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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
     
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 Number)
7555 Irvine Center Drive
Irvine, CA 92618

(Address of principal executive offices, including zip code)
(949) 784-0800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filero   Smaller reporting company o
        (Do not check if a 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 o No þ
As of April 30, 2011 there were 21,231,284 shares of the registrant’s common stock, $0.00001 par value, outstanding.
 
 

 


 

LOCAL.COM CORPORATION
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 EX-31.1
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 EX-32.1

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
LOCAL.COM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
                 
    March 31,     December 31,  
    2011     2010  
    (Unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 20,213     $ 13,079  
Accounts receivable, net of allowances of $297 and $297, respectively
    13,094       11,912  
Notes receivable — current portion
    624       249  
Prepaid expenses and other current assets
    802       1,454  
 
           
 
               
Total current assets
    34,733       26,694  
 
               
Property and equipment, net
    7,405       7,119  
Goodwill
    17,339       17,339  
Intangible assets, net
    8,360       8,989  
Long-term portion of note recievable
    706       751  
Deposits
    52       52  
 
           
 
               
Total assets
  $ 68,595     $ 60,944  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 6,913     $ 7,626  
Accrued compensation
    1,461       1,906  
Deferred rent
    622       641  
Warrant liability
    1,281       2,840  
Other accrued liabilities
    421       651  
Revolving line of credit
          7,000  
Deferred revenue
    537       699  
 
           
 
               
Total current liabilities
    11,235       21,363  
 
           
 
               
Deferred income taxes
    188       188  
 
           
 
               
Total liabilities
    11,423       21,551  
 
           
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
Convertible preferred stock, $0.00001 par value; 10,000 shares authorized; none issued and outstanding for all periods presented
           
Common stock, $0.00001 par value; 65,000 shares authorized; issued and outstanding 21,224 and 16,584, respectively
           
Additional paid-in capital
    113,291       94,194  
 
               
Accumulated deficit
    (56,119 )     (54,801 )
 
           
 
               
Stockholders’ equity
    57,172       39,393  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 68,595     $ 60,944  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOCAL.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
                 
    Three Months Ended March 31,  
    2011     2010  
Revenue
  $ 16,795     $ 18,631  
 
           
 
               
Operating Expenses:
               
Cost of revenues
    10,988       10,802  
Sales and marketing
    3,282       3,098  
General and administrative
    2,610       1,914  
Research and development
    1,528       1,112  
Amortization and write-down of intangibles
    1,198       1,230  
 
           
Total operating expenses
    19,606       18,156  
 
           
 
               
Operating income (loss)
    (2,811 )     475  
 
               
Interest and other income (expense), net
    (55 )     (56 )
Change in fair value of warrant liability
    1,559       (272 )
 
           
 
               
Income (loss) before income taxes
    (1,307 )     147  
 
               
Provision for income taxes
    11       13  
 
           
 
               
Net income (loss)
  $ (1,318 )   $ 134  
 
           
 
               
Per share data:
               
 
               
Basic net income (loss) per share
  $ (0.07 )   $ 0.01  
 
           
Diluted net income (loss) per share
  $ (0.07 )   $ 0.01  
 
           
 
               
Basic weighted average shares outstanding
    20,241       14,605  
Diluted weighted average shares outstanding
    20,241       15,918  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOCAL.COM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
                 
    Three Months Ended March 31,  
    2011     2010  
Cash flows from operating activities:
               
Net income (loss)
  $ (1,318 )   $ 134  
Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities:
               
Depreciation and amortization
    1,847       1,476  
Stock-based compensation expense
    972       624  
Change in fair value of warrant liability
    (1,559 )     272  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,182 )     (1,914 )
Note receivable
    45        
Prepaid expenses and other
    652       53  
Accounts payable and accrued liabilities
    (1,407 )     1,219  
Deferred revenue
    (162 )     (154 )
 
           
Net cash (used in) provided by operating activities
    (2,112 )     1,710  
 
           
Cash flows from investing activities:
               
Capital expenditures
    (935 )     (356 )
Issuance of notes receivable
    (375 )      
Purchases of intangible assets
    (520 )     (1,216 )
 
           
Net cash used in investing activities
    (1,830 )     (1,572 )
 
           
Cash flows from financing activities:
               
Proceeds from issuance of common stock:
               
Exercise of options
    74       716  
Public offering
    18,227        
Payment of financing related costs
    (225 )      
Payment of revolving credit facility
    (7,000 )      
 
           
Net cash provided by financing activities
    11,076       716  
 
           
Net increase in cash and cash equivalents
    7,134       854  
Cash and cash equivalents, beginning of the period
    13,079       10,080  
 
           
Cash and cash equivalents, end of the period
  $ 20,213     $ 10,934  
 
           
Supplemental cash flow information:
               
Interest paid
  $ 31     $ 26  
 
           
Income taxes paid
  $ 9     $ 169  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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LOCAL.COM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Summary of Significant Accounting Policies
Nature of operations
We are a local media advertising company that enables local businesses and consumers to find each other and connect. We operate online businesses that collectively reach over 20 million monthly unique visitors across over 100,000 websites, and we serve over 37,000 small business customers with a variety of web hosting and local online advertising products. Our Owned & Operated business unit (“O&O”) manages our flagship property, Local.com, and a proprietary network of over 20,000 local websites, which collectively reaches over 15 million monthly unique visitors. Our Network business unit (“Network”) operates (i) a leading private label local syndication network of over 1,100 U.S. regional media websites, (ii) 80,000 third-party local websites, and (iii) our own organic feed of local businesses plus third-party advertising feeds, both of which are focused primarily on local consumers, to a distribution network of hundreds of websites. Our Sales & Ad Services business unit (“SAS”) provides over 37,000 direct monthly subscribers with web hosting or web listing products. We use patented and proprietary search technologies and systems, to provide consumers with relevant search results for local businesses, products and services. By providing our users and those of our network partners with robust, current, local information about businesses and other offerings in their local area, we have attracted an audience of users that our direct advertisers and advertising partners desire to reach. In May, 2011, the Company officially launched Spreebird, the company’s new daily deal service, website and brand. Spreebird represents the company’s new Social Buying business unit (“Social Buying”).
Principles of consolidation and basis of presentation
Our consolidated 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. In April 2010, Local.com PG Acquisition Corporation merged with and into Local.com Corporation and the separate corporate entity of Local.com PG Acquisition Corporation ceased to exist. We have evaluated all subsequent events through the date the consolidated financial statements were issued.
The unaudited interim condensed consolidated financial statements as of March 31, 2011 and for the three months ended March 31, 2011 and 2010, included herein, have been prepared by us, 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 results of operations for the three months ended March 31, 2011 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, 2010 included in our Form 10-K/A filed with the Securities and Exchange Commission on April 29, 2011.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
Our financial instruments consist principally of cash and cash equivalents, accounts receivable, long and short term notes receivable, revolving line of credit and accounts payable. The fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The carrying amount of the revolving line of credit approximates its fair value because the interest rate on these instruments fluctuates with market interest rates. The long term note receivable has a fixed interest rate considered to be market related and therefore the carrying value also approximates its fair value. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
The fair value of the warrant liability is determined using the Black-Scholes valuation method, a “Level 3” input, based on the quoted price of our common stock, volatility based on the historical market activity of our stock, the expected life based

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on the remaining contractual term of the warrants and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants’ contractual life.
Intangible Assets
Intangible assets are amortized over their estimated useful lives, generally on a straight-line basis over two to four years. The small business subscriber relationships are amortized based on how we expect the customer relationships to contribute to future cash flows. As a result, amortization of the small business subscriber relationships intangible assets is accelerated over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four.
2. Notes receivable
During 2010 the Company entered into a promissory note and security agreement with one of its customers related to the sale of domain names and services. The promissory note totaled $1,000,000, carrying interest at 5% per annum payable in twelve equal quarterly payments of $54,000 beginning on March 31, 2011, and continuing on the last day of each calendar quarter thereafter until December 31, 2013, and three additional annual balloon payments of $80,000, $210,000, and $157,238 due on the 31st day of December of 2011, 2012, and 2013, respectively. The Company considered the credit quality of the customer and determined that no allowance for credit losses is necessary. As of March 31, 2011, no portion of the note receivable balance was past due. The note receivable is secured by the domain names sold to the customer.
The Company also entered into five separate short term promissory notes with Digital Post Interactive, Inc., a Nevada corporation (“DGLP”) totaling $375,000 at March 31, 2011. Subsequent to March 31, 2011, DGLP notified the Company that they intend to seek bankruptcy protection. In conjunction with DGLP filing for bankruptcy, the Company entered into an asset purchase agreement with DGLP for the acquisition of substantially all of the assets of Rovion, Inc. (“Rovion”) a wholly-owned subsidiary of DGLP. As part of the asset purchase agreement, cash paid by the Company for the acquisition of assets will be used to repay the promissory notes in full. The asset purchase agreement will be completed upon the satisfaction of certain closing conditions, including the approval of the transaction by the bankruptcy court. On May 4, 2011 the bankruptcy court approved the asset purchase agreement.
3. Intangible assets
Intangible assets, net, consisted of the following (in thousands):
                                                                 
    March 31, 2011     December 31, 2010  
    Gross             Net     Weighted     Gross             Net     Weighted  
    Carrying     Accumulated     Carrying     Average     Carrying     Accumulated     Carrying     Average  
    Amount     Amortization     Amount     Useful Life     Amount     Amortization     Amount     Useful Life  
                            (years)                             (years)  
Developed technology
  $ 4,488     $ (2,584 )   $ 1,904       4     $ 3,933     $ (2,446 )   $ 1,487       4  
Non-compete agreements
    98       (32 )     66       2       83       (25 )     58       2  
Customer-related
    12,939       (8,556 )     4,383       4       12,939       (7,534 )     5,405       4  
Patents
    431       (431 )           3       431       (431 )           3  
Domain names — indefinite life
    1,601             1,601               1,601             1,601          
Trademarks and Trade Name
    500       (94 )     406       4       500       (62 )     438       4  
 
                                                   
 
  $ 20,057     $ (11,697 )   $ 8,360             $ 19,487     $ (10,498 )   $ 8,989          
 
                                                   
4. Acquisition
On January 1, 2011, the Company entered into an asset purchase agreement for the purchase of all the assets of iTwango. The assets acquired consisted of an early stage group-buying technology platform that allows advertisers to submit discounted offers to consumers who receive those geo-targeted offers daily via email and various other sources. The Company made an initial payment of $300,000 and issued a total of 7,639 shares, worth approximately $50,000, for the assets. The initial agreement included certain earnout provisions for additional payments of up to $100,000. The Company made an initial earnout payment of $10,000 in January 2011. On February 25, 2011 the Company entered into a modification and release agreement whereby the Company made an additional payment of $90,000 in exchange for the release of any future liability to the Company as it relates to the earnout payments noted in the original asset purchase agreement. The assets acquired are being used in the Company’s new social buying business unit. As a result of this transaction, the Company recognized approximately $450,000 of amortizable intangible assets.
5. Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. We perform annual impairment reviews during the fourth

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fiscal quarter of each year or earlier if indicators of potential impairment exist. For goodwill, we engage an independent appraiser to assist management in the determination of the fair value of our reporting unit and compare the resulting fair value to the carrying value of the reporting unit to determine if there is goodwill impairment. For other intangible assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment. We performed our annual impairment analysis for our indefinite lived intangible assets, as of December 31, 2010 and determined that the estimated fair value of the reporting unit substantially exceeded its carrying value and therefore no impairment existed. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets.
6. Web site development costs and computer software developed for internal use
Generally accepted accounting principles in the Unites States (“U.S. GAAP”) require that development costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP further requires that costs incurred in the preliminary project and operating stage of web site development be expensed as incurred and that certain costs incurred in the development stage of web site development be capitalized and amortized over its useful life. During the three months ended March 31, 2011, we capitalized $898,000, related to web site development. Amortization of capitalized web site costs was $381,000, for the three months ended March 31, 2011. During the three months ended March 31, 2010, we capitalized $212,000 related to web site development. Amortization of capitalized web site costs was $114,000 for the three months ended March 31, 2010. Capitalized web site costs are included in property and equipment, net.
7. Net income (loss) per share
Basic net income (loss) per share is calculated using the weighted average shares of common stock outstanding during the periods. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for options and warrants.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share amounts):
                 
    Three Months Ended March 31,  
    2011     2010  
Numerator:
               
Net income (loss)
  $ (1,318 )   $ 134  
 
           
Denominator:
               
Denominator for historical basic calculation weighted average shares
    20,241       14,605  
Dilutive common stock equivalents:*
               
Options
          966  
Warrants
          347  
 
           
 
               
Denominator for historical diluted calculation weighted average shares
    20,241       15,918  
 
           
Net income (loss) per share:
               
Historical basic net income (loss) per share
  $ (0.07 )   $ 0.01  
 
           
Historical diluted net income (loss) per share
  $ (0.07 )   $ 0.01  
 
           
 
*   For the three months ended March 31, 2011, potentially dilutive securities, which consist of options to purchase 4,104,161 shares of common stock at prices ranging from $1.28 to $16.59 per share and warrants to purchase 1,477,936 shares of common stock at prices ranging from $4.32 to $8.09 per share were not included in the computation of diluted net income per share because such inclusion would be antidilutive.
In January 2011, the Company consummated a public offering of 4,600,000 shares of common stock, at a price of $4.25 per share, for total proceeds, net of issue costs, of $18.2 million.

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8. Composition of certain balance sheet and statement of operations captions
Property and equipment, net, consisted of the following (in thousands):
                 
    March 31,     December 31,  
    2011     2010  
Furniture and fixtures
  $ 852     $ 835  
Office equipment
    399       397  
Computer equipment
    2,848       2,737  
Computer software
    7,046       6,249  
Leasehold improvements
    893       886  
 
           
 
    12,038       11,104  
Less accumulated depreciation and amortization
    (4,633 )     (3,985 )
 
           
Property and equipment, net
  $ 7,405     $ 7,119  
 
           
Interest and other income (expense), net, consisted of the following (in thousands):
                 
    Three Months Ended March 31,  
    2011     2010  
Interest income
  $ 17     $ 6  
Interest expense
    (72 )     (62 )
 
           
Interest and other income (expense), net
  $ (55 )   $ (56 )
 
           
9. Credit facility
On June 28, 2010, we entered into a Loan and Security Agreement (the “LSA”) with Silicon Valley Bank (“SVB”). The LSA provides us with a revolving credit facility of up to $30.0 million (the “Revolving Line”). The maturity date of the Revolving Line is June 28, 2013.
The LSA allows us to choose whether borrowings made from the Revolving Line bear interest either at the prime rate announced from time to time by SVB or the prime rate plus 0.5% or 1%, or at LIBOR plus 2%, 2.5% or 3%, depending in the case of both prime rate and LIBOR rate borrowings on whether our leverage ratio is less than one, at least one and not greater than two, or greater than two. The leverage ratio is our consolidated funded indebtedness to our consolidated EBITDA for the twelve months ending on the date of determination. For the quarter ended March 31, 2011 we elected the LIBOR rate as the interest rate for the facility.
Our ability to borrow under the Revolving Line is subject to various ongoing conditions precedent, described in further detail in the LSA. Some of these conditions are subject to SVB’s judgment in its sole discretion as to specified matters such as whether or not there has been any material impairment in our results of operation or financial condition. The LSA contains customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain restrictions on dispositions of our assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The LSA also contains customary events of default, including payment defaults and a breach of representations and warranties and covenants. If an event of default occurs and is continuing, SVB has certain rights and remedies under the LSA, including declaring all outstanding borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of set-off.
We must meet certain financial covenants during the term of the Revolving Line, including maintaining a minimum adjusted quick ratio of 1.25 to 1, which is a ratio of our unrestricted cash and cash equivalents plus net billed accounts receivable and investments that mature in fewer than 12 months to our current liabilities minus deferred revenue, warrant liability and plus 25% of any outstanding credit extensions under the Revolving Line. We are also required to maintain a Leverage Ratio of not greater than 2.5 at the end of each fiscal quarter through June 30, 2012, and 2.0 at the end of each fiscal quarter thereafter. In addition, our quarterly adjusted EBITDA must equal at least $1,000,000 (this minimum amount is for financial covenant purposes only, and does not represent projections of our future financial results). As of March 31, 2011 we had no balance outstanding on the revolving line of credit and therefore such financial covenants were not applicable. Should we draw on the revolving line, we cannot assure you that we will remain in compliance with our financial covenants in the future. If we are unable to comply with our financial covenants, the lender may declare an event of default under the loan agreement, in which event all outstanding borrowings would become immediately due and payable and no further amounts would be available under the Revolving Line. The Company’s results for the first quarter of 2011 are such that the Company did not satisfy the

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quarterly EBITDA requirement of $1,000,000 under the Revolving Line. As such, we did not have any funds available under the revolving credit line with Silicon Valley Bank Line at the end of the first quarter of 2011 and do not expect to have any availability until such time as our quarterly results satisfy certain covenant requirements.
We paid a facility fee of $75,000 to SVB on June 28, 2010, pursuant to the LSA. Additionally, there is an annual facility fee of 0.25% of the unused portion of the Revolving Line, calculated as specified in the LSA. In addition, we paid $225,000 in professional fees related to closing the LSA.
All amounts borrowed under the facility are secured by a general security interest on our assets, except for our intellectual property, which we have instead agreed to remain unencumbered during the term of the LSA.
The Revolving Line replaced a $10 million credit facility with Square 1 Bank, entered into on June 26, 2009, pursuant to a loan and security agreement . The loan and security agreement expired by its terms on June 25, 2010, and we paid off the $3 million balance at that time.
During the first quarter of 2011 the Company repaid the total amount outstanding of $7 million on the Revolving Line.
10. Operating information
U.S. GAAP regarding disclosures about segments of an enterprise requires that public business enterprises report entity-wide disclosures. Although we have aligned our operations into three business units, these business units meet the criteria for aggregation into one reporting segment: paid-search. The following table presents summary operating geographic and product information as required by the entity-wide disclosure requirements (in thousands):
                 
    Three Months Ended March 31,  
    2011     2010  
Revenue by geographic region:
               
United States
  $ 16,795     $ 18,631  
 
               
Revenue by product:
               
Pay-Per-Click (PPC)
  $ 12,427     $ 14,797  
Local Promote (Subscription)
    963       1,554  
Domain Sales and Services
    1,873       1,173  
Banner Advertisement
    1,532       1,095  
Local Connect (License)
          12  
 
           
Total revenue
  $ 16,795     $ 18,631  
 
           
11. Stock-based compensation
Stock option activity under the equity incentive plans during the three months ended March 31, 2011 was as follows:
                         
            Weighted     Aggregate  
            Average     Intrinsic Value  
    Shares     Exercise Price     (in thousands)  
Outstanding at December 31, 2010
    4,037,768     $ 5.02          
Granted
    172,300       4.43          
Exercised
    (31,919 )     2.33          
Cancelled
    (73,988 )     4.43          
 
                     
Outstanding at March 31, 2011
    4,104,161     $ 5.03     $ 1,310  
 
                 
 
                       
Exercisable at March 31, 2011
    2,038,507     $ 4.98     $ 868  
 
                 
The weighted-average fair value at grant date for the options granted during the three months ended March 31, 2011 and 2010 was $3.05 and $5.30 per option, respectively.

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The aggregate intrinsic value of all options exercised during the three months ended March 31, 2011 and 2010 was $87,000 and $585,000, respectively.
The following table summarizes information regarding options outstanding and exercisable at March 31, 2011:
                                         
    Options Outstanding        
            Weighted             Options Exercisable  
            Average     Weighted             Weighted  
            Remaining     Average             Average  
            Contractual     Exercise             Exercise  
Range of Exercise Prices   Shares     Life     Price     Shares     Price  
$1.01 - $2.00
    419,120     5.9 years   $ 1.57       303,801     $ 1.57  
$2.01 - $3.00
    105,310     7.0 years     2.31       44,375       2.33  
$3.01 - $4.00
    726,060     6.4 years     3.69       434,790       3.71  
$4.01 - $5.00
    1,221,860     7.0 years     4.57       640,197       4.63  
$5.01 - $6.00
    282,591     7.4 years     5.50       152,951       5.64  
$6.01 - $7.00
    839,182     9.1 years     6.18       119,105       6.40  
$7.01 - $8.00
    221,862     5.1 years     7.49       190,112       7.51  
$8.01 - $9.00
    190,000     7.7 years     8.51       55,000       8.98  
$9.01 - $10.00
    15,000     4.2 years     9.90       15,000       9.90  
$10.01 - $16.59
    83,176     3.3 years     15.62       83,176       15.62  
 
                                   
 
    4,104,161     7.1 years   $ 5.03       2,038,507     $ 4.98  
 
                                   
The fair values of these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
                 
    Three Months Ended March 31,  
    2011     2010  
Risk-free interest rate
    2.04 %     3.28 %
Expected lives (in years)
  5.2 years     6.1 years  
Expected dividend yield
  None     None  
Expected volatility
    85.35 %     92.60 %
Total stock-based compensation expense recognized for the three months ended March 31, 2011 and 2010 was as follows (in thousands, except per share amount):
                 
    Three Months Ended March 31,  
    2011     2010  
Cost of revenues
  $ 86     $ 20  
Sales and marketing
    319       156  
General and administrative
    448       301  
Research and development
    119       147  
 
           
Total stock-based compensation expense
  $ 972     $ 624  
 
           
Basic and diluted net stock-based compensation expense per share
  $ 0.05     $ 0.04  
 
           
12. Stock repurchase program
On August 4, 2010, our Board of Directors approved a stock repurchase program of up to $2.0 million of Local.com Corporation common stock. The share repurchase program is authorized for 12 months and authorizes us to repurchase shares from time to time through open market or privately negotiated transactions. From time to time, we may enter into a Rule 10b5-1 trading plan that will allow us to purchase our shares at times when we 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. Any Rule 10b5-1 trading plan we enter into in connection with carrying out our stock repurchase program will not, however, be capable of modification or extension once established. During the year ended December 31, 2010, we repurchased 270,400 shares of common stock at an average price of $4.52 per share and an aggregate purchase price of approximately $1.2 million. During the quarter ended March 31, 2011 the board of directors terminated the stock repurchase plan.

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13. Warrants
On January 20, 2011, in connection with the completion of the offer and sale to the underwriter of 4,600,000 shares of common stock and in accordance with the anti-dilution provisions contained in each of the warrants to purchase up to 537,373 shares of common stock at an exercise price of $7.89 per share that were issued in a private placement transaction on August 1, 2007 (the “Series A Warrants”) and the warrants to purchase up to 537,373 shares of common stock at an exercise price of $9.26 per share that were issued in the same private placement transaction on August 1, 2007 (the “Series B Warrants”), the exercise price of the Series A Warrants and the Series B Warrants was reduced to $7.02 per share and $8.09 per share, respectively, and the Company issued an additional 66,207 Series A Warrants at an exercise price of $7.02 per share, which are immediately exercisable (the “New Series A Warrants”), and an additional 77,707 Series B Warrants at an exercise price of $8.09 per share, which are immediately exercisable (the “New Series B Warrants” and together with the New Series A Warrants, the “New Warrants”). The Series A Warrants and the Series B Warrants are exercisable until February 1, 2013 and February 3, 2014, respectively, and the New Series A Warrants and the New Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively.
Warrant activity for the three months ended March 31, 2011 was as follows:
                 
            Weighted  
            Average  
    Shares     Exercise Price  
Outstanding at December 31, 2010
    1,334,022     $ 7.88  
Issued
    143,914       7.60  
Exercised
           
Expired
           
 
           
Outstanding at March 31, 2011
    1,477,936     $ 7.11  
 
           
Exercisable at March 31, 2011
    1,477,936     $ 7.11  
 
           
The following table summarizes information regarding warrants outstanding and exercisable at March 31, 2011:
                         
    Warrants Outstanding and Exercisable  
            Average        
            Remaining     Weighted  
            Contractual     Average  
Range of Exercise Price   Shares     Life     Exercise Price  
$4.00 - $4.99
    129,638     0.9 years   $ 4.60  
$5.00 - $5.99
    129,638     0.9 years     5.41  
$7.00 - $7.99
    603,580     1.8 years     7.02  
$9.00 - $9.99
    615,080     2.8 years     8.09  
 
                   
 
    1,477,936     2.1 years   $ 7.11  
 
                   

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14. Fair Value Measurement of Assets and Liabilities
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 (in thousands):
                         
    As of     Active Markets     Significant  
    March 31,     for Identical     Unobservable  
Description   2011     Assets (Level 1)     Inputs (Level 3)  
Assets:
                       
Cash and cash equivalents:
                       
Bank deposits and money market funds
  $ 20,213     $ 20,213     $  
 
                 
Total financial assets
  $ 20,213     $ 20,213     $  
 
                 
Liabilities:
                       
Warrant liability
  $ 1,281     $     $ 1,281  
 
                 
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 (in thousands):
                         
            Quoted Prices in        
    As of     Active Markets     Significant  
    December 31,     for Identical     Unobservable  
Description   2010     Assets (Level 1)     Inputs (Level 3)  
Assets:
                       
Cash and cash equivalents:
                       
Bank deposits and money market funds
  $ 13,079     $ 13,079     $  
 
                 
Total financial assets
  $ 13,079     $ 13,079     $  
 
                 
Liabilities:
                       
Warrant liability
  $ 2,840     $     $ 2,840  
 
                 
Our financial assets are valued using market prices on active markets (Level 1) obtained from real-time quotes for transactions in active exchange markets involving identical assets. As of March 31, 2011, our warrant liability was based on measurement at fair value without observable market values that required a high level of judgment to determine fair value (Level 3) using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as our stock price, risk-free interest rates and expected volatility.
The fair value of the warrant liability was estimated at March 31, 2011 grant using a Black-Scholes option pricing model with the following assumptions:
                 
    Exercise Price of  
    Related Warrants  
    $8.09     $7.02  
Risk-free interest rate
    1.29 %     0.80 %
Expected lives (in years)
  2.8 years     1.8 years  
Expected dividend yield
  None     None  
Expected volatility
    81.80 %     70.22 %
The following table presents a reconciliation for our warrant liability measured and recorded at fair value on a recurring basis, using significant unobservable inputs (Level 3) (in thousands):
         
    Level 3  
Balance at December 31, 2010
  $ 2,840  
Change in fair value of warrant liability
    (1,559 )
 
     
Balance at March 31, 2011
  $ 1,281  
 
     

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15. Subsequent Events
Rovion
On February 11, 2011, we entered into an asset purchase agreement with Digital Post Interactive, Inc., a Nevada corporation, and its wholly-owned subsidiary, Rovion, Inc., a Delaware corporation, pursuant to which we would acquire substantially all of the assets of Rovion (the “Rovion Agreement”). On March 23, 2011, the Company, DGLP and Rovion, agreed to mutually terminate the Rovion Agreement following notice from DGLP and Rovion to the Company that they intended to seek bankruptcy protection. Subsequently, the Company, DGLP and Rovion entered into negotiations to purchase the assets of Rovion in accordance with the bankruptcy proceedings.
On April 4, 2011, the Company entered into an Asset Purchase Agreement (“Agreement”) with DGLP and Rovion, pursuant to which the Company acquired substantially all of the assets of Rovion on May 5, 2011. The assets acquired include:
    A rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including “In-Person” the online video spokesperson, as well as virtually all other forms of rich media advertisements;
 
    A rich media advertising toolset, known as the Rovion Ad Management Platform (“RAMP”), targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RAMP control panel;
 
    A workflow/tracking toolset that facilitates the schedules and tracking of In-Person ad requests, scheduling of actors and studios and the approval of scripts; and
 
    Two professional quality green-screen studios and the maintenance of a network of relationships for access to additional professional quality green-screen studios throughout the United States.
The purchase of the Rovion assets was completed following the satisfaction of all closing conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion. In accordance with the terms of the Agreement, the Company paid DGLP and Rovion $2,196,000 less $485,000 in loans owed by DGLP to Rovion. The transaction was funded from the Company’s cash on hand. Allocation of the purchase price will be determined based on a fair market valuation of the assets acquired. Except for liabilities arising from certain contracts to be assumed by the Company from and after the closing of the transaction and accounts payable related to Rovion, no other liabilities will be assumed by the Company in connection with the transaction.
The initial accounting for the Rovion asset purchase is not yet complete. We are currently analyzing the fair value of each major class of assets acquired and liabilities assumed. These fair value calculations and judgments are complex and not yet completed as of the date of this report.
Krillion
On April 29, 2011, the Company entered into a Stock Purchase Agreement (“SPA”) with Krillion, Inc., a Delaware corporation (“Krillion”), all of the stockholders of Krillion and the stockholders’ agent to purchase all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash. The transaction was funded from the Company’s cash on hand. The purchase price was subject to working capital adjustments as outlined in the SPA.
Krillion provides consumers and its business partner’s real-time information on where specific branded products are sold, and which retailer, at a particular retail location, has them in stock. Krillion aggregates and structures consumer product information in real time, to create an up-to-the-minute index of products across various brands, at various retailer locations in multiple cities across the United States. Krillion further provides the following products and services —
    patent-pending local product search platform, the Krillion Localization Engine™ that helps connect customers with in-stock products at local retailers;
 
    real-time StockCheck™ tool that enables web-savvy shoppers to find, compare and buy products at particular retail locations near them;
 
    the ability for consumers to take advantage of in-store pickup and other convenience services offered by multichannel retailers and;
 
    local product information that is available as a data service that powers the websites and applications of manufacturers and content providers, mobile providers and applications, and the rich media for marketers

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The Company, Krillion and the Krillion stockholders also agreed to establish a $1.0 million escrow fund to secure the Company’s rights to seek indemnification under the Agreement, as well as any adjustment to the purchase price that might be required. The escrow fund will terminate the day on or after all the funds have been paid out of the escrow fund.
The initial accounting for the Krillion stock purchase is not yet complete. We are currently analyzing the fair value of each major class of assets acquired and liabilities assumed. These fair value calculations and judgments are complex and not yet completed as of the date of this report.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q or certain information included or incorporated by reference in this report, contains or may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed “forward-looking statements” within the meaning of the federal securities laws. These statements relate to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” and “potential” or the negative of such terms or other comparable terminology. In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social, economic, market, legal or regulatory circumstances, changes in our business or growth strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including customers, competitors and governmental authorities, and various other factors, including those described or referred to in Item 1A of Part II of this Quarterly Report. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions prove incorrect, our actual results could differ materially from those expressed in the forward-looking statements and there can be no assurance that the forward-looking statements contained in this report will in fact occur.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the attached condensed consolidated financial statements and related notes thereto, and with the audited consolidated financial statements and related notes thereto as of December 31, 2010 and for the year ended December 31, 2010 included in our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 29, 2011.
Overview
We are a local media advertising company that enables local businesses and consumers to find each other and connect. We operate online businesses that collectively reach over 20 million monthly unique visitors across over 100,000 websites, and we serve over 37,000 small business customers with a variety of web hosting and local online advertising products.
Our Owned & Operated business unit manages our flagship property, Local.com, and a proprietary network of over 20,000 local websites, which reaches over 15 million monthly unique visitors. Our Network business unit operates (i) a leading private label local syndication network of over 1,100 U.S. regional media websites, (ii) 80,000 third-party local websites, and (iii) our own organic feed of local businesses plus third-party advertising feeds, both of which are focused primarily on local consumers to a distribution network of hundreds of websites. Our Sales & Ad Services business unit provides over 37,000 direct monthly subscribers with web hosting or web listing products. Our Octane business, which is a part of our Sales & Ad Services business unit, significantly adds to the products and services we are able to offer our direct customers, including the sourcing, registration, development and hosting of geo-category based local website domains. We use patented and proprietary search technologies and systems, to provide consumers with relevant search results for local businesses, products and services. By providing our users and those of our network partners with robust, current, local information about businesses and other offerings in their local area, we have attracted an audience of users that our direct advertisers and advertising partners desire to reach.
We launched Local.com in August of 2005, our local syndication network in July 2007, and we expanded our sales and advertiser services offerings to include a larger number of direct service subscribers throughout 2009 and 2010. In the third quarter of 2010, we also acquired Octane360. We have been regularly developing and deploying new features and functionality to each of these channels designed to enhance the experience of our users and increase the value of our audience to our advertisers. With a strategic focus on three key drivers for our business — traffic, technology and advertisers — we believe we can continue to grow through our own efforts and the acquisition of complementary businesses and technologies intended to accelerate our growth.
In May, 2011, the Company launched Spreebird, the company’s new daily deal service, website and brand. Spreebird represents the company’s new Social Buying business unit.
Recent Developments
On January 14, 2011, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with respect to the offer and sale (the “Offering”) of 4,000,000 shares of our common stock at a price to the public of $4.25 per share. Under the terms of the Underwriting Agreement, we granted the underwriter an option, exercisable for 30 days, to purchase up to an additional 600,000 shares of our common stock (the “Option Shares”) at the same purchase price to cover over-allotments, which was exercised in full by the underwriter on January 18, 2011. The offering of our common stock was made pursuant to our effective shelf registration statement on Form S-3 (Registration No. 333-147494) (the “Registration Statement”), including a related prospectus as supplemented by a Preliminary Prospectus Supplement dated January 13, 2011 and

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Prospectus Supplement dated January 14, 2011, which we filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended. The Registration Statement was set to expire on January 15, 2011, but was extended as a result of our filing on January 14, 2011 of a new shelf registration statement on Form S-3 to register 8,000,000 shares of its common stock in replacement of the expiring Registration Statement (the “New Shelf Registration Statement”). While we sold 4,600,000 shares of our common stock in the Offering which reduced the number of available shares under the New Registration Statement, we intend to increase the number of available shares so that we will have up to 8,000,000 shares available for future offerings under the replacement registration statement. Net proceeds to the Company from the sale of shares in the Offering, after deducting underwriting discounts and commissions and other related expenses, was approximately $18.2 million.
On January 20, 2011, in connection with the completion of the Offering and in accordance with the anti-dilution provisions contained in each of the warrants to purchase up to 537,373 shares of common stock at an exercise price of $7.89 per share that were issued in a private placement transaction on August 1, 2007 and the warrants to purchase up to 537,373 shares of common stock at an exercise price of $9.26 per share that were issued in the same private placement transaction on August 1, 2007, the exercise price of the Series A Warrants and the Series B Warrants was reduced to $7.02 per share and $8.09 per share, respectively, and the Company issued an additional 66,207 Series A Warrants at an exercise price of $7.02 per share, which are immediately exercisable, and an additional 77,707 Series B Warrants at an exercise price of $8.09 per share, which are immediately exercisable. The Series A Warrants and the Series B Warrants are exercisable until February 1, 2013 and February 3, 2014, respectively, and the New Series A Warrants and the New Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively.
In January 2011, we entered into an asset purchase agreement with iTwango for the purchase of a deal-of-the-day technology platform. The purchase price, including earnout payments, totaled approximately $450,000 paid in a combination of cash and our common stock.
On February 11, 2011, the Company entered into an asset purchase agreement with Digital Post Interactive, Inc., a Nevada corporation, and its wholly-owned subsidiary, Rovion, Inc., a Delaware corporation, pursuant to which the Company would acquire substantially all of the assets of Rovion.
On March 23, 2011, the Company, DGLP and Rovion, agreed to mutually terminate the Rovion Agreement following notice from DGLP and Rovion to the Company that they intended to seek bankruptcy protection. Subsequently, the Company, DGLP and Rovion entered into negotiations to purchase the assets of Rovion in accordance with the bankruptcy proceedings.
On April 4, 2011, the Company entered into an Asset Purchase Agreement with DGLP and Rovion, pursuant to which the Company acquired substantially all of the assets of Rovion on May 5, 2011. The purchase of the Rovion assets was completed following the satisfaction of all closing conditions, including approval by the bankruptcy court hearing the bankruptcy proceeding of Rovion. In accordance with the terms of the Agreement, the Company paid DGLP and Rovion $2,196,000 less $485,000 in loans owed by DGLP to Rovion. The transaction was funded from the Company’s cash on hand. Allocation of the purchase price will be determined based on a fair market valuation of the assets acquired. Except for liabilities arising from certain contracts to be assumed by the Company from and after the closing of the transaction and accounts payable related to Rovion, no other liabilities will be assumed by the Company in connection with the transaction.
Outlook for Our Business
Local search allows consumers to search for local businesses, products or services by including geographic area, zip code, city name, or other geographically targeted search parameters in their search requests.
According to a September 2010 study, The Kelsey Group estimates that the local search market in the United States will grow from $4.2 billion in 2010 to $8.6 billion by 2014. Local businesses, those that principally serve consumers within a fifty mile radius of their location, are increasingly shifting their newspaper and print yellow pages ad spend to online advertising, some of which is directed towards local search advertising.
We believe that local search will be an increasingly significant segment of the online advertising industry. Although search advertising has been used primarily by businesses that serve the national market, local businesses are increasingly using online advertising to attract local customers. Our O&O and Network business units are designed to serve this market of consumers and advertisers, which we believe will provide an opportunity for growth from increased local search volumes by consumers, as well as increased competition by advertisers to display their ad listings in front of those consumers.
Local search is relatively new, and as a result it is difficult to determine our current market share or predict our future market share. Our revenue, profitability and future growth depend not only on our ability to execute our business plan, but also, among other things, on acceptance of our services, the growth of the paid-search market, our ability to effectively compete with other providers of local search, and paid-search technologies and services.

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We have also taken steps to diversify our revenue sources, while maintaining our focus on local offerings, including through the acquisition of Octane360 and more recently the acquisition of the iTwango deal-of-the-day technology platform and its relaunch as Spreebird. Subsequent to quarter-end we also acquired all of the outstanding capital stock of Krillion, a local shopping data and content provider, and substantially all of the assets of Rovion, which includes a self-service rich media advertising platform.
We intend to continue making significant investments in the Spreebird business and Rovion and Krillion acquisitions as part of our initiative to diversify our revenue and promote the future growth of the Company.
As we also continue to invest in our core offerings, while pursuing the acquisitions noted above, we have increased our operating expenses, mainly related to traffic acquisition costs to bring users to our Local.com website, the deployment of new features and functionality across business units and the support of our acquired companies. We also intend to continue to increase our sales and marketing expenses to promote our Local.com website.
In the fourth quarter of 2010, in connection with Yahoo!’s integration of its advertising service with Microsoft’s Bing, we experienced a material reduction in the revenue per click (“RPC”) that Yahoo! pays for clicks on their advertisements on our sites. The material reduction in RPC from Yahoo! had a material adverse effect on our revenue and earnings results for the fourth quarter of 2010 and first quarter 2011. We continue to actively work with Yahoo! to improve RPC and have also been pursuing a number of other strategies, including, but not limited to, optimization of our SEM campaigns as well as optimization and deployment of advertiser feeds from existing and new partners. In the first quarter 2011 we normalized our operations to this shift in RPC from Yahoo! while continuing our efforts to maximize our revenue and earnings opportunities with Yahoo!. These and other strategies are intended to preserve revenue and net income. This lower level of monetization from Yahoo! is expected to continue through 2011. We cannot give assurances that our efforts to improve monetization with Yahoo! or any of the alternative strategies will be successful.
Sources of Revenue
We generate revenue primarily on our Local.com website and Network from both direct and indirect advertiser relationships, via:
    click-throughs on sponsored listings;
 
    calls to cost-per-call advertiser listings;
 
    lead generation;
 
    banner ads;
 
    subscription advertiser listings;
 
    domain sales and services; and
 
    web hosting services.
Operating Expenses
Cost of Revenues
Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards and fees for LEC billings). We advertise on large search engine websites such as Google, Yahoo!, MSN/Bing and Ask.com, as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to our Local.com website. During the three months ended March 31, 2011, approximately 64% of our overall traffic was purchased from other search engine websites. During the three months ended March 31, 2011, advertising costs to drive consumers to our Local.com website were $8.1 million of which $6.1 million was attributable to Google, Inc. If we are unable to advertise on these websites, or the cost to advertise on these websites increases, our financial results will likely suffer materially.

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Sales and Marketing
Sales and marketing expenses consist of sales commissions and salaries for our internal and outsourced sales force, customer service staff and marketing personnel, advertising and promotional expenses. We record advertising costs and sales commission in the period in which the expense is incurred. We expect our sales and marketing expenses will increase in absolute dollars as we continue to experience growth.
General and Administrative
General and administrative expenses consist of salaries and other costs associated with employment of our executive, finance, human resources and information technology staff, legal, tax and accounting, and professional service fees.
Research and Development
Research and development expenses consist of salaries and other costs of employment of our development staff, outside contractor costs and amortization of capitalized website development costs.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenue and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies also described in more detail in Note 1 to our consolidated financial statements included in our 2010 Annual Report on Form 10-K, involve judgments and estimates that are significant to the presentation of our consolidated financial statements.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.
We generate revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement, the fulfillment of subscription listing obligations, or the delivery of Octane360 products to our customers. We enter into contracts to distribute sponsored listings and banner advertisements with our direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). We recognize our portion of the bid price based upon our contractual agreement. Sponsored listings and banner advertisements are included as search results in response to keyword searches performed by consumers on our Local.com website and network partner websites. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. We have analyzed our revenue recognition and determined that our web hosting revenue will be recognized net of direct costs. All other revenue is recognized on a gross basis.
During the year ended December 31, 2010 we entered into multiple-deliverable arrangements for the sale of domains and for providing services relating to such domains. We evaluated the agreements in accordance with the provision of the revenue recognition topic that addresses multiple-deliverable revenue arrangements as updated in October 2009. Although such updated provisions were only effective for fiscal periods beginning on or after June 15, 2010, we opted to adopt such provisions early. The multiple-deliverable arrangements entered into consisted of various units of accounting such as the sale of domains, website development fees, content delivery and hosting fees. Such elements were considered separate units of accounting due to each element having value to the customer on a stand-alone basis. The selling price for each of the units of accounting was determined using a combination of vendor-specific objective evidence and management estimates. Revenue relating to domains was recognized with the transfer of title of such domains. Revenue for website development, content delivery and hosting fees are recognized as such services are performed or delivered. The agreements did not include any cancellation, termination or refund provisions that we consider probable.

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Allowance for Doubtful Accounts
Our management estimates the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. If we believe that our customers’ financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.
As of March 31, 2011, two customers, Yahoo! and SuperMedia represented 59% of our total accounts receivable. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.
Goodwill and Other Intangible Assets
Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For goodwill, we engage an independent appraiser to assist management in the determination of the fair value of our reporting unit and compare the resulting fair value to the carrying value of the reporting unit to determine if there is goodwill impairment. For other intangible assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to determine if there is impairment. We performed our annual impairment analysis for our indefinite lived intangible assets, as of December 31, 2010 and determined that the estimated fair value of the reporting unit substantially exceeded its carrying value and therefore no impairment existed. Future impairment reviews may result in charges against earnings to write-down the value of intangible assets.
Stock Based Compensation
Total stock-based compensation expense recognized for the three months ended March 31, 2011 and 2010 is as follows (in thousands, except per share amount):
                 
    Three Months Ended March 31,  
    2011     2010  
Cost of revenues
  $ 86     $ 20  
Sales and marketing
    319       156  
General and administrative
    448       301  
Research and development
    119       147  
 
           
Total stock-based compensation expense
  $ 972     $ 624  
 
           
Basic and diluted net stock-based compensation expense per share
  $ 0.05     $ 0.04  
 
           

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Results of Operations
The following table sets forth our historical operating results as a percentage of revenue for the three months ended March 31, 2011 and 2010:
                 
    Three Months Ended March 31,  
    2011     2010  
Revenue
    100.0 %     100.0 %
 
           
Operating expenses:
               
Cost of revenues
    65.4       58.0  
Sales and marketing
    19.5       16.6  
General and administrative
    15.5       10.3  
Research and development
    9.1       6.0  
Amortization and write-down of intangibles
    7.1       6.6  
 
           
Total operating expenses
    116.7       97.5  
 
           
 
               
Operating income (loss)
    (16.7 )     2.5  
Interest and other income (expense), net
    (0.3 )     (0.3 )
Change in fair value of warrant liability
    9.3       (1.5 )
 
           
Income (loss) before income taxes
    (7.8 )     0.8  
 
               
Provision for income taxes
    0.1       0.1  
 
           
 
               
Net income (loss)
    (7.8) %     0.7 %
 
           
Three months ended March 31, 2011 and 2010
Revenue (dollars in thousands)
                                         
    Three Months Ended March 31,     Percent  
    2011     (*)     2010     (*)     change  
    (in thousands)             (in thousands)                  
Owned and operated
  $ 10,242       61.0 %   $ 10,717       57.5 %     (4.4 )%
Network
    3,723       22.2 %     5,189       27.9 %     (28.3 )%
Sales and advertiser services
    2,830       16.8 %     2,725       14.6 %     3.9 %
 
                             
Total revenue
  $ 16,795       100.0 %   $ 18,631       100.0 %     (9.9 )%
 
                             
Owned and operated revenue for the three months ended March 31, 2011 decreased $0.5 million, or 4.4%, compared to the same period in 2010. The decrease in revenue is primarily due to decreased monetization as our revenue per thousand visitors (“RKV”) decreased to $211 for the three months ended March 31, 2011 from $260 for the three months ended March 31, 2010 partially offset by an increase in traffic on our Local.com website. The decrease in RKV was a result of decreased RPC from Yahoo!, Inc., our largest customer. The decrease in RPC was due to the Yahoo!/Bing alliance, which resulted in changes to the Yahoo! search and advertising platform. The decline in the revenue from Yahoo! started during the fourth quarter of 2010. This lower level of monetization from Yahoo! is expected to continue through 2011.
Network revenue for the three months ended March 31, 2011 decreased $1.5 million, or 28.3%, compared to the same period in 2010. The decrease is primarily due to a decrease in network partners on the Company’s distribution network due to the decreased RPC caused by the Yahoo!/Bing alliance.
Sales and advertiser services revenue for the three months ended March 31, 2011 remained relatively flat compared to the same period in 2010.

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The growth in small business subscribers in prior years was a result of acquisitions of subscriber bases and internal and outsourced sales efforts. The following table provides the revenue relating to the acquisition of subscriber bases and revenue relating to internal and outsourced sales efforts (dollars in thousands):
                                         
    Three Months Ended March 31,     Percent  
    2011     (*)     2010     (*)     change  
Revenue from internal and outsourced sales
  $ 824       29.1 %   $ 825       30.3 %     (0.1 )%
Revenue from acquired bases
    2,006       70.9 %     1,900       69.7 %     5.6 %
 
                             
Total sales and advertiser services revenue
  $ 2,830       100.0 %   $ 2,725       100.0 %     3.9 %
 
                             
Sales and advertiser services revenue from acquired subscriber bases for the three months ended March 31, 2011 increased only 5.6%, compared to the same periods in 2010. Sales and advertiser services revenue from internal and outsourced sales efforts for the three months ended March 31, 2011 was consistent compared to the same period in 2010.
The base of small business subscribers decreased to approximately 37,000 on March 31, 2011 from approximately 48,000 on March 31, 2010. The decreased in the small business subscriber base is due to the Company’s decision to suspend acquisitions of LEC-billed subscriber bases in order to concentrate resources around the Octane360 product suite powered by our recently acquired Octane360 platform. As a result, we anticipate revenue from our existing subscribers to decline. Initially, the expected growth in revenue from Octane360 products is not expected to fully offset the decline in revenue from existing subscribers.
Based on the above, total revenue for the three months ended March 31, 2011, decreased 9.9%, compared to the same period in 2010.
The following table identifies our major customers across all product lines and on our Local.com website that represented greater than 10% of our total revenue in the periods presented:
                 
    Percentage of Total Revenue  
    Three Months Ended March 31,  
Customer   2011     2010  
Yahoo! Inc.
    37.0 %     49.4 %
SuperMedia Inc.
    22.7 %     20.7 %
Operating expenses:
Operating expenses were as follows (dollars in thousands):
                                         
    Three Months Ended March 31,        
            Percent of             Percent of        
            Total             Total     Percent  
    2011     Revenue     2010     Revenue     Change  
Cost of revenues
  $ 10,988       65.4 %   $ 10,802       58.0%       1.7 %
Sales and marketing
    3,282       19.5 %     3,098       16.6%       5.9 %
General and administrative
    2,610       15.5 %     1,914       10.3%       36.4 %
Research and development
    1,528       9.1 %     1,112       6.0%       37.4 %
Amortization and write-down of intangibles
    1,198       7.1 %     1,230       6.6%       (2.6 )%
 
                             
 
                                       
Total operating expenses
  $ 19,606       116.7 %   $ 18,156       97.5%       8.0 %
 
                             
Cost of revenues
Cost of revenues expense for the three months ended March 31, 2011 remained relatively flat compared to the same period in 2010. During the period we had decreased revenue share payments to distribution network partners due to decrease revenue relating to the distribution network, offset by increased traffic acquisition costs associated with driving more consumers to our Local.com website.

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Sales and marketing
Sales and marketing expenses for the three months ended March 31, 2011 remained relatively flat compared to the same period in 2010 although somewhat higher as a percent of revenue.
General and administrative
General and administrative expenses for the three months ended March 31, 2011 increased by 36.4% compared to the same periods in 2010. The increase is due to higher personnel-related costs as a result of increased headcount, partially offset by a decrease in professional fees.
Research and development
Research and development expenses for the three months ended March 31, 2011 increased by 37.4%, compared to the same periods in 2010. The increase is mainly due to higher personnel-related costs and consulting fees as we continue to invest in our systems and technology platforms. We capitalized an additional $898,000 of research and development expenses for website development and amortized $381,000 during the three months ended March 31, 2011. We capitalized an additional $212,000 of research and development expenses for website development and amortized $114,000 of capitalized website development costs during the three months ended March 31, 2010.
Amortization of intangibles
Amortization of intangibles expense was $1,198,000 for the three months ended March 31, 2011, compared to $1,230,000 for the three months ended March 31, 2010. The majority of the intangible asset amortization relates to customer-related intangible assets which are amortized over the expected life of the assets based on the expected cash flow from the customers. As a result, amortization of the small business subscriber relationships intangible assets is accelerated over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four.
Interest and other income (expense), net
Interest and other income (expense), net for the three months ended March 31, 2011 remained relatively flat compared to the same period in 2010. Interest expense increased due to interest on the Revolving Line’s available and outstanding balance and amortization of fees related to the Revolving Line, offset by an increase in interest income due to interest earned on an outstanding note receivable.
Provision for income taxes
Provision for income taxes was $11,000 for the three months ended March 31, 2011 primarily due to anticipated tax amortization on indefinite-lived assets, partially offset by California research and development credits.
Liquidity and Capital Resources
Liquidity and capital resources highlights (in thousands):
                 
    March 31,     December 31,  
    2011     2010  
Cash and cash equivalents
  $ 20,213     $ 13,079  
 
           
Working capital
  $ 24,779     $ 8,171  
 
           
Cash flow highlights (in thousands):
                 
    Three Months Ended March 31,  
    2011     2010  
Net cash (used in) provided by operating activities
  $ (2,112 )   $ 1,710  
Net cash used in investing activities
    (1,830 )     (1,572 )
Net cash provided by financing activities
    11,076       716  

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We have funded our business, to date, primarily from issuances of equity and debt securities; however, during the years ended December 31, 2010 and 2009, we generated positive cash flow from operations. Cash and cash equivalents were $20.2 million as of March 31, 2011 and $13.1 million as of December 31, 2010. We had working capital of $24.8 million as of March 31, 2011 and $8.1 million as of December 31, 2010. Additionally, pursuant to the loan and security agreement with Silicon Valley Bank that we entered into on June 28, 2010, as further discussed below, we have secured a revolving credit facility of up to $30 million, based on certain formulas as set forth below. During the three months ended March 31, 2011, we repaid the total balance outstanding of $7 million to Silicon Valley Bank.
Net cash used in operating activities was $2.1 million for the three months ended March 31, 2011. Net income adjusted for non-cash charges (adding back depreciation and amortization , stock-based compensation expense and change in fair value of warrant liability) used was approximately $0.1 million. Changes in operating assets and liabilities used cash of $2.1 million. Net cash provided by operating activities was $1.7 million for the three months ended March 31, 2010, primarily from the net income adjusted for non-cash items. The change from net cash provided by operations to net cash used in operations from the prior year period is primarily due to decreased bottom-line results driven by lower revenue and decreased operating margins over the same period.
There are four primary drivers that affect cash provided by or (used in) operations: net income (loss); non-cash adjustments to net income (loss); changes in accounts receivable; and changes in accounts payable. For the three months ended March 31, 2011 the terms of our accounts receivable and accounts payable remained unchanged.
The table below substantiates the change in net cash provided by (used in) operating activities for the three months ended March 31, 2011 and 2010 (in thousands):
                         
    Three Months Ended March 31,        
    2011     2010     Change  
Net income (loss)
  $ (1,318 )   $ 134     $ (1,452 )
Non-cash (1)
    1,260       2,372       (1,112 )
 
                 
Subtotal
    (58 )     2,506       (2,564 )
AR, AP and Other
    (2,054 )     (796 )     (1,258 )
 
                 
Net cash (used in) provided by operations
  $ (2,112 )   $ 1,710     $ (3,822 )
 
                 
 
(1)   Includes depreciation, amortization, change in fair value of warrant liability and non-cash expense related to stock option issuances.
Net cash used in investing activities was $1.8 million for the three months ended March 31, 2011 and consisted of $935,000 for capital expenditures, $520,000 related to purchases of intangible assets and $375,000 related to the issuance of notes receivable. Net cash provided by financing activities was $11.1 million for the three months ended March 31, 2011 and primarily consisted of $18.2 million from a public offering of the Company’s common stock partially offset by the repayment of the $7.0 million outstanding balance of the revolving credit facility.
Net cash used in investing activities was $1.6 million for the three months ended March 31, 2010 and consisted of $356,000 for capital expenditures and $1.2 million related to purchases of customer-related intangible assets. Net cash provided by financing activities was $716,000 for the three months ended March 31, 2010 from the proceeds from exercise of stock options.
Management believes, based upon projected operating needs, that our working capital is sufficient to fund our operations for at least the next 12 months.
Credit facility
On June 28, 2010, we entered into a Loan and Security Agreement (the “LSA”) with Silicon Valley Bank (“SVB”). The LSA provides us with a revolving credit facility of up to $30.0 million (the “Revolving Line”). The maturity date of the Revolving Line is June 28, 2013.
The LSA allows us to choose whether borrowings made from the Revolving Line bear interest either at the prime rate announced from time to time by SVB or the prime rate plus 0.5% or 1%, or at LIBOR plus 2%, 2.5% or 3%, depending in the case of both prime rate and LIBOR rate borrowings on whether our leverage ratio is less than one, at least one and not greater than two, or greater than two. The leverage ratio is our consolidated funded indebtedness to our consolidated EBITDA for the twelve months ending on the date of determination. For the quarter ended March 31, 2011 we elected the LIBOR rate as the interest rate for the facility.

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Our ability to borrow under the Revolving Line is subject to various ongoing conditions precedent, described in further detail in the LSA. Some of these conditions are subject to SVB’s judgment in its sole discretion as to specified matters such as whether or not there has been any material impairment in our results of operation or financial condition. The LSA contains customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain restrictions on dispositions of our assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The LSA also contains customary events of default, including payment defaults and a breach of representations and warranties and covenants. If an event of default occurs and is continuing, SVB has certain rights and remedies under the LSA, including declaring all outstanding borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of set-off.
We must meet certain financial covenants during the term of the Revolving Line, including maintaining a minimum adjusted quick ratio of 1.25 to 1, which is a ratio of our unrestricted cash and cash equivalents plus net billed accounts receivable and investments that mature in fewer than 12 months to our current liabilities minus deferred revenue, warrant liability and plus 25% of any outstanding credit extensions under the Revolving Line. We are also required to maintain a Leverage Ratio of not greater than 2.5 at the end of each fiscal quarter through June 30, 2012, and 2.0 at the end of each fiscal quarter thereafter. In addition, our quarterly adjusted EBITDA must equal at least $1,000,000 (this minimum amount is for financial covenant purposes only, and does not represent projections of our future financial results). As of March 31, 2011 we had no balance outstanding on the revolving line of credit and therefore such financial covenants were not applicable. Should we draw on the revolving line, we cannot assure you that we will remain in compliance with our financial covenants in the future. If we are unable to comply with our financial covenants, the lender may declare an event of default under the loan agreement, in which event all outstanding borrowings would become immediately due and payable and no further amounts would be available under the Revolving Line. The Company’s results for the first quarter of 2011 are such that the Company did not satisfy the quarterly EBITDA requirement of $1,000,000 under the Revolving Line. As such, we did not have any funds available under the revolving credit line with Silicon Valley Bank Line at the end of the first quarter of 2011 and do not expect to have any availability until such time as our quarterly results satisfy certain covenant requirements.
We paid a facility fee of $75,000 to SVB on June 28, 2010, pursuant to the LSA. Additionally, there is an annual facility fee of 0.25% of the unused portion of the Revolving Line, calculated as specified in the LSA. In addition, we paid $225,000 in professional fees related to closing the LSA.
All amounts borrowed under the facility are secured by a general security interest on our assets, except for our intellectual property, which we have instead agreed to remain unencumbered during the term of the LSA.
The Revolving Line replaced a $10 million credit facility with Square 1 Bank, entered into on June 26, 2009, pursuant to a loan and security agreement. The loan and security agreement expired by its terms on June 25, 2010, and we paid off the $3 million balance at that time.
During the first quarter of 2011 the Company repaid the total amount outstanding of $7 million on the Revolving Line.
Shelf Registration Statement
On January 14, 2011, we filed the New Registration Statement with the Securities and Exchange Commission pursuant to which we registered 8,000,000 shares of our common stock. On March 23, 2011 we filed an amendment to the New Registration Statement with an effective date of April 12, 2011. The shelf registration statement is set to expire in April 2014. We may periodically offer all or a portion of the remaining shares of common stock registered on the New Registration Statement, when it becomes effective, at prices and on terms to be announced when and if the shares of common stock are so offered. The specifics of any future offerings, along with the use of proceeds of any common stock offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. Our ability to sell our common stock, including on terms and at prices that are acceptable to the Company, is subject to market conditions and other factors, such as contractual commitments of our previously issued warrants.
Stock repurchase program
On August 4, 2010, our Board of Directors approved a stock repurchase program of up to $2.0 million of Local.com Corporation common stock. The share repurchase program is authorized for 12 months and authorizes us to repurchase shares from time to time through open market or privately negotiated transactions. From time to time, we may enter into a Rule 10b5-1 trading plan that will allow us to purchase our shares at times when we 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. Any Rule 10b5-1 trading plan we enter into in connection with carrying out our stock repurchase program will not, however, be capable of modification or extension once established. During the year ended December 31, 2010, we repurchased

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270,400 shares of common stock at an average price of $4.52 per share and an aggregate purchase price of approximately $1.2 million. During the quarter ended March 31, 2011 the board of directors terminated the stock repurchase plan.
Subsequent events
On April 4, 2011, the Company entered into an Asset Purchase Agreement with DGLP and its wholly-owned subsidiary Rovion, pursuant to which the Company acquired on May 5, 2011 substantially all of the assets of Rovion. The assets acquired include:
    A rich media advertising platform, which allows for the sale, creation, delivery and tracking of animated and video-based ads for both national and local advertisers, including “In-Person” the online video spokesperson, as well as virtually all other forms of rich media advertisements;
 
    A rich media advertising toolset, known as the Rovion Ad Management Platform , targeted to local media publishers and medium to small ad agencies, which allows for self-service rich media ad creation by professional media developers and novices alike, and subsequently enables the delivery, tracking and reporting of all ad activity through the RAMP control panel;
 
    A workflow/tracking toolset that facilitates the schedules and tracking of In-Person ad requests, scheduling of actors and studios and the approval of scripts; and
 
    Two professional quality green-screen studios and the maintenance of a network of relationships for access to additional professional quality green-screen studios throughout the United States.
The transaction was completed following the satisfaction of certain closing conditions, including the approval of the bankruptcy court currently hearing the bankruptcy proceedings of Rovion. DGLP received $2,196,000 in cash of which $485,000 was used to repay certain promissory notes made by DGLP and held by the Company. The transaction was funded from the Company’s cash on hand. Allocation of the purchase price will be determined based on a fair market valuation of the assets acquired. Except for liabilities arising from certain contracts to be assumed by the Company from and after the closing of the transaction and accounts payable related to Rovion, no other liabilities will be assumed by the Registrant in connection with the transaction.
On April 29, 2011, the Company entered into a Stock Purchase Agreement (“SPA”) with Krillion, Inc., a Delaware corporation, all of the stockholders of Krillion and the stockholders’ agent to purchase all of the outstanding shares of Krillion for an aggregate purchase price of $3.5 million in cash. The transaction was funded from the Company’s cash on hand. The purchase price was subject to working capital adjustments as outlined in the SPA.
Krillion provides consumers and its business partner’s real-time information on where specific branded products are sold, and which retailer, at a particular retail location, has them in stock. Krillion aggregates and structures consumer product information in real time, to create an up-to-the-minute index of products across various brands, at various retailer locations in multiple cities across the United States. Krillion further provides the following products and services:
    patent-pending local product search platform, the Krillion Localization Engine™ that helps connect customers with in-stock products at local retailers;
 
    real-time StockCheck™ tool that enables web-savvy shoppers to find, compare and buy products at particular retail locations near them;
 
    the ability for consumers to take advantage of in-store pickup and other convenience services offered by multichannel retailers and;
 
    local product information that is available as a data service that powers the websites and applications of manufacturers and content providers, mobile providers and applications, and the rich media for marketers
The Company, Krillion and the Krillion stockholders also agreed to establish a $1.0 million escrow fund to secure the Company’s rights to seek indemnification under the Agreement, as well as any adjustment to the purchase price that might be required. The escrow fund will terminate the day on or after all the funds have been paid out of the escrow fund.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Other than the repayment of the $7 million outstanding Revolving Line with SVB, which eliminated our risk as it relates to fluctuation in interest rates, there have been no material changes in our disclosures regarding market risk since December 31, 2010. See also Item 7A in our Annual Report on Form 10-K/A for the year ended December 31, 2010 for further sensitivity analysis regarding our market risk related to interest rates and derivative liabilities.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we may be subject to a variety of legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of intellectual property rights and claims arising in connection with our services. Other than the GEOTAG discussed below, we are not currently a party to any material legal proceedings.
GEOTAG Litigation
On July 23, 2010, a lawsuit alleging patent infringement was filed in the United States District Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a Delaware corporation with its principal offices in Plano, Texas. The complaint alleges that we infringe U.S. Patent No. 5,930,474 (hereinafter, the “ ‘474 Patent”) as a result of the operation of our website at www.local.com. GEOTAG, Inc. purports to be the rightful assignee of all right, title and interest in and to the ‘474 Patent. The complaint seeks unspecified amounts of damages and costs incurred, including attorney fees, as well as a permanent injunction preventing us from continuing those activities that are alleged to infringe the ‘474 Patent. We are investigating the merits of the claims and intend to vigorously defend ourselves.
Leite Litigation
On March 9, 2011, a putative class action was filed in the Superior Court for the State of California, County of Orange, against us, DGLP and the directors of DGLP, Michael Sawtell, Steven Dong, and Brian Goss by Chris Leite, an individual and purported shareholder of DGLP on behalf of himself and others alleged to be similarly situated. The complaint alleges that DGLP and its directors have breached their fiduciary duties to DGLP’s shareholders and that we aided and abetted such breach in connection with the proposed acquisition by us of the assets of Rovion, Inc., the wholly-owned subsidiary of DGLP, pursuant to that certain Asset Purchase Agreement by and between DGLP and the Company dated February 11, 2011. On April 11, 2011 this putative class action lawsuit was dismissed.
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/A for the year ended December 31, 2010 filed with the Securities and Exchange Commission on April 29, 2011. There were no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K/A for the year ended December 31, 2010.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
All issuances of unregistered securities during the quarter ended March 31, 2011 have been previously disclosed.
Item 3. Defaults Upon Senior Securities
None
Item 4. Removed and Reserved
None
Item 5. Other Information
None

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Item 6. Exhibits
     
Exhibit    
Number   Description
1.1(1)
  Underwriting Agreement dated January 14, 2011, by and between Registrant and Canaccord Genuity Inc.
 
   
3.1 (2)
  Amended and Restated Certificate of Incorporation of the Registrant
 
   
3.2 (3)
  Amendment to Restated Certificate of Incorporation of the Registrant
 
   
3.2 (4)
  Amended and Restated Bylaws of the Registrant
 
   
3.3 (5)
  Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation
 
   
3.4 (6)
  Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.
 
   
4.1 (6)
  Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto).
 
   
10.1 (7)#
  Fourth Amended and Restated Employment Agreement by and between the Registrant and Kenneth S. Cragun dated January 5, 2011.
 
   
10.2 (8)
  Asset Purchase Agreement by and among the Registrant and DigitalPost Interactive, Inc. dated February 11, 2011.
 
   
10.3 (9)
  Promissory note by and among the Registrant and DigitalPost Interactive, Inc. dated March 10, 2011.
 
   
10.4 (10)
  Termination of Asset Purchase Agreement dated February 11, 2011 by and among the Registrant and DigitalPost Interactive, Inc. dated March 23, 2011.
 
   
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.
 
#   Indicates management contract or compensatory plan.
 
(1)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2011.
 
(2)   Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.
 
(3)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
 
(4)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
 
(5)   Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
 
(6)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.
 
(7)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2011.
 
(8)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 16, 2011.

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(9)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 15, 2011.
 
(10)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 29, 2011.

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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
 
 
Date May 10, 2011   /s/ Heath B. Clarke    
  Heath B. Clarke   
  Chief Executive Officer
(principal executive officer) and Chairman 
 
 
     
Date May 10, 2011  /s/ Kenneth S. Cragun    
  Kenneth S. Cragun   
  Chief Financial Officer (principal financial
and accounting officer) and Secretary 
 

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INDEX TO EXHIBITS
     
Exhibit    
Number   Description
1.1(1)
  Underwriting Agreement dated January 14, 2011, by and between Registrant and Canaccord Genuity Inc.
 
   
3.1 (2)
  Amended and Restated Certificate of Incorporation of the Registrant
 
   
3.2 (3)
  Amendment to Restated Certificate of Incorporation of the Registrant
 
   
3.2 (4)
  Amended and Restated Bylaws of the Registrant
 
   
3.3 (5)
  Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation
 
   
3.4 (6)
  Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.
 
   
4.1 (6)
  Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan, Summary of Rights as Exhibit C thereto).
 
   
10.1 (7)#
  Fourth Amended and Restated Employment Agreement by and between the Registrant and Kenneth S. Cragun dated January 5, 2011.
 
   
10.2 (8)
  Asset Purchase Agreement by and among the Registrant and DigitalPost Interactive, Inc. dated February 11, 2011.
 
   
10.3 (9)
  Promissory note by and among the Registrant and DigitalPost Interactive, Inc. dated March 10, 2011.
 
   
10.4 (10)
  Termination of Asset Purchase Agreement dated February 11, 2011 by and among the Registrant and DigitalPost Interactive, Inc. dated March 23, 2011.
 
   
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.
 
#   Indicates management contract or compensatory plan.
 
(1)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2011.
 
(2)   Incorporated by reference from the Registrant’s Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on September 16, 2004.
 
(3)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
 
(4)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
 
(5)   Incorporated by reference from the Registrant’s Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
 
(6)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.
 
(7)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 5, 2011.

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(8)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 16, 2011.
 
(9)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 15, 2011.
 
(10)   Incorporated by reference from the Registrant’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 29, 2011.

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