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Local.com 10-K 2009

Documents found in this filing:

  1. Amendment To Form 10-K
  2. Ex-23.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Complete submission text file
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0000950134-09-006919.txt : 20090403
0000950134-09-006919.hdr.sgml : 20090403
20090403160633
ACCESSION NUMBER:		0000950134-09-006919
CONFORMED SUBMISSION TYPE:	10-K/A
PUBLIC DOCUMENT COUNT:		5
CONFORMED PERIOD OF REPORT:	20071231
FILED AS OF DATE:		20090403
DATE AS OF CHANGE:		20090403

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			LOCAL.COM
		CENTRAL INDEX KEY:			0001259550
		STANDARD INDUSTRIAL CLASSIFICATION:	SERVICES-BUSINESS SERVICES, NEC [7389]
		IRS NUMBER:				330849123
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K/A
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	001-34197
		FILM NUMBER:		09732175

	BUSINESS ADDRESS:	
		STREET 1:		ONE TECHNOLOGY DRIVE
		STREET 2:		BUILDING G
		CITY:			IRVINE
		STATE:			CA
		ZIP:			92618
		BUSINESS PHONE:		(949) 784-0800

	MAIL ADDRESS:	
		STREET 1:		ONE TECHNOLOGY DRIVE
		STREET 2:		BUILDING G
		CITY:			IRVINE
		STATE:			CA
		ZIP:			92618

	FORMER COMPANY:	
		FORMER CONFORMED NAME:	INTERCHANGE CORP
		DATE OF NAME CHANGE:	20030813


10-K/A
1
a52024e10vkza.htm
AMENDMENT TO FORM 10-K



e10vkza






 

 





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K/A


(Amendment No. 1)















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



For the fiscal year ended December 31, 2007















               
    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: 000-50989


LOCAL.COM CORPORATION


(Exact name of registrant as specified in its charter)
























               
    Delaware
         33-0849123
    (State or other jurisdiction of 

incorporation or organization)
         (I.R.S. Employer

Identification No.)



One Technology Drive, Building G

Irvine, CA 92618

(Address of principal executive offices)(Zip Code)


(949) 784-0800

Registrant’s telephone number, including area code


Securities registered pursuant to Section 12(b) of the Act:




























               
    Title of each class
         Name of each exchange on which registered
     
          
    Common Stock, par value $0.00001
         Nasdaq Capital Market



Securities registered pursuant to Section 12(g) of the Act:


Common Stock, par value $0.00001

(Title of class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o     No þ


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o     No þ


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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 o          Non-accelerated filer   o

(Do not check if a smaller reporting company)		         Smaller reporting company þ 

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


The aggregate market value of voting and non-voting common equity held by non-affiliates of the
issuer was approximately $63,446,144.56 based on the last reported sale price of registrant’s
common stock on June 30, 2007 as reported by Nasdaq Capital Market.


As of February 29, 2008, the number of shares of the registrant’s common stock outstanding:
14,204,110


Documents incorporated by reference: None



 

 








 




 














EXPLANATORY NOTE



Local.com Corporation (the “Company”) is filing this Amendment No. 1 to Form 10-K on Form 10-K/A
(this “Amendment”) to amend its Annual Report on Form 10-K for the fiscal year ended December 31,
2007, which was originally filed with the Securities and Exchange Commission on March 10, 2008 (the
“Initial Filing”), to amend Item 8 and Item 9A(T) in the Initial Filing by replacing each such sections
in their entirety with Item 8 and Item 9A(T), respectively, set forth in this Amendment.


The
Company has revised its disclosure in the “Revenue
recognition” and “Traffic acquisition costs” sections
of Note 1 to the Company’s consolidated financial statements
included in Item 8 of the Amendment to include expanded disclosure
related to its accounting policies related to revenue recognition and traffic acquisition costs.
In addition, the Amendment includes disclosure required by Item 9A(T) of Form 10-K that was
inadvertently omitted in the Initial Filing. The cover page to this Amendment has also been
revised to correct certain disclosures that were incorrect on the cover page of the Initial Filing
due to clerical errors.


Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
the Company has filed the certifications required by Rule 13a-14(a) or 15d-14(a) of the Exchange
Act.


Except for the amended disclosure contained herein, this Amendment does not modify or update
disclosures contained in the Initial Filing. This Amendment should be read in conjunction with the
Company’s other filings made with the Securities and Exchange Commission subsequent to the date of
the Initial Filing.


1




 











Item 8. Financial Statements and Supplemental Data



Our consolidated financial statements, including the report of our independent registered public
accounting firm, are included beginning at page F-1 immediately following the signature page of
this Report.



Item 9A(T). Controls and Procedures



Evaluation of Disclosure Controls and Procedures



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


As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation,
under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2007. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of December 31, 2007.
 

In designing and evaluating the disclosure controls and procedures, our management recognized that
any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and that our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.
 

Management’s Report on Internal Control over Financial Reporting


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


Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2007. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based upon its assessment, management concluded that, as of
December 31, 2007, our internal control over financial reporting was effective.


This Annual Report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to
attestation by our registered public accounting firm pursuant to rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this Annual Report.


Changes in Internal Control over Financial Reporting



There have been no changes in our internal control over financial reporting during the last fiscal
year that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.


2




 





PART IV




Item 15. Exhibits, Financial Statement Schedules
































































               
    Exhibit          
    Number         Description
    
 
          
    
23.1*
         Consent of Haskell & White LLP, independent registered public accounting firm.
    
 
          
    
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.



3




 










SIGNATURES



In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of the 3rd day of April,
2009.






























                         
         LOCAL.COM CORPORATION

 		     
         By: /s/ Heath B. Clarke
 		     
         Heath B. Clarke      
         Chief Executive Officer and Chairman      
     



In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.































































































































                         
    Signature         Title         Date
    
 
                    
    
/s/ Heath B. Clarke
 

Heath B. Clarke
         Chairman, Chief Executive Officer and Director 
         April 3, 2009
    
 
                    
    
/s/ Brenda Agius
 

Brenda Agius
         Chief Financial Officer, Principal Accounting
Officer and Secretary 
         April 3, 2009
    
 
                    
    
*
 

Norman K. Farra Jr.
         Director 
         April 3, 2009
    
 
                    
    
*
 

Philip K. Fricke
         Director 
         April 3, 2009
    
 
                    
    
*
 

Theodore E. Lavoie
         Director 
         April 3, 2009
    
 
                    
    
*
 

John E. Rehfeld
         Director 
         April 3, 2009
    
 
                    
    
* /s/ Heath B. Clarke
 

          
         April 3, 2009
    
Heath B. Clarke attorney-in-fact
                    




4




 











LOCAL.COM CORPORATION

INDEX TO FINANCIAL STATEMENTS































































































































                         
    
Consolidated Financial Statements:
                    
    
 
                    
                  F-2     
                  F-3     
                  F-4     
                  F-5     
                  F-6     
                  F-7     
    
 
                    
    
Financial Statement Schedule:
                    
    
 
                    
                  F-25     
    
 
                    
    
Supplementary Financial Data:
                    
    
 
                    
                  F-26     







F-1




 








REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of

Local.com Corporation



We have audited the accompanying consolidated balance sheets of Local.com Corporation (the
“Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the years in the three-year period ended December
31, 2007. Our audit also included the financial statement schedule listed in the index at F-1.
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion of the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Local.Com Corporation as of December 31, 2007 and 2006, and the
results of its consolidated operations and its cash flows for each of the years in the three-year
period ended December 31, 2007 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.


As discussed at Note 1 “Stock-based Compensation,” to the consolidated financial statements, during
the year ended December 31, 2006, the Company changed the manner in which it accounts for stock
compensation costs. Also, as discussed in Note 4 to the consolidated financial statement, effective
January 1, 2007, the company changed its methods of accounting for uncertain tax positions.


/s/ HASKELL & WHITE LLP


Irvine, California

March 7, 2008



F-2




 




LOCAL.COM CORPORATION






CONSOLIDATED BALANCE SHEETS




















































































































































































































































































































































































































































































































































                                             
              December 31,              December 31,     
              2007              2006     
              (in thousands, except share data)     
    ASSETS
    
Current Assets:
                                        
    
Cash and cash equivalents
         $    14,258              $    3,264     
    
Restricted cash
              30                   41     
    
Marketable securities
              1,999                   1,972     
    
Accounts receivable, net of allowances of $15 and $9, respectively
              3,595                   2,091     
    
Prepaid expenses and other current assets
              292                   302     
    
 
                              
 
    
Total current assets
              20,174                   7,670     
    
 
                                        
    
Property and equipment, net
              1,473                   2,028     
    
Intangible assets, net
              3,156                   2,813     
    
Goodwill
              13,233                   12,213     
    
Long-term restricted cash
              66                   125     
    
Deposits
              12                   42     
    
 
                              
 
    
Total assets
         $    38,114              $    24,891     
    
 
                              
    
 
                                        
    LIABILITIES AND STOCKHOLDERS’ EQUITY
    
Current liabilities:
                                        
    
Accounts payable
         $    4,029              $    2,851     
    
Accrued compensation
              456                   328     
    
Deferred rent
              316                   432     
    
Other accrued liabilities
              194                   374     
    
Notes payable
              —                   63     
    
Deferred revenue
              177                   245     
    
 
                              
 
    
Total liabilities, all current
              5,172                   4,293     
    
 
                              
    
 
                                        
    
Commitments and contingencies (Note 5)
                                        
    
 
                                        
    
Stockholders’ equity: (Notes 6, 7, 10, 11, 12 and 13)
                                        
    
Convertible preferred stock, $0.00001 par value; 10,000,000 shares authorized;
none issued and outstanding for all periods presented
              —                   —     
    
Common stock, $0.00001 par value; 30,000,000 shares authorized;
14,204,110 and 9,297,502 issued and outstanding, respectively
              —                   —     
    
Additional paid-in capital
              82,176                   51,657     
    
Accumulated other comprehensive loss
              (1    )              (27    )
    
Accumulated deficit
              (49,233    )              (31,032    )
    
 
                              
    
 
                                        
    
Stockholders’ equity
              32,942                   20,598     
    
 
                              
    
 
                                        
    
Total liabilities and stockholders’ equity
         $    38,114              $    24,891     
    
 
                                      




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



F-3




 







LOCAL.COM CORPORATION






CONSOLIDATED STATEMENTS OF OPERATIONS






























































































































































































































































































































































































































































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
              (In thousands, except share and per shares amounts)     
    
Revenue
         $    21,525              $    14,213              $    18,139     
    
 
                                             
 
    
Operating Expenses:
                                                            
    
Search serving
              3,862                   4,960                   10,707     
    
Sales and marketing
              20,268                   13,169                   6,025     
    
General and administrative
              4,890                   5,881                   4,025     
    
Research and development
              2,555                   2,829                   2,988     
    
Amortization and write-down of intangibles
              1,121                   947                   1,078     
    
 
                                             
 
    
Total operating expenses
              32,696                   27,786                   24,823     
    
 
                                             
 
    
Operating loss
              (11,171    )              (13,573    )              (6,684    )
    
 
                                                            
    
Interest and other income (expense)
              (7,030    )              288                   680     
    
 
                                             
 
    
Loss before income taxes
              (18,201    )              (13,285    )              (6,004    )
    
 
                                                            
    
Provision for income taxes
              1                   1                   498     
    
 
                                             
 
    
Net loss
         $    (18,202    )         $    (13,286    )         $    (6,502    )
    
 
                                             
    
 
                                                            
    
Per share data:
                                                            
    
 
                                                            
    
Basic net loss per share
         $    (1.58    )         $    (1.44    )         $    (0.75    )
    
 
                                             
    
Diluted net loss per share
         $    (1.58    )         $    (1.44    )         $    (0.75    )
    
 
                                             
    
 
                                                            
    
Basic weighted average shares outstanding
              11,499,879                   9,249,973                   8,658,069     
    
Diluted weighted average shares outstanding
              11,499,879                   9,249,973                   8,658,069     




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



F-4




 







LOCAL.COM CORPORATION






CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY








































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































                                                                                                                                                                     
                                                                                                                  Accumulated                                        
                                                      Convertible              Additional              Other                                  Total     
              Common Stock              Preferred Stock              Paid-in              Comprehensive              Accumulated              Stockholders’     
              Shares              Amount              Shares              Amount              Capital              Loss              Deficit              Equity     
              (in thousands)     
    
Balance at December 31, 2004
              7,954              $    —                   —              $    —              $    45,497              $    (36    )         $    (11,244    )         $    34,217     
 
    
Common stock issued:
                                                                                                                                                                
    
Exercise of warrants
              629                   —                   —                   —                   1,143                   —                   —                   1,143     
    
Exercise of options
              484                   —                   —                   —                   1,426                   —                   —                   1,426     
    
Asset purchase
              104                   —                   —                   —                   750                   —                   —                   750     
    
Non-cash equity based expense for services
              —                   —                   —                   —                   95                   —                   —                   95     
    
Financing costs
              —                   —                   —                   —                   (205    )              —                   —                   (205    )
    
Comprehensive income:
                                                                                                                                                                
    
Net unrealized loss on marketable securities
              —                   —                   —                   —                   —                   (109    )              —                   (109    )
    
Foreign currency translation adjustments
              —                   —                   —                   —                   —                   (6    )              —                   (6    )
    
Net income
              —                   —                   —                   —                   —                   —                   (6,502    )              (6,502    )
    
 
                                                                                                                                                           
 
    
Comprehensive income
              —                   —                   —                   —                   —                   —                   —                   (6,617    )
    
 
                                                                                                                        
 
    
Balance at December 31, 2005
              9,171                   —                   —                   —                   48,706                   (151    )              (17,746    )              30,809     
    
 
                                                                                                                                                                
    
Common stock issued:
                                                                                                                                                                
    
Exercise of warrants
              43                   —                   —                   —                   77                   —                   —                   77     
    
Exercise of options
              83                   —                   —                   —                   345                   —                   —                   345     
    
Non-cash equity based expense for services
              —                   —                   —                   —                   2,531                   —                   —                   2,531     
    
Financing costs
              —                   —                   —                   —                   (3    )              —                   —                   (3    )
    
Swing sale profit contribution
              —                   —                   —                   —                   1                   —                   —                   1     
    
Comprehensive income:
                                                                                                                                                                
    
Net unrealized gain on marketable securities
              —                   —                   —                   —                   —                   118                   —                   118     
    
Foreign currency translation adjustments
              —                   —                   —                   —                   —                   6                   —                   6     
    
Net loss
              —                   —                   —                   —                   —                   —                   (13,286    )              (13,286    )
    
 
                                                                                                                                                           
 
    
Comprehensive loss
              —                   —                   —                   —                   —                   —                   —                   (13,162    )
    
 
                                                                                                                        
 
    
Balance at December 31, 2006
              9,297                   —                   —                   —                   51,657                   (27    )              (31,032    )              20,598     
    
 
                                                                                                                                                                
    
Common stock issued:
                                                                                                                                                                
    
Conversion of senior secured convertible notes
              1,990                   —                   —                   —                   8,000                   —                   —                   8,000     
    
Private placement
              2,357                   —                   —                   —                   12,963                   —                   —                   12,963     
    
Exercise of warrants
              366                   —                   —                   —                   1,385                   —                   —                   1,385     
    
Exercise of options
              90                   —                   —                   —                   343                   —                   —                   343     
    
Asset purchase
              104                   —                   —                   —                   431                   —                   —                   431     
    
Issue of senior secured convertible notes and
warrants
              —                   —                   —                   —                   6,679                   —                   —                   6,679     
    
Non-cash stock based compensation
              —                   —                   —                   —                   1,748                   —                   —                   1,748     
    
Financing costs
              —                   —                   —                   —                   (1,035    )              —                   —                   (1,035    )
    
Swing sale profit contribution
              —                   —                   —                   —                   5                   —                   —                   5     
    
Comprehensive income:
                                                                                                                                                                
    
Net unrealized gain on marketable securities
              —                   —                   —                   —                   —                   26                   —                   26     
    
Net loss
              —                   —                   —                   —                   —                   —                   (18,202    )              (18,202    )
    
 
                                                                                                                                                           
 
    
Comprehensive loss
              —                   —                   —                   —                   —                   —                   —                   (18,176    )
    
 
                                                                                                                        
    
 
                                                                                                                                                                
    
Balance at December 31, 2007
              14,204              $    —                   —              $    —              $    82,176              $    (1    )         $    (49,233    )         $    32,942     
    
 
                                                                                                                                                        




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




F-5




 







LOCAL.COM CORPORATION






CONSOLIDATED STATEMENTS OF CASH FLOWS



























































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
              (in thousands)     
    
Cash flows from operating activities:
                                                            
    
Net income (loss)
         $    (18,202    )         $    (13,286    )         $    (6,502    )
    
Adjustments to reconcile net income (loss) to cash (used in)
provided by operating activities:
                                                            
    
Depreciation and amortization
              2,206                   2,160                   1,539     
    
Write-down of intangible asset
              —                   —                   337     
    
Provision for doubtful accounts
              14                   (23    )              69     
    
Non-cash equity expense related to stock option issuances
              1,748                   2,531                   95     
    
Non-cash interest expense
              6,803                   —                   —     
    
Non-cash interest income
              —                   (6    )              (15    )
    
Loss on disposal of property and equipment
              —                   18                   63     
    
Realized loss on marketable securities
              —                   42                   34     
    
Realized loss on foreign exchange translation
              —                   4                   —     
    
Cash received for lease incentive
              —                   —                   547     
    
Changes in operating assets and liabilities:
                                                            
    
Accounts receivable
              (1,391    )              (930    )              163     
    
Prepaid expenses and other
              (114    )              157                   30     
    
Deferred income tax assets
              —                   —                   678     
    
Other non-current assets
              30                   5                   (5    )
    
Accounts payable and accrued liabilities
              873                   138                   (242    )
    
Deferred revenue
              (68    )              (50    )              (214    )
    
 
                                             
    
 
                                                            
    
Net cash used in operating activities
              (8,101    )              (9,240    )              (3,423    )
    
 
                                             
    
 
                                                            
    
Cash flows from investing activities:
                                                            
    
Capital expenditures
              (531    )              (487    )              (4,010    )
    
Purchases of marketable securities
              —                   —                   (7,982    )
    
Proceeds from sales of marketable securities
              —                   11,354                   4,998     
    
Decrease (increase) in restricted cash
              70                   10                   (112    )
    
Increase (decrease) in minority interest
              —                   1                   (1    )
    
Proceeds from sale of property and equipment
              —                   6                   —     
    
Acquisition, net of cash acquired
              (2,042    )              232                   (15,329    )
    
 
                                             
    
 
                                                            
    
Net cash provided by (used in) investing activities:
              (2,503    )              11,116                   (22,436    )
    
 
                                             
    
 
                                                            
    
Cash flows from financing activities:
                                                            
    
Proceeds from issuance of common stock:
                                                            
    
From private placement
              12,963                   —                   —     
    
Exercise of warrants
              1,385                   77                   1,143     
    
Exercise of options
              343                   344                   1,426     
    
Issuance of senior secured convertible notes
              8,000                   —                   —     
    
Payment of notes payable
              (63    )              (109    )              (41    )
    
Swing sale profit contribution
              5                   1                   —     
    
Payment of financing related costs
              (1,035    )              (3    )              (205    )
    
 
                                             
    
 
                                                            
    
Net cash provided by financing activities
              21,598                   310                   2,323     
    
 
                                             
    
 
                                                            
    
Effect of currency translation on cash
              —                   3                   (6    )
    
 
                                             
 
    
Net increase (decrease) in cash and cash equivalents
              10,994                   2,189                   (23,542    )
    
Cash and cash equivalents, beginning of year
              3,264                   1,075                   24,617     
    
 
                                             
    
 
                                                            
    
Cash and cash equivalents, end of year
         $    14,258              $    3,264              $    1,075     
    
 
                                             
    
 
                                                            
    
Supplemental Cash Flow Information:
                                                            
    
Interest paid
         $    279              $    5              $    2     
    
 
                                             
    
Income taxes paid
         $    1              $    1              $    1     
    
 
                                             
    
 
                                                            
    
Non-cash investing and financing transactions:
                                                            
    
Common stock issued for asset purchase
                                                 $    750     
    
 
                                                       
    
Insurance financing
         $    88              $    88              $    125     
    
 
                                             
    
Debt discount related to issuance of senior secured convertible notes
         $    6,221                                             
    
 
                                                       
    
Conversion of senior secured convertible notes into common stock
         $    8,000                                             
    
 
                                                       
    
Warrants issued for financing costs
         $    458                                             
    
 
                                                       
    
Common stock issued for asset purchase
         $    431                                             
    
 
                                                           




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



F-6




 







LOCAL.COM CORPORATION






Notes to Consolidated Financial Statements



1. Nature of operations and summary of significant accounting policies



Nature of operations



Local.com Corporation, a Delaware corporation (the Company), is a provider of paid-search services
on the Internet. The Company provides advertisers’ sponsored listings in response to local searches
on the Company’s own web site, Local.com and other search engines that have integrated the
Company’s search service into their web sites. The Company’s sponsored listings are comprised of
subscription-based fixed placement advertisers and advertisers of other paid-search companies.
Advertisers pay a specified bid price for each click-through on the advertisers’ sponsored listing.
The Company operates in one reportable business segment.


On November 2, 2006, the Company changed its name from Interchange Corporation to Local.com
Corporation. The Company amended its Amended and Restated Certificate of Incorporation in
connection with a merger of a wholly-owned subsidiary of the Company with and into the Company in
accordance with Section 253 of the Delaware General Corporation Law.


Certain reclassifications have been made to the prior year’s consolidated financial statements to
conform to current year’s presentation. Accrued royalties of $19,000 as of December 31, 2006 is
included in other accrued liabilities. Non-cash equity based expense of $95,000 for the year ended
December 31, 2005 is included in general and administrative expense.


Principles of consolidation



Prior to January 1, 2007, the Company’s consolidated financial statements included the accounts of
Local.com Corporation, its wholly-owned subsidiaries, Interchange Europe Holding Corporation,
Interchange Internet Search GmbH, Inspire Infrastructure 2i AB, and Inspire Infrastructure (UK)
Limited, along with its majority owned subsidiary Inspire Infrastructure Espana SL. From January 1,
2007 to June 30, 2007, the Company’s financial statements include only the accounts of Local.com
Corporation as all of the Company’s subsidiaries had been dissolved. Subsequent to July 1, 2007,
the Company’s financial statements include the accounts of Local.com Corporation and its
wholly-owned subsidiary Local.com PG Acquisition Corporation. All intercompany balances and
transactions were eliminated.


Foreign currency translation



The Company measures the financial statements for its foreign subsidiaries using the local currency
as the functional currency. Current assets and current liabilities of these subsidiaries are
translated at the exchange rate as of the balance sheet date, while long-term items are translated
at historical rates. Revenues, costs and expenses are translated at the rates prevailing during the
year. Translation adjustments from this process are included in stockholders’ equity. Any gains or
losses from foreign currency transactions are included in other income.


Use of estimates



The preparation of financial statements in conformity with accounting principles generally accepted
in the United States 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.


Cash and cash equivalents



The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. Deposits held with banks may exceed the amount of insurance provided
on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal
risk.


F-7




 




Restricted cash



On June 26, 2002, the Company pledged $100,000 of cash for an irrevocable letter of credit related
to the lease of office space that is classified as restricted cash on the balance sheet. The letter
of credit was reduced to $40,960 on April 1, 2006. The letter of credit expired on April 1, 2007.


On April 22, 2005, the Company pledged $125,129 of cash for an irrevocable letter of credit related
the lease of new office space that is classified as restricted cash on the balance sheet. The
letter of credit was reduced to $96,397 on July 31, 2007 and will be reduced to $66,506 on July 31,
2008, and $35,448 on July 31, 2009. The letter of credit will expire on July 31, 2010.


Marketable securities



The Company carries marketable securities at fair value, with unrealized gains and losses, net of
any tax, reported as a separate component of stockholders’ equity. The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and declines in value judged
to be other-than-temporary on short-term investments are included in interest and other income
(expense). The cost of securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in interest income.


Accounts receivable



The Company’s accounts receivable are due primarily from customers located in the United States and
are typically unsecured. 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
management believes that a customer’s financial condition has deteriorated such that it impairs its
ability to make payments, additional allowances may be required. The Company’s subscription-based
advertisers pay monthly in advance. In addition, the Company grants its advertiser partners net 30
terms. Of the customers that do not pay in advance, as of December 31, 2007 and 2006, one customer
represented 62% and 52% of total accounts receivable, respectively and one additional customer
represented 12% of total accounts receivable as of December 31, 2007 and another customer
represented 11% of total accounts receivable as of December 31, 2006.


Property and equipment



Property and equipment are stated at cost, net of accumulated depreciation and amortization.
Depreciation and amortization are calculated under the straight-line basis over the shorter of the
estimated useful lives or the respective assets as follows:







































                         
    
Furniture and fixtures
         7 years
    
Office equipment
         5 years
    
Computer equipment
         3 years
    
Computer software
         3 years
    
Leasehold improvements
         5 years (life of lease)




Repairs and maintenance expenditures that do not significantly add to the value of the property, or
prolong its life, are charged to expense, as incurred. Gains and losses on dispositions of property
and equipment are included in the operating results of the related period.


Intangible assets



Developed technology arising from acquisitions is recorded at cost and amortized on a straight-line
basis over five years. Accumulated amortization at December 31, 2007 was $1,265,367. Accumulated
amortization at December 31, 2006 was $818,767.


Non-compete agreement arising from acquisitions is recorded at cost and amortized on a
straight-line basis over two to three years. Accumulated amortization at December 31, 2007 was
$245,400. Accumulated amortization at December 31, 2006 was $158,400.


F-8




 




Purchased technology arising from acquisitions is recorded at cost and amortized on a straight-line
basis over three years. Accumulated amortization at December 31, 2007 was $1,056,794. Accumulated
amortization at December 31, 2006 was $643,715.


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


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


The estimated total amortization expense for intangible asset over the next five years is as
follows (in thousands):























































                         
    For the years ending December 31,         Amortization Expense
    
2008
         $    999     
    
2009
         $    798     
    
2010
         $    343     
    
2011
         $    204     
    
2012
         $    119     




Impairment of long-lived assets



The Company accounts for the impairment and disposition of definite life intangible and long-lived
assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment of Disposal of Long-Lived Assets (SFAS No. 144). In accordance with SFAS No.
144, such assets to be held are reviewed for events, or changes in circumstances, which indicate
that their carrying value may not be recoverable. The Company periodically reviews related carrying
values to determine whether or not impairment to such value has occurred. During the year ended
December 31, 2005, due to the deterioration of revenues in Europe since the acquisition of Inspire
in February 2005, management believed that the carrying amount for customer contracts and
relationships was impaired. The carrying amount of customer contracts and relationships exceeded
the sum of the undiscounted cash flows expected and as a result, the Company wrote-down the
remaining unamortized balance of $337,000. For the years ended December 31, 2007 and 2006,
management had no evidence of impairment.


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 name are recorded at cost.
Intangible assets, such as goodwill and domain name, which are determined to have an indefinite
life, are not amortized in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The
Company performs annual impairment reviews during the fourth fiscal quarter of each year, or
earlier if indicators of potential impairment exist. For goodwill, the Company engages an
independent appraiser to assist management in the determination of the fair value of its reporting
unit and compares 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, the Company
compares future undiscounted cash flow forecasts prepared by management to the carrying value of
the related intangible asset group to determine if there is impairment. The Company performed its
annual impairment analysis as of December 31, 2007 and determined that no impairment existed.
Future impairment reviews may result in charges against earnings to write-down the value of
intangible assets.


Fair value of financial instruments



The Company’s balance sheets include the following financial instruments: cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities. The
Company considers the carrying value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities in the financial statements to approximate fair value for these
financial instruments because of the relatively short period of time between origination of the
instruments and their expected realization.


Deferred revenue



Deferred revenue represents deposits from direct advertisers for their advertising campaigns and is
recognized as revenue upon a click-through.


F-9




 




Sales commissions



When an advertiser makes a deposit into its account with the Company, the Company’s applicable
salesperson earns a commission, subject to certain criteria. The Company records sales commission
expense in the period the deposit is received.


Refunds



Refunds of any remaining deposits paid by direct advertisers are available to those advertisers
upon written request submitted between 30 and 90 days from the date of deposit.


Revenue recognition



Revenue is recognized 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 the Company’s
fees is probable. The Company generates revenue when it is realizable and earned, as evidenced by
click-throughs occurring on advertisers’ sponsored listings, the display of a banner advertisement
or the fulfillment of subscription listing obligations. Management believes all four revenue
recognition criteria are met as a result of each click-through, display of a banner advertisement
or the fulfillment of subscription listing obligation (monthly). The Company enters into a
contractual arrangement to distribute sponsored listings and banners from an advertiser or an
Advertiser Network partner. The advertisers provide sponsored listings along with bid prices (what
the advertisers are willing to pay for each click-through on those listings) to the Company. These
sponsored listings and banners are then included as search results that the Company distributes in
response to keyword searches performed by consumers on the Company’s web site. Depending on the
source of the advertiser, the Company recognizes an applicable portion of the bid price for each
click-through the Company delivers on advertisers’ sponsored listings. Revenue is recognized when
earned based on click-through activity to the extent that collection is reasonably assured from
credit worthy direct advertisers and Advertiser Network partners. Licensing revenue is recognized
each month our customer utilizes our Local Connect platform. Payment is due thirty days following
the end of the month in which the license was used.


One local advertising network partner represented 49%, 40% and 2% of the Company’s total revenue
for the years ended December 31, 2007, 2006 and 2005, respectively, one local advertising network
partner represented 15%, 3% and 0% of the Company’s total revenue for the years ended December 31,
2007, 2006 and 2005, respectively and one national advertising network partner represented 1%, 15%
and 30% of the Company’s total revenue for the years ended December 31, 2007, 2006 and 2005,
respectively.


Search serving



Search serving expenses consist primarily of revenue-sharing payments that the Company makes to its
Distribution Network partners, and to a lesser extent, royalties, Internet connectivity costs, data
center costs, amortization of certain software license fees and maintenance and depreciation of
computer equipment used in providing the Company’s paid-search services.


Web site development costs and computer software developed for internal use



Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1), requires that costs incurred in the preliminary project and
post-implementation stages of an internal use software project be expensed as incurred and that
certain costs incurred in the application development stage of a project be capitalized. Emerging
Issues Task Force Issue No. 00-02 Accounting for Web Site Development Costs (EITF 00-02), 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 the estimated useful life. During the year ended
December 31, 2007, the Company capitalized $330,000 related to web site development with an
estimated useful life of three years. During the year ended December 31, 2007, amortization of
capitalized web site costs was $187,000. During the year ended December 31, 2006, the Company
capitalized $392,000 related to the web site development with an estimated useful life of three
years. During the year ended December 31, 2006, amortization of capitalized web site costs was
$174,000. During the year ended December 31, 2005, the Company capitalized $244,000 related to the
web site development with an estimated useful life of three years. During the year ended December
31, 2005, amortization of capitalized web site costs was $34,000. Capitalized web site costs are
included in property and equipment, net.



F-10






 




Research and development



Research and development expenses consist of expenses incurred by the Company in the development,
creation and enhancement of its paid-search services. Research and development expenses include
salaries and other costs of employment of the Company’s development staff as well as outside
contractors and the amortization of capitalized web site development costs.


Traffic acquisition cost



The Company defines traffic acquisition cost (TAC) as the cost of advertising and promoting its
website on other search engines. The Company advertises on other search engine web sites, primarily
google.com, but also yahoo.com, msn.com and ask.com, by bidding on certain keywords it believes
will drive traffic to its Local.com web site. Accordingly, the Company’s TAC is a sales and
marketing expense as opposed to a cost of sales expense which is directly related to the generation
of revenue. The Company pays TAC regardless of whether or not there is a revenue generating event.
Other companies define TAC as the cost associated with driving traffic directly to affiliated
advertisers. During the year ended December 31, 2007, approximately 92% of the traffic on our
Local.com web site was acquired from other search engine web sites. During the year ended December
31, 2007, traffic acquisition costs (TAC) were $13.7 million of which $10.9 million was paid to
Google, Inc and such amounts are included in sales and marketing in accompanying consolidated
statements of operations. During the year ended December 31, 2006, traffic acquisition costs (TAC)
were $7.7 million of which $6.9 million was paid to Google, Inc and such amounts are included in
sales and marketing in accompanying consolidated statements of operations.


Income taxes



The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes, which requires
recognition of deferred income tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements and tax returns. Deferred income tax
assets and liabilities are determined based upon the difference between the financial statement and
tax bases of assets and liabilities, using the enacted tax rates in effect for the year in which
the differences are expected to reverse. A valuation allowance is provided when it is more likely
than not that deferred income tax assets will not be realized.


Comprehensive income (loss)



The Company accounts for comprehensive income (loss) using SFAS No. 130, Reporting Comprehensive
Income (SFAS No. 130). SFAS No. 130 establishes standards for reporting comprehensive income (loss)
and its components in financial statements. Comprehensive income (loss), as defined therein, refers
to revenue, expenses, gains and losses that are not included in net income (loss) but rather are
recorded directly in shareholders’ equity. For the year ended December 31, 2007, comprehensive
income consisted of net loss plus unrealized gain on marketable securities. For the years ended
December 31, 2006 and 2005, comprehensive loss consisted of net loss plus net unrealized gain/loss
on marketable securities and foreign currency translation adjustments.


Supplemental comprehensive income (loss) information (in thousands):


































































































































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
    
Foreign currency translation adjustments arising during period
         $    —              $    10              $    (6    )
    
Reclassification adjustment for losses included in net loss
              —                   (4    )              —     
    
 
                                             
    
Foreign currency translation adjustments
         $    —              $    6              $    (6    )
    
 
                                             
    
 
                                                            
    
Unrealized holding gains (losses) arising during period
         $    26              $    160              $    (75    )
    
Reclassification adjustment for losses included in net loss
              —                   (42    )              (34    )
    
 
                                             
    
Net unrealized gain (loss) on marketable securities
         $    26              $    118              $    (109    )
    
 
                                                         




F-11




 





Stock-based compensation



In December 2004, the Financial Accounting Standard Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123R, Share-Based Payment, which addresses the accounting for
employee stock options. SFAS No. 123R requires that the cost of all employee stock options, as well
as other equity-based compensation arrangements, be reflected in the financial statements based on
the estimated fair value of the awards. That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award—the requisite service period
(usually the vesting period).


The Company adopted SFAS No. 123R on January 1, 2006, the beginning of its first quarter of fiscal
2006, using the modified-prospective transition method. Under the modified-prospective transition
method prior periods of the Company’s financial statements are not restated for comparison
purposes. In addition, the measurement, recognition and attribution provisions of SFAS No. 123R
apply to new grants and grants outstanding on the adoption date. Estimated compensation expense for
outstanding grants at the adoption date will be recognized over the remaining vesting period using
the compensation expense calculated for the pro forma disclosure purposes under SFAS No. 123,
Accounting for Stock-Based Compensation.


Total stock-based compensation expense recognized for the years ended December 31, 2007 and 2006 is
as follows (in thousands, except per share amount):



































































































































                                             
              Year ended December 31,     
              2007              2006     
    
Sales and marketing
         $    544              $    601     
    
General and administrative
              968                   1,674     
    
Research and development
              236                   256     
    
 
                              
 
    
Total stock-based compensation expense
         $    1,748              $    2,531     
    
 
                              
    
 
                                        
    
Basic and diluted net stock-based compensation expense per share
         $    0.15              $    0.27     
    
 
                                      




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:







































































                                             
              Year ended December 31,
              2007         2006
    
Risk-free interest rate
              4.02    %              4.66    %
    
Expected lives (in years)
              7.0                   6.5     
    
Expected dividend yield
         None         None
    
Expected volatility
              100.00    %              112.37    %




As of December 31, 2007, there was $3.4 million of unrecognized stock-based compensation expense
related to outstanding stock options, net of forecasted forfeitures. This amount is expected to be
recognized over a weighted average period of 1.5 years. The stock-based compensation expense for
these awards will be different if the actual forfeiture rate is different from the Company’s
forecasted rate.


Prior to the adoption of SFAS No. 123R the Company accounted for stock-based employee compensation
under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees and the disclosure requirements of SFAS No. 123 and
related SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure.


F-12




 




The following table illustrates the pro forma effect of the fair value recognition of stock-based
compensation on net income (loss) and net income (loss) per share for the year ended December 31,
2005 (in thousands, except per share amounts):






















































































































































                         
              Year ended     
              December 31,     
              2005     
    
Net income (loss), as reported
         $    (6,502    )
    
Additional stock-based employee compensation expense
determined under fair value based method for all awards, net
of tax effects
              (4,725    )
    
 
               
 
    
Pro forma net income (loss)
         $    (11,227    )
    
 
               
    
 
                    
    
Earnings (loss) per share:
                    
    
Basic — as reported
         $    (0.75    )
    
 
               
    
Basic — pro forma
         $    (1.30    )
    
 
               
    
 
                    
    
Earnings (loss) per share:
                    
    
Diluted — as reported
         $    (0.75    )
    
 
               
    
Diluted — pro forma
         $    (1.30    )
    
 
                   




The fair value of these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following assumptions:
























































                         
              Year ended
              December 31,
              2005
    
Risk free interest rate
              4.62    %
    
Expected lives (in years)
              9.3     
    
Dividend yield
         None
    
Expected volatility
              62    %




Net income (loss) per share



SFAS No. 128, Earnings per Share, establishes standards for computing and presenting earnings 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.


For the year ended December 31, 2007, potentially dilutive securities, which consist of options to
purchase 2,703,850 share of common stock at prices ranging from $0.40 to $16.59 and warrants to
purchase 3,470,278 shares of common stock at prices ranging from $3.00 to $25.53 were not included
in the computation of diluted net income per share because such inclusion would be antidilutive.


For the year ended December 31, 2006, potentially dilutive securities, which consist of options to
purchase 1,933,363 share of common stock at prices ranging from $0.40 to $16.59 and warrants to
purchase 1,043,664 shares of common stock at prices ranging from $3.00 to $25.53 were not included
in the computation of diluted net income per share because such inclusion would be antidilutive.


For the year ended December 31, 2005, potentially dilutive securities, which consist of options to
purchase 1,339,360 shares of common stock at prices ranging from $0.40 to $16.59 and warrants to
purchase 1,279,575 shares of common stock at prices ranging from $2.00 to $25.53 were not included
in the computation of diluted net income per share because such inclusion would be antidilutive.


F-13




 




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):








































































































































































































































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
    
Numerator:
                                                            
    
Net income (loss)
         $    (18,202    )         $    (13,286    )         $    (6,502    )
    
 
                                             
    
 
                                                            
    
Denominator:
                                                            
    
Denominator for historical basic calculation weighted average shares
              11,500                   9,250                   8,658     
    
Dilutive common stock equivalents:
                                                            
    
Options
              —                   —                   —     
    
Warrants
              —                   —                   —     
    
 
                                             
    
Denominator for historical diluted calculation weighted average
shares
              11,500                   9,250                   8,658     
    
 
                                             
    
 
                                                            
    
Net income (loss) per share:
                                                            
    
Historical basic net income (loss) per share
         $    (1.58    )         $    (1.44    )         $    (0.75    )
    
 
                                             
    
Historical diluted net income (loss) per share
         $    (1.58    )         $    (1.44    )         $    (0.75    )
    
 
                                                         




New accounting pronouncements



In December 2007, FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which retains the
underlying concepts of SFAS 141 in that all business combinations are still required to be
accounted for at fair value under the acquisition method of accounting but SFAS 141R changed the
method of applying the acquisition method in a number of significant aspects. Acquisition costs
will generally be expensed as incurred; noncontrolling interests will be valued at fair value at
the acquisition date; in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. The provision of SFAS 141R are effective for fiscal years
beginning after December 15, 2008 with earlier adoption prohibited. The Company is currently
analyzing the effect of adopting SFAS 141R.


In December 2007, FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160), which requires the
recognition of a noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net income attributable
to the noncontrolling interest will be included in consolidated net income on the face of the
income statement. It also amends certain aspects of ARB No. 51’s consolidation procedures for
consistency with the requirements of SFAS 141R. This statement also includes expanded disclosure
requirements regarding the interests of the parent and its noncontrolling interest. The provisions
of SFAS 160 are effective for fiscal years beginning after December 15, 2008 with earlier adoption
prohibited. The Company is currently analyzing the effect of adopting SFAS 160.


F-14




 




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



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



































































































































































                                             
              December 31,              December 31,     
              2006              2006     
    
Furniture and fixtures
         $    203              $    201     
    
Office equipment
              119                   91     
    
Computer equipment
              1,889                   1,750     
    
Computer software
              1,841                   1,473     
    
Leasehold improvements
              583                   583     
    
 
                              
    
 
              4,635                   4,098     
    
 
                                        
    
Less accumulated depreciation and amortization
              (3,162    )              (2,070    )
    
 
                              
    
Property and equipment, net
         $    1,473              $    2,028     
    
 
                                      




Intangible assets consisted of the following (in thousands):


















































































































































































                                             
              December 31,              December 31,     
              2007              2006     
    
Developed technology
         $    2,233              $    2,233     
    
Non-compete agreements
              274                   261     
    
Purchased technology
              1,239                   1,239     
    
Customer-related
              1,020                   —     
    
Patents
              431                   —     
    
Domain name
              701                   701     
    
 
                              
    
 
              5,898                   4,434     
    
 
                                        
    
Less accumulated amortization
              (2,742    )              (1,621    )
    
 
                              
 
    
Intangible assets, net
         $    3,156              $    2,813     
    
 
                                      




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














































































































































































                                                                 
              Year ended December 31,     
              2007              2006              2005     
    
Interest income
         $    536              $    328              $    600     
    
Interest expense
              (887    )              (5    )              45     
    
Interest expense — non-cash
              (6,679    )              —                   —     
    
IRS penalty reversal
              —                   —                   132     
    
Net gain (loss) on sale of fixed assets
              —                   7                   (63    )
    
Realized loss on sale of marketable securities
              —                   (42    )              (34    )
    
 
                                             
 
    
Interest and other income (expense), net
         $    (7,030    )         $    288              $    680     
    
 
                                                         




F-15




 





3. Marketable securities



The following is a summary of marketable securities all of which are classified as available for
sale (in thousands):






























































































































































































                                                                 
                                  Gross              Estimated     
                                  Unrealized              Fair     
              Cost              Loss              Value     
    
As of December 31, 2007:
                                                            
    
 
                                                            
    
Mortgage backed government securities
         $    2,000              $    (1    )         $    1,999     
    
 
                                             
    
 
                                                            
    
As of December 31, 2006:
                                                            
    
 
                                                            
    
Mortgage backed government securities
         $    1,999              $    (27    )         $    1,972     
    
 
                                                         




The contractual maturities of marketable securities are as follows (in thousands):




























































































































































































































                                                                 
                                  Gross              Estimated     
                                  Unrealized              Fair     
              Cost              Loss              Value     
    
As of December 31, 2007:
                                                            
    
 
                                                            
    
Maturities:
                                                            
    
Less than one year
         $    2,000              $    (1    )         $    1,999     
    
 
                                             
    
 
                                                            
    
As of December 31, 2006:
                                                            
    
 
                                                            
    
Maturities:
                                                            
    
After one year through five years
         $    1,999              $    (27    )         $    1,972     
    
 
                                                         




4. Income taxes



The Company’s provision (benefit) for income taxes consists of the following (in thousands):






































































































































































































































































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
    
Current:
                                                            
    
Federal
         $    —              $    —              $    —     
    
State
              1                   —                   (2    )
    
Foreign
              —                   1                   (27    )
    
 
                                             
    
 
                                                            
    
Total current
              1                   1                   (29    )
    
 
                                             
    
 
                                                            
    
Deferred:
                                                            
    
Federal
              —                   —                   412     
    
State
              —                   —                   115     
    
Foreign
              —                   —                   —     
    
 
                                             
    
 
                                                            
    
Total deferred
              —                   —                   527     
    
 
                                             
    
 
                                                            
    
Total provision (benefit) for income taxes
         $    1              $    1              $    498     
    
 
                                                         




F-16




 





The provision (benefit) for income taxes differs from the amount computed by applying the federal
income tax rate as follows:












































































































































































                                                                 
              Years ended December 31,
              2007         2006         2005
    
Statutory federal tax rate
              34           %              34           %              34           %
    
State income taxes, net of federal benefit
              —                   —                   —     
    
Stock option grants
              3                   (4    )              —     
    
Change in valuation allowance
              (37    )              (30    )              (43    )
    
Other
              —                   —                   1     
    
 
                                                            
    
 
                                                            
    
 
              —    %              —    %              (8)          %
    
 
                                                            




Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts
of assets and liabilities for reporting purposes and the amounts used for income tax purposes. The
components of deferred tax assets and liabilities are as follows (in thousands):

















































































































































































































































































































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
    
Deferred income tax assets:
                                                            
    
Net operating loss carryforwards
         $    18,402              $    10,730              $    7,666     
    
Accrued expenses
              1,290                   1,095                   76     
    
Fixed assets/depreciation
              1,440                   1,551                   241     
    
 
                                             
    
 
                                                            
    
Gross deferred tax assets
              21,132                   13,376                   7,983     
    
Valuation allowance
              (20,015    )              (11,808    )              (6,335    )
    
 
                                             
    
 
              1,117                   1,568                   1,648     
    
 
                                             
    
 
                                                            
    
Deferred income tax liabilities:
                                                            
    
Acquired intangibles
              (1,102    )              (1,285    )              (1,356    )
    
Fixed assets/depreciation
              (15    )              —                   —     
    
Other
              —                   (283    )              (292    )
    
 
                                             
    
 
                                                            
    
 
              (1,117    )              (1,568    )              (1,648    )
    
 
                                             
    
 
                                                            
    
Net deferred tax assets (liabilities)
         $    —              $    —              $    —     
    
 
                                                         




As of December 31, 2007, the Company has approximately $2.6 million of valuation allowance
attributable to the tax benefit of exercised stock options and warrants issued for services, which
will be credited directly to paid-in capital when the related deferred tax assets are realized.


As of December 31, 2007, the Company had $47.2 million and $40.6 million in net operating loss
carryforwards for federal and state income tax purposes, respectively. The losses begin to expire
in 2021 for federal and 2012 for state income tax purposes.


In June 2006, FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN48), which defines the threshold for recognizing the benefits of tax return positions in the
financial statements as “more-likely-than-not” to be sustained by the taxing authority. A tax
position that meet the “more-likely-than-not” criterion shall be measured at the largest amount of
benefit that is more than 50% likely of being realized upon ultimate settlement. FIN48 applies to
all tax positions accounted for under SFAS No. 109, Accounting for Income Taxes. FIN48 is effective
for fiscal years beginning after December 15, 2006.


The Company adopted FIN48 as of January 1, 2007, the beginning of its current fiscal year. Based on
the Company’s preliminary analysis, the Company believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments that will result in a
material change to its financial position including its effective tax rate. Therefore, no reserves
for uncertain income tax positions have been recorded pursuant to FIN 48 and
the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. In
addition, the Company has not recorded any accrued interest and penalties related to income tax. It
is the Company’s policy to classify interest and penalties related to income tax as income taxes in
its financial statements.


F-17




 




The following tax years that remain subject to examination by major tax jurisdictions are as
follows:


Federal — 2004, 2005 and 2006;


California (state) — 2004, 2005 and 2006;


Virginia (state) — 2004, 2005 and 2006.


5. Commitments and contingencies


Lease Commitments


The Company leases office space under an operating lease agreement that expires in June 2010. The
future minimum lease payments under non-cancelable operating leases at December 31, 2007 are as
follows (in thousands):














































































                         
              Operating     
              Leases     
    
Years ending December 31,
                    
    
2008
         $    375     
    
2009
              389     
    
2010
              199     
    
 
               
 
    
Total minimum lease payments
         $    963     
    
 
                   




The Company recognizes rent expense on a straight-line basis over the life of the operating lease
as the lease contains a fixed escalation rent clause. Rent expense for the years ended December 31,
2007, 2006 and 2005 was $249,000, $336,000 and $407,000, respectively.


401(k) Plan



The Company maintains a 401(k) plan for eligible employees. Employees become eligible to
participate in the plan at the beginning of each calendar quarter (January, April, July, October)
following their hire date. Employees may contribute amounts ranging from 1% to 15% or their annual
salary, up to maximum limits set by the Internal Revenue Service. The Company may make matching
contributions at its own discretion. Employees immediately vest 100% of their own contributions and
20% of the Company’s matching contributions for each year of service. Through December 31, 2007,
the Company has made no matching contributions.


Employment Agreements



The Company has signed employment agreements with its three executive officers and six of its key
employees. The agreements provide for the payments of annual salaries totaling $1.9 million and
annual bonuses of up to $702,000 in the aggregate. The agreements have a term of one year and
automatically renew for one year terms unless terminated on at least 30 days notice by either
party. If the Company terminates one of these officers or key employees without cause, the Company
is obligated to pay the terminated officer or key employee (i) his annual salary and other benefits
earned prior to termination, (ii) the greater of such officer’s or key employee’s annual salary for
the remaining term of the agreement or such officer’s or key employee’s annual salary, (iii) the
average of all bonuses during the term of the employment agreement, (iv) the same benefits that
such officer or key employee received prior to termination, for a period of 12 months following
termination, and (v) the right to exercise all options, including any as yet unvested options, for
a period of 12 months following termination.


Legal Proceedings



From time to time, however, the Company may be subject to a variety of legal proceedings and claims
in the ordinary course of business.


F-18




 




6. Stockholders’ equity



The Company has authorized 30,000,000 shares of common stock and 10,000,000 shares of convertible
preferred stock.


Warrants



Warrant activity for the years ended December 31, 2005, 2006 and 2007 was as follows:






































































































































































































































                                             
                                  Weighted Average     
              Shares              Exercise Price     
    
Outstanding at December 31, 2004
              2,088,194              $    6.43     
    
Exercised
              (761,369    )              3.07     
    
Expired
              (47,250    )              14.58     
    
 
                                   
 
    
Outstanding at December 31, 2005
              1,279,575                   8.13     
    
Exercised
              (159,682    )              3.91     
    
Expired
              (76,229    )              3.58     
    
 
                                   
 
    
Outstanding at December 31, 2006
              1,043,644                   9.11     
    
Issued
              2,810,070                   6.22     
    
Exercised
              (365,331    )              3.79     
    
Expired
              (18,125    )              7.31     
    
 
                                   
 
    
Outstanding at December 31, 2007
              3,470,278              $    7.34     
    
 
                              
    
Exercisable at December 31, 2007
              2,395,532              $    6.79     
    
 
                                      




The weighted average fair value at grant date of the warrants granted during the year ended
December 31, 2007 was $3.83. No warrants were issued during the years ended December 31, 2005 and
2006.


The following table summarizes information regarding warrants outstanding and exercisable at
December 31, 2007:









































































































































































































































































































































































                                                                                                         
              Warrants Outstanding              Warrants Exercisable     
                                  Weighted                                                       
                                  Average              Weighted                                  Weighted     
                                  Remaining              Average                                  Average     
                                  Contractual              Exercise                                  Exercise     
    Range of Exercise Prices         Shares              Life              Price              Shares              Price     
    
$3.00 - $3.99
              173,124                   0.6              $    3.50                   173,124              $    3.50     
    
$4.00 - $4.99
              874,596                   4.1              $    4.36                   874,596              $    4.36     
    
$5.00 - $5.99
              867,662                   4.1              $    5.17                   867,662              $    5.17     
    
$7.00 - $7.99
              537,373                   4.6              $    7.89                   —              $    —     
    
$9.00 - $9.99
              537,373                   4.6              $    9.26                   —              $    —     
    
$10.00 - $19.99
              315,750                   1.8              $    10.00                   315,750              $    10.00     
    
$20.00 - $25.53
              164,400                   2.0              $    25.53                   164,400              $    25.53     
    
 
                                                                                          
    
 
              3,470,278                   3.8              $    7.34                   2,395,532              $    6.79     
    
 
                                                                                               




7. Stock plans



In March 1999, the Company adopted the 1999 Equity Incentive Plan (1999 Plan). The 1999 Plan
provides for the grant of non-qualified and incentive stock options to employees, directors and
consultants of options to purchase shares of the Company’s stock. Options are granted at exercise
prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25%
of the options were available for exercise at the end of nine months, while the remainder of the
grant were exercisable ratably over the next 27 month period, provided the optionee remained in
service to the Company. For options granted in 2006, 33.33% of the options are available for
exercise at the end of one year, while the remainder of the grant is exercisable ratably over the
next 8 quarters, provided the optionee remains in service to the Company. The options generally
expire ten years from the date of grant. The Company has reserved 500,000 shares for issuance under
the 1999 Plan, of which 188,469 were outstanding and 23 were available for future grant at December
31, 2007.


F-19




 




In March 2000, the Company adopted the 2000 Equity Incentive Plan (2000 Plan). The 2000 Plan
provides for the grant of non-qualified and incentive stock options to employees, directors and
consultants of options to purchase shares of the Company’s stock. Options are granted at exercise
prices equal to the fair market value of the common stock on the date of grant. Prior to 2006, 25%
of the options were available for exercise at the end of nine months, while the remainder of the
grant were exercisable ratably over the next 27 month period, provided the optionee remained in
service to the Company. For options granted in 2006, 33.33% of the options are available for
exercise at the end of one year, while the remainder of the grant is exercisable ratably over the
next 8 quarters, provided the optionee remains in service to the Company. The options generally
expire ten years from the date of grant. The Company has reserved 500,000 shares for issuance under
the 2000 Plan, of which 350,181 were outstanding and 42 were available for future grant at December
31, 2007.


In January 2004, the Company adopted the 2004 Equity Incentive Plan (2004 Plan), in August 2004,
the Company amended the 2004 Plan and in September 2004, the stockholders of the Company approved
the 2004 Plan, as amended. The 2004 Plan provides for the grant of non-qualified and incentive
stock options to employees, directors and consultants of options to purchase shares of the
Company’s stock. Options are granted at exercise prices equal to the fair market value of the
common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at
the end of nine months, while the remainder of the grant were exercisable ratably over the next 27
month period, provided the optionee remained in service to the Company. For options granted in
2006, 33.33% of the options are available for exercise at the end of one year, while the remainder
of the grant is exercisable ratably over the next 8 quarters, provided the optionee remains in
service to the Company. The options generally expire ten years from the date of grant. The Company
has reserved 600,000 shares for issuance under the 2004 Plan, of which 463,940 were outstanding and
16,596 were available for future grant at December 31, 2007.


In August 2005, the Company adopted and the stockholders of the Company approved the 2005 Equity
Incentive Plan (2005 Plan). The 2005 Plan provides for the grant of non-qualified and incentive
stock options to employees, directors and consultants of options to purchase shares of the
Company’s stock. Options are granted at exercise prices equal to the fair market value of the
common stock on the date of grant. Prior to 2006, 25% of the options were available for exercise at
the end of nine months, while the remainder of the grant were exercisable ratably over the next 27
month period, provided the optionee remained in service to the Company. For options granted in 2006
and thereafter, 33.33% of the options are available for exercise at the end of one year, while the
remainder of the grant is exercisable ratably over the next 8 quarters, provided the optionee
remains in service to the Company. The Company has reserved 1,000,000 shares for issuance under the
2005 Plan, of which 914,706 were outstanding and 4,693 were available for future grant at December
31, 2007.


In August 2007, the Company adopted and the stockholders of the Company approved the 2007 Equity
Incentive Plan (2007 Plan). The 2007 Plan provides for the grant of non-qualified and incentive
stock options to employees, directors and consultants of options to purchase shares of the
Company’s stock. Options are granted at exercise prices equal to the fair market value of the
common stock on the date of grant. 33.33% of the options are available for exercise at the end of
one year, while the remainder of the grant is exercisable ratably over the next 8 quarters,
provided the optionee remains in service to the Company. The options generally expire ten years
from the date of grant. The Company has reserved 1,000,000 shares for issuance under the 2007 Plan,
of which 786,554 were outstanding and 213,446 were available for future grant at December 31, 2007.


F-20




 




Stock option activity under the plans for the years ended December 31, 2005, 2006 and 2007 is as
follows:






























































































































































































































































































































































                                                                 
                                                      Aggregate     
                                  Weighted Average              Intrinsic Value     
              Shares              Exercise Price              (in thousands) (1)     
    
Outstanding at December 31, 2004
              1,292,947              $    3.19                         
    
Granted
              773,814                   9.61                         
    
Exercised
              (484,211    )              2.94                         
    
Canceled
              (243,190    )              8.91                         
    
 
                                                       
 
    
Outstanding at December 31, 2005
              1,339,360                   5.95                         
    
Granted
              864,104                   4.05                         
    
Exercised
              (82,748    )              4.16                         
    
Canceled
              (187,353    )              6.77                         
    
 
                                                       
 
    
Outstanding at December 31, 2006
              1,933,363                   5.10                         
    
Granted
              1,001,054                   4.89                         
    
Exercised
              (90,016    )              3.81                         
    
Canceled
              (140,551    )              5.62                         
    
 
                                                       
 
    
Outstanding at December 31, 2007
              2,703,850              $    5.04              $    1,896     
    
 
                                             
    
Exercisable at December 31, 2007
              1,347,613              $    5.35              $    1,389     
    
 
                                                         




The weighted-average fair value at grant date for the options granted during the years ended
December 31, 2005, 2006 and 2007 was $9.01, $3.50, and $4.11 per option, respectively.


The aggregate intrinsic value of all options exercised during the years ended December 31, 2005,
2006 and 2007 was $2.1 million, $122,000 and $406,000, respectively.


The following table summarizes information regarding options outstanding and exercisable at
December 31, 2007:












































































































































































































































































































































































































                                                                                                         
              Options Outstanding         Options Exercisable
                                  Weighted                                        
                                  Average         Weighted                             Weighted
                                  Remaining         Average                             Average
                                  Contractual         Exercise                             Exercise
    Range of Exercise Price         Shares         Life         Price         Shares         Price
    
$0.00 - $1.00
              18,625              0.3 years         $    0.40                   18,625              $    0.40     
    
$1.01 - $2.00
              160,000              5.0 years              2.00                   160,000                   2.00     
    
$2.01 - $3.00
              141,028              4.4 years              2.25                   141,028                   2.25     
    
$3.01 - $4.00
              772,815              7.3 years              3.69                   448,517                   3.75     
    
$4.01 - $5.00
              938,388              9.6 years              4.67                   66,164                   4.58     
    
$5.01 - $6.00
              133,459              8.2 years              5.69                   95,218                   5.71     
    
$6.01 - $7.00
              117,773              7.9 years              6.39                   97,657                   6.39     
    
$7.01 - $8.00
              190,112              7.7 years              7.51                   142,414                   7.54     
    
$8.01 - $10.00
              120,000              8.3 years              8.76                   68,333                   9.18     
    
$15.01 - $16.59
              111,650              6.6 years              15.61                   109,657                   15.60     
    
 
                                                                                                    
    
 
              2,703,850              7.9 years         $    5.04                   1,347,613              $    5.35     
    
 
                                                                                                    




F-21




 





8. Operating segment information



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





























































































































                                                                 
              Years ended December 31,     
              2007              2006              2005     
    
Revenue by geographic region:
                                                            
    
United States
         $    21,116              $    14,069              $    17,663     
    
Europe
              409                   144                   476     
    
 
                                             
    
Total revenue
         $    21,525              $    14,213              $    18,139     
    
 
                                                         




9. Inspire Infrastructure 2i AB acquisition



On February 28, 2005, the Company completed the acquisition, through a wholly owned subsidiary, of
all of the outstanding capital stock of Inspire Infrastructure 2i AB (Inspire), a Swedish Internet
and wireless local-search technology company for $15.0 million in cash and cash acquisition costs
of $409,000. Under the terms of the acquisition, Inspire shareholders could have received
additional consideration consisting of up to 447,067 shares of Local.com common stock, valued at
$7.5 million based upon a 30-day moving average at the date of acquisition, which was payable upon
the achievement of certain future business performance criteria.


On May 15, 2006, the Company entered into a Share Purchase Termination Agreement with Interchange
Europe Holding Corporation, a wholly owned subsidiary of the Company, and the five former
shareholders of Inspire Infrastructure 2i AB (Sellers) to terminate all provisions of the Share
Purchase Agreement dated February 2, 2005, except for Provision 10 — Non-Compete and Section 11.7
— Confidentiality. As a result of this termination, $232,000 of the cash escrow was returned to
the Company which reduced goodwill. In addition, the Sellers will not earn or receive the
additional consideration of 447,067 shares of Local.com common stock.


On December 20, 2006, the Company entered into a Share Purchase Agreement with Starboard Finans AB
to sell all of the outstanding capital stock of Interchange Europe AB (formerly Inspire
Infrastructure 2i AB) it owns (1,000 shares) for $140 (SEK 1,000).


10. Senior Secured Convertible Notes



On February 22, 2007, the Company entered into a Purchase Agreement with two investors. Pursuant to
this agreement, the investors purchased an aggregate of $8.0 million of 9% senior secured
convertible notes and warrants to purchase shares of the Company’s common stock. The senior secured
convertible notes are secured by the Company’s assets and were due on February 23, 2009. Each
senior secured convertible note holder had the right, at any time, to convert their note into
shares of the Company’s common stock at an initial conversion ratio of one share of common stock
for each $4.02 of principal amount of their note. The Company recorded a beneficial conversion
feature amount of $3.1 million as debt discount which was amortized into interest expense over the
life of the notes. The Company also issued warrants to purchase an aggregate of 796,020 shares of
common stock at an exercise price of $4.82 per share that expire five years from the date of
issuance and warrants to purchase an aggregate of 796,020 shares of common stock at an exercise
price of $5.63 per share that expire five years from the date of issuance. The relative fair value
of these warrants, using the Black-Scholes model at the date of grant, was $3.1 million and was
recorded as convertible debt discount and was amortized into interest expense over the life of the
notes. The assumptions used in the Black-Scholes model were as follows: no dividend yield; 4.67%
interest rate; five years contractual life; and volatility of 100%.


In connection with the issuance of the senior secured convertible notes, the Company paid $530,000
in cash for placement agent fees of which $205,000 was paid to a director of the Company. These
fees are recorded in prepaid expenses and will be amortized into interest expense over the life of
the notes. The Company also issued to the placement agents warrants to purchase an aggregate of
71,642 shares of common stock, of which 27,711 were issued to a director of the Company, at an
exercise price of $4.82 per share that expire five years from the date of issuance
and warrants to purchase an aggregate of 71,642 shares of common stock, of which 27,711 were issued
to a director of the Company, at an exercise price of $5.63 per share that expire five years from
the date of issuance. The fair value of these warrants, using the Black-Scholes model at the date
of grant, was $458,000 and was recorded in prepaid expenses and will be amortized into interest
expense over the life of the notes.


F-22




 




On March 29, 2007, the Company entered into Amendment No. 1 to the Purchase Agreement whereby the
exercise date of the warrants issued to the investors was amended to be the six month anniversary
of the closing date (February 23, 2007) of the Purchase Agreement.


During July 2007, the Investors converted all of the $8.0 million in aggregate principal amount of
the Notes into an aggregate of 1,990,050 shares of the Company’s common stock.


On July 31, 2007, the Company entered into a Consent to Equity Sales agreements with the Investors
whereby the Investors waived the application of Section 7.9 of the Convertible Note Agreement which
prohibits the Company from selling securities under certain circumstances and the Strategic
Investor waived their Right of First Refusal pursuant to Section 7.12 of the Convertible Note
Agreement with respect to any equity transaction that occurs during the 90 day period following
July 9, 2007. In addition, the Company agreed to amend the warrants issued to the Investors so that
the exercise price of the Series A Warrant is decreased to $4.32 per share and the exercise price
per share of the Series B Warrant is decreased to $5.13 per share. The difference of the fair value
of the repriced warrants and the original warrants on the date of the repricing using the
Black-Scholes model was $133,000 and was recorded as a private placement cost (Note 13). The
assumptions used in the Black-Scholes model were as follows: no dividend yield; 4.6% interest rate;
4.58 years contractual life; and volatility of 100%.


11. Atlocal asset purchase



On June 9, 2005, the Company entered into an asset purchase agreement with Xiongwu Xia, an
individual, to purchase the patent-pending Atlocal Search Engine Computer software, the Atlocal.com
domain name, a computer server, and the Atlocal.com database for $500,000 in cash, cash acquisition
costs of $3,238 and 104,311 unregistered shares of Local.com common stock valued at $750,000 based
upon a 90-day moving average. In addition, the Company will issue Mr. Xia an additional 104,311
shares of unregistered Local.com common stock if the patent is issued for the Atlocal Search Engine
Computer software before June 9, 2010.


On June 12, 2007, the Company was issued patent number 7,231,405, Methods and Apparatus of Indexing
Web Pages of a Web Site for Geographical Searchine Based on User Location. The Company issued Mr.
Xia the additional 104,311 shares of unregistered Local.com common stock valued at $431,000 based
upon the closing price of the Company’s common stock of $4.13 and recorded the amount as an
intangible asset and will amortize the value over three years.


12. PremierGuide, Inc. acquisition



On July 18, 2007, the Company completed the acquisition, through a wholly owned subsidiary, of all
of the outstanding capital stock of PremierGuide, Inc. (PremierGuide), a Delaware corporation and
provider of online business directories for an aggregate purchase price of $2.0 million in cash and
cash acquisition costs of $81,000. The purchase price of $2.1 million was allocated as follows (in
thousands):








































































                         
    
Current assets
         $    192     
    
Customer-related intangibles
              1,020     
    
Non-compete agreement
              13     
    
Goodwill
              1,020     
    
Liabilities assumed
              (139    )
    
 
               
 
    
Total purchase price
         $    2,106     
    
 
                   




PremierGuide’s operating results have been included in the Company’s consolidated financial
statements from the date of acquisition. Customer-related intangibles are being amortized on a
straight-line basis over five years. Non-compete agreement is being amortized on a straight-line
basis over two years. Goodwill, which is determined to have an indefinite life, is not amortized in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets.


F-23




 




13. Private placement



On August 1, 2007, the Company issued 2,356,900 shares of its common stock, par value $0.00001 per
share, for an aggregate purchase price of $12,962,950 to five institutional investors in a private
placement transaction pursuant to a Securities Purchase Agreement, dated as of July 31, 2007
(Securities Purchase Agreement). In connection with the sale of the common stock, the Company also
issued the investors warrants to purchase up to 471,380 shares of the Company’s common stock at an
exercise price of $7.89 per share exercisable beginning February 1, 2008 and for a period of five
years thereafter; and warrants to purchase up to 471,380 shares of the Company’s common stock at an
exercise price of $9.26 per share exercisable beginning February 1, 2008 and for a period of six
years thereafter. In connection with the transaction described herein, the Company also entered
into a Registration Rights Agreement which obligates the Company to register the resale of the
shares of common stock sold in the private placement and the shares of common stock issuable upon
exercise of the warrants under the Securities Act of 1933, as amended and indemnifies the investors
against any Claims, as defined in the Registration Rights Agreement, incurred as a result of any
Violations, as defined in the Registration Rights Agreement. These shares were registered on a Form
S-3 (Registration No. 333-145580) declared effective by the Securities and Exchange Commission on
August 28, 2007.


In connection with the transaction, GunnAllen Financial Inc. (GunnAllen) acted as the Company’s
placement agent. For payment for these services, the Company paid GunnAllen fees of $827,777 in
cash, of which $250,000 was paid to Norman K. Farra Jr., a director of the Company and an employee
of GunnAllen. In addition, the Company issued GunnAllen warrants to purchase up to 46,063 shares of
the Company’s common stock at $7.89 per share and warrants to purchase up to 46,063 shares of the
Company’s common stock at $9.26 per share. In addition, the Company issued Norman K. Farra Jr.
warrants to purchase 19,930 shares of the Company’s common stock at $7.89 per share and warrants to
purchase 19,930 shares of the Company’s common stock at $9.26 per share.


The fair value of all of the warrants issued, using the Black-Scholes model at the date of grant,
was $4,648,108 and was recorded as a private placement cost. The assumptions used in the
Black-Scholes model were as follows: no dividend yield; 4.6% interest rate; five years contractual
life; and volatility of 100%.


F-24




 










Schedule II — Valuation and Qualifying Accounts

Years ended December 31, 2007, 2006 and 2005



















































































































































































                                                                                     
              Balance at         Charges to                             Balance at
              Beginning         Costs and                             End of
    Accounts receivable (in thousands):         of Period         Expenses         Deductions         Period
    
Year ended December 31, 2007
                                                                                
    
Allowance for doubtful accounts
         $    9              $    14              $    (8    )         $    15     
    
Year ended December 31, 2006
                                                                                
    
Allowance for doubtful accounts
         $    30              $    (23    )         $    2              $    9     
    
Year ended December 31, 2005
                                                                                
    
Allowance for doubtful accounts
         $    5              $    69              $    (44    )         $    30     




F-25




 








SELECTED QUARTERLY FINANCIAL DATA

(in thousands, except per share amounts)

(Unaudited)






































































































































































































































































                                                                                                                                                                     
              Quarters ended
              December 31,         September 30,         June 30,         March 31,         December 31,         September 30,         June 30,         March 31,
              2007         2007         2007         2007         2006         2006         2006         2006
    
Revenue
         $    5,932              $    5,614              $    5,098              $    4,881              $    3,628              $    4,059              $    3,374              $    3,151     
    
Operating loss
         $    (2,860    )         $    (2,879    )         $    (2,537    )         $    (2,894    )         $    (3,244    )         $    (2,886    )         $    (3,557    )         $    (3,887    )
    
Net loss
         $    (2,666    )         $    (9,297    )         $    (3,151    )         $    (3,087    )         $    (3,159    )         $    (2,832    )         $    (3,475    )         $    (3,783    )
    
Basic net loss
per share
         $    (0.19    )         $    (0.71    )         $    (0.34    )         $    (0.33    )         $    (0.34    )         $    (0.31    )         $    (0.38    )         $    (0.41    )
    
Diluted net loss
per share
         $    (0.19    )         $    (0.71    )         $    (0.34    )         $    (0.33    )         $    (0.34    )         $    (0.31    )         $    (0.38    )         $    (0.41    )





F-26




 







INDEX TO EXHIBITS



































































               
    Exhibit          
    Number         Description
     
    
 
          
    
23.1*
         Consent of Haskell & White LLP, independent registered public accounting firm.
    
 
          
    
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.















EX-23.1
2
a52024exv23w1.htm
EX-23.1



exv23w1






Exhibit 23.1



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Stockholders

Local.com Corporation


We consent to the incorporation by reference in the registration statements (No. 333-145633, No.
333-120638, and No. 333-127810) on Form S-8 and the registration statements (No. 333-148617, No.
333-147494, No. 333-145580, No. 333-141890, No. 333-129539) on Form S-3 of Local.com Corporation of
our report dated March 7, 2008, appearing in Amendment No. 1 to the Annual Report on Form 10-K/A of
Local.com Corporation for the year ended December 31, 2007.





























                         
    
 
                   /s/ HASKELL & WHITE LLP
    
Irvine, California 


April 3, 2009
                    
















EX-31.1
3
a52024exv31w1.htm
EX-31.1



exv31w1






EXHIBIT 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



I, Heath B. Clarke, certify that:








































         1.         I have reviewed this Amendment No.1 to Form 10-K on Form
10-K/A of Local.com Corporation;
     
         2.         Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
     
         3.         Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
     
         4.         The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f) and 15d-15(f)) for the registrant and have:








































         a)         Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
     
         b)         Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
     
         c)         Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
     
         d)         Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and













         5         The registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):






















         a)         All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
     
         a)         Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.



Date: April 3, 2009





























                         
               
              /s/ Heath B. Clarke
 		     
         Heath B. Clarke      
         Chief Executive Officer

(Principal Executive Officer) 		     


 







EX-31.2
4
a52024exv31w2.htm
EX-31.2



exv31w2
















                         


EXHIBIT 31.2



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



I, Brenda Agius, certify that:









































         1.         I have reviewed this Amendment No.1 to Form 10-K on Form
10-K/A of Local.com Corporation;
     
         2.         Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
     
         3.         Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
     
         4.         The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rule 13a-15(f) and 15d-15(f)) for the registrant and have:








































         a)         Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
     
         b)         Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
     
         c)         Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
     
         d)         Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and













         5         The registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):






















         a)         All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
     
         b)         Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.



Date: April 3, 2009































                         
               
              /s/ Brenda Agius
 		     
         Brenda Agius      
         Chief Financial Officer

(Principal Financial Officer) 		     
     



 










EX-32.1
5
a52024exv32w1.htm
EX-32.1



exv32w1






EXHIBIT 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


In
connection with Amendment No.1 to the Annual Report on Form 10-K of Local.com Corporation (the “Company”) for the
period ended December 31, 2007 on Form 10-K/A (the “Report”), the undersigned hereby certify in their capacities
as Chief Executive Officer and Chief Financial Officer of the Company, respectively, pursuant to 18
U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:






















         1)         the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
     
         2)         the information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.



Date: April 3, 2009



















































                         
               
              /s/ Heath B. Clarke
 		     
         Heath B. Clarke      
         Chief Executive Officer

(Principal Executive Officer) 		     
     
               
              /s/ Brenda Agius
 		     
         Brenda Agius      
         Chief Financial Officer

(Principal Financial Officer) 		     
     

A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form
within the electronic version of this written statement required by Section 906, has been provided
to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.












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