10-Q

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 September 30, 2012

OR

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

For the Transition Period from              to             .

Commission File Number: 000-26357

LOOKSMART, LTD.

(Exact Name of Registrant as Specified in its Charter)

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

555 California Street, Suite 324

San Francisco, California 94105

(415) 348-7000

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

NASDAQ Stock Market LLC

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

Common Stock, par value $0.001 per share

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

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x      No o

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

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x

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

As of November 13, 2012 there were 17,305,828 shares of the registrant’s common stock outstanding, par value $0.001 per share.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS	3
	UNAUDITED CONSOLIDATED BALANCE SHEETS	3
	UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS	5
	UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS	6
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	26
ITEM 4.	CONTROLS AND PROCEDURES	26
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 1A.	RISK FACTORS	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4.	MINE SAFETY DISCLOSURES	27
ITEM 5.	OTHER INFORMATION	27
ITEM 6.	EXHIBITS	27
SIGNATURE		28
EXHIBIT INDEX		29

2

PART I

ITEM 1. FINANCIAL STATEMENTS

LOOKSMART, LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2012			December 31, 2011
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	6,506		$	17,950
Short-term investments		11,118			6,809
Total cash, cash equivalents and short-term investments		17,624			24,759
Trade accounts receivable, net		2,018			1,588
Prepaid expenses and other current assets		571			604
Total current assets		20,213			26,951
Property and equipment, net		1,179			1,941
Capitalized software and other assets, net		1,784			1,220
Total assets	$	23,176		$	30,112
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable	$	1,909		$	1,682
Accrued liabilities		1,207			895
Deferred revenue and customer deposits		1,125			1,143
Current portion of capital lease obligations		208			515
Total current liabilities		4,449			4,235
Capital lease and other obligations, net of current portion		150			296
Total liabilities		4,599			4,531
Stockholders' equity:
Convertible preferred stock, $0.001 par value; Authorized: 5,000 shares at September 30, 2012 and December 31, 2011; Issued and Outstanding: none at September 30, 2012 and December 31, 2011		-			-
Common stock, $0.001 par value; Authorized: 80,000 shares; Issued and Outstanding: 17,306 shares and 17,288 shares at September 30, 2012 and December 31, 2011, respectively		17			17
Additional paid-in capital		262,402			262,201
Accumulated other comprehensive loss		(32	)		(24	)
Accumulated deficit		(243,776	)		(236,613	)
Treasury stock at cost:  40 shares at September 30, 2012		(34	)		-
Total stockholders' equity		18,577			25,581
Total liabilities and stockholders' equity	$	23,176		$	30,112

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

3

LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue	$	3,915		$	7,356		$	11,502		$	22,350
Cost of revenue		2,564			4,187			7,149			12,281
Gross profit		1,351			3,169			4,353			10,069
Operating expenses:
Sales and marketing		682			565			2,141			1,732
Product development and technical operations		1,437			1,767			4,780			4,911
General and administrative		1,743			1,066			4,468			3,528
Restructuring charge		159			-			159			889
Total operating expenses		4,021			3,398			11,548			11,060
Loss from operations		(2,670	)		(229	)		(7,195	)		(991	)
Non-operating income (expense), net
Interest income		23			21			64			68
Interest expense		(7	)		(11	)		(28	)		(64	)
Other income (expense), net		-			(1	)		(4	)		325
Loss from operations before income taxes		(2,654	)		(220	)		(7,163	)		(662	)
Income tax expense		-			(4	)		-			(3	)
Net loss	$	(2,654	)	$	(224	)	$	(7,163	)	$	(665	)
Net loss per share - Basic and Diluted	$	(0.15	)	$	(0.01	)	$	(0.41	)	$	(0.04	)
Weighted average shares outstanding used in computing basic and diluted net loss per share		17,306			17,284			17,306			17,265

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

4

LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME LOSS

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net loss	$	(2,654	)	$	(224	)	$	(7,163	)	$	(665	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(12	)		(5	)		(34	)		(5	)
Unrealized gain (loss) on investments		(1	)		(50	)		26			(35	)
Change in accumulated other comprehensive loss		(13	)		(55	)		(8	)		(40	)
Comprehensive loss	$	(2,667	)	$	(279	)	$	(7,171	)	$	(705	)

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

5

LOOKSMART, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(7,163	)	$	(665	)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,568			2,039
Provision for doubtful accounts		293			36
Share-based compensation		170			263
Other non-cash charges		57			69
Deferred rent		(5	)		(8	)
Restructuring charge		159			-
Gain on closure of settlement fund		-			(339	)
Changes in operating assets and liabilities:
Trade accounts receivable		(723	)		96
Prepaid expenses and other current assets		(75	)		(71	)
Trade accounts payable		205			(639	)
Accrued liabilities		312			(628	)
Deferred revenue and customer deposits		(18	)		(2	)
Net cash provided by (used in) operating activities		(5,220	)		151
Cash flows from investing activities:
Purchase of investments		(15,560	)		(16,672	)
Proceeds from sale of investments		11,220			11,793
Payments for property, equipment, and capitalized software		(1,387	)		(738	)
Proceeds from contingent purchase consideration of certain consumer assets		-			91
Net cash used in investing activities		(5,727	)		(5,526	)
Cash flows from financing activities:
Principal payments of capital lease obligations		(448	)		(873	)
Proceeds from issuance of common stock		19			75
Payments for repurchase of common stock		(34	)		-
Net cash used in financing activities		(463	)		(798	)
Effect of exchange rate changes on cash and cash equivalents		(34	)		(5	)
Decrease in cash and cash equivalents		(11,444	)		(6,178	)
Cash and cash equivalents, beginning of period		17,950			22,119
Cash and cash equivalents, end of period	$	6,506		$	15,941
Supplemental disclosure of noncash activities:
Change in unrealized gain (loss) on investments	$	26		$	(35	)
Share-based compensation capitalized as software development costs	$	12		$	19
Change in deferred lease incentive	$	178		$	-

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

6

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”) is a digital advertising solutions company that provides relevant solutions for search and display advertising. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

LookSmart provides advertisers with search marketing and display advertising solutions, and offers publishers the ability to monetize their inventory through our search network:

Search Advertisers: LookSmart search marketing network acquires queries from a large variety of sources and matches them with the keywords of our advertising customers. Our search advertising customers are generally of three types; Intermediaries, Direct Advertisers and Self-Service Advertisers. Intermediaries purchase clicks to sell into the affiliate networks of the large search engine providers. Direct Advertisers and their agencies purchase clicks with the assistance of LookSmart account managers to achieve conversions or sales from the clicks or to obtain unique page views. Self-Service Advertisers are small Direct Advertisers that sign-up online, pay by credit card and manage their account with minimal LookSmart account management assistance. LookSmart offers search advertising customers targeted search via a monitored search advertising distribution network using the Company’s “AdCenter” platform technology. The Company’s search advertising network includes publishers and search advertising customers, including Intermediaries and direct advertising customers and their agencies as well as self-service customers, in the United States and certain other countries. The Company’s application programming interface (“API”) allows search advertising customers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns.

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

For Publishers: LookSmart also 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.

Principles of Consolidation

The Unaudited Consolidated Financial Statements as of September 30, 2012 and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011, 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 September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, 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 September 30, 2012 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, 2011(“Annual Report”). The Consolidated Balance Sheet as of December 31, 2011 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 September 30, 2012 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 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.

Reclassifications

Certain amounts in the financial statements for the prior periods have been reclassified to conform to the current presentation. These reclassifications did not change the previously reported net loss, net change in cash and cash equivalents or stockholders’ equity.

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. 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. Net unrealized gains or losses on these investments are reported as a component of Other Comprehensive Loss in the Unaudited Consolidated Statements of Comprehensive Loss. The Company recognizes realized gains and losses upon sale of investments using the specific identification method.

7

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 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. Profit sharing is generally a 50%/50% equal sharing of profits with Intermediaries based on affiliate network revenue less traffic acquisition costs. Revenue also includes revenue 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 obligor 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. We had no revenue reserves at September 30, 2012. We had $0.3 million in revenue reserves at December 31, 2011.

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 to determine whether a provision or reversal is required. The review is based on factors including the application of historical collection rates to current receivables and economic conditions. The Company will record an increase or reduction of its allowance for doubtful accounts if collection rates or economic conditions are more or less favorable than it anticipated. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company anticipated or for customer-specific circumstances, such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable, net is $0.7 million and $0.6 million at September 30, 2012 and December 31, 2011, respectively. Bad debt allowance included in general and administrative expense was not significant and $0.3 million for three and nine months ended September 30, 2012, respectively. Bad debt allowance included in general and administrative expense was not significant for both the three and nine months ended September 30, 2011.

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 September 30, 2012 and December 31, 2011, 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. These amounts exceed federally insured limits. 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.

8

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, if necessary. 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 gross accounts receivable:

	September 30, 2012			December 31, 2011
Company 1		33	%		**
Company 2		12	%		20	%
Company 3		**			12	%

** Less than 10%

Revenue and Cost Concentrations

The following table reflects countries that accounted for more than 10% of net revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
United States		53	%		73	%		55	%		70	%
Europe, Middle East and Africa		36	%		16	%		39	%		22	%

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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Advertiser Networks		94	%		96	%		92	%		96	%
Publisher Solutions		6	%		4	%		8	%		4	%

The following table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Company 1		27	%		**			23	%		**
Company 2		**			14	%		**			11	%
Company 3		**			12	%		**			12	%

** Less than 10%

9

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 TAC:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Distribution Partner 1		37	%		**		27	%		**
Distribution Partner 2		10	%		**		**			**
Distribution Partner 3		**			**		10	%		**

** Less than 10%

Property and Equipment

Property and equipment are stated at cost 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

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.

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.

Impairment of Long-Lived Assets

The Company reviews long-lived assets held or used in operations, including property and equipment and capitalized software development costs, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Subject assets are tested for impairment at the lowest level of operations that generate cash flows that are largely independent of the cash flows from those of other groups of asset and liabilities. Management has determined that the equity of its single reporting unit is the lowest level of operation at which independent cash flows can be identified. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to dispose.

The Companytested its long-lived assets used in operations for impairment as of September 30, 2012, and determined there was no impairment. As a result of the San Francisco office lease abandonment the Leasehold Improvements were no longer in use and as such were written off in the amount of $0.2 million in the third quarter of 2012 (see Note 3 for more information).

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.

The Company records TAC expenses as cost of revenue and TAC are expensed based on the volume of the underlying activity or revenue, multiplied by the agreed-upon price or rate.

10

Share-Based Compensation

The Company recognizes share-based compensation costs for all awards granted, including stock option grants, 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. The Company estimates the fair value of option awards on the grant date using the Black-Scholes method. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s Unaudited Consolidated Statements of Operations over the requisite service periods. Share-based compensation expense recognized for the three and nine months ended September 30, 2012 were $0.1 million and $0.2 million, respectively, and $0.1 million and $0.3 million for three and nine months ended September 30, 2011, respectively, which was related to stock option grants and employee stock purchases.

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.

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 interest and penalties related to unrecognized tax benefits within operations as income tax expense.

Comprehensive Loss

Other comprehensive income (loss) as of September 30, 2012 and December 31, 2011, consists of unrealized gains (losses) on marketable securities categorized as available-for-sale and foreign currency translation adjustments.

Net Loss per Common Share

Basic net loss and diluted net loss per share is calculated using the weighted average shares of common stock outstanding. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for stock options.

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 September 30, 2012 and December 31, 2011, all of the Company’s accounts receivable, intangible assets, and deferred revenue are 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 1, 2012, we adopted guidance issued by the Financial Accounting Standards Board (“FASB”) which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. Adoption of this new guidance did not have a material impact on our financial statements.

On January 1, 2012, we adopted guidance issued by the FASB on accounting and disclosure requirements related to fair value measurements. The guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. Adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In December 2011, the FASB issued an amendment to an existing accounting standard which indefinitely defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued amendments to the indefinite-lived intangible asset impairment guidance which provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012.  The Company is required to adopt this standard as of October 1, 2012; early adoption is permitted.  Adoption of this new guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

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2.  Cash, Cash Equivalents and Short-Term Investments

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 September 30, 2012, and December 31, 2011 (in thousands):

	Amortized Cost and Estimated Fair Value
	September 30,		December 31,
	2012		2011
Cash and cash equivalents:
Cash	$	1,016	$	7,205
Cash equivalents
Money market mutual funds		140		1,045
Certificates of deposit		1,500		3,100
Commercial paper		3,850		6,600
Total cash equivalents		5,490		10,745
Total cash and cash equivalents		6,506		17,950
Short-term investments:
Corporate bonds		2,520		2,031
Certificates of deposit		3,402		3,278
Commercial paper		5,196		1,500
Total short-term investments		11,118		6,809
Total cash, and cash equivalents, and short-term investments	$	17,624	$	24,759

Realized gains and losses were not significant for either of the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012, and December 31, 2011, there were no significant unrealized gains or losses on investments. The cost of all securities sold is based on the specific identification method.

The contractual maturities of cash equivalents and short-term investments at September 30, 2012, and December 31, 2011, were less than one year.

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 nine months ended September 30, 2012 and 2011, the Company did not recognize any impairment charges on outstanding investments. As of September 30, 2012, 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 September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012							December 31, 2011
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Computer equipment	$	9,852	$	(8,940	)	$	912	$	9,751	$	(8,002	)	$	1,749
Furniture and fixtures		167		(76	)		91		75		(62	)		13
Software		1,452		(1,283	)		169		1,241		(1,229	)		12
Leasehold improvements		28		(21	)		7		308		(141	)		167
Total	$	11,499	$	(10,320	)	$	1,179	$	11,375	$	(9,434	)	$	1,941

Depreciation expense on property and equipment for the three and nine months ended September 30, 2012, including property and equipment under capital lease, was $0.3 million and $1.1 million, respectively, and is recorded in operating expenses. Depreciation expense on property and equipment for the three and nine months ended September 30, 2011, including property and equipment under capital lease, was $0.4 million and $1.3 million, respectively. Equipment under capital lease totaled $0.9 million and $2.8 million as of September 30, 2012 and December 31, 2011, respectively. Depreciation expense on equipment under capital lease was $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, respectively, and was $0.2 million and $0.8 million for the three and nine months ended September 30, 2011, respectively. Additionally, accumulated depreciation on equipment under capital lease was $0.7 million and $2.5 million as of September 30, 2012, and December 31, 2011, respectively. As a result of the San Francisco office lease abandonment the Leasehold Improvements were no longer in use and as such were written off in the amount of $0.2 million in the third quarter of 2012 (see Note 3 for more information).

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4.  Capitalized Software and Other Assets

The Company’s capitalized software and other assets are as follows at September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012							December 31, 2011
	Gross Amount		Accumulated Amortization			Net Book Value		Gross Amount		Accumulated Amortization			Net Book Value
Capitalized software	$	7,144	$	(5,503	)	$	1,641	$	6,688	$	(5,503	)	$	1,185
Amortizable purchased technology		78		(78	)		-		78		(78	)		-
Other assets		47		-			47		35		-			35
Deferred lease incentive		96		-			96		-		-			-
	$	7,365	$	(5,581	)	$	1,784	$	6,801	$	(5,581	)	$	1,220

Capitalized software consists of 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 and is amortized over three years. In the three and nine months ended September 30, 2012, $0.3 million and $1.0 million, respectively, were added to active projects, as compared to $0.1 million and $0.2 million for the same periods in 2011, respectively. The Company had capitalized costs of $1.4 million and $0.5 million at September 30, 2012 and December 31, 2011, respectively, related to projects not yet placed into service.Amortization expense was $0.1 million and $0.5 million for the three and nine months ended September 30, 2012, respectively, and was $0.3 million and $0.5 million for the three and nine months ended September 30, 2011, respectively.

Fully amortized capitalized software of $0.5 million was determined to be obsolete and was written off in March 2012.

5.  Accrued Liabilities

Accrued liabilities consisted of the following as of September 30, 2012, and December 31, 2011 (in thousands):

	September 30,		December 31,
	2012		2011
Accrued distribution and partner costs	$	825	$	409
Accrued compensation and related expenses		243		137
Accrued professional service fees		139		257
Other		-		92
Total accrued liabilities	$	1,207	$	895

6.  Restructuring Charges

The Company had $0.2 million in restructuring costs associated with the sub-lease of the San Francisco headquarters during the three months ended September 30, 2012. During the nine months ended September 30, 2011, the Company paid $0.9 million in pre-tax restructuring charges associated with the termination of employees. All restructuring charges have been classified as such on the Unaudited Consolidated Statement of Operations. The Company had no accrued restructuring charges at September 30, 2012 or December 31, 2011.

7.  Capital Lease and Other Obligations

Capital lease and other obligations consist of the following at September 30, 2012, and December 31, 2011 (in thousands):

	September 30,			December 31,
	2012			2011
Capital lease obligations	$	208		$	657
Deferred rent		150			154
Total capital lease and other obligations		358			811
Less: current portion of capital lease obligations		(208	)		(515	)
Capital lease and other obligations, net of current portion	$	150		$	296

Capital Lease Obligations

In April 2007, the Company entered into a master equipment lease agreement with CNB for an original amount of up to $5.0 million for the purchase of computer equipment. The lease expired on April 30, 2010, at which time the Company had drawn down approximately $4.9 million of the available lease line of credit. Interest on the capital leases was calculated using interest rates ranging from 4.32% to 7.95% per annum. In 2011, the master equipment lease agreement was amended to modify two financial covenants, with which the Company was in compliance as of September 30, 2012, and December 31, 2011.

The agreements with CNB, consisting of an outstanding standby letter of credit (“SBLC”) and a master equipment lease agreement, contain cross-default provisions, whereby a default under one is deemed a default for the other, and are secured by a general lien on all assets of the Company. As of September 30, 2012, and December 31, 2011, the Company was not in default on either agreement with CNB. For further discussion see Note 8, Commitments and Contingencies.

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8.  Commitments and Contingencies

As of September 30, 2012, future minimum payments under all capital and operating leases are as follows (in thousands):

	CNB Capital Lease			Operating Leases		Total
Three months ending December 31, 2012	$	101		$	43	$	144
Years ending December 31,
2013		111			41		152
2014		-			15		15
2015		-			81		81
Total minimum payments		212		$	180	$	392
Less amount representing interest		(4	)
Present value of net minimum payments		208
Less: current portion		(208	)
Long-term portion of capital lease obligations	$	-

Operating Leases

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

The Company leases a sales office in New York, New York on a month to month basis.

The Company leases office space in Kitchener, Canada of approximately of 5,222 square feet. The lease has a constant term of six months.

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

Letters of Credit

As of September 30, 2012, and December 31, 2011, the Company has an outstanding SBLC related to the security of a building lease for $0.2 million. The SBLC contains two financial covenants, with which the Company was in compliance as of September 30, 2012.

The agreements with CNB, consisting of the SBLC and master equipment lease agreement, contain cross-default provisions, whereby a default under one is deemed a default for the other, and are secured by a general lien on all assets of the Company. As of September 30, 2012, and December 31, 2011, the Company was not in default on either agreement with CNB. For further discussion, see Note 7, Capital Lease and Other Obligations.

Purchase Obligations

The Company had outstanding purchase obligations of an insignificant amount relating to an open purchase order for which the Company had not received the related services or goods and a non-cancelable contractual obligation relating to IT data center operations as of September 30, 2012, and December 31, 2011.

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 a lessor 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.

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Unsolicited Tender Offer

In July 2012, PEEK Investments, Inc. (“PEEK”) and other persons acting in concert with PEEK made an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of common stock of the Company. As extended, the tender offer is scheduled to expire on November 30, 2012. 

As more fully described in the Company’s Solicitation/Recommendation on Schedule 14D-9 filed with the SEC on August 2, 2012, as amended, in response to the offer, the Company’s Board of Directors unanimously recommended that the Company’s stockholders reject the offer and not tender their shares to PEEK for purchase. The Company is currently engaged in discussion with PEEK with respect to possible board representation rights and related agreements and transactions. However, the Company cannot guarantee that the negotiations will result in any agreement between the Company and PEEK.  Responding to PEEK’s unsolicited tender offer resulted in the Company incurring significant additional legal and other advisory costs with respect to the tender offer and the Company may incur additional such expenses in the future.

Legal Proceedings

The Company is involved, from time to time, in various 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 Company’s Plans are administered by the Compensation Committee of the Board of Directors. 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. The number of shares issued or reserved for issuance under the Plans was 4.1 million and 4.3 million shares of common stock as of September 30, 2012 and December 31, 2011, respectively. There were 1.7 million shares available to be granted under the 2007 Plan at September 30, 2012.

Share-based compensation expense recorded during three and nine months ended September 30, 2012, and 2011 was included in the Company’s Unaudited Consolidated Statements of Operations as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Sales and marketing	$	6	$	10	$	23	$	12
Product development and technical operations		13		47		41		131
General and administrative		29		41		106		120
Total share-based compensation expense		48		98		170		263
Amounts capitalized as software development costs		8		3		12		19
Total share-based compensation	$	56	$	101	$	182	$	282

Total unrecognized share-based compensation expense related to share-based compensation arrangements at September 30, 2012 was $0.6 million and is expected to be recognized over a weighted-average period of approximately 2.8 years. The total fair value of equity awards vested during the three and nine months ended September 30, 2012 was $0.1 million, and $0.2 million, respectively, and $0.1 million and $0.3 million during the three and nine months ended September 30, 2011, respectively.

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Option Awards

Stock option activity under the Plans during the nine months ended September 30, 2012 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, 2011		2,662		$	2.76
Granted		207			1.26
Exercised		(2	)		1.39
Expired/forfeited		(235	)		2.50
Options outstanding at March 31, 2012		2,632			2.64
Granted		213			0.83
Exercised		-			-
Expired/forfeited		(565	)		2.61
Options outstanding at June 30, 2012		2,280			2.47
Granted		107			0.91
Exercised		-			-
Expired/forfeited		(104	)		1.84
Options outstanding at September 30, 2012		2,283		$	2.43		4.52	$	-
Vested and expected to vest at September 30, 2012		2,035		$	2.58		4.30	$	-
Exercisable at September 30, 2012		1,353		$	3.21		3.50	$	-

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

The following table summarizes information about stock options outstanding at September 30, 2012:

					Options Outstanding						Options Exercisable
Price Ranges					Shares		Weighted- Average Remaining Contractual Term		Weighted- Average Exercise Price Per Share		Shares		Weighted- Average Exercise Price Per Share
					(in thousands)		(in years)				(in thousands)
$	0.76	-	$	1.19		473		6.01	$	0.94		101	$	1.06
	1.23	-		1.86		1,106		4.90		1.53		562		1.51
	1.88	-		2.83		175		3.84		2.52		161		2.58
	2.91	-		4.45		366		3.21		3.51		366		3.51
	4.46	-		7.35		54		2.30		5.37		54		5.37
	7.75	-		20.55		109		0.74		13.43		109		13.43
						2,283		4.52		2.43		1,353		3.21

Stock Awards

The Company did not issue restricted stock during the three and nine months ended September 30, 2012 and 2011.The Company recorded no share-based compensation for stock awards for each of the three and nine months ended September 30, 2012 and 2011.

Employee Stock Purchase Plan

On July 14, 2009, the 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was approved by the shareholders. Under the 2009 ESPP, the Company is authorized to issue up to 500 thousand shares of Common Stock to employees of the Company. Under the 2009 ESPP, substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. Each offering period is 6 months and consists of one purchase period. ESPP contributions are limited to a maximum of 15 percent of an employee’s eligible compensation, and ESPP participants are limited to purchasing a maximum of 5,000 shares per purchase period. Share-based compensation expense under the 2009 ESPP was insignificant for each of the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012, 82 thousand shares have been issued under the 2009 ESPP.

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Share-Based Compensation Valuation Assumptions

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average assumptions used in the Black-Scholes option valuation model and the weighted average grant date fair value per share for employee, consultant and director stock options were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Volatility		62.6	%		64.8	%		62.6	%		67.0	%
Risk-free interest rate		0.61	%		1.14	%		0.74	%		1.43	%
Expected term (years)		4.48			4.48			4.40			4.12
Expected dividend yield		-			-			-			-
Weighted average grant date fair value	$	0.45		$	0.76		$	0.51		$	0.88

As share-based compensation expense recognized in the Unaudited Consolidated Statements of Operations is based on awards ultimately expected to vest, it 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 months ended September 30, 2012, and 2 thousand options exercised in nine months ended September 30, 2012. There were 7 thousand and 42 thousand options exercised in the three and nine months ended September 30, 2011, respectively. The Company issues new shares of common stock upon exercise of stock options. No income tax benefits have been realized from exercised stock options.

Stockholder Rights Agreement

On August 23, 2012 the Company adopted a Stockholders Rights Agreement (the “Rights Agreement”). Pursuant to the Rights Agreement, each share of common stock of the Company is now associated with one preferred stock purchase right. Each right entitles stockholders to buy a unit representing one one-thousandth of a share of Series A Participating Preferred Stock of the Company for $5.00. Under certain circumstances, if a person or group acquires beneficial ownership of 15% or more of the Company's common stock, each right (other than rights held by the acquiror) will, unless the rights are redeemed by the Company, become exercisable upon payment of the exercise price.. Each one one-thousandth of a Preferred Share has designations and powers, preferences and rights, and the qualifications, limitations and restrictions designed to make it the economic equivalent of one share of the Company’s common stock.

Share Repurchases

In May 2012 the Company's Board of Directors authorized the repurchase of up to $1 million of the Company's common shares. Under the program, the Company may purchase its common shares from time to time in the open market or in privately negotiated transactions. The amount and timing of the purchases will depend on a number of factors including the price and availability of the Company's common shares, trading volume and general market conditions. The Company may also from time to time establish a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate purchases of its common shares under this authorization. From May 31, 2012 through September 30, 2012, the Company repurchased approximately 40 thousand shares of its common stock under the share repurchase program announced in May 2012 at an average price of $0.84 per share for a total of 34 thousand dollars.

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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 September 30, 2012, and December 31, 2011 were as follows (in thousands):

	Balance at September 30, 2012		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	$	140	$	140	$	-	$	-
Certificates of deposit		1,500		-		1,500		-
Commercial paper		3,850		-		3,850		-
Total cash equivalents		5,490		140		5,350		-
Short-term investments:
Certificates of deposit		3,402		-		3,402		-
Corporate bonds		2,520		-		2,520		-
Commercial paper		5,196		-		5,196		-
Total short-term investments		11,118		-		11,118		-
Total financial assets measured at fair value	$	16,608	$	140	$	16,468	$	-

	Balance at December 31, 2011		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	$	1,045	$	1,045	$	-	$	-
Certificates of deposit		3,100		-		3,100		-
Commercial paper		6,600		-		6,600		-
Total cash equivalents		10,745		1,045		9,700		-
Short-term investments:
Certificates of deposit		3,278		-		3,278		-
Corporate bonds		2,031		-		2,031		-
Commercial paper		1,500		-		1,500		-
Total short-term investments		6,809		-		6,809		-
Total financial assets measured at fair value	$	17,554	$	1,045	$	16,509	$	-

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 September 30, 2012 and December 31, 2011, the Company did not adjust prices received from the pricing service.

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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 which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company.

11.  Related Party Transactions

In each of the three and nine months ended September 30, 2012 and 2011, Dr. Jean-Yves Dexmier was paid fees totaling $0.1 million and $0.4 million, respectively, in connection with his services as the Company’s Chief Executive Officer and Board member.

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, additional expenses to be incurred in connection with the unsolicited tender offer by PEEK, 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, 2011. As of September 30, 2012, there had been no material changes to our critical accounting policies and estimates.

Business Overview

LookSmart, Ltd. (“LookSmart” or the “Company”) is a digital advertising solutions company that provides relevant solutions for search and display advertising. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

LookSmart provides advertisers with search marketing and display advertising solutions, and offers publishers the ability to monetize their inventory through our search network:

Search Advertisers: LookSmart search marketing network acquires queries from a large variety of sources and matches them with the keywords of our advertising customers. Our search advertising customers are generally of three types; Intermediaries, Direct Advertisers and Self-Service Advertisers. Intermediaries purchase clicks to sell into the affiliate networks of the large search engine providers. Direct Advertisers and their agencies purchase clicks with the assistance of LookSmart account managers to achieve conversions or sales from the clicks or to obtain unique page views. Self-Service Advertisers are small Direct Advertisers that sign-up online, pay by credit card and manage their account with minimal LookSmart account management assistance. LookSmart offers search advertising customers targeted search via a monitored search advertising distribution network using the Company’s “AdCenter” platform technology. The Company’s search advertising network includes publishers and search advertising customers, including Intermediaries and direct advertising customers and their agencies as well as self-service customers, in the United States and certain other countries. The Company’s application programming interface (“API”) allows search advertising customers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns.

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

For Publishers: LookSmart also 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.

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In 2011, revenue from Intermediaries decreased significantly. The decrease was primarily driven by a revenue decrease throughout the year, including a significant decrease in the fourth quarter of 2011 due to revenue chargebacks to our Intermediary customers by large search engine providers. This had a severe impact to Intermediary business models and consequently the business they conduct with us. We ceased business with several Intermediaries as a result; however beginning in the second quarter of 2012, our Intermediary business and associated revenue began to increase. Intermediary revenue has increased to the point that it is currently the largest component of our overall revenue. We expect Intermediary revenue will continue to be the largest component of our revenue for the foreseeable future.

Unsolicited Tender Offer

In July 2012, PEEK and other persons acting in concert with PEEK made an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of our common stock. As extended, the tender offer is scheduled to expire on November 30, 2012. 

As more fully described in the Company’s Solicitation/Recommendation on Schedule 14D-9 filed with the SEC on August 2, 2012, as amended, in response to the offer, the Company’s Board of Directors unanimously recommended that the Company’s stockholders reject the offer and not tender their shares to PEEK for purchase. We are currently engaged in discussion with PEEK with respect to possible board representation rights and related agreements and transactions. However, the Company cannot guarantee that the negotiations will result in any agreement between the Company and PEEK. Responding to PEEK’s unsolicited tender offer resulted in the Company incurring significant additional legal and other advisory costs with respect to the tender offer and the Company may incur additional such expenses in the future. In relation to the tender offer, we have recorded $0.6 million in expenses during the three months ended September 30, 2012, consisting primarily of legal, advisory, and other professional services fees.

Results of Operations

Overview of the Three and Nine Months Ended September 30, 2012 and 2011

The following tables set forth selected information concerning our results of operations for the periods indicated (in thousands):

	Three Months Ended September 30,
	2012			% of Revenue			2011			% of Revenue			Dollar Change			% Change
Revenue	$	3,915			100.0	%	$	7,356			100.0	%	$	(3,441	)		(47	%)
Cost of revenue		2,564			65.5	%		4,187			56.9	%		(1,623	)		(39	%)
Gross profit		1,351			34.5	%		3,169			43.1	%		(1,818	)		(57	%)
Operating expenses:
Sales and marketing		682			17.4	%		565			7.7	%		117			21	%
Product development and technical operations		1,437			36.7	%		1,767			24.0	%		(330	)		(19	%)
General and administrative		1,743			44.5	%		1,066			14.5	%		677			64	%
Restructuring charge		159			4.1	%		-			0.0	%		159			100	%
Total operating expenses		4,021			102.7	%		3,398			46.2	%		623			18	%
Loss from operations		(2,670	)		(68.2	%)		(229	)		(3.1	%)		(2,441	)		1066	%
Non-operating income, net		16			0.4	%		9			0.1	%		7			78	%
Loss from continuing operations before income taxes		(2,654	)		(67.8	%)		(220	)		(3.0	%)		(2,434	)		1106	%
Income tax expense		-			-			(4	)		(0.1	%)		4			100	%
Net loss	$	(2,654	)		(67.8	%)	$	(224	)		(3.1	%)	$	(2,430	)		1085	%

	Nine Months Ended September 30,
	2012			% of Revenue			2011			% of Revenue			Dollar Change			% Change
Revenue	$	11,502			100.0	%	$	22,350			100.0	%	$	(10,848	)		(49	%)
Cost of revenue		7,149			62.2	%		12,281			54.9	%		(5,132	)		(42	%)
Gross profit		4,353			37.8	%		10,069			45.1	%		(5,716	)		(57	%)
Operating expenses:
Sales and marketing		2,141			18.6	%		1,732			7.7	%		409			24	%
Product development and technical operations		4,780			42	%		4,911			22.0	%		(131	)		(3	%)
General and administrative		4,468			38.8	%		3,528			15.8	%		940			27	%
Restructuring charge		159			1	%		889			4.0	%		(730	)		(82	%)
Total operating expenses		11,548			100.4	%		11,060			49.5	%		488			4	%
Loss from operations		(7,195	)		(62.6	%)		(991	)		(4.4	%)		(6,204	)		626	%
Non-operating income, net		32			0.3	%		329			1.5	%		(297	)		(90	%)
Loss from continuing operations before income taxes		(7,163	)		(62.3	%)		(662	)		(2.9	%)		(6,501	)		982	%
Income tax expense		-			-			(3	)		-			3			(100	%)
Net loss	$	(7,163	)		(62.3	%)	$	(665	)		(2.9	%)	$	(6,498	)		977	%

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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 nine months ended September 30, 2012, and 2011, were as follows (in thousands):

	Three Months Ended September 30,
	2012		% of Revenue			2011		% of Revenue			Dollar Change			% Change
Advertiser Networks	$	3,676		94	%	$	7,043		96	%	$	(3,367	)		(48	%)
Publisher Solutions		239		6	%		313		4	%		(74	)		(24	%)
Total revenue	$	3,915		100	%	$	7,356		100	%	$	(3,441	)		(47	%)

	Nine Months Ended September 30,
	2012		% of Revenue			2011		% of Revenue			Dollar Change			% Change
Advertiser Networks	$	10,626		92	%	$	21,504		96	%	$	(10,878	)		(51	%)
Publisher Solutions		876		8	%		846		4	%		30			4	%
Total revenue	$	11,502		100	%	$	22,350		100	%	$	(10,848	)		(49	%)

Advertiser Networks

The decrease in Advertiser Networks revenue for the three months and nine months ended September 30, 2012, as compared to the same periods in 2011 is the result of a reduction in revenues from Intermediaries, Direct Advertisers and Self Service Advertisers. We experienced a large reduction in Intermediary revenue throughout 2011 and a significant decrease in revenue from Intermediaries in the fourth quarter of 2011due to revenue chargebacks to our customers by large search engine providers. This had a severe impact to Intermediary business models and consequently the business they conduct with us. We have ceased business with several Intermediaries as a result; however, beginning in the second quarter of 2012, our Intermediary business and associated revenue began to increase. Intermediary revenue has increased to the point that it is currently the largest component of our overall revenue, although our overall revenue for Advertisers Networks has continued to decrease. We expect Intermediary revenue will continue to be the largest component of our revenue for the foreseeable future.

Publisher Solutions

Publisher Solutions revenues were lower in the three months ended September 30, 2012, compared to the same period in 2011 due to volume reductions by licensees. Publisher Solutions revenues were higher in the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, due to additions to licensees and higher transaction volumes in the first quarter of 2012 as compared to the first quarter of 2011.

Cost of Revenue and Gross Margin

Cost of revenue, consisting of TAC which are amounts paid to our distribution network partners, connectivity costs, hosting expenses, commissions paid to advertising agencies, and credit card fees were as follows for the three and nine months ended September 30, 2012, and 2011 (in thousands):

	Three Months Ended September 30,
	2012		% of Revenue			2011		% of Revenue			Dollar Change			% Change
Traffic acquisition costs	$	2,196		56	%	$	3,803		52	%	$	(1,607	)		(42	%)
Other costs		368		9	%		384		5	%		(16	)		(4	%)
Total cost of revenue	$	2,564		65	%	$	4,187		57	%	$	(1,623	)		(39	%)

	Nine Months Ended September 30,
	2012		% of Revenue			2011		% of Revenue			Dollar Change			% Change
Traffic acquisition costs	$	6,066		53	%	$	11,106		50	%	$	(5,040	)		(45	%)
Other costs		1,083		9	%		1,175		5	%		(92	)		(8	%)
Total cost of revenue	$	7,149		62	%	$	12,281		55	%	$	(5,132	)		(42	%)

TAC as a percent of Advertisers Network revenue increased in the three and nine months ended September 30, 2012, when compared to the three and nine months ended September 30, 2011. This increase is due to higher TAC on Intermediary business in 2012 as compared to 2011.

Our other costs of revenue, which consist of network operating costs and credit card processing fees, decreased due to the decrease in revenue.

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Operating Expenses

Operating expenses for the three and nine months ended September 30, 2012, as compared to the same period in 2011, increased by $0.6 million and $0.5 million, respectively. Operating expense for the three months ended September 30, 2012 included $0.6 million related to the unsolicited tender offer by PEEK and a $0.2 million restructuring charge for the sublease of the San Francisco headquarters. Operating expense for the nine months ended September 30, 2011, included a $0.9 million restructuring charge for a reduction in workforce in that period. Excluding the effect of those tender offer and restructuring charges, operating expenses decreased by $0.1 million in the three months ended September 30, 2012, compared to the three months ended September 30, 2011, and increased by $0.6 million in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Responding to PEEK’s unsolicited tender offer resulted in the Company incurring significant additional legal and other advisory costs with respect to the tender offer and the Company may incur additional such expenses in the future. In relation to the PEEK tender offer, we have recorded $0.6 million in expenses during the three months ended September 30, 2012, consisting primarily of legal, advisory, and other professional services fees. Operating expenses consist of sales and marketing, product development and technical operations, general and administrative, and restructuring charges for the three and nine months ended September 30, 2012, and 2011, and were as follows (in thousands):

	Three Months Ended September 30,
	2012		% of Revenue			2011		% of Revenue			Dollar Change			% Change
Sales and marketing	$	682		17	%	$	565		8	%	$	117			21	%
Product development and technical operations		1,437		37	%		1,767		24	%		(330	)		(19	%)
General and administrative		1,743		45	%		1,066		14	%		677			64	%
Restructuring charge		159		4	%		-		0	%		159			100	%
Total operating expenses	$	4,021		103	%	$	3,398		46	%	$	623			18	%

	Nine Months Ended September 30,
	2012		% of Revenue			2011		% of Revenue			Dollar Change			% Change
Sales and marketing	$	2,141		19	%	$	1,732		7	%	$	409			24	%
Product development and technical operations		4,780		41	%		4,911		22	%		(131	)		(3	%)
General and administrative		4,468		39	%		3,528		16	%		940			27	%
Restructuring charge		159		1	%		889		4	%		(730	)		(82	%)
Total operating expenses	$	11,548		100	%	$	11,060		49	%	$	488			4	%

Sales and Marketing

Sales and marketing expenses include salaries, commissions, share-based compensation and other costs of employment for our sales force, sales administration and customer service staff and marketing personnel, overhead, facilities and allocation of depreciation. Sales and marketing expenses also include the costs of advertising, trade shows, public relations activities and various other activities supporting our customer acquisition effort. The increase in sales and marketing expenses for the three and nine months ended September 30, 2012, is primarily due to higher compensation related expense associated with increased headcount.

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. Costs related to the development of software for internal use in the business, including salaries and associated costs of employment are capitalized after certain milestones have been achieved and amortized over a three year period once the project is placed in service. 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.

Capitalized software development costs include the costs to develop software for internal use, excluding costs associated with research, training and testing.

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Product development and technical operations and capitalized software development costs for the three and nine months ended September 30, 2012, and 2011, were as follows (in thousands):

	Three Months Ended September 30,
	2012			% of Revenue			2011			% of Revenue			Dollar Change			% Change
Product development and technical operations costs	$	1,775			45	%	$	1,853			25	%	$	(78	)		(4	%)
Capitalized software development costs		(338	)		(8	%)		(86	)		(1	%)		(252	)		293	%
Total product development and technical operations expense	$	1,437			37	%	$	1,767			24	%	$	(330	)		(19	%)

	Nine Months Ended September 30,
	2012			% of Revenue			2011			% of Revenue			Dollar Change			% Change
Product development and technical operations costs	$	5,743			50	%	$	5,260			24	%	$	483			9	%
Capitalized software development costs		(963	)		(8	%)		(349	)		(2	%)		(614	)		(176	%)
Total product development and technical operations expense	$	4,780			42	%	$	4,911			22	%	$	(131	)		(3	%)

The decrease in product development and technical operations expense, net of capitalized software development costs for the three and nine months ended September 30, 2012, is primarily due to decreased travel costs.

General and Administrative

General and administrative expenses include costs of executive management, human resources, finance, facilities, and desktop support personnel. These costs include salaries and associated costs of employment, including share-based compensation, overhead, facilities and allocation of depreciation. General and administrative expenses also include legal, insurance, tax and accounting, consulting, professional services fees and the provision for, and reductions of, the allowance for doubtful trade receivables.

The increase in general and administrative expenses for the three and nine months ended September 30, 2012, is primarily due to costs of $0.6 million related to the unsolicited tender offer by PEEK and a $0.2 million restructuring charge for the sublease of the San Francisco headquarters.

Restructuring Charges

The Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing commitment. The Company had $0.2 million in restructuring costs associated with the sub-lease of the San Francisco headquarters in the three and nine months ended September 30, 2012. The Company had $0.9 million in restructuring costs associated with the reduction of its headcount in the nine months ended September 30, 2011.

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Other Items

The tables below set forth other continuing operations data for the three and nine months ended September 30, 2012, and 2011 (in thousands):

	Three Months Ended September 30,
	2012			% of Revenue			2011			% of Revenue			Dollar Change		% Change
Non-operating income (expense), net
Interest income	$	23			0	%	$	21			0	%	$	2		10	%
Interest expense		(7	)		0	%		(11	)		0	%		4		(36	%)
Other income (expense), net		-			0	%		(1	)		0	%		1		(100	%)
Total non-operating income (expense), net	$	16			0	%	$	9			0	%	$	7		78	%
Income tax expense	$	-			0	%	$	(4	)		0	%	$	4		100	%

	Nine Months Ended September 30,
	2012			% of Revenue			2011			% of Revenue			Dollar Change			% Change
Non-operating income (expense), net
Interest income	$	64			0	%	$	68			0	%	$	(4	)		(6	%)
Interest expense		(28	)		0	%		(64	)		0	%		36			(56	%)
Other income (expense), net		(4	)		0	%		325			1	%		(329	)		(101	%)
Total non-operating income (expense), net	$	32			0	%	$	329			1	%	$	(297	)		(90	%)
Income tax expense	$	-			0	%	$	(3	)		0	%	$	3			(100	%)

Interest Income and Expense

Interest expense, primarily consisting of interest paid on capital leases, decreased during the three and nine months ended September 30, 2012, as compared to the three and nine months ended September 30, 2011. This decrease was primarily due to a reduction in capital lease obligations.

Other Income (Expense), Net

In 2008, the Company established a settlement fund related to a class action lawsuit in which the Company was named as a defendant, Lane’s Gifts and Collectibles, L.L.C., v. Yahoo! Inc. (the “Fund”). In the second quarter of 2011, the Company determined that all settlements related to the Fund had been paid. The Fund was closed on June 30, 2011, and the Company recorded $0.3 million in non-operating income (expense), net related to the closure. This amount is included in other income (expense), net for the three and nine months ended September 30, 2011.

Income Tax Expense

Due to our utilizable net operating losses, our income tax expense in the U.S. consists of minimum state taxes. We do not anticipate any tax expense in Canada in 2012.

Liquidity and Capital Resources

The decrease in cash and cash equivalents is as follows for the nine months ended September 30, 2012, and 2011 (in thousands):

	Nine Months Ended September 30,
	2012			2011			Change
Net cash provided by (used in) operating activities	$	(5,220	)	$	151		$	(5,371	)
Net cash used in investing activities		(5,727	)		(5,526	)		(201	)
Net cash used in financing activities		(463	)		(798	)		335
Effect of exchange rate changes on cash and cash equivalents		(34	)		(5	)		(29	)
Decrease in cash and cash equivalents	$	(11,444	)	$	(6,178	)	$	(5,266	)

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Cash, cash equivalents and short-term investment balances were as follows as of September 30, 2012, and December 31, 2011 (in thousands):

	September 30,			December 31,
	2012			2011			Change
Cash and cash equivalents	$	6,506		$	17,950		$	(11,444	)
Short-term investments		11,118			6,809			4,309
Total	$	17,624		$	24,759		$	(7,135	)
% of total assets		76	%		82	%
Total assets	$	23,176		$	30,112

At September 30, 2012, we had $17.6 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 and U.S. corporate securities. 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, Cash Equivalents and Short-Term Investments,” which describes further the composition of our cash, cash equivalents and short-term investments.

Cash, cash equivalents and short-term investments decreased $7.2 million to $17.6 million at September 30, 2012, from $24.8 million at December 31, 2011, primarily due to operating losses, the use of capital to acquire equipment, principal payments on capital leases, and decreased accounts payable.

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, investment in software development, and financing obligations.  We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to satisfy our current anticipated cash requirements through at least the next 12 months. Our liquidity could be negatively affected by a decrease in demand for our services beyond the current quarter, and changes in customer buying behavior. In addition, our liquidity could be negatively affected if we are in default under our credit facilities and are required to pay the lenders cash in an amount equal to the capital lease balance, or are required to identify restricted cash equal to the capital lease balance, plus an outstanding standby letter of credit. 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, continuing to respond to PEEK’s unsolicited tender offer may require LookSmart to incur significant additional costs and could have an adverse effect on the Company’s operations. 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 nine months ended September 30, 2012, 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 nine months of 2012 was $5.2 million and consisted of a net loss of $7.2 million, adjustments for non-cash items of $2.2 million and cash used by working capital and other activities of $0.3 million. Adjustments for non-cash items primarily consisted of $1.6 million of depreciation and amortization expense on property and equipment and internally developed software, $0.3 million bad debt expense and $0.2 million of share-based compensation expense. In addition, changes in working capital activities primarily consisted of a $0.5 million net increase in accounts payable and accrued liabilities, combined with an increase  of $0.7 million in accounts receivable. The increase in accounts payable and accrued liabilities was primarily due to increased TAC and operating expenses. The increase in accounts receivable is primarily attributed to an increase in invoiced customer revenue.

Cash provided by operating activities in the nine months ended September 30, 2011, consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization, and share-based compensation expense, as well as the effect of changes in working capital and other activities. Cash provided by operations in the first nine months of 2011 was $151 thousand and consisted of a net loss of $0.7 million, adjustments for non-cash items of $2.0 million and cash used by working capital and other activities of $1.2 million. Adjustments for non-cash items primarily consisted of $2.0 million of depreciation and amortization expense on property and equipment and internally developed software and $0.3 million of share-based compensation expense. In addition, changes in working capital activities primarily consisted of a $1.3 million decrease in accounts payable and accrued liabilities partially offset by a net decrease of $0.1 million in accounts receivable. The decrease in accounts payable and accrued liabilities was primarily due to reduced TAC and lower operating expenses. The decrease in accounts receivables is primarily attributed to the decrease in revenue and improvement in collections.

Investing Activities

Cash used in investing activities in the first nine months of 2012 of $5.7 million was primarily attributed to $4.3 million net purchase of investments. Capital expenditures in the first nine months of 2012 consisted of $0.4 million for equipment acquired during the period and an investment of $1.0 million in internally developed software related to our AdCenter platform technology.

Cash used in investing activities in the first nine months of 2011 of $5.5 million was primarily attributed to $4.9 million net purchase of investments. Capital expenditures in the first nine months of 2011 consisted of $0.4 million for equipment acquired during the period and an investment of $0.3 million in internally developed software related to our AdCenter platform technology.

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Financing Activities

Cash used in financing activities in the first nine months of 2012 of $0.5 million is primarily attributed to scheduled capital lease payments.

Cash used in financing activities in the first nine months of 2011 of $0.8 million is primarily attributed to scheduled capital lease payments.

Credit Arrangements

We have an outstanding standby letters of credit (“SBLC”) issued by City National Bank (“CNB”) of approximately $0.2 million at September 30, 2012, related to security of our corporate office lease.

We have a master equipment lease agreement with CNB for an original amount of up to $5.0 million for the purchase of computer equipment. The lease expired on April 30, 2010, at which time the Company had drawn down approximately $4.9 million of the available lease line of credit. As of September 30, 2012, our outstanding balance was $0.2 million.

Our agreements with CNB, consisting of the SBLC and master equipment lease agreement, contain cross-default provisions whereby a default under one is deemed a default for the other, and are secured by a general lien on all assets of the Company. As of September 30, 2012, and December 31, 2011 we are in compliance with both agreements with CNB.

Off-Balance Sheet Arrangements

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

Contractual Obligations and Commercial Commitments

In comparison with our Annual Report on Form 10-K for the year ended December 31, 2011, we believe that there have been no material changes in contractual obligations or commercial commitments outside the ordinary course of business, during the nine months ended September 30, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in rules promulgated under the Securities Exchange Act of 1934, as amended) for our Company. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and Form 10-Q, and (ii) is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Chief Financial Officer have concluded that these controls and procedures are effective at the “reasonable assurance” level.

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PART II

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Other than the risk factors below, there have been no material changes to the risk factors as set forth in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2011.

Our securities may be delisted

The NASDAQ Stock Market (“NASDAQ”) requires us to satisfy certain continued listing requirements, including maintaining a minimum closing bid price for our common stock of at least $1.00 per share. On June 1, 2012, we received from NASDAQ a deficiency notice letter indicating that for 30 consecutive business days the bid price of our common stock has closed below the minimum $1.00 per share requirement for continued inclusion on NASDAQ. In accordance with Marketplace Rule 5810(c)(3)(A), we have 180 calendar days, or until November 28, 2012, to regain compliance. If at any time before November 28, 2012 the bid price of our common stock closes at $1.00 per share or more for a minimum of ten consecutive business days, NASDAQ will provide written notification that we have achieved compliance. If we do not regain compliance by November 28, 2012, then we may apply to transfer our securities to The NASDAQ Capital Market and may obtain additional time in which to regain compliance with the minimum bid price rule.  If NASDAQ concludes that we will not be able to cure the deficiency, or if we do not submit a transfer application, NASDAQ would provide written notification that our common stock will be delisted, after which we may appeal the delisting determination to a Hearings Panel. At our 2012 Annual Meeting of Stockholders, our stockholders rejected a reverse stock split proposal to address the minimum closing bid price deficiency; therefore, we may not be able to regain compliance with the minimum closing bid price rule before the required deadline.

 In addition, we need to have at least 300 public holders to remain listed on the Nasdaq Capital Market and at least 400 public holders to remain listed on the Nasdaq Global Market.  As a result of the unsolicited tender offer, the number of our record and beneficial holders may drop below the NASDAQ requirement.  No assurance can be given that we will remain in compliance with other NASDAQ Stock Market’s continued listing requirements. If delisting were to occur, our securities will not enjoy the same liquidity as shares that are traded on the NASDAQ Stock Market or a national U.S. securities exchange and investors may find that it is more difficult to obtain accurate and timely quotations. As a result, the price of our securities would likely decline.

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

Our board of directors has adopted a Stockholder Rights Plan, which could prevent or delay a takeover of Looksmart by causing substantial dilution to a potential acquirer that attempts to acquire beneficial ownership of more than 15% of  our common stock on terms not approved by our board of directors. In addition, our charter and bylaws and provisions of Delaware law may deter or prevent a takeover attempt, including an attempt that might result in a premium over the market price for our common stock. Our board of directors has the authority to issue shares of preferred stock and to determine the price, rights, preferences and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, our charter and bylaws provide for a classified board of directors. These provisions, along with Section 203 of the Delaware General Corporation Law, prohibiting certain business combinations with an interested stockholder, could discourage potential acquisition proposals and could delay or prevent a change of control.

PEEK Investments unsolicited takeover attempt may continue to distract our management and employees, result in substantial legal and other advisory expenses, and create uncertainty that may adversely affect our business and results.

In July 2012, PEEK and other persons acting in concert with PEEK made an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of our common stock for $1.00 per share. As extended, the tender offer is scheduled to expire on November 30, 2012. As more fully described in the Company’s Solicitation/Recommendation on Schedule 14D-9 filed with the SEC on August 2, 2012, as amended, in response to the offer, the Company’s Board of Directors unanimously recommended that the Company’s stockholders reject the offer and not tender their shares to PEEK for purchase. As of September 30, 2012, the Company has recorded approximately $0.6 million of expenses incurred in connection with the offer, consisting primarily of legal, advisory and other professional fees.

The review, consideration, and response to PEEK’s efforts to gain control of our Company require the expenditure of significant time and resources by us and may be a significant distraction for our management and employees. Acquisition efforts have also created uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees and to attract new employees. In addition, PEEK’s acquisition efforts have created and may continue to create uncertainty for current and potential partners, suppliers and customers. The impact of PEEK’s acquisition efforts due to these or other factors may undermine our business and have a material adverse effect on our results of operations, and may cause increased volatility and wide price fluctuations in our stock price.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchase of Equity Securities by the Company

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as a Part of Publicly Announced Plans or Programs (1)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2012 - July 31, 2012		-	$	-		-	$	1,000,000
August 1, 2012 - August 31, 2012		10,800		0.87		-	$	990,604
September 1, 2012 - September 30, 2012		28,891		0.86		-	$	965,758
Total		39,691	$	0.86		-	$	965,758

(1)   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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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SIGNATURE

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

LOOKSMART, LTD.

Dated: November 14, 2012

By:	/s/    William O’Kelly
	William O’Kelly
	Senior Vice President Operations
	and Chief Financial Officer

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EXHIBIT INDEX

Exhibits

Number	Description of Document
3.1	Registrant’s Certificate of Incorporation (including Certificate of Designation of Series A Participating Preferred Stock) (Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).
3.2	Bylaws (Filed with the Company’s Quarterly Report on Form 10-Q (File No. 000-26357) filed with the SEC on August 14, 2000).
4.1	Form of Specimen Stock Certificate (Filed with the Company’s Quarterly Report on Form 10-Q (File No. 000-26357) filed with the SEC on November 14, 2005).
4.2	Rights Agreement dated as of August 23, 2012 among LookSmart, Ltd. and Computershare Trust Company, N.A. (Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).
4.3	Form of Rights Certificate (Filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2012).
10.86*	Sublease Agreement between the Company and Rocket Lawyer, Inc. for property located at 55 Second Street, San Francisco, California, dated June 30, 2012.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Extension Schema
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase
101.DEF**	XBRL Taxonomy Extension Definition Linkbase
101.LAB**	XBRL Taxonomy Extension Label Linkbase
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase

(*)  Filed herewith

(**) Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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EX-10.86

EXHIBIT 10.86

SUB-SUBLEASE AGREEMENT

THIS SUB-SUBLEASE AGREEMENT (this “Sublease”) is made as of the day of June, 2012, between LOOKSMART, LTD, a Delaware corporation (“Sublandlord”) and ROCKET LAWYER, a Delaware corporation (“Subtenant”).

R E C I T A L S

WHEREAS, Sublandlord is the tenant under that certain sublease dated September 1, 2009, between KPMG LLP, a Delaware limited liability partnership (“Original Sublandlord”), as landlord, and Sublandlord, as tenant (“Original Sublease”).  A copy of the Original Sublease is attached hereto as Exhibit A (with certain financial provisions redacted);

WHEREAS, Original Sublandlord is a tenant under that certain Lease dated November 20, 2003 between Original Sublandlord and Cousins/Myers II, LLC, a Delaware limited liability company (“Original Landlord”), as landlord and Original Sublandlord, as tenant (“Original Lease”); the Original Lease as thereafter amended and supplemented by that certain First Amendment to Lease Agreement dated April 7, 2004, Letter dated September 20, 2004, Supplemental Notice Establishing Rent Commencement Date dated December 21, 2004, and Second Amendment to Lease Agreement dated November 22, 2005 (the “Second Amendment”), being referred to herein as the “Lease”) for premises comprised of 118,102 rentable square feet (the “Premises”) located in that certain building generally known as 55 Second Street, San Francisco, California (the “Building”).  A copy of the Lease is attached hereto as Exhibit B (with certain financial provisions redacted).  Capitalized terms used in this Sublease and not otherwise defined herein shall have the meanings given to them in the Lease.

WHEREAS, Original Landlord’s interest as landlord under the Lease was subsequently transferred to Hines 55 Second Street LP, a Delaware limited partnership (“Landlord”).

WHEREAS, Original Sublandlord subleases the portion of the Premises leased to Sublandlord, pursuant to the Original Sublease, located on and comprising the entire seventh (7th) floor of the Building (the “Space”).

WHEREAS, Subtenant desires to sublease from Sublandlord the Space and Sublandlord is willing to sublease the Space to Subtenant upon the terms, covenants and conditions hereinafter provided.

NOW, THEREFORE, for and in consideration of the mutual covenants and obligations set forth in this Sublease, Sublandlord and Subtenant do hereby agree as follows:

1.             Subleased Premises.  Sublandlord does hereby sublease to Subtenant, and Subtenant does hereby sublease and rent from Sublandlord, (i) the Space and (ii) all permanent improvements within the Space constructed by Landlord or by or on behalf of Sublandlord (collectively, the “Subleased Premises”).  Subtenant shall have the right to use in common with Original Sublandlord and others entitled thereto the common areas of the Project pursuant to the Lease.  In addition, subject to the terms, covenants and conditions of this Sublease, Subtenant shall have the exclusive right to use during the Sublease Term (defined below), free of charge, the furniture, fixtures and equipment more particularly described on Schedule A annexed hereto and made a part hereof (the “Personal Property”) located in the Space.  Subtenant shall have no obligation whatsoever to repair, replace or maintain the Personal Property, unless any damage thereto is caused by the negligence or willful misconduct of Subtenant.  Provided that there is no change in the size of the Subleased Premises between the date of this Sublease and the Commencement Date (defined below) (e.g., there has been no change in the size of the Subleased Premises by reason of any damage or destruction to or condemnation of the Subleased Premises), the parties hereby (i) stipulate that the Space shall be deemed to contain approximately 19,997 rentable square feet upon delivery of the Space by Sublandlord to Subtenant (the “Space Measurement”), (ii) agree that neither party shall have any right to dispute the Space Measurement and (iii) waive any claim in connection with the Space Measurement, regardless of whether the Space is found to have contained more or less than 19,997 rentable square feet upon delivery of the Space to Subtenant.  Sublandlord represents and warrants for the benefit of Subtenant that the rentable square footage of the Space was not remeasured pursuant to Section 4 of the Second Amendment and that Sublandlord pays Base Rental for the Space under the Lease and Tenant’s Forecast Additional Rental and Tenant’s Additional Rental for the Space under the Lease on the basis of the Space consisting of 19,997 rentable square feet.

2.             Term.

(a)           Commencement Date.  The term of this Sublease (the “Sublease Term”) shall begin on the date (the “Commencement Date”), that is the later to occur of (i) August 15, 2012, (ii) the date on which Sublandlord delivers exclusive possession of the Subleased Premises to Subtenant in broom clean condition, and (iii) the date that the written consent of Landlord and Original Sublandlord to this Sublease have been obtained in accordance with Section 13.  Such access shall be subject to and in accordance with all of the terms, covenants and conditions of this sublease, (including, without limitation, the provisions of Section 7) provided that subtenant shall have no obligation to pay any Rent (defined below) prior to the Rent Commencement Date, except for the first monthly installment of Base Rent (defined below) payable pursuant to Section 3(a).  Subtenant may access any portion of the Subleased Premises for the purpose of preparing the Subleased Premises for Subtenant’s initial use and occupancy prior to the Commencement Date with ten (10) days written notice to Sublandlord and subject to Sublandlord’s security requirements.  Notwithstanding anything to the contrary in this Section 2(a), if for any reason Sublandlord has not provided Subtenant access to the Subleased Premises pursuant to this Section 2(a) by August 15, 2012, the Rent Commencement Date shall be extended by one (1) day for each day that the Subtenant's access to the Subleased Premises is delayed beyond August 15, 2012.  In addition, if for any reason the Commencement Date has not occurred by September 15, 2012, Subtenant shall have the right, but not the obligation, to terminate this Sublease by written notice to Sublandlord, in which event neither party shall have any further rights or obligations under this Sublease, and Sublandlord shall return the Letter of Credit to Subtenant and reimburse Subtenant for any Base Rent prepaid by Subtenant to Sublandlord.

(b)           Expiration Date.  The Sublease Term shall expire on December 30, 2014 (the “Expiration Date”), unless this Sublease is sooner terminated in accordance with the terms and conditions set forth herein.

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3.             Rent.

(a)           Base Rent.  Subtenant shall pay to Sublandlord, commencing on August 15, 2012 (as such date may be extended pursuant to Section 2(a) hereof) (the “Rent Commencement Date”) and throughout the Sublease Term, a base rent (the “Base Rent”) at the annual rate set forth on Schedule B annexed hereto and made a part hereof.  The Base Rent shall be payable by Subtenant to Sublandlord, in advance, in equal consecutive monthly installments which are due and payable on or before the first day of each calendar month during the Sublease Term commencing on the Rent Commencement Date; provided, however, that the first monthly installment of Base Rent, in the amount of $54,991.75, shall be paid by Subtenant to Sublandlord at the time that (i) this Sublease has been executed by Sublandlord and Subtenant, and (ii) Sublandlord has obtained the written consent of Landlord to this Sublease in accordance with Section 13.

(b)           Additional Rent.  In addition to the Base Rent, and subject to Section 14(q), Subtenant shall pay to Sublandlord, on a monthly basis concurrent with payment of Base Rent, 16.932% (i.e., Subtenant’s pro rata share) of the Operating Expenses and Tax Expenses payable by Sublandlord pursuant to Sections 6 and 7 of the Original Lease, over the Operating Expenses and Tax Expenses payable by Sublandlord pursuant to Sections 6 and 7 of the Original Lease for Subtenant’s Base Year (“Additional Rent”) (to the extent such payments relate to periods occurring during the Sublease Term, and with Subtenant to receive its prorata share of any credit or refund of excess payments of Operating Expenses and Tax Expenses to which Sublandlord is entitled under Section 6 of the Original Lease).  Subtenant’s obligations under this Sublease with respect to the payment of such Additional Rent shall be determined based on (i) “Subtenant’s Base Year” being the calendar year 2013 and (ii) the Premises containing 118,102 rentable square feet.  Sublandlord shall promptly provide Subtenant copies of Landlord’s estimate of “Tenant’s Forecast Additional Rental” and “Reconciliation Statements” which Sublandlord receives from Original Sublandlord from time to time pursuant to Section 3(b) of the Original Sublease, and Subtenant’s payment of Additional Rent pursuant to this Section 3(b) shall be based thereon.  To the extent such payments relate to periods within and outside of the Sublease Term they shall be appropriately prorated for purposes of this Section 3(b).

(c)           Other Charges.  In addition to the Base Rent and Additional Rent, Subtenant shall be solely responsible for all other costs or charges with respect to Subtenant’s (or any person or entity claiming by, through, or under Subtenant) use of the Subleased Premises or the Building facilities made available to Subtenant (or any person claiming by, thorough or under Subtenant) during the Sublease Term pursuant to the Lease including, without limitation, overtime HVAC service requested by Subtenant and additional janitorial services requested by Subtenant.  Subtenant shall also pay any and all tax due with respect to Rent to the extent imposed pursuant to the laws of the State of California and/or any political subdivision thereof; provided, however, that Subtenant shall not be responsible for the payment of any tax levied on Sublandlord that is in the nature of an income, inheritance, estate, succession, transfer or gift tax. Notwithstanding anything to the contrary in this Section 3(c) or elsewhere in this Sublease, Original Sublandlord shall retain sole responsibility for paying all ad valorem taxes on the Personal Property and on the value of the leasehold improvements in the Subleased Premises as of the Commencement Date, with Subtenant to be responsible for paying only any ad valorem taxes on any Personal Property of Subtenant within the Subleased Premises and the increase, if any, in the amount of the ad valorem taxes on the value of the leasehold improvements in the Subleased Premises as of the Commencement Date directly resulting from any Alterations (including the Subtenant Approved Alterations) in the Subleased Premises made by Subtenant.

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(d)           The Base Rent and Additional Rent and all other sums due and payable by Subtenant pursuant to this Sublease are collectively referred to in this Sublease as “Rent”.  Rent for any partial month during the Sublease Term shall be prorated based on the actual number of days in such partial month.  All Rent shall be paid by Subtenant without any setoff or deduction whatsoever except to the extent that rent is abated for Sublandlord with respect to the Space pursuant to the terms of the Original Sublease, in which event Subtenant’s Rent with respect to the Space also shall be proportionately and equitably abated.  All Rent shall be paid initially by wire transfer in accordance with Sublandlord’s wiring instructions set forth on Schedule C annexed hereto and made a part hereof or, if designated by Sublandlord, shall be delivered to the following address or at such other place as Sublandlord may designate in writing from time to time in accordance with Section 11:  LookSmart, Ltd, Attention:  William O’Kelly, 100 N. Sepulveda Blvd, Suite 275, El Segundo, CA  90254.

4.             Relationship to Lease.  This Sublease and all of Subtenant’s rights hereunder are expressly subject and subordinate to all of the terms and conditions of the Lease and the Original Sublease.  Subtenant hereby acknowledges that it has read all of the terms and conditions of the Lease and Original Sublease.  In the event of any conflict between the terms of the Lease and the terms of this Sublease, or between the terms of the Original Sublease and the terms of this Sublease, this Sublease shall control as between Sublandlord and Subtenant.  Subtenant hereby agrees to perform all obligations of Sublandlord under the Original Sublease (as tenant under the Lease) during the Sublease Term to the extent relating to the Subleased Premises except (i) with respect to the payment of “Base Rental” (as such term is defined in Section 5 of the Original Lease), and (ii) with respect to the payment of the additional rent and other charges required to be paid by Original Sublandlord under Sections 6 and 7 of the Original Lease.  During the Sublease Term, the benefit of all repairs, restorations, compliance with laws and other requirements, materials and services, performed by Landlord or provided to the Subleased Premises by Landlord pursuant to the Lease, and any consents provided by Landlord pursuant to the Lease, shall accrue to Subtenant.  If Landlord defaults under any of the terms, covenants and provisions of the Lease and such default has a materially adverse effect on Subtenant’s use or occupancy of or access to the Subleased Premises (an “Interruption”) then, in such event, upon Subtenant’s written request, Sublandlord shall make a commercially reasonable effort to enforce the applicable provisions of the Lease, at no cost or expense to Sublandlord and at Subtenant’s sole cost and expense (provided, however, that Sublandlord shall be responsible for paying any costs or expenses incurred by Sublandlord as a result of enforcing the applicable provisions of the Lease in the event that an Interruption results from an Event of Default by Sublandlord under the Lease), for Subtenant’s benefit in an attempt to cause Landlord to cure such default; provided, however, that in no event shall the foregoing require, or be construed or interpreted as requiring, Sublandlord to commence or prosecute any legal actions or proceedings against Landlord.  Notwithstanding the foregoing, provided that no Default (defined below) exists, if an Interruption has occurred and an action with respect to such Interruption against Landlord by Subtenant in Subtenant’s own name is barred by reason of lack of privity, non-assignability or otherwise, then upon request, Sublandlord shall execute all documents reasonably required to allow Subtenant to bring such action in Sublandlord’s name, provided the same is without cost and expense to (provided that Sublandlord shall be responsible for paying any costs or expenses incurred by Sublandlord as a result of allowing Subtenant to bring such action in Sublandlord’s name if an Interruption results from an Event of Default by Sublandlord under the Lease), or recourse against, Sublandlord.  Subtenant shall indemnify and hold harmless Sublandlord from and against any and all suits, claims, demands, liability, damages, costs and expenses of every kind and nature incurred by Sublandlord including, without limitation, reasonable attorneys’ fees and expenses, court costs, penalties and fines (excluding, however, any costs or expenses incurred by Sublandlord in the event that the Interruption resulted from an Event of Default by Sublandlord under the Lease), to the extent resulting from any such action.  Subtenant hereby acknowledges that Subtenant shall look solely to Landlord for the performance of all the Landlord’s obligations under the Lease and that Sublandlord shall not be obligated to provide any services to Subtenant or otherwise perform any obligations in connection with the Subleased Premises that are Landlord’s obligation under the Lease.  Subtenant acknowledges that any termination of the Lease may result in a termination of this Sublease.  Notwithstanding anything to the contrary contained in this Sublease or the Lease, Sublandlord shall indemnify, defend and protect Subtenant from any and all claims, liabilities, judgments, causes of action, damages, costs and expenses (including reasonable attorneys’ fees) resulting from the termination of this Sublease by reason of a default by Sublandlord under the Lease (and such default is not caused by a default of Subtenant under this Sublease).  The indemnification provisions set forth in this Section 4 shall survive the expiration or earlier termination of this Sublease.  Sublandlord agrees not to hereafter surrender the Subleased Premises or voluntarily terminate the Original Sublease or enter into any agreement with Original Sublandlord to terminate the Original Sublease provided, however, that the foregoing shall not be construed or interpreted in any manner as prohibiting Sublandlord from exercising any right currently contained in the Original Sublease in favor of Sublandlord for the termination of the Sublease in the event of casualty or condemnation.

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5.             Permitted Use; Alterations; Building Security.

(a)           Permitted Use.  Subtenant shall use and occupy the Subleased Premises solely for general office uses and all legal uses reasonably ancillary thereto permitted under the Lease (the “Permitted Use”), and for no other use or purpose whatsoever.  Subject to the foregoing, Subtenant’s use of the Subleased Premises for the Permitted Use shall be strictly in accordance with the use and all other provisions of the Lease applicable to the Subleased Premises.

(b)           Alterations.  Subtenant shall make no alterations or changes (collectively, “Alterations”) to the Subleased Premises or the Building of any kind or nature without Sublandlord’s prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed.  It is agreed that it will be reasonable for Sublandlord to withhold its reasonable consent to any Alterations if Subtenant has not obtained Original Sublandlord’s and Landlord’s reasonable consent to such Alterations, to the extent that Landlord’s consent to such Alterations is required pursuant to Section 12 of the Original Lease.  In addition, Sublandlord’s consent may be conditioned upon Subtenant complying with all of the provisions of Section 12 of the Original Lease.  Sublandlord shall, at the time of granting consent to any Alterations, provide to Subtenant in writing Sublandlord’s reasonable determination of whether Subtenant shall be required to remove such Alteration upon the expiration or earlier termination of the Sublease Term.  Without limiting the generality of the foregoing, wherever Landlord’s consent or approval is required, or wherever information, documentation, sums of money, or other items are required to be delivered to Landlord pursuant to Section 12 of the Original Lease, Sublandlord’s and Original Sublandlord’s consent and approval shall also be required, and Subtenant shall also be required to make all such deliveries to Sublandlord (provided, however, Subtenant shall not be obligated to pay any review, supervisory or other fee to Sublandlord in connection with any Alterations by Subtenant).  Any review or approval by Sublandlord of any Alterations or any plans and specifications with respect to any Alterations, is solely for Sublandlord’s benefit, and without representation or warranty to Subtenant with respect to the adequacy, correctness or efficiency thereof, their compliance with law or otherwise.

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(c)           Personal Property.  Sublandlord will remove and store the Personal Property identified on Schedule D (the “Work Stations”) prior to the Commencement Date.  Sublandlord will be responsible for reinstalling the Work Stations to the Space at the end of the Sublease Term.  Subject to Section 10, Sublandlord shall pay the cost of removing, storing and reinstalling the Work Stations (the “Work Station Costs”).

(d)           Building Security.  Sublandlord approves, subject to Subtenant’s compliance with the provisions of Section 5(b) of this Sublease and Section 12(d) of the Original Lease (including without limitation, provisions requiring Landlord’s consent, to the extent applicable), Subtenant’s installation of its own Building compatible security system within the Space (“Subtenant’s Security System”), which Subtenant’s Security System shall be installed at Subtenant’s sole cost and expense, in a good and workmanlike manner and in compliance with all applicable laws and building codes.  Subtenant’s Security System shall be maintained by Subtenant in a first class manner at Subtenant’s sole cost and expense.

6.             Default.  Any act or omission by Subtenant that would constitute a default by Sublandlord under the Original Sublease if it had been committed by Sublandlord shall be a default by Subtenant under this Sublease.  The following events shall each be deemed to be a “Default” by Subtenant under this Sublease:  (i) Subtenant shall fail to pay Rent when due pursuant to the terms hereof, and shall fail to cure such failure within five (5) calendar days after Subtenant receives notice from Sublandlord of such failure; (ii) Subtenant shall fail to perform any obligation of Subtenant under this Sublease or to comply with any provision of this Sublease (including, without limitation, the provision set forth in the first sentence of this Section 6), other than the payment of Rent or compliance with the items in clauses (iii) through (vi) of this Section 6 below, and shall not cure such failure within twenty (20) calendar days after Subtenant receives notice thereof from Sublandlord; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 or any similar or successor law; and provided further, that if the nature of such failure is that it cannot reasonably be cured within a twenty (20) calendar day period, Subtenant shall not be deemed to be in Default hereunder if it diligently commences such cure within such period, notifies Sublandlord within such period that it cannot reasonably complete such cure within twenty (20) calendar days and thereafter diligently proceeds to cure such failure as soon as reasonably possible but in no event later than sixty (60) calendar days after the receipt of Sublandlord’s notice; (iii) Subtenant shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due, or shall file a petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a petition in any proceeding seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or fail timely to contest the material allegations of a petition filed against it in any such proceeding; (iv) a proceeding is commenced against Subtenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, and such proceeding shall not have been dismissed within sixty (60) calendar days after the commencement thereof; (v) a receiver or trustee shall be appointed for all or substantially all of the assets of Subtenant; or (vi) Subtenant shall do or permit to be done anything which creates a lien upon the Subleased Premises or the Building and such lien is not removed or discharged or bonded over within ten (10) calendar days after Subtenant obtains knowledge of such filing.  Any Default by Subtenant shall entitle Sublandlord to exercise any and all of the same rights and remedies against Subtenant as are available to Original Sublandlord against Sublandlord as tenant under the Original Sublease, arising out of an Event of Default under the Original Sublease.  In addition, subject to the terms of Section 19 of this Sublease, any Default by Subtenant shall entitle Sublandlord to recover all expenses incurred by Sublandlord to the extent resulting from such Default (including, without limitation, reasonable attorneys’ fees and disbursements incurred in enforcing the provisions of this Sublease).  If at any time Subtenant or anyone claiming by, through or under Subtenant is holding over in all or any portion of the Subleased Premises beyond the expiration or sooner termination of the Sublease Term (a “Subtenant Holdover”) and Sublandlord incurs any costs, claims, damages, fees (including, without limitation, reasonable attorneys’ fees), expenses, or liabilities resulting from a Subtenant Holdover, including, without limitation, any sums Sublandlord may be required to pay pursuant to Section 28 of the Original Sublease (collectively, “Hold Over Expenses”), then Subtenant shall indemnify and hold Sublandlord harmless from and against any and all Hold Over Expenses.  Notwithstanding the foregoing, if Sublandlord or anyone claiming by, through or under Sublandlord is holding over in all or any portion of the remainder of the Premises after the expiration or sooner termination of the term of the Lease, then Subtenant shall only be obligated to pay 16.932% (i.e., Subtenant’s pro rata share) of such Hold Over Expenses pursuant to such indemnification.

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7.             Insurance and Indemnities.  Subtenant hereby agrees to indemnify and hold Sublandlord harmless, with respect to this Sublease and the Subleased Premises, to the same extent that Sublandlord is required to indemnify and hold Original Sublandlord harmless with respect to the Original Sublease and the Premises; provided, however, that in no event shall such indemnification of Sublandlord by Subtenant apply with respect to any loss, cost, damage, injury, expense or liability incurred by Sublandlord to the extent resulting from any condition existing or event occurring in the Subleased Premises prior to  the date that Subtenant access any portion of the Subleased Premises for the purpose of preparing the Subleased Premises for Subtenant’s initial use and occupancy pursuant to Section 2(a) of this Sublease.  In addition, Subtenant shall indemnify and hold harmless Sublandlord from and against any and all suits, claims, liability, damages, costs and expenses including, without limitation, reasonable attorneys’ fees and expenses, to the extent resulting from (i) a default by Subtenant of its obligations under this Sublease, or (ii) the negligence or willful misconduct of Subtenant.  Sublandlord shall indemnify and hold harmless Subtenant from and against any and all suits, claims, liability, damages, costs and expenses including, without limitation, reasonable attorneys’ fees and expenses, to the extent resulting from (i) a default by Sublandlord of its obligations under the Original Sublease (except to the extent caused by a default of Subtenant under this Sublease) or this Sublease, or (ii) the negligence or willful misconduct of Sublandlord.  The indemnification provisions set forth in this Section 7 shall survive the expiration or earlier termination of this Sublease.  In addition, Subtenant hereby agrees to obtain and provide evidence satisfactory to Sublandlord, on or before the Commencement Date, and from time to time upon request, that Subtenant is carrying insurance with respect to the Subleased Premises and this Sublease in the same amounts and of the same types required to be carried by Sublandlord under the Original Sublease with regard to the Lease and the Premises and, to the extent Landlord or Original Sublandlord is required to be named by Sublandlord on any such insurance so required to be carried by Sublandlord, Subtenant shall name Landlord, Original Sublandlord, and Sublandlord on Subtenant’s insurance policies.  The waiver of subrogation set forth in Section 16 of the Original Lease shall apply as between Sublandlord and Subtenant.  Notwithstanding anything to the contrary in this Section 7, (i) Subtenant shall be obligated to provide thirty (30) calendar days written notice of any change to the insurance maintained by Subtenant under Section 15(a) of the Original Lease only in the event the change is material and adverse; (ii) with respect to any Alterations by Subtenant, Subtenant’s contractor, rather than Subtenant, shall be obligated to maintain Builder’s Special Form insurance with respect to such Alterations, and (iii) Sublandlord, at Sublandlord’s cost, shall continue to be obligated to maintain insurance insuring the leasehold improvements located in the Space as of the Commencement Date and the Personal Property in the amounts and of the types required to be carried by Sublandlord under Section 15 of the Original Lease, and Subtenant shall have no obligation to maintain any such insurance.

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8.             Subleasing and Assignment.  Subtenant shall not assign this sublease or further sublet all or any part of the Subleased Premises except subject to and in compliance with all of the terms and conditions of the Lease and Sublandlord (in addition to Original Sublandlord  and Landlord) shall have the same approval rights with respect to assignment and subleasing as Landlord under the Lease.

9.             Condition of Subleased Premises.  The Subleased Premises are being leased in their “AS-IS” condition as of the date of this Sublease (reasonable wear and tear excepted) and the parties acknowledge that Sublandlord has made no representations concerning the condition or suitability of the Subleased Premises except as expressly set forth herein.  To the best of Sublandlord’s knowledge, the Personal Property and all Building systems (including, without limitation, HVAC, plumbing, electrical, life safety, security and lighting systems) servicing the Subleased Premises are in good working order and repair as of the date of this Sublease.  Upon the expiration or earlier termination of the Sublease Term, Subtenant shall surrender the Space in the condition required by Section 29 of the Lease upon the expiration of the term thereof and remove all of (i) its personal property from the Space (and repair any damage caused by such removal) and (ii) any other Alterations which Sublandlord shall have reasonably requested that Subtenant remove at the time at which Sublandlord shall have consented to the same in accordance with Section 5(b).  Subject to the provisions of Article 14(q) hereof, upon the expiration or earlier termination of the Sublease Term, Subtenant shall deliver the Personal Property to Sublandlord.  The provisions of this Section 9 shall survive the expiration or earlier termination of this Sublease.

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10.           Tenant Improvement Allowance.  Subtenant shall be entitled to a tenant improvement allowance (“TIA”) equal to two dollars ($2.00) RSF for any tenant improvements tenant makes to the Premises.  The TIA will be given by Sublandlord in the form of a Base Rent Credit.  Notwithstanding the foregoing, the Base Rent Credit, if any, shall be reduced by the Work Station Costs.

11.           Notices.  Notices by Sublandlord and Subtenant shall be given and be deemed received in the same manner provided by Section 30 of the Original Lease at the following addresses:

To Sublandlord:

Prior to the Commencement Date:

LookSmart, Ltd.

100 N. Sepulveda Blvd, Suite 275El Segundo, CA  90245

Attention: Chief Financial Officer

On and after the Commencement Date:

LookSmart, Ltd.

55 Second Street, 7th Floor

San Francisco, CA 94105

Attention:  Chief Financial Officer

To Subtenant:

Prior to the Commencement Date:

Rocket Lawyer Incorporated

220 Montgomery Street, Suite 991

San Francisco, CA 94104

Attention: Monique Covington, VP Administration On and after the Commencement Date:

Rocket Lawyer Incorporated

55 Second Street, 7th Floor

San Francisco, CA 94105

Attention: Monique Covington, VP Administration

12.           Brokers.  Each party represents to the other that it has not dealt with any real estate broker, sales person or finder in connection with this Sublease other than Cornish & Carey Commercial Newmark Knight Frank (for Sublandlord) and Finegold Commercial Real Estate (“FCRE”) (for Subtenant) (collectively, the “Broker”).  Sublandlord shall be responsible for paying a commission to FCRE pursuant to a separate agreement between Sublandlord and FCRE.  Each of Sublandlord and Subtenant  hereby agrees to indemnify and hold the other harmless from and against any liabilities and claims for commissions and fees due or claimed to be due by any broker, real estate salesperson or similar person or entity other than the Broker, arising out of any such broker, real estate salesperson or similar person or entity claiming to have dealt with the indemnifying party in connection with this Sublease.

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13.           Landlord’s and Original Sublandlord’s Consent.  This Sublease and all of Sublandlord’s and Subtenant’s obligations under this Sublease (except for Subtenant’s obligation to deliver the Letter of Credit to Sublandlord pursuant to the terms of Section 15) are expressly contingent upon Sublandlord obtaining the written consent to this Sublease from the Original Sublandlord under the Original Sublease and from the Landlord under the Lease.  Sublandlord shall use diligent good faith efforts to obtain such consents (without any cost or expense to Subtenant) as soon as reasonably possible after the date of this Sublease.  If despite such diligent good faith efforts Sublandlord has not obtained such consents within thirty (30) calendar days after the date of this Sublease, then Subtenant shall have the right to terminate this Sublease by giving written notice to Sublandlord within five (5)  calendar days after the expiration of such thirty (30) day period, and Sublandlord shall return the Letter of Credit to Subtenant and reimburse Subtenant for the first monthly installment of Base Rent (in the amount of $54,991.75) paid by Subtenant to Sublandlord.  If despite such diligent good faith efforts Sublandlord has not obtained such consents within sixty (60) calendar days after the date of this Sublease (and Subtenant has not terminated this Sublease in accordance with the foregoing sentence), then this Sublease shall be null and void and of no further force or effect, and Sublandlord shall return the Letter of Credit to Subtenant and reimburse Subtenant for the first monthly installment of Base Rent (in the amount of $54,991.75) paid by Subtenant to Sublandlord.

14.           Miscellaneous.

(a)           Governing Law – This Sublease shall be governed by the laws of the State of California without regard to any conflict of law principles.

(b)           Waiver of Trial By Jury – To the extent permitted by law, the parties hereto mutually hereby knowingly, voluntarily and intentionally waive the right to a trial by jury in respect of any claims by either party based on this Sublease, arising out of, under, or in connection with this Sublease, or any course of conduct, course of dealings, statements (whether verbal or written) or actions of either party (including, without limitation, any course of conduct in the enforcement of this Sublease), and the parties hereby agree that they will not seek to consolidate any litigation, based on any such claim, with any other action in which a jury trial cannot be or has not been waived.

(c)           Merger of Prior Agreements – All prior or contemporaneous promises, agreements, and understandings, whether oral or written, relating to the subject matter of this Sublease are deemed to be superseded by this Sublease, and no party is relying on any promise, agreement or understanding not set forth in this Sublease.  This Sublease may not be amended or modified, except by a written instrument executed and delivered by each of the parties hereto.

(d)           No Waiver – No delay or omission of any party in exercising its rights and remedies against the other shall constitute a waiver.  A breach by any party of its obligations under this Sublease may only be waived by a written instrument executed by the party to be charged therewith.  A waiver of any breach in one or more instances shall not constitute or otherwise be an implicit waiver of any subsequent breach.

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(e)           Limitation of Remedies -- With respect to any provision of this Sublease, or any holding or interpretation of law which provides, in effect, that Sublandlord shall not unreasonably withhold or unreasonably condition or delay any consent or any approval, Subtenant in no event shall be entitled to make, nor shall Subtenant make, any claim, and Subtenant hereby waives any claim, for money damages nor shall Subtenant claim any money damages by way of set-off, counterclaim or defense based upon any claim or assertion by Subtenant that Sublandlord has unreasonably withheld or unreasonably conditioned or delayed any consent or approval.  Subtenant’s sole remedy in any such case shall be an action or proceeding to enforce any such provision by way of specific performance or for a declaratory judgment.

(f)           No Counterclaims -- In the event that Sublandlord commences any summary proceedings for possession of the Subleased Premises, Subtenant shall not interpose any counterclaim of whatever nature or description in any such proceeding (unless such counterclaim is compulsory or unless Subtenant’s failure to interpose such counterclaim in such proceeding would result in the waiver of Subtenant’s right to bring such claim in a separate proceeding under applicable law).  Notwithstanding the foregoing, Subtenant may assert any affirmative defenses that Subtenant has to Sublandlord’s right to bring such summary proceeding and shall not be required to bring a separate action to assert such affirmative defenses.

(g)           Successors and Assigns – The covenants, conditions and agreements contained in this Sublease shall bind and inure to the benefit of Sublandlord and Subtenant and their respective successors and, except as otherwise provided in this Sublease, their assigns.

(h)           Captions and Headings – The captions and headings in this Sublease are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Sublease or the intent of any provisions hereof.

(i)            No Presumption – This Sublease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Sublease to be drafted.

(j)            Default Interest – In the event any payment of Rent required to be made hereunder is not made within five (5) calendar days after the date such payment is due pursuant to the provisions of this Sublease, Subtenant shall pay to Sublandlord interest on such overdue amount calculated from the date such payment was due until the date the same is actually received by Sublandlord at an annual rate of interest equal to the lesser of (i) the Interest Rate set forth in Section 9 of the Original Lease, and (ii) the maximum rate of interest permitted by law.

(k)           Self-Help – In addition to any and all other rights and remedies available to Sublandlord under this Sublease, if a Default exists, Sublandlord, without thereby waiving such Default and without liability to Subtenant, may, but shall not be obligated to, perform the same for the account and at the expense of Subtenant, without notice in case of emergency and upon five (5) calendar days prior notice in all other cases and Sublandlord shall have the right to enter the Space at any time thereafter to cure any such Default.  Sublandlord shall use commercially reasonable efforts to minimize any interference with the conduct of Subtenant’s business at the Subleased Premises during any such entry into the Space by Sublandlord.  If Sublandlord engages an attorney and/or incurs any other expense in connection with exercising the foregoing right, Subtenant agrees that it shall pay such reasonable attorneys’ fees or other expenses to Sublandlord, within five (5) calendar days after receipt of a bill therefor.

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(l)             No Accord and Satisfaction – No payment by Subtenant, or receipt by Sublandlord, of a lesser amount than the Rent required to be paid shall be deemed to be other than on account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment of Rent be deemed an accord and satisfaction, and Sublandlord may accept such check or payment without prejudice to Sublandlord’s right to recover the balance of such Rent or pursue any other rights or remedies available to Sublandlord.

(m)           Personal Liability - Notwithstanding anything to the contrary in this Sublease, or in any instrument executed in connection with this Sublease (a) Subtenant acknowledges that Sublandlord is a corporation; (b) Subtenant expressly agrees that any liability of Sublandlord arising out of or in connection with this Sublease, or any instrument executed in connection with this Sublease, or the relationship of Sublandlord and Subtenant under this Sublease, and the ability of Subtenant to recover damages or other relief under this Sublease, or under any instrument executed in connection with this Sublease, shall be limited solely to the assets of Sublandlord; (c) in no instance whatsoever shall any present, past or future partner, members, shareholders, directors, agents, officers, employees, contractors, successors and / or assigns  have any personal or individual liability hereunder for the satisfaction of any obligations or liabilities of Sublandlord under this Sublease, or under any instrument executed in connection with this Sublease, all such personal or individual liability, if any, being expressly, unconditionally and irrevocably waived and released by Subtenant. Sublandlord acknowledges and expressly agrees that in no event shall Subtenant’s officers, directors, shareholders, members or employees have any personal or individual liability under this Sublease for the satisfaction of any obligations or liabilities of Subtenant under this Sublease, or under any instrument executed in connection with this Sublease, all such personal or individual liability, if any, being expressly, unconditionally and irrevocably waived and released by Sublandlord.

(n)           Parking.  Subject to the provisions of Section 43(s) of the Original Lease, during the Sublease Term, Subtenant shall be allocated two (2) parking spaces in the Garage for use by Subtenant’s employees.  Subtenant shall pay Sublandlord on a monthly basis for the parking spaces the monthly amount payable by Sublandlord under the Original Sublease for the parking spaces (as the monthly amount may be adjusted from time to time pursuant to Section 43(s) of the Original Lease) (regardless of whether Subtenant or its employees are using them), within twenty (20) calendar days of receipt of demand.

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(o)           Signage; Building Directory.

(i)            Signage.  Sublandlord agrees not to unreasonably withhold, condition or delay its consent, subject to Subtenant’s compliance with all applicable provisions of this Sublease (including, without limitation, the provisions of Section 5(b)) and Section 41 of the Lease (including, without limitation, provisions thereof requiring Landlord’s consent, to the extent applicable), to Subtenant’s installation of two (2) Building standard identifying signs in the elevator landing area utilizing Subtenant’s corporate graphics at the entrance to the Space, along with one sign in the interior of the Space visible from the elevator landing area, which shall be installed at Subtenant’s sole cost and expense, in a good and workmanlike manner, in accordance with all applicable laws, and pursuant to plans and specifications prepared by a licensed architect and approved by Sublandlord (which approval shall not be unreasonably withheld, conditioned or delayed).  Such signage shall be maintained by Subtenant in a first class manner at its sole cost and expense.  Upon the expiration or earlier termination of the Sublease Term, Subtenant shall remove any signage installed by Subtenant at its sole cost and expense and repair all damage to the Building caused by such removal.

(ii)           Building Directory.  Provided no Default exists, Sublandlord shall request Original Sublandlord to list Subtenant’s name and location in the Building directory.  Any costs and expenses charged by Landlord associated with changing such Building directory listing shall be paid by Subtenant within twenty (20) calendar days of receipt of demand.

(p)           Attornment.  Subtenant acknowledges that Landlord shall have the right to continue or terminate this Sublease, in Landlord’s sole discretion, upon termination of the Lease, and Subtenant agrees to recognize and attorn to Landlord in the event that Landlord elects under such circumstances to continue this Sublease on all of the terms and conditions set forth herein for the remainder of the Sublease Term.

(q)           Submetering.  To the extent required by Landlord as a result of Landlord’s determination that Subtenant’s use of electricity in the IDF room within the Subleased Premises exceeds normal electricity use for an IDF room for office use, Subtenant shall, at its sole cost and expense, install a meter, and all related equipment, to measure electricity consumed in the IDF room within the Subleased Premises, in accordance with all of the applicable terms, covenants and conditions of Articles 12 and 15 of the Original Lease and Exhibit I of the Original Lease.  Subtenant shall pay on demand (i) the actual metered cost of such excess electric current consumed by Subtenant as measured by such meter (the “Excess Metered IDF Electricity Costs”), as billed by Landlord, (ii) the reasonable, actual costs incurred by Landlord for any repairs to, replacements or maintenance of, such meter, and (iii) any actual accounting expenses incurred by Landlord in connection with such metering.  It is the understanding and expectation of Sublandlord and Subtenant that Operating Expenses shall not include the Excess Metered IDF Electricity Costs pursuant to the terms of the Lease.

(r)           Cooling Unit.  Subject and conditional upon Landlord approval, Subtenant may install a cooling unit in Subtenant’s computer room without the need to separately meter said cooling unit.

15.           Security Deposit.

(a)           Subtenant shall deliver to Sublandlord upon its execution of this Sublease, for the full and faithful performance by Subtenant of each and every term, provision, covenant and condition of this Sublease and Subtenant shall maintain as set forth herein, a clean, irrevocable and freely transferable letter of credit, in the sum of $219,967.00 in form and substance, and issued by a bank, reasonably satisfactory to Sublandlord (the “Letter of Credit”).  The Letter of Credit shall provide (i) for automatic annual renewals thereof to and including the date that is sixty (60) calendar days after the expiration of the Sublease Term, unless Sublandlord shall be notified by the issuing bank at least sixty (60) calendar days prior to any expiration date that the Letter of Credit shall not be extended beyond such date; (ii) that upon presentation of the Letter of Credit to the issuing bank and its receipt of a written statement purported to be signed by or on behalf of Sublandlord stating that Subtenant is in Default under the Sublease, said issuing bank will pay to Sublandlord the amount stated in such notice to be necessary to cure such Default, up to the face amount of the Letter of Credit; and (iii) that it shall be freely transferable by Sublandlord, to Sublandlord’s assignee of its interest in this Sublease upon notice to the issuing bank, without charge.  The Letter of Credit shall be subject to the Uniform Practices for Documentary Credits then prevailing.

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In the event that the issuing bank shall notify Sublandlord that the Letter of Credit shall not be renewed or extended, then, not later than thirty (30) calendar days prior to the expiration of the Letter of Credit, Subtenant shall deliver to Sublandlord a replacement Letter of Credit in the full amount required pursuant to this Section 15, in form and substance, and issued by a bank, reasonably satisfactory to Sublandlord.  The failure of Subtenant to so timely furnish such replacement Letter of Credit as herein provided shall be deemed a Default hereunder.

(b)           If Subtenant is in Default hereunder, Sublandlord may, but shall not be required to draw on the Letter of Credit (as above provided) for the payment of any Rent in default or for payment of any other sum which Sublandlord may expend, or be required to expend, by reason of such Default, and, if Subtenant is in Default for having failed to timely furnish to Sublandlord a replacement Letter of Credit in accordance with the terms of Section 15(a), then Sublandlord shall have the right to draw the entire amount of the Letter of Credit and to hold the proceeds as a cash security deposit (the “Security Deposit”), as security for the full and faithful performance by Subtenant of all of the terms, covenants and conditions of this Sublease.  If Subtenant is in Default, Sublandlord may use, apply or retain the whole or any part of the Security Deposit for the payment of any Rent in default or for payment of any other sum which Sublandlord may expend, or be required to expend, by reason of Subtenant’s Default.  If Sublandlord uses or retains all or a portion of the Security Deposit, Subtenant shall replenish such amount as Sublandlord used, within ten (10) calendar days after written demand of Sublandlord.  At any time or times when, pursuant to the provisions of this Section 15, Sublandlord shall draw on the Letter of Credit as aforesaid, and within five (5) calendar days after Sublandlord’s demand therefor, Subtenant shall restore the amount of the Letter of Credit to the amount then required hereunder and deliver an amendment to the Letter of Credit to Sublandlord, in form and substance reasonably satisfactory to Sublandlord, evidencing the same.  Sublandlord shall release the Security Deposit to Subtenant upon delivery to Sublandlord of a replacement Letter of Credit complying with the terms hereof.  Sublandlord’s obligations with respect to the Security Deposit are those of a debtor and not a trustee.  Sublandlord shall not be required to maintain the Security Deposit in a trust account or separate from Sublandlord’s general or other funds and Sublandlord may commingle the Security Deposit with any of Sublandlord’s general or other funds.  Subtenant shall not be entitled to any interest on the Security Deposit.

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(c)           In case of the assignment or other transfer by Sublandlord of its interest in this Sublease, or any cessation of Sublandlord’s interest therein, whether in whole or in part, (i) Sublandlord may, upon notice to Subtenant, transfer its interest in the Letter of Credit or Security Deposit, as the case may be, to the grantee, assignee or other transferee of Sublandlord’s interest, and (ii) from and after such transfer and the transferee’s written assumption of Sublandlord’s obligations under this Section 15 Sublandlord shall be relieved of all liability with respect to the Letter of Credit or Security Deposit, as the case may be, and Subtenant shall look solely to the grantee, assignee or transferee for same.  Subtenant agrees that Subtenant shall not assign (except in connection with an assignment of the Sublease made in accordance with this Sublease) or encumber the Letter of Credit or Security Deposit, as the case may be, and no such assignment or encumbrance by Subtenant of all or any part of the Letter of Credit or Security Deposit, as the case may be, shall be binding upon Sublandlord, whether made prior to, during, or after the Sublease Term.  Sublandlord shall not be required to exhaust its remedies against Subtenant or against the Letter of Credit or Security Deposit, as the case may be, before having recourse to any other form of security held by Sublandlord and recourse by Sublandlord to such other form of security shall not affect any remedies of Sublandlord which are provided in this Sublease or which are available to Sublandlord under this Sublease.

(d)           Sublandlord agrees that, provided that no Default exists, Subtenant shall be permitted to reduce the amount of the Letter of Credit to $109,983.50 on October 15, 2013.  Upon request by Subtenant, given no earlier than ten (10) calendar days prior to the respective dates upon which the Letter of Credit may be reduced pursuant to the preceding sentence and provided that no Default exists, Sublandlord shall deliver to the issuing bank, within ten (10) calendar days after receipt of such request from Subtenant, its written authorization to so reduce the amount of the Letter of Credit as of the date in question.

(e)           Subject to all of the other conditions and provisions of this Section 15, Subtenant agrees to deliver, and Sublandlord agrees to accept, initially, a Letter of Credit conforming to all of the requirements of this Section 15 issued by Silicon Valley Bank (the “Bank”).  In the event that at anytime (i) the Bank’s credit rating, or (ii) the credit rating of any subsequent issuer of a Letter of Credit held by Sublandlord hereunder, falls below a level reasonably acceptable to Sublandlord, then, in such event, Subtenant shall supply and deliver to Sublandlord, within thirty (30) calendar days of Sublandlord’s notice to Subtenant of the occurrence of (i) or (ii) above, a substitute Letter of Credit from a bank having a credit rating reasonably acceptable to Sublandlord, and otherwise in compliance with the conditions and provisions of this Section 15.

(f)            Provided that no Default exists, within sixty (60) calendar days of the expiration or termination of the term of this Sublease (not resulting from a Default), Sublandlord shall return the Letter of Credit or Security Deposit, if any, to Subtenant.

15

16.           Representations and Warranties of Sublandlord.  Sublandlord represents and warrants for the benefit of Subtenant that:  (i) the copy of the Original Sublease attached hereto as Exhibit A is a true, correct and complete copy thereof (with certain financial provisions redacted); (ii) the copy of the Lease attached hereto as Exhibit B is a true, correct and complete copy thereof (with certain financial provisions redacted); (iii) there exist no amendments, modifications or other agreements (whether oral or written) affecting the Original Sublease or Lease except as attached hereto; (iv) to the best of Sublandlord’s knowledge, neither Sublandlord nor Original Sublandlord is in default under the Lease or Original Sublease nor is there any event, condition or circumstance existing which with notice or the passage of time or both could constitute a default under the Lease or Original Sublease; (iv) the Lease and Original Sublease are in full force and effect; (v) neither Sublandlord nor, to the best of Sublandlord’s knowledge, anyone claiming by, through or under Sublandlord, has caused any Hazardous Substances to be generated, placed, held, stored, used, located or disposed of at the Subleased Premises in violation of Section 39 of the Original Lease, and to Sublandlord’s actual knowledge, no Hazardous Substances are located on, about or under the Subleased Premises; (vi) Sublandlord has received no notice from Original Sublandlord or Landlord with respect to any default by Sublandlord under the Lease or Original Sublease remaining uncured as of the date hereof; and (vii) as of the date hereof, Sublandlord has received no written notice of any pending suit for claims against Sublandlord relating to any condition existing or event occurring in the Subleased Premises and Sublandlord has no knowledge of any such claims.

17.           Amendment of Lease.  Sublandlord shall not amend or modify the Original Sublease in any way, except as otherwise expressly permitted in the last sentence of Section 4, so as to materially or adversely affect Subtenant or its interest under this Sublease, increase Subtenant’s obligations under this Sublease or restrict Subtenant’s rights under this Sublease, in each case without the prior written consent of Subtenant, which may be withheld in Subtenant’s sole discretion.

18.           Casualty and Condemnation.  In the event that, as a result of any casualty or condemnation affecting the Subleased Premises, or affecting any other portions of the Project (except the Garage) that materially and adversely affects the use of and/or access to the Subleased Premises, Sublandlord has the right under the Original Sublease to terminate the Original Sublease as a result thereof, Subtenant shall have a corresponding right to terminate this Sublease, independent of Sublandlord’s right to terminate under the Original Sublease in such event.

19.           Attorneys’ Fees.  In the event of any dispute or litigation between Sublandlord and Subtenant concerning the terms of this Sublease or by either party to enforce the obligations of the other party under this Sublease, the losing party in any such transaction shall be obligated to reimburse the prevailing party for all reasonable and actually incurred costs and expenses, including reasonable, actual attorneys’ fees, incurred in connection with any such dispute.

 [NO FURTHER TEXT ON THIS PAGE; SIGNATURE PAGE FOLLOWS]

16

IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of the day and year first above written.

SUBLANDLORD:
LOOKSMART, LTD,
a Delaware Corporation
By:	/s/ William O’Kelly
	Name: William O’Kelly
	Title:   Chief Financial Officer
SUBTENANT:
ROCKET LAWYER
A Delaware Corporation
By:	/s/ Charles Moore
	Name: Charles Moore
	Title: Founder and Executive Chairman

17

SCHEDULE A

THE PERSONAL PROPERTY

Inventory of Items contained 55 2nd St., 7th floor, San Francisco, CA 94105
Knoll Life Chairs	93
Knoll Side Chairs	50
Harter Mesh Chairs	12
Conference Room Chairs	18
Folding Chairs	38
Free Standing Lateral File Cabinets	29
Propeller Tables	6
Folding Tables	7
GE Refrigerators	2
64 Sq. Ft. Cubicles	47
48 Sq. Ft. Cubicles	37
Ice Machine	1
Hardwired coffee maker	1
Large Credeza	2
Small Credenza	1
All AV in the conference rooms will stay in place with the furniture

18

SCHEDULE B

BASE RENT

Period	Annual Base Rent		Monthly
During the period commencing on the Rent Commencement Date and ending on August 14, 2013*	$	659,901.00	$	54,991.75
During the period commencing on August 15, 2013 and ending on the Expiration Date*	$	679,898.00	$	56,658.17

*           In the event the Rent Commencement Date is extended pursuant to Section 2(a), each of the August dates set forth in this Schedule B shall be extended for a like number of days.  For example, if the Rent Commencement Date is extended pursuant to Section 2(a) to August 20, 2012, then during the period commencing on August 20, 2011 and ending on August 19, 2012, the Annual Base Rent would be $659,901,

19

SCHEDULE C

SUBLANDLORD’S WIRING INSTRUCTIONS

20

SCHEDULE D

WORK STATIONS

21

EXHIBIT A

ORIGINAL SUBLEASE

(see attached)

22

EXHIBIT B

LEASE

23

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER,

AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jean-Yves Dexmier, 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act 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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012

/s/ Jean-Yves Dexmier

Jean-Yves Dexmier

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER,

AS REQUIRED BY SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William O’Kelly, 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act 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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012

/s/ William O’Kelly

William O’Kelly

Senior Vice President Operations and

Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Jean-Yves Dexmier, 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 September 30, 2012 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: November 14, 2012
By:	/s/ Jean-Yves Dexmier
Name:	Jean-Yves Dexmier
Title:	Chief Executive Officer (Principal Executive Officer)

I, William O’Kelly, 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 September 30, 2012 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: November 14, 2012
By:	/s/ William O’Kelly
Name:	William O’Kelly
Title:	Senior Vice President Operations and Chief Financial Officer (Principal Financial and Accounting Officer)

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of LookSmart, Ltd. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Restructuring Charges (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2012	Dec. 31, 2011
Restructuring Charges [Abstract ]
Payment for restructuring charges	$ 0.2	$ 0.9
Accrued restructuring costs	$ 0	$ 0	$ 0

XML

Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Future minimum payments under capital and operating leases

As of September 30, 2012, future minimum payments under all capital and operating leases are as follows (in thousands):

	CNB Capital Lease			Operating Leases		Total
Three months ending December 31, 2012	$	101		$	43	$	144
Years ending December 31,
2013		111			41		152
2014		-			15		15
2015		-			81		81
Total minimum payments		212		$	180	$	392
Less amount representing interest		(4	)
Present value of net minimum payments		208
Less: current portion		(208	)
Long-term portion of capital lease obligations	$	-

XML

Fair Value Measurements (Details) (Recurring [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Cash equivalents [Abstract]
Cash equivalents	$ 5,490	$ 10,745
Short-term investments [Abstract]
Short-term investments	11,118	6,809
Total financial assets measured at fair value	16,608	17,554
Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Cash equivalents [Abstract]
Cash equivalents	140	1,045
Short-term investments [Abstract]
Short-term investments	0	0
Total financial assets measured at fair value	140	1,045
Significant Other Observable Inputs (Level 2) [Member]
Cash equivalents [Abstract]
Cash equivalents	5,350	9,700
Short-term investments [Abstract]
Short-term investments	11,118	6,809
Total financial assets measured at fair value	16,468	16,509
Significant Unobserved Inputs (Level 3) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Short-term investments [Abstract]
Short-term investments	0	0
Total financial assets measured at fair value	0	0
Money market mutual funds [Member]
Cash equivalents [Abstract]
Cash equivalents	140	1,045
Money market mutual funds [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Cash equivalents [Abstract]
Cash equivalents	140	1,045
Money market mutual funds [Member] | Significant Other Observable Inputs (Level 2) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Money market mutual funds [Member] | Significant Unobserved Inputs (Level 3) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Commercial paper [Member]
Cash equivalents [Abstract]
Cash equivalents	3,850	6,600
Short-term investments [Abstract]
Short-term investments	5,196	1,500
Commercial paper [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Short-term investments [Abstract]
Short-term investments	0	0
Commercial paper [Member] | Significant Other Observable Inputs (Level 2) [Member]
Cash equivalents [Abstract]
Cash equivalents	3,850	6,600
Short-term investments [Abstract]
Short-term investments	5,196	1,500
Commercial paper [Member] | Significant Unobserved Inputs (Level 3) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Short-term investments [Abstract]
Short-term investments	0	0
Certificates of deposit [Member]
Cash equivalents [Abstract]
Cash equivalents	1,500	3,100
Short-term investments [Abstract]
Short-term investments	3,402	3,278
Certificates of deposit [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Short-term investments [Abstract]
Short-term investments	0	0
Certificates of deposit [Member] | Significant Other Observable Inputs (Level 2) [Member]
Cash equivalents [Abstract]
Cash equivalents	1,500	3,100
Short-term investments [Abstract]
Short-term investments	3,402	3,278
Certificates of deposit [Member] | Significant Unobserved Inputs (Level 3) [Member]
Cash equivalents [Abstract]
Cash equivalents	0	0
Short-term investments [Abstract]
Short-term investments	0	0
Corporate bonds [Member]
Short-term investments [Abstract]
Short-term investments	2,520	2,031
Corporate bonds [Member] | Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]
Short-term investments [Abstract]
Short-term investments	0	0
Corporate bonds [Member] | Significant Other Observable Inputs (Level 2) [Member]
Short-term investments [Abstract]
Short-term investments	2,520	2,031
Corporate bonds [Member] | Significant Unobserved Inputs (Level 3) [Member]
Short-term investments [Abstract]
Short-term investments	$ 0	$ 0

XML

Property and Equipment

9 Months Ended

Sep. 30, 2012

Property and Equipment [Abstract]

Property and Equipment

3. Property and Equipment

Property and equipment consist of the following at September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012							December 31, 2011
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Computer equipment	$	9,852	$	(8,940	)	$	912	$	9,751	$	(8,002	)	$	1,749
Furniture and fixtures		167		(76	)		91		75		(62	)		13
Software		1,452		(1,283	)		169		1,241		(1,229	)		12
Leasehold improvements		28		(21	)		7		308		(141	)		167
Total	$	11,499	$	(10,320	)	$	1,179	$	11,375	$	(9,434	)	$	1,941

Depreciation expense on property and equipment for the three and nine months ended September 30, 2012, including property and equipment under capital lease, was $0.3 million and $1.1 million, respectively, and is recorded in operating expenses. Depreciation expense on property and equipment for the three and nine months ended September 30, 2011, including property and equipment under capital lease, was $0.4 million and $1.3 million, respectively. Equipment under capital lease totaled $0.9 million and $2.8 million as of September 30, 2012 and December 31, 2011, respectively. Depreciation expense on equipment under capital lease was $0.1 million and $0.3 million for the three and nine months ended September 30, 2012, respectively, and was $0.2 million and $0.8 million for the three and nine months ended September 30, 2011, respectively. Additionally, accumulated depreciation on equipment under capital lease was $0.7 million and $2.5 million as of September 30, 2012, and December 31, 2011, respectively. As a result of the San Francisco office lease abandonment the Leasehold Improvements were no longer in use and as such were written off in the amount of $0.2 million in the third quarter of 2012 (see Note 3 for more information).

XML

Cash, Cash Equivalents and Short-Term Investments (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011	Dec. 31, 2010
Cash and cash equivalents [Abstract]
Cash	$ 1,016	$ 7,205
Cash equivalents [Abstract]
Total cash equivalents	5,490	10,745
Total cash and cash equivalents	6,506	17,950	15,941	22,119
Short-term investments [Abstract]
Total short-term investments	11,118	6,809
Total cash, cash equivalents and short-term investments	17,624	24,759
Contractual maturities of cash and and short term investments	less than one year
Number of issuers to which credit exposure is limited	1
Money market mutual funds [Member]
Cash equivalents [Abstract]
Total cash equivalents	140	1,045
Certificates of deposit [Member]
Cash equivalents [Abstract]
Total cash equivalents	1,500	3,100
Short-term investments [Abstract]
Total short-term investments	3,402	3,278
Commercial paper [Member]
Cash equivalents [Abstract]
Total cash equivalents	3,850	6,600
Short-term investments [Abstract]
Total short-term investments	5,196	1,500
Corporate bonds [Member]
Short-term investments [Abstract]
Total short-term investments	$ 2,520	$ 2,031

XML

Summary of Significant Accounting Policies (Details) (USD $)	3 Months Ended				9 Months Ended				12 Months Ended
	Sep. 30, 2012		Sep. 30, 2011		Sep. 30, 2012		Sep. 30, 2011		Dec. 31, 2011
Summary of Significant Accounting Policies [Abstract]
Number of types of customers					3
Minimum maturity period to consider instruments as investments					90 days
Profits sharing with intermediaries					50%/50%
Revenue reserve					$ 0				$ 300,000
Allowance for doubtful accounts	700,000				700,000				600,000
Provisions for doubtful accounts	300,000				300,000
Concentration Risk [Line Items]
Number of services or products offered					2
Property, Plant and Equipment [Line Items]
Amortization period for internal-use software development costs					3 years
Impaired assets write off	200,000
Share-based compensation expense recognized	$ 100,000		$ 100,000		$ 200,000		$ 300,000
Number of operating segments					1
Computer equipment [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life of property, plant and equipment					4 years
Computer equipment [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life of property, plant and equipment					3 years
Furniture and Fixtures [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life of property, plant and equipment					7 years
Furniture and Fixtures [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life of property, plant and equipment					5 years
Software [Member] | Maximum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life of property, plant and equipment					3 years
Software [Member] | Minimum [Member]
Property, Plant and Equipment [Line Items]
Estimated useful life of property, plant and equipment					2 years
Accounts Receivable [Member]
Concentration Risk [Line Items]
Minimum reportable percentage for concentration of credit risk					10.00%
Accounts Receivable [Member] | Company 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)					33.00%					[1]
Accounts Receivable [Member] | Company 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)					12.00%				20.00%
Accounts Receivable [Member] | Company 3 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)						[1]			12.00%
Net Revenue [Member]
Concentration Risk [Line Items]
Minimum reportable percentage for concentration of credit risk					10.00%
Net Revenue [Member] | United States [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	53.00%		73.00%		55.00%		70.00%
Net Revenue [Member] | Europe, Middle East and Africa [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	36.00%		16.00%		39.00%		22.00%
Net Revenue [Member] | Company 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	27.00%			[1]	23.00%			[1]
Net Revenue [Member] | Company 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)		[1]	14.00%			[1]	11.00%
Net Revenue [Member] | Company 3 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)		[1]	12.00%			[1]	12.00%
Net Revenue [Member] | Advertiser Networks [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	94.00%		96.00%		92.00%		96.00%
Net Revenue [Member] | Publisher Solutions [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	6.00%		4.00%		8.00%		4.00%
Traffic Acquisition Costs [Member]
Concentration Risk [Line Items]
Minimum reportable percentage for concentration of credit risk					10.00%
Traffic Acquisition Costs [Member] | Distribution Partner 1 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	37.00%			[1]	27.00%			[1]
Traffic Acquisition Costs [Member] | Distribution Partner 2 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)	10.00%			[1]		[1]		[1]
Traffic Acquisition Costs [Member] | Distribution Partner 3 [Member]
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)		[1]		[1]	10.00%			[1]

[1] ** Less than 10%

XML

Property and Equipment (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Property and equipment [Abstract]
Cost	$ 11,499,000		$ 11,499,000		$ 11,375,000
Accumulated Depreciation	(10,320,000)		(10,320,000)		(9,434,000)
Net Book Value	1,179,000		1,179,000		1,941,000
Depreciation expense	300,000	400,000	1,100,000	1,300,000
Impaired assets write off	200,000
Computer equipment [Member]
Property and equipment [Abstract]
Cost	9,852,000		9,852,000		9,751,000
Accumulated Depreciation	(8,940,000)		(8,940,000)		(8,002,000)
Net Book Value	912,000		912,000		1,749,000
Furniture and fixtures [Member]
Property and equipment [Abstract]
Cost	167,000		167,000		75,000
Accumulated Depreciation	(76,000)		(76,000)		(62,000)
Net Book Value	91,000		91,000		13,000
Software [Member]
Property and equipment [Abstract]
Cost	1,452,000		1,452,000		1,241,000
Accumulated Depreciation	(1,283,000)		(1,283,000)		(1,229,000)
Net Book Value	169,000		169,000		12,000
Leasehold improvements [Member]
Property and equipment [Abstract]
Cost	28,000		28,000		308,000
Accumulated Depreciation	(21,000)		(21,000)		(141,000)
Net Book Value	7,000		7,000		167,000
Equipment under capital leases [Member]
Property and equipment [Abstract]
Depreciation expense	100,000	200,000	300,000	800,000
Equipment under capital lease	900,000		900,000		2,800,000
Accumulated depreciation on equipment under capital lease	$ 700,000		$ 700,000		$ 2,500,000

XML

Capitalized Software and Other Assets (Details) (USD $)	3 Months Ended		9 Months Ended			3 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Mar. 31, 2012 Capitalized software [Member]	Sep. 30, 2012 Capitalized software [Member]	Dec. 31, 2011 Capitalized software [Member]	Sep. 30, 2012 Amortizable purchased technology [Member]	Dec. 31, 2011 Amortizable purchased technology [Member]	Sep. 30, 2012 Other assets [Member]	Dec. 31, 2011 Other assets [Member]	Sep. 30, 2012 Deferred lease incentive [Member]	Dec. 31, 2011 Deferred lease incentive [Member]
Capitalized software and other assets [Abstract]
Gross Amount	$ 7,365,000		$ 7,365,000		$ 6,801,000		$ 7,144,000	$ 6,688,000	$ 78,000	$ 78,000	$ 47,000	$ 35,000	$ 96,000	$ 0
Accumulated Amortization	(5,581,000)		(5,581,000)		(5,581,000)		(5,503,000)	(5,503,000)	(78,000)	(78,000)	0	0	0	0
Net Book Value	1,784,000		1,784,000		1,220,000		1,641,000	1,185,000	0	0	47,000	35,000	96,000	0
Amortization period for internal-use software development costs			3 years				3 years
Amortization expense	100,000	300,000	500,000	500,000		500,000
Capitalized costs	1,400,000		1,400,000		500,000
Amortization of capitalized software	$ 300,000	$ 100,000	$ 1,000,000	$ 200,000

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Cash, Cash Equivalents and Short-Term Investments

9 Months Ended

Sep. 30, 2012

Cash, Cash Equivalents and Short-Term Investments [Abstract]

Cash, Cash Equivalents and Short-Term Investments

2. Cash, Cash Equivalents and Short-Term Investments

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 September 30, 2012, and December 31, 2011 (in thousands):

	Amortized Cost and Estimated Fair Value
	September 30,		December 31,
	2012		2011
Cash and cash equivalents:
Cash	$	1,016	$	7,205
Cash equivalents
Money market mutual funds		140		1,045
Certificates of deposit		1,500		3,100
Commercial paper		3,850		6,600
Total cash equivalents		5,490		10,745
Total cash and cash equivalents		6,506		17,950
Short-term investments:
Corporate bonds		2,520		2,031
Certificates of deposit		3,402		3,278
Commercial paper		5,196		1,500
Total short-term investments		11,118		6,809
Total cash, and cash equivalents, and short-term investments	$	17,624	$	24,759

Realized gains and losses were not significant for either of the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012, and December 31, 2011, there were no significant unrealized gains or losses on investments. The cost of all securities sold is based on the specific identification method.

The contractual maturities of cash equivalents and short-term investments at September 30, 2012, and December 31, 2011, were less than one year.

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 nine months ended September 30, 2012 and 2011, the Company did not recognize any impairment charges on outstanding investments. As of September 30, 2012, the Company does not consider any of its investments to be other-than-temporarily impaired.

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Accrued Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Accrued liabilities, current [Abstract]
Accrued distribution and partner costs	$ 825	$ 409
Accrued compensation and related expenses	243	137
Accrued professional service fees	139	257
Other	0	92
Total accrued liabilities	$ 1,207	$ 895

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CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 6,506	$ 17,950
Short-term investments	11,118	6,809
Total cash, cash equivalents and short-term investments	17,624	24,759
Trade accounts receivable, net	2,018	1,588
Prepaid expenses and other current assets	571	604
Total current assets	20,213	26,951
Property and equipment, net	1,179	1,941
Capitalized software and other assets, net	1,784	1,220
Total assets	23,176	30,112
Current liabilities:
Trade accounts payable	1,909	1,682
Accrued liabilities	1,207	895
Deferred revenue and customer deposits	1,125	1,143
Current portion of capital lease obligations	208	515
Total current liabilities	4,449	4,235
Capital lease and other obligations, net of current portion	150	296
Total liabilities	4,599	4,531
Stockholders' equity:
Convertible preferred stock, $0.001 par value; Authorized: 5,000 shares at September 30, 2012 and December 31, 2011; Issued and Outstanding: none at September 30, 2012 and December 31, 2011	0	0
Common stock, $0.001 par value; Authorized: 80,000 shares; Issued and Outstanding: 17,306 shares and 17,288 shares at September 30, 2012 and December 31, 2011, respectively	17	17
Additional paid-in capital	262,402	262,201
Accumulated other comprehensive loss	(32)	(24)
Accumulated deficit	(243,776)	(236,613)
Treasury stock at cost: 40 shares at September 30, 2012	(34)	0
Total stockholders' equity	18,577	25,581
Total liabilities and stockholders' equity	$ 23,176	$ 30,112

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities:
Net loss	$ (7,163)	$ (665)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	1,568	2,039
Provision for doubtful accounts	293	36
Share-based compensation	170	263
Other non-cash charges	57	69
Deferred rent	(5)	(8)
Restructuring charge	159	0
Gain on closure of settlement fund	0	(339)
Changes in operating assets and liabilities:
Trade accounts receivable	(723)	96
Prepaid expenses and other current assets	(75)	(71)
Trade accounts payable	205	(639)
Accrued liabilities	312	(628)
Deferred revenue and customer deposits	(18)	(2)
Net cash provided by (used in) operating activities	(5,220)	151
Cash flows from investing activities:
Purchase of investments	(15,560)	(16,672)
Proceeds from sale of investments	11,220	11,793
Payments for property, equipment, and capitalized software	(1,387)	(738)
Proceeds from contingent purchase consideration of certain consumer assets	0	91
Net cash used in investing activities	(5,727)	(5,526)
Cash flows from financing activities:
Principal payments of capital lease obligations	(448)	(873)
Proceeds from issuance of common stock	19	75
Payments for repurchase of common stock	(34)	0
Net cash used in financing activities	(463)	(798)
Effect of exchange rate changes on cash and cash equivalents	(34)	(5)
Decrease in cash and cash equivalents	(11,444)	(6,178)
Cash and cash equivalents, beginning of period	17,950	22,119
Cash and cash equivalents, end of period	6,506	15,941
Supplemental disclosure of noncash activities:
Change in unrealized gain (loss) on investments	26	(35)
Share-based compensation capitalized as software development costs	12	19
Change in deferred lease incentive	$ 178	$ 0

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Commitments and Contingencies (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
CNB Capital Lease [Abstract]
Three months ending December 31, 2012	$ 101,000
Years ending December 31, 2013	111,000
Years ending December 31, 2014	0
Years ending December 31, 2015	0
Total minimum payments	212,000
Less: amount representing interest	(4,000)
Present value of net minimum payments	208,000
Less: current portion	(208,000)	(515,000)
Long-term portion of capital lease obligations	0
Operating Leases [Abstract]
Three months ending December 31, 2012	43,000
Years ending December 31, 2013	41,000
Years ending December 31, 2014	15,000
Years ending December 31, 2015	81,000
Total minimum payments	180,000
Total [Abstract]
Three months ending December 31, 2012	144,000
Years ending December 31, 2013	152,000
Years ending December 31, 2014	15,000
Years ending December 31, 2015	81,000
Total minimum payments	392,000
Letters of Credit [Abstract]
Outstanding SBLC related to the security of a building lease	$ 200,000	$ 200,000
Number of financial covenants	2
Kitchener, Canada [Member]
Property Subject to or Available for Operating Lease [Line Items]
Lease area (in square feet)	5,222
Lease constant term	6 months
Los Angeles, California [Member]
Property Subject to or Available for Operating Lease [Line Items]
Lease area (in square feet)	4,803

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Capitalized Software and Other Assets (Tables)

9 Months Ended

Sep. 30, 2012

Capitalized Software and Other Assets [Abstract]

Capitalized software and other assets

The Company's capitalized software and other assets are as follows at September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012							December 31, 2011
	Gross Amount		Accumulated Amortization			Net Book Value		Gross Amount		Accumulated Amortization			Net Book Value
Capitalized software	$	7,144	$	(5,503	)	$	1,641	$	6,688	$	(5,503	)	$	1,185
Amortizable purchased technology		78		(78	)		-		78		(78	)		-
Other assets		47		-			47		35		-			35
Deferred lease incentive		96		-			96		-		-			-
	$	7,365	$	(5,581	)	$	1,784	$	6,801	$	(5,581	)	$	1,220

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Stockholders' Equity (Details) (USD $)	3 Months Ended				9 Months Ended
	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Aug. 23, 2012	Dec. 31, 2011
Stock Option Plans [Abstract]
Number of stock option plans					2
Exercisable period for outstanding stock options					4 years
Expiration period for outstanding stock options					7 years
Shares issued or reserved for issuance under the Plans (in shares)	4,100,000				4,100,000			4,300,000
Shares available to be granted (in shares)	1,700,000				1,700,000
Share-based compensation expense [Abstract]
Total share-based compensation expense	$ 48,000			$ 98,000	$ 170,000	$ 263,000
Amounts capitalized as software development costs	8,000			3,000	12,000	19,000
Total share-based compensation	56,000			101,000	182,000	282,000
Total unrecognized share-based compensation expense related to share-based compensation arrangements	600,000				600,000
Weighted-average period over which expected cost is to be recognized					2 years 9 months 18 days
Total fair value of equity awards vested	100,000			100,000	200,000	300,000
Shares [Abstract]
Options outstanding, beginning balance (in shares)	2,280,000	2,632,000	2,662,000		2,662,000
Granted (in shares)	107,000	213,000	207,000
Exercised (in shares)	0	0	(2,000)
Expired/forfeited (in shares)	(104,000)	(565,000)	(235,000)
Options outstanding, ending balance (in shares)	2,283,000	2,280,000	2,632,000		2,283,000
Vested and expected to vest at September 30, 2012 (in shares)	2,035,000				2,035,000
Exercisable at September 30, 2012 (in shares)	1,353,000				1,353,000
Weighted Average Exercise Price Per Share [Abstract]
Options outstanding at December 31, 2011 (in dollars per share)	$ 2.47	$ 2.64	$ 2.76		$ 2.76
Granted (in dollars per share)	$ 0.91	$ 0.83	$ 1.26
Excercised (in dollars per share)	$ 0	$ 0	$ 1.39
Expired/forfeited (in dollars per share)	$ 1.84	$ 2.61	$ 2.50
Options outstanding at September 30, 2012 (in dollars per share)	$ 2.43	$ 2.47	$ 2.64		$ 2.43
Vested and expected to vest at September 30, 2012 (in dollars per share)	$ 2.58				$ 2.58
Exercisable at September 30, 2012 (in dollars per share)	$ 3.21				$ 3.21
Weighted Average Contractual Life Remaining In Years [Abstract]
Options outstanding at September 30, 2012					4 years 6 months 7 days
Vested and expected to vest at September 30, 2012					4 years 3 months 18 days
Exercisable at September 30, 2012					3 years 6 months
Aggregate Intrinsic Value [Abstract]
Options outstanding at September 30, 2012	0				0
Vested and expected to vest at September 30, 2012	0				0
Exercisable at September 30, 2012	0				0
Options Outstanding [Abstract]
Shares (in shares)	2,283,000				2,283,000
Weighted-Average Remaining Contractual Term					4 years 6 months 7 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 2.43				$ 2.43
Options Exercisable [Abstract]
Shares (in shares)	1,353,000				1,353,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 3.21				$ 3.21
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation for stock awards	100,000			100,000	200,000	300,000
Maximum contribution by employee (in hundredths)	15.00%				15.00%
Maximum number of shares per purchase period (in shares)					5,000
Shares issued under ESPP (in shares)					82,000
Assumptions used in Black-Scholes option valuation model and weighted average grant date fair value per share [Abstract]
Volatility (in hundredths)	62.60%			64.80%	62.60%	67.00%
Risk-free interest rate (in hundredths)	0.61%			1.14%	0.74%	1.43%
Expected term (years)	4 years 5 months 23 days			4 years 5 months 23 days	4 years 4 months 24 days	4 years 1 month 13 days
Expected dividend yield (in hundredths)	0.00%			0.00%	0.00%	0.00%
Weighted average grant date fair value (in dollars per share)	$ 0.45			$ 0.76	$ 0.51	$ 0.88
Deferred Compensation Arrangement with Individual, Share-based Payments [Line Items]
Options exercised (in shares)	0	0	2,000
Share Repurchases [Abstract]
Authorized amount for stock repurchased					1,000,000
Share repurchase (in shares)					40,000
Share repurchased per share (in dollars per share)					$ 0.84
Shares repurchase amount					34,000
Stockholders Rights Agreement [Abstract]
Number of preferred stock purchase right associated with each share of common stock (in shares)							1
Percentage of a share of Series A Preferred stock each right will be entitled to purchase							0.10%
Purchase price of each unit							5
Minimum percentage of ownership required for the rights to become exercisable (in hundredths)							15.00%
Employee and Director [Member]
Shares [Abstract]
Exercised (in shares)	0			(7,000)	(2,000)	(42,000)
Deferred Compensation Arrangement with Individual, Share-based Payments [Line Items]
Options exercised (in shares)	0			7,000	2,000	42,000
Income tax benefits realized from exercised stock options					0
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted stock issued during period (in shares)	0				0
Share-based compensation for stock awards	0			0	0	0
2009 ESPP[Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum number of shares authorized (in shares)	500,000				500,000
Purchase price specified as percentage of fair market value (in hundredths)					85.00%
Months in each offering period					6 months
Purchase period in each offering period					1
$0.76 - $ 1.19 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower exercise price range limit					$ 0.76
Upper exercise price range limit					$ 1.19
Options Outstanding [Abstract]
Shares (in shares)	473,000				473,000
Weighted-Average Remaining Contractual Term					6 years 4 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 0.94				$ 0.94
Options Exercisable [Abstract]
Shares (in shares)	101,000				101,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 1.06				$ 1.06
$ 1.23 - $ 1.86 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower exercise price range limit					$ 1.23
Upper exercise price range limit					$ 1.86
Options Outstanding [Abstract]
Shares (in shares)	1,106,000				1,106,000
Weighted-Average Remaining Contractual Term					4 years 10 months 24 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 1.53				$ 1.53
Options Exercisable [Abstract]
Shares (in shares)	562,000				562,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 1.51				$ 1.51
$ 1.88- $ 2.83 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower exercise price range limit					$ 1.88
Upper exercise price range limit					$ 2.83
Options Outstanding [Abstract]
Shares (in shares)	175,000				175,000
Weighted-Average Remaining Contractual Term					3 years 10 months 2 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 2.52				$ 2.52
Options Exercisable [Abstract]
Shares (in shares)	161,000				161,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 2.58				$ 2.58
$ 2.91 - $ 4.45 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower exercise price range limit					$ 2.91
Upper exercise price range limit					$ 4.45
Options Outstanding [Abstract]
Shares (in shares)	366,000				366,000
Weighted-Average Remaining Contractual Term					3 years 2 months 16 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 3.51				$ 3.51
Options Exercisable [Abstract]
Shares (in shares)	366,000				366,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 3.51				$ 3.51
$ 4.46 - $ 7.35 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower exercise price range limit					$ 4.46
Upper exercise price range limit					$ 7.35
Options Outstanding [Abstract]
Shares (in shares)	54,000				54,000
Weighted-Average Remaining Contractual Term					2 years 3 months 18 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 5.37				$ 5.37
Options Exercisable [Abstract]
Shares (in shares)	54,000				54,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 5.37				$ 5.37
$ 7.75 - $ 20.55 [Member]
Share-based Compensation, Shares Authorized under Stock Option Plans, Exercise Price Range [Line Items]
Lower exercise price range limit					$ 7.75
Upper exercise price range limit					$ 20.55
Options Outstanding [Abstract]
Shares (in shares)	109,000				109,000
Weighted-Average Remaining Contractual Term					8 months 27 days
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 13.43				$ 13.43
Options Exercisable [Abstract]
Shares (in shares)	109,000				109,000
Weighted-Average Exercise Price Per Share (in dollars per share)	$ 13.43				$ 13.43
Sales and marketing [Member]
Share-based compensation expense [Abstract]
Total share-based compensation expense	6,000			10,000	23,000	12,000
Product development and technical operations [Member]
Share-based compensation expense [Abstract]
Total share-based compensation expense	13,000			47,000	41,000	131,000
General and administrative [Member]
Share-based compensation expense [Abstract]
Total share-based compensation expense	$ 29,000			$ 41,000	$ 106,000	$ 120,000

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Capital Lease and Other Obligations (Tables)

9 Months Ended

Sep. 30, 2012

Capital Lease and Other Obligations [Abstract]

Capital lease and other obligations

Capital lease and other obligations consist of the following at September 30, 2012, and December 31, 2011 (in thousands):

	September 30,			December 31,
	2012			2011
Capital lease obligations	$	208		$	657
Deferred rent		150			154
Total capital lease and other obligations		358			811
Less: current portion of capital lease obligations		(208	)		(515	)
Capital lease and other obligations, net of current portion	$	150		$	296

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. Summary of Significant Accounting Policies

Nature of Business

LookSmart, Ltd. ("LookSmart" or the "Company") is a digital advertising solutions company that provides relevant solutions for search and display advertising. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

LookSmart provides advertisers with search marketing and display advertising solutions, and offers publishers the ability to monetize their inventory through our search network:

Search Advertisers: LookSmart search marketing network acquires queries from a large variety of sources and matches them with the keywords of our advertising customers. Our search advertising customers are generally of three types; Intermediaries, Direct Advertisers and Self-Service Advertisers. Intermediaries purchase clicks to sell into the affiliate networks of the large search engine providers. Direct Advertisers and their agencies purchase clicks with the assistance of LookSmart account managers to achieve conversions or sales from the clicks or to obtain unique page views. Self-Service Advertisers are small Direct Advertisers that sign-up online, pay by credit card and manage their account with minimal LookSmart account management assistance. LookSmart offers search advertising customers targeted search via a monitored search advertising distribution network using the Company's "AdCenter" platform technology. The Company's search advertising network includes publishers and search advertising customers, including Intermediaries and direct advertising customers and their agencies as well as self-service customers, in the United States and certain other countries. The Company's application programming interface ("API") allows search advertising customers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns.

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

For Publishers: LookSmart also 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.

Principles of Consolidation

The Unaudited Consolidated Financial Statements as of September 30, 2012 and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011, 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 September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, 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 September 30, 2012 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, 2011("Annual Report"). The Consolidated Balance Sheet as of December 31, 2011 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 September 30, 2012 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 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.

Reclassifications

Certain amounts in the financial statements for the prior periods have been reclassified to conform to the current presentation. These reclassifications did not change the previously reported net loss, net change in cash and cash equivalents or stockholders' equity.

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. 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. Net unrealized gains or losses on these investments are reported as a component of Other Comprehensive Loss 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 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. Profit sharing is generally a 50%/50% equal sharing of profits with Intermediaries based on affiliate network revenue less traffic acquisition costs. Revenue also includes revenue 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 obligor 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. We had no revenue reserves at September 30, 2012. We had $0.3 million in revenue reserves at December 31, 2011.

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 to determine whether a provision or reversal is required. The review is based on factors including the application of historical collection rates to current receivables and economic conditions. The Company will record an increase or reduction of its allowance for doubtful accounts if collection rates or economic conditions are more or less favorable than it anticipated. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company anticipated or for customer-specific circumstances, such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable, net is $0.7 million and $0.6 million at September 30, 2012 and December 31, 2011, respectively. Bad debt allowance included in general and administrative expense was not significant and $0.3 million for three and nine months ended September 30, 2012, respectively. Bad debt allowance included in general and administrative expense was not significant for both the three and nine months ended September 30, 2011.

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 September 30, 2012 and December 31, 2011, 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. These amounts exceed federally insured limits. 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.

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, if necessary. 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 gross accounts receivable:

	September 30, 2012			December 31, 2011
	2012			2011
Company 1		33	%		**
Company 2		12	%		20	%
Company 3		**			12	%

** Less than 10%

Revenue and Cost Concentrations

The following table reflects countries that accounted for more than 10% of net revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
United States		53	%		73	%		55	%		70	%
Europe, Middle East and Africa		36	%		16	%		39	%		22	%

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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Advertiser Networks		94	%		96	%		92	%		96	%
Publisher Solutions		6	%		4	%		8	%		4	%

The following table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Company 1		27	%		**			23	%		**
Company 2		**			14	%		**			11	%
Company 3		**			12	%		**			12	%

** 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 TAC:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Distribution Partner 1		37	%		**		27	%		**
Distribution Partner 2		10	%		**		**			**
Distribution Partner 3		**			**		10	%		**

** Less than 10%

Property and Equipment

Property and equipment are stated at cost 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

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.

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.

Impairment of Long-Lived Assets

The Company reviews long-lived assets held or used in operations, including property and equipment and capitalized software development costs, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Subject assets are tested for impairment at the lowest level of operations that generate cash flows that are largely independent of the cash flows from those of other groups of asset and liabilities. Management has determined that the equity of its single reporting unit is the lowest level of operation at which independent cash flows can be identified. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to dispose.

The Companytested its long-lived assets used in operations for impairment as of September 30, 2012, and determined there was no impairment. As a result of the San Francisco office lease abandonment the Leasehold Improvements were no longer in use and as such were written off in the amount of $0.2 million in the third quarter of 2012 (see Note 3 for more information).

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.

The Company records TAC expenses as cost of revenue and TAC are expensed based on the volume of the underlying activity or revenue, multiplied by the agreed-upon price or rate.

Share-Based Compensation

The Company recognizes share-based compensation costs for all awards granted, including stock option grants, 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. The Company estimates the fair value of option awards on the grant date using the Black-Scholes method. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company's Unaudited Consolidated Statements of Operations over the requisite service periods. Share-based compensation expense recognized for the three and nine months ended September 30, 2012 were $0.1 million and $0.2 million, respectively, and $0.1 million and $0.3 million for three and nine months ended September 30, 2011, respectively, which was related to stock option grants and employee stock purchases.

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.

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 interest and penalties related to unrecognized tax benefits within operations as income tax expense.

Comprehensive Loss

Other comprehensive income (loss) as of September 30, 2012 and December 31, 2011, consists of unrealized gains (losses) on marketable securities categorized as available-for-sale and foreign currency translation adjustments.

Net Loss per Common Share

Basic net loss and diluted net loss per share is calculated using the weighted average shares of common stock outstanding. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for stock options.

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 September 30, 2012 and December 31, 2011, all of the Company's accounts receivable, intangible assets, and deferred revenue are 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 1, 2012, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. Adoption of this new guidance did not have a material impact on our financial statements.

On January 1, 2012, we adopted guidance issued by the FASB on accounting and disclosure requirements related to fair value measurements. The guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. Adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.

Recent Accounting Pronouncements

In December 2011, the FASB issued an amendment to an existing accounting standard which indefinitely defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. 

In July 2012, the Financial Accounting Standards Board ("FASB") issued amendments to the indefinite-lived intangible asset impairment guidance which provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012.  The Company is required to adopt this standard as of October 1, 2012; early adoption is permitted.  Adoption of this new guidance is not expected to have a material impact on the Company's consolidated financial position or results of operations.

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Stockholders' equity:
Convertible preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Convertible preferred stock, shares authorized (in shares)	5,000	5,000
Convertible preferred stock, shares issued (in shares)	0	0
Convertible preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	80,000	80,000
Common stock, shares issued (in shares)	17,306	17,288
Common stock, shares outstanding (in shares)	17,306	17,288
Treasury stock (in shares)	40	0

XML

Related Party Transactions

9 Months Ended

Sep. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

11. Related Party Transactions

In each of the three and nine months ended September 30, 2012 and 2011, Dr. Jean-Yves Dexmier was paid fees totaling $0.1 million and $0.4 million, respectively, in connection with his services as the Company's Chief Executive Officer and Board member.

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 13, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	LOOKSMART LTD
Entity Central Index Key	0001077866
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		17,305,828
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012

XML

Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Nature of Business

Nature of Business

LookSmart, Ltd. ("LookSmart" or the "Company") is a digital advertising solutions company that provides relevant solutions for search and display advertising. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

LookSmart provides advertisers with search marketing and display advertising solutions, and offers publishers the ability to monetize their inventory through our search network:

Search Advertisers: LookSmart search marketing network acquires queries from a large variety of sources and matches them with the keywords of our advertising customers. Our search advertising customers are generally of three types; Intermediaries, Direct Advertisers and Self-Service Advertisers. Intermediaries purchase clicks to sell into the affiliate networks of the large search engine providers. Direct Advertisers and their agencies purchase clicks with the assistance of LookSmart account managers to achieve conversions or sales from the clicks or to obtain unique page views. Self-Service Advertisers are small Direct Advertisers that sign-up online, pay by credit card and manage their account with minimal LookSmart account management assistance. LookSmart offers search advertising customers targeted search via a monitored search advertising distribution network using the Company's "AdCenter" platform technology. The Company's search advertising network includes publishers and search advertising customers, including Intermediaries and direct advertising customers and their agencies as well as self-service customers, in the United States and certain other countries. The Company's application programming interface ("API") allows search advertising customers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns.

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

For Publishers: LookSmart also 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.

Principles of Consolidation

Principles of Consolidation

The Unaudited Consolidated Financial Statements as of September 30, 2012 and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011, 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

Unaudited Interim Financial Information

The accompanying Unaudited Consolidated Financial Statements as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, 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 September 30, 2012 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, 2011("Annual Report"). The Consolidated Balance Sheet as of December 31, 2011 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 September 30, 2012 is not necessarily indicative of results to be expected for the full year.

Use of Estimates and Assumptions

Use of Estimates and Assumptions

The Unaudited Consolidated Financial Statements have been prepared in conformity with 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.

Reclassifications

Reclassifications

Certain amounts in the financial statements for the prior periods have been reclassified to conform to the current presentation. These reclassifications did not change the previously reported net loss, net change in cash and cash equivalents or stockholders' equity.

Investments

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. 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. Net unrealized gains or losses on these investments are reported as a component of Other Comprehensive Loss 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

Revenue Recognition

Our online search advertising revenue is composed of per-click fees that we charge customers and profit sharing 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. Profit sharing is generally a 50%/50% equal sharing of profits with Intermediaries based on affiliate network revenue less traffic acquisition costs. Revenue also includes revenue 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 obligor 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. We had no revenue reserves at September 30, 2012. We had $0.3 million in revenue reserves at December 31, 2011.

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

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 to determine whether a provision or reversal is required. The review is based on factors including the application of historical collection rates to current receivables and economic conditions. The Company will record an increase or reduction of its allowance for doubtful accounts if collection rates or economic conditions are more or less favorable than it anticipated. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company anticipated or for customer-specific circumstances, such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable, net is $0.7 million and $0.6 million at September 30, 2012 and December 31, 2011, respectively. Bad debt allowance included in general and administrative expense was not significant and $0.3 million for three and nine months ended September 30, 2012, respectively. Bad debt allowance included in general and administrative expense was not significant for both the three and nine months ended September 30, 2011.

Concentrations, Credit Risk and Credit Risk Evaluation

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 September 30, 2012 and December 31, 2011, 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. These amounts exceed federally insured limits. 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.

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, if necessary. 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 gross accounts receivable:

	September 30, 2012			December 31, 2011
	2012			2011
Company 1		33	%		**
Company 2		12	%		20	%
Company 3		**			12	%

** Less than 10%

Revenue and Cost Concentrations

The following table reflects countries that accounted for more than 10% of net revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
United States		53	%		73	%		55	%		70	%
Europe, Middle East and Africa		36	%		16	%		39	%		22	%

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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Advertiser Networks		94	%		96	%		92	%		96	%
Publisher Solutions		6	%		4	%		8	%		4	%

The following table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Company 1		27	%		**			23	%		**
Company 2		**			14	%		**			11	%
Company 3		**			12	%		**			12	%

** 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 TAC:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Distribution Partner 1		37	%		**		27	%		**
Distribution Partner 2		10	%		**		**			**
Distribution Partner 3		**			**		10	%		**

** Less than 10%

Property and Equipment

Property and Equipment

Property and equipment are stated at cost 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

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.

Internal-Use Software Development Costs

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.

Impairment of Long-Lived Assets

Impairment of Long-Lived Assets

The Company reviews long-lived assets held or used in operations, including property and equipment and capitalized software development costs, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. Subject assets are tested for impairment at the lowest level of operations that generate cash flows that are largely independent of the cash flows from those of other groups of asset and liabilities. Management has determined that the equity of its single reporting unit is the lowest level of operation at which independent cash flows can be identified. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to dispose.

The Companytested its long-lived assets used in operations for impairment as of September 30, 2012, and determined there was no impairment. As a result of the San Francisco office lease abandonment the Leasehold Improvements were no longer in use and as such were written off in the amount of $0.2 million in the third quarter of 2012 (see Note 3 for more information).

Traffic Acquisition Costs

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.

The Company records TAC expenses as cost of revenue and TAC are expensed based on the volume of the underlying activity or revenue, multiplied by the agreed-upon price or rate.

Share-Based Compensation

Share-Based Compensation

The Company recognizes share-based compensation costs for all awards granted, including stock option grants, 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. The Company estimates the fair value of option awards on the grant date using the Black-Scholes method. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company's Unaudited Consolidated Statements of Operations over the requisite service periods. Share-based compensation expense recognized for the three and nine months ended September 30, 2012 were $0.1 million and $0.2 million, respectively, and $0.1 million and $0.3 million for three and nine months ended September 30, 2011, respectively, which was related to stock option grants and employee stock purchases.

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.

Income Taxes

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 interest and penalties related to unrecognized tax benefits within operations as income tax expense.

Comprehensive Loss

Comprehensive Loss

Other comprehensive income (loss) as of September 30, 2012 and December 31, 2011, consists of unrealized gains (losses) on marketable securities categorized as available-for-sale and foreign currency translation adjustments.

Net Income (Loss) per Common Share

Net Loss per Common Share

Basic net loss and diluted net loss per share is calculated using the weighted average shares of common stock outstanding. Diluted net income per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for stock options.

Segment Information

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 September 30, 2012 and December 31, 2011, all of the Company's accounts receivable, intangible assets, and deferred revenue are related to the online advertising segment. All long-lived assets are located in the United States and Canada.

Adoption of New Accounting Standards

Adoption of New Accounting Standards

On January 1, 2012, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. Adoption of this new guidance did not have a material impact on our financial statements.

On January 1, 2012, we adopted guidance issued by the FASB on accounting and disclosure requirements related to fair value measurements. The guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured at a net basis, and provides guidance on the applicability of premiums and discounts. Additionally, the guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. Adoption of this new guidance did not have a material impact on the Company's consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
CONSOLIDATED STATEMENTS OF OPERATIONS [Abstract]
Revenue	$ 3,915	$ 7,356	$ 11,502	$ 22,350
Cost of revenue	2,564	4,187	7,149	12,281
Gross profit	1,351	3,169	4,353	10,069
Operating expenses:
Sales and marketing	682	565	2,141	1,732
Product development and technical operations	1,437	1,767	4,780	4,911
General and administrative	1,743	1,066	4,468	3,528
Restructuring charge	159	0	159	889
Total operating expenses	4,021	3,398	11,548	11,060
Loss from operations	(2,670)	(229)	(7,195)	(991)
Non-operating income (expense), net
Interest income	23	21	64	68
Interest expense	(7)	(11)	(28)	(64)
Other income (expense), net	0	(1)	(4)	325
Loss from operations before income taxes	(2,654)	(220)	(7,163)	(662)
Income tax expense	0	(4)	0	(3)
Net loss	$ (2,654)	$ (224)	$ (7,163)	$ (665)
Net loss per share - Basic and Diluted (in dollars per share)	$ (0.15)	$ (0.01)	$ (0.41)	$ (0.04)
Weighted average shares outstanding used in computing basic net loss per share (in shares)	17,306	17,284	17,306	17,265

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Restructuring Charges

9 Months Ended

Sep. 30, 2012

Restructuring Charges [Abstract ]

Restructuring Charges

6. Restructuring Charges

The Company had $0.2 million in restructuring costs associated with the sub-lease of the San Francisco headquarters during the three months ended September 30, 2012. During the nine months ended September 30, 2011, the Company paid $0.9 million in pre-tax restructuring charges associated with the termination of employees. All restructuring charges have been classified as such on the Unaudited Consolidated Statement of Operations. The Company had no accrued restructuring charges at September 30, 2012 or December 31, 2011.

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Accrued Liabilities

9 Months Ended

Sep. 30, 2012

Accrued Liabilities [Abstract]

Accrued Liabilities

5. Accrued Liabilities

Accrued liabilities consisted of the following as of September 30, 2012, and December 31, 2011 (in thousands):

	September 30,		December 31,
	2012		2011
Accrued distribution and partner costs	$	825	$	409
Accrued compensation and related expenses		243		137
Accrued professional service fees		139		257
Other		-		92
Total accrued liabilities	$	1,207	$	895

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Accrued Liabilities (Tables)

9 Months Ended

Sep. 30, 2012

Accrued Liabilities [Abstract]

Schedule of accrued liabilities

Accrued liabilities consisted of the following as of September 30, 2012, and December 31, 2011 (in thousands):

	September 30,		December 31,
	2012		2011
Accrued distribution and partner costs	$	825	$	409
Accrued compensation and related expenses		243		137
Accrued professional service fees		139		257
Other		-		92
Total accrued liabilities	$	1,207	$	895

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2012

Concentration Risk [Line Items]

Property and equipment

Property and equipment are stated at cost 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

Accounts Receivable [Member]

Concentration Risk [Line Items]

Schedules of concentration of risk by risk factor

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

	September 30, 2012			December 31, 2011
	2012			2011
Company 1		33	%		**
Company 2		12	%		20	%
Company 3		**			12	%

** Less than 10%

Net Revenue [Member]

Concentration Risk [Line Items]

Schedules of concentration of risk by risk factor

Revenue and Cost Concentrations

The following table reflects countries that accounted for more than 10% of net revenue:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
United States		53	%		73	%		55	%		70	%
Europe, Middle East and Africa		36	%		16	%		39	%		22	%

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 September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Advertiser Networks		94	%		96	%		92	%		96	%
Publisher Solutions		6	%		4	%		8	%		4	%

The following table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Company 1		27	%		**			23	%		**
Company 2		**			14	%		**			11	%
Company 3		**			12	%		**			12	%

** Less than 10%

Traffic Acquisition Costs [Member]

Concentration Risk [Line Items]

Schedules of concentration of risk by risk factor

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 TAC:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Distribution Partner 1		37	%		**		27	%		**
Distribution Partner 2		10	%		**		**			**
Distribution Partner 3		**			**		10	%		**

** Less than 10%

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Stockholders' Equity

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

Stockholders' Equity

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 Company's Plans are administered by the Compensation Committee of the Board of Directors. 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. The number of shares issued or reserved for issuance under the Plans was 4.1 million and 4.3 million shares of common stock as of September 30, 2012 and December 31, 2011, respectively. There were 1.7 million shares available to be granted under the 2007 Plan at September 30, 2012.

Share-based compensation expense recorded during three and nine months ended September 30, 2012, and 2011 was included in the Company's Unaudited Consolidated Statements of Operations as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Sales and marketing	$	6	$	10	$	23	$	12
Product development and technical operations		13		47		41		131
General and administrative		29		41		106		120
Total share-based compensation expense		48		98		170		263
Amounts capitalized as software development costs		8		3		12		19
Total share-based compensation	$	56	$	101	$	182	$	282

Total unrecognized share-based compensation expense related to share-based compensation arrangements at September 30, 2012 was $0.6 million and is expected to be recognized over a weighted-average period of approximately 2.8 years. The total fair value of equity awards vested during the three and nine months ended September 30, 2012 was $0.1 million, and $0.2 million, respectively, and $0.1 million and $0.3 million during the three and nine months ended September 30, 2011, respectively.

Option Awards

Stock option activity under the Plans during the nine months ended September 30, 2012 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, 2011		2,662		$	2.76
Granted		207			1.26
Exercised		(2	)		1.39
Expired/forfeited		(235	)		2.50
Options outstanding at March 31, 2012		2,632			2.64
Granted		213			0.83
Exercised		-			-
Expired/forfeited		(565	)		2.61
Options outstanding at June 30, 2012		2,280			2.47
Granted		107			0.91
Exercised		-			-
Expired/forfeited		(104	)		1.84
Options outstanding at September 30, 2012		2,283		$	2.43	4.52	$     -
Vested and expected to vest at September 30, 2012		2,035		$	2.58	4.30	$   -
Exercisable at September 30, 2012		1,353		$	3.21	3.50	$   -

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

The following table summarizes information about stock options outstanding at September 30, 2012:

					Options Outstanding						Options Exercisable
Price Ranges					Shares		Weighted- Average Remaining Contractual Term		Weighted- Average Exercise Price Per Share		Shares		Weighted- Average Exercise Price Per Share
					(in thousands)		(in years)				(in thousands)
$	0.76	-	$	1.19		473		6.01	$	0.94		101	$	1.06
	1.23	-		1.86		1,106		4.90		1.53		562		1.51
	1.88	-		2.83		175		3.84		2.52		161		2.58
	2.91	-		4.45		366		3.21		3.51		366		3.51
	4.46	-		7.35		54		2.30		5.37		54		5.37
	7.75	-		20.55		109		0.74		13.43		109		13.43
						2,283		4.52		2.43		1,353		3.21

Stock Awards

The Company did not issue restricted stock during the three and nine months ended September 30, 2012 and 2011.The Company recorded no share-based compensation for stock awards for each of the three and nine months ended September 30, 2012 and 2011.

Employee Stock Purchase Plan

On July 14, 2009, the 2009 Employee Stock Purchase Plan (the "2009 ESPP") was approved by the shareholders. Under the 2009 ESPP, the Company is authorized to issue up to 500 thousand shares of Common Stock to employees of the Company. Under the 2009 ESPP, substantially all employees may purchase the Company's common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. Each offering period is 6 months and consists of one purchase period. ESPP contributions are limited to a maximum of 15 percent of an employee's eligible compensation, and ESPP participants are limited to purchasing a maximum of 5,000 shares per purchase period. Share-based compensation expense under the 2009 ESPP was insignificant for each of the three and nine months ended September 30, 2012 and 2011. As of September 30, 2012, 82 thousand shares have been issued under the 2009 ESPP.

Share-Based Compensation Valuation Assumptions

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average assumptions used in the Black-Scholes option valuation model and the weighted average grant date fair value per share for employee, consultant and director stock options were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Volatility		62.6	%		64.8	%		62.6	%		67.0	%
Risk-free interest rate		0.61	%		1.14	%		0.74	%		1.43	%
Expected term (years)		4.48			4.48			4.40			4.12
Expected dividend yield		-			-			-			-
Weighted average grant date fair value	$	0.45		$	0.76		$	0.51		$	0.88

As share-based compensation expense recognized in the Unaudited Consolidated Statements of Operations is based on awards ultimately expected to vest, it 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 months ended September 30, 2012, and 2 thousand options exercised in nine months ended September 30, 2012. There were 7 thousand and 42 thousand options exercised in the three and nine months ended September 30, 2011, respectively. The Company issues new shares of common stock upon exercise of stock options. No income tax benefits have been realized from exercised stock options.

Stockholder Rights Agreement

On August 23, 2012 the Company adopted a Stockholders Rights Agreement (the "Rights Agreement"). Pursuant to the Rights Agreement, each share of common stock of the Company is now associated with one preferred stock purchase right. Each right entitles stockholders to buy a unit representing one one-thousandth of a share of Series A Participating Preferred Stock of the Company for $5.00. Under certain circumstances, if a person or group acquires beneficial ownership of 15% or more of the Company's common stock, each right (other than rights held by the acquiror) will, unless the rights are redeemed by the Company, become exercisable upon payment of the exercise price.. Each one one-thousandth of a Preferred Share has designations and powers, preferences and rights, and the qualifications, limitations and restrictions designed to make it the economic equivalent of one share of the Company's common stock.

Share Repurchases

In May 2012 the Company's Board of Directors authorized the repurchase of up to $1 million of the Company's common shares. Under the program, the Company may purchase its common shares from time to time in the open market or in privately negotiated transactions. The amount and timing of the purchases will depend on a number of factors including the price and availability of the Company's common shares, trading volume and general market conditions. The Company may also from time to time establish a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate purchases of its common shares under this authorization. From May 31, 2012 through September 30, 2012, the Company repurchased approximately 40 thousand shares of its common stock under the share repurchase program announced in May 2012 at an average price of $0.84 per share for a total of 34 thousand dollars.

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Capital Lease and Other Obligations

9 Months Ended

Sep. 30, 2012

Capital Lease and Other Obligations [Abstract]

Capital Lease and Other Obligations

7. Capital Lease and Other Obligations

Capital lease and other obligations consist of the following at September 30, 2012, and December 31, 2011 (in thousands):

	September 30,			December 31,
	2012			2011
Capital lease obligations	$	208		$	657
Deferred rent		150			154
Total capital lease and other obligations		358			811
Less: current portion of capital lease obligations		(208	)		(515	)
Capital lease and other obligations, net of current portion	$	150		$	296

Capital Lease Obligations

In April 2007, the Company entered into a master equipment lease agreement with CNB for an original amount of up to $5.0 million for the purchase of computer equipment. The lease expired on April 30, 2010, at which time the Company had drawn down approximately $4.9 million of the available lease line of credit. Interest on the capital leases was calculated using interest rates ranging from 4.32% to 7.95% per annum. In 2011, the master equipment lease agreement was amended to modify two financial covenants, with which the Company was in compliance as of September 30, 2012, and December 31, 2011.

The agreements with CNB, consisting of an outstanding standby letter of credit ("SBLC") and a master equipment lease agreement, contain cross-default provisions, whereby a default under one is deemed a default for the other, and are secured by a general lien on all assets of the Company. As of September 30, 2012, and December 31, 2011, the Company was not in default on either agreement with CNB. For further discussion see Note 8, Commitments and Contingencies.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

8. Commitments and Contingencies

As of September 30, 2012, future minimum payments under all capital and operating leases are as follows (in thousands):

	CNB Capital Lease			Operating Leases		Total
Three months ending December 31, 2012	$	101		$	43	$	144
Years ending December 31,
2013		111			41		152
2014		-			15		15
2015		-			81		81
Total minimum payments		212		$	180	$	392
Less amount representing interest		(4	)
Present value of net minimum payments		208
Less: current portion		(208	)
Long-term portion of capital lease obligations	$	-

Operating Leases

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

The Company leases a sales office in New York, New York on a month to month basis.

The Company leases office space in Kitchener, Canada of approximately of 5,222 square feet. The lease has a constant term of six months.

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

Letters of Credit

As of September 30, 2012, and December 31, 2011, the Company has an outstanding SBLC related to the security of a building lease for $0.2 million. The SBLC contains two financial covenants, with which the Company was in compliance as of September 30, 2012.

The agreements with CNB, consisting of the SBLC and master equipment lease agreement, contain cross-default provisions, whereby a default under one is deemed a default for the other, and are secured by a general lien on all assets of the Company. As of September 30, 2012, and December 31, 2011, the Company was not in default on either agreement with CNB. For further discussion, see Note 7, Capital Lease and Other Obligations.

Purchase Obligations

The Company had outstanding purchase obligations of an insignificant amount relating to an open purchase order for which the Company had not received the related services or goods and a non-cancelable contractual obligation relating to IT data center operations as of September 30, 2012, and December 31, 2011.

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 a lessor 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.

Unsolicited Tender Offer

In July 2012, PEEK Investments, Inc. ("PEEK") and other persons acting in concert with PEEK made an unsolicited proposal to acquire the Company and subsequently commenced a tender offer for all outstanding shares of common stock of the Company. As extended, the tender offer is scheduled to expire on November 30, 2012. 

As more fully described in the Company's Solicitation/Recommendation on Schedule 14D-9 filed with the SEC on August 2, 2012, as amended, in response to the offer, the Company's Board of Directors unanimously recommended that the Company's stockholders reject the offer and not tender their shares to PEEK for purchase. The Company is currently engaged in discussion with PEEK with respect to possible board representation rights and related agreements and transactions. However, the Company cannot guarantee that the negotiations will result in any agreement between the Company and PEEK.  Responding to PEEK's unsolicited tender offer resulted in the Company incurring significant additional legal and other advisory costs with respect to the tender offer and the Company may incur additional such expenses in the future.

Legal Proceedings

The Company is involved, from time to time, in various 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.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

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 September 30, 2012, and December 31, 2011 were as follows (in thousands):

	Balance at September 30, 2012		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	$	140	$	140	$	-	$	-
Certificates of deposit		1,500		-		1,500		-
Commercial paper		3,850		-		3,850		-
Total cash equivalents		5,490		140		5,350		-
Short-term investments:
Certificates of deposit		3,402		-		3,402		-
Corporate bonds		2,520		-		2,520		-
Commercial paper		5,196		-		5,196		-
Total short-term investments		11,118		-		11,118		-
Total financial assets measured at fair value	$	16,608	$	140	$	16,468	$	-

	Balance at December 31, 2011		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	$	1,045	$	1,045	$	-	$	-
Certificates of deposit		3,100		-		3,100		-
Commercial paper		6,600		-		6,600		-
Total cash equivalents		10,745		1,045		9,700		-
Short-term investments:
Certificates of deposit		3,278		-		3,278		-
Corporate bonds		2,031		-		2,031		-
Commercial paper		1,500		-		1,500		-
Total short-term investments		6,809		-		6,809		-
Total financial assets measured at fair value	$	17,554	$	1,045	$	16,509	$	-

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 September 30, 2012 and December 31, 2011, 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 which the liability with short settlement periods would be transferred to a market participant with a similar credit standing as the Company.

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Capital Lease and Other Obligations (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Capital lease and other obligations [Abstract]
Capital lease obligations	$ 208,000	$ 657,000
Deferred rent	150,000	154,000
Capital lease and other obligations	358,000	811,000
Less: current portion of capital lease obligations	(208,000)	(515,000)
Capital lease and other obligations, net of current portion	150,000	296,000
Debt Instrument [Line Items]
Maximum borrowing amount under lease agreement	5,000,000
Amount drawn under lease agreement	$ 4,900,000
Interest rate on capital leases, minimum (in hundredths)	4.32%
Interest rate on capital leases, maximum (in hundredths)	7.95%
Number of financial covenants	2

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2012

Property and Equipment [Abstract]

Property and equipment

Property and equipment consist of the following at September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012							December 31, 2011
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Computer equipment	$	9,852	$	(8,940	)	$	912	$	9,751	$	(8,002	)	$	1,749
Furniture and fixtures		167		(76	)		91		75		(62	)		13
Software		1,452		(1,283	)		169		1,241		(1,229	)		12
Leasehold improvements		28		(21	)		7		308		(141	)		167
Total	$	11,499	$	(10,320	)	$	1,179	$	11,375	$	(9,434	)	$	1,941

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Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

Share-based compensation expense included in consolidated statement of operations

Share-based compensation expense recorded during three and nine months ended September 30, 2012, and 2011 was included in the Company's Unaudited Consolidated Statements of Operations as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Sales and marketing	$	6	$	10	$	23	$	12
Product development and technical operations		13		47		41		131
General and administrative		29		41		106		120
Total share-based compensation expense		48		98		170		263
Amounts capitalized as software development costs		8		3		12		19
Total share-based compensation	$	56	$	101	$	182	$	282

Stock option activity under the Plans

Stock option activity under the Plans during the nine months ended September 30, 2012 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, 2011		2,662		$	2.76
Granted		207			1.26
Exercised		(2	)		1.39
Expired/forfeited		(235	)		2.50
Options outstanding at March 31, 2012		2,632			2.64
Granted		213			0.83
Exercised		-			-
Expired/forfeited		(565	)		2.61
Options outstanding at June 30, 2012		2,280			2.47
Granted		107			0.91
Exercised		-			-
Expired/forfeited		(104	)		1.84
Options outstanding at September 30, 2012		2,283		$	2.43	4.52	$     -
Vested and expected to vest at September 30, 2012		2,035		$	2.58	4.30	$   -
Exercisable at September 30, 2012		1,353		$	3.21	3.50	$   -

Summary of stock options outstanding

The following table summarizes information about stock options outstanding at September 30, 2012:

					Options Outstanding						Options Exercisable
Price Ranges					Shares		Weighted- Average Remaining Contractual Term		Weighted- Average Exercise Price Per Share		Shares		Weighted- Average Exercise Price Per Share
					(in thousands)		(in years)				(in thousands)
$	0.76	-	$	1.19		473		6.01	$	0.94		101	$	1.06
	1.23	-		1.86		1,106		4.90		1.53		562		1.51
	1.88	-		2.83		175		3.84		2.52		161		2.58
	2.91	-		4.45		366		3.21		3.51		366		3.51
	4.46	-		7.35		54		2.30		5.37		54		5.37
	7.75	-		20.55		109		0.74		13.43		109		13.43
						2,283		4.52		2.43		1,353		3.21

Share-Based Compensation Valuation Assumptions

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model. The weighted average assumptions used in the Black-Scholes option valuation model and the weighted average grant date fair value per share for employee, consultant and director stock options were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Volatility		62.6	%		64.8	%		62.6	%		67.0	%
Risk-free interest rate		0.61	%		1.14	%		0.74	%		1.43	%
Expected term (years)		4.48			4.48			4.40			4.12
Expected dividend yield		-			-			-			-
Weighted average grant date fair value	$	0.45		$	0.76		$	0.51		$	0.88

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME LOSS (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME LOSS [Abstract]
Net loss	$ (2,654)	$ (224)	$ (7,163)	$ (665)
Other comprehensive income (loss):
Foreign currency translation adjustments	(12)	(5)	(34)	(5)
Unrealized gain (loss) on investments	(1)	(50)	26	(35)
Change in accumulated other comprehensive loss	(13)	(55)	(8)	(40)
Comprehensive loss	$ (2,667)	$ (279)	$ (7,171)	$ (705)

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Capitalized Software and Other Assets

9 Months Ended

Sep. 30, 2012

Capitalized Software and Other Assets [Abstract]

Capitalized Software and Other Assets

4. Capitalized Software and Other Assets

The Company's capitalized software and other assets are as follows at September 30, 2012, and December 31, 2011 (in thousands):

	September 30, 2012							December 31, 2011
	Gross Amount		Accumulated Amortization			Net Book Value		Gross Amount		Accumulated Amortization			Net Book Value
Capitalized software	$	7,144	$	(5,503	)	$	1,641	$	6,688	$	(5,503	)	$	1,185
Amortizable purchased technology		78		(78	)		-		78		(78	)		-
Other assets		47		-			47		35		-			35
Deferred lease incentive		96		-			96		-		-			-
	$	7,365	$	(5,581	)	$	1,784	$	6,801	$	(5,581	)	$	1,220

Capitalized software consists of 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 and is amortized over three years. In the three and nine months ended September 30, 2012, $0.3 million and $1.0 million, respectively, were added to active projects, as compared to $0.1 million and $0.2 million for the same periods in 2011, respectively. The Company had capitalized costs of $1.4 million and $0.5 million at September 30, 2012 and December 31, 2011, respectively, related to projects not yet placed into service.Amortization expense was $0.1 million and $0.5 million for the three and nine months ended September 30, 2012, respectively, and was $0.3 million and $0.5 million for the three and nine months ended September 30, 2011, respectively.

Fully amortized capitalized software of $0.5 million was determined to be obsolete and was written off in March 2012.

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Financial assets measured at fair value on a recurring basis

The Company's financial assets measured at fair value on a recurring basis subject to disclosure requirements at September 30, 2012, and December 31, 2011 were as follows (in thousands):

	Balance at September 30, 2012		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	$	140	$	140	$	-	$	-
Certificates of deposit		1,500		-		1,500		-
Commercial paper		3,850		-		3,850		-
Total cash equivalents		5,490		140		5,350		-
Short-term investments:
Certificates of deposit		3,402		-		3,402		-
Corporate bonds		2,520		-		2,520		-
Commercial paper		5,196		-		5,196		-
Total short-term investments		11,118		-		11,118		-
Total financial assets measured at fair value	$	16,608	$	140	$	16,468	$	-

	Balance at December 31, 2011		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	$	1,045	$	1,045	$	-	$	-
Certificates of deposit		3,100		-		3,100		-
Commercial paper		6,600		-		6,600		-
Total cash equivalents		10,745		1,045		9,700		-
Short-term investments:
Certificates of deposit		3,278		-		3,278		-
Corporate bonds		2,031		-		2,031		-
Commercial paper		1,500		-		1,500		-
Total short-term investments		6,809		-		6,809		-
Total financial assets measured at fair value	$	17,554	$	1,045	$	16,509	$	-

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Related Party Transactions (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Related Party Transactions [Abstract]
Fees paid in connection with services to Dr. Jean-Yves Dexmier	$ 0.1	$ 0.1	$ 0.4	$ 0.4

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Cash, Cash Equivalents and Short-Term Investments (Tables)

9 Months Ended

Sep. 30, 2012

Cash, Cash Equivalents and Short-Term Investments [Abstract]

Summary of cash and available-for-sale securities amortized cost and estimated fair value

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 September 30, 2012, and December 31, 2011 (in thousands):

	Amortized Cost and Estimated Fair Value
	September 30,		December 31,
	2012		2011
Cash and cash equivalents:
Cash	$	1,016	$	7,205
Cash equivalents
Money market mutual funds		140		1,045
Certificates of deposit		1,500		3,100
Commercial paper		3,850		6,600
Total cash equivalents		5,490		10,745
Total cash and cash equivalents		6,506		17,950
Short-term investments:
Corporate bonds		2,520		2,031
Certificates of deposit		3,402		3,278
Commercial paper		5,196		1,500
Total short-term investments		11,118		6,809
Total cash, and cash equivalents, and short-term investments	$	17,624	$	24,759