x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Delaware
|
20-0498783
|
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
|
21700 Oxnard Street, Suite 1600
Woodland Hills, California
|
91367
|
(Address of principal executive offices)
|
(Zip Code)
|
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
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Non-accelerated filer
|
x (Do not check if a smaller reporting company)
|
Smaller reporting company
|
¨
|
Title of Class
|
Number of Shares Outstanding on November 3, 2011
|
|
Common Stock, $0.00001 par value
|
29,392,406
|
Page
|
|||
Part I.
|
Financial Information
|
||
Item 1.
|
Condensed Consolidated Financial Statements (unaudited)
|
||
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
|
3
|
||
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010
|
4
|
||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010
|
5
|
||
Notes to the Condensed Consolidated Financial Statements
|
6
|
||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
15
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
29
|
|
Item 4.
|
Controls and Procedures
|
29
|
|
Part II.
|
Other Information
|
||
Item 1.
|
Legal Proceedings
|
30
|
|
Item 1A.
|
Risk Factors
|
30
|
|
Item 6.
|
Exhibits
|
30
|
|
Signatures
|
31
|
Item 1.
|
FINANCIAL STATEMENTS
|
September 30,
|
December 31,
|
|||||||
2011
|
2010
|
|||||||
Assets
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 93,593 | $ | 79,906 | ||||
Short-term investments
|
627 | 8,208 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $376 and $373 at September 30, 2011
and December 31, 2010, respectively
|
4,052 | 3,295 | ||||||
Prepaid expenses and other current assets
|
2,097 | 2,372 | ||||||
Assets of discontinued operations, net
|
— | 2,026 | ||||||
Total current assets
|
100,369 | 95,807 | ||||||
Property and equipment, net
|
8,854 | 6,531 | ||||||
Capitalized software development costs, net
|
11,139 | 8,829 | ||||||
Restricted certificates of deposit
|
964 | 801 | ||||||
Intangible assets, net
|
2,503 | 2,963 | ||||||
Other assets
|
1,159 | 1,339 | ||||||
Goodwill
|
41,766 | 34,118 | ||||||
Total assets
|
$ | 166,754 | $ | 150,388 | ||||
Liabilities and Stockholders’ Equity
|
||||||||
Current Liabilities:
|
||||||||
Accounts payable
|
$ | 28,307 | $ | 27,471 | ||||
Accrued expenses
|
17,649 | 14,042 | ||||||
Deferred payment obligations
|
1,939 | 530 | ||||||
Deferred revenue and other current liabilities
|
28,630 | 24,656 | ||||||
Total current liabilities
|
76,525 | 66,699 | ||||||
Deferred rent and deferred payment obligations
|
2,461 | 1,673 | ||||||
Total liabilities
|
78,986 | 68,372 | ||||||
Commitments and contingencies (Note 6)
|
||||||||
Stockholders’ Equity:
|
||||||||
Common stock, $0.00001 par value—140,000 shares authorized; 29,394 and 28,165 shares issued and
outstanding at September 30, 2011 and December 31, 2010, respectively
|
— | — | ||||||
Receivable from stockholder
|
(87 | ) |
(87
|
) | ||||
Additional paid-in capital
|
113,209 | 98,140 | ||||||
Accumulated deficit
|
(25,041 | ) |
(16,044
|
) | ||||
Accumulated other comprehensive income (loss)
|
(313 | ) | 7 | |||||
Total stockholders’ equity
|
87,768 | 82,016 | ||||||
Total liabilities and stockholders’ equity
|
$ | 166,754 | $ | 150,388 |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Revenue
|
$ | 98,629 | $ | 77,121 | $ | 275,439 | $ | 211,109 | ||||||||
Cost of revenue
|
50,265 | 42,172 | 141,363 | 115,458 | ||||||||||||
Operating expenses:
|
||||||||||||||||
Selling and marketing
|
36,769 | 28,343 | 103,457 | 78,046 | ||||||||||||
Product and technology
|
4,257 | 2,623 | 10,800 | 7,034 | ||||||||||||
General and administrative
|
8,821 | 5,970 | 24,470 | 16,940 | ||||||||||||
Total operating expenses
|
49,847 | 36,936 | 138,727 | 102,020 | ||||||||||||
Loss from continuing operations
|
(1,483 | ) | (1,987 | ) | (4,651 | ) | (6,369 | ) | ||||||||
Other income, net
|
280 | 155 | 697 | 410 | ||||||||||||
Loss from continuing operations before provision (benefit)
for income taxes
|
(1,203 | ) | (1,832 | ) | (3,954 | ) | (5,959 | ) | ||||||||
Provision (benefit) for income taxes
|
126 | 83 | 323 | (462 | ) | |||||||||||
Loss from continuing operations, net of income taxes
|
(1,329 | ) | (1,915 | ) | (4,277 | ) | (5,497 | ) | ||||||||
Loss from discontinued operations, net of income taxes
|
(3,272 | ) | (956 | ) | (4,720 | ) | (2,022 | ) | ||||||||
Net loss
|
$ | (4,601 | ) | $ | (2,871 | ) | $ | (8,997 | ) | $ | (7,519 | ) | ||||
Net loss per share from continuing operations, basic and diluted
|
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.32 | ) | ||||
Net loss per share from discontinued operations, basic and diluted
|
(0.11 | ) | (0.03 | ) | (0.16 | ) | (0.12 | ) | ||||||||
Net loss per share, basic and diluted
|
$ | (0.16 | ) | $ | (0.10 | ) | $ | (0.31 | ) | $ | (0.44 | ) | ||||
Weighted average common shares used in computation of net
loss per share, basic and diluted
|
29,302 | 27,848 | 28,936 | 17,157 | ||||||||||||
The following earnings per share information is presented as if all
preferred shares were converted into common stock as of the
beginning of the period presented
|
||||||||||||||||
Net loss per share, as if converted:
|
||||||||||||||||
Net loss per share from continuing operations, basic and diluted
|
$ | (0.05 | ) | $ | (0.07 | ) | $ | (0.15 | ) | $ | (0.21 | ) | ||||
Net loss per share from discontinued operations, basic and diluted
|
(0.11 | ) | (0.03 | ) | (0.16 | ) | (0.08 | ) | ||||||||
Net loss per share, basic and diluted
|
$ | (0.16 | ) | $ | (0.10 | ) | $ | (0.31 | ) | $ | (0.29 | ) | ||||
Weighted average common shares used in computation of net loss
per share, as if converted:
|
||||||||||||||||
Basic and diluted
|
29,302 | 27,848 | 28,936 | 25,728 |
Nine Months Ended September 30,
|
||||||||
2011
|
2010
|
|||||||
Cash flow from operating activities:
|
||||||||
Net loss from continuing operations
|
$ | (4,277 | ) | $ | (5,497 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
7,635 | 4,354 | ||||||
Stock-based compensation, net
|
6,316 | 3,966 | ||||||
Provision for doubtful accounts
|
180 | 234 | ||||||
Impairment of intangible assets
|
764 | — | ||||||
Provision for deferred income taxes
|
— | (702 | ) | |||||
Accrual of interest on deferred payment obligations
|
25 | (102 | ) | |||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(903 | ) | (318 | ) | ||||
Prepaid expenses and other current assets
|
273 | (673 | ) | |||||
Other assets
|
163 | (368 | ) | |||||
Accounts payable and accrued expenses
|
4,734 | (50 | ) | |||||
Deferred revenue and deferred payment obligations
|
4,984 | 7,008 | ||||||
Net cash provided by operating activities, continuing operations
|
19,894 | 7,852 | ||||||
Net cash used for operating activities, discontinued operations
|
(1,307 | ) | (1,683 | ) | ||||
Net cash provided by operating activities
|
18,587 | 6,169 | ||||||
Cash flow from investing activities:
|
||||||||
Additions to property, equipment and software
|
(9,547 | ) | (5,899 | ) | ||||
Purchase of DealOn, net of acquired cash
|
(5,793 | ) | — | |||||
Purchase of SMB:LIVE, net of acquired cash
|
— | (2,759 | ) | |||||
Payment of deferred obligations
|
(417 | ) | (5,853 | ) | ||||
Proceeds from maturity of certificates of deposits
|
7,666 | — | ||||||
Purchase of restricted certificates of deposit
|
(195 | ) | 371 | |||||
Purchase of short-term investments
|
(85 | ) | (136 | ) | ||||
Net cash used in investing activities, continuing operations
|
(8,371 | ) | (14,276 | ) | ||||
Net cash used in investing activities, discontinued operations
|
(1,244 | ) | (1,033 | ) | ||||
Net cash used in investing activities
|
(9,615 | ) | (15,309 | ) | ||||
Cash flow from financing activities:
|
||||||||
Proceeds from exercise of stock options
|
5,515 | 428 | ||||||
Proceeds from initial public offering
|
— | 47,648 | ||||||
Deferred offering costs
|
— | (4,620 | ) | |||||
Net cash provided by financing activities
|
5,515 | 43,456 | ||||||
Effect of exchange rate changes on cash
|
(800 | ) | 460 | |||||
Net change in cash and cash equivalents
|
13,687 | 34,776 | ||||||
Cash and cash equivalents—beginning of period
|
79,906 | 35,379 | ||||||
Cash and cash equivalents—end of period
|
$ | 93,593 | $ | 70,155 | ||||
Supplemental disclosure of other cash flow information:
|
||||||||
Cash paid for interest
|
$ | — | $ | 184 | ||||
Cash paid for income taxes
|
$ | 150 | $ | 114 | ||||
Supplemental disclosure of non-cash investing and financing activities:
|
||||||||
Capitalized software development costs resulting from stock-based compensation
and deferred payment obligations
|
$ | 1,237 | $ | 1,777 | ||||
Deferred payment obligations
|
$ | 1,878 | $ | 639 |
•
|
persuasive evidence of an arrangement exists;
|
|
•
|
services have been performed;
|
•
|
the selling price is fixed or determinable; and
|
|
•
|
collectability is reasonably assured.
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Convertible preferred stock
|
— | — | — | 8,571 | ||||||||||||
Restricted stock subject to repurchase
|
52 | 365 | 87 | 294 | ||||||||||||
SMB:LIVE acquisition—deferred stock consideration
|
56 | 133 | 194 | 115 | ||||||||||||
Stock options and warrant
|
1,356 | 1,507 | 2,157 | 1,589 | ||||||||||||
1,464 | 2,005 | 2,438 | 10,569 |
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
|
The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value (in thousands):
|
Basis of Fair Value Measurement
|
||||||||||||||||
Balance at
September 30,
2011
|
Quoted Prices in
Active Markets
for Identical
Items
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Cash and cash equivalents
|
$ | 93,593 | $ | 93,593 | $ | — | $ | — | ||||||||
Certificates of deposit
|
$ | 1,591 | $ | 1,591 | $ | — | $ | — |
Basis of Fair Value Measurement
|
||||||||||||||||
Balance at
December 31,
2010
|
Quoted Prices in
Active Markets
for Identical
Items
(Level 1)
|
Significant Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
|||||||||||||
Cash and cash equivalents
|
$ | 79,906 | $ | 79,906 | $ | — | $ | — | ||||||||
Certificates of deposit
|
$ | 9,009 | $ | 9,009 | $ | — | $ | — |
Year Ended December 31,
|
||||
2011 (3 months)
|
$ | 383 | ||
2012
|
1,302 | |||
2013
|
128 | |||
Total
|
$ | 1,813 |
Deferred
Cash
Consideration
|
Deferred
Stock
Consideration
|
Total
|
||||||||||
February 2012
|
$ | 734 | $ | 243 | $ | 977 | ||||||
August 2012
|
367 | 122 | 489 | |||||||||
February 2013
|
367 | 122 | 489 | |||||||||
Total Deferred Consideration
|
$ | 1,468 | $ | 487 | $ | 1,955 |
Year Ended December 31,
|
||||
2011 (3 months)
|
162 | |||
2012
|
274 | |||
2013
|
229 | |||
2014
|
25 | |||
Total
|
$ | 690 |
September 30,
2011
|
December 31,
2010
|
|||||||
Capitalized software development costs
|
$ | 20,709 | $ | 14,839 | ||||
Accumulated amortization
|
(9,570 | ) | (6,010 | ) | ||||
Capitalized software development costs, net
|
$ | 11,139 | $ | 8,829 |
All Options
|
Vested Options
|
Unvested Options
|
||||||||||||||||||||||
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
Outstanding at December 31, 2010
|
6,235 | $ | 9.88 | 3,247 | $ | 7.58 | 2,988 | $ | 12.45 | |||||||||||||||
Granted
|
1,466 | 21.61 | 1 | 20.98 | 1,465 | 21.61 | ||||||||||||||||||
Options vesting
|
— | — | 1,033 | 11.66 | (1,033 | ) | 11.66 | |||||||||||||||||
Exercised
|
(932 | ) | 5.87 | (932 | ) | 5.87 | — | — | ||||||||||||||||
Forfeited
|
(270 | ) | 14.53 | (4 | ) | 10.03 | (266 | ) | 14.59 | |||||||||||||||
Outstanding at September 30, 2011
|
6,499 | $ | 12.90 | 3,345 | $ | 9.32 | 3,154 | $ | 16.85 |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Expected dividend yield
|
0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Risk-free interest rate
|
1.12 | % | 1.70 | % | 2.04 | % | 4.75 | % | ||||||||
Expected life (in years)
|
4.75 | 4.75 | 4.75 | 4.75 | ||||||||||||
Expected volatility
|
57 | % | 57 | % | 57 | % | 57 | % |
Restricted
Stock Units
|
Vested
|
Unvested
|
||||||||||
Outstanding at December 31, 2010
|
2,662 | 2,535 | 127 | |||||||||
Issuance of restricted stock units
|
90 | 7 | 83 | |||||||||
Cancelled
|
(4 | ) | — | (4 | ) | |||||||
Vested
|
— | 27 | (27 | ) | ||||||||
Outstanding at September 30, 2011
|
2,748 | 2,569 | 179 |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Stock-based compensation
|
$ | 2,574 | $ | 2,122 | $ | 7,409 | $ | 5,345 | ||||||||
Less: Capitalized stock-based compensation
|
243 | 598 | 1,093 | 1,379 | ||||||||||||
Stock-based compensation expense, net
|
$ | 2,331 | $ | 1,524 | $ | 6,316 | $ | 3,966 |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Stock-based compensation expense, net
|
||||||||||||||||
Cost of revenue
|
$ | 60 | $ | 51 | $ | 176 | $ | 212 | ||||||||
Selling and marketing
|
325 | 318 | 1,068 | 757 | ||||||||||||
Product and technology
|
421 | 284 | 976 | 766 | ||||||||||||
General and administrative
|
1,525 | 871 | 4,096 | 2,231 | ||||||||||||
$ | 2,331 | $ | 1,524 | $ | 6,316 | $ | 3,966 |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Revenue:
|
||||||||||||||||
North America
|
$ | 75,068 | $ | 63,726 | $ | 214,002 | $ | 176,834 | ||||||||
International
|
23,561 | 13,395 | 61,437 | 34,275 | ||||||||||||
$ | 98,629 | $ | 77,121 | $ | 275,439 | $ | 211,109 | |||||||||
September 30,
2011
|
December 31,
2010
|
|||||||||||||||
Long-lived assets (excluding patents and other intangibles):
|
||||||||||||||||
North America
|
$ | 7,900 | $ | 6,800 | ||||||||||||
International
|
3,045 | 1,649 | ||||||||||||||
$ | 10,945 | $ | 8,449 |
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
•
|
Revenue recognition
|
|
•
|
Software development costs
|
|
•
|
Income taxes
|
|
•
|
Goodwill and intangible assets
|
|
•
|
Stock-based compensation
|
Grant Dates
|
Number of Shares
Underlying
Options
|
Exercise Price
Per Share
|
Estimated Fair
Value Per
Underlying
Share as of
Grant Date
|
Intrinsic Value
Per Share at Date
of Grant
|
||||||||||||
February 2011
|
244,650 | $ | 20.98 | $ | 20.98 | $ | — | |||||||||
February 2011
|
700,000 | $ | 22.46 | $ | 20.98 | $ | — | |||||||||
April 2011
|
236,100 | $ | 25.51 | $ | 25.51 | $ | — | |||||||||
June 2011
|
56,045 | $ | 17.32 | $ | 17.32 | $ | — | |||||||||
August 2011
|
229,650 | $ | 16.70 | $ | 16.70 | $ | — |
Expected dividend yield
|
0 | % | ||
Risk free interest rate
|
2.04 | % | ||
Expected life, in years
|
4.75 | |||
Expected volatility
|
57 | % |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
(in thousands) |
2011
|
2010
|
2011
|
2010
|
||||||||||||
Revenue
|
$ | 98,629 | $ | 77,121 | $ | 275,439 | $ | 211,109 | ||||||||
Cost of revenue (1)
|
50,265 | 42,172 | 141,363 | 115,458 | ||||||||||||
Operating expenses:
|
||||||||||||||||
Selling and marketing (1)
|
36,769 | 28,343 | 103,457 | 78,046 | ||||||||||||
Product and technology (1)
|
4,257 | 2,623 | 10,800 | 7,034 | ||||||||||||
General and administrative (1)
|
8,821 | 5,970 | 24,470 | 16,940 | ||||||||||||
Total operating expenses
|
49,847 | 36,936 | 138,727 | 102,020 | ||||||||||||
Loss from continuing operations
|
(1,483 | ) | (1,987 | ) | (4,651 | ) | (6,369 | ) | ||||||||
Other income, net
|
280 | 155 | 697 | 410 | ||||||||||||
Loss from continuing operations before provision (benefit) for income taxes
|
(1,203 | ) | (1,832 | ) | (3,954 | ) | (5,959 | ) | ||||||||
Provision (benefit) for income taxes
|
126 | 83 | 323 | (462 | ) | |||||||||||
Loss from continuing operations, net of income taxes
|
(1,329 | ) | (1,915 | ) | (4,277 | ) | (5,497 | ) | ||||||||
Loss from discontinued operations, net of income taxes
|
(3,272 | ) | (956 | ) | (4,720 | ) | (2,022 | ) | ||||||||
Net loss
|
$ | (4,601 | ) | $ | (2,871 | ) | $ | (8,997 | ) | $ | (7,519 | ) |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Stock-based compensation:
|
||||||||||||||||
Cost of revenue
|
$ | 60 | $ | 51 | $ | 176 | $ | 212 | ||||||||
Selling and marketing
|
325 | 318 | 1,068 | 757 | ||||||||||||
Product and technology
|
421 | 284 | 976 | 766 | ||||||||||||
General and administrative
|
1,525 | 871 | 4,096 | 2,231 | ||||||||||||
$ | 2,331 | $ | 1,524 | $ | 6,316 | $ | 3,966 | |||||||||
Depreciation and amortization:
|
||||||||||||||||
Cost of revenue
|
$ | 194 | $ | 97 | $ | 551 | $ | 267 | ||||||||
Selling and marketing
|
413 | 257 | 1,080 | 745 | ||||||||||||
Product and technology
|
1,862 | 1,084 | 5,033 | 2,555 | ||||||||||||
General and administrative
|
359 | 278 | 971 | 787 | ||||||||||||
$ | 2,828 | $ | 1,716 | $ | 7,635 | $ | 4,354 |
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|||||||||||||||||||||||
2011
|
2010
|
2011-2010
% Change
|
2011
|
2010
|
2011-2010
% Change
|
|||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||
Direct Local
|
$ | 76,814 | $ | 57,245 | 34.2 | % | $ | 213,168 | $ | 156,816 | 35.9 | % | ||||||||||||
National Brands, Agencies and Resellers
|
21,815 | 19,876 | 9.8 | % | 62,271 | 54,293 | 14.7 | % | ||||||||||||||||
Total revenue
|
$ | 98,629 | $ | 77,121 | 27.9 | % | $ | 275,439 | $ | 211,109 | 30.5 | % | ||||||||||||
At period end:
|
||||||||||||||||||||||||
Number of IMCs:
|
||||||||||||||||||||||||
Upperclassmen
|
344 | 264 | 30.3 | % | ||||||||||||||||||||
Underclassmen
|
464 | 432 | 7.4 | % | ||||||||||||||||||||
Total
|
808 | 696 | 16.1 | % | ||||||||||||||||||||
Active Advertisers (1)
|
18,700 | 17,100 | 9.4 | % | ||||||||||||||||||||
Active Campaigns (2)
|
27,000 | 22,500 | 20.0 | % |
(1)
|
Active Advertisers is a number we calculate to approximate the number of clients directly served through our Direct Local channel as well as clients served through our National Brands, Agencies and Resellers channel, but excludes advertisers sold by our dedicated deal marketing consultants. We calculate Active Advertisers by adjusting the number of Active Campaigns to combine clients with more than one Active Campaign as a single Active Advertiser. Clients with more than one location are generally reflected as multiple Active Advertisers. Because this number includes clients served through the National Brands, Agencies and Resellers channel, Active Advertisers includes entities with which we do not have a direct client relationship. These numbers reflect the exclusion of the Active Advertisers sold by our dedicated deal marketing consultants due to the elimination of those positions. The second quarter of 2011 was the only quarter in which we included advertisers sold by our dedicated deal marketing consultants in the counts for Active Advertisers. If during the second quarter of 2011 the numbers of Active Advertisers was calculated in the foregoing manner, it would have been 18,200. Numbers are rounded to the nearest hundred.
|
(2)
|
Active Campaigns is a number we calculate to approximate the number of individual products or services we are managing under contract for Active Advertisers, but excludes campaigns sold by our dedicated deal marketing consultants. For example, if we were performing both ReachSearch and ReachDisplay campaigns for a client, we consider that two Active Campaigns. Similarly, if a client purchased ReachSearch campaigns for two different products or purposes, we consider that two Active Campaigns. These numbers reflect the exclusion of the Active Campaigns sold by our dedicated deal marketing consultants due to the elimination of those positions. The second quarter of 2011 was the only quarter in which we included campaigns sold by our dedicated deal marketing consultants in the counts for Active Campaigns. If during the second quarter of 2011 the numbers of Active Campaigns was calculated in the foregoing manner, it would have been 25,500. Numbers are rounded to the nearest hundred.
|
Three Months Ended
September 30,
|
2011-2010
|
Nine Months Ended
September 30,
|
2011-2010
|
|||||||||||||||||||||
2011
|
2010
|
% Change
|
2011
|
2010
|
% Change
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Cost of revenue
|
$ | 50,265 | $ | 42,172 | 19.2 | % | $ | 141,363 | $ | 115,458 | 22.4 | % | ||||||||||||
As a percentage of revenue:
|
51.0 | % | 54.7 | % | 51.3 | % | 54.7 | % |
Three Months Ended
September 30,
|
2011-2010
|
Nine Months Ended
September 30,
|
2011-2010
|
|||||||||||||||||||||
2011
|
2010
|
% Change
|
2011
|
2010
|
% Change
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Salaries, benefits and other costs
|
$ | 26,086 | $ | 19,246 | 35.5 | % | $ | 73,047 | $ | 53,174 | 37.4 | % | ||||||||||||
Commission expense
|
10,683 | 9,097 | 17.4 | % | 30,410 | 24,872 | 22.3 | % | ||||||||||||||||
Total selling and marketing
|
$ | 36,769 | $ | 28,343 | 29.7 | % | $ | 103,457 | $ | 78,046 | 32.6 | % | ||||||||||||
Underclassmen Expense included above, excluding commissions (1)
|
$ | 11,591 | $ | 9,540 | 21.5 | % | $ | 32,714 | $ | 26,025 | 25.7 | % | ||||||||||||
As a percentage of revenue:
|
||||||||||||||||||||||||
Salaries, benefits and other costs
|
26.4 | % | 25.0 | % | 26.5 | % | 25.2 | % | ||||||||||||||||
Commission expense
|
10.8 | % | 11.8 | % | 11.0 | % | 11.8 | % | ||||||||||||||||
Total selling and marketing
|
37.3 | % | 36.8 | % | 37.6 | % | 37.0 | % |
(1)
|
See “Non-GAAP Financial Measures” for our definition of Underclassmen Expense.
|
Three Months Ended
September 30,
|
2011-2010
% Change
|
Nine Months Ended
September 30,
|
2011-2010
% Change
|
|||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Product and technology expenses
|
$ | 4,257 | $ | 2,623 | 62.3 | % | $ | 10,800 | $ | 7,034 | 53.4 | % | ||||||||||||
Capitalized software development costs
from product and technology resources
|
1,682 | 1,889 | (11.0 | )% | 5,690 | 5,038 | 12.9 | % | ||||||||||||||||
Total product and technology expenses and
capitalized costs
|
$ | 5,939 | $ | 4,512 | 31.6 | % | $ | 16,490 | $ | 12,072 | 36.6 | % | ||||||||||||
As a percentage of revenue:
|
||||||||||||||||||||||||
Product and technology expenses costs
|
4.3 | % | 3.4 | % | 3.9 | % | 3.3 | % | ||||||||||||||||
Capitalized software development costs from
product and technology resources
|
1.7 | % | 2.5 | % | 2.1 | % | 2.4 | % | ||||||||||||||||
Total product and technology costs expensed
and capitalized
|
6.0 | % | 5.9 | % | 6.0 | % | 5.7 | % |
Three Months Ended
September 30,
|
2011-2010
% Change
|
Nine Months Ended
September 30,
|
2011-2010
% Change
|
|||||||||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
General and administrative
|
$ | 8,821 | $ | 5,970 | 47.8 | % | $ | 24,470 | $ | 16,940 | 44.4 | % | ||||||||||||
As a percentage of revenue:
|
8.9 | % | 7.7 | % | 8.9 | % | 8.0 | % |
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Adjusted EBITDA (1)
|
$ | 4,530 | $ | 1,286 | $ | 10,674 | $ | 2,493 | ||||||||
Underclassmen Expense (2)
|
$ | 11,591 | $ | 9,540 | $ | 32,714 | $ | 26,025 |
(1)
|
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing operations before interest, income taxes, depreciation and amortization expenses, excluding, when applicable, stock-based compensation, the effects of accounting for business combinations (including any impairment of acquired intangibles and, in the case of the acquisition of SMB:LIVE, the deferred cash consideration), and amounts included in other non-operating income or expense. This definition excludes the effect of Bizzy as a discontinued operation and the impairment of certain intangibles acquired in the DealOn acquisition.
|
(2)
|
Underclassmen Expense. We define Underclassmen Expense as our investment in Underclassmen, which is comprised of the selling and marketing expenses we allocate to Underclassmen during a reporting period. The amount includes the direct salaries and allocated benefits of the Underclassmen (excluding commissions), training and sales organization expenses including depreciation allocated based on relative headcount and marketing expenses allocated based on relative revenue. While we believe that Underclassmen Expense provides useful information regarding our approximated investment in Underclassmen, the methodology we use to arrive at our estimated Underclassmen Expense was developed internally by the company, is not a concept or method recognized by GAAP and other companies may use different methodologies to calculate or approximate measures similar to Underclassmen Expense. Accordingly, our calculation of Underclassmen Expense may not be comparable to similar measures used by other companies.
|
|
•
|
Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;
|
|
•
|
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;
|
|
•
|
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
|
|
•
|
Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;
|
|
•
|
Adjusted EBITDA does not reflect the potentially significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness we may incur in the future;
|
|
•
|
Adjusted EBITDA does not reflect income and expense items that relate to our financing and investing activities, any of which could significantly affect our results of operations or be a significant use of cash;
|
|
•
|
Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and
|
|
•
|
Other companies, including companies in our industry, calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Loss from continuing operations
|
$ |
(1,483
|
) | $ |
(1,987
|
) | $ | (4,651 | ) | $ | (6,369 | ) | ||||
Add:
|
||||||||||||||||
Depreciation and amortization
|
2,828 | 1,716 | 7,635 | 4,354 | ||||||||||||
Stock-based compensation, net
|
2,331 | 1,524 | 6,316 | 3,966 | ||||||||||||
Acquisition and integration costs
|
854 | 33 | 1,374 | 542 | ||||||||||||
Adjusted EBITDA
|
$ | 4,530 | $ | 1,286 | $ | 10,674 | $ | 2,493 |
Nine Months Ended September 30,
|
||||||||
Consolidated Statements of Cash Flow Data:
(in thousands)
|
2011
|
2010
|
||||||
Net cash provided by operating activities
|
$ | 18,587 | $ | 6,169 | ||||
Net cash used in investing activities
|
$ | (9,615 | ) | $ | (15,309 | ) | ||
Net cash provided by financing activities
|
$ | 5,515 | $ | 43,456 | ||||
Capital Expenditures (1)
|
$ | 9,547 | $ | 7,056 |
(1)
|
Represents purchases of property and equipment and the amount of software development costs capitalized, on an aggregate basis.
|
Item 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Item 4.
|
CONTROLS AND PROCEDURES
|
Item 1.
|
LEGAL PROCEEDINGS
|
Item 1A.
|
RISK FACTORS
|
Item 6.
|
EXHIBITS
|
Exhibit No
|
Description of Exhibit
|
|
10.1*
|
Third Amendment to Office Lease, dated as of July 22, 2011, between Douglas Emmett 2000, LLC, as Landlord and ReachLocal, Inc., as Tenant
|
|
10.2*
|
Form of Dutch Stock Option Agreement
|
|
10.3*
|
Form of Japanese Stock Option Agreement
|
|
31.1*
|
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2*
|
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1†
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2†
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS**
|
XBRL Instance
|
101.SCH**
|
XBRL Taxonomy Extension Schema
|
101.CAL**
|
XBRL Taxonomy Extension Calculation
|
101.DEF**
|
XBRL Taxonomy Extension Definition
|
101.LAB**
|
XBRL Taxonomy Extension Labels
|
101.PRE**
|
XBRL Taxonomy Extension Presentation
|
*
|
Filed herewith.
|
†
|
Furnished herewith.
|
**
|
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
|
REACHLOCAL, INC.
|
|
By:
|
/s/ Zorik Gordon
|
Name:
|
Zorik Gordon
|
Title:
|
President and Chief Executive Officer
|
By:
|
/s/ Ross G. Landsbaum
|
Name:
|
Ross G. Landsbaum
|
Title:
|
Chief Financial Officer
|
Exhibit No
|
Description of Exhibit
|
10.1*
|
Third Amendment to Office Lease, dated as of July 22, 2011, between Douglas Emmett 2000, LLC, as Landlord and ReachLocal, Inc., as Tenant
|
10.2*
|
Form of Dutch Stock Option Agreement
|
10.3*
|
Form of Japanese Stock Option Agreement
|
31.1*
|
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2*
|
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1†
|
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2†
|
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
101.INS**
|
XBRL Instance
|
101.SCH**
|
XBRL Taxonomy Extension Schema
|
101.CAL**
|
XBRL Taxonomy Extension Calculation
|
101.DEF**
|
XBRL Taxonomy Extension Definition
|
101.LAB**
|
XBRL Taxonomy Extension Labels
|
101.PRE**
|
XBRL Taxonomy Extension Presentation
|
*
|
Filed herewith.
|
†
|
Furnished herewith.
|
**
|
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
|
1.
|
Confirmation of Defined Terms. Unless modified herein, all terms previously defined and capitalized in the Lease shall hold the same meaning for the purposes of this Third Amendment.
|
2.
|
Confirmation of Expansion Dates and Term. The Phase I Expansion Date is hereby confirmed to be March 2, 2011 and the Term is hereby confirmed from and including March 2, 2011 to and including December 31, 2021; and the Phase II Expansion Date is hereby confirmed to be March 30, 2011 and the Term is hereby confirmed from and including March 30, 2011 to and including December 31, 2021.
|
3.
|
Confirmation of Usable Area, Tenant’s Share and Tenant’s Common Area Share. The Usable Area of the 16th Floor is hereby confirmed to be 22,856 square feet. Tenant’s Share for the 16th floor is confirmed to be 5.8%; and Tenant’s Common Area Share for the 16th floor is confirmed to be 3.87%.
|
Suites
|
Square Feet of
Usable Area
|
Tenant’s
Share
|
Tenant’s Share of the
Common Area
|
1600/1610
|
12,055
|
3.06%
|
2.04%
|
1635
|
880
|
0.22%
|
0.15%
|
1640
|
1,957
|
0.50%
|
0.33%
|
1650
|
6,218
|
1.58%
|
1.05%
|
1680
|
1,746
|
0.44%
|
0.30%
|
TOTAL
|
22,856
|
5.80%
|
3.87%
|
4.
|
Revision in Fixed Monthly Rent.
|
5.
|
Amendment of Section 5.1 of Exhibit B of the Second Amendment. Section 5.1 of Exhibit B of the Second Amendment is hereby deleted in its entirety and replaced with the following:
|
6.
|
Warranty of Authority. If Landlord or Tenant signs as a corporation or a partnership, each of the persons executing this Third Amendment on behalf of Landlord or Tenant hereby covenants and warrants that the corporation executing hereinbelow is a duly authorized and existing entity that is qualified to do business in California; that the person(s) signing on behalf of either Landlord or Tenant have full right and authority to enter into this Third Amendment; and that each and every person signing on behalf of either Landlord or Tenant are authorized in writing to do so.
|
7.
|
Successors and Heirs. The provisions of this Third Amendment shall inure to the benefit of Landlord’s and Tenant’s respective successors, assigns, heirs and all persons claiming by, through or under them.
|
8.
|
Confidentiality. Except as may be required by law, Landlord and Tenant agree that the covenants and provisions of this Third Amendment shall not be divulged to anyone not directly involved in the management, administration, ownership, lending against, or subleasing of the Premises, other than Tenant’s or Landlord’s counsel-of-record or leasing or sub-leasing broker of record.
|
9.
|
Governing Law. The provisions of this Third Amendment shall be governed by the laws of the State of California.
|
|
10. Reaffirmation. Landlord and Tenant acknowledge and agree that the Lease, as amended herein, constitutes the entire agreement by and between Landlord and Tenant relating to the Premises, and supersedes any and all other agreements written or oral between the parties hereto. Furthermore, except as modified herein, all other covenants and provisions of the Lease shall remain unmodified and in full force and effect.
|
LANDLORD:
|
TENANT:
|
|
DOUGLAS EMMETT 2000, LLC, a
Delaware limited liability company
|
REACHLOCAL, INC.,
a Delaware corporation
|
|
By: DOUGLAS EMMETT
MANAGEMENT, LLC, a Delaware
limited liability company, Its Agent
|
||
By: DOUGLAS EMMETT
MANAGEMENT, INC., a Delaware
corporation, Its Manager
|
By: /s/ Ross G. Landsbaum
Ross G. Landsbaum, CFO
|
|
By: /s/ Kenneth M. Panzer
Kenneth M. Panzer, COO
|
||
Dated: July 22, 2011
|
Optionee:
|
|
Grant Date:
|
|
Vesting Commencement Date:
|
|
Exercise Price per Share:
|
$
|
Total Exercise Price:
|
$
|
Total Number of Shares
Subject to the Option:
|
shares
|
Expiration Date:
|
Type of Option: | Non-Qualified Stock Option |
Vesting Schedule:
|
Subject to the Optionee’s continued status as an Employee, the Option shall vest and become exercisable with respect to twenty-five percent (25%) of the shares of Common Stock subject thereto on the first anniversary of the Vesting Commencement Date set forth above (the “Vesting Commencement Date”), and with respect to an additional 1/48th of the shares of Common Stock subject thereto on each monthly anniversary thereafter.
|
REACHLOCAL, INC.
|
OPTIONEE
|
|||
By:
|
|
By:
|
||
Print Name:
|
Print Name:
|
|||
Title:
|
||||
Address:
|
Address:
|
|||
Optionee:
|
||
Grant Date:
|
||
Vesting Commencement Date:
|
||
Exercise Price per Share:
|
$
|
|
Total Exercise Price:
|
$
|
|
Total Number of Shares Subject to the Option:
|
shares
|
|
Expiration Date:
|
Type of Option: |
Non-Qualified Stock Option
|
Vesting Schedule:
|
Subject to the Optionee’s continued status as an Employee, Consultant or Non-Employee Director, the Option shall vest and become exercisable with respect to twenty-five percent (25%) of the shares of Common Stock subject thereto on the first anniversary of the Vesting Commencement Date set forth above (the “Vesting Commencement Date”), and with respect to an additional 1/48th of the shares of Common Stock subject thereto on each monthly anniversary
thereafter.
|
REACHLOCAL, INC.
|
OPTIONEE
|
|||
By:
|
|
By:
|
||
Print Name:
|
Print Name:
|
|||
Title:
|
||||
Address:
|
Address:
|
|||
/s/ Zorik Gordon
|
Zorik Gordon
|
Chief Executive Officer
|
Date: November 4, 2011
|
/s/ Ross G. Landsbaum
|
Ross G. Landsbaum
|
Chief Financial Officer
|
Date: November 4, 2011
|
/s/ Zorik Gordon
|
Zorik Gordon
|
Chief Executive Officer
|
(Principal Executive Officer)
|
Date: November 4, 2011
|
/s/ Ross G. Landsbaum
|
Ross G. Landsbaum
|
Chief Financial Officer
|
(Principal Financial Officer)
|
Date: November 4, 2011
|
Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $) In Thousands, except Per Share data | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Allowance for doubtful accounts (in Dollars) | $ 376 | $ 373 |
Common stock, par value (in Dollars per share) | $ 0.00001 | $ 0.00001 |
Common stock, shares authorized | 140,000 | 140,000 |
Common stock, shares issued | 29,394 | 28,165 |
Common stock, shares outstanding | 29,394 | 28,165 |
Document And Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Nov. 03, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | ReachLocal Inc | |
Document Type | 10-Q | |
Current Fiscal Year End Date | --12-31 | |
Entity Common Stock, Shares Outstanding | 29,392,406 | |
Amendment Flag | false | |
Entity Central Index Key | 0001297336 | |
Entity Current Reporting Status | Yes | |
Entity Voluntary Filers | No | |
Entity Filer Category | Non-accelerated Filer | |
Entity Well-known Seasoned Issuer | No | |
Document Period End Date | Sep. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 |
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Note 7 - Stock-Based Compensation | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Disclosure of Compensation Related Costs, Share-based Payments [Text Block] |
7.
Stock-Based Compensation
Stock-based
compensation cost is measured at the grant date, based on the
fair value of the award, and recognized on a straight-line
basis over the requisite service period, which is generally
the vesting period.
The
following table summarizes vested and unvested options
activity (number of shares in thousands):
During
the nine months ended September 30, 2011, the Company
granted 1.5 million stock options with exercise prices
ranging from $16.70 per share to $25.51 per share, and
vesting periods of 4 years.
The
following table presents the weighted-average assumptions
used to estimate the fair values of the stock options granted
during the three and nine months ended September 30, 2011 and
2010.
The
weighted average remaining contractual life of all options
outstanding as of September 30, 2011 was 5.2 years. The
remaining contractual life for options vested and exercisable
at September 30, 2011 was 4.6 years. Furthermore, the
aggregate intrinsic value of all options outstanding as of
September 30, 2011 was $6,198,000, and the aggregate
intrinsic value of options vested and exercisable at
September 30, 2011 was $6,120,000, in each case based on the
fair value of the Company’s common stock on September
30, 2011. The per-share weighted-average grant date fair
value of unvested options as of September 30, 2011 was $7.82.
The per share weighted-average grant date fair value of
options vested during the nine months ended September 30,
2011 was $4.47. The per-share weighted-average grant date
fair value of options forfeited during the nine months ended
September 30, 2011 was $6.30. The total fair value of options
vested during the nine months ended September 30, 2011was
$4,620,000. The aggregate intrinsic value of stock options
exercised during the nine months ended September 30, 2011 was
$14,174,000.
Restricted
Stock Units
The
following table summarizes restricted stock unit activity (in
thousands):
Stock-Based
Compensation Expense
The
Company records stock-based compensation expense net of
amounts capitalized as software development costs. The
following table summarizes stock-based compensation (in
thousands):
Stock-based compensation expense, net of capitalization, is
included in the accompanying condensed consolidated
statements of operations in the following captions (in
thousands):
As
of September 30, 2011, there was $23,771,000 of unrecognized
stock-based compensation related to restricted stock units
and outstanding stock options, net of estimated forfeitures.
This amount is expected to be recognized over a weighted
average period of 1.5 years. Future stock-based compensation
expense for these awards may differ in the event actual
forfeitures deviate from management’s estimates.
|
Note 3 - Fair Value of Financial Instruments | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Text Block] |
3.
Fair Value of Financial Instruments
The
Company applies the fair value hierarchy for financial
instruments. Fair value is defined as the exchange price that
would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement
date. Valuation techniques used to measure fair value
maximize the use of observable inputs and minimize the use of
unobservable inputs. The fair value hierarchy is based on
three levels of inputs, of which the first two are considered
observable and the last is considered unobservable, that are
used to measure fair value:
|
Note 9 - Segment Information | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Segment Reporting Disclosure [Text Block] |
9.
Segment Information
Revenue
by geographic region with respect to the Direct Local channel
and national brands is based on the physical location of the
sales office, and with respect to agencies and resellers, is
based on the physical location of the agency or reseller. The
following summarizes revenue by geographic region (in
thousands):
|
Note 10 - Subsequent Events | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Subsequent Events [Text Block] |
10.
Subsequent Events
On
November 1,
2011, the Company announced that it will wind down
the operations of Bizzy due to insufficient consumer adoption
of the Bizzy recommendation engine and determined that Bizzy
would be considered a discontinued operation as of the third
quarter of 2011. In connection with this decision, the
Company recorded a noncash charge of $2.5 million in the
third quarter of 2011to reflect the impairment of capitalized
software development costs. The Company expects to record a
charge to discontinued operations in the fourth quarter of
2011 of approximately $0.7 million, consisting of
personnel and severance costs, operating losses, and
facilities and other costs. As
the Company is in an overall tax loss position, it has
recorded a full valuation allowance against any tax benefit
resulting from the losses from discontinued
operations.
On
November 4, 2011, the Company announced that its Board of
Directors authorized the repurchase of up to $20 million of
the Company’s outstanding common stock. Purchases will
be made from time-to-time in open market or privately
negotiated transactions as determined by the
Company’s management. The amount and timing of
the share repurchase will depend on business and market
conditions, stock price, trading restrictions, acquisition
activity, and other factors. The share repurchase program
does not obligate the Company to acquire any
particular amount of common stock, and the repurchase program
may be suspended or discontinued at any time at the
Company’s discretion.
|
Note 8 - Income Taxes | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Income Tax Disclosure [Text Block] |
8.
Income Taxes
The
Company follows ASC Topic 740-270, Income
taxes—Interim Reporting, for the computation and
presentation of its interim period tax provision.
Accordingly, management estimates the effective annual tax
rate and applies this rate to the year-to-date pre-tax book
income or loss to determine the interim provision for income
taxes. For the three and nine months ended September 30,
2011, the income tax provisions were $126,000 and $323,000,
respectively, and relate to federal, state, local and foreign
income taxes. The income tax benefit for the nine months
ended September 30, 2010 was primarily attributable to the
acquisition of SMB:LIVE, in which we recorded a one-time
discrete deferred tax benefit of $702,000.
The
Company and its subsidiaries file income tax returns in the
U.S. federal, various state and foreign jurisdictions. All of
the Company’s income tax returns since inception are
open to examination by federal, state, and foreign tax
authorities. In August of 2010, the Internal Revenue Service
initiated an examination of the Company’s U.S.
consolidated 2008 income tax return that was finalized in
March 2011 with no proposed adjustments.
|
Note 1 - Organization and Description of Business | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Nature of Operations [Text Block] |
1.
Organization and Description of Business
ReachLocal,
Inc. (the “Company”) was incorporated in the
state of Delaware in August 2003. The Company’s
operations are located in the United States, Canada,
Australia, the United Kingdom, India, the Netherlands and
Germany. The Company’s mission is to help small- and
medium-sized businesses (“SMBs”) acquire,
maintain and retain customers via the Internet. The Company
offers a comprehensive suite of online marketing solutions,
including search engine marketing (ReachSearch™), Web
presence (ReachCast™), display advertising
(ReachDisplay™) and remarketing, deal commerce
(ReachDeals™) , online marketing analytics
(TotalTrack®), and
an out-of-the-box assisted chat service
(TotalLiveChat™), each targeted to the SMB market. The
Company delivers this suite of services to SMBs through a
combination of its proprietary technology platform and its
direct, “feet-on-the-street” sales force of
Internet Marketing Consultants, or IMCs, and select third
party agencies and resellers. The Company has
discontinued and is winding down the operations of Bizzy,
which is a wholly owned subsidiary of the Company. The
Company is headquartered in Woodland Hills, CA.
|
Note 4 - Acquisitions | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mergers, Acquisitions and Dispositions Disclosures [Text Block] |
4.
Acquisitions
Intangible
Assets Acquired in Prior Periods
As
of September 30, 2011, intangible assets from the
acquisitions of ReachLocal Australia Pty Ltd.
(“ReachLocal Australia”) and SMB:LIVE Corporation
(“SMB:LIVE”) included customer relationships of
$727,000 (net of accumulated amortization of $1,573,000) and
developed technology of $1,086,000 (net of accumulated
amortization of $1,214,000). Intangible assets are amortized
on a straight-line basis over the estimated useful life of
three years. Based on the current amount of intangibles
subject to amortization, the estimated amortization expense
for the succeeding three years is as follows (in
thousands):
For
the three months ended September 30, 2011 and 2010,
amortization expense related to the ReachLocal Australia and
SMB:LIVE intangibles was $383,000 and $384,000, respectively,
and for the nine months ended September 30, 2011 and 2010,
was $1,150,000 and $1,024,000, respectively.
Acquisition
of DealOn
On
February 8, 2011, the Company entered into an agreement
to acquire all of the outstanding member interests of DealOn,
LLC (“DealOn”) for consideration of up to
approximately $9,566,000 in cash and stock. DealOn is a deal
commerce company that operates in the United States and
provided the Company with a turnkey platform to strategically
enter the deal commerce space.
On
the closing date, the Company paid $5,793,000 in cash and
issued 82,878 shares of its common stock, valued at
$1,895,000 based on fair value of the Company’s stock
on the acquisition date. The balance of the purchase price of
$1,955,000 (the “DealOn Deferred Consideration”)
is payable in cash of $1,468,000 and in 21,297 shares of the
Company’s common stock, and is subject to adjustment
under the terms of the acquisition agreement. The following
table summarizes the DealOn Deferred Consideration milestone
payments, subject to adjustment under the acquisition
agreement (in thousands):
For
purposes of determining the Company’s acquisition
consideration, management discounted the DealOn Deferred
Consideration to its then present value, or $1,878,000, and
recorded this amount at the time of acquisition. The Company
has accrued interest on the deferred consideration originally
recorded. As of September 30, 2011, the Company has a total
deferred payment obligation of $1,840,000, after certain
purchase price adjustments, of which $1,379,000 is
classified as a current liability. The Company
recorded the acquired assets and liabilities at their
respective fair values. The following table summarizes the
fair value of assets and liabilities acquired (in
thousands):
At
September 30, 2011, the remaining amortization of
DealOn’s intangibles is as follows (in
thousands):
As
of September 30, 2011, intangible assets included customer
relationships and developed technology of $690,000 (net of
accumulated amortization of $626,000). For the
three and nine months ended September 30, 2011, amortization
expense related to the acquired intangibles was $243,000 and
$626,000, respectively.
In
connection with the DealOn acquisition, the Company incurred
approximately $414,000 in costs that are reflected in
“general and administrative expense” in the
accompanying Consolidated Statements of Operations for the
nine months ended September 30, 2011.
|
Note 5 - Software Development Costs | 9 Months Ended | ||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||
Research, Development, and Computer Software Disclosure [Text Block] |
5.
Software Development Costs
Capitalized
software development costs consisted of the following (in
thousands):
The
Company recorded amortization expense of $1,323,000 and
$758,000 for the three months ended September 30, 2011 and
2010, respectively, and $3,517,000 and $1,727,000 for the
nine months ended September 30, 2011 and 2010,
respectively. As of September 30, 2011, $1,275,000
of capitalized software development costs are related to
projects still in process.
|
Note 6 - Commitments and Contingencies | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Commitments and Contingencies Disclosure [Text Block] |
6.
Commitments and Contingencies
Deferred
Payment Obligations
On
February 22, 2011, the Company made a deferred payment
required under the SMB:LIVE acquisition agreement in the
amount of $165,000 and issued 90,062 shares of its common
stock. The payment reflected an adjustment for working
capital as contemplated by the SMB:LIVE acquisition
agreement.
On
August 22, 2011, the Company paid $252,000 and issued 93,346
shares of its common stock under the SMB:LIVE acquisition
agreement. The payment reflected deferred payment obligations
under the SMB:LIVE acquisition agreement based on achieving
certain milestones tied to employee retention objectives. The
remaining deferred payment obligations are also based on
achieving certain milestones tied to employee retention
objectives through February 22, 2012 and include $575,000 of
deferred cash consideration and 181,284 shares of the
Company’s common stock.
As
part of the acquisition of DealOn, the Company is obligated
to pay up to approximately $1,468,000 in cash and 21,297
shares of its common stock, subject to adjustment under the
terms of the acquisition agreement (see Note 4).
Litigation
From
time to time the Company is involved in legal proceedings
arising in the ordinary course of its business. The Company
believes that there is no litigation pending that is likely
to have a material adverse effect on its results of
operations and financial condition.
On
March 1, 2010, a class action lawsuit was filed by two
of the Company’s former employees in California
Superior Court in Los Angeles, California. The complaint
alleged wage and hour violations in a Fair Labor Standards
Act collective action and a California class action. On May
6, 2011, the Court granted preliminary approval of a
settlement of the class action for $800,000, which
together with legal costs resulted in a charge of $832,000
recorded in fiscal 2010. On or about February 2, 2011, a
second class action lawsuit was filed by former employees
alleging substantially similar wage and hour violations. The
second class action was settled for a de minimis
amount was dismissed by the court on September 27,
2011.
DealOn,
which the Company acquired in February 2011, had been sued in
two patent infringement matters. Both of the cases were
dismissed without prejudice.
|
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Note 2 - Summary of Significant Accounting Policies | 9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant Accounting Policies [Text Block] |
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
condensed consolidated financial statements include the
accounts of ReachLocal, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Basis
of Presentation
The
accompanying condensed consolidated financial statements are
unaudited. These unaudited interim condensed consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
(“GAAP”) and applicable rules and
regulations of the Securities and Exchange Commission
(“SEC”) regarding interim financial reporting.
Certain information and note disclosures normally included in
the financial statements prepared in accordance with GAAP
have been condensed or omitted pursuant to such
rules and regulations. Accordingly, these interim
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto contained in the Company’s Annual Report
on Form 10-K for the fiscal year ended December 31,
2010. The condensed consolidated balance sheet as of
December 31, 2010, included herein was derived from the
audited consolidated financial statements as of that date,
but does not include all disclosures including notes required
by GAAP.
The
unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments
(consisting only of normal recurring adjustments) necessary
for the fair presentation of the Company’s statement of
financial position at September 30, 2011, the Company’s
results of operations for the three and nine months ended
September 30, 2011 and 2010, and the Company’s cash
flows for the nine months ended September 30, 2011 and 2010.
The results for the three and nine months ended September 30,
2011 are not necessarily indicative of the results to be
expected for the year ending December 31, 2011. All
references to the three and nine months ended September 30,
2011 and 2010 in the notes to the condensed consolidated
financial statements are unaudited.
Discontinued
Operations
As
a result of the winding down of the operations of Bizzy, the
Company has reclassified and presented all related historical
financial information as “discontinued
operations” in the accompanying Consolidated Balances
Sheets, Consolidated Statements of Operations and
Consolidated Statements of Cash Flows. In addition, all Bizzy
related activities have been excluded from footnote
disclosures unless specifically referenced. Refer to Note 10
“Subsequent Events” for additional
information.
Use
of Estimates
The
preparation of financial statements in conformity with 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
income and expenses during the reporting period. These
estimates are based on information available as of the date
of the financial statements. Therefore, actual results could
differ from those estimates.
Software
Development Costs
The
Company capitalizes costs to develop software when management
has determined that the development efforts will result in
new or additional functionality or new products. Costs
capitalized as internal use software are amortized on a
straight-line basis over the estimated three-year useful
life. Costs incurred prior to meeting these criteria and
costs associated with ongoing maintenance are expensed as
incurred and are recorded along with amortization of
capitalized software development costs as product and
technology expenses within the accompanying condensed
consolidated statements of operations.
Goodwill
The
Company’s goodwill is attributable to business
acquisitions completed from 2009 through 2011. Management
evaluates goodwill for impairment using a two-step process
that is performed at least annually, or whenever events or
circumstances indicate that goodwill may be impaired. The
first step is a comparison of the estimated fair value of an
internal 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 is recognized for the
difference. Management performs an annual impairment test of
goodwill as of the first day of each fiscal fourth quarter
(October 1).
Revenue
Recognition
The
Company recognizes revenue for its services when all of the
following criteria are satisfied:
The
Company recognizes revenue as the cost for the third-party
media is incurred, which is upon delivery of the advertising
on behalf of its clients. The Company recognizes revenue for
its ReachSearch product as clicks are recorded on sponsored
links on the various search engines and for its ReachDisplay
product when the display advertisements record impressions or
as otherwise provided in its agreement with the applicable
publisher. The Company recognizes revenue for its ReachCast
product on a straight-line basis over the applicable service
period for each campaign. The Company recognizes revenue when
it charges set-up, management service or other fees on a
straight-line basis over the term of the related campaign
contract or the completion of any obligation for services, if
shorter. When the Company receives advance payments from
clients, management records these amounts as deferred revenue
until the revenue is recognized. When the Company extends
credit, management records a receivable when the revenue is
recognized.
When
the Company sells through agencies, it either receives
payment in advance of services or in some cases extends
credit. The Company pays each agency an agreed-upon
commission based on the revenue it earns or cash it receives.
Some agency clients who have been extended credit may offset
the amount otherwise due to the Company by any commissions
they have earned. Management evaluates whether it is
appropriate to record the gross amount of campaign revenue or
the net amount earned after commissions. When the Company is
primary obligor, is subject to the credit risk, and has
discretion over both price and media, management recognizes
the gross amount of such sales as revenue and any commissions
are recognized as a selling and marketing expense.
The
Company also has a small number of resellers. Resellers
integrate the Company’s services, including
ReachSearch, ReachDisplay, ReachCast, remarketing and
TotalTrack, into their product offerings. In each case, the
resellers integrate with the Company’s platform, the RL
Platform, through a custom application programming interface.
Resellers are responsible for the price and specifications of
the integrated product offered to their clients. Resellers
pay the Company in arrears, net of commissions and other
adjustments. Management recognizes revenue generated under
reseller agreements net of the agreed-upon commissions and
other adjustments earned or retained by the reseller, as
management believes that the reseller retains sufficient
control and bears sufficient risks to be considered the
primary obligor in those arrangements.
The
Company offers varying incentives to clients in exchange for
certain minimum commitments. In these circumstances,
management estimates the amount of the future incentives that
will be earned by clients and defers a portion of the
otherwise recognizable revenue. Estimates are based upon a
statistical analysis of previous campaigns for which such
incentives were offered. Should a client not meet its minimum
commitment and no longer qualify for the incentive,
management recognizes the revenue previously deferred related
to the estimated incentive.
During
the first quarter of 2011, the Company began selling
discounted deals to consumers on behalf of its SMB clients
through the Company’s ReachDeals platform. The Company
earns a commission for acting as an agent in these
transactions, which are recorded on a net basis and are
included in revenue upon completion of the sale of the deal
to the consumer. The liability for redemption and potential
income for breakage remain with the SMB client; therefore,
the Company does not record redemption or breakage of the
deals. The Company applies a sales allowance for potential
consumer refunds.
Stock-Based
Compensation
The
Company accounts for stock-based compensation based on fair
value. The Company follows the attribution method, which
reduces current stock-based compensation expenses recorded by
the effect of anticipated forfeitures. Management estimates
forfeitures based upon its historical experience, which has
resulted in a small expected forfeiture rate.
The
fair value of each award is estimated on the date of the
grant and amortized over the requisite service period, which
is the vesting period. The Company uses the Black-Scholes
option pricing model to estimate the fair value of
stock-based awards on the date of grant. Determining the fair
value of stock-based awards at the grant date under this
model requires judgment, including estimating the value per
share of common stock, volatility, expected term and
risk-free interest rate. The assumptions used in calculating
the fair value of stock-based awards represent
management’s estimate based on judgment and subjective
future expectations. These estimates involve inherent
uncertainties. If any of the assumptions used in the
Black-Scholes model significantly changes, stock-based
compensation for future awards may differ materially from the
awards granted previously.
Net
Loss Per Share
Basic
net loss per share available to common stockholders is
computed by dividing the net loss available to common
stockholders for the period by the weighted average number of
common shares outstanding during the period. Diluted net loss
per share available to common stockholders is computed by
dividing the net loss for the period by the weighted average
number of common and potential dilutive shares outstanding
during the period, to the extent such shares are dilutive.
Potential dilutive shares are composed of incremental common
shares issuable upon the exercise of stock options, warrants
and unvested restricted shares using the treasury stock
method and convertible preferred stock under the if-converted
method, where such conversions would be dilutive.
The
following potentially dilutive securities have been excluded
from the calculation of diluted net loss per common share as
they would be anti-dilutive because the Company had net
losses for the periods below (in thousands):
In
addition, certain other stock options have been excluded from
the computation of diluted net loss per share because they
had an anti-dilutive impact as the deemed proceeds under the
treasury stock method were in excess of the average fair
market value for the period. For the three months
ended September 30, 2011 and 2010, the number of such
securities was 2,862,000 and 1,814,000, respectively, and for
the nine months ended September 30, 2011 and 2010, the number
of such securities was 1,583,000 and 1,225,000,
respectively.
Recently
Issued Accounting Standards
Accounting
Standards Codification (“ASC”) Topic 220-10,
Comprehensive
Income - Presentation of Comprehensive Income,
specifies an entity has the option to present the total of
comprehensive income, the components of net income, and the
components of other comprehensive income either in a single
continuous statement of comprehensive income or in two
separate but consecutive statements. Under both options, an
entity will be required to present each component of net
income along with total net income, each component of other
comprehensive income along with a total for other
comprehensive income, and a total amount for comprehensive
income. Furthermore, regardless of the presentation
methodology elected, the entity will be required to present
on the face of the financial statements reclassification
adjustments for items that are reclassified from other
comprehensive income to net income. The amendments do not
change the items that must be reported in other
comprehensive income or when an item of other comprehensive
income must be reclassified to net income. The amendments
also do not affect how earnings per share is calculated or
presented. ASC Topic 220-10 is effective for the Company on
January 1, 2012. Although adopting the guidance will
not impact the Company’s accounting for comprehensive
income, it will affect its presentation of components of
comprehensive income by eliminating the Company’s
practice of showing these items within the Consolidated
Statements of Shareowners’ Equity.
ASC
Topic 820-10, Fair Value
Measurement - Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and
IFRSs (International Financial Reporting Standards),
clarifies existing fair value measurement and disclosure
requirements, amends certain fair value measurement
principles and requires additional disclosures about fair
value measurements. Adoption of this provision, which
is effective for the Company on January 1, 2012, is not
expected to have a material impact on the Company’s
consolidated financial statements.
ASC
Topic 350-20-35-3, Intangibles
– Goodwill and Other, provides an entity with
the option to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair
value of a reporting unit is less than its carrying
amount. If an entity determines that it is more likely
than not that the fair value of a reporting unit is less than
its carrying amount, then performing the two-step impairment
test is necessary. The amended guidance will be effective for
the Company as of January 1, 2012, and early adoption is
permitted. The Company is currently assessing the impact of
the amended guidance on its consolidated financial
statements.
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