Local (LOCMQ) 10-Q 2015 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2015

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 incorporation or organization)	(I.R.S. Employer 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  þ    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  þ    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	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	þ

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

As of April 30, 2015 there were 23,306,184 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
	Condensed Consolidated Balance Sheets As of March 31, 2015 and December 31, 2014 (Unaudited)		3
	Condensed Consolidated Statements of Operations For the three months ended March 31, 2015 and 2014 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows For the three months ended March 31, 2015 and 2014 (Unaudited)		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3.	Defaults Upon Senior Securities		25
Item 4.	Mine Safety Disclosures		25
Item 5.	Other Information		25
Item 6.	Exhibits		26
	Signatures		28
	Index to Exhibits		29

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LOCAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)

	March 31, 2015			December 31, 2014
ASSETS
Current assets:
Cash	$	2,288		$	2,438
Accounts receivable, net of allowances of $589 and $508, respectively		7,400			8,426
Prepaid expenses and other current assets		952			449
Total current assets		10,640			11,313
Property and equipment, net		5,196			5,650
Goodwill		19,281			19,281
Intangible assets, net		1,643			1,752
Long-term receivable, net of allowances of $3,431 and $3,431, respectively		—			—
Deposits		64			72
Total assets	$	36,824		$	38,068
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,006		$	9,669
Accrued compensation		814			940
Deferred rent		63			116
Other accrued liabilities		1,044			1,474
Short-term portion of senior secured convertible notes		2,433			—
Revolving line of credit		3,184			4,883
Deferred revenue		142			109
Total current liabilities		18,686			17,191
Senior secured convertible notes, net of discount of $3,832 and $383, respectively		4,754			4,630
Warrant liability		1,752			156
Deferred income taxes		480			480
Total liabilities		25,672			22,457
Commitments, contingencies and subsequent events
Stockholders’ equity:
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 23,306 and 23,294, respectively		—			—
Additional paid-in capital		125,197			125,076
Accumulated deficit		(114,045	)		(109,465	)
Stockholders’ equity		11,152			15,611
Total liabilities and stockholders’ equity	$	36,824		$	38,068

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

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LOCAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2015			2014
Revenue	$	13,087		$	26,180
Operating Expenses:
Cost of revenues		11,563			20,405
Sales and marketing		1,687			2,350
General and administrative		1,998			3,318
Research and development		1,257			1,559
Amortization of intangibles		114			225
Total operating expenses		16,619			27,857
Operating loss		(3,532	)		(1,677	)
Interest and other income (expense), net		(3,616	)		(543	)
Change in fair value of derivative liabilities		2,568			(334	)
Loss before income taxes		(4,580	)		(2,554	)
Provision for income taxes		—			274
Net loss	$	(4,580	)	$	(2,828	)
Per share data:
Basic net loss per share	$	(0.20	)	$	(0.12	)
Diluted net loss per share	$	(0.20	)	$	(0.12	)
Basic weighted average shares outstanding		23,305			23,225
Diluted weighted average shares outstanding		23,305			23,225

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

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LOCAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net loss	$	(4,580	)	$	(2,828	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		1,041			1,104
Provision for doubtful accounts		115			150
Stock-based compensation expense		125			253
Change in fair value of derivative liabilities		(2,568	)		334
Non-cash interest expense		2,403			257
Deferred income taxes		—			274
Changes in operating assets and liabilities:
Accounts receivable		911			(1,071	)
Prepaid expenses and other		(16	)		256
Other non-current assets		8			—
Accounts payable and accrued liabilities		728			551
Deferred revenue		33			(7	)
Net cash used in operating activities		(1,800	)		(727	)
Cash flows from investing activities:
Capital expenditures		(478	)		(940	)
Net cash used in investing activities		(478	)		(940	)
Cash flows from financing activities:
Repayment of senior secured convertible notes		(5,000	)		—
Proceeds from the issuance of senior secured convertible notes and warrants		9,318			—
Payment of term loan		—			(1,875	)
Payment of financing related costs		(491	)		(41	)
Proceeds from (payment of) revolving credit facility, net		(1,699	)		2,225
Net cash provided by financing activities		2,128			309
Net decrease in cash		(150	)		(1,358	)
Cash, beginning of the period		2,438			5,069
Cash, end of the period	$	2,288		$	3,711
Supplemental cash flow information:
Interest paid	$	140		$	202
Income taxes paid	$	—		$	—
Non-cash financing activities:
Debt discount recorded in connection with the issuance of senior secured convertible notes	$	3,893		$	—

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

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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 advertising technology company that provides its search results to consumers who are searching online for local businesses, products and services. The Company’s search results consist primarily of local business listings and product listings that it aggregates, indexes, normalizes and syndicates using its sophisticated technology platforms. The Company provides its search results through its flagship Local.com website and platform and through other proprietary websites (“Owned and Operated” or “O&O”) and to a network of websites that rely on its search syndication services to provide local search results to their own users (“Network”). The Company generates revenue from a variety of ad units it places alongside its search results, which include pay-per-click, pay-per-call, and display (banner) ad units, including video.

The Company uses patented and proprietary technologies and systems to provide users of its O&O websites and Network with relevant search results for local businesses, products and services, event information, ratings and reviews, driving directions and more into its search results. By distributing this information across its O&O websites and Network, the Company is able to reach users that its direct advertisers and advertising partners desire to reach.

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.

Certain comparative prior period amounts in the condensed consolidated financial statements and accompanying notes have been reclassified to conform to the current period presentation. The Company reclassified the warrant liability of $156,000, as of December 31, 2014, from current to non-current.

The unaudited interim condensed consolidated financial statements as of March 31, 2015, and for the three months ended March 31, 2015 and 2014, 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 months ended March 31, 2015, 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, 2014, included in our Form 10-K filed with the Securities and Exchange Commission on March 27, 2015.

Future Operations, Liquidity and Capital Resources

The Company has experienced substantial net losses from operations for the three months ended March 31, 2015 and 2014, totaling $4.6 million and $2.8 million, respectively. As of March 31, 2015, the Company had a working capital deficit of $8.0 million, which included $3.2 million relating to the line of credit with Square 1 Bank and $2.4 million related to the short term portion of the senior secured convertible notes.

The Company had negative cash flow from operations of $1.8 million during the three months ended March 31, 2015. The decrease in the Company’s revenue during the first quarter of fiscal 2015 resulted in a decrease in the Company’s ability to borrow on its line of credit with Square 1 Bank. As a result, the Company was required to make payments on the line of credit with Square 1 Bank of approximately $1.7 million during the first quarter of fiscal 2015.

The Company also continues to focus on generating new revenue streams through various initiatives. However, if our revenue does not grow, we may continue to experience losses in one or more future periods. We may not be able to reduce or maintain our expenses in response to any decrease in our revenue, which may impact our ability to implement our business strategy and adversely affect our financial condition. The Company continues to evaluate its operating plan and manage its costs in line with estimated revenues and has recently undertaken cost reductions to better manage its costs in light of recent revenue trends.

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On March 9, 2015, the Company entered into multiple financing agreements, resulting in additional net cash flow to the Company of approximately $3.3 million (includes a $1.0 million prepayment penalty) and extended the due date of repayments. SeeNote 9 — Senior Secured Convertible Notes.

During the first quarter of fiscal 2015, the Company had a reduction in workforce, reducing the amount of employees from 70 as of December 31, 2014 to 60.

Use of estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. 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, 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, 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 approximate its fair values because the interest rate on these instruments fluctuates with market interest rates. The 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 estimated fair values of the conversion option and warrant liability are determined using the Black-Scholes valuation model, a “Level 3” fair value measurement, based on the quoted price of common stock, volatility based on the historical market activity of the Company’s stock, the expected life based on the remaining contractual term of the conversion option and warrants and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ and conversion options’ contractual life. The Company has engaged a valuation specialist to determine the fair value of the conversion option and warrant liabilities using the lattice-based model. While the valuation is in progress, the Company will use the Black-Scholes valuation model to estimate the fair value.

Intangible Assets

Definite-lived intangible assets represent developed technology, non-compete agreements, customer related intangible assets, patents, trademark and trade names and are amortized over their estimated useful lives, generally on a straight-line basis over two to four years. Indefinite lived intangible assets relate to domain names owned by the Company.

Revenue Recognition

The Company recognizes 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.

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 and the fulfillment of subscription listing obligations. The Company enters into contracts to distribute sponsored listings and banner advertisements with direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at any time. The Company’s indirect advertisers provide 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 the contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on its O&O websites and Network. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Revenue recognized is net of estimated adjustments for traffic screening.

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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 gross sales price. The Company generally records the net amounts as revenue earned if it is not primarily obligated and does not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. All revenue 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. 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 months ended March 31, 2015 and 2014, approximately 66% and 76% respectively, of our overall traffic was purchased from other search engine websites. During the three months ended March 31, 2015, advertising costs to drive consumers to our Local.com website were $7.5 million of which $6.0 million and $1.5 million were attributable to Google and Yahoo, respectively. During the three months ended March 31, 2014, advertising costs to drive consumers to our Local.com website were $9.4 million of which $7.5 million and $1.3 million were attributable to Google and Yahoo, respectively. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will likely suffer materially.

2. Intangible assets

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

	March 31, 2015									December 31, 2014
	Gross Carrying Amount		Accumulated Amortization and impairment			Net Carrying Amount		Weighted Average Useful Life		Gross Carrying Amount		Accumulated Amortization and impairment			Net Carrying Amount		Weighted Average Useful Life
								(years)									(years)
Developed technology	$	5,623	$	(5,590	)	$	33		4	$	5,623	$	(5,490	)	$	133		4
Customer-related		1,240		(1,240	)		—		4		1,240		(1,239	)		1		4
Patents		431		(431	)		—		3		431		(431	)		—		3
Domain names — indefinite life		1,606		—			1,606				1,601		—			1,601
Trademarks and Trade Name		700		(696	)		4		4		700		(683	)		17		4
	$	9,600	$	(7,957	)	$	1,643			$	9,595	$	(7,843	)	$	1,752

3. Goodwill and Other Intangible Assets

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. When the Company performs the two-step process, the first step requires a comparison of the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference.

The Company performs annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible assets with indefinite lives, the Company either performs a qualitative assessment or compares the fair value of related assets to the carrying value to determine if there is impairment. The Company’s indefinite lived intangible assets consist of domain names for which the fair value is determined by using a third party valuation site which calculates the value of domain names using internal algorithms. For other intangible assets with definite lives, the Company compares future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is an impairment. The Company determined that the decrease in revenue could be considered a potential indicator of impairment and therefore performed an impairment review of goodwill

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as of March 31, 2015. After comparing the Company’s carrying value to its current market capitalization it was determined that the estimated fair value of the reporting unit still exceeds its carrying value and therefore no impairment existed.

4. 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 web site development be expensed as incurred and that certain costs incurred in the development stage of web site development be capitalized and amortized over its useful life. During the three months ended March 31, 2015, the Company capitalized $433,000 related to web site development. Amortization of capitalized web site costs was $613,000 for the three months ended March 31, 2015. During the three months ended March 31, 2014, the Company capitalized $565,000 related to web site development. Amortization of capitalized web site costs was $607,000 for the three months ended March 31, 2014. Capitalized web site costs are included in property and equipment, net on the accompanying condensed consolidated balance sheets.

5. 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 March 31,
	2015			2014
Numerator:
Net income (loss)	$	(4,580	)	$	(2,828	)
Denominator:
Denominator for historical basic calculation weighted average shares		23,305			23,225
Dilutive common stock equivalents *:
Options		—			—
Warrants		—			—
Denominator for historical diluted calculation weighted average shares		23,305			23,225
Net loss per share:
Basic net income (loss) per share	$	(0.20	)	$	(0.12	)
Diluted net income (loss) per share	$	(0.20	)	$	(0.12	)

* For the three months ended March 31, 2015, potentially dilutive securities, which consist of options to purchase 3,924,690 shares of common stock at prices ranging from $0.46 to $9.90 per share, warrants to purchase 8,729,888 shares of common stock at a price of $0.65 to $1.47 per share and conversion options to purchase 14,954,841 shares of common stock at a price of $0.55 to $0.71 were not included in the computation of diluted net loss per share because such inclusion would be antidilutive.

* For the three months ended March 31, 2014, potentially dilutive securities, which consist of options to purchase 3,855,253 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 a price of $2.01 to $2.87 per share and a conversion option to purchase 2,487,562 shares of common stock at a price of $2.01 were not included in the computation of diluted net loss per share because such inclusion would be antidilutive.

6. Property and equipment

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

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	March 31, 2015			December 31, 2014
Furniture and fixtures	$	993		$	993
Office equipment		549			549
Computer equipment		4,788			4,782
Computer software		17,155			16,687
Leasehold improvements		916			916
		24,401			23,927
Less accumulated depreciation and amortization		(19,205	)		(18,277	)
Property and equipment, net	$	5,196		$	5,650

Depreciation expense for the three months ended March 31, 2015 and 2014 was $927,000 and $880,000, respectively.

7. Interest and other income (expense), net

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

	Three Months Ended March 31,
	2015			2014
Interest income	$	—		$	—
Interest expense		(3,616	)		(543	)
Interest and other income (expense), net	$	(3,616	)	$	(543	)

The increase in interest expense is due to a $1.0 million premium paid by the Company related to the repayment of the 2013 Notes. The Company also recorded non-cash interest expense of $2.4 million of which $383,000 related to the remaining debt discount on the 2013 Notes, $60,000 of debt discount related to the 2015 Senior Secured Convertible Notes and $2.0 million related to a loss recorded due to debt extinguishment of the 2013 Notes and the issuance of the 2015 Senior Secured Convertible Notes.

8. Credit facilities

On August 3, 2011, the Company entered into a Loan and Security Agreement (“Loan Agreement”) with Square 1 Bank, as amended. The Loan Agreement provided the Company with a revolving credit facility of up to $12.0 million (the “Facility”). The Loan Agreement maturity date was April 2, 2015.

At March 31, 2015, the Company had a total of $3.2 million outstanding under the Facility with no amount available to draw upon.

On March 9, 2015, the Company entered into a Financing and Security Agreement, amended on March 9, 2015, with Fast Pay Partners LLC (“Fast Pay”) creating an accounts receivable-based credit facility (the “Fast Pay Agreement”). Under the terms of the Fast Pay Agreement, Fast Pay may, at its sole discretion, purchase the Company’s eligible accounts receivables. Upon any acquisition of accounts receivable, Fast Pay will advance the Company up to 80% of the gross value of the purchased accounts, up to a maximum of $10.0 million in advances. Each account receivable purchased by Fast Pay will be subject to a factoring fee rate specified in the Fast Pay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over thirty days. The all-in interest cost to the Company under the Fast Pay Agreement will not exceed the limit on the Company’s permitted senior indebtedness under the Series A and Series B Notes. The Company will be obligated to repurchase accounts remaining uncollected after a specified deadline, and Fast Pay will generally have full recourse against the Company in the event of nonpayment of any purchased accounts. The Fast Pay Agreement has an initial term ending April 9, 2016, automatically renewing for successive one year terms thereafter. The Company’s obligations under the Fast Pay Agreement are secured by substantially all of the Company’s assets.

On April 2, 2015 the Company repaid the total balance outstanding on the Square 1 Bank line of credit, in part with funds provided by the new accounts receivable-based credit facility with Fast Pay.

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9. Senior secured convertible notes

On April 10, 2013, the Company entered into a Convertible Note and Warrant Purchase Agreement (“2013 Agreement”) with two investors. Pursuant to this agreement, the investors purchased an aggregate of $5.0 million of 7% subordinated convertible notes (“2013 Notes”) and warrants to purchase shares of the Company’s common stock. These 2013 Notes were repaid in full on March 12, 2015.

On March 9, 2015, the Company entered into a Securities Purchase Agreement (the “Agreement”) relating to the sale and issuance of Senior Convertible Notes (the “Notes”), comprising $4.57 million aggregate principal amount of new 8% Senior Convertible Notes (“Series A Notes”) maturing in April 2018 and initially convertible at $0.5534 per share, $250,000 of which was invested by certain management and board members, and $4.75 million aggregate principal amount of 10% Partially Liquidating Debentures (“Series B Notes”) maturing August 2016, initially convertible at $0.7090 per share. Note that conversion prices are subject to adjustment. Both transactions included issuance of five-year warrants with 50% coverage with an exercise price at market price, defined as the preceding 5 day volume weighted average price. The Company issued the Series B Notes pursuant to its effective shelf registration statement. The Company has agreed to file a registration statement covering the resale of the common stock issuable upon conversion of the Series A Notes and upon issuance of the warrants. The Company used a portion of the proceeds to repay its outstanding 2013 Notes due April 2015 and associated fees.

The Company determined that the conversion options for the Series A and Series B Notes should be bifurcated and accounted for as a derivative liability. Using the Black-Scholes valuation model the Company determined the estimated fair value of the Series A and Series B conversion option liabilities to be $2.2 million and $1.0 million, respectively, at the date of the Agreement. The Company also issued warrants to purchase an aggregate of 7,708,091 shares of common stock at an exercise price of $0.65 per share that expire five years from the date of issuance. The estimated fair value of these warrants, using the Black-Scholes valuation model at the date of grant, was $2.7 million. The fair value of the Series A and Series B Notes were determined using the effective interest of the senior convertible notes for which the counter party was not a party to the convertible notes the Company entered into in 2013. Applying the effective interest rate to the total value of the Series A and Series B Notes resulted in a total debt discount of $3.9 million as of the date of the transaction, which will be amortized into interest expense over the life of the senior convertible notes using the effective interest rate method. The difference between the estimated fair value of the conversion option liabilities and warrant liability and the fair value of debt discount totaled $2.0 million and was recorded as interest expense in the accompanying condensed consolidated statement of operations. The conversion option liability and warrant liability are recorded at fair value each reporting period with changes in the fair value recorded in the condensed consolidated statement of operations. The fair value of the Series A and Series B conversion option liabilities relating to the Series A and Series B Notes was $1.3 million and $444,000, respectively, as of March 31, 2015, and included in the senior convertible notes in the accompanying condensed consolidated balance sheets. The fair value of the conversion option liability relating to the 2013 Notes was $13,000 as of December 31, 2014, and is included in the senior convertible notes in the accompanying condensed consolidated balance sheets. The fair value of the warrant liability was $1.8 and $156,000 at March 31, 2015 and December 31, 2014, respectively.

The Notes are subordinate to the interests of Fast Pay pursuant to the Fast Pay Agreement.

The Company also incurred legal and other consulting fees totaling $487,000 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.

10. Operating information

U.S. GAAP regarding disclosures about segments of an enterprise requires that public business enterprises report entity-wide disclosures. Although we have aligned our operations into two business units, these business units meet the criteria for aggregation into one reporting segment: paid-search. The following table presents summary operating geographic and product information as required by the entity-wide disclosure requirements (in thousands):

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	Three Months Ended March 31,
	2015		2014
Revenue by geographic region:
United States	$	13,087	$	26,180
Revenue by product:
Pay-Per-Click (PPC)		10,390		20,028
Subscription Advertising Products		13		97
Domain Sales and Services		30		27
Display and Banner Advertising Services		2,559		5,897
Other		95		131
Total revenue	$	13,087	$	26,180

11. Stock-based compensation

Stock option activity under the equity incentive plans during the three months ended March 31, 2015, was as follows:

	Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2014		4,480,856		$	3.32
Granted		24,800			0.76
Cancelled		(580,966	)		5.20
Outstanding at March 31, 2015		3,924,690		$	3.02	$	—
Exercisable at March 31, 2015		2,720,877		$	3.63	$	—

The weighted-average fair value at grant date for the options granted during the three months ended March 31, 2015 was $0.35.

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 March 31, 2015
Risk-free interest rate	1.10%
Expected lives (in years)	3.5 years
Expected dividend yield	None
Expected volatility	64.45%

Restricted stock unit activity under the 2011 Omnibus Plan for the three months ended March 31, 2015, is as follows:

	Shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2014		21,117		$	2.29
Exercised		(15,653	)		2.29
Cancelled		(4,242	)		2.29
Unvested at March 31, 2015		1,222		$	2.29

Total stock-based compensation expense recognized for the three months ended March 31, 2015 and 2014, was as follows (in thousands):

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	Three Months Ended March 31,
	2015		2014
Cost of revenues	$	9	$	12
Sales and marketing		12		29
General and administrative		87		195
Research and development		17		17
Total stock-based compensation expense	$	125	$	253

12. Warrants

As part of a convertible note and warrant purchase agreement the Company entered into on April 10, 2013, the Company issued warrants to purchase 746,268 shares of common stock at an exercise price of $2.01 that expires five years from issuance (the “2013 Warrants”). The warrant purchase agreement includes certain anti-dilution provisions that provides for the adjustment of the exercise price as well as the issuance of additional warrants to purchase shares of common stock, should there be a subsequent sale of shares of common stock or instruments to purchase shares of common stock at a lower price.

On March 9, 2015 the Company entered into a Securities Purchase Agreement relating to the sale and issuance of Senior Convertible Notes that also included the issuance of warrants. As these instruments were issued at a lower price than the 2013 Warrants, the exercise price of the 2013 Warrants were adjusted down from $2.01 to $1.47 and an additional 275,529 warrants to purchase shares of common stock were issued. Total 2013 Warrants outstanding as of March 31, 2015 was 1,021,797 at an exercise price of $1.47.

SeeNote 9 — Senior secured convertible notes footnote, relating to warrants issued in the first quarter fiscal 2015 as part of the issuance of the senior secured convertible notes.

Warrant activity for the three months ended March 31, 2015, was as follows:

	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2014		746,268	$	2.01
Issued		7,983,620		0.68
Exercised		—		—
Outstanding at March 31, 2015		8,729,888	$	0.79
Exercisable at March 31, 2015		8,729,888	$	0.79

13. 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 March 31, 2015 (in thousands):

Description	As of March 31, 2015		Significant Unobservable Inputs (Level 3)
Liabilities:
Warrant liability	$	1,752	$	1,752
Convertible option liability	$	1,701	$	1,701

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 (in thousands):

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Description	As of December 31, 2014		Significant Unobservable Inputs (Level 3)
Liabilities:
Warrant liability	$	156	$	156
Convertible option liabilities	$	13	$	13

As of March 31, 2015, 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.

The fair value of the financial liabilities was estimated at March 31, 2015, using a Black-Scholes option pricing model with the following assumptions:

	Series A and Series B Notes Warrants	2013 Notes Warrants	Conversion option of Series A Notes	��	Conversion option of Series B Notes
Risk-free interest rate	1.37%	0.89%	0.89%		0.26%
Expected lives (in years)	5.0 years	3.0 years	3.0 years		1.15 years
Expected dividend yield	None	None	None		None
Expected volatility	66.80%	57.14%	57.14%		66.74%

The Company has engaged a valuation specialist to determine the fair value of the conversion option and warrant liability using the lattice-based model. While the valuation is in progress the Company will use the Black-Scholes valuation model to estimate the fair value.

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

	Warrant			Conversion option
Balance at December 31, 2014	$	156		$	13
Issuances		2,685			3,180
Cancellations		—			(13	)
Change in fair value		(1,089	)		(1,479	)
Balance at March 31, 2015	$	1,752		$	1,701

14. Subsequent events

On April 30, 2015, the Company announced that it has engaged Siemer & Associates as financial advisors as the Company initiates an external process to explore strategic alternatives to enhance shareholder value.

On May 11, 2015, a lawsuit was filed against the Company by Online Equity Ventures, LLC, a Florida limited liability company (“OEV”) alleging that the Company breached its contract with OEV and its affiliates and seeks an award of damages of approximately $2.4 million plus attorney fees. The Company does not believe this lawsuit has any merit and intends to vigorously defend itself.

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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, 2014, and for the year ended December 31, 2014, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2015.

Overview

We are a local advertising technology company that provides our search results to consumers who are searching online for local businesses, products and services. Our search results consist primarily of local business listings and product listings that we aggregate, index, normalize and syndicate using our sophisticated technology platforms. We provide our search results through our flagship Local.com website and platform and through other proprietary websites (“Owned and Operated” or “O&O”) and to a network of websites that rely on our search syndication services to provide local search results to their own users (“Network”). We generate revenue from a variety of ad units we place alongside our search results, which include pay-per-click, pay-per-call, and display (banner) ad units, including video.

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

Recent Developments

On March 9, 2015, we entered into a Securities Purchase Agreement relating to the sale and issuance of New Senior Convertible Notes, comprising $4.57 million aggregate principal amount of new 8% Senior Convertible Notes (“Series A Notes”) maturing in April 2018 and initially convertible at $0.5534 per share, $250,000 of which was invested by certain management and board members, and $4.75 million aggregate principal amount of 10% Partially Liquidating Debentures (“Series B Notes”) maturing August 2016, initially convertible at $0.7090 per share. Note that conversion prices are subject to adjustment. Both transactions included issuance of five-year warrants with 50% coverage with an exercise price at market price, defined as the preceding 5 day volume-weighted average price. We issued the Series B Notes pursuant to our effective shelf registration statement. We have agreed to file a registration statement covering the resale of the common stock issuable upon conversion of the Series A Notes and upon issuance of the warrants. We used $6.4 million of the proceeds to repay our outstanding 2013 Notes and associated fees, which included a $1 million premium on the $5 million outstanding.

On March 9, 2015, we entered into a Financing and Security Agreement, amended on March 9, 2015, with Fast Pay Partners LLC (“Fast Pay”) creating an accounts receivable-based credit facility (the “Fast Pay Agreement”). Under the terms of the Fast Pay Agreement, Fast Pay may, at its sole discretion, purchase our eligible accounts receivable. Upon any acquisition of accounts receivable, Fast Pay will advance us up to 80% of the gross value of the purchased accounts, up to a maximum of $10.0 million in advances. Each account receivable purchased by Fast Pay will be subject to a factoring fee rate specified in the Fast Pay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over thirty days. The all-in interest cost to us under the Fast Pay Agreement will not exceed the limit on our permitted senior indebtedness under the Notes. We will be obligated to repurchase accounts remaining uncollected after a specified deadline, and Fast Pay will generally have full recourse against us in the event of nonpayment of any purchased accounts. The Fast Pay Agreement has an initial term ending April 9, 2016, automatically renewing for successive one year terms thereafter. Our obligations under the credit facility are secured by substantially all of the Company’s assets.

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On April 30, 2015, we announced that we have engaged Siemer & Associates as financial advisors as we initiate an external process to explore strategic alternatives to enhance shareholder value.

Outlook for Our Business

According to BIA/Kelsey, U.S. local online advertising revenue is projected to reach $140.7 billion in 2015. “Local search,” that is, searches for products, services and businesses within a geographic region, is an increasingly significant segment of the online advertising industry. Local search allows consumers to search for local businesses’ products or services by including geographic area, zip code, city and other geographically targeted search parameters in their search requests—such as entering “florists in Irvine, CA.” In addition, BIA/Kelsey estimates that the local search market in the U.S. will grow from $6.3 billion in 2013, to $8.6 billion by 2017.

Consumers who conduct local searches for businesses and products 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 Local.com, our Network partner websites and other third party partner websites.

Local online search and more specifically local mobile search is still growing at a fast pace, and as a result, it is difficult to determine our current market share, or predict our future market share. However, we have a number of competitors that have announced an intention to increase their focus on local search with regard to U.S. online advertising, including some of the leading online advertising companies in the world, including Google, Yahoo, and Microsoft, among many others, with greater experience and resources than we have.

The U.S. online advertising industry, including the local search segment, is regularly impacted and changed by new and emerging technologies, including, for instance, ad targeting and mobile technologies, as well as the increased fragmentation of the online advertising industry in general, from different technology platforms, to different advertising formats, targeting methodologies and the like. Those companies within our industry who are able to quickly adapt to new technologies, as well as offer innovations of their own, have a better chance of succeeding than those that do not. We have recently launched proprietary technologies intended to accelerate our innovation in a changing technological environment, but our new technologies have yet to have a material impact on our overall financial results.

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

Our revenue, profitability and future growth depend not only on our ability to execute our business plan, but also, the growth of the paid-search market and our ability to effectively compete with other providers of local and paid-search technologies and services among other things. There can be no guarantee that we will be able to successfully execute our business plan or compete with other providers of local and paid-search technologies.

As we continue to diversify our technologies and traffic sources, we remain focused on technology and advertising offerings that will improve the experience for our end users, and allow our network and other third party partners to enhance their service offerings and lower their costs. While we are still very focused on the local search industry, we believe there are additional opportunities in technology and advertising that we and our customers can benefit from, while diversifying our revenue sources.

As we continue to invest in our core offerings, we have increased our operating expenses, mainly related to traffic acquisition costs, the deployment of new features and functionality across our business and the support of our new initiatives. We cannot give assurances that our efforts to improve our results of operations through this strategy will be successful in the future. To date, our efforts to improve our results of operations have not been successful. In light of this and in order to potentially accelerate the delivery of value to our stockholders, we have recently engaged Siemer & Associates to undertake a review of potential strategic alternatives for the Company.

The consumer shift to mobile devices presents a tremendous opportunity for us. Today, consumers are using their mobile devices more than ever before to search for local products and services. In fact, our research says that over 76% of consumers access local retail store information from their smartphones. According to Forrester Research, the online to offline market opportunity is five times greater than everything sold online today. The market for web influenced sales to the retail store is almost $690 billion. While it is uncertain that we will be able to realize this opportunity, we have developed and deployed products we believe addresses this opportunity directly.

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Sources of Revenue

We generate revenue primarily on our Local.com website and Network from both direct and indirect advertiser relationships, via:

• click-throughs on sponsored listings;

• calls to cost-per-call advertiser listings;

• lead generation;

• banner ads;

• subscription advertiser listings;

• domain sales and services; and

• web hosting services.

Operating Expenses

Cost of Revenues

Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees. 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 months ended March 31, 2015 and 2014, approximately 66% and 76% respectively, of our overall traffic was purchased from other search engine websites. During the three months ended March 31, 2014, advertising costs to drive consumers to our Local.com website were $7.5 million of which $6.0 million and $1.5 million were attributable to Google and Yahoo, respectively. During the three months ended March 31, 2014, advertising costs to drive consumers to our Local.com website were $9.4 million, of which $7.5 million and $1.3 million were attributable to Google and Yahoo, respectively. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will likely suffer materially.

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 and Use of Estimates

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.

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Revenue Recognition

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

We generate revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement and the fulfillment of subscription listing obligations. We enter into contracts to distribute sponsored listings and banner advertisements with direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at any time. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). We recognize our portion of the bid price based upon the contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on its O&O websites and Network. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Revenue recognized is net of estimated adjustments for traffic screening. Management has analyzed revenue recognition and determined that web hosting revenue is recognized net of direct costs.

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

Allowance for Doubtful Accounts

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

As of March 31, 2015, two customers, Yahoo and Google, represented 66% of our total accounts receivable. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.

Goodwill and Other Intangible Assets

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. The first step in determining if there is any goodwill impairment is a comparison of the estimated fair value of the reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference.

We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. Our indefinite lived intangible assets consist of domain names for which the fair value is determined by using a third party valuation site which calculates the value of domain names using internal algorithms. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is an impairment. We determined that the decrease in revenue could be considered a potential indicator of impairment and therefore performed an impairment review of goodwill as of March 31, 2015. After comparing the Company’s carrying value to its current market capitalization it was determined that the estimated fair value of the reporting unit still exceeds its carrying value and therefore no impairment existed.

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Stock Based Compensation

Total stock-based compensation expense recognized for the three months ended March 31, 2015 and 2014, is as follows (in thousands):

	Three Months Ended March 31,
	2015		2014
Cost of revenues	$	9	$	12
Sales and marketing		12		29
General and administrative		87		195
Research and development		17		17
Total stock-based compensation expense	$	125	$	253

Results of Operations

The following table sets forth our historical operating results as a percentage of revenue for the three months ended March 31, 2015 and 2014:

	Three Months Ended March 31,
	2015			2014
Revenue		100.0	%		100.0	%
Operating expenses:
Cost of revenues		88.4			77.9
Sales and marketing		12.9			9.0
General and administrative		15.3			12.7
Research and development		9.6			6.0
Amortization of intangibles		0.9			0.9
Total operating expenses		127.0			106.4
Operating income (loss)		(27.0	)		(6.4	)
Interest and other income (expense), net		(27.6	)		(2.1	)
Change in fair value of warrant liability		19.6			(1.3	)
Income (loss) before income taxes		(35.0	)		(9.8	)
Provision for income taxes		—			1.0
Net income (loss)		(35.0	)%		(10.8	)%

Three months ended March 31, 2015 and 2014

Revenue (dollars in thousands):

	Three Months Ended March 31,										Percent change
	2015		(*)			2014		(*)
Owned and operated	$	8,279		63.3	%	$	11,418		43.6	%		(27.5	)
Network		4,808		36.7	%		14,762		56.4	%		(67.4	)
Total revenue	$	13,087		100.0	%	$	26,180		100.0	%		(50.0	)

(*) — Percent of total revenue

O&O Revenue

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	Three months ended March 31,				Percentage change
	2015		2014
Revenue per thousand visitors (“RKV”)	$	186	$	189		(1.6	)%
O&O Monthly Unique Visitors (in millions)		44.4		59.9		(25.9	)%

Owned and operated revenue for the three months ended March 31, 2015, decreased 27.5% compared to the same period in 2014. The decrease in revenue for the three months ended March 31, 2015, compared to the same period in 2014 is due to a decrease in monetization as our revenue per thousand visitors (“RKV”) decreased from $189 for the three months ended March 2014 to $186 for the three months ended March 31, 2015. Revenue further decreased due to a decrease in traffic to our Owned and Operated sites. The decrease in traffic and monetization was due to changes in traffic sources and editorial requests from advertising partners.

Network revenue

Network revenue for the three months ended March 31, 2015, decreased 67.4%, compared to the same period in 2014. The decrease in network revenue for the three months ended March 31, 2015, compared to the same periods in 2014, is mainly due to a reduction in the amount of traffic we accepted from our network partners as we continue to apply increasingly more stringent traffic filters to ensure our advertising partners continue to receive traffic that converts for our advertisers, which resulted in a reduction in network revenue in 2015.

As previously noted, a large portion of Network revenue is based on traffic from other websites to which we provide our organic and third-party ad feeds. We continue to experience fluctuations in this portion of our Network revenue related to changes in the partners’ traffic levels, traffic quality and market conditions for paid search. We expect that this portion of our Network revenue will continue to be subject to significant fluctuations. 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. During the three months ended September 30, 2014, we substantially reduced the total number of Network partners to which we provide organic and third-party ad feeds in order to focus on the implementation of increased monitoring and filtering tools to prevent questionable or fraudulent traffic. This has materially impacted the level of Network revenue we were able to achieve. This trend has continued into the fourth quarter of 2014 and the first quarter of 2015.

Based on the above, total revenue for the three months ended March 31, 2015, decreased 50% compared to the same period in 2014.

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 March 31,
Customer	2015			2014
Google Inc		36.6	%		21.9	%
Yahoo! Inc.		36.5	%		47.1	%

Operating expenses:

Operating expenses were as follows (dollars in thousands):

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	Three Months Ended March 31,
	2015		Percent of Total Revenue			2014		Percent of Total Revenue			Percent Change
Cost of revenues	$	11,563		88.4	%	$	20,405		77.9	%		(43.3	)%
Sales and marketing		1,687		12.9	%		2,350		9.0	%		(28.2	)%
General and administrative		1,998		15.3	%		3,318		12.7	%		(39.8	)%
Research and development		1,257		9.6	%		1,559		6.0	%		(19.4	)%
Amortization of intangibles		114		0.9	%		225		0.9	%		(49.3	)%
Total operating expenses	$	16,619		127.0	%	$	27,857		106.4	%		(40.3	)%

Cost of revenues

Cost of revenues for the three months ended March 31, 2015, decreased by 43.3%, compared to the same period in 2014. The decrease in cost of revenues during the three months ended March 31, 2015, compared to the same period in 2014 is due to a decrease in the revenue share as network revenue continued to decrease together with a decrease in traffic acquisition costs associated with driving consumers to our Local.com website.

Sales and marketing

Sales and marketing expenses for the three months ended March 31, 2015, decreased 28.2% compared to the same period in 2014. The decrease is mainly due to a decrease in personnel-related costs as part of our continued cost savings efforts.

General and administrative

General and administrative expenses for the three months ended March 31, 2015, decreased 39.8% compared to the same period in 2014. The decrease in general and administrative expenses are due to a decrease in personnel related costs, consulting and professional fees.

Research and development

Research and development expenses for the three months ended March 31, 2015, decreased by 19.4%, compared to the same period in 2014. The decrease is due to a reduction in consulting fees as part of our continued cost savings efforts. We capitalized an additional $433,000 of research and development expenses for website development and amortized $613,000 of capitalized website development costs during the three months ended March 31, 2015. We capitalized an additional $565,000 of research and development expenses for website development and amortized $607,000 of capitalized website development costs during the three months ended March 31, 2014.

Amortization of intangibles

Amortization of intangibles expense was $114,000 for the three months ended March 31, 2015, compared to $225,000 for the same period in 2014.

Interest and other income (expense), net

Interest and other income (expense), net was ($3.6) million for the three months ended March 31, 2015, compared to ($543,000) for the same period in 2014. The increase in interest expense is due to a $1.0 million premium paid by the Company related to the repayment of the 2013 Notes. We also recorded non-cash interest expense of $2.4 million of which $383,000 related to the remaining debt discount on the 2013 Notes, $60,000 of debt discount related to the 2015 Senior Secured Convertible Notes and $2.0 million related to a loss recorded due to debt extinguishment of the 2013 Notes and the issuance of the 2015 Senior Secured Convertible Notes.

Provision for income taxes

Provision for income taxes was $0 and $274,000 for the three months ended March 31, 2015 and 2014, respectively. Taxes are primarily due to anticipated tax amortization on indefinite-lived assets, partially offset by California research and development credits. As a result of the closing of a 2010 California tax examination of the Company’s research and development credits, the associated unrecognized tax position has been reversed. Accordingly, the Company recorded approximately $140,000 of income tax benefit in Q1 2015 which is offset by $140,000 of deferred income tax expense.

Liquidity and Capital Resources

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Liquidity and capital resources highlights (in thousands):

	March 31, 2015			December 31, 2014
Cash	$	2,288		$	2,438
Working capital (deficit)	$	(8,046	)	$	(5,878	)

Cash flow highlights (in thousands):

	Three Months Ended March 31,
	2015			2014
Net cash used in operating activities	$	(1,800	)	$	(727	)
Net cash used in investing activities		(478	)		(940	)
Net cash provided by financing activities		2,128			309

We have funded our business, to date, primarily from issuances of equity securities as well as through debt facilities. Cash was $2.3 million as of March 31, 2015, and $2.4 million as of December 31, 2014. We had a working capital deficit of $8.0 million as of March 31, 2015, and $5.9 million as of December 31, 2014. As of March 31, 2015, we had a total of $3.2 million outstanding on the revolving credit facility with Square 1 Bank, $9.3 million outstanding on the Series A and Series B Notes issued in the first quarter of fiscal 2015, and no availability under the revolving credit facility. On April 2, 2015, we paid off the remaining balance of the Square 1 Bank credit facility, partially using proceeds from our new facility with Fast Pay.

Net cash used in operating activities was $1.8 million for the three months ended March 31, 2015. Net loss adjusted for non-cash charges (adding back depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, change in fair value of derivative liability and non-cash interest expense) was approximately $3.5 million, and changes in operating assets and liabilities provided cash of $1.7 million for the three months ended March 31, 2015. Net cash used in operating activities was $727,000 for the three months ended March 31, 2014. Net loss adjusted for non-cash charges (adding back depreciation and amortization, provision for doubtful accounts, stock-based compensation expense, change in fair value of derivative liability, non-cash interest expense and deferred income taxes) was approximately $456,000, and changes in operating assets and liabilities provided cash of $271,000 for the three months ended March 31, 2014.

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; and changes in accounts payable. For the three months ended March 31, 2015, 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 three months ended March 31, 2015 and 2014 (in thousands):

	Three Months Ended March 31,						Change
	2015			2014
Net income (loss)	$	(4,580	)	$	(2,828	)	$	(1,752	)
Non-cash (1)		1,116			2,372			(1,256	)
Subtotal		(3,464	)		(456	)		(3,008	)
AR, AP and Other		1,664			(271	)		1,935
Net cash used in operations	$	(1,800	)	$	(727	)	$	(1,073	)

(1) Includes depreciation, amortization, change in fair value of derivative liabilities, non-cash expense related to stock-based compensation, non-cash interest expense, provision for doubtful accounts, and deferred income taxes.

Net cash used in investing activities was $478,000 for the three months ended March 31, 2015, of which all related to capital expenditures, primarily for website development costs. Net cash provided by financing activities was $2.1 million for the three months ended March 31, 2015, and primarily consisted of net proceeds from the issuance of Senior Secured Convertible Notes of $4.3 million (excluding $1 million prepayment penalty), partially offset by repayments on the Square 1 Bank revolving line of credit of $1.7 million. Net cash used in investing activities was $940,000 for the three months ended March 31, 2014, of which all related to capital expenditures, primarily for website development costs. Net cash provided by financing activities was $309,000 for the three months ended March 31, 2014, and primarily consisted of net proceeds from the Square 1 Bank revolving line of credit of $2.2 million partially offset by the repayment of the Square 1 Bank term loan.

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Our need for additional capital and the uncertainties surrounding our ability to raise such funding, among others, raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. In 2015, we completed the 2015 Notes offering, closed a new accounts receivable credit facility with Fast Pay and implemented a reduction in workforce and related cost savings. Notwithstanding these actions, we still require additional capital to fund our operations over the next 12 months. Management cannot provide assurances that 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our disclosures regarding market risk since December 31, 2014. See also Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2014, 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 Principal Executive Officer and Chief Financial and Accounting 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.

Shopping Cheapest Litigation

On April 24, 2014, a lawsuit was filed against the Company by Shopping Cheapest, LLC, a purported UK limited liability company (“Shopping Cheapest”) and subsequently dismissed. On November 3, 2014, an individual related to Shopping Cheapest filed a lawsuit alleging that the Company breached its contract with Shopping Cheapest and seeks an award of damages of approximately $1.1 million plus attorney fees. We do not believe this lawsuit has any merit and intend to vigorously defend ourselves.

Online Equity Ventures Litigation

On May 11, 2015, a lawsuit was filed against the Company by Online Equity Ventures, LLC, a Florida limited liability company (“OEV”) alleging that the Company breached its contract with OEV and its purported affiliate, Blabwire Media, LLC, a California limited liability company and seeks an award of damages of approximately $2.4 million plus attorney fees. We do not believe this lawsuit has any merit and intend to vigorously defend ourselves.

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, 2014, filed with the Securities and Exchange Commission on March 27, 2015. 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, 2014.

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

On March 9, 2015, the Company entered into a Securities Purchase Agreement (the “Agreement”) relating to the sale and issuance of Senior Convertible Notes (the “Notes”), comprising $4.57 million aggregate principal amount of new 8% Senior Convertible Notes (“Series A Notes”) maturing in April 2018 and initially convertible at $0.5534 per share, $250,000 of which was invested by certain management and board members, and $4.75 million aggregate principal amount of 10% Partially Liquidating Debentures (“Series B Notes”) maturing August 2016, initially convertible at $0.7090 per share. Note that conversion prices are subject to adjustment. Both transactions included issuance of five-year warrants with 50% coverage with an exercise price at market price, defined as the preceding 5 day volume weighted average price. The Company issued the Series B Notes pursuant to its effective shelf registration statement. The Company has agreed to file a registration statement covering the resale of the common stock issuable upon conversion of the Series A Notes and upon issuance of the warrants. The Company used a portion of the proceeds to repay its outstanding 2013 Notes due April 2015 and associated fees and the remaining proceeds will be used for general corporate purposes. This transaction was previously disclosed on the Company’s Form 8-K as filed with the Securities and Exchange Commission on March 9, 2015.

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Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

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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)	Securities Purchase Agreement, dated March 9, 2015, between Local Corporation and the Investors named therein.
10.2(7)	Form of Base Indenture between Local Corporation and U.S. Bank National Association.
10.3(7)	Form of First Supplemental Indenture and Second Supplemental Indenture.
10.4(7)	Form of Series A Notes and Series B Notes.
10.5(7)	Form of Warrant.
10.6(7)	Form of Registration Rights Agreement.
10.7(7)	Tenth Amendment, dated March 9, 2015, to Loan and Security Agreement, dated August 3, 2011, by and among Local Corporation, Krillion, Inc., Screamin’ Media Group, Inc. and Square 1 Bank.
10.8(8)	Financing and Security Agreement by and among the Registrant, Fast Pay Partners LLC, Krillion, Inc. and Screamin Media Group, Inc. dated March 9, 2015.
10.9(8)	First Amendment, dated March 9, 2015, to Financing and Security Agreement, dated March 9, 2015, by and among Local Corporation, Krillion, Inc., Screamin’ Media Group, Inc. and Fast Pay Partners LLC.
10.10(9)	Seventh Amendment to Google Services Agreement dated April 1, 2015 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 and Accounting 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 Principal 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

26

(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.

(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 March 10, 2015.

(8) Incorporated by reference from the Registrant’s Current Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2015.

(9) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2015.

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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
May 15, 2015	/s/ Frederick G. Thiel
Date	Frederick G. Thiel
	Chief Executive Officer (principal executive officer) and Chairman
May 15, 2015	/s/ Kenneth S. Cragun
Date	Kenneth S. Cragun
	Chief Financial Officer (Principal Financial and Accounting Officer) and Secretary

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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)	Securities Purchase Agreement, dated March 9, 2015, between Local Corporation and the Investors named therein.
10.2(7)	Form of Base Indenture between Local Corporation and U.S. Bank National Association.
10.3(7)	Form of First Supplemental Indenture and Second Supplemental Indenture.
10.4(7)	Form of Series A Notes and Series B Notes.
10.5(7)	Form of Warrant.
10.6(7)	Form of Registration Rights Agreement.
10.7(7)	Tenth Amendment, dated March 9, 2015, to Loan and Security Agreement, dated August 3, 2011, by and among Local Corporation, Krillion, Inc., Screamin’ Media Group, Inc. and Square 1 Bank.
10.8(8)	Financing and Security Agreement by and among the Registrant, Fast Pay Partners LLC, Krillion, Inc. and Screamin Media Group, Inc. dated March 9, 2015.
10.9(8)	First Amendment, dated March 9, 2015, to Financing and Security Agreement, dated March 9, 2015, by and among Local Corporation, Krillion, Inc., Screamin’ Media Group, Inc. and Fast Pay Partners LLC.
10.10(9)	Seventh Amendment to Google Services Agreement dated April 1, 2015 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 and Accounting 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 Principal 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

29

(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.

(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 March 10, 2015.

(8) Incorporated by reference from the Registrant’s Current Report on Form 10-K, filed with the Securities and Exchange Commission on March 27, 2015.

(9) Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 5, 2015.

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