| LOOKSMART LTD ITEM 1A RISK FACTORS You should carefully consider the risks described below before making an investment decision regarding our common stock |
| If any of the following risks actually occur, our business, financial condition and results of operations could be harmed |
| In that case, the trading price of our common stock could decline and our investors could lose all or part of their investment |
| Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations |
| Risks Related to our Business Our financial results are highly concentrated in the online advertising business; if we are unable to grow online advertising revenues and find alternative sources of revenue, our financial results will suffer The display of listings advertisements accounted for substantially all of our revenues for the year ended December 31, 2005 |
| Our success depends upon advertisers choosing to use, and distribution network partners choosing to distribute, our listings products |
| Advertisers and distribution network partners may not adopt our listings products at projected rates, or changes in market conditions may adversely affect the use or distribution of listings advertisements |
| Because of our revenue concentration in the online advertising business, such shortfalls or changes could have a negative impact on our financial results |
| Also, many of our products are offered to website publishers who use them to display or generate revenue from their online advertisements |
| If we are unable to generate significant revenue from our online advertising business, or if market conditions adversely affect the use or distribution of online advertisements generally, our results of operations, financial condition and/or liquidity will suffer |
| We rely primarily on our network of distribution network partners to generate paid clicks; if we are unable to maintain or expand this network, our ability to generate revenues may be seriously harmed The success of our online advertisement products depends in large part on the size and quality of our distribution network |
| We may be unable to maintain or add distribution network partners of satisfactory quality in our distribution network at reasonable revenue-sharing rates, or at all |
| Our distribution network is concentrated, with our three and four largest distribution network partners accounting for approximately 46prca and 52prca of our revenues for the year ended December 31, 2005 and 2004, respectively |
| If we lose any significant portion of our distribution network, we would need to find alternative sources of quality click traffic to replace the lost paid clicks |
| In the past, we have lost portions of our distribution network, such as when our contract with Microsoft’s MSN expired in the first quarter of 2004 |
| Although alternate sources of click traffic are currently available in the market, they may not be available at reasonable prices, they will likely be subject to competition from various paid search providers, and they may be of lower quality |
| There is fierce competition among search providers to sign agreements with traffic providers |
| We may be unable to negotiate and sign agreements with quality traffic providers on favorable terms, if at all |
| If we are unsuccessful in maintaining and expanding our distribution network, then our ability to generate revenues may be seriously harmed |
| We have generated significant losses in the past and we may be unable to achieve operating profitability in the foreseeable future, and if we achieve profitability, we may be unable to maintain it, which could result in a decline in our stock price We had a net loss of dlra17dtta8 million in the year ended December 31, 2005 and as of December 31, 2005 our accumulated deficit was dlra203dtta8 million |
| We may be unable to achieve profitability in the foreseeable future and, if we regain profitability, we may be unable to maintain it |
| Our ability to achieve and maintain profitability will depend on our ability to generate additional revenues and contain our expenses |
| In order to generate additional revenues, we will need to expand our network of distribution network partners, expand our proprietary traffic sources such as our owned-and-operated websites, offer our publisher products to publisher customers and expand our advertiser base |
| We may be unable to accomplish some or any of these goals because of the risks 7 ______________________________________________________________________ [36]Table of Contents identified in this report or for unforeseen reasons |
| Also, we may be unable to contain our costs due to the need to make revenue sharing payments to our distribution network partners, to invest in product development, marketing and search technologies (exemplified by our renewed focus on our vertical search business), and enhance our search services |
| Because of the foregoing factors, and others outlined in this report, we may be unable to achieve profitability in the future, which could result in a decline in our stock price |
| If we experience downward pressure on our revenue per click and/or match rate, or we are unable to rebuild our revenue per click and/or match rate, our financial results will suffer We have experienced, and may in the future experience, downward pressure on our average revenue per click and average match rate, or rate at which paid listings are matched against search queries, due to various factors |
| In the year ended December 31, 2005, for example, our average revenue per click and average match rate decreased compared to the year ended December 31, 2004 |
| We may experience decreases in revenue per click or average match rate in the future for many reasons, including the erosion of our advertiser base, the reduction in average advertiser spend, the reduction in the number of listings purchased by advertisers, or for other reasons |
| If our revenue per click or average match rate falls for any reason, or if we are unable to grow our revenue per click and average match rate, then we may be unable to achieve our financial projections and our stock price would likely suffer |
| Our growth depends on our ability to retain and grow our advertiser base; if our advertiser base and average advertiser spend falls, our financial results will suffer Our growth depends on our ability to build an advertiser base that corresponds with the characteristics of our distribution network |
| Our distribution network, which currently consists of a diversified network of small distribution sources, may change as new distribution sources are added and old distribution sources are removed |
| Advertisers may view these changes to the distribution network negatively, and existing or potential advertisers may elect to purchase fewer or no listings advertisements for display on our distribution network |
| If this occurs, it is likely that our average revenue per click and average match rate may decline, we may be unable to meet our financial guidance, and our stock price would likely suffer |
| Our growth depends upon our ability to retain and grow our audience for our vertical search sites, and there are risks associated with introducing new products and services To maintain and grow our revenue, part of our strategy is to increase the amount, frequency and page views by consumers of our vertical search sites |
| Our development, testing and implementation efforts for these products and services have required, and are expected to continue to require, substantial investments of our time |
| We recently began owning and operating our own websites, and we may not gain enough of an audience for our vertical search sites to generate any, or sufficient, revenue to justify our efforts, or we may gain a sufficient audience but be unable to gain advertiser acceptance of our vertical search sites |
| Also, if we do not improve and enhance our vertical search sites in a timely manner, we may lose existing customers to our competitors or fail to attract new customers, which may adversely affect our performance and results of operations |
| If we are unable to license or acquire compelling content at reasonable costs, we may be unable to increase traffic to and revenue of our vertical search sites Our future success depends in part upon our ability to aggregate compelling content and search results and deliver them through our online properties |
| We license much of the content on our online properties, such as journal articles and news items, from third parties |
| Also, as competition for compelling content increases both domestically and internationally, our content providers may increase the prices at which they offer their content to us and potential content providers may not offer their content on terms agreeable to us |
| An increase in the prices charged to us by third-party content providers could harm our operating results and financial condition |
| If 8 ______________________________________________________________________ [37]Table of Contents we are unable to license or acquire compelling content at reasonable prices, if other companies broadcast content that is similar to or the same as that provided by us, the number of consumers of our services may not grow at all or may grow at a slower rate than anticipated, which could harm our operating results |
| Our growth depends upon our ability to offer and support our technology services to online publishers, and there are risks associated with introducing new products and services To maintain and grow our revenue, part of our strategy is to offer and host syndicated technology services to online publishers |
| Our development, testing and implementation efforts for these products and services have required, and are expected to continue to require, substantial investments of our time |
| Also, we do not have significant experience offering services to online publishers, and we may not gain publisher acceptance of our offerings |
| We may be unable to successfully implement syndicated publisher solutions, or our implementation of a solution may interfere with our ability to operate our other products and services or other implementations, or a publisher customer may decide not to use or continue to use our solution |
| These failures could have an adverse effect on our business and results of operations |
| If we do not introduce new and upgraded products and services and successfully adapt to our rapidly changing industry, our financial condition may suffer The Internet search industry is rapidly evolving and very turbulent, and we will need to continue developing new and upgraded products and services, adapt to new business environments and competition, and generate traffic to our consumer web properties in order to maintain and grow revenue and reach our profitability goals |
| New search and advertising technologies could emerge that make our services comparatively less useful or new business methods could otherwise emerge that divert web traffic away from our search network and consumer web properties |
| Competition from other web businesses may prevent us from attracting substantial traffic to our services |
| Also, we may inaccurately predict the direction of search technologies or the advertising market, which could lead us to make investments in technologies and products that do not generate sufficient returns |
| We may face platform and resource constraints that prevent us from developing upgraded products and services |
| We may fail to successfully identify new products or services, or fail to bring new products or services to market in a timely and efficient manner |
| Rapid industry change makes it difficult for us to forecast our results accurately, particularly over longer periods |
| We face the risk that we may be unable to adapt to new developments in the search industry, or that our new consumer products and services may not be broadly adopted by customers, in which case we would eventually need to obtain additional financing or cease operations |
| We face intense competitive pressures, which could materially and adversely affect our financial results We compete in the relatively new and rapidly evolving paid search industry, which presents many uncertainties that could require us to further refine our business model |
| We compete with companies that provide paid placement products, paid inclusion products, and other forms of search marketing |
| We compete for advertisers on the basis of the relevance of our search results, the price per click charged to advertisers, the volume of clicks that we can deliver to advertisers, tracking and reporting of campaign results, customer service and other factors |
| We also compete for distribution network partners and for ad placement on those partners’ sites on the basis of the relevance of our search results and the price per click charged to advertisers |
| We also experience competition for our owned-and-operated websites and for offering our technology to website publishers |
| Some of our competitors have larger distribution networks and proprietary traffic bases, longer operating histories, greater brand recognition, higher prices per click, better relevance and conversion rates, or better products and services than we have |
| Our acquisition of businesses and technologies may be costly and time-consuming; acquisitions may also dilute our existing stockholders From time to time we evaluate corporate development opportunities, and when appropriate, we intend to make acquisitions of, or significant investments in, complementary companies or technologies to increase our 9 ______________________________________________________________________ [38]Table of Contents technological capabilities and expand our service offerings |
| Acquisitions may divert the attention of management from the day-to-day operations of LookSmart |
| It may be difficult to retain key management and technical personnel of the acquired company during the transition period following an acquisition |
| Acquisitions or other strategic transactions may also result in dilution to our existing stockholders if we issue additional equity securities and may increase our debt |
| We may also be required to amortize significant amounts of intangible assets, record impairment of goodwill in connection with future or past acquisitions, or divest non-performing assets at below-market prices, which would adversely affect our operating results |
| We have acquired businesses and technologies in recent years, including the acquisition of Net Nanny from BioNet Systems, LLC in the second quarter of 2004, and from Furl, LLC in the third quarter of 2004 |
| Integration of acquired companies and technologies into LookSmart is likely to be expensive, time-consuming and a strain on our managerial resources |
| We may not be successful in integrating any acquired businesses or technologies and these transactions may not achieve anticipated business benefits |
| We offer to end users certain software we acquired, but we may lack the managerial and technical resources necessary to implement a successful software licensing business model in a timely manner |
| Unlicensed copying and use of such software in the United States and abroad will represent a loss of revenue to us |
| Our success depends on our ability to attract and retain key personnel; if we were unable to continue to attract and retain key personnel in the future, our business could be materially and adversely impacted Our success depends on our ability to identify, attract, retain and motivate highly skilled development, technical, sales, and management personnel |
| We have a limited number of key development, technical, sales and management personnel performing critical company functions, and the loss of the services of any of our key employees, particularly any of our executive team members or key technical personnel, could adversely affect our business |
| In recent years, we have experienced significant turnover in our management team |
| For example, our Chief Financial Officer joined us in November 2005 |
| Other members of management have also joined us in the last year, and the management team as a whole has had only a limited time to work together |
| We cannot assure you that we will be able to retain our key employees or that we can identify attract and retain highly skilled personnel in the future |
| We face capacity constraints on our software and infrastructure systems that may be costly and time-consuming to resolve We use proprietary and licensed software to crawl the web and index web pages, create and edit listings, compile and distribute our search results, track paid clicks, and detect click fraud |
| Any of these software systems may contain undetected errors, defects or bugs or may fail to operate with other software applications |
| The following developments may strain our capacity and result in technical difficulties with our web site or the web sites of our distribution network partners: · customization of our search results for distribution to particular distribution network partners, · substantial increases in the number of search queries to our database, · substantial increases in the number of listings in our search databases, or · the addition of new products or new features or changes to our products |
| If we fail to address these issues in a timely manner, we may lose the confidence of advertisers and distribution network partners, our revenues may decline and our business could suffer |
| In addition, as we expand our service offerings and enter into new business areas, we may be required to significantly modify and expand our software and infrastructure systems |
| If we fail to accomplish these tasks in a timely manner, our business will likely suffer |
| 10 ______________________________________________________________________ [39]Table of Contents Risks Related to Operating in our Industry If we fail to prevent, detect and remove invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer Invalid clicks, most often due to “click fraud”, are an ongoing problem for the Internet advertising industry, and we are exposed to the risk of invalid clicks on our paid listings |
| Invalid clicks occur when a person or robotic software causes a click on a paid listing to occur for some reason other than to view the underlying content |
| We invest significant time and resources in preventing, detecting and eliminating invalid traffic from our distribution network |
| However, the perpetrators of click fraud have developed sophisticated methods to evade detection, and we are unlikely to detect and remove all invalid traffic from our search network |
| We are subject to advertiser complaints and litigation regarding invalid clicks, and we may be subject to advertiser complaints, claims, litigation or inquiries in the future |
| We have from time to time credited invoices or refunded revenue to our customers due to suspicious traffic, and we expect to continue to do so in the future |
| If our systems to detect invalid traffic are insufficient, or if we find new evidence of past invalid clicks, we may have to issue credits or refunds retroactively to our advertisers, and we may still have to pay revenue share to our distribution network partners |
| This could negatively affect our profitability and hurt our brand |
| If traffic consisting of invalid clicks is not detected and removed from our search network, the affected advertisers may experience a reduced return on their investment in our online advertising because the invalid clicks will not lead to actual sales for the advertisers |
| This could lead the advertisers to become dissatisfied with our products, which could lead to loss of advertisers and revenue and could materially and adversely affect our financial results |
| Any failure in the performance of our key operating systems could materially and adversely affect our revenues Any system failure that interrupts our hosted products or services, including our search service, whether caused by computer viruses, software failure, power interruptions, intruders and hackers, or other causes, could harm our financial results |
| For example, our system for tracking and invoicing clicks is dependent upon a proprietary software platform |
| If we lose key personnel or experience a failure of software, this system may fail |
| In such event, we may be unable to track paid clicks and invoice our customers, which would materially and adversely affect our financial results and business reputation |
| The occurrence of a natural disaster or unanticipated problems at our principal headquarters or at a third-party facility could cause interruptions or delays in our business, loss of data or could render us unable to provide some services |
| Our California facilities exist on or near known earthquake fault zones and a significant earthquake could cause an interruption in our services |
| We do not have back-up sites for our main customer operations center, which is located at our San Francisco, California office |
| An interruption in our ability to serve search results, track paid clicks, and provide customer support would materially and adversely affect our financial results |
| Our business and operations depend on Internet service providers and third party technology providers, and any failure or system downtime experienced by these companies could materially and adversely affect our revenues Our consumers, distribution network partners and customers depend on Internet service providers, online service providers and other third parties for access to our search results |
| These service providers have experienced significant outages in the past and could experience outages, delays and other operating difficulties in the future |
| The occurrence of any or all of these events could adversely affect our reputation, brand and business, which could have a material adverse effect on our financial results |
| We have an agreement with Savvis Communications, Inc |
| to house equipment for web serving and networking and to provide network connectivity services |
| We also have agreements with third-party click 11 ______________________________________________________________________ [40]Table of Contents tracking and ad-serving technology providers |
| We also have an agreement with AboveNet Communications, Inc |
| to provide network connectivity services |
| We do not presently maintain fully redundant click tracking, customer account and web serving systems at separate locations |
| Accordingly, our operations depend on Savvis and AboveNet to protect the systems in their data centers from system failures, earthquake, fire, power loss, water damage, telecommunications failure, hackers, vandalism and similar events |
| Neither Savvis nor AboveNet guarantees that our Internet access will be uninterrupted, error-free or secure |
| We have developed a 30-day disaster recovery plan to respond in the event of a catastrophic loss of our critical, revenue-generating systems |
| We have an agreement with Raging Wire, Inc |
| in Sacramento, California to provide co-location and networking services for our critical systems in such an event |
| Although we maintain property insurance and business interruption insurance, we cannot guarantee that our insurance will be adequate to compensate us for all losses that may occur as a result of a catastrophic system failure |
| Also, if our third-party click tracking or ad-serving technology providers experience service interruptions, errors or security breaches, our ability to track, realize and record revenue would suffer |
| We may face liability for claims related to our products and services, and these claims may be costly to resolve Companies in the Internet, technology and media industries own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement or other violations of intellectual property rights |
| These claims might, for example, be made for trademark, copyright or patent infringement, defamation, negligence, personal injury, breach of contract, unfair advertising, unfair competition, invasion of privacy or other claims |
| As we face increasing competition and expand the number of websites that we publish, the possibility of intellectual property rights claims against us grows, and we cannot guarantee that our services do not infringe the intellectual property rights of others |
| Lawsuits are filed against us from time to time, and we are currently subject to two purported class action lawsuits in connection with our listings services |
| In addition, we are obligated in some cases to indemnify our customers or distribution network partners in the event that they are subject to claims that our services infringe on the rights of others |
| Litigating these claims could consume significant amounts of time and money, divert management’s attention and resources, cause delays in integrating acquired technology or releasing new products, or require us to enter into royalty or licensing agreements |
| Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all |
| Our insurance may not adequately cover claims of this type, if at all |
| If a court were to determine that some aspect of our search services or listings infringed upon or violated the rights of others, we could be prevented from offering some or all of our services, which would negatively impact our revenues and business |
| For any of the foregoing reasons, litigation involving our listings business and technology could have a material adverse effect on our business, operating results and financial condition |
| We could be subject to infringement claims that may be costly to defend, result in the payment of settlements or damages or lead us to change the way we conduct our business Internet, technology, media companies and patent holding companies often possess a significant number of patents |
| Further, many of these companies and other parties are actively developing search, indexing, electronic commerce and other Web-related technologies, as well as a variety of online business models and methods |
| We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection |
| As a result, we may face claims of infringement of patents and other intellectual property rights held by others |
| Also, as we expand our business, license or acquire content and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement claims |
| In the event that there is a determination that we have infringed third-party proprietary rights such as patents, copyrights, trademark rights, trade secret rights or other third party rights such as publicity and privacy rights, we could incur substantial monetary liability, be required to enter into costly royalty or licensing agreements or be prevented from using the rights, which could require us to change our business practices in the future and limit our ability to compete effectively |
| We may also incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims |
| In addition, many of our agreements with 12 ______________________________________________________________________ [41]Table of Contents our customers or affiliates require us to indemnify them for certain third-party intellectual property infringement claims, which could increase our costs in defending such claims and our damages |
| The occurrence of any of these results could harm our brand and negatively impact our operating results |
| Litigation, regulation, legislation or enforcement actions directed at or materially affecting us may adversely affect the commercial use of our products and services and our financial results New lawsuits, laws, regulations and enforcement actions applicable to the online industry may limit the delivery, appearance and content of our advertising or websites or otherwise adversely affect our business |
| If such laws are enacted, or if existing laws are interpreted to restrict the types and placements of advertisements we can carry, it could have a material and adverse effect on our financial results |
| For example, in 2002, the Federal Trade Commission, in response to a petition from a private organization, reviewed the way in which search engines disclose paid placement or paid inclusion practices to Internet consumers and issued guidance on what disclosures are necessary to avoid misleading consumers about the possible effects of paid placement or paid inclusion listings on the search results |
| In 2003, the United States Department of Justice issued statements indicating its belief that displaying advertisements for online gambling might be construed as aiding and abetting an illegal activity under federal law |
| In 2004, the United States Congress considered new laws regarding sale of pharmaceutical products over the Internet and the use of adware to distribute advertisements on the Internet, any of which could, if enacted, adversely affect our business |
| If any new law or government agency were to require changes in the labeling, delivery or content of our advertisements, or if we are subject to legal proceedings regarding these issues, it may reduce the desirability of our services or the types of advertisements that we can run, and our business could be materially and adversely harmed |
| In addition, legislation or regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), present ongoing compliance risks, and a failure to comply with these new laws and regulations could materially harm our business |
| For example, in the course of our general evaluation of our internal controls and our 2005 close process, we identified four significant deficiencies in the design and operation of our internal controls |
| We have addressed and are now in the process of remediating such deficiencies |
| It is possible that as we continue our Section 404 compliance efforts we will identify significant deficiencies, or material weaknesses, in the design and operation of our internal controls |
| We may be unable to remediate any of these matters in a timely fashion, and/or our independent registered public accounting firm may not agree with our remediation efforts in connection with their Section 404 attestation |
| Such failures could impact our ability to record, process, summarize and report financial information, and could impact market perception of the quality of our financial reporting, which could adversely affect our business and our stock price |
| Privacy-related regulation of the Internet could limit the ways we currently collect and use personal information, which could decrease our advertising revenues or increase our costs Internet user privacy has become an issue both in the United States and abroad |
| The United States Congress is considering new legislation to regulate Internet privacy, and the Federal Trade Commission and government agencies in some states and countries have investigated some Internet companies, and lawsuits have been filed against some Internet companies, regarding their handling or use of personal information |
| Any laws imposed to protect the privacy of Internet consumers may affect the way in which we collect and use personal information |
| We could incur additional expenses if new laws or court judgments, in the United States or abroad, regarding the use of personal information are introduced or if any agency chooses to investigate our privacy practices |
| Our search engine places information, known as cookies, on a user’s hard drive, generally without the user’s knowledge or consent |
| This technology enables web site operators to target specific consumers with a particular advertisement, to limit the number of times a user is shown a particular advertisement, and to track certain behavioral data |
| Although some Internet browsers allow consumers to modify their browser settings to remove cookies at any time or to prevent cookies from being stored on their hard drives, many consumers are not aware 13 ______________________________________________________________________ [42]Table of Contents of this option or are not knowledgeable enough to use this option |
| Some privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies |
| If this technology is reduced or limited, the Internet may become less attractive to advertisers and sponsors, which could result in a decline in our revenues |
| We and some of our distribution network partners or advertisers retain information about our consumers |
| If others were able to penetrate the network security of these user databases and access or misappropriate this information, we and our distribution network partners or advertisers could be subject to liability |
| These claims may result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant time and financial resources |
| Online commerce security risks, including security breaches, identity theft, service disrupting attacks and viruses, could harm our reputation and the conduct of our business, which could have a material adverse effect on our financial results A fundamental requirement for online commerce and communications is the secure storage, and transmission over public networks of confidential information |
| Although we have developed and use systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, our security measures may not prevent security breaches or identity theft that could harm our reputation and business |
| Currently, a significant number of our consumers provide credit card and other financial information and authorize us to bill their credit card accounts directly for all transaction fees charged by us |
| We rely on encryption and authentication technology to provide the security and authentication to effect secure transmission of confidential information, including customer credit card numbers |
| Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us to protect transaction data |
| In addition, any party who is able to illicitly obtain a user’s password could access the user’s transaction data |
| Any compromise of our security could damage our reputation and expose us to a risk of litigation and possible liability |
| The coverage limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches |
| Additionally, our servers are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, and we have experienced “denial-of-service” type attacks on our system that have made all or portions of our websites unavailable for periods of time |
| We may need to expend significant resources to protect against security breaches or to address problems caused by breaches |
| Disruptions in our services and damage caused by viruses and other attacks could cause a loss of user confidence in our systems and services, which could lead to reduced usage of our products and services and materially adversely affect our business and financial results |
| New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our search service and our financial results Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce |
| New or revised state tax regulations may subject us or our advertisers to additional state sales, income and other taxes |
| We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet |
| New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet |
| Any of these events could have an adverse effect on our business and results of operations |
| Risks Related to Accounting Matters Accounting for employee stock options using the fair value method could significantly reduce our net income As described in Note 1 (Summary of Significant Accounting Policies) to the Consolidated Financial Statements in this report, we are required to adopt Statement of Financial Accounting Standards Nodtta 123R, 14 ______________________________________________________________________ [43]Table of Contents Share-Based Payment (“SFAS 123R”) starting January 1, 2006 |
| We will be required to begin accounting for the fair value of stock options granted to employees as compensation expense |
| The adoption of SFAS 123R will likely have a significant adverse impact on our results of operations and net loss per share |
| In addition, if we reduce or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the employee marketplace |
| In order to prevent any net decrease in their overall compensation packages, we might decide to make corresponding increases in the cash compensation we pay to current and prospective new employees |
| An increase in employee wages and salaries would diminish our cash available for marketing, product development and other uses and might cause our GAAP profits to decline |
| Any of these effects might cause the market price of our stock to decline, particularly if investors conclude that any resulting decrease in reported profits in 2006 was caused by operational problems rather than by accounting rule changes |
| Risks Related to the Capital Market Our quarterly revenues and operating results may fluctuate for many reasons, each of which may negatively affect our stock price Our revenues and operating results will likely fluctuate significantly from quarter to quarter as a result of a variety of factors, including: · changes in our distribution network, particularly the gain or loss of key distribution network partners, or changes in the implementation of search results on partner web sites, · changes in the number of advertisers who purchase our listings, or the amount of spending per customer, · changes in the amount, frequency and page views by consumers of our vertical search sites, · the revenue-per-click we receive from advertisers, or other factors that affect the demand for, and prevailing prices of, Internet advertising and marketing services, · the effect of accounting for our headquarters office lease in San Francisco, which reflects our management’s assumptions about the subleasing market, · systems downtime on our AdCenter, our web site or the web sites of our distribution network partners, or · the effect of SFAS 123R, which becomes effective January 1, 2006, and requires that we begin accounting for the fair value of stock options granted to employees as compensation Due to the above factors, we believe that period-to-period comparisons of our financial results are not necessarily meaningful, and you should not rely on past financial results as an indicator of our future performance |
| If our financial results in any future period fall below the expectations of securities analysts and investors, the market price of our securities would likely decline |
| Our stock price is extremely volatile, and such volatility may hinder investors’ ability to resell their shares for a profit The stock market has experienced significant price and volume fluctuations in recent years, and the stock prices of Internet companies have been extremely volatile |
| The low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur |
| Also, because of our limited operating history and the significant changes we experienced as a result of the expiration of our contractual relationship with Microsoft’s MSN in the first quarter of 2004, it is extremely 15 ______________________________________________________________________ [44]Table of Contents difficult to evaluate our business and prospects |
| You should evaluate our business in light of the risks, uncertainties, expenses, delays and difficulties associated with managing and growing a relatively new business, many of which are beyond our control |
| Our stock price may fluctuate, and you may not be able to sell your shares for a profit, as a result of a number of factors including: · changes in the market valuations of Internet companies in general and comparable companies in particular, · quarterly fluctuations in our operating results, · the termination or expiration of our distribution agreements, · our potential failure to meet our forecasts or analyst expectations on a quarterly basis, · the relatively thinly traded volume of our publicly traded shares, which means that small changes in the volume of trades may have a disproportionate impact on our stock price, · the loss of key personnel, or our inability to recruit experienced personnel to fill key positions, · changes in ratings or financial estimates by analysts or the inclusion/removal of our stock from certain stock market indices used to drive investment choices, · announcements of new distribution network partnerships, technological innovations, acquisitions or products or services by us or our competitors, · the sales of substantial amounts of our common stock in the public market by our stockholders, or the perception that such sales could occur, · the exchange by Chess Depositary Interest (CDI) holders of CDIs for shares of common stock at a ratio of 1:1, and resale of such shares in the Nasdaq National Market (as of March 9, 2006, the CDIs registered for trading on the Australian Stock Exchange were exchangeable into an aggregate of approximately 1dtta8 million shares of common stock), or · conditions or trends in the Internet that suggest a decline in rates of growth of advertising-based Internet companies |
| In the past, securities class action litigation has often been instituted after periods of volatility in the market price of a company’s securities |
| A securities class action suit against us could result in substantial costs and the diversion of management’s attention and resources, regardless of the merits or outcome of the case |
| We may need additional capital in the future to support our operations and, if such additional financing is not available to us, on reasonable terms or at all, our liquidity and results of operations will be materially and adversely impacted Although we believe that our working capital will provide adequate liquidity to fund our operations and meet our other cash requirements for the foreseeable future, unanticipated developments in the short term, such as the entry into agreements, which require large cash payments or the acquisition of businesses with negative cash flows, may necessitate additional financing |
| We may seek to raise additional capital through public or private debt or equity financings in order to: · fund the additional operations and capital expenditures, · take advantage of favorable business opportunities, including geographic expansion or acquisitions of complementary businesses or technologies, · develop and upgrade our technology infrastructure beyond current plans, · develop new product and service offerings, 16 ______________________________________________________________________ [45]Table of Contents · take advantage of favorable conditions in capital markets, or · respond to competitive pressures |
| The capital markets, and in particular the public equity market for Internet companies, have historically been volatile |
| It is difficult to predict when, if at all, it will be possible for Internet companies to raise capital through these markets |
| We cannot assure you that the 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 |
| Provisions of Delaware corporate law and provisions of our charter and bylaws may discourage a takeover attempt 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 |