Local (LOCMQ) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period endedSeptember 30, 2008

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

For the transition period from                    to                    

Commission File Number:001-34197

LOCAL.COM CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 33-0849123
(I.R.S. Employer
Identification No.)

One Technology Drive, Building G
Irvine, CA 92618
(Address of principal executive offices)(Zip Code)

(949) 784-0800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

Large accelerated filero  Accelerated filero  Non-accelerated filer  þ
(Do not check if a smaller reporting company) Smaller Reporting Companyo 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Number of shares outstanding at October 31, 2008:	Common: 14,446,107
	Preferred: 0

LOCAL.COM CORPORATION
TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION
Item 1.Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007	3
Condensed Consolidated Statements of Operations for the three and nine months ended	4
September 30, 2008 and 2007 (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended	5
September 30, 2008 and 2007 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and	6
2007 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
Item 3.Quantitative and Qualitative Disclosures About Market Risk.	19
Item 4T.Controls and Procedures.	19
PART II — OTHER INFORMATION
Item 1.Legal Proceedings.	21
Item 1A.Risk Factors.	21
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.	21
Item 3.Defaults Upon Senior Securities.	21
Item 4.Submission of Matters to a Vote of Security Holders.	21
Item 5.Other Information.	21
Item 6.Exhibits.	22
EX-31.1
EX-31.2
EX-32.1

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	September 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,926		$	14,258
Restricted cash		31			30
Marketable securities		—			1,999
Accounts receivable, net of allowances of $25 and $15, respectively		6,325			3,595
Prepaid expenses and other current assets		173			292
Total current assets		19,455			20,174
Property and equipment, net		1,075			1,473
Intangible assets, net		2,358			3,156
Goodwill		13,231			13,233
Long-term restricted cash		35			66
Deposits		12			12
Total assets	$	36,166		$	38,114
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,902		$	4,029
Accrued compensation		614			456
Deferred rent		230			316
Other accrued liabilities		427			194
Deferred revenue		83			177
Total liabilities, all current		7,256			5,172
Commitments and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.00001 par value; 10,000,000 shares authorized; none issued and outstanding for all periods presented		—			—
Common stock, $0.00001 par value; 30,000,000 shares authorized; 14,446,107 and 14,204,110 issued and outstanding, respectively		—			—
Additional paid-in capital		84,540			82,176
Accumulated comprehensive loss		—			(1	)
Accumulated deficit		(55,630	)		(49,233	)
Stockholders’ equity		28,910			32,942
Total liabilities and stockholders’ equity	$	36,166		$	38,114

See accompanying notes to the condensed consolidated financial statements.

3

LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue	$	10,196		$	5,614		$	28,684		$	15,593
Operating expenses:
Search serving		1,331			1,116			4,104			2,884
Sales and marketing		8,455			5,298			23,997			14,698
General and administrative		1,271			1,143			4,113			3,654
Research and development		725			621			2,358			1,871
Amortization of intangibles		200			315			798			796
Total operating expenses		11,982			8,493			35,370			23,903
Operating loss		(1,786	)		(2,879	)		(6,686	)		(8,310	)
Interest and other income (expense), net		72			(6,418	)		290			(7,224	)
Loss before income taxes		(1,714	)		(9,297	)		(6,396	)		(15,534	)
Provision for income taxes		—			—			1			1
Net loss	$	(1,714	)	$	(9,297	)	$	(6,397	)	$	(15,535	)
Per share data:
Basic net loss per share	$	(0.12	)	$	(0.71	)	$	(0.45	)	$	(1.47	)
Diluted net loss per share	$	(0.12	)	$	(0.71	)	$	(0.45	)	$	(1.47	)
Basic weighted average shares outstanding		14,357,860			13,106,117			14,268,372			10,590,686
Diluted weighted average shares outstanding		14,357,860			13,106,117			14,268,372			10,590,686

See accompanying notes to the condensed consolidated financial statements.

4

LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Net loss	$	(1,714	)	$	(9,297	)	$	(6,397	)	$	(15,535	)
Other comprehensive income (loss):
Net unrealized gain (loss) on marketable securities		—			11			1			22
Total comprehensive loss	$	(1,714	)	$	(9,286	)	$	(6,396	)	$	(15,513	)
Supplemental comprehensive income (loss) information:
Unrealized holding gains (losses) arising during period	$	—		$	11		$	1		$	22
Reclassification adjustment for losses included in net loss		—			—			—			—
Net unrealized gain (loss) on marketable securities	$	—		$	11		$	1		$	22

See accompanying notes to the condensed consolidated financial statements.

5

LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine months ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(6,397	)	$	(15,535	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		1,478			1,617
Provision for doubtful accounts		10			9
Non-cash stock based compensation		1,801			1,207
Non-cash interest expense		—			6,679
Changes in operating assets and liabilities:
Accounts receivable		(2,740	)		(1,160	)
Prepaid expenses and other		152			112
Accounts payable and accrued liabilities		2,178			906
Deferred revenue		(94	)		(39	)
Net cash used in operating activities		(3,612	)		(6,204	)
Cash flows from investing activities:
Capital expenditures		(315	)		(495	)
Proceeds from sales of marketable securities		2,000			—
Decrease in restricted cash		30			41
Acquisition, net of cash returned		2			(2,034	)
Net cash provided by (used in) investing activities		1,717			(2,488	)
Cash flows from financing activities:
Proceeds from issuance of senior secured convertible notes		—			8,000
Proceeds from issuance of common stock in a private placement		—			12,963
Proceeds from issuance of common stock from exercise of options		397			324
Proceeds from issuance of common stock from exercise of warrants		188			1,341
Proceeds from swing-sale profits		3			5
Payment of notes payable		—			(63	)
Payment of financing related costs		(25	)		(1,028	)
Net cash provided by financing activities		563			21,542
Net (decrease) increase in cash and cash equivalents		(1,332	)		12,850
Cash and cash equivalents, beginning of period		14,258			3,264
Cash and cash equivalents, end of period	$	12,926		$	16,114
Supplemental cash flow information:
Interest paid	$	—		$	279
Income taxes paid	$	1		$	1
Non-cash investing and financing transactions:
Debt discount related to issuance of senior secured convertible notes				$	6,221
Conversion of senior secured convertible notes into common stock				$	8,000
Warrants issued for financing costs				$	458
Common stock issued for asset purchase				$	431

See accompanying notes to the condensed consolidated financial statements.

6

LOCAL.COM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of presentation

The unaudited interim condensed consolidated financial statements as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007, included herein, have been prepared by the Company, without audit, pursuant to rules and regulations of the Securities and Exchange Commission, and, in the opinion of management, reflect all adjustments (consisting of only normal recurring adjustments), which are necessary for a fair presentation. The consolidated results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007 included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

2. Significant accounting policies

Principles of consolidation

From January 1, 2007 to June 30, 2007, the Company’s financial statements include only the accounts of Local.com Corporation because the Company did not have any subsidiaries during that period. Subsequent to July 1, 2007, the Company’s financial statements include the accounts of Local.com Corporation and its wholly-owned subsidiary Local.com PG Acquisition Corporation. All intercompany balances and transactions were eliminated.

Intangible assets

Developed technology arising from acquisitions is recorded at cost and amortized on a straight-line basis over five years. Accumulated amortization at September 30, 2008 was $1,600,317. Accumulated amortization at December 31, 2007 was $1,265,367.

Non-compete agreements arising from acquisitions are recorded at cost and amortized on a straight-line basis over three years. Accumulated amortization at September 30, 2008 was $7,810. Accumulated amortization at December 31, 2007 was $248,335.

Patents are recorded at cost and amortized on a straight-line basis over three years. Accumulated amortization at September 30, 2008 was $186,681. Accumulated amortization at December 31, 2007 was $78,981.

Customer-related intangibles arising from acquisitions are recorded at cost and amortized on a straight-line basis over five years. Accumulated amortization at September 30, 2008 was $245,129. Accumulated amortization at December 31, 2007 was $92,129.

Goodwill

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain name are recorded at cost. Intangible assets, such as goodwill and domain name, which are determined to have an indefinite life, are not amortized in accordance with Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets. The Company performs annual impairment reviews during the fourth fiscal quarter of each year, or earlier, if indicators of potential impairment exist. The Company performed its annual impairment analysis as of December 31, 2007 and determined that no impairment existed. Future impairment reviews may result in charges against earnings to write-down the value of non-amortized assets.

Web site development costs and computer software developed for internal use

Statement of Position 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use(SOP 98-1), requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. Emerging Issues Task Force Issue No. 00-02Accounting for Web Site Development Costs(EITF 00-02), requires that costs incurred in the preliminary project and operating stage of web site development be

7

expensed as incurred and that certain costs incurred in the development stage of web site development be capitalized and amortized over its useful life. During the three and nine months ended September 30, 2008, the Company capitalized an additional $130,000 related to the web site development. Amortization of capitalized web site costs was $123,000 and $263,000 for the three and nine months ended September 30, 2008, respectively. During the three and nine months ended September 30, 2007, the Company capitalized an additional $90,000 and $311,000, respectively, related to the web site development with a useful life of three years. Amortization of capitalized web site costs was $49,000 and $134,000 for the three and nine months ended September 30, 2007, respectively. Capitalized web site costs are included in property and equipment, net.

Stock-based compensation

The Company adopted SFAS No. 123R,Share-Based Paymenton January 1, 2006, the beginning of its first quarter of fiscal 2006, using the modified-prospective transition method.

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Risk-free interest rate		3.54	%		4.77	%		3.49	%		4.77	%
Expected lives (in years)		7.0			7.0			7.0			7.0
Expected dividend yield	None			None			None			None
Expected volatility		100.00	%		100.00	%		100.00	%		100.00	%

Total stock-based compensation expense recognized for the three and nine months ended September 30, 2008 and 2007 is as follows (in thousands, except per share amount):

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Sales and marketing	$	218	$	151	$	692	$	364
General and administrative		293		168		919		661
Research and development		67		51		190		183
Total stock-based compensation expense	$	578	$	370	$	1,801	$	1,208
Basic and diluted net compensation expense per share	$	0.04	$	0.03	$	0.13	$	0.11

Net loss per share

SFAS No. 128,Earnings per Share, establishes standards for computing and presenting earnings per share. Basic net loss per share is calculated using the weighted average shares of common stock outstanding during the periods. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the as-if converted method for senior secured convertible notes, and the treasury stock method for options and warrants.

For the three and nine months ended September 30, 2008, potentially dilutive securities, which consist of options to purchase 2,856,921 shares of common stock at prices ranging from $2.00 to $16.59 per share and warrants to purchase 3,351,782 shares of common stock at prices ranging from $3.00 to $25.53 per share were not included in the computation of diluted net income per share because such inclusion would be antidilutive.

For the three and nine months ended September 30, 2007, potentially dilutive securities, which consist of options to purchase 1,938,518 shares of common stock at prices ranging from $0.40 to $16.59 per share, warrants to purchase 3,499,278 shares of common stock at prices ranging from $3.00 to $25.53 per share were not included in the computation of diluted net income per share because such inclusion would be antidilutive.

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Numerator:
Net loss	$	(1,714	)	$	(9,297	)	$	(6,397	)	$	(15,535	)
Denominator:
Denominator for basic calculation weighted average shares		14,358			13,106			14,268			10,591
Dilutive common stock equivalents:
Options		—			—			—			—
Warrants		—			—			—			—
Denominator for diluted calculation weighted average shares		14,358			13,106			14,268			10,591
Net loss per share:
Basic net loss per share	$	(0.12	)	$	(0.71	)	$	(0.45	)	$	(1.47	)
Diluted net loss per share	$	(0.12	)	$	(0.71	)	$	(0.45	)	$	(1.47	)

3. Composition of certain balance sheet and statement of operations captions

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

	September 30,			December 31,
	2008			2007
Furniture and fixtures	$	203		$	203
Office equipment		132			119
Computer equipment		1,368			1,889
Computer software		1,652			1,841
Leasehold improvements		583			583
		3,938			4,635
Less accumulated depreciation and amortization		(2,863	)		(3,162	)
Property and equipment, net	$	1,075		$	1,473

Intangible assets consisted of the following (in thousands):

	September 30,			December 31,
	2008			2007
Developed technology	$	2,233		$	2,233
Non-compete agreements		13			274
Purchased technology		—			1,239
Customer-related		1,020			1,020
Patents		431			431
Domain name		701			701
		4,398			5,898
Less accumulated amortization		(2,040	)		(2,742	)
Intangible assets, net	$	2,358		$	3,156

9

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

	Three months ended					Nine months ended
	September 30,					September 30,
	2008		2007			2008		2007
Interest income	$	72	$	175		$	290	$	342
Interest expense		—		(526	)		—		(887	)
Interest expense — non-cash		—		(6,067	)		—		(6,679	)
Interest and other income (expense), net	$	72	$	(6,418	)	$	290	$	(7,224	)

4. Operating segment information

SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information(SFAS No. 131), requires that public business enterprises report certain information about operating segments. The Company has one reporting segment: paid-search. The following table presents summary operating geographic information as required by SFAS No. 131 (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Revenue by geographic region:
United States	$	9,968	$	5,426	$	28,143	$	15,280
Europe		228		188		541		313
Total revenue	$	10,196	$	5,614	$	28,684	$	15,593

5. Stock option plans

1999 Plan

In March 1999, the Company adopted the 1999 Equity Incentive Plan (1999 Plan). The 1999 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of the Company’s stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant were exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. The Company has reserved 500,000 shares for issuance under the 1999 Plan, of which 117,396 were outstanding and 496 were available for future grant at September 30, 2008.

2000 Plan

In March 2000, the Company adopted the 2000 Equity Incentive Plan (2000 Plan). The 2000 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of the Company’s stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant were exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. The Company has reserved 500,000 shares for issuance under the 2000 Plan, of which 237,181 were outstanding and 334 were available for future grant at September 30, 2008.

10

2004 Plan

In January 2004, the Company adopted the 2004 Equity Incentive Plan (2004 Plan). In August 2004, the Company amended the 2004 Plan and in September 2004, the stockholders of the Company approved the 2004 Plan, as amended. The 2004 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of the Company’s stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant were exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. The Company has reserved 600,000 shares for issuance under the 2004 Plan, of which 479,207 were outstanding and 1,329 were available for future grant at September 30, 2008.

2005 Plan

In August 2005, the Company adopted and the stockholders of the Company approved the 2005 Equity Incentive Plan (2005 Plan). The 2005 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of the Company’s stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at the end of nine months, while the remainder of the grant were exercisable ratably over the next 27 month period, provided the optionee remained in service to the Company. For options granted in 2006 and thereafter, 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. The Company has reserved 1,000,000 shares for issuance under the 2005 Plan, of which 914,073 were outstanding and 2,008 were available for future grant at September 30, 2008.

2007 Plan

In August 2007, the Company adopted and the stockholders of the Company approved the 2007 Equity Incentive Plan (2007 Plan). The 2007 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of the Company’s stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. The Company has reserved 1,000,000 shares for issuance under the 2007 Plan, of which 999,598 were outstanding and 402 were available for future grant at September 30, 2008.

2008 Plan

In June 2008, the Company adopted and the stockholders of the Company approved the 2008 Equity Incentive Plan (2008 Plan). The 2008 Plan provides for the grant of non-qualified and incentive stock options to employees, directors and consultants of options to purchase shares of the Company’s stock. Options are granted at exercise prices equal to the fair market value of the common stock on the date of grant. 33.33% of the options are available for exercise at the end of one year, while the remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in service to the Company. The options generally expire ten years from the date of grant. The Company has reserved 1,000,000 shares for issuance under the 2008 Plan, of which 109,466 were outstanding and 890,534 were available for future grant at September 30, 2008.

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Stock option activity under the plans during the nine months ended September 30, 2008 is as follows:

	Shares			Weighted		Aggregate
				Average		Intrinsic Value
				Exercise Price		(in thousands)
Outstanding at December 31, 2007		2,703,850		$	5.04
Granted		492,789			4.32
Exercised		(186,626	)		2.13
Cancelled		(153,092	)		3.75
Outstanding at September 30, 2008		2,856,921		$	5.17	$	14
Exercisable at September 30, 2008		1,410,879		$	5.79	$	14

The weighted-average fair value at grant date for the options granted during the nine months ended September 30, 2008 and 2007 was $3.61 and $4.52 per option, respectively.

The aggregate intrinsic value of all options exercised during the nine months ended September 30, 2008 and 2007 was $353,000 and $370,000, respectively.

Stock option summary information for the plans at September 30, 2008 is as follows:

	Options Outstanding					Options Exercisable
			Weighted
			Average	Weighted				Weighted
			Remaining	Average				Average
			Contractual	Exercise				Exercise
Range of Exercise Prices	Shares		Life	Price		Shares		Price
$1.01 - $2.00		47,500	4.3 years	$	2.00		47,500	$	2.00
$2.01 - $3.00		111,828	7.1 years	$	2.40		70,428	$	2.25
$3.01 - $4.00		821,191	6.8 years	$	3.73		547,289	$	3.71
$4.01 - $5.00		1,209,408	9.1 years	$	4.67		144,694	$	4.53
$5.01 - $6.00		131,459	7.4 years	$	5.69		111,758	$	5.69
$6.01 - $7.00		113,773	7.1 years	$	6.40		106,660	$	6.38
$7.01 - $8.00		190,112	6.9 years	$	7.51		184,234	$	7.52
$8.01 - $10.00		120,000	7.6 years	$	8.76		86,666	$	8.98
$15.01 - $16.59		111,650	5.9 years	$	15.61		111,650	$	15.61
		2,856,921	7.8 years	$	5.17		1,410,879	$	5.79

6. Warrants

Warrant activity during the nine months ended September 30, 2008 is as follows:

				Weighted Average
	Shares			Exercise Price
Outstanding at December 31, 2007		3,470,278		$	7.34
Exercised		(55,371	)		3.38
Expired		(63,125	)		3.75
Outstanding and exercisable at September 30, 2008		3,351,782		$	7.47

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Warrant summary information at September 30, 2008 is as follows:

	Warrants Outstanding and Exercisable
			Weighted
			Average		Weighted
			Remaining		Average
			Contractual		Exercise
Range of Exercise Prices	Shares		Life		Price
$0.00 — $3.99		61,562		0.2	$	3.40
$4.00 — $4.99		867,662		3.4	$	4.36
$5.00 — $5.99		867,662		3.4	$	5.17
$7.00 — $7.99		537,373		3.8	$	7.89
$9.00 — $9.99		537,373		3.8	$	9.26
$10.00 — $19.99		315,750		1.0	$	10.00
$20.00 — $25.53		164,400		1.2	$	25.53
		3,351,782		3.2	$	7.47

7. Subsequent events

Stock repurchase program

On October 8, 2008, the Company’s Board of Directors approved a stock repurchase program of up to $2 million dollars of Local.com Corporation common stock. The share repurchase program authorizes Local.com to repurchase shares over the next 18 months, from time to time, through open market or privately negotiated transactions. A Rule 10b5-1 repurchase plan will allow the Company to purchase its shares at times when it ordinarily would not be in the market because of self-imposed trading blackout periods. The number of shares to be purchased and the timing of the purchases will be based on market conditions, share price and other factors. The stock repurchase program does not require the Company to repurchase any specific dollar value or number of shares and may be modified, extended or terminated by the Board of Directors at any time.

Stockholder rights plan

On October 14, 2008, the Company’s Board of Directors adopted a Stockholder Rights Plan (Rights Plan). Under the Rights Plan, a right to purchase 1/1000^th of a share of the Company’s Series A Participating Preferred Stock, at an exercise price of $10.00, will be distributed for each share of common stock held of record as of the close of business on October 22, 2008. The rights will automatically trade with the Company’s underlying common stock and no separate preferred stock purchase rights certificates will be distributed. The right to acquire preferred stock is not immediately exercisable and will become exercisable only if a person or group acquires 15 percent or more of the Company’s common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock. If any person becomes a 15 percent or more stockholder of the Company, each right (subject to certain limitations) will entitle its holder to purchase, at the rights’ then-current exercise price, a number of the Company’s common shares or of the acquirer having a market value at the time of twice the right’s per share exercise price. If the exercise price is not adjusted, such holders would be able to purchase $20 worth of common stock for $10.

The Board of Directors may redeem the rights for $0.01 per right at any time on or before the fifth day following the acquisition by a person becoming a 15 percent stockholder. Unless the rights are redeemed, exchanged or terminated earlier, they will expire on October 15, 2018.

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

This Quarterly Report onForm 10-Q or certain information included or incorporated by reference in this report, contains or may contain forward-looking statements that involve risks, uncertainties and assumptions. All statements, other than statements of historical fact, are statements that could be deemed “forward- looking statements” within the meaning of the federal securities laws. In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including customers, competitors and governmental authorities, and various other factors, including those described or referred to in Item 1A of Part II of this Quarterly Report. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, our actual results could differ materially from those expressed in the forward-looking statements and there can be no assurance that the forward-looking statements contained in this report will in fact occur.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with the audited consolidated financial statements and related notes thereto as of December 31, 2007 and for the year ended December 31, 2007 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2008.

Overview

We provide paid-search services that enable businesses to reach consumers through targeted online advertising. Our services enable businesses to advertise their products and services by listing them in our search results. We supply these sponsored listings on our web site, Local.com, and through our Local Connect private label network in response to targeted keyword searches performed by Internet users.

We generate revenue each time an Internet user initiates a search on our Local.com web site or on our Local Connect partner’s web site and clicks-through on a sponsored listing. We also generate revenue each time we display a banner advertisement on our Local.com web site and through the fulfillment of subscription advertisement listings.

Stock-based compensation

We adopted Statement of Financial Accounting Standards (SFAS) No. 123R,Share-Based Payment,on January 1, 2006, the beginning of our first quarter of fiscal 2006, using the modified-prospective transition method.

Total stock-based compensation expense recognized for the three and nine months ended September 30, 2008 and 2007 is as follows (in thousands, except per share amount):

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Sales and marketing	$	218	$	151	$	692	$	364
General and administrative		293		168		919		661
Research and development		67		51		190		183
Total stock-based compensation expense	$	578	$	370	$	1,801	$	1,208
Basic and diluted net compensation expense per share	$	0.04	$	0.03	$	0.13	$	0.11

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Results of Operations

The following table sets forth our historical operating results as a percentage of revenue for the periods indicated and is derived from our unaudited financial statements, which, in the opinion of our management, reflect all adjustments that are of a normal recurring nature, necessary to present such information fairly:

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
Search serving		13.0			19.9			14.3			18.5
Sales and marketing		82.9			94.4			83.6			94.3
General and administrative		12.5			20.3			14.3			23.4
Research and development		7.1			11.1			8.2			12.0
Amortization of intangibles		2.0			5.6			2.9			5.1
Total operating expenses		117.5			151.3			123.3			153.3
Operating loss		(17.5	)		(51.3	)		(23.3	)		(53.3	)
Interest and other income (expense), net		0.7			(114.3	)		1.0			(46.3	)
Loss before income taxes		(16.8	)		(165.6	)		(22.3	)		(99.6	)
Provision for income taxes		0.0			0.0			0.0			0.0
Net loss		(16.8)	%		(165.6)	%		(22.3)	%		(99.6)	%

Revenue

Revenue by business categories was as follows (dollars in thousands):

	Three months ended September 30,										Percent			Nine months ended September 30,										Percent
	2008		(*)			2007		(*)			change			2008		(*)			2007		(*)			change
Local domestic	$	9,799		96.1	%	$	4,804		85.6	%		104.0	%	$	26,987		94.1	%	$	12,900		82.7	%		109.2	%
Local international		228		2.2	%		188		3.3	%		21.3	%		541		1.9	%		313		2.0	%		72.8	%
Total local		10,027		98.3	%		4,992		88.9	%		100.9	%		27,528		96.0	%		13,213		84.7	%		108.3	%
National		169		1.7	%		622		11.1	%		(72.8	)%		1,156		4.0	%		2,380		15.3	%		(51.4	)%
Total revenue	$	10,196		100.0	%	$	5,614		100.0	%		81.6	%	$	28,684		100.0	%	$	15,593		100.0	%		84.0	%

 (*) —  Percent of total revenue.

Domestic local search revenue for the three months ended September 30, 2008 increased $5.0 million, or 104.0%, compared to the same period in 2007. Domestic local search revenue for the nine months ended September 30, 2008 increased $14.1 million, or 109.2%, compared to the same period in 2007. The increases in revenue were primarily due to increased monetization as our revenue per thousand visitors (RKV) increased to $278 for the three months ended September 30, 2008 from $168 for the three months ended September 30, 2007 and increased to $253 for the nine months ended September 30, 2008 from $157. The increase in RKV was a result of additional ad units per page, optimization of search results to improve page yields, greater revenue share received from our advertising partners and improved search engine marketing.

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International local search revenue for the three months ended September 30, 2008 increased $40,000, or 21.3%, compared to the same period in 2007. International local search revenue for the nine months ended September 30, 2008 increased $228,000, or 72.8%, compared to the same period in 2007. The increases in revenue were primarily due to an increase in revenue-generating click-throughs from an increase in traffic to our uk.local.com web site.

National revenue for the three months ended September 30, 2008 decreased $453,000, or 72.8%, compared to the same period in 2007. National revenue for the nine months ended September 30, 2008 decreased $1.2 million, or 51.4%, compared to the same period in 2007. The decrease in revenue was primarily due to a decrease in revenue- generating click-throughs as we have transitioned away from national search to focus our business efforts on local search.

Total revenue for the three months ended September 30, 2008 increased $4.6 million, or 81.6%, compared to the same period in 2007. Total revenue for the nine months ended September 30, 2008 increased $13.1 million, or 84.0%, compared to the same period in 2007.

The following table identified our major customers that represented greater than 10% of our total revenue in any of the period presented:

	Percentage of total revenue
	Three months ended						Nine months ended
	September 30,						September 30,
Customer	2008			2007			2008			2007
Yahoo! Inc.		43.9	%		45.6	%		45.1	%		47.4	%
Idearc Media Corp.		15.1	%		15.0	%		16.7	%		14.2	%

Operating expenses:

Operating expenses were as follows (dollars in thousands):

	Three months ended September 30,										Percent			Nine months ended September 30,										Percent
	2008		(*)			2007		(*)			change			2008		(*)			2007		(*)			change
Search serving	$	1,331		13.0	%	$	1,116		19.9	%		19.3	%	$	4,104		14.3	%	$	2,884		18.5	%		42.3	%
Sales and marketing		8,455		82.9	%		5,298		94.4	%		59.6	%		23,997		83.6	%		14,698		94.3	%		63.3	%
General and administrative		1,271		12.5	%		1,143		20.3	%		11.2	%		4,113		14.3	%		3,654		23.4	%		12.6	%
Research and development		725		7.1	%		621		11.1	%		16.7	%		2,358		8.2	%		1,871		12.0	%		26.0	%
Amortization of intangibles		200		2.0	%		315		5.6	%		(36.5	)%		798		2.9	%		796		5.1	%		0.3	%
Total operating expenses	$	11,982		117.5	%	$	8,493		151.3	%		41.1	%	$	35,370		123.3	%	$	23,903		153.3	%		48.0	%

(*) — Percent of total revenue.

Search serving

Search serving expenses for the three months ended September 30, 2008 increased $215,000, or 19.3%, compared to the same period in 2007. Search serving expenses for the nine months ended September 30, 2008 increased $1.2 million, or 42.3%, compared to the same period in 2007. The increases were primarily due to an increase in payments to our private label partners associated with the business we acquired from PremierGuide, Inc. We expect search serving expense to increase slightly as a result of an increase in business with our private label partners.

Search serving expenses were 13.0% and 19.9% of total revenue for the three months ended September 30, 2008 and 2007, respectively. Search serving expenses were 14.3% and 18.5% of total revenue for the nine months ended September 30, 2008 and 2007, respectively.

Sales and marketing

Sales and marketing expenses for the three months ended September 30, 2008 increased $3.2 million, or 59.6%, compared to the same period in 2007. Sales and marketing expenses for the nine months ended September 30, 2008 increased $9.3 million, or 63.3%, compared to the same period in 2007. The increases were primarily due to an

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increase in advertising and traffic acquisition costs (TAC) for our Local.com web site. We expect sales and marketing expenses to increase as we increase our TAC and marketing efforts for our Local.com web site.

Sales and marketing expenses were 82.9% and 94.4% of total revenue for the three months ended September 30, 2008 and 2007, respectively. Sales and marketing expenses were 83.6% and 94.3% of total revenue for the nine months ended September 30, 2008 and 2007, respectively.

General and administrative

General and administrative expenses for the three months ended September 30, 2008 increased $128,000, or 11.2%, compared to the same period in 2007. General and administrative expenses for the nine months ended September 30, 2008 increased $459,000, or 12.6%, compared to the same period in 2007. The increase was primarily due to an increase payroll and non-cash stock based compensation expense. We expect general and administrative expenses to increase slightly due to fees for LEC processing of our telesales orders.

General and administrative expenses were 12.5% and 20.3% of total revenue for the three months ended September 30, 2008 and 2007, respectively. General and administrative expenses were 14.3% and 23.4% of total revenue for the nine months ended September 30, 2008 and 2007, respectively.

Research and development

Research and development expenses for the three months ended September 30, 2008 increased $104,000, or 16.7%, compared to the same period in 2007. Research and development expenses for the nine months ended September 30, 2008 increased $487,000, or 26.0%, compared to the same period in 2007. The increases were primarily due to a decrease in capitalized research and development expenses and an increase in amortized web site development expense. We expect research and development expenses to increase due to consulting fees for additional resources to support our initiatives. During the three and nine months ended September 30, 2008, we capitalized an additional $130,000 for web site development and we amortized $123,000 and $263,000 during the three and nine months ended September 30, 2008, respectively. During the three and nine months ended September 30, 2007, we capitalized an additional $90,000 and $311,000, respectively, for web site development and we amortized $49,000 and $134,000 during the three and nine months ended September 30, 2007, respectively.

Research and development expenses were 7.1% and 16.7% of total revenue for the three months ended September 30, 2008 and 2007, respectively. Research and development expenses were 8.2% and 12.0% of total revenue for the nine months ended September 30, 2008 and 2007, respectively.

Amortization of intangibles

Amortization of intangibles expense was $200,000 and $315,000 for the three months ended September 30, 2008 and 2007, respectively. Amortization of intangibles expense was $798,000 and $796,000 for the nine months ended September 30, 2008 and 2007, respectively. This includes the amortization of developed technology and non-compete agreements associated with the Inspire acquisition, the amortization of purchased technology associated with the Atlocal asset purchase and the amortization of non-compete agreement. Amortization of intangibles also includes the amortization of customer-related intangibles and non-compete agreement associated with the PremierGuide acquisition for the three and nine months ended September 30, 2008.

Interest and other income (expense)

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

	Three months ended					Nine months ended
	September 30,					September 30,
	2008		2007			2008		2007
Interest income	$	72	$	175		$	290	$	342
Interest expense		—		(526	)		—		(887	)
Interest expense — non-cash		—		(6,067	)		—		(6,679	)
Interest and other income (expense), net	$	72	$	(6,418	)	$	290	$	(7,224	)

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Interest and other income (expense) was $72,000 and $(6.4 million) for the three months ended September 30, 2008 and 2007, respectively, representing an increase of $6.5 million. Interest and other income (expense) was $290,000 and $(7.2 million) for the nine months ended September 30, 2008 and 2007, respectively, representing an increase of $7.5 million. The increases were due to higher interest income as a result of more cash to invest and the elimination of interest expense related to the senior secured convertible notes which were converted into equity in 2007.

Provision for income taxes

There was no provision for income taxes during the three months ended September 30, 2008 or 2007. Provision for income taxes was $1,000 for the nine months ended September 30, 2008 and 2007 respectively. This amount represents the minimum amounts required for state income taxes.

Liquidity and Capital Resources

Liquidity and capital resources highlights (in thousands):

	September 30,		December 31,
	2008		2007
Cash and cash equivalents	$	12,926	$	14,258
Marketable securities		—		1,999
Total cash, cash equivalents and marketable securities	$	12,926	$	16,257
Working capital	$	12,199	$	15,002

Cash flow highlights (in thousands):

	Nine months ended September 30,
	2008			2007
Net cash used in operating activities	$	(3,612	)	$	(6,204	)
Net cash provided by (used in) investing activities	$	1,717		$	(2,488	)
Net cash provided by financing activities	$	563		$	21,542

We have funded our business, to date, primarily from issuances of equity and debt securities. Cash, cash equivalents and marketable securities were $12.9 million as of September 30, 2008 and $16.3 million as of December 31, 2007. We had working capital of $12.2 million as of September 30, 2008 and $15.0 million as of December 31, 2007.

Net cash used in operations was $3.6 million and $6.2 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease in cash used in operations was due to a lower operating loss and an increase in accounts payable partially offset by an increase in accounts receivable as a result of higher revenue.

Net cash provided by (used in) investing activities was $1.7 million and $(2.5 million) for the nine months ended September 30, 2008 and 2007, respectively. Investing activity for the nine months ended September 30, 2008 consisted of proceeds from the sale of marketable securities of $2.0 million, a decrease in restricted cash of $30,000 and capital expenditures of $315,000. Investing activity for the nine months ended September 30, 2007 included capital expenditures of $495,000, a decrease in restricted cash of $41,000 and $2.0 million related to the acquisition of PremierGuide, Inc.

Net cash provided by financing activities was $563,000 and $21.5 million for the nine months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2008, we raised gross proceeds of $397,000 from the exercise of stock options, $188,000 from the exercise of warrants and $3,000 from swing-sale profits. During the nine months ended September 30, 2007, we raised gross proceeds of $8.0 million from the issuance of senior secured convertible notes, $13.0 million from the issuance of common stock in a private placement, $324,000 from the exercise of stock options, $1.3 million from the exercise of warrants and $5,000 from swing-sale profits.

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Management believes, based upon projected operating needs, that our working capital is sufficient to fund our operations for at least the next 12 months.

Stock repurchase program

On October 8, 2008, our Board of Directors approved a stock repurchase program of up to $2 million dollars of our common stock. The share repurchase program authorizes us to repurchase shares over the next 18 months, from time to time, through open market or privately negotiated transactions. A Rule 10b5-1 repurchase plan will allow the company to purchase its shares at times when it ordinarily would not be in the market because of self-imposed trading blackout periods. The number of shares to be purchased and the timing of the purchases will be based on market conditions, share price and other factors. The stock repurchase program does not require us to repurchase any specific dollar value or number of shares and may be modified, extended or terminated by the Board of Directors at any time.

Stockholder rights plan

On October 14, 2008, our Board of Directors adopted a Stockholder Rights Plan (Rights Plan). Under the Rights Plan, a right to purchase 1/1000^th of a share of our Series A Participating Preferred Stock, at an exercise price of $10.00, will be distributed for each share of common stock held of record as of the close of business on October 22, 2008. The rights will automatically trade with our underlying common stock and no separate preferred stock purchase rights certificates will be distributed. The right to acquire preferred stock is not immediately exercisable and will become exercisable only if a person or group acquires 15 percent or more of our common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock. If any person becomes a 15 percent or more stockholder of the Company, each right (subject to certain limitations) will entitle its holder to purchase, at the rights’ then-current exercise price, a number of our common shares or of the acquirer having a market value at the time of twice the right’s per share exercise price. If the exercise price is not adjusted, such holders would be able to purchase $20 worth of common stock for $10.

The Board of Directors may redeem the rights for $0.01 per right at any time on or before the fifth day following the acquisition by a person becoming a 15 percent stockholder. Unless the rights are redeemed, exchanged or terminated earlier, they will expire on October 15, 2018.

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As of September 30, 2008, we have no exposure to market risk relating to interest rate changes or foreign currency exchange rates, commodity prices, equity prices, or other changes that affect market risk sensitive instruments.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information 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.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired

19

control objectives, and that our management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework. Based upon its assessment, management concluded that, as of September 30, 2008, our internal control over financial reporting was effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

Information on risk factors can be found in “Part I, ITEM 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007. There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

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

None

Item 3. Defaults upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None

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Item 6. Exhibits.

Exhibit
Number	Description
31.1*	Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

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SIGNATURES

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

	LOCAL.COM CORPORATION
November 7, 2008	/s/ Heath B. Clarke
Date	Heath B. Clarke
	Chief Executive Officer (principal executive officer) and Chairman
	/s/ Douglas S. Norman
	Douglas S. Norman
	Chief Financial Officer (principal financial and accounting officer) and Secretary

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EXHIBITS FILED WITH THIS REPORT

Exhibit
Number	Description
31.1*	Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

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