The Company and Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2013 |
Earnings Per Share [Abstract] | ' |
Nature of Operations | ' |
Nature of Operations |
Local Corporation (the “Company”) is a leading technology and advertising company that provides its search results to consumers who are searching online for local businesses, products and services. The Company’s search results consist primarily of local business listings and product listings that it aggregates, index, normalize 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 over 1,600 other websites that rely on its search syndication services to provide local search results to their own users (“Network”). The Company also provided digital media services to its existing small and medium sized businesses (“SMBs”) acquired through its legacy direct sales business and continue to seek channel sales opportunities for these products (“Business Solutions”). 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 Consumer Properties, the Company is able to reach users that its direct advertisers and advertising partners desire to reach. |
In July 2013, the Company sold all the assets of its Spreebird business. The Spreebird business operations are included in discontinued operations in the accompanying consolidated financial statements. |
Principles of Consolidation | ' |
Principles of Consolidation |
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Krillion, Inc. and Screamin Media Group, Inc. (“SMG”). All intercompany balances and transactions were eliminated. |
Certain comparative prior year amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income (loss). |
Discontinued Operations | ' |
Discontinued Operations |
As a result of the Company’s decision to sell all of the assets and liabilities relating to its Rovion business and all of the assets of its Spreebird business, the Company has reclassified and presented all related historical financial information as it relates to these assets and liabilities as “assets held for sale” in the accompanying consolidated balance sheets and “discontinued operations” in the accompanying 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). The sale of the Spreebird business assets closed on July 26, 2013, for a minimum consideration of $210,000. The Rovion business was sold on October 19, 2012, for $3.9 million. |
Use of Estimates | ' |
Use of Estimates |
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for allowance for doubtful accounts, reserve for long term receivable, impairment of goodwill and intangible assets, capitalization of web development cost, tax provision and share-based compensation, among others. |
Revenue Recognition | ' |
Revenue Recognition |
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, the fulfillment of subscription listing obligations, or the delivery of its SMB products to its customers or those of its channel partners. The Company enters into contracts to distribute sponsored listings and banner advertisements with direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at any time. The Company’s indirect advertisers provide it 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 Consumer Properties. 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 |
Cost of revenues consists of traffic acquisition costs, revenue sharing payments that the Company makes to its network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to its O&O websites, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing paid-search services, and payment processing fees (credit cards and fees for Local Exchange Carrier (“LEC”) billings). The Company advertises on large search engine websites such as Google, Yahoo, and Microsoft/Bing, as well as other search engine websites, by bidding on certain keywords the Company believes will drive traffic to its O&O websites. During the year ended December 31, 2013, approximately 57% of overall traffic was purchased from other search engine websites. During the year ended December 31, 2013, advertising costs to drive consumers to Local.com website were $35.9 million of which $27.4 million and $6.1 million was attributable to Google and Yahoo, respectively. During the year ended December 31, 2012, approximately 60% of overall traffic was purchased from other search engine websites. During the year ended December 31, 2012, advertising costs to drive consumers to Local.com website were $57.3 million of which $39.7 million and $15.4 million was attributable to Google and Yahoo, respectively. |
Research and Development | ' |
Research and Development |
Research and development expenses consist of the Company’s expenses incurred in the development, creation and enhancement of its paid-search services. Research and development expenses include salaries and other costs of employment of the Company’s development staff as well as outside contractors and the amortization of capitalized website development costs. |
Stock Based Compensation | ' |
Stock based compensation |
The cost of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the financial statements based on the estimated fair value of the awards. That cost is recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period). |
Calculating stock-based compensation expense requires the input of highly subjective assumptions, including the expected term of the stock options, stock price volatility, pre-vesting forfeiture rate of stock awards and in the case of restricted stock units, the fair market values of the underlying stock on the dates of grant. The Company estimates the expected life of options granted based on historical exercise patterns, which it believes are representative of future behavior. The Company estimates the volatility of common stock on the date of grant based on the historical market activity of the stock. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, stock-based compensation expense could be materially different in the future. In addition, The Company is required to estimate the expected pre-vesting award forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of stock-based awards that are granted and cancelled before vesting. If actual forfeiture rate is materially different from the original estimate, the stock-based compensation expense could be significantly different from what the Company recorded in the current period. Changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the effect of adjusting the forfeiture rate for all current and previously recognized expense for unvested awards is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which will result in an increase to the expense recognized in the financial statements. See Note 12—Stockholders’ Equity for additional information. |
Sales Commissions | ' |
Sales Commissions |
Sales commissions are earned by the Company’s applicable salesperson when revenue from an advertiser is recognized, subject to certain criteria. The Company records sales commission expense in the period the sales commission is earned and the associated revenue is recorded. Adjustments or chargebacks are made for any credits issued to customers or any amounts deemed to be uncollectible. |
Refunds | ' |
Refunds |
Refunds of any remaining deposits paid by direct advertisers are available to those advertisers upon written request submitted between 30 and 90 days from the date of deposit. |
Income Taxes | ' |
Income Taxes |
The Company recognizes deferred income tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements and tax returns. Deferred income tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that deferred income tax assets will not be realized. |
Fair Value of Financial Instruments | ' |
Fair Value of Financial Instruments |
The Company’s financial instruments consist principally of accounts receivable, long and short term notes 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 long term note receivable and 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 method, a “Level 3” input, based on the quoted price of common stock, volatility based on the historical market activity of the Company’s stock, the expected life based on the remaining contractual term of the conversion option and warrants and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ and conversion options’ contractual life. See Note 14—Fair value measurement of assets and liabilities for additional information. |
Accounts Receivable | ' |
Accounts Receivable |
The Company’s accounts receivable are due primarily from customers located in the United States and are typically unsecured. The Company’s management estimates the losses that may result from that portion of its accounts receivable that may not be collectible as a result of the inability of its customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If the Company believes that its customers’ financial condition has deteriorated such that it impairs their ability to make payments, additional allowances may be required. The Company reviews past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured. |
During 2013 and 2012, the Company reserved $1.7 million and $1.4 million, respectively, of its long-term receivable. The reserves were recorded in general and administrative expenses in the accompanying consolidated statements of operations. The long-term receivable relates to the Company’s remaining LEC receivables. The Company has determined that the collection of the remaining LEC receivable is doubtful, and therefore the Company has recorded additional bad debt expense to fully reserve for the remaining balance as of December 31, 2013. |
Certain Risks and Concentrations | ' |
Certain Risks and Concentrations |
The Company’s revenues are principally derived in the U.S. from online advertising, the market for which is highly competitive and rapidly changing. Significant changes in this industry or changes in customer buying or advertiser spending behavior could adversely affect operating results. |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable, long term receivable, notes receivable and revolving line of credit. Accounts receivable are typically unsecured and are derived from revenues earned from customers located in the U.S. Most advertisers and network partners are in the Internet industry. The Company performs ongoing evaluations to determine customer credit and the Company limits the amount of credit it extends, but generally the Company does not require collateral from its customers. The Company maintains reserves for estimated credit losses and these losses have generally been within our expectations. The Company has two customers that each represents more than 10% of total revenue. |
As of December 31, 2013 and 2012, two customers represented 60% and 61%, respectively, of the Company’s total accounts receivable. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so. |
The Company is exposed to the risk of fluctuation in interest rates on the revolving line of credit. During 2013, the Company did not use interest rate swaps or other types of derivative financial instruments to hedge interest rate risk. See Note 8 – Credit Facilities. |
Property and Equipment | ' |
Property and Equipment |
Property and equipment are stated at cost, net of accumulated depreciation and amortization. |
Repairs and maintenance expenditures that do not significantly add to the value of the property, or prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property and equipment are included in the operating results of the related period. |
Website Development Costs and Computer Software Developed for Internal Use | ' |
Website Development Costs and Computer Software Developed for Internal Use |
U.S. GAAP regarding accounting for the costs of computer software developed or obtained for internal use requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP regarding accounting for website development costs requires that costs incurred in the preliminary project and operating stage of website development be expensed as incurred and that certain costs incurred in the development stage of website development be capitalized and amortized over the estimated useful life. Capitalized website development costs are included in property and equipment, net. |
Intangible Assets | ' |
Intangible Assets |
Intangible assets are amortized over their estimated useful lives, generally on a straight-line basis over two to four years. In 2012, the Company accelerated the amortization of certain small business subscriber relationships as the expected useful lives of such small business subscriber relationship was truncated due to changes in the Company’s ability to bill such small business subscribers. |
Impairment of Long-lived Assets | ' |
Impairment of Long-lived Assets |
The Company accounts for the impairment and disposition of definite life intangible and long-lived assets in accordance with U.S. GAAP guidance on accounting for the impairment or disposal of long-lived assets. In accordance with the guidance, such assets to be held are reviewed for events, or changes in circumstances, which indicate that their carrying value may not be recoverable. The Company periodically reviews related carrying values to determine whether or not impairment to such value has occurred. During the second quarter of fiscal 2013, management recorded impairment charges for certain capitalized software assets and intangible assets with a book value of $300,000 and $182,000, respectively, related to its Spreebird business unit. The impairment charges were due to the Company’s sale of the assets of its Spreebird business and the cessation of its Spreebird business operations. Such impairment charges are included in discontinued operations in the accompanying consolidated statements of operations. |
Goodwill and Other Intangible Assets | ' |
Goodwill and Other Intangible Assets |
Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. . The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. For reporting units where the Company performs the two-step process, the first step requires a comparison of the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference. |
The Company performs annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible assets with indefinite lives, the Company either performs a qualitative assessment or compares the fair value of related assets to the carrying value to determine if there is impairment. The Company’s indefinite lived intangible assets consist of domain names for which the fair value is determined by using a third party valuation site which calculates the value of domain names using internal algorithms. For other intangible assets with definite lives, the Company compares future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment. |
With the Company’s decision to sell the assets of its Spreebird business unit, the carrying value of the goodwill associated with the Spreebird business was determined to be fully impaired. As a result, the Company recorded an impairment charge of approximately $3.1 million during the second quarter of fiscal 2013, which included goodwill of $2.6 million. Such impairment charge is included in discontinued operations in the accompanying consolidated statements of operations. |
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The Company performed its annual impairment analysis as of December 31, 2013, and determined that the estimated fair value of the reporting unit exceeded its carrying value and therefore no impairment existed. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets. |
Deferred Revenue | ' |
Deferred Revenue |
Deferred revenue represents deposits from advertising partners and the undelivered component of revenue relating to the sale of domains and services accounted for under the provisions of the revenue recognition topic that addresses multiple-deliverable revenue arrangements. Revenue is recognized in subsequent periods when earned. |
Conversion Option and Warrant Liability | ' |
Conversion Option and Warrant Liability |
U.S. GAAP guidance regarding accounting for derivatives requires that certain of the Company’s warrants and the conversion option relating to the Company’s convertible notes be accounted for as derivative instruments and that the Company records the conversion option and warrant liability at fair value and recognize the change in valuation in its statement of operations each reporting period. Determining the liabilities to be recorded requires the Company to develop estimates to be used in calculating the fair value of the derivatives. The Company calculates the fair values using the Black-Scholes valuation model. |
The use of the Black-Scholes model requires the Company to make estimates of the following assumptions: |
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| • | | Expected volatility—The estimated stock price volatility is derived based upon the Company’s actual historic stock prices over the contractual life of the derivatives, which represents the Company’s best estimate of expected volatility. |
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| • | | Risk-free interest rate—The Company uses the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the derivatives’ contractual life assumption as the risk-free interest rate. |
The Company is exposed to the risk of changes in the fair value of the derivative liabilities. The fair value of these derivative liabilities is primarily determined by fluctuations in the Company’s stock price. As the Company’s stock price increases or decreases, the fair value of these derivative liabilities increases or decreases, resulting in a corresponding current period loss or gain to be recognized. |
Recent Accounting Pronouncements | ' |
Recent Accounting Pronouncements |
In July 2013, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard update on the financial statement presentation of unrecognized tax benefits. The new guidance provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective for the Company on January 1, 2014 and it will be applied prospectively to unrecognized tax benefits that exist at the effective date with retrospective application permitted. The Company is currently assessing the impact of this new guidance. |
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. |
Operating Segments | ' |
The Company manages its business functionally and has historically had two reportable operating segments: Paid Search and Daily Deals. Paid Search consists of the Company’s online businesses that collectively reach customers with a variety of local online advertising products and web hosting. The Company’s Daily Deals segment consisted of the Company’s 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. |