By Pacific Coast Business Times Staff Monday, May 17th, 2010

Santa Barbara-based Lenco Mobile, a designer and distributor of mobile phone advertisements, is testing the waters in the United States after its revenue and share price have risen based on its operations abroad.

In an April 15 U.S. Securities and Exchange Commission filing, Lenco said sales had jumped 725 percent to $12.2 million in 2009. Meanwhile, its shares, which trade on the pink sheets under the symbol LNCM, have climbed 37 percent this year, closing at $5.70 on May 10.

Lenco’s revenue surge is based in part on operations formerly owned by Commerce Planet, a Goleta company that shut down in the wake of revelations that it misstated financial results and a complaint by the Federal Trade Commission that it deceived customers. The FTC action resulted in a $19.7 million suspended judgment against Commerce Planet and its chief executive, who now works for Lenco.

In an interview with the Business Times, Lenco CEO Michael Levinsohn said his company is committed to keeping out of the crosshairs of regulators.

“The Commerce Planet environment has nothing to do with us,” he said. “We spend an enormous amount of time focused on compliance. … It’s a minefield out there. It’s a tough regulatory environment. We’re being as cautious as we can.”

But the legacy operations it acquired are crucial to its success. According to SEC filings, 37 percent of Lenco’s revenue came from the revitalization of Commerce Planet. Michael Hill, Commerce Planet’s CEO, is now president of Lenco’s AdMax unit, which is built from the assets of his old company.

Lenco’s Business

Lenco’s technology can compress MMS messages — similar to text messages, but with images, sound and video — and inject them into carriers’ networks such as Vodacom and MTN, two of its biggest customers in Africa. Lenco said April 28 that it has finished testing text delivery to U.S. handsets from Samsung, LG, Nokia, BlackBerry and Apple’s iPhone. Lenco is “sending millions of MMS messages to mobile subscribers outside of the USA and the company believes that it will achieve high acceptance in the USA,” the company stated in a news release.

“We’ve got the most advanced mobile technology in the world,” Levinsohn said in an interview.

In addition to distributing mobile ads, Lenco also designs mobile ad campaigns and websites and has worked for brands such as Ford and Doritos. At the Lenco headquarters in downtown Santa Barbara, employees are busy taking phone calls and pounding keyboards below whiteboards scrawled with company goals.

“We have deep engineering experience, and we have marketing expertise,” Levinsohn said. “We saw an opportunity in MMS.”

Lenco said its revenues went from $1.5 million in 2008 to $12.2 million in 2009. Some $4.5 million of that revenue came from the AdMax unit, a sales lead generation and online advertising business derived from Commerce Planet’s assets.

‘Legacy issues’

Lenco bought Commerce Planet’s assets from an Indiana firm called Superfly Advertising, becoming the third owner in less than 60 days. In January 2009, Superfly bought the Commerce Planet assets for $800,000 and about 4.5 million shares of Commerce Planet stock, worth about $675,000 at the time.

The next month, Lenco took on $2.7 million in Superfly debt and gave 5 million shares, worth $19 million at Lenco’s price at the time, to buy Commerce Planet. The value of the Lenco stock was more than 22 times the earnings of the Commerce Planet assets, which made $836,197 in profits on $12.8 million in revenue in 2008.

The transactions took place after accounting problems at Commerce Planet in 2006 and 2007. According to SEC filings, its books may have been misstated by as much as $15 million because of “improper accounting for stock based compensation, derivative accounting and matching of expenses with revenue.”

Levinsohn said the most recent profit figures for Commerce Planet’s assets were carefully evaluated by independent auditors during what he called an “arms-length transaction, done neatly.”

The Commerce Planet assets included a system for real-time management of online ads that Levinsohn said can be used to link into Lenco’s mobile systems. “Any advertisement you create online you can migrate to mobile,” Levinsohn said.

A Commerce Planet database with the names of 120 million U.S. customers was a big part of why Lenco acquired the assets, Levinsohn said. Lenco stated in an SEC filing that the database will give its customers “higher confidence that the leads that we provide represent legitimate, interested consumers.”

Levinsohn, who owns more Lenco stock than any other investor, said the price paid for the Commerce Planet assets reflects the business he believes Lenco can build from them.

“I was happy that we paid fair value,” he said. “I’ve got the most money in the deal here. I have the shareholders’ interest at heart.”

In a subsequent e-mail to the Business Times, Levinsohn said of the deal, “Hindsight is a perfect science. Retrospectively, perhaps we would have closed the transaction in a different way. But, based on warranties given at the time, and after a due diligence, we decided to go ahead and acquire certain defined assets from Superfly Advertising. Fundamentally we have great people and great technology, but some challenges due to legacy issues which we believe we have now dealt with.”

FTC and Commerce Planet

At Commerce Planet, the FTC targeted the company and Hill over “negative option features.” Customers had to opt out not to be automatically enrolled in programs that resulted in charges, but that information was buried on a separate page of the website, the FTC said.

The result was a $19.7 million stipulated judgment in 2009 against Hill and Commerce Planet. In it, Hill admitted no wrongdoing. His judgment payments were suspended after he paid $700,000 in cash and other assets.

The judgment also included permanent injunctions against Hill and any company he works with that include the following, according to SEC documents:

• prohibitions against misrepresenting any material fact in connection with the advertising, promotion, offering or sale of a product or service;
• requirements to clearly and conspicuously disclose all costs and terms of an offer, including any refund policy;
• and a requirement to obtain express informed consent from consumers prior to using any billing information to obtain payment for a product or service.

Levinshon said Hill would not be available to comment for this article.

The Business Times contacted the FTC staffers who worked the Commerce Planet complaint to ask whether they would monitor Hill’s activities at Lenco for compliance with the injunctions. They declined to comment.

“Who’s going to be out there monitoring? Probably nobody,” said Paul Stephens, director of policy and advocacy for Privacy Rights Clearinghouse, a San Diego-based consumer advocacy group. “Unfortunately, the regulatory process is reactive rather than proactive.”

Levinsohn said Hill was one of “many, many people” caught up in FTC complaints over Internet marketing in the mid-to-late 2000s.

“We adhere to all of the various regulatory requirements necessary to send an MMS message to a mobile subscriber and we will only offer use of our platform to brand owners who have permission to market to their customers via a mobile phone,” Levinsohn said in a recent news release. “We do not and will not facilitate spam messages. Protecting both brand owners and subscribers is critical for us.”

In its annual report, Lenco told investors that the FTC issued self-regulation guidelines for Internet advertisers who track consumers’ habits. Lenco said formal regulations could hurt its ability to make money off its Internet advertising operations.

Privacy Rights Clearinghouse is pushing for tighter rules on consumer privacy. “Self-regulation does not work,” Stephens said. “It almost uniformly is a catastrophic failure for consumer protection because the industry generally comes up with programs that are favorable to industry rather than consumer protection.”

In November, Lenco filed papers saying it is seeking a listing on the Nasdaq exchange. Levinsohn said in an e-mail to the Business Times that although the firm does not, as a rule, issue guidance, it has “the potential to achieve well over $100 million in gross revenue.”

“The way things are right now,” he said in an interview, “I see no reason we can’t get there.”

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