Local (LOCMQ) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 001-34197

LOCAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	33-0849123
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

7555 Irvine Center Drive

Irvine, CA 92618

(Address of principal executive offices, including zip code)

(949) 784-0800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	(Do not check if a smaller reporting company)  ¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 31, 2013, there were 23,035,458 shares of the registrant’s common stock, $0.00001 par value, outstanding.

LOCAL CORPORATION

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets As of September 30, 2013 and December 31, 2012		3
	Condensed Consolidated Statements of Operations For the three and nine months ended September 30, 2013 and 2012		4
	Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2013 and 2012		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
Item 4.	Controls and Procedures		26
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Mine Safety Disclosures		30
Item 5.	Other Information		30
Item 6.	Exhibits		31
	Signatures		33
	Index to Exhibits		34

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LOCAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)

	September 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash	$	4,847		$	3,696
Restricted cash		—			42
Accounts receivable, net of allowances of $548 and $250, respectively		14,885			10,618
Notes receivable - current portion		167			319
Prepaid expenses and other current assets		1,405			648
Assets held for sale		—			3,452
Total current assets		21,304			18,775
Property and equipment, net		5,992			6,467
Goodwill		19,281			19,281
Intangible assets, net		2,664			3,351
Long-term receivable, net of allowances of $1,710 and $1,710, respectively		1,722			1,585
Escrow receivable		390			390
Deposits		72			58
Total assets	$	51,425		$	49,907
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,470		$	8,367
Accrued compensation		1,264			829
Deferred rent		371			452
Warrant liability		766			5
Conversion option liability		1,192			—
Other accrued liabilities		3,244			1,315
Revolving line of credit		6,417			10,000
Current portion of term loan		1,500			—
Deferred revenue		162			203
Total current liabilities		25,386			21,171
Long-term portion of term loan		750			—
Senior secured convertible notes, net of debt discount of $1,773		3,227			—
Deferred income taxes		302			302
Total liabilities		29,665			21,473
Commitments and contingencies
Stockholders’ equity (deficit):
Convertible preferred stock, $0.00001 par value; 10,000 shares authorized; none issued and outstanding for all periods presented		—			—
Common stock, $0.00001 par value; 65,000 shares authorized; issued and outstanding 23,035 and 22,172, respectively		—			—
Additional paid-in capital		124,045			122,036
Accumulated deficit		(102,285	)		(93,602	)
Stockholders’ equity		21,760			28,434
Total liabilities and stockholders’ equity	$	51,425		$	49,907

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

LOCAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue	$	23,472		$	24,365		$	67,591		$	75,399
Operating Expenses:
Cost of revenues		16,208			18,407			48,253			55,632
Sales and marketing		2,230			3,649			7,419			11,940
General and administrative		3,894			2,522			9,685			7,706
Research and development		1,664			1,240			4,900			3,666
Amortization of intangibles		225			1,754			687			3,211
Total operating expenses		24,221			27,572			70,944			82,155
Operating loss		(749	)		(3,207	)		(3,353	)		(6,756	)
Interest and other income (expense), net		(537	)		(131	)		(1,799	)		(325	)
Change in fair value of conversion option and warrant liability		(413	)		65			229			173
Loss from continuing operations before income taxes		(1,699	)		(3,273	)		(4,923	)		(6,908	)
(Benefit from) provision for income taxes		(109	)		22			121			121
Net loss from continuing operations		(1,590	)		(3,295	)		(5,044	)		(7,029	)
Loss from discontinued operations (net of taxes)		(154	)		(507	)		(3,639	)		(9,322	)
Net loss	$	(1,744	)	$	(3,802	)	$	(8,683	)	$	(16,351	)
Per share data:
Basic and diluted net loss per share from continuing operations	$	(0.07	)	$	(0.15	)	$	(0.22	)	$	(0.32	)
Basic and diluted net loss per share from discontinued operations	$	(0.01	)	$	(0.02	)	$	(0.16	)	$	(0.42	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.17	)	$	(0.38	)	$	(0.74	)
Basic and diluted weighted average shares outstanding		22,962			22,092			22,802			22,087

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

LOCAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(8,683	)	$	(16,351	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		3,732			6,581
Provision for doubtful accounts		809			138
Stock-based compensation expense		1,431			2,176
Non-cash interest expense		409			—
Loss on exchange of warrants		723			—
Change in fair value of conversion option and warrant liability		(229	)		(173	)
Impairment of goodwill and intangible assets		3,051			6,451
Changes in operating assets and liabilities:
Accounts receivable		(4,866	)		497
Long term receivable		(137	)		(1,133	)
Note receivable		152			167
Prepaid expenses and other		(411	)		223
Accounts payable and accrued liabilities		4,386			(2,248	)
Deferred revenue		(41	)		(75	)
Net cash provided by (used in) operating activities		326			(3,747	)
Cash flows from investing activities:
Capital expenditures		(2,379	)		(2,553	)
Decrease (Increase) in restricted cash		42			(32	)
Net cash used in investing activities		(2,337	)		(2,585	)
Cash flows from financing activities:
Proceeds from issuance of senior secured convertible notes and warrants		5,000			—
Proceeds from the exercise of options		22			22
Proceeds (payment) of revolving credit facility		(583	)		(373	)
Payments of the term loan		(750	)		—
Payment of financing related costs		(527	)		(5	)
Net cash provided by (used in) financing activities		3,162			(356	)
Net increase (decrease) in cash		1,151			(6,688	)
Cash, beginning of the period		3,696			10,394
Cash, end of the period	$	4,847		$	3,706
Supplemental cash flow information:
Interest paid	$	426		$	320
Income taxes paid	$	7		$	12
Non-cash financing activities:
Derivative liabilities recorded in connection with the issuance of senior secured convertible notes	$	2,182		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

LOCAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. The Company and Summary of Significant Accounting Policies

Nature of operations

Local Corporation (the “Company��) is a local media company that specializes in connecting local businesses with online consumers. The Company reaches consumers on its proprietary sites, as well as third-party sites (collectively, “Consumer Properties”), which includes its Owned & Operated web sites such as Local.com and Krillion.com (collectively, “O&O”), as well as its network of third-party U.S. regional media websites (collectively, “Network”). The Company continues to provide digital media services to its existing small and medium sized businesses (“SMBs”) acquired through the Company’s legacy direct sales business and continues to seek channel sales opportunities for these products (“Business Solutions”). The Company also enables third parties to distribute their advertiser listings on its Consumer Properties, from which the Company generates ad revenue. The Company generates revenue principally from display advertising and performance ad units such as pay-per-click, pay-per-call, lead generation and subscription ad units.

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 our 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 January 2013, the Company shifted its Business Solutions strategy to focus exclusively on channel sales opportunities. The Company continues to develop theses channel sales relationships through which it intends to be able to offer its Launch by Local products.

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 condensed consolidated financial statements.

Principles of consolidation and basis of presentation

The Company’s condensed consolidated financial statements include the accounts of Local Corporation and its wholly-owned subsidiaries: Krillion, Inc. and Screamin Media Group, Inc (“SMG”). All intercompany balances and transactions were eliminated. The Company has evaluated all subsequent events through the date the condensed consolidated financial statements were issued.

The unaudited interim condensed consolidated financial statements as of September 30, 2013, and for the three and nine months ended September 30, 2013 and 2012, included herein, have been prepared by the Company, without audit, pursuant to rules and regulations of the Securities and Exchange Commission, and, in the opinion of management, reflect all adjustments (consisting of only normal recurring adjustments), which are necessary for a fair presentation.

The consolidated results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2012, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on April 2, 2013.

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 condensed consolidated balance sheets and “discontinued operations” in the condensed consolidated statements of operations. In addition, all related activities have been excluded from footnote disclosures unless specifically referenced. These reclassifications have no effect on previously reported net income (loss). The sale of the Spreebird business assets closed on July 26, 2013, for a minimum consideration of $210,000.

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

6

amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to the accounts receivable (including long-term receivable) and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of stock-based awards, warrant and conversion option liabilities, income taxes, and contingent liabilities, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could materially differ from those estimates.

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 our common stock, volatility based on the historical market activity of our stock, the expected life based on the remaining contractual term of the conversion option and warrants and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ and conversion options’ contractual life.

Intangible Assets

Intangible assets 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

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 condensed consolidated statements of operations.

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 our direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. The Company’s indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). The Company recognizes its portion of the bid price based upon our 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 our revenue recognition and determined that our 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, is subject to inventory risk, has latitude in establishing prices and selecting suppliers, or has several but not all of these indicators, revenue is recorded at the

7

gross sales price. The Company generally records the net amounts as revenue earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. All revenue, other than web hosting revenue, is recognized on a gross basis.

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 our paid-search services, and payment processing fees (credit cards and fees for LEC billings). The Company advertises on large search engine websites such as Google, Inc. (“Google”), Yahoo!, Inc. (“Yahoo”), and Microsoft Inc./Bing (“Microsoft”), as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to its O&O websites. During the three and nine months ended September 30, 2013, approximately 56%, of our overall traffic were purchased from other search engine websites. During the three and nine months ended September 30, 2013, advertising costs to drive consumers to our Local.com website were $7.4 million and $26.3 million respectively. Of the total advertising cost for the three and nine months ended September 30, 2013, $5.7 million and $19.4 million were attributable to Google and $1.3 million and $5.0 million were attributable to Yahoo, respectively. During the three and nine months ended September 30, 2012, approximately 61% and 62%, respectively, of our overall traffic were purchased from other search engine websites. During the three and nine months ended September 30, 2012, advertising costs to drive consumers to our Local.com website were $15.2 million and $46.4 million respectively. Of the total advertising cost for the three and nine months ended September 30, 2012, $10.3 million and $32.1 million were attributable to Google and $4.3 million and $12.7 million were attributable to Yahoo, respectively.

2. Assets held for sale and discontinued operations

As a result of the decision by the Company to sell all of the assets related to the Spreebird business, all assets to be sold were classified as held for sale in the accompanying condensed consolidated balance sheets at December 31, 2012. The results of operations relating to this business have been reclassified to discontinued operations in the condensed consolidated statements of operations for all periods presented. Assets held for sale are valued at the lower of net depreciable value or net realizable value.

Assets held for sale consisted of the following (in thousands):

	September 30, 2013		December 31, 2012
Goodwill		—		2,569
Fixed assets, net		—		302
Intangible assets, net		—		581
Assets held for sale	$	—	$	3,452

The sale of the Spreebird business closed on July 26, 2013, for a minimum consideration of $210,000. The Company also sold its Rovion business on October 19, 2012, for $3.9 million, of which approximately $3.5 million was received in cash with the remainder placed in escrow to be settled within 18 months.

8

Revenue and pretax income (loss) related to discontinued operations are as follows (in thousands):

	Rovion
	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue	$	—		$	179		$	—		$	553
Pretax income (loss)	$	—		$	(141	)	$	—		$	(852	)
Provision (benefit) for income taxes		—			—			—			23
Income (loss) from discontinued operations (net of taxes)	$	—		$	(141	)	$	—		$	(875	)
	Spreebird
	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue	$	34		$	406		$	551		$	1,476
Pretax income (loss)	$	(122	)	$	(366	)	$	(3,639	)	$	(8,447	)
Provision (benefit) for income taxes		32			—			—			—
Income (loss) from discontinued operations (net of taxes)	$	(154	)	$	(366	)	$	(3,639	)	$	(8,447	)
Total income (loss) from discontinued operations (net of taxes)	$	(154	)	$	(507	)	$	(3,639	)	$	(9,322	)

3. Intangible assets

Intangible assets, net, consisted of the following (in thousands):

	September 30, 2013										December 31, 2012
	Gross Carrying Amount			Accumulated Amortization/ Impairment			Net Carrying Amount		Weighted Average Useful Life		Gross Carrying Amount		Accumulated Amortization/ Impairment			Net Carrying Amount		Weighted Average Useful Life
									(years)									(years)
Developed technology	$	5,623		$	(4,643	)	$	980		4	$	5,623	$	(4,007	)	$	1,616		4
Non-compete agreements		83			(83	)		—		2		83		(71	)		12		2
Customer-related		1,240			(1,236	)		4		4		13,711		(13,706	)		5		4
Patents		431	��		(431	)		—		3		431		(431	)		—		3
Domain names - indefinite life		1,601			—			1,601				1,601		—			1,601
Trademarks and Trade Name		700			(621	)		79		4		700		(583	)		117		4
	$	9,678		$	(7,014	)	$	2,664			$	22,149	$	(18,798	)	$	3,351

4. Goodwill and Other Intangible Assets

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. The first step in determining if there is any goodwill impairment is a comparison of the estimated fair value of 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 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 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 condensed consolidated statements of operations.

9

5. Website development costs and computer software developed for internal use

U.S. GAAP requires that development costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP further requires that costs incurred in the preliminary project and operating stage of website development be expensed as incurred and that certain costs incurred in the development stage of website development be capitalized and amortized over its useful life. Capitalized website costs are included in property and equipment, net. During the second quarter of fiscal 2013, the Company recorded an impairment charge of $300,000 relating to capitalized software of the Spreebird business unit. Such impairment charge is included in discontinued operations in the accompanying condensed consolidated statements of operations.

The following table sets forth the additional capitalized website development costs and the amortization of capitalized website development costs for the period indicated (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Additional capitalized website development costs	$	531		$	413		$	1,595		$	1,523
Amortization of capitalized website development costs	$	(648	)	$	(580	)	$	(1,893	)	$	(1,579	)

6. Net income (loss) per share

Basic net income (loss) per share is calculated using the weighted average shares of common stock outstanding during the periods. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for options and warrants.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Numerator:
Net loss from continuing operations	$	(1,590	)	$	(3,295	)	$	(5,044	)	$	(7,029	)
Net loss from discontinued operations	$	(154	)	$	(507	)	$	(3,639	)	$	(9,322	)
Denominator:
Denominator for historical basic calculation weighted average shares		22,962			22,092			22,802			22,087
Dilutive common stock equivalents:*
Options		—			—			—			—
Warrants		—			—			—			—
Denominator for historical diluted calculation weighted average shares		22,962			22,092			22,802			22,087
Net loss from continuing operations per share:
Historical basic and diluted net loss from continuing operations per share	$	(0.07	)	$	(0.15	)	$	(0.22	)	$	(0.32	)
Net loss from discontinued operations per share:
Historical basic and diluted net loss from discontinued operations per share	$	(0.01	)	$	(0.02	)	$	(0.16	)	$	(0.42	)
Net loss per share:
Historical basic and diluted net loss per share	$	(0.08	)	$	(0.17	)	$	(0.38	)	$	(0.74	)

* For the three and nine months ended September 30, 2013, potentially dilutive securities, which consist of options to purchase 3,539,450 shares of common stock at prices ranging from $1.41 to $16.59 per share, warrants to purchase 766,268 shares of common stock at prices ranging from $2.01 to $2.87 per share, secured convertible notes that could convert into 2,487,562 shares of common stock were not included in the computation of diluted net income (loss) per share because such inclusion would be antidilutive.

* For the three and nine months ended September 30, 2012, potentially dilutive securities, which consist of options to purchase 4,447,544 shares of common stock at prices ranging from $1.41 to $16.59 per share and warrants to purchase 1,238,660 shares of common stock at prices ranging from $2.87 to $8.09 per share were not included in the computation of diluted net income (loss) per share because such inclusion would be antidilutive.

10

7. Property and equipment

Property and equipment, net, consisted of the following (in thousands):

	September 30,			December 31,
	2013			2012
Furniture and fixtures		981			981
Office equipment		516			503
Computer equipment		3,729			3,428
Computer software		13,132			11,154
Leasehold improvements		905			905
		19,263			16,971
Less accumulated depreciation and amortization		(13,271	)		(10,504	)
Property and equipment, net	$	5,992		$	6,467

8. Interest and other income (expense), net

Interest and other income (expense), net, consisted of the following (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Interest income	$	3		$	8		$	10		$	26
Interest expense		(540	)		(139	)		(1,086	)		(351	)
Loss on exchange of warrants		—			—			(723	)		—
Interest and other income (expense), net	$	(537	)	$	(131	)	$	(1,799	)	$	(325	)

9. Credit facilities

On August 3, 2011, the Company entered into a Loan and Security Agreement with Square 1 Bank, as amended. The Loan Agreement provides us with a revolving credit facility of up to $12.0 million (the “Facility”). The Loan Agreement maturity date is February 3, 2015. Subject to the terms of the Loan Agreement, the borrowing base used to determine loan availability under the Facility is based on a formula equal to 80% of eligible accounts receivable, with account eligibility measured in accordance with standard determinations as more particularly defined in the Loan Agreement (the “Formula Revolving Line”). Prior to March 28, 2013, the Company was allowed to borrow $3.0 million, irrespective of the formula noted above and had borrowed $3.0 million from the Facility (the “Non-Formula Advance”). On March 28, 2013, the date of the sixth amendment, Square 1 Bank terminated the non-Formula Advances and the Company is repaying the outstanding Non-Formula Advance amount of $3.0 million, plus all accrued interest, over 24 months beginning on April 28, 2013. On April 10, 2013, the date of the Seventh Amendment, Square 1 Bank added as security under the Loan Agreement all of our intellectual property and to undertake certain reporting obligations to Square 1 Bank with respect to such intellectual property. All amounts borrowed under the Facility are secured by a general security interest on our assets. The Non-Formula Advance is deemed to be a term loan and allocated between the short-term and long-term portion. As of September 30, 2013, the Non-Formula Advance had an outstanding balance of $2.3 million of which $1.5 million was considered to be current.

Except as otherwise set forth in the Loan Agreement, borrowings made pursuant to the Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.0% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 1.75% and borrowings made pursuant to the Non-Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.25% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 2.0%. Additionally, there is an annual fee of $25,000 and an unused line fee equal to 0.25% of the unused line if less than 40% of the Facility is in use.

The Loan Agreement contains customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain restrictions on dispositions of assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The Loan Agreement also contains customary events of default, including payment defaults and a breach of representations and warranties and covenants. If an event of default occurs and is continuing, Square 1 Bank has certain rights and remedies under the Loan Agreement, including declaring all outstanding borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of set-off.

The Company must meet certain financial covenants during the term of the Facility, including (i) maintaining a minimum liquidity ratio, which is defined as cash on hand plus the most recently reported borrowing base less the aggregate amount

11

outstanding under the Non-Formula Revolving Line divided by outstanding bank debt less the Non-Formula Revolving Line, and (ii) certain Adjusted EBITDA covenants, as defined, as more particularly described in the Agreement and amendments to the Agreement (such Adjusted EBITDA amounts are for financial covenant purposes only, and do not represent projections of the Company’s financial results). The Loan Agreement provides for a five day cure period for any liquidity ratio violations before any such violation would be deemed an event of default under the Loan Agreement. The Loan Agreement also includes a covenant requiring us to obtain approval from Square 1 Bank in the event we have a going concern paragraph included in the independent registered public accounting firm’s opinion. As of September 30, 2013, the Company was in compliance with all of its financial covenants.

In connection with the sale of the assets of the Spreebird business, the Company obtained a release from Square 1 Bank and the holders of the Senior Secured Convertible Notes to allow the Company to sell such assets.

At September 30, 2013, the Company had a total of $8.7 million outstanding and $3.3 million available under the Facility.

10. Operating information

The Company manages its business functionally and has historically had two reportable operating segments: Paid Search and Daily Deals. Paid Search consists of the 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.

U.S. GAAP regarding disclosures about segments of an enterprise requires that public business enterprises report entity-wide disclosures. The following table presents summary operating geographic and product information as required by the entity-wide disclosure requirements (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenue by geographic region:
United States	$	23,472	$	24,365	$	67,591	$	75,399
Revenue by product:
Pay-Per-Click (PPC)		20,692		19,780		57,948		60,134
Subscription Advertising Products		154		569		705		2,008
Domain Sales and Services		62		681		211		3,674
Display and Banner Advertising Services		2,469		3,335		8,531		9,583
Other		95		—		196		—
Total revenue	$	23,472	$	24,365	$	67,591	$	75,399

11. Stock-based compensation

Stock option activity under the equity incentive plans during the nine months ended September 30, 2013, was as follows:

	Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2012		4,048,461		$	4.07
Granted		158,900			1.78
Exercised		(14,628	)		1.49
Cancelled		(653,283	)		3.32
Outstanding at September 30, 2013		3,539,450		$	4.12	$	108
Exercisable at September 30, 2013		2,781,587		$	4.55	$	77

12

The weighted-average fair value at grant date for the options granted during the nine months ended September 30, 2013 and 2012, was $1.06 and $1.65 per option, respectively.

The aggregate intrinsic value of all options exercised during the nine months ended September 30, 2013 and 2012, was $3,000 and $10,000, respectively.

The following table summarizes information regarding options outstanding and exercisable at September 30, 2013:

	Options Outstanding
			Weighted			Options Exercisable
Range of Exercise Prices	Shares		Average Remaining Contractual Life	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
$0.00 - $2.00		327,728	5.4 years	$	1.62		201,827	$	1.57
$2.01 - $3.00		1,007,749	5.0 years		2.36		487,084		2.36
$3.01 - $4.00		666,752	5.2 years		3.57		599,996		3.57
$4.01 - $5.00		700,527	4.1 years		4.68		684,257		4.68
$5.01 - $6.00		164,650	4.5 years		5.59		157,649		5.61
$6.01 - $7.00		448,868	5.8 years		6.17		427,598		6.18
$7.01 - $8.00		80,000	2.3 years		7.18		80,000		7.18
$8.01 - $9.00		62,500	2.3 years		8.90		62,500		8.90
$9.01 - $10.00		15,000	1.7 years		9.90		15,000		9.90
$10.01 - $16.59		65,676	1.3 years		15.76		65,676		15.76
		3,539,450	4.8 years	$	4.12		2,781,587	$	4.55

Restricted stock unit activity under the 2011 Omnibus Plan for the nine months ended September 30, 2013, is as follows:

	Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2012		349,214		$	2.25
Granted		320,419			2.08
Vested		(300,420	)		2.21
Cancelled		(99,754	)		2.12
Unvested at September 30, 2013		269,459		$	2.14

Performance stock unit activity under the 2011 Omnibus Plan for the nine months ended September 30, 2013, is as follows:

	Shares			Weighted Average Exercise Price
Unvested at December 31, 2012		210,585		$	2.28
Granted		217,209			2.10
Vested		(190,705	)		2.10
Cancelled		(237,089	)		2.26
Unvested at September 30, 2013		—		$	—

The fair values of these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Risk-free interest rate		1.01	%		0.63	%		0.66	%		0.76	%
Expected lives (in years)		4.5 years			5.1 years			4.5 years			5.1 years
Expected dividend yield		None			None			None			None
Expected volatility		77.35	%		89.35	%		77.35	%		89.35	%

13

Total stock-based compensation expense recognized for the three and nine months ended September 30, 2013 and 2012, was as follows (in thousands, except per share amount):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	26	$	22	$	85	$	61
Sales and marketing		83		207		333		657
General and administrative		192		320		787		988
Research and development		51		63		207		163
Total stock-based compensation expense	$	352	$	612	$	1,412	$	1,869
Basic and diluted net stock-based compensation expense per share	$	0.02	$	0.03	$	0.06	$	0.08

12. Warrants

On February 7, 2013, the Company repriced warrants to purchase 615,080 shares of the Company’s common stock with an exercise price of $8.09 per share to an exercise price of $2.10 per share. The warrants were issued in connection with a private placement transaction consummated on August 1, 2007, including warrants to purchase 537,373 shares of the Company’s common stock issued on August 1, 2007 (the “Series B Warrants”) and warrants to purchase 77,707 shares of the Company’s common stock issued on January 20, 2011, as a result of the anti-dilution provisions contained in each of the Series B Warrants (the “New Series B Warrants” and together with the Series B Warrants, the “Warrants”).

On February 28, 2013, the Company entered into separate Exchange Agreements with each of the holders (collectively the “Investors”) of all of these outstanding Warrants.

In the Exchange Agreements, the Investors agreed to surrender for cancellation all of their Warrants in exchange for an aggregate of 430,561 shares of the Company’s common stock. As a result of the exchange, the Company recorded a loss on warrant exchange of $723,000 during the three months ended March 31, 2013. The loss on warrant exchange has been included in interest income and other income (expense), net in the accompanying condensed consolidated statements of operations.

See note 13 - Senior secured convertible notes footnote, relating to warrants issued in the second quarter fiscal 2013 as part of the issuance of the senior secured convertible notes.

Warrant activity for the nine months ended September 30, 2013, was as follows:

	Shares			Weighted Average Exercise Price
Outstanding at December 31, 2012		1,238,660		$	4.51
Issued		746,268			2.01
Exercised		—			—
Expired		(603,580	)		7.02
Exchanged		(615,080	)		2.10
Outstanding at September 30, 2013		766,268		$	2.03
Exercisable at September 30, 2013		766,268		$	2.03

The following table summarizes information regarding warrants outstanding and exercisable at September 30, 2013:

	Warrants Outstanding					Warrants Exercisable
Range of Exercise Price	Shares		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
$ 2.01		746,268	4.5 years	$	2.01		746,268	$	2.01
$ 2.87		20,000	1.1 years		2.87		20,000		2.87
		766,268	4.4 years	$	2.03		766,268	$	2.03

14

13. Senior secured convertible notes

On April 10, 2013, the Company entered into a Convertible Note and Warrant Purchase Agreement (“Agreement”) with two investors. Pursuant to this agreement, the investors purchased an aggregate of $5.0 million of 7% subordinated convertible notes (“Notes”) and warrants to purchase shares of the Company’s common stock. Interest is payable quarterly in cash or registered shares of the Company’s common stock at the Company’s option. Stock payments will be at a 7% discount to the lower of the closing price on the trading day immediately preceding or the average of the daily Volume Weighted Average Price (“VWAP”) for the 20 trading days preceding the payment date. The Notes are secured by the Company’s assets and are due on April 10, 2015. Each Note holder has the right, at any time, to convert their Note into shares of the Company’s common stock at an initial conversion ratio of one share of common stock for each $2.01 of principal amount of their note. The Company has the option to force conversion of all or part of the Notes provided the Company’s common stock price exceeds 200% of the conversion price for 90 consecutive trading days.

Based on applicable accounting guidance, the Company determined that the conversion option should be bifurcated and accounted for as a derivative. Using the Black-Scholes valuation model the Company determined the fair value of the conversion option liability to be $1.4 million at the date of the Agreement. The Company also issued warrants to purchase an aggregate of 746,268 shares of common stock at an exercise price of $2.01 per share that expire five years from the date of issuance. The relative fair value of these warrants, using the Black-Scholes valuation model at the date of grant, was $768,000. The conversion option and warrant liability was recorded as convertible debt discount and will be amortized into interest expense over the life of the notes using the effective interest rate method. The conversion option liability and warrant liability will be fair valued at each reporting period with changes in the fair value recorded in the income statement.

The assumptions used in the Black-Scholes model for valuing the warrant liability were as follows: no dividend yield; 0.74% interest rate; five years contractual life; and volatility of 75.25%.

The assumptions used in the Black-Scholes model for valuing the conversion option liability were as follows: no dividend yield; 0.24% interest rate; two years contractual life; and volatility of 66.08%.

The Notes are subordinate to the Square 1 Bank line of credit.

In connection with the issuance of the Notes, the Company paid $356,000 in cash for placement agent fees of which $127,500 was paid to a director of the Company. The Company also incurred legal and other consulting fees totaling $244,000 related to the issuance of the Notes. Fees related to the issuance of the Notes are recorded in prepaid expenses and are amortized into interest expense over the life of the Notes.

14. Fair Value Measurement of Financial Assets and Liabilities

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 (in thousands):

Description	As of September 30, 2013		Significant Unobservable Inputs (Level 3)
Liabilities:
Convertible option liability	$	1,192	$	1,192
Warrant liability	$	766	$	766

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 (in thousands):

Description	As of December 31, 2012		Significant Unobservable Inputs (Level 3)
Liabilities:
Warrant liability	$	5	$	5

As of September 30, 2013, our conversion option and warrant liabilities were based on measurement at fair value without observable market values that required a high level of judgment to determine fair value (Level 3) using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as our stock price, risk-free interest rates and expected volatility.

15

The fair value of the financial liabilities was estimated at September 30, 2013, using a Black-Scholes option pricing model with the following assumptions:

	Warrant			Conversion option
Risk-free interest rate		1.39	%		0.33	%
Expected lives (in years)		4.5 years			1.5 years
Expected dividend yield		None			None
Expected volatility		66.41	%		53.12	%

The following table presents a reconciliation for our warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in thousands):

	Level 3
Balance at December 31, 2012	$	5
Cancellation of warrants		(5	)
Issuance of warrants		768
Change in fair value of warrant liability		(2	)
Balance at September 30, 2013	$	766

The following table presents a reconciliation for our conversion option liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in thousands):

	Level 3
Balance at December 31, 2012	$	—
Issuance of Notes		1,414
Change in fair value of conversion option liability		(222	)
Balance at September 30, 2013	$	1,192

15. Subsequent events

On November 11, 2013, we entered into a Settlement and Patent License Agreement (“Settlement Agreement”) with GeoTag, Inc., pursuant to which we paid GeoTag, Inc. a license fee of $550,000 in return for a license to the ‘474 Patent, and all patent applications related thereto, and all reissue patents, continuations and continuations-in-part through the expiration of the last surviving patent related to the ‘474 Patent. In connection with the Settlement Agreement, Geotag will dismiss its claims against the Company. The Company accrued for the total settlement amount of $550,000 as of September 30, 2013.

16

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q or certain information included or incorporated by reference in this report, contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed “forward-looking statements” within the meaning of the federal securities laws. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” and “potential” or the negative of such terms or other comparable terminology. In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including customers, competitors and governmental authorities, and various other factors, including those described or referred to in Item 1A of Part II of this Quarterly Report. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, our actual results could differ materially from those expressed in the forward-looking statements and there can be no assurance that the forward-looking statements contained in this report will in fact occur.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with the audited consolidated financial statements and related notes thereto as of December 31, 2012, and for the year ended December 31, 2012, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 2, 2013.

Overview

We are a local media company that specializes in connecting local businesses with online consumers. We reach consumers on our proprietary sites, as well as third-party sites (collectively, “Consumer Properties”), which includes our Owned & Operated web sites such as Local.com and Krillion.com (collectively, “O&O”), as well as our network of third-party U.S. regional media websites (collectively, “Network”). We also continue to provide digital media services to our existing small and medium sized businesses (“SMBs”) acquired through our legacy direct sales business and continue to seek channel sales opportunities for these products (“Business Solutions”). We also enable third parties to distribute their advertiser listings on our Consumer Properties, from which we generates ad revenue. We generate revenue principally from display advertising and performance ad units such as pay-per-click, pay-per-call, lead generation and subscription ad units.

We use patented and proprietary technologies and systems to provide users of our O&O websites and Network with relevant search results for local businesses, products and services, event information, ratings and reviews, driving directions and more into our search results. By distributing this information across our Consumer Properties, we are able to reach users that our direct advertisers and advertising partners desire to reach.

Recent Developments

During the second quarter 2013, we decided to sell the assets relating to the Spreebird business and cease all operations of the Spreebird business. This resulted in an impairment charge of $3.1 million in the second quarter 2013, with the remaining assets being classified as held for sale assets as of June 30, 2013. With the decision to sell the Spreebird assets and cease all operations relating to the Spreebird business we now operate in a single reportable segment. The sale of the Spreebird business closed on July 26, 2013, for a minimum consideration of $210,000.

On November 11, 2013, we entered into a Settlement and Patent License Agreement (“Settlement Agreement”) with GeoTag, Inc., pursuant to which we paid GeoTag, Inc. a license fee of $550,000 in return for a license to the ‘474 Patent, and all patent applications related thereto, and all reissue patents, continuations and continuations-in-part through the expiration of the last surviving patent related to the ‘474 Patent. In connection with the Settlement Agreement, Geotag will dismiss its claims against us. We denied liability in the litigation and entered into the Settlement Agreement to put an end to litigation costs associated with this suit. We accrued for the total settlement amount of $550,000 as of September 30, 2013.

Outlook for Our Business

According to BIA/Kelsey, the U.S. online advertising market is an approximately $42 billion a year industry. “Local search,” that is, searches for products, services and businesses within a geographic region is an increasingly significant segment of the online advertising industry. Local search allows consumers to search for local businesses’ products or services by including geographic area, zip code, city and other geographically targeted search parameters in their search requests – such as entering “florists in Irvine, CA.” According to a September 2012 study, BIA/Kelsey estimates that the local search market in the

17

United States will grow from $6.1 billion in 2011, to $13.4 billion by 2016. Consumers who conduct local searches on the Internet (“local searchers”) tend to convert into buying customers at a higher rate than other types of Internet users. As a result, advertisers often pay a significant premium to place their ads in front of local searchers on websites like those powered by our Consumer Properties business, including Local.com or our network partners’ websites. Additionally, local SMBs that would not normally compete at the national level for advertising opportunities are increasingly engaging in and competing for local advertising opportunities, including local search, to promote their products and services.

Local online search is still relatively new, and as a result, it is difficult to determine our current market share, or predict our future market share. However, we have a number of competitors that have announced an intention to increase their focus on local search with regard to U.S. online advertising, including some of the leading online advertising companies in the world, including Google, Yahoo, and Microsoft, among many others, with greater experience and resources than we have. For example, Facebook recently announced a Graph Search tool which allows users to access the interests and opinions of friends regarding local places, movies and interests and which may emerge as a significant competitor to our current offerings.

The U.S. online advertising industry, including the local search segment, is regularly impacted and changed by new and emerging technologies, including, for instance, ad targeting and mobile technologies, as well as the increased fragmentation of the online advertising industry in general, from different technology platforms, to different advertising formats, targeting methodologies and the like. Those companies within our industry who are able to quickly adapt to new technologies, as well as offer innovations of their own, have a better chance of succeeding than those that do not.

We believe that local search will be an increasingly significant segment of the online advertising industry. Although search advertising has been used primarily by businesses that serve the national market, local businesses are increasingly using online advertising to attract local customers. Our Consumer Properties are all designed to serve this market of consumers, advertisers and publishers, which we believe will provide an opportunity for growth from increased local search volumes by consumers, as well as increased competition by advertisers to display their ad listings in front of those consumers.

Our revenue, profitability and future growth depend not only on our ability to execute our business plan, but also, the growth of the paid-search market and our ability to effectively compete with other providers of local, and paid-search technologies and services among other things.

As we continue to diversify our technologies and traffic sources, we remain focused on local media offerings that will improve the experience for our end users, and allow our regional media network partners to enhance their service offerings and lower their costs. While we are still very focused on the local search industry, we believe there are additional opportunities in local media that we and our customers can benefit from, while diversifying our revenue sources. We intend to continue making significant investments in initiatives to diversify our revenue sources and promote our future growth.

As we continue to invest in our core offerings, we have increased our operating expenses, mainly related to traffic acquisition costs, the deployment of new features and functionality across our business and the support of our acquired companies. We cannot give assurances that our efforts to improve our results of operations through this strategy will be successful.

Sources of Revenue

We generate revenue primarily on our Consumer Properties from both direct and indirect advertiser relationships, via:

• click-throughs on sponsored listings;

• calls to cost-per-call advertiser listings;

• lead generation;

• banner ads;

• subscription advertiser listings;

• small business advertising services; and

• domain sales and services.

Operating Expenses

Cost of Revenues

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

18

and fees for Local Exchange Carrier (“LEC”) billings ended in December 2012). We advertise on large search engine websites such as Google, Yahoo and Microsoft, as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to our Local.com website. During the three and nine months ended September 30, 2013, approximately 56%, of our overall traffic were purchased from other search engine websites. During the three and nine months ended September 30, 2013, advertising costs to drive consumers to our Local.com website were $7.4 million and $26.3 million respectively. Of the total advertising cost for the three and nine months ended September 30, 2013, $5.7 million and $19.4 million were attributable to Google and $1.3 million and $5.0 million were attributable to Yahoo, respectively. During the three and nine months ended September 30, 2012, approximately 61% and 62%, respectively, of our overall traffic were purchased from other search engine websites. During the three and nine months ended September 30, 2012, advertising costs to drive consumers to our Local.com website were $15.2 million and $46.4 million respectively. Of the total advertising cost for the three and nine months ended September 30, 2012, $10.3 million and $32.1 million were attributable to Google and $4.3 million and $12.7 million were attributable to Yahoo, respectively.

Sales and Marketing

Sales and marketing expenses consist of sales commissions and salaries for our internal and outsourced sales force, customer service staff and marketing personnel, advertising and promotional expenses. We record advertising costs and sales commission in the period in which the expense is incurred.

General and Administrative

General and administrative expenses consist of salaries and other costs associated with employment of our executive, finance, human resources and information technology staff, legal, tax and accounting, and professional service fees.

Research and Development

Research and development expenses consist of salaries and other costs of employment of our development staff, outside contractor costs and amortization of capitalized website development costs.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenue and expenses. Actual results may differ materially from these estimates under different assumptions or conditions. Our significant accounting policies described in more detail in Note 1 to our condensed consolidated financial statements included in this Report on Form 10-Q, involve judgments and estimates that are significant to the presentation of our condensed consolidated financial statements.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

We generate revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement, the fulfillment of subscription listing obligations, the sale of deal of the day vouchers, or the delivery of our SMB products to our customers or those of our channel partners. We enter into contracts to distribute sponsored listings and banner advertisements with our direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). We recognize our portion of the bid price based upon the execution of our contractual obligations. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on our 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 our revenue recognition and determined that our web hosting revenue is recognized net of direct costs.

19

We evaluate whether it is appropriate to record the gross amount of sales and related costs or the net amount earned as revenue. Generally, when we are primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross sales price. We generally record the net amounts as revenue earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. All revenue, other than web hosting revenue, is recognized on a gross basis.

Allowance for Doubtful Accounts

Our management estimates the losses that may result from that portion of our accounts receivable, including long-term receivable, that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If we believe that our customers’ financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.

As of September 30, 2013, and December 31, 2012, two customers, Yahoo and Google represented 69% and 61% of our total accounts receivable, respectively. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.

Goodwill and Other Intangible Assets

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. The first step in determining if there is any goodwill impairment is a comparison of the estimated fair value of 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 charge is recognized for the difference.

We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. Our indefinite lived intangible assets consist of domain names for which the fair value is determined by using a third party valuation site which calculates the value of domain names using internal algorithms. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment.

With our decision to sell the assets of the Spreebird business unit, the carrying value of the goodwill associated with the Spreebird business was determined to be fully impaired. As a result, we recorded an impairment charge of approximately $3.0 million during the second quarter of fiscal 2013, which included goodwill of $2.6 million. Such amounts are included in discontinued operations in the accompanying statements of operations.

Stock Based Compensation

Total stock-based compensation expense recognized for the three and nine months ended September 30, 2013 and 2012, is as follows (in thousands, except per share amount):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of revenues	$	26	$	22	$	85	$	61
Sales and marketing		83		207		333		657
General and administrative		192		320		787		988
Research and development		51		63		207		163
Total stock-based compensation expense	$	352	$	612	$	1,412	$	1,869
Basic and diluted net stock-based compensation expense per share	$	0.02	$	0.03	$	0.06	$	0.08

20

Results of Operations

The following table sets forth our historical operating results as a percentage of revenue for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Cost of revenues		69.1			75.5			71.4			73.8
Sales and marketing		9.5			15.0			11.0			15.8
General and administrative		16.6			10.4			14.3			10.2
Research and development		7.1			5.1			7.2			4.9
Amortization of intangibles		1.0			7.2			1.0			4.3
Total operating expenses		103.2			113.2			105.0			109.0
Operating loss		(3.2	)		(13.2	)		(5.0	)		(9.0	)
Interest and other income (expense), net		(2.3	)		(0.5	)		(2.7	)		(0.4	)
Change in fair value of warrant liability		(1.8	)		0.3			0.3			0.2
Loss from continuing operations before income taxes		(7.2	)		(13.4	)		(7.3	)		(9.2	)
Provision for income taxes		(0.5	)		0.1			0.2			0.2
Net loss from continuing operations		(6.8	)		(13.5	)		(7.5	)		(9.3	)
Loss from discontinued operations (net of taxes)		(0.7	)		(2.1	)		(5.4	)		(12.4	)
Net loss		(7.4	)%		(15.6	)%		(12.8	)%		(21.7	)%

Three and nine months ended September 30, 2013 and 2012

Revenue (dollars in thousands):

	Three Months Ended September 30,										Percent			Nine Months Ended September 30,										Percent
	2013		(*)			2012		(*)			change			2013		(*)			2012		(*)			change
Owned and operated	$	8,807		37.5	%	$	18,340		75.3	%		-52.0	%	$	32,711		48.4	%	$	56,791		75.3	%		-42.4	%
Network		14,540		61.9	%		4,961		20.4	%		193.1	%		34,413		50.9	%		13,289		17.6	%		159.0	%
Business solutions		125		0.5	%		1,064		4.4	%		-88.3	%		467		0.7	%		5,319		7.1	%		-91.2	%
Total revenue	$	23,472		100.0	%	$	24,365		100.0	%		-3.7	%	$	67,591		100.0	%	$	75,399		100.0	%		-10.4	%

(*) – Percent of total revenue

O&O revenue for the three and nine months ended September 30, 2013, decreased 52.0% and 42.4%, respectively, compared to the same periods in 2012. The decrease in revenue for the three and nine months ended September 30, 2013, compared to the same periods in 2012 is due to a decrease in monetization as our revenue per thousand visitors (“RKV”) decreased from $276 and $287 for the three and nine months ended September 30, 2012, to $180 and $199 for the three and nine months ended September 30, 2013, coupled with a decrease in traffic. The decrease in RKV is largely due to periodical changes to traffic provider policies and guidelines. These changes impacted both our advertising campaigns to purchase traffic and the monetization of our search results pages. During October 2012, our largest traffic provider made certain changes to their policies and guidelines. These changes had a negative impact on our first, second and third quarter of fiscal 2013 O&O revenue and results of operations. This advertising partner also made some changes beginning in July 2013 related to bidding for mobile and desktop advertising campaigns, which further had a negative impact on our traffic and monetization of such traffic. We continue to work closely with this traffic provider to refine our traffic acquisition approach and user experience on our search results pages.

Network revenue for the three and nine months ended September 30, 2013, increased 193.1% and 159.0%, respectively, compared to the same periods in 2012. The increase is primarily due to an increase in the number of network partner websites. The increase is partially offset by a decrease in organic traffic to existing partner websites due to a change in the way third party search engines index our network partner websites. A portion of the Network revenue is based on other websites for which we provide our organic and third-party ad feeds. We have experienced volatility in this portion of our Network revenue related to changes in the partners’ traffic levels, traffic quality and market conditions for paid search. This portion of our Network revenue remains volatile. If we experience a reduction in the number of Network partner websites receiving our organic and third-party ad feeds, or if the overall traffic levels derived from our Network partner websites is reduced, or if the quality of traffic derived from those Network partner websites is diminished, we expect that our Network revenue would decrease materially.

21

Business Solutions revenue for the three and nine months ended September 30, 2013, decreased 88.3% and 91.2%, respectively, compared to the same periods in 2012. The decrease in revenue is due to a decrease in revenue from our LEC-billed subscriber bases and a decrease in revenue from our Launch by Local product suite. The decrease in revenue from our LEC-billed subscriber bases is due to a decision by certain LEC’s to no longer provide billing services for our products and services during 2012. In January 2013, we made a decision to eliminate our direct sales efforts of our SMB product suit to small and medium size businesses (“SMBs”). We will still be providing our SMB solution through our channel partners.

The growth in small business subscribers in prior years was a result of acquisitions of subscriber bases and internal and outsourced sales efforts. The following table provides the revenue relating to the acquisition of subscriber bases and revenue relating to internal and outsourced sales efforts (dollars in thousands):

	Three Months Ended September 30,										Percent			Nine Months Ended September 30,										Percent
	2013		(*)			2012		(*)			change			2013		(*)			2012		(*)			change
Revenue from internal and outsourced sales	$	125		100.0	%	$	596		56.0	%		-79.0	%	$	467		100.0	%	$	2,727		51.3	%		-82.9	%
Revenue from acquired bases		—		0.0	%		468		44.0	%		-100.0	%		—		0.0	%		2,592		48.7	%		-100.0	%
Total sales and advertiser services revenue	$	125		100.0	%	$	1,064		100.0	%		-88.3	%	$	467		100.0	%	$	5,319		100.0	%		-91.2	%

Based on the above, total revenue for the three and nine months ended September 30, 2013, decreased 3.7% and 10.4%, respectively, compared to the same periods in 2012.

The following table identifies our major customers that represented greater than 10% of our total revenue in the periods presented:

	Percentage of Total Revenue Three Months Ended September 30,						Percentage of Total Revenue Nine Months Ended September 30,
Customer	2013			2012			2013			2012
Google, Inc.		20.1	%		44.3	%		25.0	%		45.0	%
Yahoo! Inc.		56.7	%		20.2	%		46.2	%		18.3	%

Operating expenses:

Operating expenses were as follows (dollars in thousands):

	Three Months Ended September 30,													Nine Months Ended June 30,
	2013		Percent of Total Revenue			2012		Percent of Total Revenue			Percent Change			2013		Percent of Total Revenue			2012		Percent of Total Revenue			Percent Change
Cost of revenues	$	16,208		69.1	%	$	18,407		75.5	%		(11.9	)%	$	48,253		71.4	%	$	55,632		73.8	%		(13.3	)%
Sales and marketing		2,230		9.5	%		3,649		15.0	%		(38.9	)%		7,419		11.0	%		11,940		15.8	%		(37.9	)%
General and administrative		3,894		16.6	%		2,522		10.4	%		54.4	%		9,685		14.3	%		7,706		10.2	%		25.7	%
Research and development		1,664		7.1	%		1,240		5.1	%		34.2	%		4,900		7.2	%		3,666		4.9	%		33.7	%
Amortization of intangibles		225		1.0	%		1,754		7.2	%		(87.2	)%		687		1.0	%		3,211		4.3	%		(78.6	)%
Total operating expenses	$	24,221		103.2	%	$	27,572		113.2	%		(12.2	)%	$	70,944		105.0	%	$	82,155		109.0	%		(13.6	)%

Cost of revenues

Cost of revenues for the three and nine months ended September 30, 2013, decreased by 11.9% and 13.3%, respectively, compared to the same periods in 2012. The decrease during the three and nine months ended September 30, 2013, compared to the same periods in 2012 is primarily due to a decrease in traffic acquisition costs associated with driving consumers to our Local.com website. The decrease is partially offset by an increase in revenue share related to network revenue. Included in cost of revenues during the third quarter of fiscal 2013 was a benefit from our assertion of certain contractual rights as it relates to our partner agreements.

Sales and marketing

Sales and marketing expenses for the three and nine months ended September 30, 2013, decreased 38.9% and 37.9%, respectively, compared to the same periods in 2012. The decrease is mainly due to a decrease in personnel-related costs as part of our continued cost savings efforts. The reduction in personnel related costs was partially offset by severance costs. In January 2013, we made a decision to eliminate our direct sales efforts of our SMB product suite to small and medium size businesses. We will still be providing our SMB solution through our channel partners.

22

General and administrative

General and administrative expenses for the three and nine months ended September 30, 2013, increased by 57.3% and 26.6%, respectively, compared to the same periods in 2012. The increase was due to an increase in consulting and legal expense related to our efforts to secure financing as well as legal costs relating to litigation and the accrual of a legal settlement of $550,000 during the quarter ended September 30, 2013. Also included in general and administrative expense is a $154,000 credit recorded in rent expense related to the sub-lease of an idle lease facility during the second quarter of fiscal 2013. This credit is offset by a liability recorded for the idle lease facility of $256,000 in the first quarter of fiscal 2013. The Company also recorded additional bad debt expense of approximately $450,000, of which the majority related to a second tier advertising partner, all of which has been included in general and administrative expense for the third quarter fiscal 2013.

Research and development

Research and development expenses for the three and nine months ended September 30, 2013, increased by 34.2% and 33.7%, respectively, compared to the same periods in 2012. The increase is due to lower capitalization of personnel related cost as well as an increase in personnel related costs through the first three quarters of fiscal 2013.

The following table sets forth research and development expenses, additional capitalized website development costs and amortization of capitalized website development costs for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Research and development expense	$	1,664		$	1,240		$	4,900		$	3,666
Capitalized website development costs	$	531		$	413		$	1,595		$	1,523
Amortization of capitalized website development costs	$	(648	)	$	(580	)	$	(1,893	)	$	(1,579	)

Amortization of intangibles

Amortization of intangibles expense was $225,000 and $687,000 for the three and nine months ended September 30, 2013, respectively, compared to $1.8 million and $3.2 million for the same periods in 2012. The decrease in amortization expense was primarily due to the accelerated amortization of subscriber related intangible assets in 2012 with all subscriber related intangible assets fully amortized as of the end of fiscal 2012.

Interest and other income (expense), net

Interest and other income (expense), net were ($537,000) and ($1.8 million) for the three and nine months ended September 30, 2013, respectively, compared to ($131,000) and ($325,000) for the same periods in 2012. The increase is due to additional non-cash interest expense recorded for the debt discount of the Notes issued in the second quarter 2013, and additional monthly expense relating to deferred finance charges for the Notes. Also included in interest and other income (expense) is $723,000 related to the loss on exchange of warrants.

Provision for income taxes

Provision (benefit) for income taxes was ($109,000) and $121,000 for the three and nine months ended September 30, 2013, and $22,000 and $121,000 for the three and nine months ended September 30, 2012. Taxes are primarily due to anticipated tax amortization on indefinite-lived assets, partially offset by California research and development credits.

Liquidity and Capital Resources

Liquidity and capital resources highlights (in thousands):

	September 30,			December 31,
	2013			2012
Cash and cash equivalents	$	4,847		$	3,696
Working capital (deficit)	$	(2,124	)	$	(2,391	)

23

Cash flow highlights (in thousands):

	Nine Months Ended September 30,
	2013			2012
Net cash provided by (used in) operating activities	$	326		$	(3,747	)
Net cash used in investing activities		(2,337	)		(2,585	)
Net cash provided by (used in) financing activities		3,162			(356	)

We have funded our business, to date, primarily from issuances of equity securities as well as through debt facilities. Cash was $4.8 million as of September 30, 2013, and $3.7 million as of December 31, 2012. We had a working capital deficit of $2.1 million as of September 30, 2013, and a working capital deficit of $2.4 million as of December 31, 2012. As of September 30, 2013, we had a total of $8.7 million outstanding on the revolving credit facility and term loan with Square 1 Bank, $5.0 million outstanding on the Convertible Notes issued in the second quarter of fiscal 2013, and $3.3 million available under the revolving credit facility. The decrease in working capital deficit is largely due to an increase in accounts receivable of approximately $4.2 million, which was mainly due to an increase in revenue, and an increase in cash of approximately $1.1 million as a result of the issuance of convertible notes. Working capital excludes the conversion option and warrant liability and includes assets and liabilities held for sale.

Net cash provided by operating activities was $326,000 for the nine months ended September 30, 2013. Net loss adjusted for non-cash charges (adding back depreciation and amortization, stock-based compensation expense, change in fair value of warrant and conversion option liabilities, non-cash interest expense, loss on exchange of warrants, provision for doubtful accounts and asset impairment) was cash provided of approximately $1.2 million. Changes in operating assets and liabilities used cash of $917,000 for the nine months ended September 30, 2013. Net cash used in operating activities was $3.7 million for the nine months ended September 30, 2012. Net loss adjusted for non-cash charges (adding back depreciation and amortization, stock-based compensation expense, change in fair value of conversion option and warrant liabilities, provision for doubtful accounts and asset impairment) was cash used of approximately $1.2 million. Changes in operating assets and liabilities used cash of $2.6 million for the nine months ended September 30, 2012.

There are four primary drivers that affect cash provided by or (used in) operations: net income (loss); non-cash adjustments to net income (loss); changes in accounts receivable (including long term receivable); and changes in accounts payable. For the nine months ended September 30, 2013, the terms of our accounts receivable and accounts payable remained unchanged.

The table below substantiates the change in net cash provided by (used in) operating activities for the nine months ended September 30, 2013 and 2012 (in thousands):

	Nine Months Ended September 30,
	2013			2012			Change
Net loss	$	(8,683	)	$	(16,351	)	$	7,668
Non-cash (1)		9,926			15,173			(5,247	)
Subtotal		1,243			(1,178	)		2,421
AR, AP and Other		(917	)		(2,569	)		1,652
Net cash provided by (used in) operations	$	326		$	(3,747	)	$	4,073

(1) Includes depreciation, amortization, change in fair value of conversion option and warrant liability, asset impairment, non-cash expense related to stock-based compensation and interest, loss on exchange of warrants and provision for doubtful accounts.

Net cash used in investing activities was $2.3 million for the nine months ended September 30, 2013, and consisted of $2.4 million of capital expenditures, primarily related to website development costs. Net cash provided by financing activities was $3.2 million for the nine months ended September 30, 2013, and primarily consisted of proceeds of $5.0 million from the issuance of secured convertible notes offset by the $1.3 million repayment of a portion of the outstanding balance on the Square 1 Bank line of credit and term loan and $527,000 of financing related cost. Net cash used in investing activities was $2.6 million for the nine months ended September 30, 2012, and consisted of $2.6 million of capital expenditures, primarily related to website development costs. There were no material financing activities for the nine months ended September 30, 2012, other than repayments on the revolving credit facility.

During the second half of 2012, we were able to reduce our operating losses (excluding impairment charges) through the restructuring of agreements with current partners, entering into agreements with new partners and continued efforts to optimize monetization on our Consumer Properties. We also initiated aggressive cost savings efforts in the second half of fiscal 2012 through the first quarter of fiscal 2013. These efforts resulted in the sale of our Rovion business and our decision to cease the direct sales effort of our SMB product suite, as well as the sale of our Spreebird business in July 2013. These actions resulted in estimated annual cost savings of approximately $5.6 million.

24

During October 2012, our largest traffic partner made changes to their policies and guidelines. These changes had a negative impact on our revenues and results of operations for the fourth quarter of fiscal 2012 and the three quarters of fiscal 2013. We are continuing to evaluate the effects of these changes to our business and are working on making the necessary adjustments to compensate for the loss of revenue and liquidity.

On January 30, 2013, the Loan Agreement with Square 1 Bank was amended to temporarily revise the terms under which we were allowed to draw the maximum amount on the Non-Formula Revolving Line.

On February 13, 2013, we executed the Fifth Amendment to the Loan Agreement with Square 1 Bank, extending the maturity date through February 3, 2015. On March 28, 2013, we executed the Sixth Amendment to the Loan Agreement with Square 1 Bank. The Sixth Amendment waives any and all violations of the Liquidity Ratio covenants prior to the Sixth Amendment, terminates the Non-Formula Advances under the Agreement and requires monthly payments of the outstanding Non-Formula principal, plus all accrued interest, over 24 months beginning on April 28, 2013. On April 10, 2013, we entered into the Seventh Amendment to the Loan Agreement. The Seventh Amendment provided for us to add as security for our obligations under the Loan Agreement all of our intellectual property and to undertake certain reporting obligations to Square 1 Bank with respect to such intellectual property. As of September 30, 2013, we are in compliance with all covenants relating to the Square 1 Bank revolving credit facility and term loan.

In connection with the sale of the assets of the Spreebird business we obtained a release from Square 1 Bank and the holders of the Senior Secured Convertible Notes to allow us to sell such assets.

On April 10, 2013, we entered into a Convertible Note and Warrant Purchase Agreement. Pursuant to this Agreement, the investors purchased an aggregate of $5.0 million of 7% subordinated convertible notes and warrants to purchase shares of our common stock. In connection with the issuance of the Notes, we received a cash payment of $4.6 million net of $356,000 in placement agent fees. The Notes are subordinate to the Square 1 Bank line of credit facility.

Management believes that based upon projected operating needs, cash from operations, availability on our revolving credit facility and the issuance of Notes will be sufficient to fund our operations for at least the next 12 months. However, we continue to evaluate our operating plan and manage our costs in line with estimated revenues, including contingencies for further cost reductions if projected revenue and improvements in operating results are not fully realized. Furthermore, if the projections and assumptions used by management to form its opinion prove incorrect, then we may require additional capital to fund our operations over the next 12 months. Management cannot provide assurances that, if required, any additional equity or debt arrangements will be available to us in the future or that the required capital would be available on terms acceptable to us, if at all, or that any such activity would not be dilutive to our stockholders.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

25

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our disclosures regarding market risk since December 31, 2012. See also Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2012 for further sensitivity analysis regarding our market risk related to interest rates and derivative liabilities.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we may initiate or be subject to a variety of legal proceedings and claims in the ordinary course of business, including claims seeking to enforce our intellectual property rights, claims that allege we infringe the intellectual property rights of another party and claims arising in connection in the ordinary course of business. Other than the litigations discussed below, we are not currently a party to any material legal proceedings.

GEOTAG Litigation

On July 23, 2010, a lawsuit alleging patent infringement was filed in the United States District Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a Delaware corporation with its principal offices in Plano, Texas. The complaint alleges that we infringe U.S. Patent No. 5,930,474 (hereinafter, the “ ‘474 Patent”) as a result of the operation of our website atwww.local.com. On November 11, 2013, we entered into a Settlement and Patent License Agreement (“Settlement Agreement”) with GeoTag, Inc., pursuant to which we paid GeoTag, Inc. a license fee of $550,000 in return for a license to the
‘474 Patent, and all patent applications related thereto, and all reissue patents, continuations and continuations-in-part through the expiration of the last surviving patent related to the ‘474 Patent. In connection with the Settlement Agreement, Geotag will dismiss its claims against us. We denied liability in the litigation and entered into the Settlement Agreement to put an end to litigation costs associated with this suit.

Fry’s Electronics Litigation

On June 18, 2012, we filed a lawsuit against Fry’s Electronics, Inc. (“Fry’s”) alleging that Fry’s violates our registered U.S. Patent No. 7,062,453, which is entitled “Methods and systems for dynamic networked commerce architecture.” The lawsuit was filed in the Central District of California. We are seeking an injunction against Fry’s and an award of damages in an amount to be determined at trial, as well as attorney’s fees. There can be no guarantees as to the outcome of the litigation.

26

Item 1A. Risk Factors

Information on risk factors can be found in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on April 2, 2013. There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, except as follows:

The conversion price of the Notes issued in April 2013 can fluctuate under certain circumstances which, if triggered, can result in potentially material further dilution to our stockholders.

Under the terms of the Notes, the conversion price of the Notes can fluctuate in the event (i) there is an event of default under the Notes, the holders of the Notes elect to use the alternative conversion price to convert their Notes, and the alternative conversion price is less than the then-current conversion price for the Notes, (ii) the Company undertakes certain stock dividends, split, combinations, distributions, or (iii) the Company undertakes certain issuances of common stock or convertible securities at prices lower than the then-current conversion price for the Notes. In such instances, the conversion price of the Notes can fluctuate materially lower than the current conversion price of $2.01 per share.

In the event there is an event of default under the Notes and the holder elects to convert the Notes, the Notes would be converted at the lower of the conversion price then in effect or a price equal to 80% of the volume weight average price on the trading day immediately preceding the conversion date.

By way of illustration, assuming the Company is in an event of default under the Notes and the holders of the Notes elect to use the alternative conversion price to convert their Notes, the following table sets forth the dilutive impact of such a conversion assuming that the alternative price (i.e., the then-current conversion price or 80% of the volume-weighted average sale price for the common stock on the trading day immediately preceding such conversion) is approximately 25%, 50%, and 75% of the current conversion price of $2.01:

Conversion Price	Number of Shares to be Issued upon Conversion
$2.01 (current conversion price)		2,487,562
$1.50 (approximate 25% decrease)		3,333,332
$1.00 (approximate 50% decrease)		5,000,000
$0.50 (approximate 75% decrease)		10,000,000

In the event of a stock dividend, split or combination, the conversion price of the Notes would be adjusted in accordance with the following formula:

a x (b/c)

Where:

a= Current Conversion Price

b= Number of shares of Common Stock outstanding before the event

c= Number of shares of Common Stock outstanding after the event

In the event of a subsequent issuance of Common Stock by us, the conversion price of the Notes would be adjusted in accordance with the following formula:

a x (b+(c/a))/d

Where:

a= Current Conversion Price

b= Number of shares of Common Stock outstanding at time of issuance

c= Aggregate consideration received by the issuance

d= Number of shares of Common Stock outstanding after the issuance

27

By way of illustration, the following table sets forth the impact of a subsequent issuance of Common Stock by us at approximately 25%, 50% and 75% of the current conversion price of $2.01 in which the total value of such subsequent issuance of Common Stock is valued at $1,000,000, $5,000,000 or $10,000,000:

Issuance Value	Issuance Price		Number of Shares to be Issued Upon Conversion of Notes
$1,000,000	$ $ $	1.50 1.00 0.50		2,505,564 2,541,037 2,576,510
$5,000,000	$ $ $	1.50 1.00 0.50		2,570,508 2,733,959 2,897,410
$10,000,000	$ $ $	1.50 1.00 0.50		2,638,637 2,936,343 3,234,049

Accordingly, if these provisions are triggered, then potentially material additional dilution to the existing stockholders of the Company may occur and the ability of the Company to complete a subsequent financing to fund its future operating needs could be materially adversely effected.

The Notes in April 2013 contain provisions which allow us to pay our interest obligations under the Notes in shares of Common Stock discounted to the current market price.

The Notes contain provisions which allow us to pay our interest obligations under the Notes in shares of our Common Stock instead of cash. If we elect to pay our interest obligations under the Notes in shares of our Common Stock, the number of shares to be issued in satisfaction of such interest obligations would be determined by dividing such interest obligation amount by 93% of the market price of our Common Stock as of the applicable payment date. The “market price” of our Common Stock is the lesser of (i) the closing sale price of our Common Stock on the date before the applicable payment date and (ii) the volume weight average price over the 20 trading day period prior to the date before the applicable payment date. Since the price at which our Common Stock is converted into the interest obligation amount is at a discount to the market price and there is no guarantee as to what the market price will be, a potentially unlimited number of additional shares of our Common Stock could be used to pay these obligations.

By way of illustration, the following table sets forth the impact that lower market prices for our Common Stock would have on the number of shares of Common Stock to be issued in satisfaction of our interest obligations under the Notes, assuming a market price of approximately 25%, 50% and 75% of the current conversion price of the Notes:

Market Price of Common Stock at interest payment date		Conversion price (93% of Market Price)		Number of shares of Common Stock issued for interest payment
$	2.01	$	1.87		374,472
$	1.50	$	1.40		501,792
$	1.00	$	0.93		752,688
$	0.50	$	0.47		1,505,376

Accordingly, if we elect to pay our interest obligations in shares of Common Stock, then potentially material additional dilution to our existing stockholders may occur and our ability to complete a subsequent financing to fund our operating needs could be materially adversely affected.

The number of warrants issuable pursuant to the warrants issued in the April 2013 Subordinated Notes transaction and the exercise price of such warrants can fluctuate under certain circumstances which, if triggered, can result in potentially material further dilution to our stockholders.

The number of shares of our common stock for which the warrants issued in the April 2013 Subordinated Notes transaction are exercisable and the price at which such shares of our common Stock may be purchased upon exercise of the warrant may be adjusted in the event (i) we undertake certain stock dividends, split, combinations, distributions, or (ii) we undertake certain issuances of common stock or convertible securities at prices lower than the then-current exercise price for such warrants. These provisions are intended to provide the investors in our April 2013 Subordinates Notes transaction with partial protection from the effects of actions that dilute their interests in our Company on a fully-converted and fully-exercised basis. These provisions could result in substantial dilution to investors in our Common Stock that purchased our shares at higher prices.

28

In such instances, the number of shares of our Common Stock for which such warrants are exercisable and the price at which such shares of our common Stock may be purchased upon exercise of the warrant can fluctuate materially lower than the current exercise price of $2.01 per share.

In the event of a stock dividend, split or combination, the number of shares of common stock acquirable pursuant to such warrants would be adjusted in accordance with the following formula:

a x (b/c)

Where:

a= Current total number of shares of common stock issuable pursuant to the warrant

b= Number of shares of common stock outstanding after the event

c= Number of shares of common stock outstanding before the event

Simultaneously, the exercise price of such warrants would be adjusted in accordance with the following formula:

(a x b)/c

Where:

a= Current warrant price

b= Number of shares of common stock issuable pursuant to the warrant prior to the adjustment above

c= Number of shares of common stock issuable pursuant to the warrant after such adjustment

In the event of a subsequent issuance of common stock by us, the number of shares of common stock acquirable pursuant to these warrants would be adjusted in accordance with the following formula:

a/(a x ((b+(c/a))/d))

Where:

a= Current exercise price of the warrant

b= Number of shares of common stock outstanding prior to the issuance

c= Aggregate consideration received by the issuance

d= Number of shares of common stock outstanding after the issuance

Simultaneously, the exercise price of the warrants would be adjusted in accordance with the following formula:

a x ((b+(c/a))/d)

Where:

a= Current exercise price of the warrant

b= Number of shares of common stock outstanding prior to the issuance

c= Aggregate consideration received by the issuance

d= Number of shares of common stock outstanding after the issuance

By way of illustration, the following table sets forth the impact of a subsequent issuance of common stock by us at approximately 25%, 50% and 75% of the current exercise price of these warrants of $2.01 in which the total value of such subsequent issuance of common stock is valued at $1,000,000, $5,000,000 or $10,000,000:

Issuance Value		Issuance Price		Number of Shares Issuable In Aggregate to Warrant Holders		Exercise Price of Such Warrants Post-Subsequent Issuance
$	1,000,000	$ $ $	1.50 1.00 0.50		751,668 730,564 701,196	$ $ $	2.00 1.97 1.89
$	5,000,000	$ $ $	1.50 1.00 0.50		771,152 820,186 967,292	$ $ $	1.95 1.83 1.55
$	10,000,000	$ $ $	1.50 1.00 0.50		791,590 880,902 1,148,838	$ $ $	1.89 1.70 1.31

29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

As previously disclosed on Item 3.02 of Form 8-K filed with the Securities and Exchange Commission on April 11, 2013.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

30

Item 6. Exhibits

Exhibit Number	Description
3.1 (1)	Amended and Restated Certificate of Incorporation of the Registrant.
3.2(2)	Amendment to Restated Certificate of Incorporation of the Registrant.
3.3(3)	Amended and Restated Bylaws of the Registrant.
3.4(4)	Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation.
3.5(5)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.
3.6(6)	Certificate of Ownership and Merger Merging Wide Out Corporation Into Local.com Corporation.
4.1(5)	Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto).
10.1(7)	Amendment Number Five to Google Services Agreement with an effective date of August 1, 2013, by and between the Registrant and Google Inc.
10.2(8)#	Description of the Material Terms of the Registrant’s Bonus Program as of July 2, 2013.
10.3(9)†	Dual Distribution Agreement, effective July 1, 2013, by and between the Registrant and Yellowpages.com LLC.
10.4(10)	Asset Purchase Agreement by and among the Registrant, Screamin Media Group, Inc. and nCrowd, Inc., dated July 22, 2013.
10.5(11)†	AOL Advertising Insertion Order dated August 7, 2013, by and between the Registrant and AOL Advertising In.
10.6(12)†	Amendment Number Six to Google Services Agreement dated October 3, 2013, by and between the Registrant and Google Inc.
31.1*	Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.

# Indicates management contract or compensatory plan.

† Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

(1) Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.

(2) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009

(3) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.

(4) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.

31

(5) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.

(6) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 19, 2012.

(7) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 25, 2013.

(8) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 5, 2013.

(9) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 16, 2013.

(10) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 23, 2013.

(11) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 13, 2013.

(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 7, 2013.

32

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LOCAL CORPORATION
November 12, 2013	/s/ Heath B. Clarke
Date	Heath B. Clarke
	Chief Executive Officer
	(principal executive officer) and Chairman
November 12, 2013	/s/ Kenneth S. Cragun
Date	Kenneth S. Cragun
	Chief Financial Officer (principal financial
	and accounting officer) and Secretary

33

INDEX TO EXHIBITS

Exhibit Number	Description
3.1 (1)	Amended and Restated Certificate of Incorporation of the Registrant.
3.2(2)	Amendment to Restated Certificate of Incorporation of the Registrant.
3.3(3)	Amended and Restated Bylaws of the Registrant.
3.4(4)	Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation.
3.5(5)	Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.
3.6(6)	Certificate of Ownership and Merger Merging Wide Out Corporation Into Local.com Corporation.
4.1(5)	Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto).
10.1(7)	Amendment Number Five to Google Services Agreement with an effective date of August 1, 2013, by and between the Registrant and Google Inc.
10.2(8)#	Description of the Material Terms of the Registrant’s Bonus Program as of July 2, 2013.
10.3(9)†	Dual Distribution Agreement, effective July 1, 2013, by and between the Registrant and Yellowpages.com LLC.
10.4(10)	Asset Purchase Agreement by and among the Registrant, Screamin Media Group, Inc. and nCrowd, Inc., dated July 22, 2013.
10.5(11)†	AOL Advertising Insertion Order dated August 7, 2013, by and between the Registrant and AOL Advertising In.
10.6(12)†	Amendment Number Six to Google Services Agreement dated October 3, 2013, by and between the Registrant and Google Inc.
31.1*	Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Extension Schema Document.
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.

# Indicates management contract or compensatory plan.

† Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential treatment has been requested has been filed separately with the Securities and Exchange Commission.

(1) Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.

(2) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009

(3) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.

(4) Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.

34

(5) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.

(6) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on September 19, 2012.

(7) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 25, 2013.

(8) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 5, 2013.

(9) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 16, 2013.

(10) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 23, 2013.

(11) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 13, 2013.

(12) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 7, 2013.

35