10-Q 1 rloc20160729_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~March~~June 3130, 2016

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

For the transition period from to

Commission file number 001-34749

REACHLOCAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-0498783

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer Identification No.)

21700 Oxnard Street, Suite 1600

Woodland Hills, California

91367

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (818) 274-0260

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 ☒ 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 ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title of Class		Number of Shares Outstanding on ~~May~~August 1110, 2016
Common Stock, $0.00001 par value		~~30,079,188~~100

INDEX

			Page
Part I.	Financial Information
	Item 1.	Condensed Consolidated Financial Statements (unaudited)	32
		Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
		Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	2
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015	4
		Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015	3
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015	5
		Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015	4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	6
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	5
		Notes to the Condensed Consolidated Financial Statements	76
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2421
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3834
	Item 4.	Controls and Procedures	3935
Part II.	Other Information
	Item 1.	Legal Proceedings	4036
	Item 1A.	Risk Factors	4036
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4036
	Item 6.	Exhibits	4036
		Signatures	4137

PART I

FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

REACHLOCAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

	June 30, 2016			December 31, 2015
Assets
Current Assets:
Cash and cash equivalents	$	15,171		$	18,833
Short-term investments		274			359
Accounts receivable, net of allowance for doubtful accounts of $853 and $803 at June 30, 2016 and December 31, 2015, respectively		7,137			6,278
Prepaid expenses and other current assets		6,748			8,296
Total current assets		29,330			33,766

Property and equipment, net		10,763			13,550
Capitalized software development costs, net		19,559			20,691
Restricted cash- term loan		12,500			15,000
Restricted cash		3,451			3,502
Intangible assets, net		3,543			4,011
Non-marketable investments		9,000			9,000
Other assets		2,557			2,547
Goodwill		20,200			20,129
Total assets	$	110,903		$	122,196

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	32,036		$	33,581
Accrued compensation and benefits		12,739			14,478
Deferred revenue		22,566			22,985
Accrued restructuring		3,389			3,329
Term loan		13,296			8,352
Capital lease		707			698
Other current liabilities		9,256			10,166
Liabilities of discontinued operations		798			804
Total current liabilities		94,787			94,393

Term loan		11,758			16,194
Convertible notes – related party		5,000			5,000
Capital lease		131			484
Deferred rent and other liabilities		8,031			8,111
Total liabilities		119,707			124,182

Commitments and contingencies (Note 7)

Stockholders’ Deficit:
Common stock $0.00001 par value—140,000 shares authorized; 30,103 and 29,639 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		-			-
Receivable from stockholder		(57	)		(55	)
Additional paid-in capital		143,512			140,398
Accumulated deficit		(146,473	)		(136,084	)
Accumulated other comprehensive loss		(5,786	)		(6,245	)
Total stockholders’ deficit		(8,804	)		(1,986	)
Total liabilities and stockholders’ deficit	$	110,903		$	122,196

See notes to condensed consolidated financial statements.

~~PART~~REACHLOCAL, IINC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share data) (Unaudited)

FINANCIAL INFORMATION

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Revenue	$	81,460		$	98,776		$	160,169		$	198,339
Cost of revenue		45,591			55,390			89,442			111,607
Operating expenses:
Selling and marketing		22,975			33,046			46,099			69,329
Product and technology		6,063			7,082			12,149			14,504
General and administrative		9,536			9,910			17,414			20,623
Restructuring charges		233			3,133			2,689			4,588
Total operating expenses		38,807			53,171			78,351			109,044

Operating loss		(2,938	)		(9,785	)		(7,624	)		(22,312	)
Loss on deconsolidation of subsidiaries, net		(99	)		-			(171	)		-
Interest expense		(1,115	)		(713	)		(2,230	)		(788	)
Other income (expense), net		90			(135	)		78			(216	)
Loss before income taxes		(4,062	)		(10,633	)		(9,947	)		(23,316	)
Income tax provision (benefit)		175			(40	)		442			59
Net loss	$	(4,237	)	$	(10,593	)	$	(10,389	)	$	(23,375	)

Net loss per share:
Net loss per share, basic and diluted	$	(0.14	)	$	(0.36	)	$	(0.35	)	$	(0.80	)

Weighted average common shares used in the computation of loss per share:
Basic and diluted		29,840			29,097			29,824			29,083

Item 1. FINANCIAL STATEMENTS

REACHLOCAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

	March 31, 2016			December 31, 2015
Assets
Current Assets:
Cash and cash equivalents	$	13,001		$	18,833
Short-term investments		130			359
Accounts receivable, net of allowance for doubtful accounts of $866 and $803 at March 31, 2016 and December 31, 2015, respectively		6,720			6,278
Prepaid expenses and other current assets		5,768			8,296
Total current assets		25,619			33,766
Property and equipment, net		11,664			13,550
Capitalized software development costs, net		20,159			20,691
Restricted cash – term loan		15,000			15,000
Restricted cash		3,670			3,502
Intangible assets, net		3,776			4,011
Non-marketable investments		9,000			9,000
Other assets		2,594			2,547
Goodwill		20,148			20,129
Total assets	$	111,630		$	122,196
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	31,457		$	33,581
Accrued compensation and benefits		11,179			14,478
Deferred revenue		22,488			22,985
Accrued restructuring		3,829			3,329
Term loan		11,407			8,352
Capital lease		707			698
Other current liabilities		9,055			10,166
Liabilities of discontinued operations		806			804
Total current liabilities		90,928			94,393
Term loan		13,402			16,194
Convertible notes – related party		5,000			5,000
Capital lease		305			484
Deferred rent and other liabilities		8,105			8,111
Total liabilities		117,740			124,182
Commitments and contingencies (Note 7)
Stockholders’ Deficit:
Common stock, $0.00001 par value—140,000 shares authorized; 30,075 and 29,639 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		—			—
Receivable from stockholder		(59	)		(55	)
Additional paid-in capital		142,375			140,398
Accumulated deficit		(142,236	)		(136,084	)
Accumulated other comprehensive loss		(6,190	)		(6,245	)
Total stockholders’ deficit		(6,110	)		(1,986	)
Total liabilities and stockholders’ deficit	$	111,630		$	122,196

See notes to condensed consolidated financial statements.

REACHLOCAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Net loss	$	(4,237	)	$	(10,593	)	$	(10,389	)	$	(23,375	)
Other comprehensive income (loss):
Foreign currency translation adjustments		404			(204	)		459			(70	)
Comprehensive loss	$	(3,833	)	$	(10,797	)	$	(9,930	)	$	(23,445	)

(in thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2016			2015
Revenue	$	78,709		$	99,563
Cost of revenue		43,851			56,217
Operating expenses:
Selling and marketing		23,124			36,283
Product and technology		6,086			7,422
General and administrative		7,878			10,713
Restructuring charges		2,456			1,455
Total operating expenses		39,544			55,873
Operating loss		(4,686	)		(12,527	)
Loss on deconsolidation of subsidiaries, net		(72	)		—
Interest expense		(1,115	)		(75	)
Other expense, net		(12	)		(81	)
Loss before income taxes		(5,885	)		(12,683	)
Income tax provision		267			99
Net loss	$	(6,152	)	$	(12,782	)
Net loss per share:
Net loss per share, basic and diluted	$	(0.21	)	$	(0.44	)
Weighted average common shares used in the computation of net loss per share:
Basic and diluted		29,808			29,070

See notes to condensed consolidated financial statements.

REACHLOCAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

	Six Months Ended June 30,
	2016			2015
Cash flows from operating activities:
Net loss	$	(10,389	)	$	(23,375	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		8,965			10,283
Stock-based compensation		2,537			4,360
Restructuring charges		2,689			4,588
Loss on deconsolidation of subsidiary		171			-
(Gain) loss on disposal of fixed assets		(9	)		135
Provision for doubtful accounts		396			66
Non-cash interest expense, net		558			173
Changes in operating assets and liabilities:
Accounts receivable		(1,103	)		1,859
Prepaid expenses and other current assets		1,419			2,229
Restricted cash		(249	)		-
Other assets		55			(264	)
Accounts payable		(1,894	)		(8,475	)
Accrued compensation and benefits		(648	)		(823	)
Deferred revenue		(598	)		(1,259	)
Accrued restructuring		(1,280	)		(2,358	)
Deferred rent and other liabilities		(29	)		(129	)
Net cash provided by (used in) operating activities, continuing operations		591			(12,990	)
Net cash used in operating activities, discontinued operations		(7	)		(60	)
Net cash provided by (used in) operating activities		584			(13,050	)

Cash flows from investing activities:
Additions to property, equipment and software		(5,257	)		(7,748	)
Proceeds from sales of property and equipment		348			-
Changes in restricted cash due to certificates of deposits		360			50
Maturities of certificates of deposits and short-term investments		145			796
Net cash used in investing activities		(4,404	)		(6,902	)

Cash flows from financing activities:
Proceeds from term loan, net		-			24,700
Changes in restricted cash- term loan		2,500			(17,500	)
Payment of deferred and contingent consideration		(1,346	)		(434	)
Proceeds from exercise of stock options		5			6
Principal payments on capital lease obligations		(385	)		(443	)
Term loan costs		-			(194	)
Common stock repurchases		(492	)		(5	)
Net cash provided by financing activities		282			6,130

Effect of exchange rate changes on cash and cash equivalents		(124	)		(1,274	)
Net change in cash and cash equivalents		(3,662	)		(15,096	)
Cash and cash equivalents—beginning of period		18,833			43,720
Cash and cash equivalents—end of period	$	15,171		$	28,624

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2016			2015
Net loss	$	(6,152	)	$	(12,782	)
Other comprehensive income (loss):
Foreign currency translation adjustments		55			134
Comprehensive loss	$	(6,097	)	$	(12,648	)

See notes to condensed consolidated financial statements.

REACHLOCAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Loss from continuing operations	$	(6,152	)	$	(12,782	)
Adjustments to reconcile loss from continuing operations, net of income taxes, to net cash used in operating activities:
Depreciation and amortization		4,533			5,134
Stock-based compensation		1,140			2,146
Restructuring charges		2,456			1,455
Loss on deconsolidation of subsidiary		72			—
(Gain) loss on disposal of fixed assets		(4	)		161
Provision for doubtful accounts		384			78
Non-cash interest expense, net		289			2
Changes in operating assets and liabilities:
Accounts receivable		(714	)		2,069
Prepaid expenses and other current assets		2,329			(449	)
Other assets		4			(498	)
Accounts payable		(2,549	)		(1,838	)
Accrued compensation and benefits		(2,195	)		(1,765	)
Deferred revenue		(750	)		333
Accrued restructuring		(873	)		(539	)
Deferred rent and other liabilities		(1,369	)		1,963
Net cash used in operating activities, continuing operations		(3,399	)		(4,530	)
Net cash used in operating activities, discontinued operations		—			(59	)
Net cash used in operating activities		(3,399	)		(4,589	)
Cash flows from investing activities:
Additions to property, equipment and software		(2,592	)		(4,134	)
Proceeds from sales of property and equipment		348			—
Maturities of certificates of deposits and short-term investments		204			700
Purchases of certificates of deposits and short-term investments		—			(42	)
Net cash used in investing activities		(2,040	)		(3,476	)
Cash flows from financing activities:
Proceeds from exercise of stock options		—			6
Principal payments on capital lease obligations		(193	)		(191	)
Debt issuance costs		—			(50	)
Common stock repurchases		(491	)		(4	)
Net cash used in financing activities		(684	)		(239	)
Effect of exchange rate changes on cash and cash equivalents		291			(1,731	)
Net change in cash and cash equivalents		(5,832	)		(10,035	)
Cash and cash equivalents—beginning of period		18,833			43,720
Cash and cash equivalents—end of period	$	13,001		$	33,685

See notes to condensed consolidated financial statements.

REACHLOCAL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Description of Business

Overview

ReachLocal, Inc.’s (the “Company”) operations are located in the United States, Canada, Australia, New Zealand, Japan, Germany, the Netherlands, Austria, Brazil, Mexico, and India. The Company’s mission is to provide more customers to local businesses around the world. The Company offers online marketing products and solutions in three categories: digital advertising (including ReachSearch™, ReachRetargeting™, ReachDisplay™, ReachDisplay ~~InAppTM~~InApp™ and ReachSocial ~~AdsTM~~Ads™), software (ReachEdge™ and Kickserv™), and web presence (including ReachSEO™, ReachCast™, ReachSite + ReachEdge™, and TotalLiveChat™). The Company delivers its suite of products and solutions to local businesses through a combination of its proprietary technology platform, its direct inside and outside sales force, and select third-party agencies and resellers.

~~Liquidity~~The ~~and~~Merger ~~Capital Resources~~

~~During~~On ~~2015~~June 27, 2016, the Company ~~experienced~~entered ~~declining~~into ~~revenues~~an ~~primarily~~Agreement asand aPlan ~~result~~ of ~~challenging~~Merger ~~market~~(the ~~conditions~~“Merger ~~and~~Agreement”) ~~worse~~under ~~than~~which ~~expected~~Gannett ~~performance~~Co., ~~in the Company’s international markets~~Inc. In(“Parent”) ~~order~~and toRaptor ~~provide~~Merger ~~additional~~Sub, ~~liquidity~~Inc. to(“Purchaser”), ~~meet~~a ~~working~~wholly ~~capital~~owned ~~and~~subsidiary ~~capital~~of ~~resource requirements~~Parent, oncommenced ~~April~~a ~~30,~~tender ~~2015,~~offer (the ~~Company~~“Offer”) ~~entered~~on ~~into~~July a11, ~~Loan~~2016 ~~and~~to ~~Security~~acquire ~~Agreement~~all (of the ~~“Hercules~~Company’s ~~Loan~~outstanding ~~Agreement”)~~shares ~~for~~of acommon ~~$25.0~~stock ~~million~~at ~~term~~a ~~loan.~~purchase ~~The~~price ~~Company~~of ~~received~~ $244.760 ~~million~~per ofshare ~~net~~in ~~proceeds~~cash, ~~from~~subject ~~the~~to ~~term~~reduction ~~loan,~~for ~~$15.0~~any ~~million~~applicable ofwithholding ~~which~~taxes, iswithout ~~considered~~interest ~~restricted~~(“Merger ~~cash~~Consideration”). ~~required~~Upon ~~under~~ the ~~terms~~completion of the ~~Hercules~~tender ~~Loan~~offer ~~Agreement. In addition,~~ on ~~December~~August 179, ~~2015~~2016, ~~the~~Purchaser ~~Company~~acquired ~~entered~~over ~~into~~92% aof ~~convertible~~the ~~note~~Company's ~~purchase~~outstanding ~~agreement~~common ~~with~~stock ~~affiliates~~and, ofpromptly ~~its~~afterwards, ~~largest~~Purchaser ~~shareholder~~merged ~~for~~with ~~issuance~~and ofinto ~~$5.0~~the ~~million~~Company ofwithout ~~Convertible~~a ~~Second~~vote ~~Lien~~of ~~Subordinated~~the ~~Notes~~Company's stockholders (the “~~VantagePoint Notes~~Merger”)., ~~The~~with ~~note purchase agreement for~~ the ~~VantagePoint~~Company ~~Notes~~surviving ~~also~~as ~~provides~~a ~~for~~wholly ~~the~~owned ~~sale~~subsidiary of ~~up to an additional $5~~Parent.0 ~~million~~The ~~aggregate~~Company ~~principal~~is ~~amount~~now ofin ~~convertible~~the ~~notes,~~process ~~upon mutual agreement~~ of ~~ReachLocal~~deregistering ~~and~~under ~~VantagePoint~~the ~~and~~Exchange ~~Hercules’ consent~~Act.

~~Under~~In ~~the~~connection ~~Hercules~~with ~~Loan Agreement,~~ the ~~Company~~closing isof ~~due~~the toMerger, ~~make monthly interest-only payments~~ on ~~the Hercules term loan through~~ August 19, 2016, ~~though such payments may be extended through November 1, 2016 if~~ the Company ~~remains~~repaid inits ~~continuous~~$25.0 ~~compliance~~million ~~with~~term ~~the~~loan ~~financial~~with ~~covenants~~Hercules ~~under~~Technology ~~the~~Growth Capital (“Hercules Loan Agreement ~~through July 1~~”), ~~2016,~~including ~~and~~applicable nofees ~~default or event of default has occurred~~ and isinterest, ~~continuing~~in onfull. ~~such~~In ~~date.~~addition, ~~Upon~~in ~~repayment~~connection ofwith the ~~Hercules term loan~~closing, the Company’s isissued ~~also~~and ~~due~~outstanding toconvertible ~~make~~notes ~~an end-~~of~~-term~~ ~~payment to the Lenders equal to~~ $1.5.0 million, ~~which~~with isaffiliates ~~accrued~~of asVantagePoint, ~~interest based on~~ the ~~effective~~Company’s ~~interest~~largest ~~method~~shareholder, ~~over~~were ~~the~~repaid ~~3-year~~in ~~term of the Hercules Loan Agreement~~full. ~~The~~In ~~Hercules~~connection ~~term~~with ~~loan~~the isMerger, ~~secured~~the byCompany ~~substantially~~recognized ~~all~~acquisition-related costs of ~~the~~$2.4 ~~Company’s~~million ~~personal~~for ~~property, including~~ the ~~Company’s~~three ~~intellectual~~and ~~property.~~six ~~Under~~months ~~the~~ended ~~VantagePoint~~June ~~Notes~~30, ~~the~~2016, ~~Company~~which isare ~~due~~included toin ~~begin~~operating ~~making~~expenses ~~quarterly~~in ~~interest~~the ~~and~~condensed ~~principal~~consolidated ~~payments~~statements onof ~~the~~operations, ~~VantagePoint~~primarily ~~Notes~~related onto ~~April~~professional ~~15,~~services ~~2017,~~fees. ~~subject~~See toNote a17, ~~subordination~~Subsequent ~~agreement~~Events, ~~with~~for ~~Hercules.~~more information.

The Company’s covenants under the Hercules Loan Agreement include restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and undergoing a change in control, in each case subject to certain exceptions, as well as financial covenants to maintain certain minimum levels of revenue and earnings during each three-month period, tested monthly, during the term. Restrictions also include a maximum net new investment in the Company’s foreign subsidiaries, subject to certain exclusions, of $5.5 million during 2016, $4.0 million annually thereafter, and $18.0 million in the aggregate during the term of the agreement. The Hercules Loan Agreement contains a subjective acceleration clause that can be triggered if the Company experiences a Material Adverse Effect, as defined in the Hercules Loan Agreement. On August 3, 2015, the Company entered into an amendment to the Hercules Loan Agreement, which reduced the Hercules Loan Agreement’s covenant thresholds for revenue for the months ending September 30, 2015 through December 31, 2015. On November 9, 2015, the Company entered into an amendment to the Hercules Loan Agreement, which waived compliance with the revenue and earnings covenant thresholds for November and December 2015. In connection with the amendment, the Company (i) paid Hercules a one-time fee of $0.2 million, (ii) reset the schedule of prepayment fees to begin from November 9, 2016, instead of April 30, 2016, and (iii) agreed to amend the Hercules Warrant as described in Note 12, Debt and Other Obligations. On March 25, 2016, the Company and certain of its affiliates entered into a Fourth Amendment to the Hercules Loan Agreement which increased the maximum net new investment in the Company’s foreign subsidiaries during 2016 from $4.0 million to $5.5 million. At March 31, 2016, the Company is in compliance with all financial covenants of the Hercules Loan Agreement. On May 13, 2016, the Company entered into a Consent Agreement with Hercules, which provides that from the period of April 30, 2016 through June 15, 2016, as the Company completes its account migration to its new primary commercial bank, the Company need not comply with certain requirements to maintain cash in accounts subject to control agreements in favor of Hercules, provided the Company performs daily cash transfers into specified accounts at the new primary commercial bank.

At March 31, 2016, the Company had cash and cash equivalents of $13.0 million and short-term investments of $0.1 million. At March 31, 2016, the Company had restricted cash in North America related to the minimum cash balance under the terms of the Hercules Loan Agreement of $15.0 million. If the Company achieves positive “Adjusted EBITDA” as defined in the Hercules Loan Agreement, for three consecutive quarters, the minimum cash balance decreases to $12.5 million. The Company achieved positive “Adjusted EBITDA” as defined, during the quarters ended September 30, 2015, December 31, 2015 and March 31, 2016. Therefore, at April 1, 2016, the minimum cash balance obligation under the Hercules Loan Agreement decreased to $12.5 million.

At March 31, 2016, the Company had restricted cash related to certificates of deposits held at financial institutions that are pledged as collateral for letters of credit related to lease commitments, collateral for merchant accounts, and cash deposits funded to a restricted account determined on a monthly basis in accordance with its employee health care self-insurance plan in the amount of $3.7 million, of which, $0.2 million relate to the employee health care self-insurance plan. The Company’s current liabilities exceeded its current assets by $65.3 million at March 31, 2016, and incurred an operating loss of $4.7 million for the quarter then ended. To date, the Company has experienced no loss of its invested cash, cash equivalents or short-term investments, although some of those balances are subject to foreign currency exchange risk. The Company cannot, however, provide any assurances that access to its invested cash, cash equivalents and short-term investments will not be impacted by adverse conditions in the financial markets.

The Company believes that it will be able to maintain compliance with the Hercules Loan Agreement’s minimum cash balance requirement through the loan term. As the Company has remained in continuous compliance with the financial covenants under the Hercules Loan Agreement through April 1, 2016, and no event of default has occurred, the Company has extended its interest-only payments through August 1, 2016. The Company also believes that it will extend its interest-only payments through November 1, 2016 by maintaining continuous compliance and not experiencing a default or event of default through July 1, 2016. In addition, the Company believes that it will be able to maintain compliance with the other financial covenants contained in the Hercules Loan Agreement through 2016 as a result of its implemented cost and capital expenditure control measures. The Company has achieved the revenue and earnings targets under the Hercules Loan Agreement for the quarter ended March 31, 2016 and the Company believes that it will be able to achieve the revenue and earnings targets for the remainder of 2016 under the Hercules Loan Agreement, which equal 90% of the revenue estimated in the Company’s 2016 operating plan and 70% and 80% of the earnings estimated for the first and second six months, respectively, in the Company’s 2016 operating plan.

To meet the Company’s liquidity needs, management expects to minimize increases in personnel until the Company’s business performance has improved and supports additional costs. However, the Company may need to implement further cost reductions in its operating expenses to maintain a sufficient cash balance to fund its operations and maintain compliance with the minimum cash balance requirement and maximum foreign investment restriction under the Hercules Loan Agreement. Should it become necessary, the Company would implement additional cost reductions primarily through forgoing certain discretionary compensation increases, and further constraining identified non-critical product investments, and marketing and other costs, including reductions in personnel related to those activities. These identified potential actions, commencing as soon as May 2016, comprise a developed plan to reduce such costs by $4.6 million, net of implementation costs. In addition, the Company would consider borrowing up to an additional $5.0 million under the current VantagePoint notes purchase agreement, however such borrowings would be subject to VantagePoint’s willingness to lend and Hercules’ consent. The Company will continue to evaluate the extent and effectiveness of its cost-saving measures and monitor expenses compared to revenue and intends to implement additional cost reductions in future periods if and as circumstances warrant. However, there can be no assurance that these actions will be successful or that further adverse events outside of the Company’s control may arise that would result in the Company’s inability to comply with the Hercules Loan Agreement’s covenants. If an event of default were to occur, the Company may be required to obtain a further amendment or a waiver to the Hercules Loan Agreement, refinance the term loan, divest non-core assets or operations and/or obtain additional equity or debt financing. If the Company was unable to obtain such a waiver or amendment, or consummate such a transaction, the administrative agent could exercise remedies against the Company and the collateral securing the term loan, including potential foreclosure against the Company’s assets securing the Hercules Loan Agreement, including the Company’s cash. Further, the VantagePoint Notes and Hercules Loan Agreement contain cross-default provisions whereby a default under one agreement would likely result in a cross default under the other agreement. The occurrence of a default under any of these borrowing arrangements would permit the applicable creditors to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.

In consideration of these conditions, the Company currently anticipates that funds expected to be generated from operations, including cost-saving measures the Company has taken and intends to take, will be sufficient to meet the Company’s anticipated cash requirements through at least the next twelve months. However, there is no assurance that the results of operations and cash flows expected during that period of time will be achieved.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of ReachLocal, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The Condensed Consolidated Balance Sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures included in those audited consolidated financial statements.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company’s statement of financial position at ~~March~~June 3130, 2016, the Company’s results of operations for the three and six months ended ~~March~~June 3130, 2016 and 2015 and the Company’s cash flows for the ~~three~~six months ended ~~March~~June 3130, 2016 and 2015. The results for the three and six months ended ~~March~~June 3130, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016. All references to the three and six months ended ~~March~~June 3130, 2016 and 2015 in the notes to the condensed consolidated financial statements are unaudited. The condensed consolidated financial statements as presented herein have not been adjusted as of June 30, 2016 for the effects of the Merger, which closed on August 9, 2016. See Note 17, Subsequent Events, for more information.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results may differ from those estimates.

Reclassifications and Adjustments

Certain prior period amounts have been reclassified to conform to the current period presentation.

Cash and Cash Equivalents

The Company reports all highly liquid short-term investments with original maturities of three months or less at the time of purchase as cash equivalents. As of ~~March~~June 3130, 2016 and December 31, 2015, cash equivalents consist of demand deposits and money market accounts. Cash equivalents are stated at cost, which approximates fair value.

Restricted Cash—Term Loan

Under the terms of the Hercules Loan Agreement the Company iswas required to maintain, at all times, cash in North America of at least $15.0 million, unless the Company ~~achieves~~achieved positive “Adjusted EBITDA” as defined in the Loan Agreement for three consecutive quarters, in which case the minimum cash balance decreases to $12.5 million. At April 1, 2016, the Company had achieved positive “Adjusted EBITDA” as defined for three consecutive quarters and therefore the restricted cash balance required under the Hercules Loan Agreement decreased to $12.5 million. Restricted cash—term loan represents the required minimum compensating balance to secure the term loan. See Note 12, Debt and Other Obligations, for more information.

Restricted Cash

Restricted cash represents certificates of deposit held at financial institutions that are pledged as collateral for letters of credit related to lease commitments, collateral for the Company’s merchant accounts, and cash deposits in a restricted account in accordance with the Company’s employee health care self-insurance plan. The letters of credit will lapse at the end of the respective lease terms through 2024 and the certificates of deposit automatically renew for successive one-year periods over the duration of the lease term. The restrictions related to merchant accounts and the Company’s self-insurance plan will lapse upon termination of the respective underlying arrangements. At ~~March~~June 3130, 2016 and December 31, 2015, the Company had restricted cash in the amount of $3.~~7 million and $3.~~5 million, ~~respectively,~~ of which, $0.2 million, related to the employee health care self-insurance plan.

Concentrations of Credit Risk

During March 2016, the Company commenced a process to transition its two primary financial service providers of commercial banking services and merchant services for its credit and debit card processing in North America to new providers. The Company does not expect a significant impact to its financial position, results of operations or cash flows in North America as a result of the transition which is expected to be completed by May 2016.

Non-Cash Stock Bonus Plan

50% of the Company’s annual corporate bonus plan is settled in fully vested restricted stock units for certain executives and senior level employees. The Company determined that bonus expense incurred under this plan should be presented as a liability, and recognized as an expense equal to the estimated dollar value of the awards upon settlement from the period of service inception date through the grant date.

Recent Accounting Pronouncements Adopted in 2016

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an acquirer to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update were effective for the Company on January 1, 2016. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update. The adoption of this standard did not have an impact on the Company’s financial statements. The Company will apply this update prospectively, as appropriate.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software. The amendments in this update provide guidance to customers of cloud computing providers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company assessed its accounting treatment in its capacity as a cloud computing customer and has determined that no adjustments to the financial statements are necessary. The Company will apply this update going forward, as appropriate.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation. The amendments in this update require management to reevaluate whether certain legal entities should be consolidated. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update were effective for the Company as of January 1, 2016. In accordance with the adoption of this standard, the Company evaluated its non-marketable investments, comprised of a 7.2% equity interest in a privately held limited partnership that is one of its service providers, and a 14.2% equity interest in SERVIZ, Inc. (“Serviz”), the entity that acquired its former ClubLocal business. Under the amended guidance, the limited partnership interest became a VIE as the limited partners do not have substantive participating rights or kick-out rights (including liquidation rights) over the general partner. As an early-stage company, Serviz was considered a VIE as it may not have sufficient equity to finance its activities without additional financial support. The Company is not the primary beneficiary of its non-marketable investments as it does not have: (1) the power to direct the activities that most significantly impact their economic performance or (2) the obligation to absorb losses or the right to receive benefits that could potentially be significant, due to a lack of voting rights or decision-making authority, rights to receive residual returns, or obligations to provide additional financial support with either entity. Adoption of the standard did not change the Company’s determination that the non-marketable investments do not require consolidation and did not have an impact on the Company’s financial statements. The Company will apply this update going forward, as appropriate.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update were effective for the Company as of January 1, 2016. Earlier adoption is permitted. Entities may apply the amendments in this update either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The adoption of this standard did not have an impact on the Company’s financial statements. No prior periods were retrospectively adjusted. The Company will apply this update going forward, as appropriate.

Recent Accounting Pronouncements Not Yet Adopted

In March 2016, the FASB issued ASU No. 2016-09, Compensation- Stock Compensation. The amendments in this update simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The amendments in this update are effective for the Company as of January 1, 2017. Early adoption is permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments- Equity Method and Joint Ventures. The amendments in this update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this update are effective for the Company as of January 1, 2017. Early adoption is permitted. An entity should apply the amendments in this update prospectively. The Company is currently assessing the impact of this update on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in this update are effective for the Company as of January 1, 2017. Early adoption is permitted, including adoption in an interim period. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company is currently assessing the impact of this update on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendments in this update supersedes the guidance in former ASC 840, Leases with ASC 842, Leases, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The amendments in this update are effective for the Company as of January 1, 2019. Early application of this update is permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. The Company is currently assessing the impact of this update on its consolidated financial statements.

In January 2016, the FASB ASU No. 2016-01, Financial Instruments- Overall. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update are effective for the Company as of January 1, 2018. Early application of certain aspects of the amendment is permitted by public entities, otherwise early adoption is not permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern. The amendments in this update require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for the Company as of January 1, 2017. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, and May 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12, respectively. The guidance in this update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance throughout the Codification. Additionally, this update supersedes some cost guidance included in ASC 605-35, Revenue Recognition -– Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of ASC 360, Property, Plant, and Equipment, and intangible assets, within the scope of ASC 350, Intangibles -– Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement in this update. The standard was to be effective for the Company as of January 1, 2017, but in August 2015, the FASB delayed the effective date of the new revenue accounting standard to January 1, 2019, and would permit early adoption as of the original effective date. Earlier adoption is not otherwise permitted for public entities. An entity can apply the revenue standard retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (simplified transition method). The Company is currently assessing the impact of this update on its consolidated financial statements.

3. Fair Value of Financial Instruments

The Company applies the fair value hierarchy for its financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, that are used to measure fair value:

•

Level 1—Quoted prices in active markets for identical assets or liabilities.

•

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the basis used to measure certain of the Company’s financial assets and liabilities that are carried at fair value (in thousands):

			Basis of Fair Value Measurement
	Balance at March 31, 2016		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Balance at June 30, 2016		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	1315,~~001~~171	$	1315,~~001~~171	$	—-	$	—-
Restricted cash—term loan	$	15,000	$	15,000	$	—	$	—
Restricted cash-term loan	$	12,500	$	12,500	$	-	$	-
Short-term investments	$	~~130~~274	$	~~130~~274	$	—-	$	—-
Restricted cash	$	3,~~670~~451	$	—-	$	3,~~670~~451	$	—-

			Basis of Fair Value Measurement
	Balance at December 31, 2015		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	18,833	$	18,833	$	-	$	-
Restricted cash-term loan	$	15,000	$	15,000	$	-	$	-
Short-term investments	$	359	$	359	$	-	$	-
Restricted cash	$	3,502	$	-	$	3,502	$	-

			Basis of Fair Value Measurement
	Balance at December 31, 2015		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	18,833	$	18,833	$	—	$	—
Restricted cash-term loan	$	15,000		15,000	$	—	$	—
Short-term investments	$	359	$	359	$	—	$	—
Restricted cash	$	3,502	$	—	$	3,502	$	—

The Company’s restricted cash is valued using pricing sources and models utilizing market observable inputs, as provided to the Company by its broker.

The Company also has an investment in a privately held partnership that is one of its service providers. During March 2013, the Company invested $2.5 million for a 4% equity interest in the service provider, and in March 2014, the Company invested $2.0 million for an additional 3.2% equity interest. The Company does not have significant influence over the entity. In addition, the Company has an equity interest of 14.2% in SERVIZ, Inc., the entity that acquired its former ClubLocal business and does not have significant influence over the entity. The carrying amounts of the Company’s cost method investments were each $4.5 million at ~~March~~June 3130, 2016 and December 31, 2015, and are included in non-marketable investments in the accompanying condensed consolidated balance sheet. The Company’s maximum financial exposure to loss is limited to its cost based investments.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The Company carries its financial instruments at fair value with the exception of its debt. Financial instruments that are not recorded at fair value are measured at fair value on a quarterly basis for disclosure purposes. The carrying amounts and estimated fair values of financial instruments not recorded at fair value are as follows:

	Three Months Ended March 31, 2016
	June 30, 2016
	Carrying Amount		Estimated Fair Value
(in thousands)
Term loan	$	2425,~~809~~054	$	24,~~500~~800
Convertible notes- related party	$	5,000	$	4,~~400~~500

	Year Ended December 31, 2015
	December 31, 2015
	Carrying Amount		Estimated Fair Value
(in thousands)
Term loan	$	24,546	$	24,500
Convertible notes- related party	$	5,000	$	4,600

The Company’s debt ~~relates~~prior to the closing of the Merger, related to its Hercules Loan Agreement and VantagePoint Notes. The term loan and notes ~~are~~were ~~considered~~determined using Level 3 inputs under ASC 820 because there is no known or accessible market or market indices for these debt instruments to be traded or exchanged. The fair value of each of the Hercules Loan Agreement and the VantagePoint Notes was determined by discounting ~~its~~their respective cash flows expected to be paid using a discount rate commensurate with the risk, including market participant assumptions about current interest rates and the creditworthiness of the Company. The fair value of the Hercules Loan Agreement includes the discounts attributable to issuance costs as well as the end-of-term payment. The fair value of the VantagePoint Notes includes an estimated value of the embedded conversion feature determined based on its contractual terms as well as the trading information of the Company’s common stock into which the notes are convertible.

13During 2015, the Company recognized a $27.8 million goodwill impairment charge related to the Company’s Asia Pacific reporting unit. The Company recognized an impairment charge to write-down the goodwill to its fair value. The Company utilized unobservable inputs in determining the magnitude of the non-recurring impairment representing Level 3 inputs in the fair value hierarchy.

During 2015, the Company recognized a $27.8 million goodwill impairment charge related to the Company’s Asia Pacific reporting unit. The Company recognized an impairment charge to write-down the goodwill to its fair value. The Company utilized unobservable inputs in determining the magnitude of the non-recurring impairment representing level 3 inputs in the fair value hierarchy.

4. Acquisitions

Acquisition of Kickserv

On November 21, 2014, the Company acquired Kickserv, Inc. (“Kickserv”) as part of the Company’s continued effort to expand its product offerings. Kickserv is a provider of cloud-based business management software for service businesses. The purchase price consisted of $6.75 million of initial consideration, subject to a holdback and certain adjustments, and up to $4.0 million of earn-out consideration. At closing, the Company paid $5.3 million in cash ~~with~~and ~~the~~on ~~remaining~~May ~~balance~~20, of2016 the ~~initial~~Company ~~purchase~~made ~~price~~the (final payment of $1.35 million) ~~payable~~for on the ~~18-month~~indemnity ~~anniversary of the closing date, subject to certain conditions~~holdback.

Acquisition of SureFire

On March 21, 2014, ReachLocal New Zealand Limited (“RL NZ”) acquired certain assets and hired certain employees of SureFire Search Limited (“SureFire”) as part of the Company’s international expansion plan. From 2010 until the acquisition, SureFire was the Company’s exclusive reseller in New Zealand. At closing, RL NZ paid NZ$1.7 million ($1.5 million) in cash of the estimated NZ$2.8 million ($2.4 million) purchase price. The remaining balance of the estimated purchase price was deferred subject to meeting revenue targets and an indemnity holdback, payable, if at all, after the 12-month anniversary of the closing date, and the 12- and 18-month anniversaries of the closing date, respectively. The fair value of the indemnity holdback at the date of acquisition was NZ$0.4 million ($0.3 million). On April 10, 2015, RL NZ paid NZ$0.6 million ($0.4 million), which included NZ$0.4 million ($0.3 million) of earn-out consideration and NZ$0.3 million ($0.2 million) for the 12-month indemnity holdback release, offset by a NZ$0.2 million ($0.1 million) net working capital adjustment in the Company’s favor. On September 18, 2015, RL NZ made the final payment of $0.1 million for the indemnity holdback.

5. Goodwill and Finite-Lived Intangible Assets

~~The~~At ~~changes~~June in30, ~~the~~2016 ~~carrying~~and ~~amount~~December ~~of goodwill for the three months ended March~~ 31, ~~2016~~2015, ~~were~~goodwill asconsisted ~~follows~~of the following (in thousands):

	North America		Asia-Pacific			Total
Balance at December 31, 2014	$	13,680	$	34,509		$	48,189
Accumulated impairment loss		—-		(27,800	)		(27,800	)
Foreign currency translation		—-		(260	)		(260	)
Balance at December 31, 2015		13,680		6,449			20,129
Foreign currency translation		—-		1971			1971
Balance at March 31 2016	$	13,680	$	6,468		$	20,148
Balance at June 30 2016	$	13,680	$	6,520		$	20,200

The Company tests the goodwill of its reporting units for impairment annually on the first day of the fourth quarter, and whenever events occur or circumstances change that would more likely than not indicate that the goodwill might be impaired.

During 2015, due to a decline in internal projections for the Asia-Pacific reporting unit for both revenue and profitability as a result of declines in financial performance, the Company determined that sufficient indicators of potential impairment existed to require an interim quantitative goodwill impairment test for the Asia-Pacific reporting unit. Based on the Company’s revised forecasts, the carrying value of goodwill exceeded the implied fair value of goodwill for the Asia-Pacific reporting unit and as a result, the Company recorded an impairment charge of $27.8 million. Subsequent to the interim impairment test, due to further declines in the Company’s market capitalization and consideration of exiting the U.K. market, the Company determined that sufficient indicators existed to perform an additional interim quantitative goodwill impairment assessment of the North America and Asia-Pacific reporting units. Based on the assessment, it was determined that the estimated fair value of both reporting units substantially exceeded its carrying amount, including goodwill. Accordingly, no further impairment charge was recorded. During the ~~three~~six months ended ~~March~~June 3130, 2016, no events have occurred or circumstances have changed to indicate that goodwill might be impaired.

Finite-Lived Intangible Assets

At ~~March~~June 3130, 2016 and December 31, 2015, finite-lived intangible assets consisted of the following (in thousands):

	March 31, 2016
	June 30, 2016
	Useful Life (years)			Gross Value	~~Gross Value~~		Accumulated Amortization	~~Accumulated Amortization~~		Net	~~Net~~
Developed technology	3	3-8	8	$	$5,490	~~5,490~~	$	$3,107	~~3,014~~	$	$2,383	~~2,476~~
Customer contracts and relationships	2	2-4	4		1,773	~~1,744~~		1,090	~~937~~		683	~~807~~
Trade names		10			570	~~570~~		93	77		477	~~493~~
Total				$	$7,833	~~7,804~~	$	$4,290	~~4,028~~	$	$3,543	~~3,776~~

	December 31, 2015
	Useful Life (years)			Gross Value	~~Gross Value~~		Accumulated Amortization	~~Accumulated Amortization~~		Net	~~Net~~
Developed technology	3	3-8	8	$	$5,490	~~5,490~~	$	$2,920	~~2,920~~	$	$2,570	~~2,570~~
Customer contracts and relationships	2	2-4	4		1,733	~~1,733~~		799	~~799~~		934	~~934~~
Trade names		10			570	~~570~~		63	63		507	~~507~~
Total				$	$7,793	~~7,793~~	$	$3,782	~~3,782~~	$	$4,011	~~4,011~~

Based on the current amount of intangibles subject to amortization, the estimated amortization expense over the remaining lives is as follows (in thousands):

Years Ending December 31,
Remaining 2016	$	~~725~~491
2017		~~682~~685
2018		584
2019		431
2020		431
Thereafter		~~923~~921
Total	$	3,~~776~~543

For the three months ended ~~March~~June 3130, 2016 and 2015, amortization expense related to acquired intangible assets was $0.2 million and $0.54 million, respectively. For the six months ended June 30, 2016 and 2015, amortization expense related to acquired intangible assets was $0.5 million and $0.9 million, respectively.

6. Software Development Costs

Capitalized software development costs consisted of the following (in thousands):

	March 31, 2016			December 31, 2015
	June 30, 2016			December 31, 2015
Capitalized software development costs	$	7072,~~060~~460		$	67,610
Accumulated amortization		(4952,901	)		(46,919	)
Capitalized software development costs, net	$	2019,~~159~~559		$	20,691

For the three months ended ~~March~~June 3130, 2016 and 2015, the Company recorded amortization expense of $2.89 million and $23.0 million, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded amortization expense of $5.7 million and $5.8 million, respectively. At ~~March~~June 3130, 2016 and December 31, 2015, $3.98 million and $2.9 million, respectively, of capitalized software development costs were related to projects still in process.

7. Commitments and Contingencies

Legal Matters

From time to time, the Company is involved in legal proceedings arising in the ordinary course of its business. The Company believes that there is no litigation or claims pending or threatened that are likely to have a material adverse effect on its financial position, results of operations or cash flows.

~~Other~~On ~~Commitments~~July 15, 2016, Todd Miranda filed a putative class action lawsuit challenging the Merger in the Superior Court of the State of California, County of Los Angeles. In addition to the Company, the members of the Company’s Board of Directors and certain Gannett entities were named as defendants. The complaint alleges breaches of fiduciary duty by the individual members of the Company Board in connection with the Merger Agreement by allegedly accepting an inadequate offer price and allegedly agreeing to unreasonable deal protection provisions, among other actions. The complaint further alleges that the Company, Parent and Purchaser aided and abetted the purported breaches of fiduciary duty. The plaintiffs generally seek equitable and injunctive relief, including an order enjoining the defendants from completing the proposed merger transaction, rescission of any consummated transaction, unspecified amounts in damages and attorneys’ fees. The Company believes this lawsuit is without merit, and intends to vigorously defend against it.

~~The~~On ~~Company~~July 27, ~~engaged~~2016, Donal Casey filed a ~~third~~putative ~~party~~class ~~facilitator~~action tolawsuit ~~provide~~challenging ~~direct~~the ~~support~~Merger in the ~~execution~~Superior Court of ~~its~~the ~~2015~~State ~~Restructuring~~of ~~Plan~~California, County of Los Angeles. In addition to the Company, the members of the Company’s Board of Directors were named as defendants. The ~~final~~complaint ~~payment~~alleges tobreaches of fiduciary duty by the ~~facilitator~~individual ~~was~~members ~~made~~of the Company Board in ~~January~~connection ~~2016~~with the Merger Agreement by allegedly failing to properly value the Company, allegedly agreeing to unreasonable deal protection provisions, and allegedly failing to make adequate disclosures regarding the Merger, among other actions. ~~See~~The ~~Note~~plaintiffs 10generally seek equitable and injunctive relief, ~~Restructuring~~including ~~Charges~~an order enjoining the defendants from completing the Merger, ~~for~~rescission ~~more~~of ~~information~~any consummated transaction, unspecified amounts in damages and attorneys’ fees. The Company believes this lawsuit is without merit, and intends to vigorously defend against it.

8. Stockholder’s Equity

Common Stock Repurchases

The Company’s Board of Directors previously authorized the repurchase of up to $47.0 million of the Company’s outstanding common stock. At December 31, 2013, the Company had executed repurchases of 3.4 million shares of its common stock under the program for an aggregate of $36.3 million. There were no repurchases under the program during 2014 or 2015. On April 29, 2015, the Board of Directors terminated the Company’s repurchase program.

The Company is deemed to repurchase common stock surrendered by participants to cover tax withholding obligations with respect to the vesting of restricted stock and restricted stock units.

9. Stock-Based Compensation

Stock Options

The following table summarizes stock option activity (in thousands, except years and per share amounts):

	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2015		6,548		$	5.05
Granted		1,~~397~~761		$	1.9589
Exercised		—(15	)	$	—0.34
Forfeited		(~~195~~378	)	$	65.4050
Outstanding at March 31, 2016		7,750		$	4.45		6.3	$	199
Outstanding at June 30, 2016		7,916		$	4.33		6.2	$	9,899
Vested and exercisable at March 31, 2016		1,954		$	7.30		5.2	$	36
Vested and exercisable at June 30, 2016		3,006		$	5.86		6.0	$	2,110
Unvested at March 31, 2016, net of estimated forfeitures		5,795		$	3.50		6.6	$	163
Unvested at June 30, 2016, net of estimated forfeitures		4,910		$	3.40		6.3	$	7,789

The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted during the three and six months ended ~~March~~June 3130, 2016 and 2015.:

	Three Months Ended March 31,
	Three Months Ended						Six Months Ended
	2016			2015
	June 30,						June 30,
Expected dividend yield		0	%		0	%
	2016			2015			2016			2015
Risk-free interest rate		1.22	%		1.50	%
Expected dividend yield		0	%		0	%		0	%		0	%
Expected life (in years)		4.75			4.75
Risk-free interest rate		1.39	%		1.54	%		1.26	%		1.53	%
Expected volatility		69.27	%		56	%
Expected life (in years)		5.37			4.99			4.88			4.93
Weighted average fair value per share	$	1.10		$	2.92
Expected volatility		68	%		57	%		69	%		57	%

The ~~aggregate~~per-share ~~intrinsic~~weighted average grant date fair value of ~~stock~~ options ~~exercised~~granted during the ~~three~~six months ended ~~March~~June 3130, ~~2015,~~2016 was $0.1 ~~million~~.07. ~~There~~The ~~were~~aggregate nointrinsic value of stock options exercised during the ~~three~~six months ended ~~March~~June 3130, 2016. and 2015, were $19,337 and $68,531, respectively.

1614

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock and restricted stock unit awards (in thousands, except per share amounts):

	Number of shares			Weighted Average Grant Date Fair Value
Unvested at December 31, 2015		335		$	5.37
Granted		712		$	1.7990
Forfeited		(1217	)	$	115.8299
Vested		(~~685~~755	)	$	2.0445
Unvested at March 31, 2016		350		$	4.68
Unvested at June 30, 2016		275		$	4.51

Stock-Based Compensation Expense

The Company records stock-based compensation expense, net of amounts capitalized as software development costs. The following table summarizes stock-based compensation (in thousands):

	Three Months Ended March 31,
	Three Months Ended				Six Months Ended
	2016		2015
	June 30,				June 30,
Stock-based compensation	$	1,222	$	2,265
	2016		2015		2016		2015
Less: Capitalized stock-based compensation		82		119
Stock-based compensation	$	1,450	$	2,314	$	2,673	$	4,579
Stock-based compensation expense, net	$	1,140	$	2,146
Less: Capitalized stock-based compensation		53		100		136		219
Stock-based compensation expense, net	$	1,397	$	2,214	$	2,537	$	4,360

Stock-based compensation, net of capitalization, is included in the accompanying condensed consolidated statements of operations within the following captions (in thousands):

	Three Months Ended March 31,
	Three Months Ended				Six Months Ended
	2016		2015
	June 30,				June 30,
Stock-based compensation expense, net
	2016		2015		2016		2015
Cost of revenue	$	50	$	156
Stock-based compensation expense, net
Selling and marketing		201		482
Cost of revenue	$	59	$	134	$	109	$	290
Product and technology		62		168
Selling and marketing		207		424		408		906
General and administrative		827		1,340
Product and technology		178		126		240		294
	$	1,140	$	2,146
General and administrative		953		1,530		1,780		2,870
Stock-based compensation expense, net	$	1,397	$	2,214	$	2,537	$	4,360

At ~~March~~June 3130, 2016, there was $109.43 million of unrecognized stock-based compensation related to restricted stock, restricted stock units and outstanding stock options, net of estimated forfeitures. This amount is expected to be recognized over a weighted average period of 1.474 years. Future stock-based compensation expense for these awards may differ to the extent actual forfeitures vary from management estimates.

Commencing in 2015, 50% of the Company’s annual corporate bonus plan for certain executives and senior level employees is being settled with fully vested restricted stock units, and is payable in the first quarter of the following fiscal year. The plan does not limit the number of shares that can be issued to settle the obligation. On February 26, 2016, 414,239 shares (net 258,255 shares withheld to satisfy tax withholding obligations) were issued to satisfy the stock portion of the 2015 annual corporate bonus plan. ~~For~~During the three and six months ended ~~March~~June 3130, 2016, the Company has recognized stock-based compensation expense related to the 2016 plan of $320.3 million and $0.3 million,~~000~~ respectively. As of ~~March~~June 3130, 2016, approximately ~~696~~273,~~500~~998 shares would be required to satisfy the total estimated obligation relating to the stock portion of the 2016 annual corporate bonus plan.

Stock Option Exchange

On January 9, 2015, an option exchange was completed that allowed employee option holders to surrender certain outstanding stock options for cancellation in exchange for the grant of new replacement options to purchase an equal number of shares having an exercise price equal to the greater of $6.00 and the fair market value of the Company’s common stock on the replacement date grant. Total options covering 2.8 million shares were exchanged. The Company is amortizing the incremental expense of $1.5 million in addition to the remaining expense attributable to the exchanged awards over the vesting period of the new awards.

Effect of the Merger

Immediately prior to the effective time of the Merger on August 9, 2016, each outstanding Company stock option, whether or not vested, was cancelled and converted into the right to receive an amount in cash, if any, without interest and less the amount of any tax withholdings, equal to the product of (A) the excess, if any, of (1) the Merger Consideration over (2) the exercise price per share of such option, and (B) the number of Company shares underlying such option. Any Company stock option with an exercise price per share in excess of the Merger Consideration was cancelled without payment. Each outstanding Company restricted stock unit award and each restricted stock award, whether or not vested, was cancelled and converted into the right to receive an amount in cash, if any, without interest and less the amount of any tax withholdings, equal to the product of (A) the Merger Consideration, and (B) the number of Company shares underlying such award.

10. Restructuring Charges

The Company has implemented various restructuring plans to reduce its cost structure, align resources with its product strategy, improve operating efficiency and implement cost savings, which have resulted in workforce reductions and the consolidation of certain real estate facilities and data centers.

2015 Restructuring Plan

In accordance with the Company’s ongoing efforts to reduce expenses and improve the operating performance of its business, the Company commenced its 2015 Restructuring Plan. The initiative iswas focused on enhancing earnings through an analysis of opportunities to both improve revenue performance and reduce costs. Operational efficiency improvements under the 2015 Restructuring Plan ~~are~~were identified and implemented through strategic realignment and targeted cost reductions, including workforce costs, facility-related expenditures and other operating expenses. The charges incurred during the ~~three~~six months ended ~~March~~June 3130, 2016 primarily involved down-sizing certain facilities in North America, costs to utilize a third party facilitator to aid execution of the plan and reductions of the Company’s international workforces. ~~The Company expects to have continued restructuring activity under this plan that is estimated to be incurred through the fourth quarter of 2016.~~

A summary of the accrued restructuring liability related to this plan, which is recorded in “Accrued restructuring” on the consolidated balance sheet is as follows (in thousands):

	Workforce Reduction Costs			Facility Closures and Equipment Write-downs			Other Associated Costs			Total
Balance at December 31, 2015	$	586		$	606		$	344		$	1,536
Amounts accrued		~~164~~292			1,~~930~~879			—-		$	2,~~094~~171
Amounts (paid) received		(603	)		34			(278	)		(847	)
Amounts paid		(813	)		(18	)		(278	)	$	(1,109	)
Accretion		—-			(65169	)		—-		$	(65169	)
Non-cash items		(28	)		(654	)		—-		$	(~~656~~662	)
Balance at March 31, 2016	$	145		$	1,851		$	66		$	2,062
Balance at June 30, 2016	$	57		$	1,644		$	66		$	1,767

In addition to the amount paid above, the Company also has a prepaid balance for restructuring as of ~~March~~June 3130, 2016, of $0.42 million included in “Prepaid expenses and other current assets” on the consolidated balance sheet~~, which will be amortized through the second quarter of 2016~~.

The Company expects the remaining facility ~~closures~~closure ~~and~~liabilities ~~equipment write-downs~~ to be paid through the third quarter of 2024 and the workforce reduction costs to be paid through the fourth quarter of 2016.

2014 Restructuring Plans

As a result of declining performance in the Company’s North American operations during the first quarter of 2014, the Company implemented a restructuring plan that primarily involved a reduction of the Company’s North American and international workforces, as well as the closure of facilities in North America and certain international markets. ~~The Company does not expect to have continued restructuring activity under this plan, other than settlement of associated liabilities.~~

1816

A summary of the accrued restructuring liability related to this plan, which is recorded in “Accrued restructuring” on the consolidated balance sheet is as follows (in thousands):

	Facility Closuresand EquipmentWrite-downs			Total
	Facility Closures and Equipment Write-downs			Total
Balance at December 31, 2015	$	1,793		$	1,793
Amounts paid		(26171	)	$	(26171	)
Balance at March 31, 2016	$	1,767		$	1,767
Balance at June 30, 2016	$	1,622		$	1,622

The Company expects the remaining facility ~~closures~~closure ~~and~~liabilities ~~equipment write-downs~~ to be paid through the third quarter of 2024.

11. Gain (loss) on Deconsolidation of Subsidiary

On December 16, 2015, RL UK entered administration to allow for an orderly exit from the market. Upon entering administration, the Company no longer held a controlling interest, and therefore deconsolidated the subsidiary. As a result, the Company recorded a gain of $2.9 million during the fourth quarter of 2015. During the three and six months ended ~~March~~June 3130, 2016, the Company recorded a loss of $720.1 million and $0.2 million,~~000~~ respectively, related to residual expenses associated with the deconsolidation, which is included in Loss on deconsolidation of subsidiary, net in the Company’s condensed consolidated statement of operations.

12. Debt and Other Obligations

Hercules Term Loan

On April 30, 2015, the Company entered into the Hercules Loan Agreement with its direct and indirect domestic subsidiaries, as co-borrowers, Hercules ~~Technology Growth Capital~~, ~~Inc. (“Hercules”),~~ as administrative agent, and the lenders party thereto from time to time (the “Lenders”), including Hercules, pursuant to which the Lenders agreed to make a term loan available to the Company for working capital and general business purposes, in a principal amount of $25.0 million. The term loan ~~has~~had an annual interest rate equal to the greater of (i) 11.75% and (ii) the sum of (a) the prime rate, plus (b) 8.50%. During December 2015, the annual interest rate increased from 11.75% to 12.00% and remained 12.00% atthrough ~~March~~June 3130, 2016. On the closing date of the Hercules Loan Agreement the Company paid a fee of $0.3 million, ~~which is to be credited against the final payment,~~ and debt issuance costs of $0.2 million. ~~Debt issuance costs will be amortized over the life of the loan of 3 years and calculated using the effective interest method.~~

~~Under~~In accordance with the Hercules Loan Agreement, the Company ismade ~~due to make~~ monthly, contractual interest-only payments. onThe ~~the Hercules term loan through May 1, 2016, though such payments may be extended through August 1, 2016 and November 1, 2016 if the~~ Company’s ~~remains in continuous compliance with the financial~~ covenants under the Hercules Loan Agreement ~~through~~included ~~April~~restrictions 1,on ~~2016~~transferring ~~and~~collateral, ~~July~~incurring 1,additional ~~2016~~indebtedness, ~~respectively,~~engaging ~~and~~in nomergers ~~default~~ or ~~event~~acquisitions, ofpaying ~~default~~dividends ~~has~~or ~~occurred~~making ~~and~~other isdistributions, ~~continuing~~making oninvestments, ~~such~~creating ~~dates.~~liens, Asselling ~~the Company has remained in continuous compliance with the financial covenants under the Hercules Loan Agreement through April 1~~assets, ~~2016,~~ and noundergoing ~~event~~a ofchange ~~default~~in ~~has occurred~~control, ~~the~~in ~~interest-only~~each ~~payments~~case ~~have~~subject ~~been~~to ~~extended~~certain ~~through August 1~~exceptions, ~~2016.~~as ~~The~~well ~~term~~as ~~loan~~financial ~~will~~covenants ~~begin~~to ~~amortizing~~maintain atcertain ~~the~~minimum ~~end~~levels of ~~the~~revenue ~~applicable interest-only period, with monthly payments of principal~~ and ~~interest~~earnings toduring ~~the~~each ~~Lenders in consecutive monthly installments following the end of such interest~~three-~~only~~month period~~. The term loan will mature on July 1~~, ~~2018~~tested ormonthly, ifduring the ~~interest-only payments are extended through November 1, 2016, the~~ term ~~loan will mature October 1, 2018~~. ~~Upon~~Under ~~repayment of~~ the Hercules ~~term~~Loan ~~loan~~Agreement, the Company isagreed ~~also~~to ~~due~~maintain tominimum ~~make~~cash anin ~~end-of-term~~North ~~payment~~America toat ~~the~~all ~~Lenders~~times, ~~equal~~which toequaled $115.50 million, ~~which~~at isDecember ~~accrued~~31, as2015 ~~interest~~and ~~based~~reduced onto ~~the effective interest method over the 3-year term of the Hercules Loan Agreement~~$12.5 ~~The~~million ~~Hercules~~as ~~term loan is secured by substantially all~~ of ~~the~~April ~~Company’s personal property~~1, ~~including its intellectual property~~2016.

AtOn August 3, 2015, the Company entered into an amendment to the Hercules Loan Agreement, which reduced the term loan’s ~~option~~covenant thresholds for revenue for the months ending September 30, 2015 through December 31, 2015. On November 9, 2015, the ~~outstanding~~Company ~~principal~~entered ~~balance~~into ofa second amendment to the Hercules Loan Agreement, which waived compliance with the term loan’s ~~may~~revenue beand ~~prepaid~~earnings incovenant ~~whole~~thresholds for November and December 2015. In connection with the amendment, orthe inCompany ~~part~~(i) inpaid Hercules a ~~minimum~~one-time ~~amount~~fee of $20.52 million, ~~subject~~(ii) toreset athe schedule of prepayment ~~fee~~fees ofto 3%begin from the November 9, 2015, instead of ~~any~~April ~~amount~~30, ~~prepaid~~2016, ifand (iii) agreed to amend the ~~prepayment~~Hercules ~~occurs~~warrant onas ordescribed ~~prior~~below. toOn ~~November~~December 917, ~~2016~~2015 the Company entered into the third amendment to the Hercules Loan Agreement, orwhich 2%reduced the amount of restricted cash the Company was required to maintain in North America from $17.5 million to $15.0 million and which amount ~~prepaid~~would be further reduced to $12.5 million if the ~~prepayment~~Company ~~occurs~~achieved ~~after~~positive ~~November~~“Adjusted 9,EBITDA” as defined in the Hercules Loan Agreement. On March 25. 2016, ~~but~~the onCompany orand ~~prior~~certain of its affiliates entered into a Fourth Amendment to ~~November~~the 9,Hercules ~~2017.~~Loan IfAgreement which increased the ~~prepayment~~maximum ~~occurs~~net ~~after~~new ~~November~~investment 9,in ~~2017,~~the ~~there~~Company’s isforeign nosubsidiaries ~~prepayment~~during ~~fee~~2016 from $4.0 million to $5.5 million.

19In connection with the closing of the Merger, on August 9, 2016, the Company repaid the Hercules term loan in full, including applicable fees and accrued and unpaid interest of $2.3 million.

The Company’s covenants under the Hercules Loan Agreement include restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying dividends or making other distributions, making investments, creating liens, selling assets, and undergoing a change in control, in each case subject to certain exceptions, as well as financial covenants to maintain certain minimum levels of revenue and earnings during each three-month period, tested monthly, during the term. Restrictions also include a maximum net new investment in the Company’s foreign subsidiaries, subject to certain exclusions, of $5.5 million during 2016, $4.0 million annually thereafter, and $18.0 million in the aggregate during the term of the agreement. Under the Hercules Loan Agreement, the Company has agreed to maintain minimum cash in North America in an amount equal to $15.0 million at all times, unless the Company achieves positive “Adjusted EBITDA” as defined in the Hercules Loan Agreement for three consecutive quarters, in which case the minimum cash balance decreases to $12.5 million. The Company achieved positive “Adjusted EBITDA” as defined, during the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016. Therefore at April 1, 2016, the minimum cash balance required under the Hercules Loan Agreement decreased to $12.5 million. The Hercules Loan Agreement includes events of default, the occurrence and continuation of which provide Hercules, as administrative agent, with the right to exercise remedies against the Company and the collateral securing the term loan, including potential foreclosure against the Company’s assets securing the Hercules Loan Agreement, including the Company’s cash. The Hercules Loan Agreement contains a subjective acceleration clause that can be triggered if the Company experiences a Material Adverse Effect, as defined in the Hercules Loan Agreement.

On August 3, 2015, the Company entered into an amendment to the Hercules Loan Agreement, which reduced the term loan’s covenant thresholds for revenue for the months ending September 30, 2015 through December 31, 2015. On November 9, 2015, the Company entered into a second amendment to the Hercules Loan Agreement, which waived compliance with the term loan’s revenue and earnings covenant thresholds for November and December 2015. In connection with the amendment, the Company (i) paid Hercules a one-time fee of $0.2 million, (ii) reset the schedule of prepayment fees to begin from the November 9, 2015, instead of April 30, 2016, and (iii) agreed to amend the Hercules warrant as described below. On December 17, 2015 the Company entered into the third amendment to the Hercules Loan Agreement, which reduced the amount of restricted cash the Company is required to maintain in North America from $17.5 million to $15.0 million and which amount will further be reduced to $12.5 million if the Company achieves positive “Adjusted EBITDA” as defined in the loan agreement. On March 25. 2016, the Company and certain of its affiliates entered into a Fourth Amendment to the Hercules Loan Agreement which increased the maximum net new investment in the Company’s foreign subsidiaries during 2016 from $4.0 million to $5.5 million. The Company is in compliance with all of the Hercules Loan Agreement’s covenants at March 31, 2016. On May 13, 2016, the Company entered into a Consent Agreement with Hercules, which provides that from the period of April 30, 2016 through June 15, 2016, as the Company completes its account migration to its new primary commercial bank, the Company need not comply with certain requirements to maintain cash in accounts subject to control agreements in favor of Hercules, provided the Company performs daily cash transfers into specified accounts at the new primary commercial bank.

Hercules Warrant

Concurrently with entrance into the Hercules Loan Agreement, the Company issued to Hercules, as the sole lender on the closing date, a warrant to purchase up to 177,304 shares of the Company’s common stock at an exercise price of $2.82 per share. In connection with the November 9, 2015 Hercules Loan Agreement amendment, the Company agreed to amend the warrant to increase the number of shares to 300,000 and reduce the exercise price to $0.85. ~~The warrant is exercisable in full and not in part.~~ In addition, if upon the sale of all shares issued upon exercise of the warrant, or in the case of a merger or sale transaction involving other securities in whole or in part upon the sale of such securities, the absolute return on the warrant ~~exceeds~~exceeded $2.55 per share underlying the warrant, the warrant holder ~~will~~would pay the Company the excess in cash. The ~~warrant may be exercised either for cash or on a cashless basis. The warrant expires April 30, 2022. The~~ Company estimated the fair value of the warrant to be $0.3 million based on its relative fair value to the term loan using a Black-Sholes pricing model and accounted for the warrant as a discount on the carrying amount of the term loan and a component of additional paid-in capital. ~~The fair value of the warrant will be amortized in the statement of operations as a component of interest expense.~~

In connection with the closing of the Merger, on August 9, 2016, the warrant was cancelled in exchange for a payment in cash of an amount equal to (a) the total number of shares underlying the warrant (300,000), multiplied by (b) $2.55.

VantagePoint Convertible Notes (Related Party)

On December 17, 2015, the Company entered into a convertible note purchase agreement with affiliates of the Company’s largest shareholder, VantagePoint, for issuance of $5.0 million of VantagePoint Notes. The note purchase agreement also ~~provides~~provided for the sale of up to an additional $5.0 million aggregate principal amount of convertible notes, upon mutual agreement of ReachLocal and VantagePoint (and Hercules’ consent). The notes ~~bear~~bore an annual interest rate of 4%, compounded quarterly. The Company iswas required to begin making quarterly interest and principal payments commencing on April 15, 2017, subject to a subordination agreement with Hercules. The ~~VantagePoint Notes mature on April 15, 2018, and all principal and unpaid interest is due at that time. The~~ holders of the VantagePoint Notes ~~have~~had the right to convert any portion of the VantagePoint Notes into shares of ReachLocal common stock, par value $0.00001 per share, at an initial conversion rate of 200 shares of common stock per $1,000 principal amount of VantagePoint Notes, which ~~represents~~represented an initial conversion price of $5.00 per share. The conversion rate is subject to customary anti-dilution adjustments for stock dividends, splits and combinations, certain distributions on the common stock, including cash dividends, spin-offs and certain tender or exchange offers for the common stock. An event of default, as defined in the agreement, may result in the acceleration of the maturity of the notes. The VantagePoint Notes are included in convertible notes – related party in the accompanying consolidated balance sheet.

20On February 4, 2016, the Company entered into an amendment to the VantagePoint Notes. The amendment provided that, except in certain circumstances, the convertibility of the VantagePoint Notes was limited such that conversion may not result in the holders collectively acquiring beneficial ownership of more than 1.9% of the Company’s outstanding shares of common stock during any 12-month period.

OnVantagePoint ~~February~~and 4,its ~~2016,~~affiliates ~~the~~beneficially ~~Company~~owned ~~entered~~approximately ~~into~~42% anof ~~amendment~~the toCompany’s ~~the~~common ~~VantagePoint~~stock ~~Notes.~~as ~~The~~of ~~amendment~~June ~~provides~~30, ~~that~~2016, ~~except~~and inprior ~~certain~~to ~~circumstances,~~ the ~~convertibility~~closing of the Merger, VantagePoint’s ~~Notes~~Chief isExecutive ~~limited~~Officer ~~such~~and ~~that~~Managing ~~conversion~~Partner, ~~may~~was ~~not~~a ~~result~~member ~~in the holders collectively acquiring beneficial ownership~~ of ~~more than 1.9% of~~ the Company’s ~~outstanding~~Board ~~shares~~ of ~~common stock during any 12-month period~~Directors.

~~VantagePoint~~In ~~and~~connection ~~its~~with ~~affiliates~~the ~~beneficially~~closing ~~own approximately 42%~~ of the ~~Company’s~~Merger, ~~common~~on ~~stock~~August ~~and~~9, 2016, the VantagePoint’s ~~Chief~~Notes, ~~Executive~~including ~~Officer~~applicable fees and ~~Managing~~accrued ~~Partner,~~and isunpaid ainterest ~~member~~ of ~~the~~$0.2 ~~Company’s~~million, ~~Board~~were ofrepaid ~~Directors~~in full.

~~The~~ VantagePoint ~~Notes~~Irrevocable ~~and~~Letter ~~Hercules Loan Agreement contain cross-default provisions under which a default under one agreement would likely result in cross defaults under agreements covering other borrowings. The occurrence~~ of aCredit ~~default~~and ~~under~~Reimbursement ~~any~~Agreement of(Related these borrowing arrangements would permit the applicable note holders or the lenders under the term loan to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.Party)

On May 31, 2016, the Company entered into a reimbursement agreement with certain affiliates of VantagePoint (“LC Creditors”) pursuant to which the Company has agreed to reimburse the LC Creditors for (i) any amounts drawn on a $2.0 million irrevocable letter of credit issued by First Republic Bank to PayPal, Inc. for which the LC Creditors provided cash collateral to First Republic Bank in the amount of $2.0 million, and (ii) related costs, expenses and fees. Additionally, pursuant to the reimbursement agreement, the Company agreed to pay the LC Creditors an annual fee equal to 10% of the original face amount of the letter of credit, payable quarterly beginning on June 30, 2016 and, if the letter of credit is drawn upon by PayPal, Inc. in any amount, the Company has agreed to pay a fee equal to 200% of the amount so drawn. As of June 30, 2016, the irrevocable letter of credit had not been drawn upon by PayPal, Inc. and no fee was owed by the Company. The Company expensed the annual fee as incurred.

In connection with the closing of the Merger, the letter of credit was returned to the LC Creditors for cancellation and the reimbursement agreement was terminated.

13. Income Taxes

The Company provides for income taxes in interim periods based on the estimated effective income tax rate for the complete fiscal year. For the ~~quarter~~three and six months ended ~~March 31~~June 30, 2016, the Company recorded a provision for income taxes totaling $0.32 million onand ~~a pre-tax loss totaling~~ $50.94 million,. This is compared to a ~~provision~~benefit ~~for~~from income taxes of $~~0.1~~40,000 ~~million~~and on a ~~pre-tax~~provision ~~loss~~for ~~totaling~~income ~~$12.7~~taxes ~~million~~of $59,000 for the ~~quarter~~three and six months ended ~~March~~June 3130, 2015, respectively. The Company’s tax provision notwithstanding pre-tax losses is due to its full valuation allowance against its net deferred tax assets in the US and certain foreign jurisdictions. Generally, a full valuation allowance will result in a zero net tax provision, since the income tax expense or benefit that would otherwise be recognized is offset by the change in the valuation allowance. However, the income tax provision for the period ended ~~March~~June 3130, 2016 relates primarily to income taxes in the Company’s state and foreign jurisdictions and a non-cash income tax liability related to tax deductible goodwill that cannot be considered when determining a need for a valuation allowance.

The income tax provision is computed on the year to date pretax income (loss) of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred tax assets and liabilities are determined based on the future tax consequences associated with temporary differences between income and expenses reported for financial accounting and tax reporting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company determines that it is more likely than not that the deferred tax assets will not be realized.

Realization of deferred tax assets is principally dependent upon future taxable income, the estimation of which requires significant management judgment. The Company’s judgment regarding future profitability may change due to many factors, including future market conditions and the Company’s ability to successfully execute its business plans and/or tax planning strategies. These changes, if any, may require material adjustments to these deferred tax asset balances. On a quarterly basis, the Company reassesses the need for these valuation allowances based on operating results and its assessment of the likelihood of future taxable income and developments in the relevant tax jurisdictions. The Company continues to maintain a valuation allowance against its net deferred tax assets in US and various foreign jurisdictions, where the Company believes it is more likely than not that deferred tax assets will not be realized.

The Company strives to resolve open matters with each tax authority at the examination level and could reach an agreement with a tax authority at any time. While the Company has accrued for amounts it believes are the expected outcomes, the final outcome with a tax authority may result in a tax liability that is more or less than that reflected in the financial statements. In addition, the Company may later decide to challenge any assessments, if made, and may exercise its right to appeal. The liability is reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by tax authorities, negotiations between tax authorities, identification of new issues, and issuance of new legislation, regulations or case law. Management believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations of uncertain tax positions. Interest and penalties are included in income tax expense.

21The Company and its subsidiaries file income tax returns in the U.S. federal, various state and foreign jurisdictions. Certain jurisdiction’s statutes of limitations will begin to expire in 2017.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state and foreign jurisdictions. The Company has used net operating losses in recent periods, which extended the statutes of limitations with respect to a number of the Company’s tax years. Currently a majority of the Company’s tax years remain subject to audit, however, certain jurisdiction’s statutes of limitations will begin to expire in 2016.

14. Net Loss Per Share

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and potential dilutive shares outstanding during the period, to the extent such shares are dilutive. Potential dilutive shares are composed of incremental common shares issuable upon the exercise of stock options, warrants and unvested restricted shares using the treasury stock method. Basic income (loss) from continuing operations per share is computed by dividing income (loss) from continuing operations for the period by the weighted average number of common shares outstanding during the period. Diluted income (loss) from continuing operations per share is computed by dividing income (loss) from continuing operations for the period by the weighted average number of common and potentially dilutive securities outstanding during the period, to the extent such shares are dilutive. The Company had a loss from continuing operations for the three and six months ended ~~March~~June 3130, 2016 and 2015, and therefore the number of diluted shares was equal to the number of basic shares for the period.

The following potentially dilutive securities have been excluded from the calculation of diluted net ~~income (~~loss) per common share as they would be anti-dilutive for the periods below (in thousands):

	Three Months Ended March 31,
	Three Months Ended				Six Months Ended
	2016		2015
	June 30,				June 30,
Restricted stock units and unvested restricted stock		331		816
	2016		2015		2016		2015
Stock options, convertible notes, and warrant		7,886		6,243
Deferred stock consideration and unvested restricted stock		294		644		293		779
		8,217		7,059
Stock options, convertible notes, and warrant		8,753		7,189		8,313		6,721
		9,047		7,833		8,606		7,500

~~The following table sets forth the computation of basic and diluted income from continuing operations per share (in thousands, except per share amounts):~~ 19

	Three Months EndedMarch 31,
	2016			2015
Numerator:
Loss from continuing operations	$	(6,152	)	$	(12,782	)
Denominator:
Weighted average common shares used in computation of loss per share		29,808			29,070
Loss per share, basic and diluted	$	(0.21	)	$	(0.44	)

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2016			2015			2016			2015
Numerator:
Net loss	$	(4,237	)	$	(10,593	)	$	(10,389	)	$	(23,375	)
Denominator:
Weighted average common shares used in computation of loss per share		29,840			29,097			29,824			29,083
Net loss per share, basic and diluted	$	(0.14	)	$	(0.36	)	$	(0.35	)	$	(0.80	)

15. Segment Information

The Company operates in one operating segment. The Company’s chief operating decision maker manages the Company’s operations on a consolidated basis for purposes of evaluating financial performance and allocating resources.

16. Supplemental Cash Flow Information

The following table sets forth supplemental cash flow disclosures (in thousands):

	Three Months Ended March 31,
	Six Months Ended June 30,
	2016		2015
Non-cash investing and financing activities:
Capitalized software development costs resulting from stock-based compensation and deferred payment obligations	$	82136	$	~~119~~219
Unpaid purchases of property and equipment	$	567	$	~~114~~131
Assets acquired under capital leases	$	—-	$	(~~157~~204	)
Issuance of warrant	$	-	$	250

2317. Subsequent Events

On June 27, 2016, the Company entered into a Merger Agreement under which Gannett Co., Inc. (“Parent”) and Raptor Merger Sub, Inc. (“Purchaser”), a wholly owned subsidiary of Parent, commenced a tender offer (the “Offer”) on July 11, 2016 to acquire all of the Company’s outstanding shares of common stock at a purchase price of $4.60 per share in cash, subject to reduction for any applicable withholding taxes, without interest (“Merger Consideration”). Upon completion of the tender offer on August 9, 2016, Purchaser acquired over 92% of the Company's outstanding common stock and, promptly afterwards, Purchaser merged with and into the Company without a vote of the Company's stockholders (the "Merger"), with the Company surviving as a wholly owned subsidiary of Parent.

In connection with the closing of the Merger, on August 9, 2016, the Company repaid the Hercules loan in full, including applicable fees and accrued and unpaid interest of $2.3 million. In addition, the warrant issued to Hercules was cancelled in exchange for a payment in cash of an amount equal to (a) the total number of shares underlying the warrant (300,000), multiplied by (b) $2.55. Further, the Company’s issued and outstanding convertible notes of $5.0 million with affiliates of VantagePoint, the Company’s largest shareholder, were repaid in full including applicable fees and accrued and unpaid interest of $0.2 million. The VantagePoint Irrevocable Letter of Credit was returned to the creditors for cancellation. In accordance with the Merger, the Company recognized acquisition-related costs of $2.4 million for the three and six months ended June 30, 2016, which are included in operating expenses in the condensed consolidated statements of operations, primarily related to professional services fees. Upon closing of the Merger, the Company incurred additional transaction-related costs of $7.3 million.

As a result of the Merger, the Company’s assets and liabilities will be fair valued as of the date of the acquisition, August 9, 2016, and will be recorded in Gannett’s consolidated financial statements based upon their appraised values in accordance with the acquisition method of accounting. This purchase price allocation will include the valuation of identifiable intangible assets, including developed technology, customer relationships, and trade names as well as estimates of other assets and liabilities. After the fair value has been assigned to assets and liabilities, the remainder of the purchase price will be recorded as goodwill.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

In this document, ReachLocal, Inc. and its subsidiaries are referred to as “we,” “our,” “us,” the “Company” or “ReachLocal.”

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our ~~2014~~2015 Annual Report on Form 10-K.

This quarterly report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our ~~2013~~2015 Annual Report on Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

The Merger

On June 27, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which Gannett Co., Inc. (“Parent”) and Raptor Merger Sub, Inc. (“Purchaser”), a wholly owned subsidiary of Parent, commenced a tender offer (the “Offer”) on July 11, 2016 to acquire all of our outstanding shares of common stock at a purchase price of $4.60 per share in cash, subject to reduction for any applicable withholding taxes, without interest. Upon completion of the tender offer on August 9, 2016, Purchaser acquired over 92% of our outstanding common stock and, promptly afterwards, Purchaser merged with and into ReachLocal, Inc. without a vote of our stockholders (the "Merger"), with ReachLocal, Inc. surviving as a wholly owned subsidiary of Parent.

On August 9, 2016, we (i) notified the NASDAQ Stock Market LLC (“NASDAQ”) of the consummation of the Merger and (ii) requested that NASDAQ (x) suspend trading of the common stock before the opening of trading on August 10, 2016 and (y) file with the Securities and Exchange Commission (“SEC”) a Form 25 Notification of Removal from Listing and/or Registration to delist and deregister our common stock under Section 12(b) of the Securities Exchange Act of 1934, as amended. We are in the process of filing with the SEC a certification on Form 15 under the Exchange Act, requesting the deregistration of our common stock and the suspension of our reporting obligations under Sections 13 and 15(d) of the Exchange Act.

Overview

ReachLocal’s mission is to provide more customers to local businesses. We began in 2004 with the goal of helping local businesses move their advertising spend from traditional media and yellow pages to online search. While we have sold to a variety of local businesses and will continue to do so, our present focus is on small to medium-sized businesses (SMBs) and in particular, what we refer to as Premium SMBs. A Premium SMB generally has 10 to 30 employees, $1 to $10 million in annual revenue and spends approximately $40,000 annually on marketing. Premium SMBs have become increasingly sophisticated in their understanding of online marketing. However, we believe that Premium SMBs have not changed their desire for a single, unified solution to their marketing needs. Our goal is to provide a total digital marketing solution that will address Premium SMBs’ online marketing needs. Our total digital marketing solution consists of products and solutions in three categories: digital advertising (including ReachSearch™, ReachDisplay™, ReachDisplay InApp^TM, ReachRetargeting™ and ReachSocial Ads™), web presence (including ReachSite+ReachEdge™, ReachSEO™, ReachCast™, ReachListings™ and TotalLiveChat™), and software (ReachEdge™ and Kickserv™).

We began by offering online advertising solutions with the rollout of ReachSearch in 2005, when we pioneered the provisioning of search engine marketing services (SEM) on a mass scale for local businesses through the use of our technology platform. ReachSearch combines search engine marketing optimized across multiple publishers, call tracking and call recording services, and industry leading campaign performance transparency. ReachSearch remains a leading SEM offering for local businesses and has won numerous awards since its rollout, including most recently winning Google’s Quality Score Champion Award in North America and Latin America. However, ReachSearch does not solve all of the online advertising challenges of our clients. We have therefore added additional elements to our platform including our display products, such as ReachDisplay and ReachDisplay InApp, our behavioral targeting product, ReachRetargeting, and other products that are primarily focused on leveraging third-party media to drive leads to our clients.

To complement our online advertising solutions, we have also launched a number of web presence solutions. These solutions include websites, search engine optimization (SEO), social, chat, listings and other products and solutions, all focused on expanding and leveraging our clients’ web presence. Often these products are designed to work in concert with our digital advertising products with a goal of enhancing the return to our clients. These products are generally available in North America and available in certain of our international markets.

We also recognize that even successfully driving leads to our clients does not represent a complete solution to local businesses’ online marketing needs. In 2013 we expanded into lead conversion software with the introduction of ReachEdge in order to move beyond being a media-driven lead generation business to offering integrated solutions for our clients. ReachEdge is marketing automation and lead conversion software and includes tools for capturing web traffic information and converting leads into new customers. Initially, ReachEdge only came bundled with a responsive website. However, beginning in the first quarter of 2015, clients have been able to license ReachEdge’s lead conversion software without having to also purchase a website, allowing us to sell ReachEdge to local businesses that do not need a new website or who purchase their website from another provider.

Over time, we plan to add additional dynamic optimization functionality to ReachEdge, as well as features that create a more seamless relationship between our clients and their customers. For example, in the fourth quarter of 2014, we acquired Kickserv, a provider of cloud-based business management software for service businesses. With this addition, we have the ability to provide an end-to-end solution to our clients that starts with lead generation (ReachSearch, ReachDisplay and ReachSEO), includes lead conversion software (ReachEdge), and then closes and manages the business relationship (Kickserv). Local businesses already spend marketing dollars in these categories with a significant number of providers in a highly fragmented and confusing marketplace. Our integrated total marketing solution seeks to address this broad array of business needs with a simple integrated solution.

In North America, we sell our products and solutions directly, principally through our outside sales force and in certain situations, an inside sales force, in what we refer to as our Direct Local channel. Our sales personnel (primarily referred to as Digital Marketing Consultants or DMCs) both generate the sale and manage the client relationship. Each DMC is paired with a Marketing Expert (or ME) who provides day-to-day campaign management. We believe that this approach enables the DMC to focus primarily on selling and managing client relationships, while the client benefits from the support and expertise of dedicated MEs. We also have certain veteran salespeople that we refer to as IMCs who have more discretion to manage their client relationships and campaigns. Our international markets generally operate under a modified version of the North American model, as adapted for local market and product availability differences.

We refer to our separate sales channel targeting national brands, franchises and strategic accounts with operations in multiple local markets, and select third-party agencies and resellers, as our NBAR channel. The sales process for the NBAR channel typically has substantially longer lead times than in our Direct Local channel. In addition, national brand clients often involve complex operational and marketing requirements that are not typically required by our Direct Local clients. Our third-party agencies and reseller partners use our technology platform in customer segments where they have sales forces with established relationships with their client bases. We currently have over 350 agencies and resellers actively selling on our technology platform. We have a team that is responsible for identifying potential agencies and resellers, training their sales forces to sell our products and services and supporting the relationships on an ongoing basis.

During the third quarter of 2015 we introduced our Web Partner Program, under which we distribute ReachEdge through third-party web developers. We are focusing on potential partners that typically have client bases ranging from 200 to 2,000 clients. By distributing ReachEdge with their platforms, Web Partners can deliver value to their clients while also earning an additional revenue stream. We believe that our Web Partner Program can increase our sales force’s productivity by giving our sales people easier access to potential new clients.

In addition to the United States and Canada, we have sales operations in Australia, New Zealand, Japan, Germany, the Netherlands, Austria, Brazil and Mexico. We exited direct sales in the United Kingdom market in the fourth quarter of 2015 when our local subsidiary ReachLocal UK Ltd. entered administration. ~~We continue to review our operations in order to rationalize those that are underperforming and to optimize operations in our other markets.~~

Operating Metrics

We regularly review a number of financial and operating metrics to evaluate our business, determine the allocation of resources and make decisions regarding business strategies.

25The following table shows certain key operating metrics as of June 30, 2016 and 2015:

The following table shows certain key operating metrics as of March 31, 2016 and 2015:

	June 30,
	2016		2015		% Change
Active Clients (1)		16,000		19,500		(17.9	)%
Active Product Units (2)		27,700		29,600		(6.4	)%

	March 31,
	2016		2015		% Change
Active Clients (1)		16,400		20,200		(18.8	)%
Active Product Units (2)		27,200		30,700		(11.4	)%

(1)

(2)

See “Results of Operations” for our definition of Active Clients.

See “Results of Operations” for our definition of Active Product Units.

(1)	See “Results of Operations” for our definition of Active Clients.
(2)	See “Results of Operations” for our definition of Active Product Units.

We track the number of Active Clients and Active Product Units to evaluate the growth, scale and diversification of our business. We also use these metrics to determine the needs and capacity of our sales forces, our support organization, and other personnel and resources.

The decrease in the number of Active Clients and Active Product Units compared to the same period in 2015, is primarily due to an overall decrease in salespeople in ~~both~~the Direct Local and NBAR channels as we decreased the size of our sales force in an effort to focus on more productive salespeople, partially offset by increased ~~client~~ retention inand ~~the~~productivity ~~NBAR~~due ~~channel~~to ~~and~~ an increase in ~~productivity.~~selling ~~Active~~new ~~Clients~~products ~~and~~to ~~Active~~our ~~Product~~existing ~~Units~~customer ~~decreased by 6~~base.3% ~~and~~Compared ~~2.5%, respectively, compared~~ to the period ended ~~December~~March 31, ~~2015~~2016, Active Clients decreased by 2.4% primarily due to ~~the~~a ~~exit~~decrease ~~from~~in ~~direct~~productivity ~~sales~~quarter inover ~~the~~quarter, ~~U.K.~~while ~~during~~Active ~~December~~Product ~~2015,~~Units ~~offset~~increased by 1.8% due to an increase in ~~client~~product ~~retention~~units ~~and~~per ~~productivity~~client.

Basis of Presentation

Sources of Revenue

We derive our revenue principally from the provision and sale of online marketing products to our clients. Revenue includes (i) the sale of our ReachSearch, ReachRetargeting, ReachDisplay, and other products based on a package pricing model in which our clients commit to a fixed fee that includes the media, optimization, reporting and tracking technologies of our technology platform, and the personnel dedicated to support and manage their campaigns; (ii) the license (or sale) of ReachEdge, ReachSEO, ReachCast, TotalLiveChat, TotalTrack, ReachSite, Kickserv and other products and solutions; and (iii) set-up, management and service fees associated with these products and other solutions. We distribute our products and solutions directly through our outside and inside sales force that is focused on serving local businesses in their local markets through a consultative process, which we refer to as our Direct Local channel, as well as a separate sales force targeting our National Brands, Agencies and Resellers channel. The sales cycle for sales to our clients ranges from one day to over a month. Sales to our National Brands, Agencies and Resellers clients generally require several months.

We typically enter into multi-month agreements for the delivery of our products. Under our agreements, our Direct Local clients typically pay, in advance, a fixed fee on a monthly basis, which includes all charges for the included technology and any media services, management, third-party content and other costs and fees. We record these prepayments as deferred revenue and only record revenue for income statement purposes as we purchase media and perform other services on behalf of clients. Certain Direct Local clients are extended credit privileges, with payment generally due in 30 days. Revenue from the licensing of our products is recognized on a straight line basis over the applicable license or service period. There were $4.86 million and $4.0 million of accounts receivable related to our Direct Local channel at ~~March~~June 3130, 2016 and December 31, 2015, respectively.

Our National Brands, Agencies and Resellers clients enter into agreements of various lengths or that are indefinite. Our National Brands, Agencies and Resellers clients either pay in advance or are extended credit privileges with payment generally due in 30 to 60 days. There were $23.82 million and $3.3 million of accounts receivable related to our National Brands, Agencies and Resellers at ~~March~~June 3130, 2016 and December 31, 2015, respectively.

Cost of Revenue

Cost of revenue consists primarily of the costs of online media acquired from third-party publishers. Media cost is recorded as cost of revenue in the period in which the corresponding revenue is recognized. From time to time, publishers offer us rebates based upon various factors and operating rules, including the amount of media purchased. We record these rebates in the period in which they are earned as a reduction to cost of revenue and the corresponding payable to the applicable publisher, or as other receivable, as appropriate. Cost of revenue also includes the third-party telephone and information services costs, other third-party service provider costs, data center and third-party hosting costs, credit card processing fees, and other direct costs.

In addition, cost of revenue includes costs to manage and operate our various solutions and technology infrastructure, other than costs associated with our sales force, which are reflected as selling and marketing expenses. Cost of revenue includes salaries, benefits, bonuses and stock-based compensation for our MEs and related staff, who manage client accounts and provide client-facing support, and allocated overhead such as depreciation expense, rent and utilities. Cost of revenue also includes the amortization and impairment charges (as applicable) on acquired technology, customer relationships and trade names.

Operating Expenses

Selling and Marketing. Selling and marketing expenses consist primarily of personnel and related expenses for our selling and marketing staff, including salaries and wages, commissions and other variable compensation, benefits, bonuses and stock-based compensation; travel and business costs; training, recruitment, marketing and promotional events; advertising; other brand building and product marketing expenses; and occupancy, technology and other direct overhead costs. A portion of the compensation for employees in the sales organization is based on commissions. In addition, the cost of agency commissions is included in selling and marketing expenses. Generally, commissions are expensed as earned. However, we pay commissions to certain sales people for the acquisition of new clients and because our client contracts are generally not cancelable without a penalty, we defer those commissions and amortize them over the initial contract term.

Product and Technology. Product and technology expenses consist primarily of personnel and related expenses for our product development and engineering professionals, including salaries, benefits, bonuses and stock-based compensation, and the cost of third-party contractors and certain third-party service providers and other expenses, including occupancy, technology and other direct overhead costs. Technology operations costs, including related personnel and third-party costs, are included in product and technology expenses. We capitalize a portion of costs as software development and, accordingly, include amortization of those costs as product and technology expenses. Our technology platform addresses all aspects of our activities, including supporting the selling and consultation process, integrating with online publishers, driving efficiency and optimization, providing insight to our clients into the results and effects of their online advertising campaigns and supporting financial and other back-office functions of our business.

Product and technology expenses also include the amortization of the technology obtained in acquisitions and the expensing of acquisition-related deferred payment obligations attributable to product and technology personnel. Product and technology expenses do not include the costs to deliver our solutions to clients, which are included in cost of revenue.

General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for board, executive, legal, finance, human resources and corporate communications, including wages, benefits, bonuses and stock-based compensation, professional fees, insurance premiums, business taxes and other expenses, including occupancy, technology and other direct overhead, public company costs, acquisition related costs and other corporate expenses.

Restructuring Charges. Restructuring charges consist of costs associated with the realignment and reorganization of our operations. Restructuring charges include employee termination costs, facility closure and relocation costs, contract termination costs and costs associated with utilizing a third party consultant to facilitate the execution of our 2015 restructuring plan. The timing of associated cash payments is dependent upon the type of exit cost and can extend over a 12-month period or longer. We record liabilities related to restructuring charges in accrued restructuring in the condensed consolidated balance sheets. See further discussion in Note 10 of the Notes to the Condensed Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires us 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 consolidated financial statements and the reported amounts of revenue and expenses. We continually evaluate our estimates, judgments and assumptions based on available information and experience. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.

There have been no material changes to our critical accounting policies. For further information on our critical and significant accounting policies, see our 2015 Annual Report on Form 10-K.

Results of Operations

Comparison of the Three and Six Months Ended ~~March~~June 3130, 2016 and 2015

	Three Months Ended March 31,
	Three Months Ended						Six Months Ended
	2016			2015
	June 30,						June 30,
(in thousands)
	2016			2015			2016			2015
Revenue	$	78,709		$	99,563
(in thousands)
Cost of revenue (1)		43,851			56,217
Revenue	$	81,460		$	98,776		$	160,169		$	198,339
Operating expenses:
Cost of revenue (1)		45,591			55,390			89,442			111,607
Selling and marketing (1)		23,124			36,283
Operating expenses:
Product and technology (1)		6,086			7,422
Selling and marketing (1)		22,975			33,046			46,099			69,329
General and administrative (1)		7,878			10,713
Product and technology (1)		6,063			7,082			12,149			14,504
Restructuring charges		2,456			1,455
General and administrative (1)		9,536			9,910			17,414			20,623
Total operating expenses		39,544			55,873
Restructuring charges		233			3,133			2,689			4,588
Operating loss		(4,686	)		(12,527	)
Total operating expenses		38,807			53,171			78,351			109,044
Loss on deconsolidation, net		(72	)		—
Operating loss		(2,938	)		(9,785	)		(7,624	)		(22,312	)
Interest expense		(1,115	)		(75	)
Loss on deconsolidation of subsidiaries, net		(99	)		-			(171	)		-
Other expense, net		(12	)		(81	)
Interest expense		(1,115	)		(713	)		(2,230	)		(788	)
Loss before income taxes		(5,885	)		(12,683	)
Other income (expense), net		90			(135	)		78			(216	)
Income tax provision		267			99
Loss before income taxes		(4,062	)		(10,633	)		(9,947	)		(23,316	)
Net loss	$	(6,152	)	$	(12,782	)
Income tax provision (benefit)		175			(40	)		442			59
Net loss	$	(4,237	)	$	(10,593	)	$	(10,389	)	$	(23,375	)

	Three Months Ended March 31,
	2016		2015
Stock-based compensation:
Cost of revenue	$	50	$	156
Selling and marketing		201		482
Product and technology		62		168
General and administrative		827		1,340
	$	1,140	$	2,146
Depreciation and amortization:
Cost of revenue	$	159	$	132
Selling and marketing		563		833
Product and technology		3,274		3,707
General and administrative		537		462
	$	4,533	$	5,134

(1) Stock-based compensation, net of capitalization, and depreciation and amortization, included in the above line items (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Stock-based compensation:
Cost of revenue	$	59	$	134	$	109	$	290
Selling and marketing		207		424		408		906
Product and technology		178		126		240		294
General and administrative		953		1,530		1,780		2,870
	$	1,397	$	2,214	$	2,537	$	4,360

Depreciation and amortization:
Cost of revenue	$	166	$	219	$	325	$	351
Selling and marketing		504		824		1,067		1,657
Product and technology		3,259		3,591		6,533		7,298
General and administrative		503		515		1,040		977
	$	4,432	$	5,149	$	8,965	$	10,283

Revenue

	Three Months Ended March 31,
	Three Months Ended							Six Months Ended
	2016		2015		2016-2015 % Change
	June 30,							June 30,
(in thousands)
	2016		2015		2016-2015 % Change			2016		2015		2016-2015 % Change
North America (1)
(in thousands)
Direct Local	$	41,235	$	45,926		(10.2	)%
North America (1)
National Brands, Agencies and Resellers		14,337		17,573		(18.4	)%
Direct Local	$	43,943	$	46,189		(4.9	)%	$	85,179	$	92,113		(7.5	)%
Total revenue	$	55,572	$	63,499		(12.5	)%
National Brands, Agencies and Resellers		15,546		17,787		(12.6	)%		29,883		35,362		(15.5	)%
Total revenue	$	59,489	$	63,976		(7.0	)%	$	115,062	$	127,475		(9.7	)%

	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2016		2015		2016-2015 % Change			2016		2015		2016-2015 % Change
(in thousands)
International
Direct Local	$	18,511	$	31,085		(40.5	)%	$	38,036	$	63,894		(40.5	)%
National Brands, Agencies and Resellers		3,460		3,715		(6.9	)%		7,071		6,970		1.4	%
Total revenue	$	21,971	$	34,800		(36.9	)%	$	45,107	$	70,864		(36.3	)%

	Three Months Ended March 31,
	June 30,
	2016		2015		2016-2015 % Change
(in thousands)
At period end:
International
Active Clients (2)		16,000		19,500		(17.9	)%
Direct Local	$	19,524	$	32,809		(40.5	)%
Active Product Units (3)		27,700		29,600		(6.4	)%
National Brands, Agencies and Resellers		3,613		3,255		11.0	%
Total revenue	$	23,137	$	36,064		(35.8	)%
Total revenue	$	78,709	$	99,563		(20.9	)%

	March 31,
	2016		2015		2016-2015 % Change
At period end:
Active Clients (2)		16,400		20,200		(18.8	)%
Active Product Units (3)		27,200		30,700		(11.4	)%

(1)	North America includes the United States and Canada. International includes all other countries.

(2)

Active Clients is a number we calculate to approximate the number of clients directly served through our Direct Local channel as well as clients served through our National Brands, Agencies and Resellers channel. We calculate Active Clients by adjusting the number of Active Product Units to combine clients with more than one Active Product Unit as a single Active Client. Clients with more than one location are generally reflected as multiple Active Clients. Because this number includes clients served through the National Brands, Agencies and Resellers channel, Active Clients includes entities with which we do not have a direct client relationship. Numbers are rounded to the nearest hundred.

(3)

Active Product Units is a number we calculate to approximate the number of individual products, licenses, or services we are providing under contract for Active Clients. For example, if we were performing both ReachSearch and ReachDisplay campaigns for a client which also licenses ReachEdge, we consider that three Active Product Units. Similarly, if a client purchases ReachSearch campaigns for two different products or purposes, we consider that two Active Product Units. Numbers are rounded to the nearest hundred.

North America revenue decreased by $74.95 million and $12.4 million for the three and six months ended ~~March~~June 3130, 2016, respectively, compared to the same ~~period~~periods in 2015. North America Direct Local revenue ~~declined~~decreased $42.72 million ~~due~~and to$6.9 ~~smaller~~million ~~client~~for ~~bases entering~~ the ~~period~~three and ~~fewer~~six ~~new~~months ~~client~~ended ~~acquisitions~~June ~~during~~30, ~~the~~2016, ~~period~~respectively, ~~due~~compared to ~~a more difficult selling environment and fewer salespeople as we decreased~~ the ~~size~~same ofperiods ~~our salesforce~~ in an2015, ~~effort~~due to ~~focus~~a onsmaller ~~more~~client ~~productive~~base ~~salespeople~~entering the periods, partially offset by ~~improvements~~an increase in ~~client~~product ~~retention~~units ~~and~~per ~~growth in~~ client ~~budgets~~. The average productivity of our current sales force improved compared to the prior-year period, but did not improve enough to offset client cancellations ~~and fewer salespeople~~. North America National Brands, Agencies and Resellers revenue decreased by $32.2 million and $5.5 million for the three and six months ended ~~March~~June 3130, 2016, respectively, compared to the same period in 2015 primarily due to ~~a smaller client base entering the current period and~~ decreased new ~~customer~~client acquisitions, partially offset by an increase in client retention.

International revenue decreased by $12.9 million for the three months ended March 31, 2016, compared to the same period in 2015. The decrease was primarily due to a $13.3 million decline in International Direct Local revenue, $6.5 million of which related to the exit from direct sales in the U.K. during the fourth quarter of 2015, with the remaining $6.8 million decrease due to a decrease in new customer acquisitions due to fewer salespeople. On a constant currency basis, International Direct Local revenue decreased by $11.7 million. International National Brands, Agencies and Resellers revenue increased slightly during the three months ended March 31, 2016, compared to the same period in 2015, primarily due to an increase in client retention. 26

29International revenue decreased by $12.8 million and $25.8 million for the three and six months ended June 30, 2016, respectively, compared to the same periods in 2015. The decrease was primarily due to declines of $6.4 million and $12.9 million as a result of our exit from direct sales in the U.K. during the fourth quarter of 2015, and declines of $6.2 million and $13.0 million due to smaller client bases entering 2016. International National Brands, Agencies and Resellers revenue decreased $0.3 million and increased $0.1 million for the three and six months ended June 30, 2016, respectively, compared to the same periods in 2015, primarily due to a decrease in sales force productivity during the three months ended June 30, 2016 and an increase in client retention during the six months ended June 30, 2016.

Cost of Revenue

	Three Months Ended March 31,
	Three Months Ended June 30,									Six Months Ended June 30,
	2016			2015			2016-2015 % Change			2016			2015			2016-2015 % Change
(in thousands)
Cost of revenue	$	4345,~~851~~591		$	5655,~~217~~390			(2217.07	)%	$	89,422		$	111,607			(19.9	)%
As a percentage of revenue:		5556.70	%		56.51	%					55.8	%		56.3	%

The ~~decrease~~decreases in our cost of revenue as a percentage of revenue for the three and six months ended ~~March~~June 3130, 2016 compared to the same ~~period~~periods in 2015, ~~was~~were primarily due to improved margins on our ReachSearch product and a shift in product mix to our ReachSEO product and lead conversion software, which have higher margins. The decrease was partially offset by a decrease in publisher rebates as a percentage of revenue to 0.5% of revenue during the three and six months ended June 30, 2016, compared to 1.2% and 0.9 % during the same periods in 2015.

Publisher rebates as a percentage of revenue decreased to 0.4% of revenue during the three months ended March 31, 2016, compared to 0.6% during the same period in the prior year due to decreased performance against our publisher agreement targets.

Our gross margins will be affected in the future by the availability and amount of publisher rebates, the costs of support and delivery, the mix and relative amount of media we purchase to fulfill service requirements, and the cost of third-party service providers that we use as part of our solutions. We expect publisher rebates as a percentage of revenue to be between 0.4% and 1.0% during 2016 as compared to 1.7% in 2015.

Operating Expenses

Selling and Marketing

	Three Months Ended March 31,						2016-2015
	Three Months Ended June 30,									Six Months Ended June 30,
	2016			2015			2016-2015 % Change			2016			2015			2016-2015 % Change
(in thousands)
Salaries, benefits and other costs	$	1615,~~799~~885		$	2723,~~403~~737			(3833.71	)%	$	32,685		$	51,140			(36.1	)%
Commission expense		67,~~325~~090			89,~~880~~309			(2823.8	)%		13,414			18,189			(26.3	)%
Total selling and marketing	$	2322,~~124~~975		$	3633,~~283~~046			(3630.35	)%	$	46,099		$	69,329			(33.5	)%
As a percentage of revenue:
Salaries, benefits and other costs		2119.35	%		2724.50	%					20.4	%		25.8	%
Commission expense		8.17			8.9.5						8.4			9.2
Total selling and marketing		2928.42	%		3633.45	%					28.8	%		35.0	%

The ~~decrease~~decreases in selling and marketing salaries, benefits and other costs in absolute dollars for the three and six months ended ~~March~~June 3130, 2016, compared to the same ~~period~~periods in 2015, ~~was~~were primarily due to fewer salespeople, partly stemming from our exit from direct ~~sales~~selling in the UK market. The decrease as a percentage of revenue was primarily due to increased productivity per-salesperson as we decreased the number of salespeople to focus on higher performing salespeople and consolidate client accounts.

The ~~decrease~~decreases in commission expense as a percentage of revenue for the three and six months ended ~~March~~June 3130, 2016, as compared to the same ~~period~~periods in 2015, ~~was~~were primarily due to changes made to improve the cost effectiveness of our commission plans.

Product and Technology

	Three Months Ended March 31,						2016-2015
	Three Months Ended June 30,									Six Months Ended June 30,
	2016			2015			2016-2015 % Change			2016			2015			2016-2015 % Change
(in thousands)
Product and technology costs expense	$	8,~~250~~169		$	109,~~020~~717			(1715.79	)%	$	16,419		$	19,737			(16.8	)%
Capitalized software development costs from product and technology resources		2,~~164~~106			2,~~598~~635			(1620.71	)%		4,270			5,233			(18.4	)%
Total product and technology expense, net capitalized costs	$	6,~~086~~063		$	7,~~422~~082			(1814.04	)%	$	12,149		$	14,504			(16.2	)%
Percentage of revenue:
Product and technology costs expense		10.4	%		10.1	%
Product and technology expenses cost		10.0	%		9.9	%					10.3	%		10.0	%
Capitalized software development costs from product and technology resources		2.76			2.67						2.7			2.7
Total product and technology costs expense, net capitalized costs		7.74	%		7.52	%					7.6	%		7.3	%

The decreases in total product and technology expense in absolute dollars for the three and six months ended June 30, 2016, compared to the same periods in 2015, were primarily attributable to our 2015 restructuring plan and cost savings initiatives and resulted from a decrease in employee and professional services costs of $1.5 million and $3.3 million, respectively. The decreases in capitalized software development costs in absolute dollars for the three and six months ended June 30, 2016, were primarily due to a shift to lower cost resources during the three months ended June 30, 2016, as well as a decrease in headcount during the six months ended June 30, 2016. The increase in capitalized software development costs as a percentage of revenue for the six months ended June 30, 2016, was primarily driven by the decrease in revenue.

The decrease in total product and technology expense in absolute dollars for the three months ended March 31, 2016, compared to the same period in 2015, was primarily attributable to our 2015 restructuring plan and cost savings initiatives. The decrease in product and technology costs were primarily due to a decrease in employee and professional services costs of $1.8 million and the decrease in capitalized software development costs were primarily due to both a decrease in headcount and a shift to lower cost resources. The increase as a percentage of revenue was primarily driven by the decrease in revenue.

General and Administrative

	Three Months Ended March 31,						2016-2015
	Three Months Ended June 30,									Six Months Ended June 30,
	2016			2015			2016-2015 % Change			2016			2015			2016-2015 % Change
(in thousands)
General and administrative	$	79,~~878~~536		$	109,~~713~~910			(263.58	)%	$	17,414		$	20,623			(15.6	)%
As a percentage of revenue:		1011.07	%		10.80	%					10.9	%		10.4	%

The decreases in general and administrative expenses in absolute dollars ~~and~~for ~~as a percentage of revenue during~~ the three and six months ended ~~March~~June 3130, 2016, compared to the same ~~period~~periods in 2015, were primarily due to ~~reduced~~cost ~~accrued~~savings ~~legal fees~~ and ~~contingencies of $1.6 million as a result of exiting~~ the ~~U.K.~~absence ~~market, decreased professional services and employee costs~~ of ~~$0.6~~certain ~~million,~~charges ~~and~~that ~~decreased~~occurred ~~stock~~in ~~based~~the ~~compensation~~prior ~~expense of $0~~period.~~5 million as result of our cost savings initiatives.~~

During the three months ended June 30, 2016 compared to the same period in 2015, professional and employee costs decreased $1.7 million, stock based compensation expense decreased $0.5 million, and accrued fringe benefits decreased $0.3 million, offset by accrued acquisition related costs of $2.4 million.

During the six months ended June 30, 2016 compared to the same period in 2015, professional and employee costs decreased $2.3 million, stock based compensation decreased $1.1 million and accrued legal fees and contingencies decreased $1.6 million as a result of exiting the U.K., offset by accrued acquisition related costs of $2.4 million.

Restructuring Charges

In January 2015, we commenced our 2015 Restructuring Plan as part of our ongoing efforts to reduce expenses and improve the operating performance of our business. The initiative is focused on enhancing earnings through an analysis of opportunities to increase revenue and reduce costs. Restructuring charges during the ~~three~~six months ended ~~March~~June 3130, 2016 totaled $2.57 million, consisting of $1.9 million of lease termination costs as a result of down-sizing a North American facility, $0.45 million of costs associated with utilizing a third party consultant to facilitate the execution of the plan, and $0.23 million of contract termination costs. ~~We expect to have continued restructuring activity under this plan for at least the next 12 months.~~

During the first and second quarters of 2014, we also implemented restructuring plans to streamline operations and increase profitability. There has been no additional restructuring activity recognized within these 2014 plans since the year ended December 31, 2014, other than settlement of associated liabilities.

Gain (loss) on Deconsolidation of Subsidiary, Net

During the fourth quarter of 2015, we deconsolidated RL U.K. and recorded a gain of $2.9 million. During the three and six months ~~March~~ended 31June 30, 2016, we recorded a loss of $720.1 million and $0.2 million,~~000~~ respectively, related to residual expenses associated with the deconsolidation.

Interest Expense

Interest expense increased $0.4 million and $1.04 million during the three and six months ended ~~March~~June 3130, 2016, respectively, compared to the same ~~period~~periods in 2015 due to interest expense related to our Loan and Security Agreement (the “Hercules Loan Agreement”) entered into on April 30, 2015 and the Convertible Second Lien Subordinated Notes (the “VantagePoint Notes”) entered on December 17, 2015.

Other Income (Expense), Net

Other income (expense), net primarily consisted of foreign currency fluctuations affecting our cash balances, offset by interest income resulting from invested balances.

Provision for Income Taxes

WeFor the three and six months ended June 30, 2016, we recorded a provision for income taxes of $0.32 million ~~during~~and ~~the~~$0.4 ~~three~~million. ~~months~~This ~~ended~~is ~~March~~compared ~~31,~~to ~~2016,~~a ~~compared~~benefit tofrom income taxes of $~~0.1~~40,000 ~~million~~and ~~during~~a provision for income taxes of $59,000 for the ~~same~~three ~~period~~and insix months ended June 30, 2015, respectively. The overall increase in tax expense in 2016 compared to the same period in 2015 was primarily due to having a ~~full~~ valuation allowance against net deferred tax assets. ~~Generally,~~in acertain ~~full~~foreign ~~valuation~~jurisdictions ~~allowance will result~~ in a2016 ~~zero net tax provision, since the income tax expense or benefit~~ that ~~would~~did ~~otherwise~~not behave ~~recognized~~a isvaluation ~~offset~~allowance ~~by the change~~ in ~~the valuation allowance~~2015. ~~However,~~The ~~the~~ income tax provision for the period ended ~~March~~June 3130, 2016 relates primarily to income taxes in our state and foreign jurisdictions and a non-cash income tax liability related to tax deductible goodwill that cannot be considered when determining a need for a valuation allowance.

Non-GAAP Financial Measures

In addition to our GAAP results discussed above, we believe Adjusted EBITDA is useful to investors in evaluating our operating performance. For the three and six months ended ~~March~~June 3130, 2016 and 2015, our Adjusted EBITDA was as follows:

	Three Months Ended March 31,
	Three Months Ended						Six Months Ended
	2016			2015
	June 30,						June 30,
(in thousands)
	2016			2015			2016			2015
Operating loss	$	(4,686	)	$	(12,527	)
(in thousands)
Add:
Net loss	$	(4,237	)	$	(10,593	)	$	(10,389	)	$	(23,375	)
Depreciation and amortization		4,533			5,134
Add (subtract):
Stock-based compensation, net		1,140			2,146
Income tax provision (benefit)		175			(40	)		442			59
Acquisition and integration costs		10			7
Other income (expense), net		(90	)		135			(78	)		216
Restructuring charges		2,456			1,455
Interest expense		1,115			713			2,230			788
Adjusted EBITDA	$	3,453		$	(3,785	)
Loss on deconsolidation of subsidiaries, net		99			-			171			-
Operating loss		(2,938	)		(9,785	)		(7,624	)		(22,312	)
Add:
Depreciation and amortization		4,432			5,149			8,965			10,283
Stock-based compensation, net		1,397			2,214			2,537			4,360
Acquisition and integration costs		2,409			4			2,419			11
Restructuring charges		233			3,133			2,689			4,588
Adjusted EBITDA (1)	$	5,533		$	715		$	8,986		$	(3,070	)

(1)

Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing operations before interest, income taxes, depreciation and amortization expenses, excluding, when applicable, stock-based compensation, the effects of accounting for business combinations (including any impairment of acquired intangibles and, in the case of the acquisition of SMB:LIVE, the deferred cash consideration), restructuring charges, and other non-operating income or expense. Adjusted EBITDA reflects the reclassification of discontinued operations

Our management uses Adjusted EBITDA because (i) it is a key basis upon which our management assesses our operating performance; (ii) it may be a factor in the evaluation of the performance of our management in determining compensation; (iii) we use it, in conjunction with GAAP measures such as revenue and income (loss) from operations, for operational decision-making purposes; and (iv) we believe it is one of the primary metrics investors use in evaluating Internet marketing companies.

We believe that Adjusted EBITDA permits an assessment of our operating performance, in addition to our performance based on our GAAP results that is useful in assessing the progress of the business. By excluding (i) the effects of accounting for business combinations and associated acquisition and integration costs, which obscure the measurable performance of the business operations; (ii) restructuring charges, which we do not consider reflective of our ongoing operating performance; (iii) depreciation and amortization and other non-operating income and expense, each of which may vary from period to period without any correlation to underlying operating performance; and (iv) stock-based compensation, which is a non-cash expense, we believe that we are able to gain a fuller view of the operating performance of the business. We provide information relating to our Adjusted EBITDA so that investors have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of operating performance on a consolidated basis and of our ability to produce operating cash flow to fund working capital needs, capital expenditures and investments in our sales force.

In addition, we believe that Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

• Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees; • Adjusted EBITDA does not reflect the potentially significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness we may incur in the future; • Adjusted EBITDA does not reflect income and expense items that relate to our financing and investing activities, any of which could significantly affect our results of operations or be a significant use of cash; • Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and • Other companies, including companies in our industry, calculate Adjusted EBITDA measures differently, which reduces its usefulness as a comparative measure.30

		•		Adjusted EBITDA does not reflect the potentially significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness we may incur in the future;
		•		Adjusted EBITDA does not reflect income and expense items that relate to our financing and investing activities, any of which could significantly affect our results of operations or be a significant use of cash;
		•		Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and
		•		Other companies, including companies in our industry, calculate Adjusted EBITDA measures differently, which reduces its usefulness as a comparative measure.

Adjusted EBITDA is not intended to replace operating income (loss), net income (loss) and other measures of financial performance reported in accordance with GAAP. Rather, Adjusted EBITDA is a measure of operating performance that you may consider in addition to those measures. Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results, including cash flows provided by operating activities, and using total Adjusted EBITDA as a supplemental financial measure.

Liquidity and Capital Resources

	Three Months Ended March 31,
	Six Months Ended June 30,
Consolidated Statements of Cash Flow Data:	2016			2015
(in thousands)
Net cash used in operating activities, continuing operations	$	(3,399	)	$	(4,530	)
Net cash provided by (used in) operating activities, continuing operations	$	591		$	(12,990	)
Net cash used in investing activities, continuing operations	$	(24,~~040~~404	)	$	(36,~~476~~902	)
Net cash used in financing activities, continuing operations	$	(684	)	$	(239	)
Net cash provided by financing activities, continuing operations	$	282		$	6,130
Net cash used in discontinued operations	$	—(7	)	$	(5960	)

Operating Activities

During the ~~three~~six months ended ~~March~~June 3130, 2016, ~~we used $3.4 million of~~ net cash inprovided by operating activities from continuing operations, ~~primarily~~of ~~due~~$0.6 tomillion awas ~~loss~~primarily ofdue to $615.23 million ~~from~~of ~~continuing~~non-cash ~~operations~~expense ~~and~~adjustments amade ~~change~~to inour ~~operating~~net ~~assets~~loss ~~and liabilities~~ of $610.14 million, partially offset by ~~non-cash~~a ~~expenses of $8.9 million. The~~ change in operating assets and liabilities ~~included~~of a$4.3 ~~decrease~~million. inNon-cash ~~accounts~~expenses ~~payable~~included of $29.50 million ~~due~~of todepreciation ~~the~~and ~~timing of payments~~amortization, a$2.7 ~~decrease~~million inof ~~accrued~~restructuring ~~compensation~~charges and ~~benefits of~~ $2.25 million ~~due~~of tostock-based ~~the~~compensation ~~2015~~expense. ~~annual~~The ~~bonus~~change ~~payouts,~~in operating assets and liabilities included a decrease in ~~deferred~~accounts ~~rent~~payable ~~and other liabilities~~ of $1.49 million due to athe ~~decrease~~timing inof ~~accrued but unpaid legal fees~~payments, ~~offset by~~ a decrease in ~~prepaid~~accrued ~~expenses~~restructuring ~~and other receivables~~ of $21.3 million ~~due~~as torestructuring aexpenses ~~decrease~~were inincurred, ~~media~~and ~~rebates.~~an ~~Non-cash~~increase ~~expenses~~in ~~included~~accounts ~~$4.5~~receivable ~~million~~ of ~~depreciation and amortization,~~ $21.51 million ofdue ~~restructuring~~to ~~charges~~an ~~and~~increase ~~$1.1~~in ~~million~~sales ofon ~~stock-based compensation expense~~credit.

Net cash ~~used~~provided inby operating activities related to continuing operations ~~decreased~~increased by $113.16 million during the ~~three~~six months ended ~~March~~June 3130, 2016 compared to 2015, primarily as a result of a decrease in net loss ~~offset~~of by$13.0 amillion ~~decrease~~and an increase in operating liabilities of $8.6 ~~Income~~million, ~~from~~offset ~~continuing~~by ~~operations~~a ~~adjusted~~decrease ~~for~~in non-cash items ~~increased~~of by $64.53 million. ~~The~~and an increase ~~was unfavorably impacted by a decrease~~ in ~~deferred~~operating ~~rent~~assets ~~and other liabilities~~ of $3.37 million. ~~compared~~The toincrease ~~2015 due to a decrease~~ in ~~accrued~~operating ~~but~~liabilities ~~unpaid~~was ~~legal~~primarily ~~fees~~due into ~~the current quarter,~~ an increase in accounts ~~receivable~~payable of $26.86 million and aaccrued ~~decrease~~restructuring ~~in deferred revenue~~ of $1.1 million due to atiming ~~decrease~~of inpayments ~~sales~~and restructuring activity, respectively. The ~~unfavorable~~increase ~~impacts~~in ~~were~~operating ~~offset~~assets bywas aprimarily ~~decrease~~due into ~~prepaid~~an ~~expenses~~increase ~~and~~in ~~other~~accounts ~~receivables~~receivable of $23.80 million ~~compared~~due to ~~2015~~an ~~due~~increase toin ~~the~~sales ~~absence~~on credit and an increase of a$0.8 ~~tax~~million ~~refund~~in other receivables and aprepaid ~~decrease~~expenses indue ~~deferred~~to ~~tax~~timing ~~assets~~of prepaid annual contracts.

Investing Activities

Our primary investing activities have consisted of capitalized software development costs, purchases of property and equipment, business acquisitions, investments in a partnership, and short-term investments. Each of these activities varies from period to period due to the timing of the expansion of our operations and our software development efforts.

We invested $24.64 million during the ~~three~~six months ended ~~March~~June 3130, 2016, which was a decrease of $12.5 million compared to the ~~same~~comparable period in 2015. The decrease primarily relates to decreases in purchases of property and equipment of $01.94 million and software development costs of $01.60 million as we constrained investment as part of our cost savings initiatives. Our investments were offset in part by $0.64 million ofdue ~~proceeds~~to ~~from~~change ~~sales~~in ofrestricted ~~property~~cash ~~and~~due ~~equipment~~to ~~and~~closing ~~maturities~~a certificate of ~~investments~~deposit inand ~~the~~$0.3 ~~2016~~million ~~period~~of ~~compared~~proceeds tofrom ~~$0.7~~sales ~~million~~of inproperty ~~2015~~and equipment.

Financing Activities

Our primary financing activities have consisted of borrowing under a term loan and convertible notes, net proceeds from exercise of stock options, capital lease obligations and common stock repurchases in connection with equity award vesting as more fully described below.

Net cash ~~used~~provided inby financing activities ~~increased~~decreased by $05.48 million during the ~~three~~six months ended ~~March~~June 3130, 2016 compared to the same period in 2015,. ~~due~~During tothe ansix ~~increase~~months inended ~~share~~June ~~withholding~~30, ~~for~~2015, ~~taxes~~we inreceived ~~connection~~$24.7 ~~with~~million ~~restricted~~of ~~stock~~net ~~unit~~proceeds ~~vesting~~from the Hercules term loan, ~~which~~offset isby ~~accounted~~$17.5 ~~for~~million asof ~~common~~the ~~stock~~term ~~repurchases.~~loan proceeds as restricted cash

Liquidity

~~During~~At ~~2015~~June 30, 2016, we ~~experienced~~had ~~declining~~cash ~~revenues~~and ~~primarily~~cash asequivalents ~~a result~~ of ~~challenging~~$15.2 ~~market~~million ~~conditions~~ and ~~worse~~short-term ~~than~~investments ~~expected~~of ~~performance~~$0.3 ~~in our international markets~~million. InCash ~~order to provide additional liquidity to meet working capital~~ and ~~capital~~cash ~~resource~~equivalents ~~requirements,~~consist onof ~~April 30~~cash, ~~2015,~~money wemarket ~~entered~~accounts ~~into~~and ~~the~~certificates ~~Hercules~~of ~~Loan Agreement for a $25~~deposit.0 ~~million~~Short term ~~loan.~~investments Weconsist ~~received~~of ~~$24.7~~certificates ~~million~~ of ~~net~~deposit ~~proceeds~~with ~~from~~original ~~the~~maturities ~~term~~in ~~loan,~~excess ~~$15.0~~of ~~million~~three ofmonths ~~which~~but isless ~~considered~~than ~~restricted~~12 ~~cash~~months. ~~required~~To ~~under~~date, ~~the~~we ~~terms~~have ofexperienced ~~the~~no ~~Hercules~~loss ~~Loan~~of ~~Agreement.~~our Ininvested ~~addition~~cash, oncash ~~December~~equivalents ~~17,~~or ~~2015~~short-term investments, wealthough ~~entered~~some ~~into~~of athose ~~convertible~~balances ~~note~~are ~~purchase~~subject ~~agreement~~to ~~with~~foreign ~~affiliates~~currency ofexchange ~~our~~risk ~~largest~~(see ~~shareholder~~Item ~~for~~3, ~~issuance~~“Foreign ofCurrency ~~$5.0~~Exchange ~~million~~Risk,” offor ~~the~~more ~~VantagePoint Notes~~information). ~~The~~At ~~note~~June ~~purchase~~30, ~~agreement~~2016, ~~for~~we ~~the~~had ~~VantagePoint~~restricted ~~Notes~~cash ~~also~~in ~~provides~~North ~~for~~America ~~the~~related ~~sale of up~~ to anthe ~~additional~~minimum ~~$5.0~~cash ~~million~~balance ~~aggregate~~under ~~principal~~the ~~amount~~terms of ~~convertible~~the ~~notes,~~Hercules ~~upon~~Loan ~~mutual~~Agreement ~~agreement~~ of ~~ReachLocal~~$12.5 ~~and VantagePoint and Hercules’ consent~~million.

~~Under~~At ~~the~~June ~~Hercules~~30, ~~Loan Agreement~~2016, we ~~are~~had ~~due~~restricted tocash ~~make~~related ~~monthly~~to ~~interest-only~~certificates ~~payments~~of ondeposit ~~the~~held ~~Hercules~~at ~~term~~financial ~~loan~~institutions ~~through~~that ~~August~~are 1,pledged ~~2016,~~as ~~though~~collateral ~~such~~for ~~payments~~letters ~~may~~of becredit ~~extended~~related ~~through~~to ~~November~~lease 1commitments, ~~2016~~collateral iffor wemerchant ~~remain in continuous compliance with the financial covenants under the Hercules Loan Agreement through July 1~~accounts, ~~2016,~~ and nocash ~~default~~deposits orfunded ~~event~~to ofa ~~default~~restricted ~~has~~account ~~occurred~~determined ~~and is continuing~~ on ~~such~~a ~~date.~~monthly ~~Upon~~basis ~~repayment~~in ofaccordance ~~the~~with ~~Hercules~~our ~~term~~employee ~~loan,~~health wecare ~~are also due to make an end~~self-~~of-term~~insurance ~~payment~~plan toin the ~~Lenders~~amount ~~equal~~of to $13.5 million, of which, is$0.2 ~~accrued~~million asrelate ~~interest~~to ~~based on~~ the ~~effective~~employee ~~interest~~health ~~method~~care ~~over the 3~~self-~~year~~insurance ~~term of the Hercules Loan Agreement~~plan. ~~The~~Our ~~Hercules~~current ~~term~~liabilities ~~loan~~exceeded isour ~~secured~~current assets by ~~substantially~~$65.5 ~~all~~million ofat ~~our~~June ~~personal~~30, ~~property~~2016, ~~including~~and ~~our~~we ~~intellectual~~incurred ~~property.~~an ~~Under~~operating ~~the~~loss ~~VantagePoint~~of ~~Notes,~~$7.6 wemillion ~~are~~for ~~due~~the tosix ~~begin~~months ~~making~~ended ~~quarterly~~June ~~interest~~30, 2016 and ~~principal~~$60.9 ~~payments~~million onfor the ~~VantagePoint~~twelve ~~Notes~~months onended ~~April~~December 1531, ~~2017, subject to a subordination agreement with Hercules~~2015.

~~Our~~On ~~covenants~~April ~~under the Hercules Loan Agreement include restrictions on transferring collateral~~30, ~~incurring additional indebtedness~~2015, ~~creating~~we ~~liens,~~entered ~~selling~~into assets, and undergoing a change in control, in each case subject to certain exceptions, as well as financial covenants to maintain certain minimum levels of revenue and earnings during each three-month period, tested monthly, during the ~~term.~~Hercules ~~Restrictions~~Loan ~~also~~Agreement ~~include~~for a ~~maximum net new investment in our foreign subsidiaries, subject to certain exclusions, of~~ $525.50 million ~~during~~term ~~2016, $4~~loan.0 ~~million~~We ~~annually~~received ~~thereafter, and~~ $1824.07 million inof ~~the~~net ~~aggregate~~proceeds ~~during~~from the term ~~of the agreement~~loan. ~~The~~In ~~Hercules Loan Agreement contains a subjective acceleration clause that can be triggered if we experience a Material Adverse Effect~~addition, ason defined in the Hercules Loan Agreement. On August 3, 2015, we entered into an amendment to the Hercules Loan Agreement, which reduced the Hercules Loan Agreement’s covenant thresholds for revenue for the months ending September 30, 2015 through December 3117, 2015~~. On November 9~~, ~~2015,~~ we entered into ana ~~amendment~~convertible tonote ~~the~~purchase ~~Hercules~~agreement ~~Loan Agreement, which waived compliance~~ with ~~the~~affiliates ~~revenue~~of ~~and~~our ~~earnings~~largest ~~covenant~~shareholder ~~thresholds~~ for ~~November~~issuance ~~and December 2015. In connection with the amendment, we (i) paid Hercules a one-time fee~~ of $05.20 million, ~~(ii) reset the schedule~~ of ~~prepayment fees to begin from November 9, 2015, instead of April 30, 2016, and (iii) agreed to amend~~ the ~~Hercules~~VantagePoint ~~Warrant~~Notes. OnThe ~~March~~note ~~25.~~purchase ~~2016,~~agreement wefor ~~entered into a Fourth Amendment to~~ the ~~Hercules~~VantagePoint ~~Loan~~Notes ~~Agreement~~also ~~which~~provided ~~increased~~for the ~~maximum~~sale ~~net~~of ~~new~~up ~~investment~~to inan ~~our~~additional ~~foreign subsidiaries during 2016 from~~ $45.0 million toaggregate ~~$5.5~~principal ~~million.~~amount ~~At March 31, 2016, we were in compliance with all financial covenants~~ of ~~the~~convertible ~~Hercules Loan Agreement. On May 13~~notes, ~~2016,~~upon wemutual ~~entered~~agreement ~~into a Consent Agreement with Hercules, which provides that from the period~~ of ~~April~~ReachLocal ~~30,~~and ~~2016~~VantagePoint ~~through~~and June 15, 2016, as we complete our account migration to our new primary commercial bank, we need not comply with certain requirements to maintain cash in accounts subject to control agreements in favor of Hercules,’ ~~provided we perform daily cash transfers into specified accounts at the new primary commercial bank~~consent.

34Under the Hercules Loan Agreement, we made monthly interest-only payments. Under the VantagePoint Notes, we were due to begin making quarterly interest and principal payments on the VantagePoint Notes on April 15, 2017, subject to a subordination agreement with Hercules.

AtOur ~~March~~covenants ~~31,~~under ~~2016,~~the weHercules ~~had~~Loan ~~cash~~Agreement ~~and~~included ~~cash~~restrictions ~~equivalents~~on oftransferring ~~$13.0~~collateral, ~~million~~incurring ~~and~~additional ~~short-term~~indebtedness, ~~investments~~creating ofliens, ~~$0.1~~selling ~~million. Cash and cash equivalents consist of cash~~assets, ~~money market accounts~~ and ~~certificates~~undergoing ofa ~~deposit.~~change ~~Short term investments consist of certificates of deposit with original maturities~~ in ~~excess of three months but less than 12 months. To date~~control, wein ~~have~~each ~~experienced~~case nosubject ~~loss~~to ofcertain ~~our invested cash~~exceptions, ~~cash~~as ~~equivalents~~well oras ~~short-term~~financial ~~investments,~~covenants ~~although some of those balances are subject~~ to ~~foreign~~maintain ~~currency~~certain ~~exchange~~minimum ~~risk~~levels ~~(see~~of ~~Item~~revenue 3,and ~~“Foreign~~earnings ~~Currency~~during ~~Exchange~~each ~~Risk,”~~three-month ~~for more information). We cannot~~period, ~~however,~~tested ~~provide any assurances that access to our invested cash~~monthly, ~~cash~~during ~~equivalents~~the ~~and short-~~term. ~~investments~~Under ~~will not be impacted by adverse conditions in~~ the ~~financial~~Hercules ~~markets.~~Loan ~~At March 31~~Agreement, ~~2016,~~ we ~~had~~were ~~restricted~~required ~~cash in North America related~~ to ~~the~~maintain minimum cash ~~balance~~in ~~under~~North ~~the~~America ~~terms~~at ofall ~~the~~times, ~~Hercules~~which ~~Loan~~equaled ~~Agreement of~~ $15.0 million. Ifat weDecember ~~achieve positive “Adjusted EBITDA” as defined in the Loan Agreement~~31, ~~for~~2015 ~~three~~and ~~consecutive~~reduced ~~quarters, the minimum cash balance decreases~~ to $12.5 million. ~~We achieved positive “Adjusted EBITDA”~~ as ~~defined~~of ~~during the quarters ended September 30, 2015, December 31, 2015, and March 31, 2016.Therefore, at~~ April 1, 2016~~, the minimum cash balance requirement under the Hercules Loan Agreement decreased to $12~~.~~5 million.~~

AtOn ~~March~~August 313, ~~2016~~2015, we ~~had~~entered ~~restricted~~into ~~cash~~an ~~related~~amendment to ~~certificates~~the ofHercules ~~deposits~~Loan ~~held~~Agreement, atwhich ~~financial~~reduced ~~institutions~~the ~~that~~Hercules ~~are~~Loan ~~pledged~~Agreement’s ascovenant ~~collateral~~thresholds for ~~letters~~revenue offor ~~credit~~the ~~related~~months toending ~~lease~~September ~~commitments~~30, ~~collateral~~2015 ~~for~~through ~~merchant~~December ~~accounts~~31, ~~and~~2015. ~~cash~~On ~~deposits~~November ~~funded~~9, to2015, awe ~~restricted~~entered ~~account~~into ~~determined~~an onamendment ato ~~monthly~~the ~~basis~~Hercules inLoan ~~accordance~~Agreement, which waived compliance with ~~our~~the ~~employee~~revenue ~~health~~and ~~care~~earnings ~~self-insurance~~covenant ~~plan~~thresholds infor November and December 2015. In connection with the ~~amount~~amendment, we (i) paid Hercules a one-time fee of $30.72 million, (ii) reset the schedule of ~~which~~prepayment fees to begin from November 9, $02016, instead of April 30, 2016, and (iii) agreed to amend the Hercules Warrant.2 ~~million~~On ~~relate~~December 17, 2015 the Company entered into the third amendment to the ~~employee~~Hercules ~~health~~Loan ~~care~~Agreement, ~~self-insurance~~which ~~plan~~reduced the amount of restricted cash the Company was required to maintain in North America from $17.5 ~~Our~~million ~~current~~to ~~liabilities~~$15.0 ~~exceeded~~million ~~our~~and ~~current~~which ~~assets~~amount bywould be further reduced to $6512.35 million atif the Company achieved positive “Adjusted EBITDA” as defined in the Hercules Loan Agreement. On March 3125, 2016, ~~and~~ we ~~incurred~~entered aninto ~~operating~~a ~~loss~~Fourth ofAmendment to the Hercules Loan Agreement which increased the maximum net new investment in our foreign subsidiaries during 2016 from $4.70 million ~~for~~to $5.5 million. At June 30, 2016, we were in compliance with all financial covenants of the ~~quarter~~Hercules ~~then~~Loan ~~ended~~Agreement.

WeIn ~~believe~~connection ~~that we will be able to maintain compliance~~ with the ~~Hercules~~closing ~~Loan~~of ~~Agreement’s minimum cash balance requirement through~~ the ~~loan term. As we have remained in continuous compliance with the financial covenants under the Hercules Loan Agreement through April 1~~Merger, ~~2016,~~on ~~and no event of default has occurred, we have extended our interest-only payments through~~ August 19, 2016., ~~We also believe that~~ we ~~will~~repaid ~~extend~~the ~~our~~Hercules ~~interest-only~~loan ~~payments~~in ~~through November 1~~full, ~~2016~~including byapplicable ~~maintaining~~fees ~~continuous~~and ~~compliance~~accrued and ~~not~~unpaid ~~experiencing~~interest ~~a default or event~~ of ~~default~~$2.3 ~~through July 1, 2016~~million. In addition, wethe ~~believe~~warrant ~~that~~issued ~~we will be able~~ to ~~maintain~~Hercules ~~compliance~~was ~~with~~cancelled ~~the~~in ~~other~~exchange ~~financial~~for ~~covenants~~a ~~contained~~payment in ~~the~~cash ~~Hercules~~of ~~Loan~~an ~~Agreement~~amount ~~through~~equal ~~2016~~to as (a) ~~result~~the oftotal ~~our~~number ~~cost~~of ~~and~~shares ~~capital~~underlying ~~expenditure control measures. We have achieved~~ the ~~revenue~~warrant ~~and~~(300,000), ~~earnings~~multiplied ~~targets~~by ~~under~~(b) ~~the~~$2.55. ~~Hercules~~Further, in ~~Loan~~connection ~~Agreement~~with ~~for~~ the ~~quarter ended March 31~~closing, ~~2016~~our ~~and~~issued ~~we believe that we will be able to achieve the revenue~~ and ~~earnings~~outstanding ~~targets~~convertible ~~for~~notes ~~the remainder~~ of ~~2016~~$5.0 ~~under~~million ~~the~~with ~~Hercules~~affiliates ~~Loan~~of ~~Agreement~~VantagePoint, ~~which~~our ~~equal~~largest ~~90%~~shareholder, ofwere ~~the~~repaid ~~revenue estimated~~ in ~~our~~full, ~~2016~~including ~~operating~~applicable ~~plan~~fees and ~~70%~~accrued and ~~80%~~unpaid interest of ~~the~~$0.2 ~~earnings estimated for the first and second six months, respectively, in our 2016 operating plan~~million.

To meet our liquidity needs, we expect to minimize increases in personnel until our business performance has improved and supports additional costs. However, we may need to implement further cost reductions in our operating expenses to maintain a sufficient cash balance to fund our operations and maintain compliance with the minimum cash balance requirement and maximum foreign investment restriction under the Hercules Loan Agreement. Should it become necessary, we would implement additional cost reductions primarily through forgoing certain discretionary compensation increases, and further constraining identified non-critical product investments, and marketing and other costs, including reductions in personnel related to those activities. These identified potential actions, commencing as soon as May 2016, comprise a developed plan to reduce such costs by $4.6 million, net of implementation costs. In addition, we would consider borrowing up to an additional $5.0 million under the current VantagePoint notes purchase agreement, however such borrowings would be subject to VantagePoint’s willingness to lend and Hercules’ consent. We will continue to evaluate the extent and effectiveness of our cost-saving measures and monitor expenses compared to revenue and intend to implement additional cost reductions in future periods if and as circumstances warrant. However, there can be no assurance that these actions will be successful or that further adverse events outside of our control may arise that would result in our inability to comply with the Hercules Loan Agreement’s covenants. If an event of default were to occur, we may be required to obtain a further amendment or a waiver to the Hercules Loan Agreement, refinance the term loan, divest non-core assets or operations and/or obtain additional equity or debt financing. If we were unable to obtain such a waiver or amendment, or consummate such a transaction, the administrative agent could exercise remedies against us and the collateral securing the term loan, including potential foreclosure against our assets securing the Hercules Loan Agreement, including our cash. Further, the VantagePoint Notes and Hercules Loan Agreement contain cross-default provisions whereby a default under one agreement would likely result in cross defaults under the other agreement. The occurrence of a default under any of these borrowing arrangements would permit the applicable creditors to declare all amounts outstanding under those borrowing arrangements to be immediately due and payable.

In consideration of these conditions, we currently anticipate that funds expected to be generated from operations, including cost-saving measures we have taken and intend to take will be sufficient to meet our anticipated cash requirements through at least the next twelve months. However, there is no assurance that the results of operations and cash flows expected during that period of time will be achieved.

Off-Balance Sheet Arrangements

AtOn ~~March~~May 31, 2016, we ~~did~~entered ~~not~~into a reimbursement agreement with certain affiliates of VantagePoint (“LC Creditors”) pursuant to which we have agreed to reimburse the LC Creditors for (i) any ~~off-balance~~amounts ~~sheet~~drawn ~~arrangements~~on a $2.0 million irrevocable letter of credit issued by First Republic Bank to PayPal, Inc. for which the LC Creditors provided cash collateral to First Republic Bank in the amount of $2.0 million, and (ii) related costs, expenses and fees. Additionally, if the letter of credit is drawn upon by PayPal, Inc. in any amount, we have agreed to pay a fee equal to 200% of the amount so drawn. As of June 30, 2016, the irrevocable letter of credit has not been drawn upon by PayPal, Inc. and no fee is owed by us.

In connection with the closing of the Merger, the letter of credit was returned to the LC Creditors for cancellation and the reimbursement agreement was terminated.

Recent Accounting Pronouncements Adopted in 2016

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Business Combinations. The amendments in this update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this update require an acquirer to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this update were effective for us on January 1, 2016. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update. The adoption of this standard did not have an impact on our financial statements. We will apply this update prospectively, as appropriate.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software. The amendments in this update provide guidance to customers of cloud computing providers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. We assessed our accounting treatment in our capacity as a cloud computing customer and determined that no adjustments to the financial statements are necessary. We will apply this update going forward, as appropriate.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation. The amendments in this update require management to reevaluate whether certain legal entities should be consolidated. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update were effective for us as of January 1, 2016. In accordance with the adoption of this standard, we evaluated our non-marketable investments, comprised of a 7.2% equity interest in a privately held limited partnership that is one of our service providers, and a 14.2% equity interest in SERVIZ, Inc. (“Serviz”), the entity that acquired our former ClubLocal business. Under the amended guidance, the limited partnership interest became a VIE as the limited partners do not have substantive participating rights or kick-out rights (including liquidation rights) over the general partner. As an early-stage company, Serviz was considered a VIE as it may not have sufficient equity to finance its activities without additional financial support. We are not the primary beneficiary of our non-marketable investments as we do not have: (1) the power to direct the activities that most significantly impact their economic performance or (2) the obligation to absorb losses or the right to receive benefits that could potentially be significant, due to a lack of voting rights or decision-making authority, rights to receive residual returns, or obligations to provide additional financial support with either entity. Adoption of the standard did not change our determination that the non-marketable investments do not require consolidation and did not have an impact on our financial statements. We will apply this update going forward, as appropriate.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in this update were effective for us as of January 1, 2016. Earlier adoption is permitted. Entities may apply the amendments in this update either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. In addition, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The adoption of this standard did not have an impact on our financial statements. No prior periods were retrospectively adjusted. We will apply this update going forward, as appropriate.

Recent Accounting Pronouncements Not Yet Adopted

In March 2016, the FASB issued ASU No. 2016-09, Compensation- Stock Compensation. The amendments in this update simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The amendments in this update are effective for us as of January 1, 2017. Early adoption is permitted. We are currently assessing the impact of this update on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments- Equity Method and Joint Ventures. The amendments in this update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this update are effective for us as of January 1, 2017. Early adoption is permitted. An entity should apply the amendments in this update prospectively. We are currently assessing the impact of this update on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in this update are effective for us as of January 1, 2017. Early adoption is permitted, including adoption in an interim period. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. We are currently assessing the impact of this update on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The amendments in this update supersedes the guidance in former ASC 840, Leases with ASC 842, Leases, to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The amendments in this update are effective for us as of January 1, 2019. Early application of this update is permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective approach. We are currently assessing the impact of this update on our consolidated financial statements.

In January 2016, the FASB ASU No. 2016-01, Financial Instruments- Overall. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update are effective for us as of January 1, 2018. Early application of certain aspects of the amendment is permitted by public entities, otherwise early adoption is not permitted. We are currently assessing the impact of this update on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern. The amendments in this update require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update are effective for us as of January 1, 2017. The adoption of this standard is not expected to have an impact on our consolidated financial statements.

37In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, and May 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12, respectively. The guidance in this update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance throughout the Codification. Additionally, this update supersedes some cost guidance included in ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of ASC 360, Property, Plant, and Equipment, and intangible assets, within the scope of ASC 350, Intangibles - Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement in this update. The standard was to be effective for us as of January 1, 2017, but in August 2015, the FASB delayed the effective date of the new revenue accounting standard to January 1, 2019, and would permit early adoption as of the original effective date. Earlier adoption is not otherwise permitted for public entities. An entity can apply the revenue standard retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (simplified transition method). We are currently assessing the impact of this update on our consolidated financial statements.

InItem ~~May 2014, the FASB issued ASU No~~3. ~~2014-09,~~QUANTITATIVE ~~Revenue~~AND ~~from~~QUALITATIVE ~~Contracts~~DISCLOSURES ~~with~~ABOUT ~~Customers.~~MARKET The guidance in this update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific guidance throughout the Codification. Additionally, this update supersedes some cost guidance included in ASC 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of ASC 360, Property, Plant, and Equipment, and intangible assets, within the scope of ASC 350, Intangibles - Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement in this update. The standard was to be effective for us as of January 1, 2017, but in August 2015, the FASB delayed the effective date of the new revenue accounting standard to January 1, 2019, and would permit early adoption as of the original effective date. Earlier adoption is not otherwise permitted for public entities. An entity can apply the revenue standard retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings (simplified transition method). We are currently assessing the impact of this update on our consolidated financial statements.RISK

~~Item 3~~We are exposed to market risk in the ordinary course of our business. ~~QUANTITATIVE~~ ~~AND~~These ~~QUALITATIVE~~risks ~~DISCLOSURES~~primarily ~~ABOUT~~include ~~MARKET~~interest ~~RISK~~ rate, foreign exchange and inflation risks.

WeInterest ~~are~~Rate ~~exposed~~Fluctuation ~~to market risk in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks.~~Risk

~~Interest~~Our ~~Rate~~investments ~~Fluctuation~~include ~~Risk~~cash, cash equivalents and short-term investments. Cash and cash equivalents and short-term investments consist of cash, money market accounts and certificates of deposit. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be materially affected to any degree by a sudden change in market interest rates.

~~Our~~On ~~investments~~April ~~include~~30, ~~cash~~2015, ~~cash~~we ~~equivalents~~entered ~~and~~into ~~short-term~~the ~~investments.~~Hercules ~~Cash~~Loan ~~and~~Agreement ~~cash~~for ~~equivalents~~a ~~and~~$25.0 ~~short-~~million term ~~investments consist of cash, money market accounts and certificates of deposit~~loan. The ~~primary~~term ~~objective~~loan ofbears ~~our~~interest ~~investment~~at ~~activities~~the isprime torate ~~preserve~~plus ~~principal while maximizing income without significantly increasing risk~~8.5% We(with doa ~~not~~prime ~~enter~~rate ~~into~~floor ~~investments~~of ~~for trading or speculative purposes~~3.25%), ~~Our~~which ~~investments~~increases ~~are~~our ~~exposed to market~~ risk ~~due~~exposure to aincreases ~~fluctuation~~ in interest rates,. ~~which~~During ~~may~~December ~~affect~~2015, ~~our interest income and~~ the ~~fair~~annual ~~market~~interest ~~value~~rate ofincreased ~~our~~from ~~investments~~11.75% ~~Due~~ to ~~the~~12.00%. ~~short-term~~Accordingly, ~~nature~~an ofadditional ~~our~~one ~~investment~~percentage ~~portfolio,~~point weincrease doin ~~not~~the ~~believe~~prime anrate ~~immediate~~would ~~10%~~result ~~increase~~ in ~~interest~~net ~~rates~~additional ~~would~~annual ~~have~~interest aexpense ~~material~~on ~~effect~~our onoutstanding ~~the~~borrowings ~~fair~~as ~~market~~of June ~~value~~30, 2016 of $0.2 ~~our~~million. ~~portfolio~~However, ~~and~~in ~~therefore~~connection wewith dothe ~~not~~closing ~~expect~~of ~~our~~the ~~operating~~Merger, ~~results~~on orAugust ~~cash~~9, ~~flows~~2016, tothe beHercules ~~materially~~loan ~~affected~~was torepaid ~~any~~in ~~degree~~full, byincluding aapplicable ~~sudden~~fees ~~change~~and inaccrued ~~market~~and unpaid interest ~~rates~~of $2.3 million.

On April 30, 2015, we entered into the Hercules Loan Agreement for a $25.0 million term loan. The term loan bears interest at the prime rate plus 8.5% (with a prime rate floor of 3.25%), which increases our risk exposure to increases in interest rates. During December 2015, the annual interest rate increased from 11.75% to 12.00%. Accordingly, an additional one percentage point increase in the prime rate would result in net additional annual interest expense on our outstanding borrowings as of March 31, 2016 of $0.2 million.34

Foreign Currency Exchange Risk

We have foreign currency risks related to our investments, revenue and operating expenses denominated in currencies other than the U.S. dollar, including the Australian dollar, the British pound sterling, the Canadian dollar, the euro, the Japanese yen, the Indian rupee, and the Brazilian real. For the ~~three~~six months ended ~~March~~June 3130, 2016, a 10% strengthening of the U.S. dollar relative to those foreign currencies would have resulted in a decrease in revenue of $25.61 million, but an increase in operating income of $0.12 million. A 10% weakening of the U.S. dollar relative to those foreign currencies, however, would have resulted in an increase in revenue of $25.61 million, but a decrease in operating income of $0.12 million. As exchange rates vary, sales and other operating results, when translated, may differ materially from expectations. In addition, approximately 3835% of our cash balances are denominated in currencies other than the U.S. dollar, and the value of such holdings will increase or decrease along with the weakness or strength of the U.S. dollar, respectively. We continue to review potential hedging strategies that may reduce the effect of fluctuating currency rates on our business, but there can be no assurances that we will implement such a hedging strategy or that once implemented, such a strategy would accomplish our objectives or not result in losses.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

38Item 4. CONTROLS AND PROCEDURES

~~Item 4. CONTROLS~~Disclosure ~~AND~~Controls ~~PROCEDURES~~ and Procedures

~~Disclosure~~Under ~~Controls~~the supervision and ~~Procedures~~with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of June 30, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of such time to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

~~Under~~Changes the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of March 31, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of such time to provide reasonable assurance that information required to be disclosed by us in ~~reports~~Internal weControl ~~file~~Over or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial ~~Officer, as appropriate to allow timely decisions regarding required disclosure.~~ Reporting

~~Changes~~There have been no changes in ~~Internal~~our ~~Control~~internal ~~Over~~control ~~Financial~~over ~~Reporting~~financial reporting that occurred during the three and six months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.35

39PART II

~~PART~~OTHER IIINFORMATION

~~OTHER~~Item ~~INFORMATION~~1. LEGAL PROCEEDINGS

~~Item~~From 1time to time, we are involved in legal proceedings arising in the ordinary course of our business. ~~LEGAL~~We ~~PROCEEDINGS~~believe that there is no litigation or claims pending or threatened that are likely to have a material adverse effect on our financial position, results of operations or cash flows.

~~From~~On ~~time~~July to15, ~~time~~2016, weTodd ~~are~~Miranda ~~involved~~filed ina ~~legal~~putative ~~proceedings~~class ~~arising~~action lawsuit challenging the Merger in the ~~ordinary~~Superior ~~course~~Court of the State of California, County of Los Angeles. In addition to the Company, the members of our ~~business~~Board of Directors and certain Gannett entities were named as defendants. WeThe ~~believe~~complaint ~~that~~alleges ~~there~~breaches isof nofiduciary ~~litigation~~duty orby ~~claims~~the ~~pending~~individual ormembers ~~threatened~~of ~~that~~our ~~are~~Board ~~likely~~in connection with the Merger Agreement by allegedly accepting an inadequate offer price and allegedly agreeing to ~~have~~unreasonable adeal ~~material~~protection ~~adverse~~provisions, ~~effect~~among onother ~~our~~actions. ~~financial~~The ~~position~~complaint further alleges that we, ~~results~~Parent and Purchaser aided and abetted the purported breaches of ~~operations~~fiduciary orduty. ~~cash~~The ~~flows~~plaintiffs generally seek equitable and injunctive relief, including an order enjoining the defendants from completing the proposed merger transaction, rescission of any consummated transaction, unspecified amounts in damages and attorneys’ fees. We believe this lawsuit is without merit, and intend to vigorously defend against it.

~~Item~~On 1AJuly 27, 2016, Donal Casey filed a putative class action lawsuit challenging the Merger in the Superior Court of the State of California, County of Los Angeles. ~~RISK~~In ~~FACTORS~~addition to the Company, the members of our Board of Directors were named as defendants. The complaint alleges breaches of fiduciary duty by the individual members of our Board in connection with the Merger Agreement by allegedly failing to properly value the Company, allegedly agreeing to unreasonable deal protection provisions, and allegedly failing to make adequate disclosures regarding the Merger, among other actions. The plaintiffs generally seek equitable and injunctive relief, including an order enjoining the defendants from completing the Merger, rescission of any consummated transaction, unspecified amounts in damages and attorneys’ fees. We believe this lawsuit is without merit, and intend to vigorously defend against it.

~~Investors should carefully consider the risk factors in~~ Item 1A. ofRISK ~~our Annual Report on Form 10-K for the year ended December 31, 2015, in addition to the other information contained in our Annual Report and in this quarterly report on Form 10-Q.~~FACTORS

Investors should carefully consider the risk factors in Item 1A 2.of ~~UNREGISTERED~~our ~~SALES~~Annual OFReport ~~EQUITY~~on ~~SECURITIES~~Form ~~AND~~10-K ~~USE~~for OFthe ~~PROCEEDS~~year ended December 31, 2015, in addition to the other information contained in our Annual Report and in this quarterly report on Form 10-Q.

~~None~~Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Item 6~~None. ~~EXHIBITS~~

~~The~~Item ~~exhibits listed in the Exhibit Index following the signature page to this report are filed as part of, or incorporated by reference into, this report~~6. EXHIBITS

40The exhibits listed in the Exhibit Index following the signature page to this report are filed as part of, or incorporated by reference into, this report.

~~SIGNATURES~~ 36

~~Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~SIGNATURES

~~REACHLOCAL,~~Pursuant ~~INC.~~to ~~By:~~the ~~/s/~~requirements ~~Sharon~~of T.the ~~Rowlands~~Securities ~~Name:~~Exchange ~~Sharon~~Act T.of ~~Rowlands~~1934, ~~Title:~~as ~~Chief~~amended, ~~Executive~~the ~~Officer~~registrant ~~By:~~has ~~/s/~~duly ~~Ross~~caused G.this ~~Landsbaum~~report ~~Name:~~to ~~Ross~~be G.signed ~~Landsbaum~~on ~~Title:~~its ~~Chief~~behalf ~~Financial~~by ~~Officer~~the undersigned thereunto duly authorized.

~~Date~~REACHLOCAL, INC. By: ~~May~~/s/ ~~13,~~Sharon ~~2016~~T. Rowlands Name: Sharon T. Rowlands Title: Chief Executive Officer By: /s/ Ross G. Landsbaum Name: Ross G. Landsbaum Title: Chief Financial Officer

41Date: August 11, 2016

~~EXHIBIT INDEX~~37

Exhibit No		Description of Exhibit
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance 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

EXHIBIT INDEX

† Certain provisions of this exhibit have been omitted pursuant to a request for confidential treatment.

Exhibit No		Description of Exhibit

2.1		Agreement and Plan of Merger, dated as of June 27, 2016, by and among Gannett Co., Inc., Raptor Merger Sub, Inc. and ReachLocal, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K (File No. 001-34749) filed with the SEC on June 27, 2016)

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance 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

* Indicates management contract or compensatory plan, contract or arrangement.38

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