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LOCM > SEC Filings for LOCM > Form 10-Q on 14-Aug-2014All Recent SEC Filings

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Form 10-Q for LOCAL CORP


14-Aug-2014

Quarterly Report


Item 2. Management's 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 year's base salary and all of the bonus payments received by Michael Sawtell in the four fiscal quarters immediately preceding the date of separation, payable, over one year, in accordance with the schedule set forth in the separation and general release agreement. The total amount of severance was expensed in the second quarter of 2014 of which, $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.


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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 Local's 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;


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• lead generation;

• banner ads;

• subscription advertiser listings;

• domain sales and services; and

• web hosting services.

Operating Expenses

Cost of Revenues

Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards). 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


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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.


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Goodwill and Other Intangible Assets

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. The 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 )%


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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             Six months             Three months             Six months             Three months                Six months
                                   ended June 30,          ended June 30,          ended June 30,          ended June 30,          ended June 30,             ended June 30,
Revenue per thousand
visitors ("RKV")                  $            204        $            197        $            199        $            208                      2.2 %                    -5.3 %
. . .
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