U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended June 30, 2014

OR

 

¨

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period from              to             .

 

Commission File Number: 000-26357

 

 

LOOKSMART, LTD.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware		13-3904355
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

49 Geary Street, Suite 235

San Francisco, California 94108

(415) 348-7000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

NASDAQ Stock Market LLC

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

Common Stock, par value $0.001 per share

 

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

None

 

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

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

 

As of August 11, 2014 there were 5,768,851 shares of the registrant’s common stock outstanding, par value $0.001 per share.

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
ITEM 1		FINANCIAL STATEMENTS		3
		UNAUDITED CONSOLIDATED BALANCE SHEETS		3
		UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS		4
		UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS		5
		UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS		6
		NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		22
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		28
ITEM 4.		CONTROLS AND PROCEDURES		28
PART II. OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS		29
ITEM 1A.		RISK FACTORS		29
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		30
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES		30
ITEM 4.		MINE SAFETY DISCLOSURES		31
ITEM 5.		OTHER INFORMATION		31
ITEM 6.		EXHIBITS		31
SIGNATURE				32
EXHIBIT INDEX				33

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

LOOKSMART, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

 

		June 30, 2014				December 31, 2013
ASSETS		(Unaudited)
Current assets:
Cash and cash equivalents		$	2,138			$	2,789
Short-term investments			515				3,102
Total cash, cash equivalents and short-term investments			2,653				5,891
Trade accounts receivable, net			631				606
Prepaid expenses and other current assets			567				1,077
Total current assets			3,851				7,574
Long-term investments			-				154
Property and equipment, net			4,288				3,831
Other assets, net			85				87
Total assets		$	8,224			$	11,646
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable		$	1,249			$	739
Accrued liabilities			342				444
Deferred revenue and customer deposits			1,007				1,002
Current portion of capital lease obligations			86				-
Total current liabilities			2,684				2,185
Long-term portion of deferred rent			134				186
Total liabilities			2,818				2,371
Commitment and contingencies			-				-
Stockholders' equity:
Convertible preferred stock, $0.001 par value; Authorized: 5,000 shares; Issued and Outstanding: none at June 30, 2014 and December 31, 2013			-				-
Common stock, $0.001 par value; Authorized: 80,000 shares; Issued and Outstanding: 5,769 shares at both June 30, 2014 and December 31, 2013			17				17
Additional paid-in capital			262,506				262,502
Accumulated other comprehensive loss			(186	)			(154	)
Accumulated deficit			(256,773	)			(253,016	)
Treasury stock at cost:  76 shares and 32 shares at June 30, 2014 and December 31, 2013, respectively			(158	)			(74	)
Total stockholders' equity			5,406				9,275
Total liabilities and stockholders' equity		$	8,224			$	11,646

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Revenue		$	1,410			$	1,548			$	2,468			$	3,546
Cost of revenue			699				983				1,390				2,358
Gross profit			711				565				1,078				1,188
Operating expenses:
Sales and marketing			390				115				845				286
Product development and technical operations			1,217				713				2,417				1,400
General and administrative			999				778				1,641				1,991
Restructuring charge			7				7				16				22
Total operating expenses			2,613				1,613				4,919				3,699
Loss from operations			(1,902	)			(1,048	)			(3,841	)			(2,511	)
Non-operating income (expense), net
Interest income			27				33				74				41
Interest expense			(4	)			-				(7	)			(9	)
Other income (expense), net			18				2				17				9
Loss from operations before income taxes			(1,861	)			(1,013	)			(3,757	)			(2,470	)
Income tax expense			-				-				-				-
Net loss		$	(1,861	)		$	(1,013	)		$	(3,757	)		$	(2,470	)
Net loss per share - Basic and Diluted		$	(0.32	)		$	(0.18	)		$	(0.65	)		$	(0.43	)
Weighted average shares outstanding used in computing basic and diluted net loss per share			5,732				5,749				5,747				5,760

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Net loss		$	(1,861	)		$	(1,013	)		$	(3,757	)		$	(2,470	)
Other comprehensive income (loss):
Foreign currency translation adjustments			90				(8	)			0				(47	)
Unrealized loss on investments			(29	)			(1	)			(32	)			25
Change in accumulated other comprehensive loss			61				(9	)			(32	)			(22	)
Comprehensive loss		$	(1,800	)		$	(1,022	)		$	(3,789	)		$	(2,492	)

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2014				2013
Cash flows from operating activities:
Net loss		$	(3,757	)		$	(2,470	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			733				120
Provision for doubtful accounts			5				201
Share-based compensation			4				33
Other non-cash charges			(44	)			18
Deferred rent			(52	)			(21	)
Deferred lease incentive			38				38
Restructuring charge			6				32
Changes in operating assets and liabilities:
Trade accounts receivable			(30	)			992
Prepaid expenses and other current assets			474				34
Trade accounts payable			504				(685	)
Accrued liabilities			(94	)			(1,025	)
Deferred revenue and customer deposits			5				(117	)
Net cash used in operating activities			(2,208	)			(2,850	)
Cash flows from investing activities:
Purchase of investments			(72	)			(5,266	)
Proceeds from sale of investments			2,812				9,800
Payments for property and equipment			(1,013	)			-
Net cash provided by investing activities			1,727				4,534
Cash flows from financing activities:
Principal payments of capital lease obligations			(86	)			(110	)
Proceeds from issuance of common stock			-				1
Payments for repurchase of common stock			(84	)			(13	)
Net cash used in financing activities			(170	)			(122	)
Effect of exchange rate changes on cash and cash equivalents			-				(11	)
Increase in cash and cash equivalents			(651	)			1,551
Cash and cash equivalents, beginning of period			2,789				6,352
Cash and cash equivalents, end of period		$	2,138			$	7,903
Supplemental disclosure of cash flow information:
Interest paid		$	7			$	9
Supplemental disclosure of noncash activities:
Assets acquired through capital lease obligations		$	164			$	-
Change in unrealized gain (loss) on investments		$	(32	)		$	(1	)

 

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

 

 

LOOKSMART, LTD. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of Significant Accounting Policies

 

Nature of Business

 

LookSmart, Ltd. (“LookSmart” or the “Company”) provides its customers with search, social, display, mobile and video advertising solutions as well as analytic, moderation and publishing workflow solutions across the entire social media marketing ecosystem. The customers of Looksmart range from small and medium-sized businesses to large Fortune 50 companies. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

 

LookSmart’s search advertising network generates advertisements that target search intent queries on Looksmart.com and partner publisher sites.  The network offers search advertising customers targeted search through a monitored search advertising distribution network using the Company’s “AdCenter” platform technology.  The advertisers that comprise the Company’s network include intermediaries, direct advertising customers and their agencies, as well as self-service customers in the United States and certain other countries.

 

Self-service advertisers are customers that sign-up directly online with the Company and pay by credit card. Direct advertisers (and their agencies) include customers whose main objective is to obtain conversions or sales from clicks. Intermediary customers do not directly advertise on our platform but sell into the affiliate networks of the large search engine providers (“Intermediaries”).

 

LookSmart also offers advertisers the ability to buy graphical display advertising. LookSmart’s trading desk personnel utilize Demand Side Platform (“DSP”) technology and licensed data from third party providers to purchase targeted advertising on a real-time bidded basis. By leveraging our extensive historical search marketing network data along with performance data from a conversion pixel, LookSmart constructs models of the highest performing audiences and targets them via exchange inventory. LookSmart offers its trading desk as a managed service.

 

In addition, Looksmart, under its “Clickable” and “Syncapse” brands, allows customers to manage paid, owned and earned media by providing a suite of solutions for social media marketers that include publishing, monitoring, data storage, compliance, management, ad placement and analytics.  The “Clickable Analytics” dashboard provides customers with the ability to easily put all their cross channel marketing (search, display, social, email, video, offline) and audience data from various sources into one unified, flexible and customizable platform.  The platform allows the customer to better understand and utilize the data for the customizing and layering of customer specific key performance indicators.  The Company believes that this platform will allow customers to combine data in a way that better suits their particular marketing, financial and operational goals both with standard and customized dashboards and analytics.  This platform allows companies to gather and manage Application Programming Interface (“API”) data from many data providers including Facebook, Twitter, YouTube, and Instagram, as well as analyze such data in the “Clickable” proprietary platform and within a company’s own data warehouse.

 

Further, LookSmart offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology (“Publisher Solutions”). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows publishers and portals to manage their advertiser relationships, distribution channels and accounts.

 

Lastly, starting in the fourth quarter of 2013, the Company began to offer a LookSmart-branded search engine.  For parties submitting search queries, the Company offers free-of-charge search results ranked and presented based on proprietary algorithms.   While early in its evolution, part of the Company’s current search engine monetization strategy is to generate sponsored search results as a part of overall search results and provide links to paying advertisers’ websites.

 

In 2013, the Company made the decision to decrease the amount of revenue that it received from Intermediaries compared to 2012.  Decreasing Intermediary revenue represented a continued trend from 2012 and was the primary driver of the Company’s overall 2013 revenue decreases. The Company believes its revenue trends are tied to market-wide changes in the search ecosystem that have had a severe impact on Intermediary business models and consequently the business Intermediaries conduct with us.  In both 2013 and 2012, we ceased business with a number of Intermediaries.

 

 

In September 2013, LookSmart purchased the assets related to its Syncapse technology for $3 million from MNP Ltd., a receiver appointed by Ontario Superior Court of Justice under an appointment order.  As a result of this transaction, the Company acquired a social media platform that allows enterprise customers the ability to publish, monitor and analyze their social media presence on paid, owned and earned media.  The Company has begun to work with large international brands to assist them in creating, maintaining and analyzing their social media presence online.  As a result of the Syncapse asset purchase, the Company is expanding its offerings to our current customer base.  Our expanded offering allows LookSmart’s traditional customers the ability to manage ad spend in both search and social platforms.  The Company’s goal is to partner with social media companies such as Facebook, Twitter, Pinterest and YouTube, as well as others, to offer customers the ability to maximize their ad spend in all relevant ad categories.

 

In November of 2013, LookSmart acquired an approximate 10,000 square foot Data Center facility in Phoenix, Arizona.  Looksmart has completed the process of consolidating its cloud services in the newly occupied and wholly owned secure Data Center.  As a result, the Company intends to expand its cloud-based offerings to its customers.

 

In March 2014, the company formed a joint venture, Conversion Media Holdings, LLC, a Delaware Limited Liability Corporation, to create content sites directed at ecommerce verticals like housewares, electronics and other consumer products.   The operations began in April of 2014 and currently are in a testing phase.

 

Principles of Consolidation

 

The Unaudited Consolidated Financial Statements as of June 30, 2014 and December 31, 2013, and for the three and six months ended June 30, 2014 and 2013, include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

 

Unaudited Interim Financial Information

 

The accompanying Unaudited Consolidated Financial Statements as of June 30, 2014, and for the three and six months ended June 30, 2014 and 2013, reflect all adjustments that are normal and recurring in nature and, in the opinion of management, are necessary for a fair representation of the Company’s financial position as of June 30, 2014 and the results of operations for the periods shown. These Unaudited Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“Annual Report”). The Consolidated Balance Sheet as of December 31, 2013 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. The results of operations for the interim period ended June 30, 2014 are not necessarily indicative of results to be expected for the full year.

 

Use of Estimates and Assumptions

 

The Unaudited Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue, expenses, and contingent assets and liabilities during the reporting period. The Company bases its estimates on various factors and information which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, and current economic conditions and information from third party professionals that is believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

 

Investments

 

The Company invests its excess cash primarily in debt instruments of high-quality corporate and government issuers. All highly liquid instruments with maturities at the date of purchase greater than ninety days are considered investments. All instruments with maturities greater than one year from the balance sheet date are considered long-term investments unless management intends to liquidate such securities in the current operating cycle. Such securities are classified as short-term investments. These securities are classified as available-for-sale and carried at fair value.

 

Changes in the value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. Except for declines in fair value that are not considered temporary, net unrealized gains or losses on these investments are reported in the Unaudited Consolidated Statements of Comprehensive Loss. The Company recognizes realized gains and losses upon sale of investments using the specific identification method.

 

Fair Value of Financial Instruments

 

The Company’s estimate of fair value for assets and liabilities is based on a framework that establishes a hierarchy of the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions. The three levels of the hierarchy are as follows:

 

 

Level 1:

Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access.

 

Level 2:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.

 

Level 3:

Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our assumptions about the assumptions that market participants would use.

 

Revenue Recognition

 

Our online search advertising revenue is composed of per-click fees that we charge customers and profit sharing arrangements we enter with Intermediaries. The per-click fee charged for keyword-targeted listings is calculated based on the results of online bidding for keywords or page content, up to a maximum cost per keyword or page content set by the customer. The Company has profit-sharing agreements with several customers that call for the sharing of profits and losses. Profit sharing arrangements are governed by contractual agreements. Revenue from these profit-sharing agreements is reported net of the customer’s share of profit.

 

Revenue also includes revenue share from licensing of private-labeled versions of our AdCenter Platform.

 

Revenues associated with online advertising products, including Advertiser Networks, are generally recognized once collectability is established, delivery of services has occurred, all performance obligations have been satisfied, and no refund obligations exist. We pay distribution network partners based on clicks on the advertiser’s ad that are displayed on the websites of these distribution network partners. These payments are called Traffic Acquisition Costs (“TAC”) and are included in cost of revenue. The revenue derived from these arrangements that involve traffic supplied by distribution network partners is reported gross of the payment to the distribution network partners. This revenue is reported gross due to the fact that we are the primary obligors to the advertisers who are the customers of the advertising service.

 

We also enter into agreements to provide private-labeled versions of our products, including licenses to the AdCenter platform technology. These license arrangements may include some or all of the following elements: revenue-sharing based on the publisher’s customer’s monthly revenue generated through the AdCenter application; upfront fees; minimum monthly fees; and other license fees. We recognize upfront fees over the term of the arrangement or the expected period of performance, other license fees over the term of the license, and revenue-sharing portions over the period in which such revenue is earned. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.

 

We provide a provision against revenue for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these provisions are evaluated periodically based upon customer experience and historical trends. The revenue allowance included in trade receivables, net is insignificant at both June 30, 2014 and December 31, 2013.

 

Deferred revenue is recorded when payments are received in advance of performance in underlying agreements. Customer deposits are recorded when customers make prepayments for online advertising.

 

The Company evaluates individual arrangements with customers to make a determination under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 605-45 Revenue Recognition. We test and record revenue accordingly.

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers failing to make required payments. This valuation allowance is reviewed on a periodic basis. The review is based on factors including the application of historical collection rates to current receivables and economic conditions. Additional allowances for doubtful accounts are considered and recorded if there is deterioration in past due balances, if economic conditions are less favorable than the Company anticipated or for customer-specific circumstances, such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable, net is $0.7 million at both June 30, 2014 and December 31, 2013. Bad debt expense included in general and administrative expense was insignificant for both the three and six months ended June 30, 2014. Bad debt expense included in general and administrative expense was $0.3 million and $0.2 million for the three and six months ended June 30, 2013, respectively.

 

 

Concentrations, Credit Risk and Credit Risk Evaluation

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments, and accounts receivable. As of June 30, 2014 and December 31, 2013, the Company placed its cash equivalents and investments primarily through one financial institution, City National Bank (“CNB”), and mitigated the concentration of credit risk by placing percentage limits on the maximum portion of the investment portfolio which may be invested in any one investment instrument. The Company also invests in fully collateralized funds with maturities of less than two years. These amounts exceed federally insured limits at June 30, 2014 and December 31, 2013. The Company has not experienced any credit losses on these cash equivalents and investment accounts and does not believe it is exposed to any significant credit risk on these funds. The fair value of these accounts is subject to fluctuation based on market prices.

 

Credit Risk, Customer and Vendor Evaluation

 

Accounts receivable are typically unsecured and are derived from sales to customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for estimated credit losses. The Company applies judgment as to its ability to collect outstanding receivables based primarily on management’s evaluation of the customer’s financial condition and past collection history and records a specific allowance. In addition, the Company records an allowance based on the length of time the receivables are past due. Historically, such losses have been within management’s expectations.

 

The following table reflects customers that accounted for more than 10% of net accounts receivable:

 

		June 30,				December 31,
		2014				2013
Company 1			22	%			**
Company 2			18	%			**
Company 3			**				22	%
Company 4			**				18	%
Company 5			**				16	%
** Less than 10%

 

Revenue and Cost Concentrations

 

The following table reflects the concentration of revenue by geographic locations that accounted for more than 10% of net revenue:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
United States			92	%			88	%			93	%			76	%
Europe, Middle East and Africa			**				**				**				19	%
** Less than 10%

 

LookSmart derives its revenue from two service offerings, or “products”: Advertiser Networks and Publisher Solutions. The percentage distributions between the two service offerings are as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Advertiser Networks			88	%			84	%			91	%			86	%
Publisher Solutions			12	%			16	%			9	%			14	%

 

 

The following table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue, all of which are Intermediaries:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Company 1			13	%			**				12	%			**
Company 2			10	%			**				11	%			**
Company 3			10	%			**				**				**
Company 4			**				**				**				13	%
** Less than 10%

 

The Company derives its revenue primarily from its relationships with significant distribution network partners. The following table reflects the distribution partners that accounted for more than 10% of total TAC:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Distribution Partner 1			20	%			**				32	%			**
Distribution Partner 2			19	%			**				28	%			**
Distribution Partner 3			22	%			13	%			21	%			31	%
Distribution Partner 4			**				**				**				12	%
Distribution Partner 5			**				**				**				11	%
** Less than 10%

 

Property and Equipment

 

Property and equipment are stated at cost, except when an impairment analysis requires the use of fair value, and depreciated using the straight-line method over the estimated useful lives of the assets as follows:

 

Computer equipment				3 to 4 years
Furniture and fixtures				5 to 7 years
Software				2 to 3 years
Building				39 years

 

Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term.

 

When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in operating expenses. Maintenance and repairs are charged to expense as incurred. Expenditures that substantially increase an asset’s useful life are capitalized.

 

In the fourth quarter of 2013, the Company acquired a 10,000 square foot Data Center facility in Phoenix, Arizona. This facility has allowed the Company to consolidate its data needs in a company-owned Data Center, and should allow for the expansion of its cloud-based offerings to its customers.

 

Internal-Use Software Development Costs

 

The Company capitalizes external direct costs of materials and services consumed in developing and obtaining internal-use computer software and the payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use computer software. These costs are capitalized after certain milestones have been achieved and generally amortized over a three-year period once the project is placed in service.

 

Management exercises judgment in determining when costs related to a project may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the amortization period for the capitalized costs, which is generally three years. The Company expects to continue to invest in internally developed software and to capitalize such costs in the future, although no such costs were capitalized in the three and six months ended June 30, 2014.

 

 

Restructuring Charges

 

In August 2012, the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing commitment. Restructuring costs associated with the sub-lease of the San Francisco space, totaling $0.04 million and $0.1 million, respectively, at June 30, 2014 and December 31, 2013, are being amortized over the remaining term of the underlying lease.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets held or used in operations, including property and equipment and internally developed software, for impairment in accordance with ASC 360-10 “Impairment and Disposal of Long-Lived Assets”.

 

The Company reviews assets for evidence of impairment annually at year-end and whenever events or changes in circumstances indicate the carrying values may not be recoverable. The impairment review requires the Company to make significant estimates about its future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry or market conditions, changes in business operations and changes in competition.

 

Traffic Acquisition Costs (“TAC”)

 

The Company enters into agreements of varying durations with its distribution network partners that display the Company’s listings ads on their sites in return for a percentage of the revenue-per-click that the Company receives when the ads are clicked on those partners’ sites.

 

The Company also enters into agreements of varying durations with third party affiliates. These affiliate agreements provide for variable payments based on a percentage of the Company’s revenue or based on a certain metric, such as number of searches or paid clicks.

 

TAC expense is recorded in cost of revenue.

 

Share-Based Compensation

 

The Company recognizes share-based compensation costs for all share-based payment transactions with employees, including grants of employee stock options, restricted stock awards, and employee stock purchases related to the Employee Stock Purchase Plan, over the requisite service period based on their relative fair values. We estimate the fair value of each option award on the date of grant using the Black-Scholes option valuation model. Our assumptions about stock-price volatility are based on the actual volatility of our publicly traded stock. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant. We estimate the expected term based upon the historical exercise activity. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s Consolidated Statements of Operations over the requisite service periods. Share-based compensation expense, related to stock option grants and employee stock purchases, recognized were not significant for both the three and six months ended June 30, 2014, as well as both the three and six months ended June 30, 2013.

 

Forfeitures are estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is determined at the end of each fiscal quarter, based on historical rates.

 

The Company elected to adopt the alternative transition method for calculating the tax effects of share-based compensation to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards.

 

Advertising Costs

 

Advertising costs are charged to sales and marketing expenses as incurred and were insignificant and $0.02 in the three and six months ended June 30, 2014, respectively. Advertising costs were insignificant in both the three and six months ended June 30, 2013.

 

 

Product Development Costs

 

Research of new product ideas and enhancements to existing products are charged to expense as incurred.

 

Income Taxes

 

The Company accounts for income taxes using the liability method. Under the liability method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company records liabilities, where appropriate, for all uncertain income tax positions. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense.

 

Comprehensive Loss

 

Other comprehensive loss as of June 30, 2014 and December 31, 2013, consists of unrealized gains and losses on marketable securities categorized as available-for-sale and foreign currency translation adjustments.

 

Net Loss per Common Share

 

Basic net loss per share is calculated using the weighted average shares of common stock outstanding, excluding treasury stock. Diluted net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding, excluding treasury stock, during the period, using the treasury stock method for stock options. As a result of the Company’s net loss position at both June 30, 2014 and 2013, there is no dilution.

 

Segment Information

 

The Company has one operating segment, online advertising. While the Company operates under one operating segment, management reviews revenue under two product offerings—Advertiser Networks and Publisher Solutions.

 

As of June 30, 2014 and December 31, 2013, the Company’s accounts receivable and deferred revenue are primarily related to the online advertising segment. All long-lived assets are located in the United States and Canada.

 

Adoption of New Accounting Standards

 

On January 2, 2014 we adopted guidance issued by the Financial Accounting Standards Board (“FASB”), ASU 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date”, an amendment providing guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Adoption of this new guidance had no impact on the Company’s consolidated financial position or results of operations.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”) “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. We do not expect the impact of the adoption of ASU 2014-08 to be material to our consolidated financial statements.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

 

 

2. Cash and Available for Sale Securities

 

The following table summarizes the Company’s cash and available-for-sale securities’ amortized cost and estimated fair value by significant investment category as of June 30, 2014, and December 31, 2013 (in thousands):

 

		Amortized Cost and Estimated Fair  Value
		June 30,				December 31,
		2014				2013
Cash and cash equivalents:
Cash		$	828			$	1,048
Cash equivalents
Money market mutual funds			310				1,641
Commercial paper			1,000				100
Total cash equivalents			1,310				1,741
Total cash and cash equivalents			2,138				2,789
Short-term investments:
Corporate bonds			-				501
Certificates of deposit			123				800
Commercial paper			-				500
Other commodities			72				-
Collateralized debt obligations			320				1,301
Total short-term investments			515				3,102
Long-term investments:
Certificates of deposit			-				154
Total long-term investments			-				154
Total cash, and cash equivalents, short-term and long-term investments		$	2,653			$	6,045

 

Realized gains and losses were not significant for either of the three and six months ended June 30, 2014 and 2013. As of June 30, 2014, and December 31, 2013, unrealized gains or losses on investments were $0.03 and insignificant, respectively. The cost of all securities sold is based on the specific identification method.

 

The contractual maturities of cash equivalents and short-term investments at June 30, 2014, and December 31, 2013, were less than one year. There were no long-term investments at June 30, 2014. The contractual maturity of long-term investments was just over one year as of December 31, 2013.

 

The Company typically invests in highly rated securities and its policy generally limits the amount of credit exposure to any one issuer. When evaluating the investments for other-than-temporary impairment, the Company reviews such factors as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s amortized cost basis. During the three and six months ended June 30, 2014 and 2013, the Company did not recognize any impairment charges on outstanding investments. As of June 30, 2014, the Company does not consider any of its investments to be other-than-temporarily impaired.

 

3. Property and Equipment

 

Property and equipment consist of the following at June 30, 2014, and December 31, 2013 (in thousands):

 

		June 30, 2014												December 31, 2013
		Cost				Accumulated Depreciation				Net Book Value				Cost				Accumulated Depreciation				Net Book Value
Computer equipment		$	1,109			$	(461	)		$	648			$	490			$	(244	)		$	246
Furniture and fixtures			22				(3	)			19				21				(1	)			20
Software			2,977				(743	)			2,234				2,962				(246	)			2,716
Leasehold improvements			73				(12	)			61				59				(4	)			55
Land and Buildings			1,339				(13	)			1,326				797				(3	)			794
Total		$	5,520			$	(1,232	)		$	4,288			$	4,329			$	(498	)		$	3,831

 

 

Depreciation expense on property and equipment for the three and six months ended June 30, 2014, including property and equipment under capital lease at June 30, 2014, was $0.4 million and $0.7 million, respectively, and is recorded in operating expenses. Depreciation expense on property and equipment for the three and six months ended June 30, 2013, was $0.06 million and $0.1 million, respectively, and is recorded in operating expenses. Equipment under capital lease at June 30, 2014 totaled $0.2 million. There was no equipment under capital lease at June 30, 2013.

 

In November of 2013, LookSmart acquired an approximate 10,000 square foot Data Center facility in Phoenix, Arizona.  By the end of November 2013, LookSmart completed the process of consolidating its cloud services into this Data Center. As a result, the Company intends to expand its cloud based offerings to its customers.  

 

4. Other Assets

 

The Company’s other assets are as follows at June 30, 2014, and December 31, 2013 (in thousands):

 

		June 30, 2014												December 31, 2013
		Gross Amount				Accumulated Amortization				Net Book Value				Gross Amount				Accumulated Amortization				Net Book Value
Other assets			85				-				85				87				-				87
Total		$	85			$	-			$	85			$	87			$	-			$	87

 

5. Accrued Liabilities

 

Accrued liabilities consisted of the following as of June 30, 2014, and December 31, 2013 (in thousands):

 

		June 30,				December 31,
		2014				2013
Accrued distribution and partner costs		$	171			$	176
Accrued compensation and related expenses			82				87
Accrued professional service fees			82				146
Other			7				35
Total accrued liabilities		$	342			$	444

 

6. Restructuring Charges

 

In August 2012, the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing commitment. Restructuring costs associated with the sub-lease of the San Francisco space, totaling $0.04 million and $0.1 million, respectively, at June 30, 2014 and December 31, 2013, are being amortized over the remaining term of the underlying lease.

 

7. Capital Lease and Other Obligations

 

Capital lease and other obligations consist of the following at June 30, 2014, and December 31, 2013 (in thousands):

 

		June 30,				December 31,
		2014				2013
Capital lease obligations		$	86			$	-
Deferred rent			134				186
Total capital lease and other obligations			220				186
Less: current portion of capital lease obligations			(86	)			-
Capital lease and other obligations, net of current portion		$	134			$	186

 

Refer to Note 8 for future minimum payment details.

 

 

Capital Lease Obligations

 

City National Bank

 

We have an outstanding standby letter of credit issued by City National Bank (“CNB”) of approximately $0.1 and $0.2 million at June 30, 2014 and December 31, 2013, respectively, related to security of the subleased corporate office lease and secured by a money market account held at CNB.

 

8. Commitments and Contingencies

 

As of June 30, 2014, future minimum net payments under all operating leases are as follows (in thousands):

 

		Capital Lease				Operating Leases				Total
Six months ending December 31, 2014		$	88			$	80			$	168
Years ending December 31,
2015			-				178				178
2016			-				99				99
2017			-				101				101
2018			-				86				86
Total minimum net payments		$	88			$	544			$	632
Less: amount representing interest			(2	)
Present value of net minimum payments			86
Less: current portion			(86	)
Long-term portion of capital lease obligations		$	-

 

Operating Leases

 

In August 2009, the Company entered into an agreement to sublease office space for its headquarters in San Francisco, California, under an operating lease that commenced in November 2009 and expires on December 30, 2014. In July 2012, the Company entered into an agreement to sublease this subleased office space under terms generally equivalent to its existing commitment for a term that commenced in August 2012 and expires in December 2014.

 

In August 2013, the Company leased office space of approximately 2,341 square feet for its corporate office in San Francisco, California under a five year lease that commenced in September 2014 and expires on August 31, 2018.

 

The Company leases office space in Los Angeles, California of approximately of 4,803 square feet. The lease expires in July 2015.

 

The Company terminated its lease and closed its Canadian office in Kitchener in August 2013.

 

The Company entered into a 30-month operating lease agreement for various network operating equipment beginning in the fourth quarter of 2014.

 

Rent expense under all operating leases was $0.04 million and $0.08 million for the three and six months ended June 30, 2014, respectively. Rent expense under all operating leases was $0.02 and $0.05 million for the three and six months ended June 30, 2013, respectively.

 

Letters of Credit

 

We have an outstanding standby letter of credit issued by CNB of approximately $0.1 million at June 30, 2014, related to security of the subleased corporate office lease and secured by a restricted money market account held at CNB.

 

Purchase Obligations

 

The Company had outstanding purchase obligations of an insignificant amount relating to an open purchase order for which the Company had not received the related services or goods as of June 30, 2014.

 

 

Guarantees and Indemnities

 

During its normal course of business, the Company has made certain guarantees, indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to the Company’s customers and distribution network partners in connection with the sales of its products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease.

 

Officer and Director Indemnification

 

The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving, at the Company’s request, in such capacity, to the maximum extent permitted under the laws of the State of Delaware. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company maintains directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid, for indemnification of directors and officers. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, the Company has not incurred any losses or recorded any liabilities related to performance under these types of indemnities.

 

Legal Proceedings

 

On September 4, 2013, Cowen and Company, LLC filed a complaint against LookSmart with the Superior Court of California for the County of San Francisco. According to the complaint, Cowen claims that LookSmart is required by an engagement letter dated August 14, 2009 to pay Cowen a $1,000,000 "Sale Transaction Fee" as a result of the third-party tender offer for LookSmart Ltd. consummated by PEEK Investments LLC on January 14, 2013. The parties agreed to a $450,000 settlement at a June 10, 2014 mediation. This amount was subsequently paid by the Company on July 11, 2014. The Complaint and Counter Claims will be dismissed with prejudice on or before August 31, 2014.

 

On October 3, 2013, WeBoost Media S.R.L., a Societa responsabilita ("WeBoost") filed a complaint against LookSmart with the Superior Court of California for the County of San Francisco. The matter was subsequently removed and is currently pending before the United States District Court, Northern District of California. WeBoost’s complaint asserts claims for breach of contract and extra-contractual tort and punitive damages related to "click fraud".  No specific monetary amounts are indicated in the complaint. LookSmart believes the claims are meritless and intends to vigorously defend the matter. The Company is unable to presently determine the risk of loss associated with this matter.

 

The Company is involved, from time to time, in various other legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not expect resolution of these matters to have a material adverse impact on its consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution of a matter could, depending on its amount and timing, materially affect its results of operations, cash flows or financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors.

 

9. Stockholders’ Equity

 

Share-Based Compensation

 

Stock Option Plans

 

In December 1997, the Company approved the 1998 Stock Option Plan (the “1998 Plan”). In June 2007, the stockholders approved the LookSmart 2007 Equity Incentive Plan (the “2007 Plan”). Under the 2007 Plan, the Company may grant incentive stock options, nonqualified stock options, stock appreciation rights and stock rights to employees, directors and consultants. Share-based incentive awards are provided under the terms of these two plans (collectively, the “Plans”).

 

The Compensation Committee of the Board of Directors administers the Company’s Plans. Awards under the Plans principally include at-the-money options and fully vested restricted stock. Outstanding stock options generally become exercisable over a four-year period from the grant date and have a term of seven years. Grants can only be made under the 2007 Plan. The 1998 Plan is closed to further share issuance and all options have expired or been forfeited as of June 30, 2013. The number of shares issued or reserved for issuance under the 2007 Plan was 1.2 million and 1.4 million shares of common stock as of June 30, 2014 and December 31, 2013, respectively. There were 1.2 million shares available to be granted under the 2007 Plan at June 30, 2014.

 

 

Share-based compensation expense recorded during three and six months ended June 30, 2014, and 2013 was included in the Company’s Unaudited Consolidated Statements of Operations as follows (in thousands):

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Sales and marketing		$	-			$	1			$	1			$	2
Product development and technical operations			-				2				1				5
General and administrative			1				12				2				29
Total share-based compensation expense		$	1			$	15			$	4			$	36

 

Total unrecognized share-based compensation expense related to share-based compensation arrangements at June 30, 2014 was $0.01 million and is expected to be recognized over a weighted-average period of approximately 0.91 years. The total fair value of equity awards vested during both the three and six months ended June 30, 2014, was not significant. The total fair value of equity awards vested during both the three and six months ended June 30, 2013, was $0.1 million.

 

Option Awards

 

Stock option activity under the Plans during the three and six months ended June 30, 2014 is as follows:

 

		Shares				Weighted- Average Exercise Price Per Share				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value
		(in thousands)								(in years)				(in thousands)
Options outstanding at December 31, 2013			25			$	4.16				4.67			$	-
Granted			-				-
Exercised			-				-
Expired			-				-
Forfeited			(6	)			3.03
Options outstanding at March 31, 2014			19			$	4.50				4.23				-
Granted			-				-
Exercised			-				-
Expired			-				-
Forfeited			(7	)			1.85
Options outstanding at June 30, 2014			12			$	5.13				3.57			$	-
Vested and expected to vest at June 30, 2014			12			$	5.15				0.89			$	-
Exercisable at June 30, 2014			11			$	5.21				0.85			$	-

 

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the market price of the Company’s stock on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holder had all option holders exercised their options at quarter-end. The intrinsic value amount changes with changes in the fair market value of the Company’s stock.

 

 

The following table summarizes information about stock options outstanding at June 30, 2014:

 

												Options Outstanding												Options Exercisable
Price Ranges												Shares				Weighted- Average Remaining Contractual Term				Weighted- Average Exercise Price Per Share				Shares				Weighted- Average Exercise Price Per Share
												(in thousands)				(in years)								(in thousands)
$	2.55	-						$	2.67				1				5.08			$	2.65				1			$	2.65
	4.14	-							5.64				9				3.87				4.51				8				4.53
	8.10	-							11.64				2				1.04				9.87				2				9.87
													12				3.57				5.13				11				5.21

 

Stock Awards

 

The Company did not issue restricted stock during the three and six months ended June 30, 2014 and 2013.

 

Employee Stock Purchase Plan

 

On July 14, 2009, the 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was approved by the shareholders and authorized to issue up to 500 thousand shares of Common Stock to employees. Substantially all employees may purchase the Company’s common stock through payroll deductions at 85 percent of the lower of the fair market value at the beginning or end of the offering period. Each offering and purchase period is six months. ESPP contributions are limited to a maximum of 15% of an employee’s eligible compensation, and ESPP participants are limited to purchasing a maximum of 5,000 shares per purchase period. Share-based compensation expense for the 2009 ESPP was zero in the three and six months ended June 30, 2014 and insignificant in the three and six months ended June 30, 2013. As of June 30, 2014, 28 thousand shares (adjusted for the 3:1 reverse split in November 2013) have been issued under the 2009 Plan. Following the February 15, 2013 purchase, the ESPP was suspended pending a review by the Company’s Board of Directors of all equity incentive arrangements.

 

Share-Based Compensation Valuation Assumptions

 

We estimate the fair value of each option award on the date of grant using the Black-Scholes option valuation model. Our assumptions about stock-price volatility are based on the actual volatility of our publically traded stock. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant. We estimate the expected term based upon the historical exercise activity.

 

No options were granted in the first half of 2014 or 2013, therefore no weighted average assumptions are included here.

 

Share-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

Exercise of Employee and Director Stock Options and Purchase Plans

 

There were no options exercised in both the three and six months ended June 30, 2014 and 2013. The Company issues new shares of common stock upon exercise of stock options. No income tax benefits have been realized from exercised stock options.

 

Repurchase of Equity Securities by the Company

 

In May 2012, the Company's Board of Directors authorized the repurchase of up to $1 million of the Company's common shares. Under the program, the Company may purchase its common shares from time to time in the open market or in privately negotiated transactions.

 

Approximately 43 thousand shares were purchased during the three months ended June 30, 2014, at an average price of $1.86 per share under the program and recorded as Treasury Stock at cost totaling approximately $81 thousand dollars. Approximately 13 thousand shares were purchased at an average price of $2.01 per share under the program in the year ended December 31, 2013, and recorded as Treasury Stock at cost totaling approximately $26 thousand dollars.

 

 

10. Fair Value Measurements

 

Fair Value of Financial Assets

 

The Company’s financial assets measured at fair value on a recurring basis subject to disclosure requirements at June 30, 2014, and December 31, 2013 were as follows (in thousands):

 

		Balance at June 30, 2014				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobserved Inputs (Level 3)
Cash equivalents:
Money market mutual funds		$	310			$	310			$	-			$	-
Commercial paper			1,000				-				1,000				-
Total cash equivalents			1,310				310				1,000				-
Short-term investments:
Certificates of deposit			123				-				123				-
Other commodities			72				-				72				-
Commercial paper			0				-				-				-
Collateralized debt securities			320				-				-				320
Total short-term investments			515				-				195				320
Total financial assets measured at fair value		$	1,825			$	310			$	1,195			$	320

 

		Balance at December 31, 2013				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobserved Inputs (Level 3)
Cash equivalents:
Money market mutual funds		$	1,641			$	1,641			$	-			$	-
Commercial paper			100				-				100				-
Total cash equivalents			1,741				1,641				100				-
Short-term investments:
Certificates of deposit			800				-				800				-
Corporate bonds			501				-				501				-
Commercial paper			500				-				500				-
Collateralized debt securities			1,301				-				-				1,301
Total short-term investments			3,102				-				1,801				1,301
Long-term investments:
Certificates of deposit			154				-				154				-
Total long-term investments			154				-				154				-
Total financial assets measured at fair value		$	4,997			$	1,641			$	2,055			$	1,301

 

The Company held approximately $0.3 million and $1.3 million in Level 3 investments at June 30, 2014 and December 31, 2013, respectively.

 

Investments

 

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from a third party, nationally recognized pricing service (“pricing service”). When quoted market prices are unavailable, the Company utilizes a pricing service to determine a single estimate of fair value, which is mainly for its fixed maturity investments. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third party market participant would be willing to pay in an arm’s length transaction.

 

 

The Company validates the prices received from the pricing service using various methods including, applicability of Federal Deposit Insurance Corporation or other national government insurance or guarantees, comparison of proceeds received on individual investments subsequent to reporting date, prices received from publicly available sources, and review of transaction volume data to confirm the presence of active markets. The Company does not adjust the prices received from the pricing service unless such prices are determined to be inconsistent. At June 30, 2014 and December 31, 2013, the Company did not adjust prices received from the pricing service.

 

On June 1, 2013 the Company invested approximately $2.0 million in a fully collateralized fund with a maturity date of September 30, 2014.  The investment generally entitles the Company to monthly payments of principal and interest, subject to certain restrictions. From inception through June 30, 2014, the Company has received payments of $1.9 million, comprised of $1.7 million in principal and $0.3 million in interest.  The investment is recorded at amortized cost, reduced for non-temporary losses charged to earnings. No non-temporary losses were recognized by the Company as of and for the periods since the date of investment.  As of June 30, 2014, and December 31, 2013, the aggregate fair value of the investment was approximately $0.3 million and $1.3 million, respectively. 

 

Level 3 Assets – Roll forward (in thousands):

 

		Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Collateralized Debt Securities
Balance at December 31, 2013		$	1,301
Transfers into Level 3			-
Transfers out of Level 3			-
Total gains or losses
Included in earnings (or
changes in net assets)			47
Included in Other
comprehensive income			-
Purchases, issuances, sales,
and settlements
Purchases			-
Issuances			-
Sales			-
Settlements			(541	)
Balance at March 31, 2014		$	807
Transfers into Level 3			-
Transfers out of Level 3			-
Total gains or losses
Included in earnings (or
changes in net assets)			26
Included in Other
comprehensive income			-
Purchases, issuances, sales,
and settlements
Purchases			-
Issuances			-
Sales			-
Settlements			(513	)
Balance at June 30, 2014		$	320

 

Trade accounts receivable, net: The carrying value reported in the Consolidated Balance Sheets approximates fair value and is net of allowances for doubtful accounts and returns which estimate customer non-performance risk.

 

Trade accounts payable and accrued liabilities: The carrying value reported in the Consolidated Balance Sheets for these items approximates their fair value, which is the likely amount that the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company.

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes to those statements, which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believes,” “intends,” “expects,” “anticipates,” “plans,” “may,” “will” and similar expressions to identify forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this report. All forward-looking statements, including, but not limited to, projections, expectations or estimates concerning our business, including demand for our products and services, mix of revenue sources, ability to control and/or reduce operating expenses, anticipated gross margins and operating results, cost savings, product development efforts, general outlook of our business and industry, future profits or losses, competitive position, share-based compensation, adequate liquidity to fund our operations and meet our other cash requirements, are inherently uncertain as they are based on our expectations and assumptions concerning future events. These forward-looking statements are subject to numerous known and unknown risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including but not limited to, the possibility that we may fail to maintain or grow our listings advertiser base and/or distribution network, that existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms, that we may be unable to grow our online search advertising revenue and/or find alternative sources of revenue, that we may be unable to attain or maintain customer acceptance of our publisher solutions products, that changes in the distribution network composition may lead to decreases in query volumes, that we may be unable to maintain or improve our query volume, match rate, number of paid clicks, average revenue per click, conversion rate or other ad network metrics, that we may be unable to achieve or maintain profitability, that we may be unable to retain our existing credit facilities or obtain new credit facilities, that we may be unable to attract and retain key personnel, that we may have unexpected increases in costs and expenses, that we may be unable to remain listed on the NASDAQ Stock Market, or that one or more of the other risks described elsewhere in this report may occur.

 

All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and except as required by applicable law; we assume no obligation to update any forward-looking statements.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the year ended December 31, 2013. As of June 30, 2014, there had been no material changes to our critical accounting policies and estimates.

 

Business Overview

 

For a description of our business, please refer to Note 1.

 

Results of Operations

 

Overview of the Three and Six Months Ended June 30, 2014 and 2013

 

The following tables set forth selected information concerning our results of operations as a percentage of consolidated net revenue for the periods indicated (in thousands):

 

 

		Three Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Revenue		$	1,410				100.0	%		$	1,548				100.0	%		$	(138	)			(9	%)
Cost of revenue			699				49.6	%			983				63.5	%			(284	)			(29	%)
Gross profit			711				50.4	%			565				36.5	%			146				26	%
Operating expenses:
Sales and marketing			390				27.7	%			115				7.4	%			275				239	%
Product development and technical operations			1,217				86.3	%			713				46.1	%			504				71	%
General and administrative			999				70.9	%			778				50.3	%			221				28	%
Restructuring charge			7				0.5	%			7				0.5	%			-				-
Total operating expenses			2,613				185.3	%			1,613				104.2	%			1,000				62	%
Income loss from operations			(1,902	)			(134.9	%)			(1,048	)			(67.7	%)			(854	)			81	%
Non-operating income (expense), net			41				2.9	%			35				2.3	%			6				17	%
Loss from operations before income taxes			(1,861	)			(132.0	%)			(1,013	)			(65.4	%)			(848	)			84	%
Income tax expense			-				-				-				-				-				-
Net loss		$	(1,861	)			(132.0	%)		$	(1,013	)			(65.4	%)		$	(848	)			84	%

 

		Six Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Revenue		$	2,468				100.0	%		$	3,546				100.0	%		$	(1,078	)			(30	%)
Cost of revenue			1,390				56.3	%			2,358				66.5	%			(968	)			(41	%)
Gross profit			1,078				43.7	%			1,188				33.5	%			(110	)			(9	%)
Operating expenses:
Sales and marketing			845				34.2	%			286				8.1	%			559				195	%
Product development and technical operations			2,417				97.9	%			1,400				39.5	%			1,017				73	%
General and administrative			1,641				66.5	%			1,991				56.1	%			(350	)			(18	%)
Restructuring charge			16				0.7	%			22				0.6	%			(6	)			(27	%)
Total operating expenses			4,919				199.3	%			3,699				104.3	%			1,220				33	%
Loss from operations			(3,841	)			(155.6	%)			(2,511	)			(70.8	%)			(1,330	)			53	%
Non-operating income (expense), net			84				3.4	%			41				1.2	%			43				105	%
Loss from continuing operations before income taxes			(3,757	)			(152.2	%)			(2,470	)			(69.7	%)			(1,287	)			52	%
Income tax expense			-				-				-				-				-				-
Net loss		$	(3,757	)			(152.2	%)		$	(2,470	)			(69.7	%)		$	(1,287	)			52	%

 

Revenue

 

Revenue is derived from two service offerings or “products” of LookSmart Ltd. (the “Company”): Advertiser Networks and Publisher Solutions. Total revenue and revenue from Advertiser Networks and Publisher Solutions for the three and six months ended June 30, 2014, and 2013, was as follows (in thousands):

 

		Three Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Advertiser Networks		$	1,241				88	%		$	1,299				84	%		$	(58	)			(4	%)
Publisher Solutions			169				12	%			249				16	%			(80	)			(32	%)
Total revenue		$	1,410				100	%		$	1,548				100	%		$	(138	)			(9	%)

 

 

		Six Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Advertiser Networks		$	2,251				91	%		$	3,041				86	%		$	(790	)			(26	%)
Publisher Solutions			217				9	%			505				14	%			(288	)			(57	%)
Total revenue		$	2,468				100	%		$	3,546				100	%		$	(1,078	)			(30	%)

 

Advertiser Networks

 

The decrease in Advertiser Networks revenue for the three and six months ended June 30, 2014, as compared to the same period in 2013 is the result of a reduction in revenues from all categories, Intermediaries, Direct Advertisers and Self Service Advertisers.

 

In the first half of 2014, revenue from Intermediaries decreased compared to the first half of 2013. We experienced a continuing decrease in Advertising Network revenue in the first half of 2014 following a trend that began in late 2011.

 

In the first half of 2014, revenue from Direct Advertisers decreased compared to the first half of 2013.

 

In the first half of 2014, revenue from Self Service Advertisers decreased compared to the first half of 2013. The Company plans to invest in the Self Service Platform in the future.

 

Publisher Solutions

 

Publisher Solutions revenues decreased in the three and six months ended June 30, 2014, compared to the same period in 2013 generally due to volume reductions by licensees.

 

Cost of Revenue and Gross Profit

 

Cost of revenue is primarily TAC (costs paid to our distribution network partners). Other costs include data center rent and power usage and credit card fees.

 

Cost of revenue for the three and six months ended June 30, 2014 and 2013 were as follows (in thousands):

 

		Three Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Traffic acquisition costs		$	510				36	%		$	573				37	%		$	(63	)			(11	%)
Other costs			189				14	%			410				26	%			(221	)			(54	%)
Total cost of revenue		$	699				50	%		$	983				63	%		$	(284	)			(29	%)
Traffic acquisition costs as percentage of Advertiser Network revenue							41	%							44	%

 

		Six Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Traffic acquisition costs		$	971				39	%		$	1,585				45	%		$	(614	)			(39	%)
Other costs			419				17	%			773				22	%			(354	)			(46	%)
Total cost of revenue		$	1,390				56	%		$	2,358				66	%		$	(968	)			(41	%)
Traffic acquisition costs as percentage of Advertiser Network revenue							43	%							52	%

 

TAC decreased in the three and six months ended June 30, 2014, when compared to the three and six months ended June 30, 2013. Our Intermediary category of revenue generally has lower margins than Direct and Self-Service and the change in revenue mix from 2013 to 2014 drove the margin decline.

 

 

Certain other costs, such as data center costs and power usage, are generally fixed costs. Total cost of revenue decreased in 2014 primarily as result of decreases of TAC combined with decreases in other costs in the current year.

 

Traffic acquisition costs as a percentage of Advertiser Network revenue decreased to 43% in the first half of 2014, as compared to 52% in the same period in 2013 as a result of overall revenue mix changes from 2013 to 2014.

 

Operating Expenses

 

Operating expenses for the three and six months ended June 30, 2014, as compared to the same period in 2013, increased by $1.0 million and $1.2 million, respectively. Contributing factors included increases in product and development costs, a legal settlement, and depreciation.

 

Operating expenses consist of sales and marketing, product development and technical operations, general and administrative, and restructuring charges for the three and six months ended June 30, 2014, and 2013, and were as follows (in thousands):

 

 

 

		Three Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Sales and marketing		$	390				28	%		$	115				7	%		$	275				239	%
Product development and technical operations			1,217				86	%			713				46	%			504				71	%
General and administrative			999				71	%			778				50	%			221				28	%
Restructuring charge			7				-				7				-				-				-
Total operating expenses		$	2,613				185	%		$	1,613				103	%		$	1,000				62	%

 

		Six Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Sales and marketing		$	845				34	%		$	286				8	%		$	559				195	%
Product development and technical operations			2,417				98	%			1,400				39	%			1,017				73	%
General and administrative			1,641				66	%			1,991				56	%			(350	)			(18	%)
Restructuring charge			16				1	%			22				1	%			(6	)			(27	%)
Total operating expenses		$	4,919				199	%		$	3,699				104	%		$	1,220				33	%

 

Sales and Marketing

 

Sales and marketing expenses in the current year include salaries, share-based compensation and other costs of employment for our sales force, sales administration and customer service staff and marketing personnel, overhead, facilities and allocation of depreciation. Sales and marketing expenses also include the costs of advertising, trade shows, public relations activities and various other activities supporting our customer acquisition effort.

 

The increase in sales and marketing expenses for the three and six months ended June 30, 2014, reflects a rebuilding effort in our sales force. The Company is developing plans for sales and marketing and higher expenses in the future are expected in this functional area.

 

Product Development and Technical Operations

 

Product development and technical operations expense includes all costs related to the continued operations, development and enhancement of our core technology product, the AdCenter platform. The AdCenter is used to operate both our own Advertiser Network and other publishers’ client networks, and is licensed to publishers to operate their own network. These costs include salaries and associated costs of employment, including share-based compensation, overhead, and facilities. Software licensing and computer equipment depreciation related to supporting product development and technical operations functions are also included in product development and technical operations expense.

 

 

Beginning in 2013, the company had made a concentrated effort to rebuild product and technical human resources by increasing the Company’s product and technical resources to a level that the Company feels appropriate for its current and expected businesses.

 

General and Administrative

 

General and administrative expenses include personnel cost, legal, insurance, tax and accounting, consulting, professional services fees and the provision for, and reductions of, the allowance for doubtful trade receivables.

 

Operating expense for the three and six months ended June 30, 2014, included $0.5 million related to the settlement of the legal claim by Cowen. Operating expense for the three and six months ended June 30, 2013, included $0.5 million related to the tender offer by PEEK. We do not expect substantial future increases in general and administrative expense.

 

Other Items

 

The tables below set forth other continuing operations data for the three and six months ended June 30, 2014, and 2013 (in thousands):

 

		Three Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Non-operating income (expense), net
Interest income		$	27				2	%		$	33				2	%		$	(6	)			(18	%)
Interest expense			(4	)			-				-				-				(4	)			100	%
Other income, net			18				1	%			2				-				16				800	%
Total non-operating income (expense), net		$	41				3	%		$	35				2	%		$	6				17	%
Income tax expense		$	-				-			$	-				-			$	-				-

 

		Six Months Ended June 30,
		2014				% of Revenue				2013				% of Revenue				Dollar Change				% Change
Non-operating income (expense), net
Interest income		$	74				3	%		$	41				1	%		$	33				80	%
Interest expense			(7	)			-				(9	)			-				2				(22	%)
Other income (expense), net			17				-				9				-				8				89	%
Total non-operating income (expense), net		$	84				3	%		$	41				1	%		$	43				105	%
Income tax expense		$	-				-			$	-				-			$	-				-

 

Interest Income and Expense

 

Interest income decreased 18% in the three months ended June 30, 2014 as compared to the same period in 2013. This decrease is due to the amortization of the principal investment in higher yield collateralized debt obligations. Interest income, increased 80% in the six months ended June 30, 2014 as compared to the same period in 2013. The year-to-date increase was primarily due to investment in higher yield collateralized debt obligations in the middle of the second quarter of 2013.

 

Interest expense, primarily consisting of interest paid on capital leases, increased during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. This increase was primarily due to a new capital lease obligations in the first quarter of 2014. Interest expense, primarily consisting of interest paid on capital leases, decreased during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013. This decrease was primarily due to the final pay-off of capital lease obligations in the first quarter of 2013.

 

Liquidity and Capital Resources

 

Cash flows were as follows for the six months ended June 30, 2014, and 2013 (in thousands):

 

 

		Six Months Ended June 30,
		2014				2013				Change
Net cash used in operating activities		$	(2,208	)		$	(2,850	)		$	642
Net cash provided by investing activities			1,727				4,534				(2,807	)
Net cash used in financing activities			(170	)			(122	)			(48	)
Effect of exchange rate changes on cash and cash equivalents			-				(11	)			11
Increase in cash and cash equivalents		$	(651	)		$	1,551			$	(2,202	)

 

Cash, cash equivalents and short- and long-term investment balances were as follows as of June 30, 2014, and December 31, 2013 (in thousands):

 

		June 30, 2014				December 31, 2013				Change
Cash and cash equivalents		$	2,138			$	2,789			$	(651	)
Short-term investments			515				3,102				(2,587	)
Long-term investments			-				154				(154	)
Total		$	2,653			$	6,045			$	(3,392	)
% of total assets			32	%			52	%
Total assets		$	8,224			$	11,646

 

At June 30, 2014, we had $2.7 million of cash, cash equivalents and short-term marketable investments. Cash equivalents and short-term marketable investments are comprised of highly liquid debt instruments of the U.S. government, commercial paper, time deposits, money market mutual funds, U.S. corporate securities, collateralized debt obligations and other commodities. We actively monitor the depository institutions that hold our cash and cash equivalents and the institutions of whose debt instruments we hold. Our investment policy, which is reviewed annually by our Board of Directors, primarily emphasizes safety of principal while secondarily on maximizing yield on those funds. We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. These balances may exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. See Note 2 to the Unaudited Consolidated Financial Statements, “Cash and Available for Sale Securities,” which describes further the composition of our cash, cash equivalents and short-term investments.

 

Cash, cash equivalents and short- and long-term investments decreased $3.4 million to $2.7 million at June 30, 2014, from $6.0 million at December 31, 2013, primarily due to operating losses.

 

Our primary source of liquidity is our cash, cash equivalents, and short-term investments. Our current primary use of cash is to fund operating losses and investment in software development.  We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to satisfy our current anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our services beyond the current quarter, and changes in customer buying behavior. Also, if the banking system or the financial markets continue to remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected. In addition, we may seek to raise additional capital through public or private debt or equity financings in order to fund our operations and capital expenditures, take advantage of favorable business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions in capital markets or respond to competitive pressures. In addition, unanticipated developments in the short term requiring cash payments, including the acquisition of businesses with negative cash flows, may necessitate additional financing. We cannot be assured that additional financing will be available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing stockholders may experience substantial dilution.

 

Operating Activities

 

Cash used in operating activities in the six months ended June 30, 2014, consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization, provision for doubtful accounts, and share-based compensation expense, as well as the effect of changes in working capital and other activities. Cash used in operations in the first half of 2014 was $2.2 million and consisted of a net loss of $3.8 million, adjustments for non-cash items of $0.7 million and cash used by working capital and other activities of $0.9 million. Adjustments for non-cash items primarily consisted of $0.7 million of depreciation and amortization expense on property and equipment, $0.05 amortization of deferred rent, $0.04 in amortization of deferred lease incentive, and $0.03 million in other non-cash charges. In addition, changes in working capital activities primarily consisted of a $0.04 million net increase in accounts payable and accrued liabilities, an increase of $0.03 million in accounts receivable and a $0.5 million decrease in prepaid and other assets. The decrease in accounts payable and accrued liabilities was primarily due to decreased TAC and operating expenses. The increase in accounts receivable is primarily attributed to slower paying customers.

 

 

Cash used in operating activities in the six months ended June 30, 2013, consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization, provision for doubtful accounts, and share-based compensation expense, as well as the effect of changes in working capital and other activities. Cash used in operations in the first half of 2013 was $2.9 million and consisted of a net loss of $2.5 million, adjustments for non-cash items of $0.4 million and cash used by working capital and other activities of $0.8 million. Adjustments for non-cash items primarily consisted of $0.1 million of depreciation and amortization expense on property and equipment, $0.2 million in bad debt expense and $0.03 million of share-based compensation expense. In addition, changes in working capital activities primarily consisted of a $1.7 million net decrease in accounts payable and accrued liabilities, combined with a decrease of $1.0 million in accounts receivable. The decrease in accounts payable and accrued liabilities was primarily due to decreased TAC and operating expenses. The decrease in accounts receivable is primarily attributed to a decrease in invoiced customer revenue.

 

Investing Activities

 

Cash provided by investing activities in the first half of 2014 of $1.7 million was attributed to $2.8 million net proceeds from the sale of investments partially offset by a $1.0 million in purchases of property and equipment.

 

Cash used in investing activities in the first half of 2013 of $4.5 million was attributed to $4.5 million net purchase of investments.

 

Financing Activities

 

Cash used in financing activities in the first half of 2014 of $0.2 million is attributed to $0.09 million in scheduled capital lease payments and $0.08 million is the repurchase of the Company’s common stock.

 

Cash used in financing activities in the half of 2013 of $0.1 million is primarily attributed to scheduled capital lease payments.

 

Credit Arrangements

 

We have an outstanding standby letter of credit issued by CNB of approximately $0.1 million at June 30, 2014, related to security of our corporate office lease, which is secured by a restricted money market account held at CNB.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

 

Contractual Obligations and Commercial Commitments

 

In comparison with our Annual Report on Form 10-K for the year ended December 31, 2013, we believe that there have been no material changes in contractual obligations or commercial commitments outside the ordinary course of business, during the six months ended June 30, 2014.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Pursuant to Section 229.305(e) of Regulation S-K, as a smaller reporting company, we are not required to provide information regarding quantitative and qualitative disclosures about market risk.

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and principal financial and accounting officer, evaluated the effectiveness of disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of the end of the period covered by this Quarterly Report on From 10-Q.

 

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on this evaluation, our chief executive officer and principal financial and accounting officer concluded, as of June 30, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

PART II

 

ITEM 1.

LEGAL PROCEEDINGS

 

On September 4, 2013, Cowen and Company, LLC filed a complaint against LookSmart with the Superior Court of California for the County of San Francisco. According to the complaint, Cowen claims that LookSmart is required by an engagement letter dated August 14, 2009 to pay Cowen a $1,000,000 "Sale Transaction Fee" as a result of the third-party tender offer consummated for LookSmart Ltd. by PEEK Investments LLC on January 14, 2013. The parties agreed to a $450,000 settlement at a June 10, 2014 mediation. This amount was subsequently paid by the Company on July 11, 2014. The Complaint and Counter Claims will be dismissed with prejudice on or before August 31, 2014.

 

On October 3, 2013, WeBoost Media S.R.L., a Societa responsabilita ("WeBoost") filed a complaint against LookSmart with the Superior Court of California for the County of San Francisco. The matter was subsequently removed and is currently pending before the United States District Court, Northern District of California. WeBoost’s complaint asserts claims for breach of contract and extra-contractual tort and punitive damages related to "click fraud".  No specific monetary amounts are indicated in the complaint. LookSmart believes the claims are meritless and intends to vigorously defend the matter. The Company is presently unable to determine the risk of loss associated with this matter.

 

The Company is involved, from time to time, in various other legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not expect resolution of these matters to have a material adverse impact on its consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution of a matter could, depending on its amount and timing, materially affect our future results of operations, cash flows or financial position. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.

 

ITEM 1A.

RISK FACTORS

 

Other than the risk factors below, there have been no material changes to the risk factors as set forth in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013.

 

Our Stockholder Rights Plan, provisions of Delaware corporate law and provisions of our charter and bylaws may discourage a takeover attempt, which could adversely affect the value of our Common Stock.

 

Our charter and bylaws and provisions of Delaware law may deter or prevent a takeover attempt, including an attempt that might result in a premium over the market price for our common stock. Our board of directors has the authority to issue shares of preferred stock and to determine the price, rights, preferences and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, our charter and bylaws provide for a classified board of directors. These provisions, along with Section 203 of the Delaware General Corporation Law, prohibiting certain business combinations with an interested stockholder, could discourage potential acquisition proposals and could delay or prevent a change of control.

 

 

We generated net losses in 2013, 2012 and for the three and six months ended June 30, 2014, have had losses in the past, and may have further losses in the future. Failure to maintain operating profitability could harm our business and result in a decline in our stock price.

 

We had a net loss of $5.4 million in 2013 and $11 million in 2012. We had net losses of $1.9 million and $3.8 million for the three and six months ended June 30, 2014, respectively. As of December 31, 2013, our accumulated deficit was $253 million. We may be unable to achieve profitability in the foreseeable future. Our ability to achieve and maintain profitability will depend on our ability to generate additional revenue and contain our expenses. In order to generate additional revenue, we will need to expand our network of distribution network partners, increase the amount our search advertising customers spend on our advertising network, expand our advertiser base, experience an increase in paid clicks across our network and publisher products and develop and implement successful new digital advertising revenue generating models. We may be unable to accomplish some or any of these goals because of the risks identified in this report or for unforeseen reasons. Also, we may be unable to contain our costs due to the need to make revenue sharing payments to our distribution network partners, to invest in product development and to market our products. Historically, our operating expenses have increased in proportion to our revenue. Operating expenses may increase in the foreseeable future to the extent that our revenue grows and as we increase headcount, particularly our sales and technology-related headcount, incur general and administrative expenses associated with being a public company and expand our facilities. Additionally, our acquisition-related costs may increase if we pursue additional acquisition opportunities. Although we expect to achieve operating efficiencies and greater leverage of resources as we grow, because of the foregoing factors, and others outlined in this report, we may be unable to achieve profitability in the future, which could result in a decline in our stock price.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In May 2012, the Company's Board of Directors authorized the repurchase of up to $1 million of the Company's common shares. Under the program, the Company may purchase its common shares from time to time in the open market or in privately negotiated transactions. The following table details the repurchases made by the Company in the three and six months ended June 30, 2014.

 

Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Programs				Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Total at December 31, 2013											31,902			$	925,239
January 1 - January 31, 2014			1,195			$	2.05				1,195				923,011
Total at March 31, 2014			1,195			$	2.05				33,097			$	923,011
April 1 - April 30, 2014			4,755				1.88				4,755				914,056
May 1 - May 31, 2014			11,594				1.80				11,594				893,240
June 1 - June 30, 2014			26,939				1.89				26,939				842,417
Total at June 30, 2014			43,288			$	1.86				76,385			$	842,417

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

None.

 

ITEM 6.

EXHIBITS

 

Please see the exhibit index following the signature page of this report.

 

 

SIGNATURE

 

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

 

		LOOKSMART, LTD.
Date: August 14, 2014		By:		/s/ STEVEN WANG
				Steven Wang
				V.P. Finance and Controller

 

 

EXHIBIT INDEX

 

Exhibits

 

Number

Description of Document

 

4.1

Form of Specimen Stock Certificate (Filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-26357) filed with the SEC on November 14, 2005).

 

4.2

Rights Agreement dated as of August 23, 2012 among LookSmart, Ltd. and Computershare Trust Company, N.A. (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).

 

31.1*

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*

Certification of Principal Financial and Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*

Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS*

XBRL Instance Document

 

101.SCH*

XBRL Taxonomy Extension Schema Document

 

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

 

(*) Filed herewith