Summary of LOOKSMART LTD - Yahoo! Finance

Results of Operations and Financial Condition, Financial Statements and Exhibits

Item 2.02. Results of Operations and Financial Condition

On August 5, 2008, LookSmart held a conference call in connection with its announced financial results for the second quarter ended June 30, 2008. A transcript of LookSmart's conference call is furnished as Exhibit 99.1 hereto and incorporated by reference herein.

The conference call transcript includes Adjusted EBITDA, a non-GAAP financial measure. When evaluating Adjusted EBITDA, investors should consider, among other factors, (i) increasing or decreasing trends in Adjusted EBITDA, and (ii) how Adjusted EBITDA compares to levels of interest expense, taxes and depreciation and amortization. A reconciliation of Adjusted EBITDA to GAAP net income (loss) is provided below.

                                            Quarter         Quarter           Quarter
                                             Ended           Ended             Ended
                                           June 30,        March 31,         June 30,
                                             2008             2008             2007
 ('000s)                                  (unaudited)     (unaudited)       (unaudited)
 Net loss                                        (176 )   $       (488 )   $      (2,068 )
 Add: taxes                                         7                7                -
 Less: interest income, net                      (247 )           (433 )            (518 )
 Add: loss from discontinued operations           136              307               739
 Add: depreciation and amortization               753              755               439

 EBITDA                                           473              148            (1,408 )
 Add: stock-based compensation, net               547            1,013               611

 Adjusted EBITDA                                1,020            1,161              (797 )

LookSmart provides non-GAAP financial information to assist investors in assessing its current and future operations in the way that LookSmart's management evaluates those operations. Non-GAAP Adjusted EBITDA is a supplemental measure of LookSmart's performance that is not required by, and is not presented in accordance with, generally accepted accounting principles (GAAP). The non-GAAP information does not substitute for any performance measure derived in accordance with GAAP. LookSmart believes that this non-GAAP information provides useful information to investors by excluding the effect of some non-cash expenses and other amounts that are required to be recorded under GAAP but that LookSmart believes are not indicative of LookSmart's cash-based operating results.

LookSmart's management evaluates and makes operating decisions about its business operations primarily based on revenue and the cash costs of those business operations (distinct from non-cash costs of operations). Therefore, management presents the non-GAAP financial measure Adjusted EBITDA, along with GAAP measures, in this earnings release by excluding these non-cash items from the period expenses. A limitation associated with this non-GAAP measure is that it does not include stock-based compensation expense related to our workforce nor interest, taxes, depreciation and amortization amounts related to our business operations. Adjusted EBITDA line items involved in the adjustment from GAAP to non-GAAP presentation in this earnings release are the following items that include equity-based compensation charges (1) operating expenses, research and development; (2) operating expenses, selling and marketing; and
(3) operating expenses, general and administrative. These items in turn affect
(1) total costs and expenses; (2) operating income/loss; (3) income before income taxes; (4) net loss, and (5) basic earnings per share.

For the non-GAAP financial measure Adjusted EBITDA, the adjustment provides management with information about LookSmart's underlying cash-based operating performance that enables comparison of its cash-based financial results in different reporting periods. Additionally, our management uses Adjusted EBITDA as a supplemental measure in the evaluation of our business, and believes that Adjusted EBITDA provides visibility into our ability to meet our future capital expenditures and working capital requirements.

LookSmart's management excludes the impact of equity-based compensation to eliminate the effects of this non-cash item, which, because it is based upon estimates on the grant dates, may bear little resemblance to the actual values realized upon the future exercise, expiration, termination or forfeiture of the stock-based compensation, and which, as it relates to stock options and stock purchase plan shares, is required for GAAP purposes to be estimated under valuation models, including the Black-Scholes model used by LookSmart. LookSmart's management also excludes the impact of equity-based compensation to help it compare current period cash operating expenses against the operating expenses for prior periods. LookSmart's management excludes the impact of discontinued operations to help it compare current profitability from continuing operations against the profitability of continuing operations for prior periods.

Management uses non-GAAP measures to help it make budgeting decisions between those expenses that affect operating expenses and operating margin (such as research and development, sales and marketing, and general and administrative expenses), and those expenses that affect cost of revenue and gross margin. Further, the availability of non-GAAP financial information helps management track actual performance relative to financial targets, including both internal targets and publicly announced targets. Making this non-GAAP financial information available to investors, in addition to the GAAP information, helps investors compare LookSmart's performance with the performance of other companies in our industry, which use similar financial measures to supplement their GAAP financial information.

As stated above, management recognizes that the use of non-GAAP measures has limitations, including the fact that management must exercise judgment in determining which types of charges should be excluded from the non-GAAP financial information. Because other companies, including companies similar to LookSmart, may calculate their non-GAAP earnings differently than LookSmart, non-GAAP measures may have limited usefulness in comparing companies. Management believes, however, that providing this non-GAAP financial information, in addition to the GAAP information, facilitates comparison of LookSmart's financial performance on a cash basis over time. LookSmart has provided non-GAAP results to the investment community, not as an alternative but as an important supplement to GAAP information, to enable investors to evaluate LookSmart's cash-based operating performance in the same way that management does.

The transcript attached as an exhibit to this report includes "safe harbor" language pursuant to the Private Securities Litigation Reform Act of 1995, as amended, indicating that certain statements about the Company's business and other matters contained in the press release are "forward-looking" rather than "historic." The transcript also states that a more thorough discussion of certain factors which may affect the Company's operating results is included, among other sections, in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, its quarterly reports on Form 10-Q and its other public filings, which are on file with the SEC and available at the SEC's website (http://www.sec.gov).