
|
%
|
The following table presents a reconciliation for warrant and conversion option liabilities measured and recorded at fair
value on a recurring basis, using significant unobservable inputs (Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
Conversion
|
|
|
|
|
|
Conversion
|
|
|
|
Warrant
|
|
|
option
|
|
|
Warrant
|
|
|
option
|
|
Balance at January 1
|
|
$
|
537
|
|
|
$
|
550
|
|
|
$
|
5
|
|
|
$
|
|
|
Change in fair value
|
|
|
173
|
|
|
|
161
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31
|
|
|
710
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
Issuance of warrants and Notes
|
|
|
|
|
|
|
|
|
|
|
768
|
|
|
|
1,414
|
|
Change in fair value
|
|
|
33
|
|
|
|
31
|
|
|
|
(195
|
)
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30
|
|
$
|
743
|
|
|
$
|
742
|
|
|
$
|
573
|
|
|
$
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2014, the Company recorded a change in the fair value of the warrant
liability of $33,000 and $206,000, respectively, and a change in the fair value of the conversion option liability of $31,000 and $192,000, respectively.
During the three and six months ended June 30, 2013, the Company recorded a change in the fair value of the warrant liability of ($195,000) and
($200,000), respectively, and a change in the fair value of the conversion option liability of ($443,000) and ($443,000), respectively.
15.
|
Commitments and contingencies
|
On April 24, 2014, a lawsuit was filed against the Company by Shopping Cheapest, LLC. The complaint alleges that the Company breached
its contract with Shopping Cheapest, LLC and seeks an award of damages of approximately $1.1 million plus attorney fees. The Company does not believe the lawsuit has any merit, as the Company were acting in accordance with the contract in dispute at
all times, and intend to vigorously defend ourselves. Additionally, the Company has filed a countersuit against Shopping Cheapest, LLC seeking damages for breach of contract by Shopping Cheapest, LLC among other causes of action.
15
Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q or certain information included or incorporated by reference in this report, contains or
may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements
within the meaning of the federal securities laws. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of
terms such as may, will, should, could, would, expect, plan, anticipate, believe, estimate, predict,
project, and potential or the negative of such terms or other comparable terminology. In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social,
economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions
or omissions of third parties, including customers, competitors and governmental authorities, and various other factors, including those described or referred to in Item 1A of Part II of this Quarterly Report. Should any one or more of these
risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, our actual results could differ materially from those expressed in the forward-looking statements and there can be no assurance that the forward-looking
statements contained in this report will in fact occur.
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with the audited consolidated financial statements and related notes thereto as of December 31, 2013, and for the year
ended December 31, 2013, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2014.
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, our Krillion.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 also aggregate and distribute product search results to third party partners
through our proprietary Krillion
®
local shopping platform. 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.
Recent Developments
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
years 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, $503,000 remains in accrued compensation in the accompanying condensed consolidated balance sheets.
Outlook for Our Business
According to BIA/Kelsey, U.S.
local online advertising revenue will reach approximately $137.5 billion in 2014. 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.
16
Consumers who conduct local searches on the Internet (local searchers) tend to convert into buying
customers at a higher rate than other types of Internet users. As a result, advertisers often pay a significant premium to place their ads in front of local searchers on websites like those powered by our O&O and Network business, including
Local.com or our network partners 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, Microsoft and Facebook, 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.
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.
We believe 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.
We believe that Local can become the technology engine which powers third party apps and sites that
seek to provide on-the-go mobile consumers with the local business, product, and service information they want, when they need it, along their path from discovery to decision. If this happens, we believe we will be in a better position to control
our financial future by having direct relationships with retailers and brands and as a result we expect to be able to reduce our reliance on third party advertisers.
In addition, we believe that any wide adoption of the Local technology platform would result in access to an immense amount of data about retailers,
manufacturers, and consumers alike. We believe this could further evolve Locals platform into a location-based data play, complete with highly valuable consumer behavior trends, price history by category and other valuable information. We
believe we are in the early stages of this evolution in consumer search and we believe we are well positioned to take advantage of it.
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;
|
17
|
|
|
subscription advertiser listings;
|
|
|
|
domain sales and services; and
|
Operating Expenses
Cost of Revenues
Cost of revenues consists of
traffic acquisition costs, revenue sharing payments that we make to our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including
personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer
equipment used in providing our paid-search services, and payment processing fees (credit cards). We advertise on large search engine websites such as Google, Yahoo and Microsoft, as well as other search engine websites, by bidding on certain
keywords we believe will drive traffic to our Local.com website. During the three and six months ended June 30, 2014, approximately 77%, of our overall traffic were purchased from other search engine websites. During the three and six months
ended June 30, 2014, advertising costs to drive consumers to our Local.com website were $9.8 million and $19.2 million respectively. Of the total advertising cost for the three and six months ended June 30, 2013, $7.5 million and $15.1
million were attributable to Google and $1.2 million and $2.6 million were attributable to Yahoo, respectively. During the three and six months ended June 30, 2013, approximately 54%, of our overall traffic were purchased from other search
engine websites. During the three and six months ended June 30, 2013, advertising costs to drive consumers to our Local.com website were $8.7 million and $18.9 million respectively. Of the total advertising cost for the three and six months
ended June 30, 2013, $6.3 million and $13.7 million were attributable to Google and $1.6 million and $3.6 million were attributable to Yahoo, respectively.
Sales and Marketing
Sales and marketing expenses
consist of sales commissions and salaries for our internal and outsourced sales force, customer service staff and marketing personnel, advertising and promotional expenses. We record advertising costs and sales commission in the period in which the
expense is incurred. We expect our sales and marketing expenses will increase in absolute dollars as we continue to experience growth.
General and
Administrative
General and administrative expenses consist of salaries and other costs associated with employment of our executive, finance, human
resources and information technology staff, legal, tax and accounting, and professional service fees.
Research and Development
Research and development expenses consist of salaries and other costs of employment of our development staff, outside contractor costs and amortization of
capitalized website development costs.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the condensed 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 condensed consolidated financial statements included in this Report on Form 10-Q, involve judgments and estimates that are significant to the presentation of our condensed consolidated financial statements.
Updated accounting guidance not yet adopted
In
May 2014, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which provides guidance for accounting for revenue from contracts with customers. The core principle of this ASU is that an entity
18
should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those
goods or services. To achieve that core principle, an entity would be required to apply the following five steps: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction
price; 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when (or as) the entity satisfies a performance obligation. The ASU is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2016. Early adoption is not permitted. Entities will have the option to apply the final standard retrospectively or use a modified retrospective method, recognizing the cumulative effect of the ASU in
retained earnings at the date of initial application. An entity will not restate prior periods if it uses the modified retrospective method, but will be required to disclose the amount by which each financial statement line item is affected in the
current reporting period by the application of the ASU as compared to the guidance in effect prior to the change, as well as reasons for significant changes. We will adopt the updated standard in the first quarter of 2017. We are currently
evaluating the impact that implementing this ASU will have on its financial statements and disclosures, as well as whether it will use the retrospective or modified retrospective method of adoption.
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, other
than web hosting revenue, is recognized on a gross basis.
Allowance for Doubtful Accounts
Our management estimates the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of
our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. If we believe that our customers financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review past due
accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.
During the fourth quarter 2013, we fully reserved our long-term receivable resulting in an additional charge to the condensed consolidated statement of
operations of $1.7 million. The long-term receivable relates to legacy subscribers that were billed via their phone bills from local exchange carriers.
As of June 30, 2014, two customers, Yahoo and Google, represented 59% of our total accounts receivable. These customers have historically paid within the
payment period provided for under their contracts and management believes these customers will continue to do so.
19
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.
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 did not identify any
indicators of potential impairment during the three and six months ended June 30, 2014, and therefore no impairment review was performed.
Stock Based Compensation
Total stock-based
compensation expense recognized for the three and six months ended June 30, 2014 and 2013, is as follows (in thousands, except per share amount):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Cost of revenues
|
|
$
|
11
|
|
|
$
|
31
|
|
|
$
|
23
|
|
|
$
|
59
|
|
Sales and marketing
|
|
|
25
|
|
|
|
116
|
|
|
|
53
|
|
|
|
250
|
|
General and administrative
|
|
|
110
|
|
|
|
306
|
|
|
|
306
|
|
|
|
596
|
|
Research and development
|
|
|
17
|
|
|
|
73
|
|
|
|
34
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
163
|
|
|
$
|
526
|
|
|
$
|
416
|
|
|
$
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net stock-based compensation expense per share*
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations
The following table sets forth our historical operating results as a percentage of revenue for the three and six months ended June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
73.3
|
|
|
|
72.6
|
|
|
|
75.8
|
|
|
|
72.6
|
|
Sales and marketing
|
|
|
9.6
|
|
|
|
8.9
|
|
|
|
9.3
|
|
|
|
11.8
|
|
General and administrative
|
|
|
14.4
|
|
|
|
12.6
|
|
|
|
13.5
|
|
|
|
13.1
|
|
Research and development
|
|
|
5.6
|
|
|
|
6.6
|
|
|
|
5.8
|
|
|
|
7.3
|
|
Amortization of intangibles
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
103.9
|
|
|
|
101.7
|
|
|
|
105.2
|
|
|
|
105.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3.9
|
)
|
|
|
(1.7
|
)
|
|
|
(5.2
|
)
|
|
|
(5.9
|
)
|
Interest and other income (expense), net
|
|
|
(2.5
|
)
|
|
|
(1.9
|
)
|
|
|
(2.3
|
)
|
|
|
(2.9
|
)
|
Change in fair value of warrant liability
|
|
|
(0.3
|
)
|
|
|
2.8
|
|
|
|
(0.8
|
)
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(6.7
|
)
|
|
|
(0.7
|
)
|
|
|
(8.3
|
)
|
|
|
(7.3
|
)
|
Provision for income taxes
|
|
|
(0.8
|
)
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(5.9
|
)
|
|
|
(1.4
|
)
|
|
|
(8.5
|
)
|
|
|
(7.8
|
)
|
Loss from discontinued operations (net of taxes)
|
|
|
|
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
(7.9
|
)
|
Net loss
|
|
|
(5.9
|
)%
|
|
|
(15.8
|
)%
|
|
|
(8.5
|
)%
|
|
|
(15.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Three and six months ended June 30, 2014 and 2013
Revenue (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Percent
|
|
|
Six Months Ended June 30,
|
|
|
Percent
|
|
|
|
2014
|
|
|
(*)
|
|
|
2013
|
|
|
(*)
|
|
|
change
|
|
|
2014
|
|
|
(*)
|
|
|
2013
|
|
|
(*)
|
|
|
change
|
|
Owned and operated
|
|
$
|
12,602
|
|
|
|
56.0
|
%
|
|
$
|
11,066
|
|
|
|
48.8
|
%
|
|
|
13.9
|
%
|
|
$
|
24,019
|
|
|
|
49.3
|
%
|
|
$
|
24,247
|
|
|
|
55.0
|
%
|
|
|
-0.9
|
%
|
Network
|
|
|
9,912
|
|
|
|
44.0
|
%
|
|
|
11,590
|
|
|
|
51.2
|
%
|
|
|
-14.5
|
%
|
|
|
24,675
|
|
|
|
50.7
|
%
|
|
|
19,873
|
|
|
|
45.0
|
%
|
|
|
24.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
22,514
|
|
|
|
100.0
|
%
|
|
$
|
22,656
|
|
|
|
100.0
|
%
|
|
|
-0.6
|
%
|
|
$
|
48,694
|
|
|
|
100.0
|
%
|
|
$
|
44,120
|
|
|
|
100.0
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Percent of total revenue
|
O&O Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Percentage change
|
|
|
|
Three months
ended June 30,
|
|
|
Six months
ended June 30,
|
|
|
Three months
ended June 30,
|
|
|
Six months
ended June 30,
|
|
|
Three months
ended June 30,
|
|
|
Six months
ended June 30,
|
|
Revenue per thousand visitors (RKV)
|
|
$
|
204
|
|
|
$
|
197
|
|
|
$
|
199
|
|
|
$
|
208
|
|
|
|
2.2
|
%
|
|
|
-5.3
|
%
|
O&O Monthly Unique Visitors (in millions)
|
|
|
59.7
|
|
|
|
117.7
|
|
|
|
51.6
|
|
|
|
108.8
|
|
|
|
15.7
|
%
|
|
|
8.2
|
%
|
O&O revenue for the three and six months ended June 30, 2014, increased 13.9% and decreased 0.9%, respectively,
compared to the same periods in 2013. The increase in revenue for the three months ended June 30, 2014, compared to the same period in 2013 is due to an increase in monetization as our RKV increased from $199 for the three months ended
June 30, 2013, to $204 for the three months ended June 30, 2014. The increased monetization was partially offset by a decrease in traffic to our owned and operated sites. Revenue for the six months ended June 30, 2014, was consistent
with the same period in 2013, with a decrease in RKV from $208 for the six months ended June 30, 2013, to $197 for the six months ended June 30, 2014. The decrease in monetization was offset by increased traffic to our owned and operated
sites for the six months ended June 30, 2014.
Network revenue
Network revenue for the three months ended June 30, 2014 decreased 14.5% compared to the same period in 2013. The decrease in revenue for the three months
ended June 30, 2014, compared to the same period in 2013, is mainly due to a reduction in the amount of traffic we accepted from our network partners as we continued 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 for the second quarter 2014.
Network revenue for the six months ended June 30, 2014 increased 24.2% compared to the same period in 2013. The increase in revenue for the six months
ended June 30, 2014, is primarily due to an increase in the number of network partner websites to which we provide our local search results, as well as an increase in revenue from certain network partners. The increase is partially offset by a
reduction in the amount of traffic we accepted from those network partners for quality assurance purposes, as well as a decrease in organic traffic to existing partner websites due to algorithmic changes made by a large search engine affecting the
way in which the search engine indexes our network partner websites.
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 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. We continue to work with our
advertising partners to implement monitoring and filtering tools to prevent questionable or fraudulent traffic.
Based on the above, total revenue for the
three and six months ended June 30, 2014, decreased 0.6% and increased 10.4%, respectively, compared to the same periods in 2013.
21
The following table identifies our major customers that represented greater than 10% of our total revenue in the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Revenue
|
|
|
Percentage of Total Revenue
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
Customer
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Google, Inc
|
|
|
31.0
|
%
|
|
|
27.2
|
%
|
|
|
27.0
|
%
|
|
|
30.9
|
%
|
Yahoo! Inc
|
|
|
46.7
|
%
|
|
|
49.7
|
%
|
|
|
47.0
|
%
|
|
|
41.7
|
%
|
Operating expenses:
Operating expenses were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2014
|
|
|
Percent of
Total
Revenue
|
|
|
2013
|
|
|
Percent of
Total
Revenue
|
|
|
Percent
Change
|
|
|
2014
|
|
|
Percent of
Total
Revenue
|
|
|
2013
|
|
|
Percent of
Total
Revenue
|
|
|
Percent
Change
|
|
Cost of revenues
|
|
$
|
16,512
|
|
|
|
73.3
|
%
|
|
$
|
16,452
|
|
|
|
72.6
|
%
|
|
|
0.4
|
%
|
|
$
|
36,917
|
|
|
|
75.8
|
%
|
|
$
|
32,046
|
|
|
|
72.6
|
%
|
|
|
15.2
|
%
|
Sales and marketing
|
|
$
|
2,165
|
|
|
|
9.6
|
%
|
|
$
|
2,009
|
|
|
|
8.9
|
%
|
|
|
7.8
|
%
|
|
$
|
4,516
|
|
|
|
9.3
|
%
|
|
$
|
5,189
|
|
|
|
11.8
|
%
|
|
|
(13.0
|
)%
|
General and administrative
|
|
$
|
3,238
|
|
|
|
14.4
|
%
|
|
$
|
2,845
|
|
|
|
12.6
|
%
|
|
|
13.8
|
%
|
|
$
|
6,556
|
|
|
|
13.5
|
%
|
|
$
|
5,791
|
|
|
|
13.1
|
%
|
|
|
13.2
|
%
|
Research and development
|
|
$
|
1,252
|
|
|
|
5.6
|
%
|
|
$
|
1,500
|
|
|
|
6.6
|
%
|
|
|
(16.5
|
)%
|
|
$
|
2,811
|
|
|
|
5.8
|
%
|
|
$
|
3,236
|
|
|
|
7.3
|
%
|
|
|
(13.1
|
)%
|
Amortization of intangibles
|
|
$
|
225
|
|
|
|
1.0
|
%
|
|
$
|
231
|
|
|
|
1.0
|
%
|
|
|
(2.6
|
)%
|
|
$
|
450
|
|
|
|
0.9
|
%
|
|
$
|
462
|
|
|
|
1.0
|
%
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
23,392
|
|
|
|
103.9
|
%
|
|
$
|
23,037
|
|
|
|
101.7
|
%
|
|
|
1.5
|
%
|
|
$
|
51,250
|
|
|
|
105.2
|
%
|
|
$
|
46,724
|
|
|
|
105.9
|
%
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
Cost of
revenues for the three and six months ended June 30, 2014, increased by 0.4% and 15.2%, respectively, compared to the same periods in 2013. The increase during the three and six months ended June 30, 2014, compared to the same periods in
2013 is primarily due to an increase in traffic acquisition costs associated with driving consumers to our Local.com website. Revenue share also increased for the six months ended June 30, 2014, compared to the same period in 2013, while
revenue share decreased for the three months ended June 30, 2014, due to the decline in network revenue. The decrease partially offset the increase in traffic acquisition cost for the three months ended June 30, 2014.
Sales and marketing
Sales and marketing expenses for the
three and six months ended June 30, 2014, increased 7.8% and decreased 13.0%, respectively, compared to the same periods in 2013. The decrease for the six months ended June 30, 2014 compared to the same period in 2013, is mainly due to a
decrease in personnel-related costs as part of our continued cost savings efforts. In January 2013, we made a decision to eliminate our direct sales efforts of our SMB product suite to small and medium size businesses. The increase for the three
months ended June 30, 2014, compared to the same period in 2013, is mainly due to an increase in commissions during the quarter.
General and
administrative
General and administrative expenses for the three and six months ended June 30, 2014, increased by 13.8% and 13.2%, respectively,
compared to the same periods in 2013. The increase was mainly due to 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. The
increase was partially offset by the continued cost saving efforts by the Company.
Research and development
Research and development expenses for the three and six months ended June 30, 2014, decreased by 16.5% and 13.1%, respectively, compared to the same
periods in 2013. The decrease is due to higher capitalization of personnel related costs as we continue to invest in new initiatives, including mobile and local shopping, together with a reduction in consulting fees as part of our continued
operating efficiency improvements.
The following table sets forth research and development expenses, additional capitalized website development costs and
amortization of capitalized website development costs for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Research and development expense
|
|
$
|
1,252
|
|
|
$
|
1,500
|
|
|
$
|
2,811
|
|
|
$
|
3,236
|
|
Capitalized website development costs
|
|
$
|
485
|
|
|
$
|
563
|
|
|
$
|
1,050
|
|
|
$
|
1,065
|
|
Amortization of capitalized website development costs
|
|
$
|
614
|
|
|
$
|
638
|
|
|
$
|
1,221
|
|
|
$
|
1,244
|
|
Amortization of intangibles
Amortization of intangibles expense was $225,000 and $450,000 for the three and six months ended June 30, 2014, respectively, compared to $231,000 and
$462,000 for the same periods in 2013.
22
Interest and other income (expense), net
Interest and other income (expense), net were ($564,000) and ($1.1 million) for the three and six months ended June 30, 2014, respectively, compared to
($420,000) and ($1.3 million) for the same periods in 2013. The decrease in interest expense for the six months ended June 30, 2014 compared to the same period in 2013 is due to a $723,000 charge related to the loss on exchange of warrants
recorded in the first quarter of fiscal 2013. The decrease is partially offset by an increase in interest expense related to the convertible notes the Company entered into in April 2013. The interest relating to the convertible notes include cash
and non-cash interest expense.
Provision for (benefit from) income taxes
Provision for (benefit from) income taxes was ($177,000) and $97,000 for the three and six months ended June 30, 2014, and $159,000 and $230,000 for the
three and six months ended June 30, 2013. Taxes are 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):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
2014
|
|
|
2013
|
|
Cash and cash equivalents
|
|
$
|
6,676
|
|
|
$
|
5,069
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficit)
|
|
$
|
(5,254
|
)
|
|
$
|
(2,304
|
)
|
|
|
|
|
|
|
|
|
|
Cash flow highlights (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Net cash provided by (used in) operating activities
|
|
$
|
3,682
|
|
|
$
|
(1,115
|
)
|
Net cash used in investing activities
|
|
|
(1,683
|
)
|
|
|
(1,355
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(392
|
)
|
|
|
3,580
|
|
We have funded our business, to date, primarily from issuances of equity securities as well as through debt facilities. Cash
was $6.7 million as of June 30, 2014, and $5.1 million as of December 31, 2013. We had a working capital deficit of ($5.3 million) as of June 30, 2014, and a working capital deficit of ($2.3 million) as of December 31, 2013.
As of June 30, 2014, we had a total of $8.9 million outstanding on the revolving credit facility with Square 1 Bank, with additional availability of approximately $0.7 million as of June 30, 2014. 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 an increase in cash.
Net cash provided by operating activities was $3.7 million for the
six months ended June 30, 2014. Net income adjusted for non-cash charges (adding back depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, non-cash interest expense, change in fair value of warrant
and conversion option liabilities and deferred income taxes) were cash used of approximately $10,000, and changes in operating assets and liabilities provided cash of $3.7 million for the six months ended June 30, 2014. Net cash used in
operating activities was $1.1 million for the six months ended June 30, 2013. Net income 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 and asset impairment) were cash provided of approximately $375,000, and changes in operating assets and liabilities used cash of $1.5 million for the six months ended
June 30, 2013.
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 six months ended June 30, 2014, the terms of our accounts receivable and accounts payable remained unchanged.
23
The table below substantiates the change in net cash provided by (used in) operating activities for the six
months ended June 30, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Net loss
|
|
$
|
(4,158
|
)
|
|
$
|
(6,939
|
)
|
|
$
|
2,781
|
|
Non-cash (1)
|
|
|
4,148
|
|
|
|
7,314
|
|
|
|
(3,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(10
|
)
|
|
|
375
|
|
|
|
(385
|
)
|
AR, AP and Other
|
|
|
3,692
|
|
|
|
(1,490
|
)
|
|
|
5,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operations
|
|
$
|
3,682
|
|
|
$
|
(1,115
|
)
|
|
$
|
4,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes depreciation, amortization, change in fair value of conversion option and warrant liability, asset impairment, non-cash expense related to stock-based compensation, interest expense, provision for doubtful
accounts.
|
Net cash used in investing activities was $1.7 million for the six months ended June 30, 2014, and consisted of $2.1 million
of capital expenditures, primarily related to website development costs and computer hardware purchases, partially offset by proceeds from escrow of $390,000, related to the sale of the Rovion assets. Net cash used in financing activities was
$392,000 for the six months ended June 30, 2014, primarily related to the repayment of the Square 1 Bank line of credit offset by net draws on the revolving credit facility. Net cash used in investing activities was $1.4 million for the six
months ended June 30, 2013, and consisted of $1.4 million of capital expenditures, primarily related to website development costs. Net cash provided by financing activities was $3.6 million for the six months ended June 30, 2013, and
primarily consisted of proceeds of $5.0 million from the issuance of secured convertible notes offset by the $1.3 million repayment of a portion of the outstanding balance on the Square 1 Bank line of credit and term loan.
Management believes that based upon projected operating needs, cash from operations, availability on our revolving credit facility and the issuance of Notes
will be sufficient to fund our operations for at least the next 12 months. However, we continue to evaluate our operating plan and manage our costs in line with estimated revenues, including contingencies for further cost reductions if
projected revenue and improvements in operating results are not fully realized. Furthermore, if the projections and assumptions used by management to form its opinion 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.
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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