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, 2015
OR
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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)
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Delaware |
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13-3904355 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
50
California Street, 16th Floor |
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 $0.003 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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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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 10, 2015 there were 5,768,851 shares of the registrant’s common stock outstanding, par value $0.003 per share.
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS
LOOKSMART, LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 491 | | |
$ | 305 | |
Short-term investments | |
| 63 | | |
| 129 | |
Total cash, cash equivalents and short-term investments | |
| 554 | | |
| 434 | |
Trade accounts receivable, net | |
| 293 | | |
| 255 | |
Prepaid expenses and other current assets | |
| 687 | | |
| 602 | |
Total current assets | |
| 1,534 | | |
| 1,291 | |
Property and equipment, net | |
| 2,718 | | |
| 3,403 | |
Other assets, net | |
| 418 | | |
| 62 | |
Total assets | |
$ | 4,670 | | |
$ | 4,756 | |
| |
| | | |
| | |
LIABILITIES & STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Short-term Notes Payable | |
$ | 600 | | |
$ | — | |
Trade accounts payable | |
| 1,067 | | |
| 901 | |
Accrued liabilities | |
| 503 | | |
| 398 | |
Deferred revenue and customer deposits | |
| 827 | | |
| 1,018 | |
Total current liabilities | |
| 2,997 | | |
| 2,317 | |
Long-term debt | |
| 700 | | |
| — | |
Long-term portion of deferred rent | |
| 14 | | |
| 22 | |
Total liabilities | |
| 3,711 | | |
| 2,339 | |
Commitment and contingencies | |
| — | | |
| — | |
Stockholders’ equity: | |
| | | |
| | |
Convertible preferred stock, $0.001 par value; Authorized: 5,000 shares; Issued and Outstanding: none at June 30, 2015 and December 31 , 2014 | |
| — | | |
| — | |
Common stock, $0.003 par value; Authorized: 80,000 shares; Issued and Outstanding: 5,769 shares at both June 30, 2015 and December 31, 2014 | |
| 17 | | |
| 17 | |
Additional paid-in capital | |
| 263,108 | | |
| 262,508 | |
Accumulated other comprehensive loss | |
| (502 | ) | |
| (424 | ) |
Accumulated deficit | |
| (261,415 | ) | |
| (259,435 | ) |
Treasury stock at cost: 130 shares at both June 30, 2015 and December 31, 2014 | |
| (249 | ) | |
| (249 | ) |
Total stockholders’ equity | |
| 959 | | |
| 2,417 | |
Total liabilities and stockholders’ equity | |
$ | 4,670 | | |
$ | 4,756 | |
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, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenue | |
$ | 1,020 | | |
$ | 1,410 | | |
$ | 2,004 | | |
$ | 2,468 | |
Cost of revenue | |
| 412 | | |
| 699 | | |
| 864 | | |
| 1,390 | |
Gross profit | |
| 608 | | |
| 711 | | |
| 1,140 | | |
| 1,078 | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 295 | | |
| 390 | | |
| 703 | | |
| 845 | |
Product development and technical operations | |
| 631 | | |
| 1,217 | | |
| 1,333 | | |
| 2,417 | |
General and administrative | |
| 477 | | |
| 999 | | |
| 807 | | |
| 1,641 | |
Restructuring charge | |
| 217 | | |
| 7 | | |
| 293 | | |
| 16 | |
Total operating expenses | |
| 1,620 | | |
| 2,613 | | |
| 3,136 | | |
| 4,919 | |
Loss from operations | |
| (1,012 | ) | |
| (1,902 | ) | |
| (1,996 | ) | |
| (3,841 | ) |
Non-operating income (expense), net | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| — | | |
| 27 | | |
| — | | |
| 74 | |
Interest expense | |
| (1 | ) | |
| (4 | ) | |
| (1 | ) | |
| (7 | ) |
Other income (expense), net | |
| 20 | | |
| 18 | | |
| 16 | | |
| 17 | |
Loss from operations before income taxes | |
| (993 | ) | |
| (1,861 | ) | |
| (1,981 | ) | |
| (3,757 | ) |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| — | |
Net loss | |
$ | (993 | ) | |
$ | (1,861 | ) | |
$ | (1,981 | ) | |
$ | (3,757 | ) |
Net loss per share - Basic and Diluted | |
$ | (0.17 | ) | |
$ | (0.32 | ) | |
$ | (0.35 | ) | |
$ | (0.65 | ) |
Weighted average
shares outstanding used in computing basic and diluted net loss per share | |
| 5,722 | | |
| 5,732 | | |
| 5,709 | | |
| 5,747 | |
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, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net loss | |
$ | (993 | ) | |
$ | (1,861 | ) | |
$ | (1,981 | ) | |
$ | (3,757 | ) |
Other comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustments | |
| (59 | ) | |
| 90 | | |
| 78 | | |
| — | |
Unrealized loss on investments | |
| — | | |
| (29 | ) | |
| — | | |
| (32 | ) |
Change in accumulated other comprehensive loss | |
| (59 | ) | |
| 61 | | |
| 78 | | |
| (32 | ) |
Comprehensive loss | |
$ | (1,052 | ) | |
$ | (1,800 | ) | |
$ | (1,903 | ) | |
$ | (3,789 | ) |
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, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (1,981 | ) | |
$ | (3,757 | ) |
Adjustment to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 588 | | |
| 733 | |
Provision for doubtful accounts | |
| — | | |
| 5 | |
Share-based compensation | |
| — | | |
| 4 | |
Other non-cash charges | |
| — | | |
| (44 | ) |
Deferred rent | |
| (8 | ) | |
| (52 | ) |
Deferred lease incentive | |
| — | | |
| 38 | |
Restructuring charge | |
| — | | |
| 6 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Trade accounts receivable | |
| (38 | ) | |
| (30 | ) |
Prepaid expenses and other current assets | |
| 85 | | |
| 474 | |
Trade accounts payable | |
| 124 | | |
| 504 | |
Accrued liabilities | |
| 18 | | |
| (94 | ) |
Deferred revenue and customer deposits | |
| (191 | ) | |
| 5 | |
Net cash used in operating activities | |
| (1,403 | ) | |
| (2,208 | ) |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of investments | |
| — | | |
| (72 | ) |
Proceeds from sale of investments | |
| 66 | | |
| 2,812 | |
Payments for property and equipment | |
| — | | |
| (1,013 | ) |
Purchase of intangible assets | |
| (356 | ) | |
| — | |
Net cash/(used in) provided by investing activities | |
| (290 | ) | |
| 1,727 | |
Cash flows from financing activities: | |
| | | |
| | |
Principal payments of capital lease obligations | |
| — | | |
| (86 | ) |
Proceeds from short-term debt | |
| 572 | | |
| — | |
Proceeds from additional paid-in capital | |
| 600 | | |
| — | |
Proceeds from long-term debt | |
| 700 | | |
| — | |
Payments for repurchase of common stock | |
| — | | |
| (84 | ) |
Net cash provided by/(used in) financing activities | |
| 1,872 | | |
| (170 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| 7 | | |
| — | |
Increase/(decrease) in cash and cash equivalents | |
| 186 | | |
| (651 | ) |
Cash and cash equivalents, beginning of period | |
| 305 | | |
| 2,789 | |
Cash and cash equivalents, end of period | |
$ | 491 | | |
$ | 2,138 | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 1 | | |
$ | 7 | |
Supplemental disclosure of noncash activities: | |
| | | |
| | |
Assets acquired through capital lease obligations | |
$ | — | | |
$ | 164 | |
Change in unrealized gain (loss) on investments | |
$ | — | | |
$ | (32 | ) |
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”) was organized in 1996 and is incorporated in the State of Delaware.
LookSmart is a digital advertising solutions company that provides relevant solutions for search and display advertising customers,
organized along five lines of business: (i) Clickable, (ii) LookSmart AdCenter, (iii) Novatech.io, (iv) ShopWiki and (v) web searches.
In addition, LookSmart formed a partnership with Conversion Media Holdings, LLC, which supports the Company’s other lines
of business through the creation of content sites directed at ecommerce verticals. The Company operates its partnership and each
line of business, while being related to the others in terms of shared resources, as separate business lines with their own core
management, profits and losses, and the ability to operate independently as separate businesses. As a result, this separation
of business lines allows Looksmart to operate effectively as a holding company and as a capital allocator to each of the Company’s
separate businesses with the goal of finding mispriced assets in the public and private markets and subsequently taking those
assets to create scalable and sustainable businesses that may then be monetized for the ultimate benefit of Looksmart’s
stockholders.
Clickable
In
September 2013, LookSmart, through its wholly owned subsidiary LookSmart Canada Ltd., purchased the assets related to its Syncapse
Inc. (“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 the Company
believes has allowed it to quickly scale into social media analytics, publishing, and moderation. This, in turn, should allow
our enterprise customers the ability to publish, monitor and analyze their social media presence on paid, owned and earned media.
In January 2014, LookSmart re-branded Syncapse as “Clickable.”
Clickable
helps brands and agencies measure marketing ROI through a customer’s lifetime by connecting critical marketing and advertising
products and services into one platform that gives customers the ability to analyze, publish, moderate, social media and search
marketing. Clickable also offers its platform as a white label solution to agencies who use it to save hours of time creating
reports, increase transparency to clients, increase stickiness of clients, increase recurring revenue streams, and upsell other
tools and services. The Company has begun to work with large international brands to assist them in creating, maintaining and
analyzing their social media presence online. The Company’s goal is to partner with social media companies such as Facebook,
Twitter, Pinterest and YouTube, as well as others, to provide vertically integrated solutions that will offer customers the ability
to maximize their ad spend in all relevant ad categories.
In
addition, Clickable 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 of 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 that LookSmart aims to partner with, 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.
LookSmart
AdCenter
We
have developed a proprietary web-based advertising auction platform, the “AdCenter”, that allows us to create, track,
analyze, report and optimize customers’ advertising campaigns. Through the AdCenter platform, our customers are provided
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 AdCenter indexes ads, analyzes webpage information to match advertising
to relevant content, matches search queries to advertising and utilizes advanced fraud detection techniques in a high-volume ad
serving environment. The platform also collects impression and click data for each listing that we manage for our customers and
provides us with billing information. In addition, we provide each of our advertising customers with a password-protected online
account that enables them to track, analyze and optimize their search marketing campaigns using online reports. The platform also
includes an interface for publishers to access ad syndication feed reports and revenue information.
The
advertisers that comprise the Company’s customer network include intermediaries, direct advertising customers and their
agencies, as well as self-service customers in the United States and certain other countries. These AdCenter customers range from
small and medium-sized businesses to large Fortune 50 companies. 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 (“Intermediaries”) do not directly advertise
on our platform but sell into the affiliate networks of the large search engine providers. Our Intermediary business model experienced
a significant change in the fourth quarter of 2011, such that the Company’s revenue from Intermediaries has declined significantly
as compared to 2011 and earlier. Decreasing Intermediary revenue represented a continued trend from 2012 and was the primary driver
of the Company’s overall 2013 revenue decreases. Thus, in 2013, the Company made the decision to decrease the amount of
revenue that it received from Intermediaries compared to 2012. The Company believes that this decision is in the best interests
of the Company on a go-forward basis. 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 the Company.
In 2014, 2013 and 2012, we ceased business with a number of Intermediaries. Intermediaries continue as our largest category of
customer. We continued this trend of decreasing business with Intermediaries as of June 30, 2015.
Through
a web interface or our proprietary API, LookSmart’s AdCenter allows multiple search advertising customers to upload keywords,
manage daily budgets, set rates and view reports, including spend data that is updated hourly. Search advertising customers can
also access keyword suggestions, price and traffic estimates, online help and frequently asked questions (“FAQ”).
The AdCenter API is also available for search advertising customers and related agencies that use third-party or in-house systems
to analyze and manage their search campaigns.
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 capability through a monitored search advertising distribution
network. 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 those audiences via the Company’s exchange inventory. LookSmart offers its trading desk as a managed service.
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.
LookSmart
offers a suite of customizable search advertising management tools and solutions that help publishers grow their audience, control
advertiser relationships, and enhance and optimize the monetization of their sites. Our Publisher Solutions can be branded and
configured according to publishers’ needs. We offer publishers:
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Command and control over revenue diversification
and growth via the AdCenter for Publishers, a comprehensive private-labeled Application Service Provider (“ASP”)
solution that provides publishers with the ability to own and grow their advertiser relationships, increase their distribution
capacity, and diversify their revenue sources. |
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A customizable set of services and
technology to integrate multiple sources of advertisers, including dominant third-party feeds, within a single auction-based
platform for cost-per-click (“CPC”) text-based advertising. |
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Access to a “backfill”
of advertisers so they can quickly ramp their online operations and not lose time or existing revenue sources while establishing
their advertiser relationships. Connecting multiple installations of the AdCenter for Publishers together allows LookSmart
to create an open marketplace environment that empowers publishers to share, leverage, and exchange their advertisers for
expanded distribution. |
Novatech.io
In
November of 2013, LookSmart acquired an approximately 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 under the name Novatech.io.
NovaTech’s
cloud based services include a private cloud ecosystem comprised of multi-vendor enterprise technologies and capabilities while
serving as a production research and development environment to support the needs of companies who need to scale their information
technology operations quickly and securely.
ShopWiki
ShopWiki
is a consumer shopping search engine that offers comprehensive results for both stores and products. ShopWiki uses crawling technology
to find anything and everything on the internet.
It
was founded by former DoubleClick Executives, along with a DoubleClick software developer. In January 2011, the Company was acquired
by Oversee.net from whom Looksmart acquired the company.
ShopWiki
does not sell any products; it simply helps our users find any product available for sale on the Web. ShopWiki actively crawls
the Internet and API feeds from merchants to find and organize the widest selection of products from more than 250,000 online
merchants.
Web
Searches
The
Company offers 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.
Conversion
Media
In
March 2014, the Company entered into a partnership with VisionNexus, LLC, a California limited liability company. The partnership,
Conversion Media Holdings, LLC, is a Delaware limited liability corporation, with the intent to create content sites directed
at ecommerce verticals like housewares, electronics and other consumer products. The operations of Conversion Media
Holdings, LLC began in April of 2014 and currently are in a testing phase. The Company believes that Conversion Media Holdings,
LLC will begin to generate revenue at the end the 2nd quarter of 2015.
Principles
of Consolidation
The
Unaudited Consolidated Financial Statements as of June 30, 2015 and December 31, 2014, and for the three and six months ended
June 30, 2015 and 2014, 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, 2015, and for the three and six months ended June 30,
2015 and 2014, 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, 2015 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,
2014. The Consolidated Balance Sheet as of December 31, 2014 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,
2015 is 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, 2015 and December 31, 2014.
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 $0.8 million at both June 30, 2015 and December 31, 2014. Bad debt expense included in general and administrative expense
was insignificant for both the three and six months ended June 30, 2015 and 2014, 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, 2015 and December 31, 2014, 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 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, | |
| |
2015 | | |
2014 | |
Company 1 | |
| 11 | % | |
| 10 | % |
Company 2 | |
| ** | | |
| 12 | % |
Company 3 | |
| ** | | |
| 24 | % |
Company 4 | |
| ** | | |
| 13 | % |
| |
| | | |
| | |
**
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, |
|
| |
2015 |
| |
2014 |
| |
2015 |
| |
2014 |
|
United States | |
| 96 | % | |
| 92 | % | |
| 94 | % | |
| 93 | % |
Europe, Middle East and Africa | |
| ** | | |
| ** | | |
| ** | | |
| ** | |
| |
| | | |
| | | |
| | | |
| | |
** 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, |
|
| |
2015 |
| |
2014 |
| |
2015 |
| |
2014 |
|
Advertiser Networks | |
| 100 | % | |
| 88 | % | |
| 100 | % | |
| 91 | % |
Publisher Solutions | |
| 0 | % | |
| 12 | % | |
| 0 | % | |
| 9 | % |
The
following table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue.
| |
| |
| |
| |
|
| |
Three Months Ended June 30, |
| |
Six Months Ended June 30, |
|
| |
2015 |
| |
2014 |
| |
2015 |
| |
2014 |
|
Company 1 | |
| 18 | % | |
| 13 | % | |
| 12 | % | |
| 12 | % |
Company 2 | |
| ** | | |
| 10 | % | |
| ** | | |
| 11 | % |
Company 3 | |
| ** | | |
| 10 | % | |
| ** | | |
| ** | |
| |
| | | |
| | | |
| | | |
| | |
** 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, |
|
| |
2015 |
| |
2014 |
| |
2015 |
| |
2014 |
|
Distribution Partner 1 | |
| 11 | % | |
| 20 | % | |
| 15 | % | |
| 32 | % |
Distribution Partner 2 | |
| 11 | % | |
| 19 | % | |
| 10 | % | |
| 28 | % |
Distribution Partner 3 | |
| 10 | % | |
| 22 | % | |
| ** | | |
| 21 | % |
Distribution Partner 4 | |
| ** | | |
| ** | | |
| ** | | |
| ** | |
| |
| | | |
| | | |
| | | |
| | |
** 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 Improvements | |
10 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, 2015.
Restructuring
Charges
On
August 2012, the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent
to its existing commitment. This lease ended on December 31, 2014, at which time the company no longer had any obligations under
the terms of this lease.
In
the second quarter of 2015, LookSmart incurred $0.2 million in restructuring charges. These expenses include legal and the professional
expenses associated with the announcement in April 2015 that LookSmart, Ltd. (LOOK) and privately-held Pyxis Tankers Inc. (“Pyxis”)
entered into an Agreement and Plan of Merger (the “Merger Agreement”), whereby Pyxis will become a publicly listed company
as a result of the merger between of LookSmart, Ltd. (“LookSmart”) and into Pyxis’ wholly-owned subsidiary, Maritime
Technologies Corp., a Delaware corporation. On the effective date of the merger, in addition, LookSmart will spin off its existing
business into a new entity called LookSmart Group, Inc. (“LookSmart Group”).
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
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. In the first quarter of 2015, all remaining outstanding
share options were surrendered, therefore there was no share-based compensation expense in the three or six months ended June
30, 2015. Share-based compensation expense, related to stock option grants and employee stock purchases, recognized were not significant
for the three and six months ended June 30, 2014.
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 $0.01 in the three and six months ended
June 30, 2015, respectively. Advertising costs were insignificant in both the three and six months ended June 30, 2014.
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, 2015 and December 31, 2014, 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, 2015 and 2014, 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, 2015 and December 31, 2014, 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.
On
January 2, 2015, we adopted the guidance issued by the FASB, 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 raised 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. Adoption of this new guidance had no impact on the Company’s consolidated financial position or results of operations.
Recent
Accounting Pronouncements
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.
In
March 2015, The FASB has issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs
related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that
debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected
by the amendments in this ASU.
For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December
15, 2015, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements
issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15,
2016.
Early adoption of the amendments is permitted for financial statements that have not been previously issued.
The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should
be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply
with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for
the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively
adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability).
In
May 2015, The FASB has issued Accounting Standards Update No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. Existing GAAP does not include
explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing
arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service;
and (d) other similar hosting arrangements.
The amendments add guidance to Subtopic 350-40, Intangibles - Goodwill
and Other - Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud
computing arrangement. The guidance already exists in the FASB Accounting Standards Codification™ in paragraphs
985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement
includes the sale or license of software.
The amendments provide guidance to customers about whether a cloud computing
arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should
account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud
computing arrangement does not include a software license, the customer should account for the arrangement as a service contract.
The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments,
all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.
For public business entities, the amendments will be effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the
amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning
after December 15, 2016. Early adoption is permitted for all entities.
An entity can elect to adopt the amendments either: (1) prospectively to
all arrangements entered into or materially modified after the effective date; or (2) retrospectively. For prospective transition,
the only disclosure requirements at transition are the nature of and reason for the change in accounting principle, the transition
method, and a qualitative description of the financial statement line items affected by the change. For retrospective transition,
the disclosure requirements at transition include the requirements for prospective transition and quantitative information about
the effects of the accounting change.
2.
Merger/Spin-off Reorganization Transaction
The
Transaction
On
April 23, 2015, LookSmart, Ltd. (the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”)
by and among the Company; a wholly owned subsidiary of the Company (“Group”); Pyxis Tankers Inc. (“Pyxis”);
and a wholly owned subsidiary of Pyxis (“Merger Sub”). If the transactions contemplated by the Merger Agreement, which
are subject to approval by the stockholders of the Company at a special meeting (the “Meeting”) of the Company, are
completed:
|
• |
The Company will further amend its
Amended Certificate of Incorporation to effect a reverse stock split (the “Reverse Split”) of its issued and outstanding
common stock by a ratio of not less than one-for-two and not more than one-for-ten, with the exact ratio to be determined
by the Company’s board of directors in its sole discretion; |
|
• |
All of the business, assets and liabilities
of the Company will have been transferred to Group, and holders of record of the Company’s common stock will receive
a pro rata distribution of one share of Group’s common stock for each share of the Company’s common stock held
as of the record date set for said distribution (the “Spin-Off”); |
|
• |
The Company will merge with and into
Merger Sub, with Merger Sub surviving the merger and being a wholly owned subsidiary of Pyxis (the “Merger”);
and |
|
• |
Each share of the Company’s common stock held by holders of record at the close of business on the date of the closing of the Merger will be cancelled and exchanged for the right to receive the number of share(s) of Pyxis common stock equal to $4,000,000 divided by a denominator equal to (i) the final closing price of a share of the Company’s common stock (post-Reverse Split) on the date of the closing of the Merger, multiplied by (ii) the number of issued and outstanding shares of the Company’s common stock (post-Reverse Split) as of the date that the Merger becomes effective. |
In
addition, the Company and Pyxis have each agreed to take such actions as are necessary, proper or advisable to consummate the
Merger and have made certain other customary covenants in the Merger Agreement. Among other things, the Company has agreed to
the preparation and filing by Pyxis of a registration statement on Form F-4 in connection with the registration of the Pyxis’
common stock to be issued as result of the Merger, which registration statement will contain a joint proxy statement/prospectus
to be sent to the stockholders of the Company.
The
joint proxy statement/prospectus for the shareholder vote on the Merger has been filed with the Securities and Exchange Commission
(the “SEC”), and the Staff of the SEC has returned comments thereon to the Company and Pyxis, which are preparing
responses to these comments. Management of the Company believes that a special meeting of the Company’s shareholders to
vote on the Merger transactions could be held as soon as September 2015.
As
a result of the Merger, and subject to the terms and conditions of the Merger Agreement, Pyxis is expected to become a public
company. Pyxis intends to apply to have its common stock listed on the Nasdaq Capital Market or the NYSE MKT under the symbol
“PXS.”
For
additional information regarding Pyxis and the Merger transaction, see the Company’s Current Report on Form 8-K dated April
23, 2015.
Pyxis
Tankers Inc.
Pyxis
Tankers Inc. is a newly formed international maritime transportation company with a focus on the tanker sector. At the consummation
of the Merger with the Company, Pyxis’ fleet will be comprised of six double hull product tankers with an average current
age of four years and that are employed under a mix of short- and medium-term time charters and spot charters. Pyxis will acquire
these six vessels prior to the Merger from an affiliate of its founder and chief executive officer, Mr. Valentios (“Eddie”)
Valentis. Four of the vessels in the fleet will be medium-range, or MR, product tankers, three of which have eco-efficient or
eco-modified designs and two will be short-range tanker sister ships. Each of the vessels in the fleet is capable of transporting
refined petroleum products, such as naphtha, gasoline, jet fuel, kerosene, diesel and fuel oil, as well as other liquid bulk items,
such as vegetable oils and organic chemicals.
Spin-Off
Prior
to the execution of the Merger Agreement, the Company transferred all of its businesses, assets and liabilities to Group in anticipation
of the Spin-Off of Group from the Company. Group has assumed all liabilities of the Company, and the liabilities of the Company’s
former subsidiaries, and has agreed to indemnify Pyxis for losses relating to all of the liabilities of the Company and its former
subsidiaries.
Upon
completion of the Spin-Off, all of the Company’s shares of the common stock of Group shall be cancelled and Group shall
be 100% owned by the Company’s stockholders of record as of the record date set for said distribution.
The
Make Whole Record Date
In
the event that subsequent to the Merger, Pyxis completes a financing which results in gross proceeds to Pyxis of at least $5,000,000
(a “Future Pyxis Offering”) at a valuation lower than the valuation ascribed to the shares of common stock
received by the Company’s stockholders pursuant to the Merger Agreement (the “Consideration Value”),
Pyxis will be obligated to make “whole” the Company’s stockholders as of April 29, 2015 (the “Make
Whole Record Date”) by offering the Company’s stockholders the right to receive additional shares of Pyxis common
stock to compensate the Company’s stockholders for the difference in value of their Pyxis common stock.
In
addition, should Pyxis fail to complete a Future Pyxis Offering within a date which is 3 years from the date of the closing of
the Merger, each holder of the Company’s common stock who has held such stock continuously from the date of the Make Whole
Record Date until the expiration of such 3 year period (the “Legacy LS Stockholders”) will have a 24-hour option
beginning at the end of the 3 year period to require Pyxis to purchase from such Legacy LS Stockholders a pro rata amount of Pyxis
common stock that would result in aggregate gross proceeds to the Legacy LS Stockholders in an amount not to exceed $2,000,000;
provided that in no event shall a Legacy LS Stockholder receive an amount per share greater than the Consideration Value.
Voting
Agreement
In
connection with their entry into the Merger Agreement, the Company, Pyxis and Michael Onghai, entered into a voting agreement,
which is referred to herein as the “Voting Agreement.” The Voting Agreement generally requires that Mr. Onghai,
in his capacity as a stockholder of the Company, vote all of his shares of the Company’s common stock in favor of the reverse
split proposal, the spin-off proposal and the merger proposal, unless doing so would violate his fiduciary duties as an executive
officer and member of the board of directors of the Company. Mr. Ongahi beneficially holds 3,123,047 shares of the Company’s
common stock, representing approximately 54.1% of the outstanding shares of the Company’s common stock over which he possesses
voting rights and are therefore subject to the Voting Agreement.
Termination
The
Merger Agreement may be terminated at any time for various reasons. In the event of proper termination by either the Company or
Pyxis, the Merger Agreement will be of no further force or effect and the Merger will be abandoned, except that if the Merger
Agreement is terminated due to (i) the proposals relating to the transactions contemplated by the Merger Agreement not being approved,
or (ii) a breach by the Company of its covenants, agreements or representations and warranties (and has not cured its breach within
30 days of the giving of notice of such breach), then the Company shall immediately repay Pyxis the $600,000 received upon execution
of the Merger Agreement plus legal and accounting fees incurred by Pyxis (up to $450,000 in fees) (collectively, the “Break-up
Fees”), and if the Merger Agreement is terminated because the board of directors of the Company withdraws its recommendation
of the Merger or approves an alternative proposal or enters into a superior proposal, then in addition to the Break-up Fees, an
additional fee of $450,000 shall also be paid to Pyxis.
3.
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, 2015, and December 31, 2014 (in thousands):
| |
Amortized Cost and Estimated Fair Value |
| |
June 30, |
| |
December 31, |
|
| |
2015 | |
2014 |
Cash and cash equivalents: | |
| | | |
| | |
Cash | |
$ | 489 | | |
$ | 304 | |
Cash equivalents | |
| | | |
| | |
Money market mutual funds | |
| 2 | | |
| 1 | |
Total cash equivalents | |
| 2 | | |
| 1 | |
Total cash and cash equivalents | |
| 491 | | |
| 305 | |
Short-term investments: | |
| | | |
| | |
Certificates of deposit | |
| 23 | | |
| 123 | |
Commercial paper | |
| 34 | | |
| — | |
Other commodities | |
| 6 | | |
| 6 | |
Collateralized debt obligations | |
| — | | |
| — | |
Total short-term investments | |
| 63 | | |
| 129 | |
Total cash, and cash equivalents, short-term and long-term investments | |
$ | 554 | | |
$ | 434 | |
The
contractual maturities of cash equivalents and short-term investments at June 30, 2015, and December 31, 2014, were less than
one year. There were no long-term investments at June 30, 2015 and December 31, 2014.
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, 2015 and 2014, the Company did not recognize any impairment
charges on outstanding investments. As of June 30, 2015, 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, 2015, and December 31, 2014 (in thousands):
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
Cost | | |
Accumulated Depreciation | | |
Net Book Value | | |
Cost | | |
Accumulated Depreciation | | |
Net Book Value | |
Computer equipment | |
$ | 1,099 | | |
$ | (719 | ) | |
$ | 380 | | |
$ | 1,108 | | |
$ | (602 | ) | |
$ | 506 | |
Furniture and fixtures | |
| 22 | | |
| (6 | ) | |
| 16 | | |
| 22 | | |
| (4 | ) | |
| 18 | |
Software | |
| 2,573 | | |
| (1,499 | ) | |
| 1,074 | | |
| 2,733 | | |
| (1,137 | ) | |
| 1,596 | |
Building and Leasehold improvements | |
| 541 | | |
| (63 | ) | |
| 478 | | |
| 541 | | |
| (36 | ) | |
| 505 | |
Land and Buildings | |
| 797 | | |
| (27 | ) | |
| 770 | | |
| 797 | | |
| (19 | ) | |
| 778 | |
Total | |
$ | 5,032 | | |
$ | (2,314 | ) | |
$ | 2,718 | | |
$ | 5,201 | | |
$ | (1,798 | ) | |
$ | 3,403 | |
Depreciation expense
on property and equipment for the three and six months ended June 30, 2015, including property and equipment under capital lease
at June 30, 2015, was $0.3 million and $0.6 million respectively, and is recorded in operating expenses. 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. Equipment under capital lease
at June 30, 2015 totaled $0.1 million. Equipment under capital lease at June 30, 2014 totaled $0.2 million.
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 under the name Novatech.io .
4. Other Assets
The Company’s
other assets are as follows at June 30, 2015, and December 31, 2014 (in thousands):
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
Gross Amount | | |
Accumulated Amortization | | |
Net Book Value | | |
Gross Amount | | |
Accumulated Amortization | | |
Net Book Value | |
Other assets | |
| 418 | | |
| — | | |
| 418 | | |
| 62 | | |
| — | | |
| 62 | |
Total | |
$ | 418 | | |
$ | — | | |
$ | 418 | | |
$ | 62 | | |
$ | — | | |
$ | 62 | |
5. Accrued Liabilities
Accrued liabilities
consisted of the following as of June 30, 2015, and December 31, 2014 (in thousands):
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
Accrued distribution and partner costs | |
$ | 48 | | |
$ | 89 | |
Accrued compensation and related expenses | |
| 95 | | |
| 102 | |
Accrued professional service fees | |
| 68 | | |
| 117 | |
Notes Payable | |
| 212 | | |
| — | |
Other | |
| (7 | ) | |
| 3 | |
Capital lease obligation (Note 7) | |
| 87 | | |
| 87 | |
Total accrued liabilities | |
$ | 503 | | |
$ | 398 | |
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. This lease ended on December 31, 2014, at which time the company no longer had any obligations
under the terms of this lease.
In the second quarter of 2015,
LookSmart incurred $0.2 million in restructuring charges. These expenses include legal and the professional expenses associated
with the announcement in April 2015 that LookSmart, Ltd. (LOOK) and privately-held Pyxis Tankers Inc. (“Pyxis”) entered
into an Agreement and Plan of Merger (the “Merger Agreement”), whereby Pyxis will become a publicly listed company as
a result of the merger between of LookSmart, Ltd. (“LookSmart”) and into Pyxis’ wholly-owned subsidiary, Maritime Technologies
Corp., a Delaware corporation. On the effective date of the merger, in addition, LookSmart will spin off its existing business
into a new entity called LookSmart Group, Inc. (“LookSmart Group”).
7. Capital Lease and Other Obligations
Capital lease and other obligations
consist of the following at June 30, 2015, and December 31, 2014 (in thousands):
| |
| | |
| |
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
Capital lease obligations | |
$ | 87 | | |
$ | 87 | |
Deferred rent | |
| 14 | | |
| 22 | |
Notes Payable | |
| 700 | | |
| — | |
Total capital lease and other obligations | |
| 801 | | |
| 109 | |
Less: current portion of capital lease obligations | |
| (87 | ) | |
| (87 | ) |
Capital lease and other obligations, net of current portion | |
$ | 714 | | |
$ | 22 | |
Refer to Note 8 for future minimum
payment details.
Capital Lease Obligations
The Company
had an outstanding standby letter of credit issued by City National Bank (“CNB”) of approximately $0.1 at December
31, 2014, related to security of the subleased corporate office lease which expired on December 30, 2014. This sublease was secured
by a money market account held at CNB. In February 2015, the Company cancelled this letter of credit upon release by the Lessor.
Other Obligations
From December
2014 to March 2015, Snowy August Management LLC advanced certain funds to the Company in the aggregate amount of $0.6 million.
The Company incorrectly stated the amount of the funds advanced as $0.75 million in its Annual Report on Form 10-K for the year
ended December 31, 2014, but does not consider such misstatement material. The Company’s Chief Executive Officer, Michael
Onghai is the manager of Snowy August Management LLC. The Company intends to repay in full such funds to Snowy August Management
LLC.
From April
2015 to June 2015, Snowy August Management LLC advanced certain funds to the Company in the aggregate amount of $0.1 million.
On June 5, 2015, LookSmart Ltd. obtained
a 12 month loan from Inca Capital in the amount of $0.6 million collateralized by our data center facility in Phoenix, Arizona.
The interest-only loan carries an interest rate of 10.5%. The loan’s maturity date is May 30, 2016.
8. Commitments and Contingencies
As of June 30, 2015, future minimum net
payments under all operating leases are as follows (in thousands):
| |
| |
| |
|
| |
|
Capital
Lease |
| |
|
Operating Leases |
| |
|
Total |
|
Six months ending December 31, 2015 | |
$ | 87 | | |
$ | 24 | | |
$ | 111 | |
Years ending December 31, | |
| | | |
| | | |
| | |
2016 | |
| — | | |
| — | | |
| — | |
2017 | |
| — | | |
| — | | |
| — | |
2018 | |
| — | | |
| — | | |
| — | |
Total minimum net payments | |
$ | 87 | | |
$ | 24 | | |
$ | 111 | |
Less: amount representing interest | |
| — | | |
| | | |
| | |
Present value of net minimum payments | |
| 111 | | |
| | | |
| | |
Less: current portion | |
| (111 | ) | |
| | | |
| | |
Long-term portion of capital lease obligations | |
$ | — | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
Operating Leases
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. On October 15, 2014, the Company terminated this lease,
closed the office and was released from all obligations under this lease.
The Company
leases office space in Los Angeles, California of approximately of 4,803 square feet. The lease expires in August 2015.
The Company
entered into a 30-month operating lease agreement for various network operating equipment beginning in the fourth quarter of 2013.
Rent expense under
all operating leases was $0.07 million and $0.1 million for the three and six months ended June 30, 2015, respectively. 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.
Letters of Credit
The Company
had an outstanding standby letter of credit issued by City National Bank (“CNB”) of approximately $0.1 at December
31, 2014, related to security of the subleased corporate office lease which expired on December 30, 2014. This sublease was secured
by a money market account held at CNB. In February 2015, the Company cancelled this letter of credit upon release by the Lessor.
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 October
3, 2013, 4Media 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 to the United States District Court,
Northern District of California. WeBoost’s complaint asserted claims for breach of contract and extra-contractual tort and
punitive damages related to “click fraud”. The parties agreed to a $42,500 settlement at an April 21, 2015 mediation.
This amount was subsequently paid by the Company on April 24, 2015. WeBoost’s complaint and cross claim was dismissed with
prejudice on May 4, 2015.
The Company
is otherwise 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, 2014. 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, 2015 and December 31, 2014,
respectively.
Share-based compensation expense recorded during three and
six months ended June 30, 2015, and June 30, 2014 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 |
|
| |
2015 |
| |
2014 |
| |
2015 |
| |
2014 |
|
Sales and marketing | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 1 | |
Product development and technical operations | |
| — | | |
| — | | |
| — | | |
| 1 | |
General and administrative | |
| — | | |
| 1 | | |
| — | | |
| 2 | |
Total share-based compensation expense | |
$ | — | | |
$ | 1 | | |
$ | — | | |
$ | 4 | |
| |
| | | |
| | | |
| | | |
| | |
Total unrecognized
share-based compensation expense related to share-based compensation arrangements at June 30, 2015 was zero. The total fair value
of equity awards vested during the three months ended June 30, 2015 was zero. The total fair value of equity awards vested during
the three and six months ended June 30, 2014, was zero.
Option Awards
Stock option activity under the Plans during the three and
six months ended June 30, 2015 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, 2014 | |
| 5 | | |
$ | 5.27 | | |
| 2.93 | | |
$ | — | |
Granted | |
| — | | |
| — | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Expired | |
| — | | |
| — | | |
| | | |
| | |
Forfeited | |
| (5 | ) | |
| 5.27 | | |
| 2.93 | | |
| | |
Options outstanding at March 31, 2015 | |
| — | | |
| — | | |
| — | | |
| — | |
Granted | |
| — | | |
| — | | |
| | | |
| | |
Exercised | |
| — | | |
| — | | |
| | | |
| | |
Expired | |
| — | | |
| — | | |
| | | |
| | |
Forfeited | |
| — | | |
| — | | |
| | | |
| | |
Options outstanding at June 30, 2015 | |
| — | | |
| — | | |
| — | | |
$ | — | |
Vested and expected to vest at June 30, 2015 | |
| — | | |
| — | | |
| — | | |
$ | — | |
Exercisable at June 30, 2015 | |
| — | | |
| — | | |
| — | | |
$ | — | |
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.
There are no stock
options outstanding as of June 30, 2015.
Stock Awards
The Company did not issue restricted stock
during the three and six months ended June 30, 2015 and 2014.
Employee Stock Purchase Plan
On July 14,
2009, the 2009 Employee Stock Purchase Plan (the “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. On February
15, 2013, the ESPP was suspended pending a review by the Company’s Board of Directors of all equity incentive arrangements.
Share-based compensation expense for the ESPP was zero in the both three and six months ended June 30, 2015 and zero in both the
three months ended June 30, 2014. As of June 30, 2015, 28 thousand shares (adjusted for the 3:1 reverse split in November
2013) have been issued under the 2009 Plan.
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 three or six months of 2015 or 2014, 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 the three and six months ended June 30, 2015 and 2014. 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.
There were no shares
repurchased during the three or six months ended June 30, 2015. Approximately 98,000 shares were purchased at an average price
of $1.78 per share under the program in the year ended December 31, 2014, and recorded as Treasury Stock at cost totaling approximately
$174,440.
Additional Paid-in Capital
Paid-in Capital increased by $0.6 million.
This increase is due to the $0.6 million LookSmart received from privately-held Pyxis Tankers Inc. (“Pyxis”) associated
with the announcement in April 2015 that LookSmart, Ltd. (LOOK) and privately-held Pyxis Tankers Inc. (“Pyxis”) entered
into an Agreement and Plan of Merger (the “Merger Agreement”), whereby Pyxis will become a publicly listed company as
a result of the merger between of LookSmart, Ltd. (“LookSmart”) and into Pyxis’ wholly-owned subsidiary, Maritime Technologies
Corp., a Delaware corporation. On the effective date of the merger, in addition, LookSmart will spin off its existing business
into a new entity called LookSmart Group, Inc. (“LookSmart Group”).
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, 2015, and December
31, 2014 were as follows (in thousands):
| |
Balance at June 30,
2015 | | |
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 | | |
$ | 1 | | |
$ | — | | |
$ | — | |
Total cash equivalents | |
| 1 | | |
| 1 | | |
| — | | |
| — | |
Short-term investments: | |
| | | |
| | | |
| | | |
| | |
Certificates of deposit | |
| 23 | | |
| — | | |
| 23 | | |
| — | |
Other commodities | |
| 6 | | |
| — | | |
| 6 | | |
| — | |
Commercial paper | |
| 34 | | |
| — | | |
| 34 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Total short-term investments | |
| 63 | | |
| — | | |
| 63 | | |
| — | |
Total financial assets measured at fair value | |
$ | 64 | | |
$ | 1 | | |
$ | 63 | | |
$ | — | |
| |
Balance at December 31, 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 | |
$ | 1 | | |
$ | 1 | | |
$ | — | | |
$ | — | |
Total cash equivalents | |
| 1 | | |
| 1 | | |
| — | | |
| — | |
Short-term investments: | |
| | | |
| | | |
| | | |
| | |
Certificates of deposit | |
| 123 | | |
| — | | |
| 123 | | |
| — | |
Other Commodities | |
| 6 | | |
| — | | |
| 6 | | |
| — | |
Total short-term investments | |
| 129 | | |
| — | | |
| 129 | | |
| — | |
Total financial assets measured at fair value | |
$ | 130 | | |
$ | 1 | | |
$ | 129 | | |
$ | — | |
The Company held no Level 3 investments
at June 30, 2015 and at December 31, 2014.
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, 2015 and December 31, 2014, the Company did not adjust prices received from the pricing service.
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, 2014. As of June
30, 2015, 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, 2015
and 2014
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, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar Change | | |
% Change | |
Revenue | |
$ | 1,020 | | |
| 100.0 | % | |
$ | 1,410 | | |
| 100.0 | % | |
$ | (390 | ) | |
| (28 | %) |
Cost of revenue | |
| 412 | | |
| 40.4 | % | |
| 699 | | |
| 49.6 | % | |
| (287 | ) | |
| (41 | %) |
Gross profit | |
| 608 | | |
| 59.6 | % | |
| 711 | | |
| 50.4 | % | |
| (103 | ) | |
| (14 | %) |
Operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 295 | | |
| 28.9 | % | |
| 390 | | |
| 27.7 | % | |
| (95 | ) | |
| (24 | %) |
Product development and technical operations | |
| 631 | | |
| 61.9 | % | |
| 1,217 | | |
| 86.3 | % | |
| (586 | ) | |
| (48 | %) |
General and administrative | |
| 477 | | |
| 46.8 | % | |
| 999 | | |
| 70.9 | % | |
| (522 | ) | |
| (52 | %) |
Restructuring charge | |
| 217 | | |
| 21.2 | % | |
| 7 | | |
| 0.5 | % | |
| 210 | | |
| 3000 | % |
Total operating expenses | |
| 1,620 | | |
| 158.8 | % | |
| 2,613 | | |
| 185.3 | % | |
| (993 | ) | |
| (38 | %) |
Loss from operations | |
| (1,012 | ) | |
| (99.2 | %) | |
| (1,902 | ) | |
| (134.9 | %) | |
| 890 | | |
| 47 | % |
Non-operating income (expense), net | |
| 19 | | |
| 1.9 | % | |
| 41 | | |
| 2.9 | % | |
| (22 | ) | |
| (54 | %) |
Loss from operations before income taxes | |
| (993 | ) | |
| (97.3 | %) | |
| (1,861 | ) | |
| (132.0 | %) | |
| 868 | | |
| 47 | % |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (993 | ) | |
| (97.3 | %) | |
$ | (1,861 | ) | |
| (132.0 | %) | |
$ | 868 | | |
| 47 | % |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Six Months Ended June 30, 2015 | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar Change | | |
% Change | |
Revenue | |
$ | 2,004 | | |
| 100.0 | % | |
$ | 2,468 | | |
| 100.0 | % | |
$ | (464 | ) | |
| (19 | %) |
Cost of revenue | |
| 864 | | |
| 43.1 | % | |
| 1,390 | | |
| 56.3 | % | |
| (526 | ) | |
| (38 | %) |
Gross profit | |
| 1,140 | | |
| 56.9 | % | |
| 1,078 | | |
| 43.7 | % | |
| 62 | | |
| 6 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 703 | | |
| 35.1 | % | |
| 845 | | |
| 34.2 | % | |
| (142 | ) | |
| (17 | %) |
Product development and technical operations | |
| 1,333 | | |
| 66.5 | % | |
| 2,417 | | |
| 97.9 | % | |
| (1,084 | ) | |
| (45 | %) |
General and administrative | |
| 807 | | |
| 40.3 | % | |
| 1,641 | | |
| 66.5 | % | |
| (834 | ) | |
| (51 | %) |
Restructuring charge | |
| 293 | | |
| 14.6 | % | |
| 16 | | |
| 0.7 | % | |
| 277 | | |
| 1731 | % |
Total operating expenses | |
| 3,136 | | |
| 156.5 | % | |
| 4,919 | | |
| 199.3 | % | |
| (1,783 | ) | |
| (36 | %) |
Loss from operations | |
| (1,996 | ) | |
| (99.6 | %) | |
| (3,841 | ) | |
| (155.6 | %) | |
| 1,845 | | |
| 48 | % |
Non-operating income (expense), net | |
| 15 | | |
| 0.7 | % | |
| 84 | | |
| 3.4 | % | |
| (69 | ) | |
| (82 | %) |
Loss from continuing operations before income taxes | |
| (1,981 | ) | |
| (98.9 | %) | |
| (3,757 | ) | |
| (152.2 | %) | |
| 1,776 | | |
| 47 | % |
Income tax expense | |
| — | | |
| — | | |
| — | | |
| 0.0 | % | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (1,981 | ) | |
| (98.9 | %) | |
$ | (3,757 | ) | |
| (152.1 | %) | |
$ | 1,776 | | |
| 47 | % |
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,
2015, and 2014, was as follows (in thousands):
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2015 | | |
% of Revenue | | |
2014 | | |
% of Revenue | | |
Dollar Change | | |
% Change | |
Advertiser Networks | |
$ | 1,020 | | |
| 100 | % | |
$ | 1,241 | | |
| 88 | % | |
$ | (221 | ) | |
| (18 | %) |
Publisher Solutions | |
| — | | |
| — | | |
| 169 | | |
| 12 | % | |
| (169 | ) | |
| (100 | %) |
Total revenue | |
$ | 1,020 | | |
| 100 | % | |
$ | 1,410 | | |
| 100 | % | |
$ | (390 | ) | |
| (28 | %) |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Six Months Ended June 30, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Advertiser Networks | |
$ | 2,003 | | |
| 100 | % | |
$ | 2,251 | | |
| 91 | % | |
$ | (248 | ) | |
| (11 | %) |
Publisher Solutions | |
| 1 | | |
| 0 | % | |
| 217 | | |
| 9 | % | |
| (216 | ) | |
| (100 | %) |
Total revenue | |
$ | 2,004 | | |
| 100 | % | |
$ | 2,468 | | |
| 100 | % | |
$ | (464 | ) | |
| (19 | %) |
Advertiser Networks
The decrease
in Advertiser Networks revenue for the three and six months ended June 30, 2015, as compared to the same period in 2014 is the
result of a reduction in revenues from all categories: Intermediaries, Direct Advertisers and Self Service Advertisers.
In the
first half of 2015, revenue from Intermediaries decreased compared to the first half of 2014. We experienced a continuing decrease
in Advertising Network revenue in the first half of 2015 following a trend that began in late 2011.
In the
first half of 2015, revenue from Direct Advertisers decreased compared to the first half of 2014.
In the
first half of 2015, revenue from Self Service Advertisers decreased compared to the first half of 2014. 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, 2015, compared to the same period in 2014 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, power usage and
credit card fees.
Cost of
revenue for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands):
| |
Three Months Ended June 30, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Traffic acquisition costs | |
$ | 370 | | |
| 36 | % | |
$ | 510 | | |
| 36 | % | |
$ | (140 | ) | |
| (27 | %) |
Other costs | |
| 42 | | |
| 4 | % | |
| 189 | | |
| 14 | % | |
| (147 | ) | |
| (78 | %) |
Total cost of revenue | |
$ | 412 | | |
| 40 | % | |
$ | 699 | | |
| 50 | % | |
$ | (287 | ) | |
| (41 | %) |
Traffic acquisition costs as percentage of Advertiser Network revenue | |
| | | |
| 36 | % | |
| | | |
| 41 | % | |
| | | |
| | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Six Months Ended June 30, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Traffic acquisition costs | |
$ | 792 | | |
| 40 | % | |
$ | 971 | | |
| 39 | % | |
$ | (179 | ) | |
| (18 | %) |
Other costs | |
| 72 | | |
| 4 | % | |
| 419 | | |
| 17 | % | |
| (347 | ) | |
| (83 | %) |
Total cost of revenue | |
$ | 864 | | |
| 43 | % | |
$ | 1,390 | | |
| 56 | % | |
$ | (526 | ) | |
| (38 | %) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Traffic acquisition costs as percentage of Advertiser Network revenue | |
| | | |
| 40 | % | |
| | | |
| 43 | % | |
| | |
TAC decreased $0.14
million and $0.18 million in the three and six months ended June 30, 2015, when compared to the three and six months ended June
30, 2014. Our Intermediary category of revenue generally has lower margins than Direct and Self-Service and our continued move
away from Intermediaries’ business drove the margin increase.
Certain
other costs, such as data center costs and power usage, are generally fixed costs. Total cost of revenue decreased in 2015 primarily
as result of decreases of TAC combined with decreases in other costs in the current year.
TAC as
a percentage of Advertiser Network revenue decreased to 40% in the first half ended June 30, 2015, as compared to 43% in the same
period in 2014 as a result of overall revenue mix changes from 2014 to 2015.
Operating Expenses
Operating expenses for the three and six months ended June 30, 2015, as compared to the same period in
2014, decreased by $1.0 and $1.8 million. Contributing factors included decreases in sales and marketing costs, product and development
costs, general and administrative costs.
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, 2015, and 2014, and were as follows (in thousands):
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Sales and marketing | |
$ | 295 | | |
| 29 | % | |
$ | 390 | | |
| 28 | % | |
$ | (95 | ) | |
| (24 | %) |
Product development and technical operations | |
| 631 | | |
| 62 | % | |
| 1,217 | | |
| 86 | % | |
| (586 | ) | |
| (48 | %) |
General and administrative | |
| 477 | | |
| 47 | % | |
| 999 | | |
| 71 | % | |
| (522 | ) | |
| (52 | %) |
Restructuring charge | |
| 217 | | |
| 21 | % | |
| 7 | | |
| — | | |
| 210 | | |
| 3000 | % |
Total operating expenses | |
$ | 1,620 | | |
| 159 | % | |
$ | 2,613 | | |
| 185 | % | |
$ | (993 | ) | |
| (38 | %) |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Six Months Ended June 30, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Sales and marketing | |
$ | 703 | | |
| 35 | % | |
$ | 845 | | |
| 34 | % | |
$ | (142 | ) | |
| (17 | %) |
Product development and technical operations | |
| 1,333 | | |
| 66 | % | |
| 2,417 | | |
| 98 | % | |
| (1,084 | ) | |
| (45 | %) |
General and administrative | |
| 807 | | |
| 40 | % | |
| 1,641 | | |
| 66 | % | |
| (834 | ) | |
| (51 | %) |
Restructuring charge | |
| 293 | | |
| 15 | % | |
| 16 | | |
| 1 | % | |
| 277 | | |
| 1731 | % |
Total operating expenses | |
$ | 3,136 | | |
| 156 | % | |
$ | 4,919 | | |
| 199 | % | |
$ | (1,783 | ) | |
| (36 | %) |
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
decrease in sales and marketing expenses for the three and six months ended June 30, 2015, reflects a reduction in our sales and
marketing personnel. 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.
Other
Items
The
tables below set forth other continuing operations data for the three and six months ended June 30, 2015, and 2014 (in thousands):
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Three Months Ended June 30, | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Non-operating income (expense), net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | — | | |
| — | | |
$ | 27 | | |
| 2 | % | |
$ | (27 | ) | |
| (100 | %) |
Interest expense | |
| (1 | ) | |
| — | | |
| (4 | ) | |
| — | | |
| 3 | | |
| 75 | % |
Other income, net | |
| 20 | | |
| 2 | % | |
| 18 | | |
| 1 | % | |
| 2 | | |
| 11 | % |
Total non-operating income (expense), net | |
$ | 19 | | |
| 2 | % | |
$ | 41 | | |
| 3 | % | |
$ | (22 | ) | |
| (54 | %) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
$ | — | | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| — | |
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
Six Months Ended June 30, 2015 | |
| |
2015 | | |
% of
Revenue | | |
2014 | | |
% of
Revenue | | |
Dollar
Change | | |
%
Change | |
Non-operating income (expense), net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | — | | |
| — | | |
$ | 74 | | |
| 3 | % | |
$ | (74 | ) | |
| (100 | %) |
Interest expense | |
| (1 | ) | |
| — | | |
| (7 | ) | |
| — | | |
| 6 | | |
| 86 | % |
Other income (expense), net | |
| 16 | | |
| 1 | % | |
| 17 | | |
| — | | |
| (1 | ) | |
| (6 | %) |
Total non-operating income (expense), net | |
$ | 15 | | |
| — | | |
$ | 84 | | |
| 3 | % | |
$ | (69 | ) | |
| (82 | %) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
$ | — | | |
| — | | |
$ | — | | |
| — | | |
$ | — | | |
| — | |
Interest
Income and Expense
Interest
income decreased 100% in both the three and six months ended June 30, 2015, respectively, as compared to the same periods in 2014.
This decrease is due to the September 30, 2014 maturation of our high-yield investment in a fully collateralized fund.
Interest
expense, primarily consisting of interest paid on capital leases, decreased during both the three and months ended June 30, 2015,
as compared to the three and six months ended June 30, 2014. This decrease was primarily due to the termination of lease obligations
in the first quarter of 2015.
Liquidity
and Capital Resources
Cash
flows were as follows for the six months ended June 30, 2015, and 2014 (in thousands):
| |
| | |
| | |
| |
| |
Six Months Ended June 30, 2015 | |
| |
2015 | | |
2014 | | |
Change | |
Net cash used in operating activities | |
$ | (1,403 | ) | |
$ | (2,208 | ) | |
$ | 805 | |
Net cash (used in) provided by investing activities | |
| (290 | ) | |
| 1,727 | | |
| (2,017 | ) |
Net cash provided by (used in) financing activities | |
| 1,872 | | |
| (170 | ) | |
| 2,042 | |
Effect of exchange rate changes on cash and cash equivalents | |
| 7 | | |
| — | | |
| 7 | |
Increase or Decrease in cash and cash equivalents | |
$ | 186 | | |
$ | (651 | ) | |
$ | 837 | |
Cash,
cash equivalents and short-term investment balances were as follows as of June 30, 2015, and December 31, 2014 (in thousands):
| |
| | |
| | |
| |
| |
June 30, | | |
December 31, | | |
| |
| |
2015 | | |
2014 | | |
Change | |
Cash and cash equivalents | |
$ | 491 | | |
$ | 305 | | |
$ | 186 | |
Short-term investments | |
| 63 | | |
| 129 | | |
| (66 | ) |
Total | |
$ | 554 | | |
$ | 434 | | |
$ | 120 | |
% of total assets | |
| 12 | % | |
| 9 | % | |
| | |
Total assets | |
$ | 4,670 | | |
$ | 4,756 | | |
| | |
At
June 30, 2015, we had approximately $0.6 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 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 increased $0.1 million to $0.6 million at June 30, 2015, from $0.4 million
at December 31, 2014, primarily due to financing efforts in the first half of 2015, offset by 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. 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, 2015, consisted of our net loss adjusted for certain non-cash items,
including depreciation and amortization, as well as the effect of changes in working capital and other activities. Cash used in
operations in the six months ended June 30, 2015 was $1.4 million and consisted of a net loss of $2.0 million, adjustments for
non-cash items of $0.6 million and cash used by working capital and other activities of zero. Adjustments for non-cash items primarily
consisted of $0.6 million of depreciation and amortization expense on property and equipment and purchased software. In addition,
changes in working capital activities primarily consisted of a $0.2 million net increase in accounts payable and accrued liabilities,
an increase of $0.04 million in accounts receivable and a $0.09 million decrease in prepaid and other assets. The increase in
accounts payable and accrued liabilities was primarily due to the increase in 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, 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.
Investing
Activities
Cash
used in investing activities in the six months ended June 30, 2015 of $0.3 million was attributed to $0.4 million purchase of
intangible assets partially offset by $0.1 million in net proceeds from the sale of investments.
Cash
provided by investing activities in the six months ended June 30, 2014 of $1.7 million was attributed to $2.1 million net proceeds
from the sale of investments partially offset by a $0.4 million in purchases of property and equipment.
Financing
Activities
Cash
provided by financing activities in the first half of 2015 of $1,872 is primarily attributed to increases in long-term liabilities
and notes payable, as well as proceeds from additional paid-in capital from Inca Capital, Snowy August Management, LLC and Pyxis
Tankers Inc.
Cash
used in financing activities in the first half of 2014 of $0.2 million is attributed to $0.09 million is scheduled capital lease
payments and $0.08 million in the repurchase of the Company’s common stock.
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, 2014, we believe that there have been no material
changes in contractual obligations or commercial commitments outside the ordinary course of business, during the three and six
months ended June 30, 2015.
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, 2015,
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, 2015, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART
II
ITEM
1. LEGAL PROCEEDINGS
On
October 3, 2013, 4Media 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 to the United States District Court,
Northern District of California. WeBoost’s complaint asserted claims for breach of contract and extra-contractual tort and
punitive damages related to “click fraud”. The parties agreed to a $42,500 settlement at an April 21, 2015 mediation.
This amount was paid by the Company on April 24, 2015. WeBoost’s complaint and cross claim was dismissed with prejudice
on May 4, 2015.
The
Company is otherwise 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.
ITEM
1A. RISK FACTORS
Not
required for smaller reporting companies.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURE
Not
applicable.
ITEM
5. OTHER INFORMATION
On
August 7, 2015 Paul Pelosi, Jr. resigned as a member of the Board of Directors of the Company.
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, 2015 |
By: |
|
/s/ Michael Onghai |
|
|
|
Michael Onghai, |
|
|
Principal Executive Officer, |
|
Principal Financial and Accounting Officer |
EXHIBIT
INDEX
Exhibits
Number | Description
of Document |
| |
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, 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. |
| |
(*) Filed herewith |
(**) This certification is being furnished solely to accompany
this Quarterly Report pursuant to 18 U.S.C. Section 1350, and it is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934 and is not to be incorporated by reference into any filing of the Company, whether made before or after the
date hereof, regardless of any general incorporation language in such filing. |
Exhibit
31.1
CERTIFICATION
PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Michael Onghai, certify that:
1. |
I have
reviewed this Quarterly Report on Form 10-Q of LookSmart, Ltd.; |
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
4. |
The registrant’s
other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The registrant’s
other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions): |
|
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: August 14, 2015 |
|
/s/ Michael Onghai |
|
|
|
Michael Onghai, CFA |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
Exhibit
31.2
CERTIFICATION
PURSUANT TO
SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I,
Michael Onghai, certify that:
1. |
I have reviewed this Quarterly
Report on Form 10-Q of LookSmart, Ltd.; |
2. |
Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report; |
3. |
Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report; |
4. |
I am responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
(a) |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
(d) |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
(b) |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
|
|
|
|
Date: August 14, 2015 |
|
/s/ Michael Onghai |
|
|
|
Michael Onghai, |
|
|
|
Principal Financial and Accounting Officer |
|
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
I,
Michael Onghai, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that the quarterly report of LookSmart, Ltd. on Form 10-Q for the fiscal quarter ended June 30, 2015, fully complies with the
requirements of §13(a) or §15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly
report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of LookSmart, Ltd.
Date: August 14, 2015 |
|
/s/ Michael Onghai |
|
|
|
Michael Onghai, |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer, Principal Financial and Accounting Officer) |
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