(unaudited)
1.
Basis of Presentation
Overview
Geeknet, Inc.
(“Geeknet” or the “Company”), is an online network for the global geek community
which is comprised of technology professionals, technology enthusiasts and
general consumers of technology-oriented goods, services and
media. The Company’s audience of technology professionals and
technology enthusiasts relies on its web sites — SourceForge, Ohloh and
freshmeat — to create, improve, compare and distribute Open Source software, on
Slashdot to peer-produce and peer-moderate technology news and discussion and on
Geek.com for technology news and resources. The Company’s
wholly-owned subsidiary, ThinkGeek, Inc., sells geek-themed retail products to
these communities through its ThinkGeek web site.
Geeknet was
incorporated in California in January 1995 and reincorporated in Delaware in
December 1999. From the date of its incorporation through October
2001, the Company sold Linux-based hardware systems and services under the name
VA Linux Systems, Inc. In December 2001, the Company changed its name
to VA Software Corporation to reflect its decision to pursue Online Media,
E-commerce, Software and Online Images businesses. In December 2005,
the Company sold its Online Images business to WebMediaBrands Inc. and in April
2007, the Company sold its Software business to CollabNet, Inc.
(“CollabNet”). On May 24, 2007 the Company changed its name to
SourceForge, Inc. and in November 2009 changed its name to Geeknet,
Inc.
The interim
financial information presented in this Form 10-Q is not audited and is not
necessarily indicative of the Company’s future consolidated financial position,
results of operations or cash flows. The accompanying condensed
consolidated balance sheet as of December 31, 2009 has been derived from audited
financial statements included on Form 10-K, and the interim unaudited condensed
consolidated financial statements contained in this Form 10-Q have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) and on the same basis as the annual financial
statements. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles in the United States of America have
been condensed or omitted in accordance with such rules and
regulations. In the opinion of management, all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company’s financial position as of June 30, 2010, its results of operations for
the three and six months ended June 30, 2010 and June 30, 2009 and its cash
flows for the six months ended June 30, 2010 and June 30, 2009 have been
made. These financial statements should be read in conjunction with
the Company’s audited financial statements and notes thereto for the fiscal year
ended December 31, 2009, included in the Company’s Annual Report on Form 10-K
filed with the SEC.
2.
Summary of Significant Accounting Policies
Except as discussed
below, there have been no significant changes to the Company’s critical
accounting estimates during the three and six months ended June 30, 2010 as
compared to what was previously disclosed in the Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009.
Adopted
Accounting Pronouncements
In January 2010,
the FASB issued a new standard, Improving Disclosures About Fair Value
Measurements, which requires reporting entities to make new disclosures about
recurring or nonrecurring fair-value measurements including significant
transfers into and out of Level 1 and Level 2 fair-value measurements and
information on purchases, sales, issuances, and settlements on a gross basis in
the reconciliation of Level 3 fair- value measurements. This standard is
effective for the Company’s 2010 calendar year reporting, except for Level 3
reconciliation disclosures which are effective for the Company’s 2011 calendar
year reporting. The Company has no additional disclosures arising from the
adoption of this standard.
Recent
Accounting Pronouncements
In September
2009, the FASB issued an update to the existing multiple-element revenue
arrangements guidance. The revised guidance primarily provides two significant
changes: 1) eliminates the need for objective and reliable evidence of the fair
value for the undelivered element in order for a delivered item to be treated as
a separate unit of accounting, and 2) eliminates the residual method to allocate
the arrangement consideration. In addition, the guidance also expands the
disclosure requirements for revenue recognition. This update will be effective
for the Company’s first quarterly reporting period of 2011, with early adoption
permitted provided that the revised guidance is retroactively applied to the
beginning of the year of adoption. The Company is currently assessing the impact
of this new accounting update on its consolidated financial
statements.
In June 2009,
the FASB issued a new standard which requires an analysis to determine whether a
variable interest gives the entity a controlling financial interest in a
variable interest entity. This statement requires an ongoing reassessment and
eliminates the quantitative approach previously required for determining whether
an entity is the primary beneficiary. This standard is effective for 2011. The
Company does not expect that the adoption of this standard will have a material
impact on its consolidated financial statements.
Use
of Estimates in Preparation of Consolidated Financial Statements
The preparation of
the Company’s consolidated financial statements and related notes requires the
Company to make estimates, which include judgments and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. The Company has
based its estimates on historical experience and on various assumptions that are
believed to be reasonable under the circumstances and the Company evaluates its
estimates on a regular basis and makes changes
accordingly. Historically, the Company’s estimates relative to its
critical accounting estimates have not differed materially from actual results,
however actual results may differ from these estimates under different
conditions.
A critical
accounting estimate is based on judgments and assumptions about matters that are
highly uncertain at the time the estimate is made. Different
estimates that reasonably could have been used, or changes in accounting
estimates, could materially impact the financial statements.
Principles
of Consolidation
The interim
financial information presented in this Quarterly Report on Form 10-Q includes
the accounts of Geeknet and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. At June 30, 2010, the Company owned approximately 9%
of CollabNet consisting of CollabNet’s Series C-1 preferred stock. As
the Company holds less than 20% of the voting stock of CollabNet and does not
otherwise exercise significant influence over them, the investment is accounted
for under the cost method. CollabNet is a developer of software used
in collaborative software development.
The Company had no
related-party revenue from CollabNet for the three and six months ended June 30,
2010.
Related-party
revenue associated with CollabNet was $0.2 million and $0.4 million for the
three and six months ended June 30, 2009.
Foreign
Currency Translation
The Company has
wholly-owned foreign subsidiaries in the United Kingdom and
Belgium. The functional currency of these foreign subsidiaries is the
local country’s currency, which is the primary currency in which the subsidiary
generates and expends cash. The Company translates the financial
statements of consolidated entities whose functional currency is not the U.S.
dollar into U.S. dollars. Assets and liabilities are translated at
exchange rates prevailing at the financial statement date and income and
expenses are translated using the average exchange rate for the
period. Gains and losses resulting from translation and the effect of
exchange rate changes on intercompany transactions of a long term nature are
reported in other comprehensive income as a component of stockholders’
equity. As of June 30, 2010, the Company did not hold any foreign
currency derivative instruments.
Segment
and Geographic Information
Operating segments
are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision-maker, or decision-making group, in making decisions about how to
allocate resources and assess performance. The Company’s chief
decision-making group is the Chief Executive Officer and the executive
team. The Company currently operates as two reportable business
segments: Media and E-commerce.
The Company markets
its products in the United States through its direct sales force and its online
web properties and with respect to international Media sales, through its
subsidiary in the United Kingdom and representatives in the United Kingdom,
Europe and Australia. Revenue for the three and six months ended June
30, 2010 and June 30, 2009, respectively, was generated primarily from sales to
customers in the United States.
Cash
and Cash Equivalents
The Company
considers all highly-liquid investments with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents
consist principally of cash deposited in money market and checking
accounts.
Investments
Investments in
highly-liquid financial instruments with remaining maturities greater than three
months and less than one year are classified as short-term
investments. Financial instruments with remaining maturities greater
than one year are classified as long-term investments.
Marketable
securities classified as available-for-sale are reported at market value, with
net unrealized gains or losses recorded in accumulated other comprehensive
income (loss), a separate component of stockholders' equity, until
realized. Realized gains and losses on investments are computed based
upon specific identification and are included in interest and other income
(expense), net. Investments designated as trading securities are
stated at fair value, with gains or losses resulting from changes in fair value
recognized currently in earnings. Non-marketable equity securities
are accounted for at historical cost.
Other-Than-Temporary
Impairment
All of the
Company’s available-for-sale investments and non-marketable equity securities
are subject to a periodic impairment review. Investments are
considered to be impaired when a decline in fair value is judged to be
other-than-temporary. This determination requires significant
judgment. For publicly-traded investments, impairment is determined
based upon the specific facts and circumstances present at the time, including a
review of the closing price over the previous six months, general market
conditions and the Company’s intent and ability to hold the investment for a
period of time sufficient to allow for recovery. For non-marketable
equity securities, the impairment analysis requires the identification of events
or circumstances that would likely have a significant adverse effect on the fair
value of the investment, including revenue and earnings trends, overall business
prospects and general market conditions in the investees’ industry or geographic
area. Investments identified as having an indicator of impairment are
subject to further analysis to determine if the investment is
other-than-temporarily impaired, in which case the investment is written down to
its impaired value. In March 2009, the Company recorded an impairment
loss of $4.6 million related to its investment in CollabNet, which is included
in interest and other income (expense), net.
Inventories
Inventories related
to the Company’s E-commerce business consist solely of finished goods that are
valued at the lower of cost or market using the average cost
method. Provisions, when required, are made to reduce excess and
obsolete inventories to their estimated net realizable values.
Property
and Equipment
Property and
equipment are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements
are amortized over the lesser of the estimated useful lives or the corresponding
lease term.
Goodwill
and Intangibles
Intangible assets
are amortized on a straight-line basis over their estimated lives of three to
five years. The Company continually evaluates whether events or
circumstances have occurred that indicate the remaining estimated useful lives
of these intangible assets may not be recoverable. When events or
circumstances indicate that the goodwill and intangible assets should be
evaluated for possible impairment, the Company uses an estimate of the related
business segment's undiscounted net income over the remaining useful life of the
intangible assets in measuring whether they are recoverable. No
events or circumstances occurred that would indicate a possible impairment in
the carrying value of intangible assets at June 30, 2010. The Company will test
goodwill and intangible assets for impairment on December 31, the last day of
the Company’s fiscal year.
Goodwill and
intangible assets are as follows (in thousands):
|
|
|
June 30, 2010
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
asset
|
|
|
amortization
|
|
|
asset
|
|
|
Goodwill
|
|
$
|
62,291
|
|
|
$
|
(60,362
|
)
|
|
$
|
1,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain and
trade names
|
|
|
6,922
|
|
|
|
(5,991
|
)
|
|
|
931
|
|
|
Purchased
technology
|
|
|
3,492
|
|
|
|
(2,881
|
)
|
|
|
611
|
|
|
|
|
|
10,414
|
|
|
|
(8,872
|
)
|
|
|
1,542
|
|
|
Total
goodwill and identified intangible assets
|
|
$
|
72,705
|
|
|
$
|
(69,234
|
)
|
|
$
|
3,471
|
|
|
|
|
December 31, 2009
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
asset
|
|
|
amortization
|
|
|
asset
|
|
|
Goodwill
|
|
$
|
62,032
|
|
|
$
|
(60,362
|
)
|
|
$
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain and
trade names
|
|
|
6,059
|
|
|
|
(5,946
|
)
|
|
|
113
|
|
|
Purchased
technology
|
|
|
3,492
|
|
|
|
(2,721
|
)
|
|
|
771
|
|
|
|
|
|
9,551
|
|
|
|
(8,667
|
)
|
|
|
884
|
|
|
Total
goodwill and identified intangible assets
|
|
$
|
71,583
|
|
|
$
|
(69,029
|
)
|
|
$
|
2,554
|
|
The future
amortization expense of identified intangibles is as follows (in
thousands):
|
Year ending December 31,
|
|
Amount
|
|
|
2010
|
|
$
|
332
|
|
|
2011
|
|
|
646
|
|
|
2012
|
|
|
446
|
|
|
2013
|
|
|
118
|
|
|
|
|
$
|
1,542
|
|
Revenue
Recognition
The Company
recognizes revenue as follows:
Media
Revenue
Media revenue is
derived primarily from advertising on the Company’s various web
sites. These advertisements include various forms of rich media and
banner advertising, text links and sponsorships. The Company
recognizes Media revenue as advertising is delivered over the period in which
the advertisements are displayed, provided that persuasive evidence of an
arrangement exists, no significant obligations remain, the fee is fixed or
determinable, and collection of the receivable is reasonably
assured. The Company’s obligations may include guarantees of a
minimum number of impressions (the number of times that an advertisement is
viewed by visitors to the Company’s web sites). To the extent that
minimum guaranteed impressions are not delivered in the specified time frame,
the Company does not recognize the corresponding revenue until the guaranteed
impressions are delivered. Traffic to the Company’s Media web sites
is seasonal, with relatively lower levels of traffic experienced during the
summer months of the northern hemisphere.
E-commerce
Revenue
E-commerce revenue
is derived from the online sale of consumer goods. The Company
recognizes E-commerce revenue from product sales when persuasive evidence of an
arrangement exists, delivery has occurred, the sale price is fixed or
determinable, and collectibility is reasonably assured. The Company
generally recognizes E-commerce revenue when products are shipped and title
transfers to the customer. The Company grants customers a limited
right to return E-commerce products. No reserve for returns was recorded at June
30, 2010. The Company recorded a returns reserve of $0.3 million at December 31,
2009.
The Company’s
E-commerce business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
calendar year-end holiday shopping season. In the past several years,
a substantial portion of the Company’s E-commerce revenue has occurred in the
Company’s fourth calendar quarter which begins on October 1 and ends on December
31. As is typical in the retail industry, the Company generally
experiences lower monthly E-commerce revenue during the first nine months of the
year. The Company’s E-commerce revenue in a particular period is not
necessarily indicative of future E-commerce revenue for a subsequent quarter or
its full year.
Concentrations
of Credit Risk and Significant Customers
The Company’s
investments are held with two reputable financial institutions; both
institutions are headquartered in the United States. The Company’s
investment policy limits the amount of risk exposure. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and trade receivables. The Company
provides credit, in the normal course of business, to a number of companies and
performs ongoing credit evaluations of its customers. The credit risk
in the Company’s trade receivables is substantially mitigated by its credit
evaluation process and reasonably short collection terms. The Company
maintains reserves for potential credit losses and such losses have been within
management’s expectations. As of June 30, 2010, no customer accounted
for more than 10% of the Company’s gross accounts receivable. As of
December 31, 2009, one advertising agency accounted for 10.5% of gross accounts
receivable.
For the three
months ended June 30, 2010 and June 30, 2009, no one customer represented more
than 10% of revenue. For the six months ended June 30, 2010, no one
customer represented more than 10% of revenue while Google Inc. represented
11.1% of revenue for the six months ended June 30, 2009.
3. Composition
of Certain Balance Sheet Components
Property and
equipment, net, consist of the following (in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Computer and
office equipment (useful lives of 2 to 4 years)
|
|
$
|
5,672
|
|
|
$
|
5,475
|
|
|
Furniture and
fixtures (useful lives of 2 to 4 years)
|
|
|
226
|
|
|
|
210
|
|
|
Leasehold
improvements (useful lives of lesser of estimated life or lease
term)
|
|
|
126
|
|
|
|
93
|
|
|
Software
(useful lives of 2 to 5 years)
|
|
|
553
|
|
|
|
390
|
|
|
Distribution
equipment in-progress
|
|
|
2,624
|
|
|
|
-
|
|
|
Total
property and equipment
|
|
|
9,201
|
|
|
|
6,168
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(4,470
|
)
|
|
|
(3,599
|
)
|
|
Property and
equipment, net
|
|
$
|
4,731
|
|
|
$
|
2,569
|
|
Distribution
equipment in-progress represents partial payments on the equipment which is
being installed at the Company's new third-party contract-fulfillment and
warehouse provider. This equipment is expected to be placed in
service prior to September 30, 2010 at a total cost of $3.3
million.
Other long-term
assets consist of the following (in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Equity
investment
|
|
$
|
1,979
|
|
|
$
|
1,979
|
|
|
Goodwill
|
|
|
1,929
|
|
|
|
1,670
|
|
|
Intangible
assets, net
|
|
|
1,542
|
|
|
|
884
|
|
|
Other
|
|
|
266
|
|
|
|
555
|
|
|
Other
long-term assets
|
|
$
|
5,716
|
|
|
$
|
5,088
|
|
Accrued liabilities
and other consist of the following (in thousands):
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued
employee compensation and benefits
|
|
$
|
1,943
|
|
|
$
|
2,386
|
|
|
Other accrued
liabilities
|
|
|
434
|
|
|
|
1,468
|
|
|
Accrued
liabilities and other
|
|
$
|
2,377
|
|
|
$
|
3,854
|
|
4.
Investments
The Company
classifies its investments as available-for-sale or trading at the time they are
acquired and reports them at fair value with net unrealized gains or losses
reported, net of tax, using the specific identification method as other
comprehensive gain or loss in stockholders’ equity or other income in the
statement of operations. See Note 5 – Fair Value
Measurements.
The Company’s cash,
cash equivalents and investments consist of the following (in
thousands):
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,263
|
|
|
$
|
-
|
|
|
$
|
3,263
|
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
|
Money market
funds
|
|
|
21,708
|
|
|
|
-
|
|
|
|
21,708
|
|
|
|
22,943
|
|
|
|
-
|
|
|
|
22,943
|
|
|
Total cash
and cash equivalents
|
|
$
|
24,971
|
|
|
$
|
-
|
|
|
$
|
24,971
|
|
|
$
|
28,943
|
|
|
$
|
-
|
|
|
$
|
28,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
|
Government
securities
|
|
|
3,550
|
|
|
|
(543
|
)
|
|
|
3,007
|
|
|
|
10,750
|
|
|
|
(1,350
|
)
|
|
|
9,400
|
|
|
Total
short-term investments
|
|
$
|
3,558
|
|
|
$
|
(543
|
)
|
|
$
|
3,015
|
|
|
$
|
10,758
|
|
|
$
|
(1,350
|
)
|
|
$
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
On June 30, 2010,
the Company exercised its right to require UBS AG (“UBS”) to repurchase its
Auction Rate Securities at par value ("ARS Right"). The transaction
settled on July 1, 2010 and the sales proceeds of $0.5 million are reflected in
other current assets. In conjunction with the completion of the
Company's facility lease in May 2010, the associated letter of credit was
canceled and the cash restriction was released.
5.
Fair Value Measurements
The
following table represents the Company’s fair value hierarchy for its financial
assets (cash equivalents and investments) measured at fair value on a recurring
basis as of June 30, 2010 (in thousands):
|
|
|
Fair Value Measurements at Reporting Date
Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Money market
fund deposits
|
|
$
|
21,708
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,708
|
|
|
Corporate
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
Municipal
bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
3,007
|
|
|
|
3,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,708
|
|
|
$
|
-
|
|
|
$
|
3,015
|
|
|
$
|
24,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
21,708
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,708
|
|
|
Short-term
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
3,015
|
|
|
|
3,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,708
|
|
|
$
|
-
|
|
|
$
|
3,015
|
|
|
$
|
24,723
|
|
Level 3
assets consist primarily of municipal bonds with an auction reset feature
(“auction-rate securities” or “ARS”) whose underlying assets are student loans
which are substantially backed by the federal
government. Auction-rate securities are long-term floating rate bonds
tied to short-term interest rates. At June 30, 2010, all of the
Company’s ARS were rated AAA, the highest credit rating, by at least one rating
agency. On June 30, 2010, the Company exercised its right to sell at
par value, auction-rate securities with a par value of $3.6 million to
UBS. The transaction settled on July 1, 2010.
The
following table provides a reconciliation of the beginning and ending balances
for the assets measured at fair value using significant unobservable inputs
(Level 3) (in thousands):
|
|
|
Fair
Value Measurements at Reporting Date
Using
significant Unobservable Inputs
(Level
3) Financial Assets
|
|
|
|
|
ARS
|
|
|
ARS Right
|
|
|
Other
|
|
|
Balance at
December 31, 2009
|
|
$
|
9,400
|
|
|
$
|
1,350
|
|
|
$
|
8
|
|
|
Gain on other
current assets
|
|
|
-
|
|
|
|
(807
|
)
|
|
|
-
|
|
|
Loss on
investments
|
|
|
807
|
|
|
|
-
|
|
|
|
-
|
|
|
Sales/Maturities
|
|
|
(7,200
|
)
|
|
|
(543
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2010
|
|
$
|
3,007
|
|
|
$
|
-
|
|
|
$
|
8
|
|
6. Restructuring
Costs
In
October 2007, the Company relocated its corporate headquarters to Mountain View,
California. In conjunction with this relocation, the Company recorded
a restructuring charge of $2.2 million for the remaining facility space and
leasehold improvements at its former corporate headquarters located in Fremont,
California. In conjunction with the sale of its Software business in
April 2007, the Company accrued a restructuring charge of $0.6 million for the
excess facility space used in the operation of its Software business, which was
included in the gain on disposal of discontinued operations. In
fiscal 2001 and 2002, the Company adopted plans to exit its hardware systems and
hardware-related software engineering and professional services businesses, as
well as exit a sublease agreement and to reduce its general and administrative
overhead costs. In May 2010, the Company completed its payments under the
facility lease. The $0.1 million restructuring gain during the three
months ended June 30, 2010 relates primarily to proceeds from the sale of office
furniture at the facility. In conjunction with the completion of the
lease, the $1 million letter of credit was cancelled and the cash restriction
was removed.
Below
is a summary of the changes to the restructuring liability (in
thousands):
|
|
|
Balance at
Beginning of
Period
|
|
|
Cash
Payments
|
|
|
Other
|
|
|
Restructuring
Charges
|
|
|
Balance at
End of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six
months ended June 30, 2010
|
|
$
|
1,238
|
|
|
$
|
(1,141
|
)
|
|
$
|
4
|
|
|
$
|
(101
|
)
|
|
$
|
-
|
|
7. Computation
of Per Share Amounts
Basic
earnings per common share is computed using the weighted-average number of
common shares outstanding (adjusted for treasury stock and common stock subject
to repurchase activity) during the period. Diluted earnings per
common share is computed using the weighted-average number of common and
dilutive common equivalent shares outstanding during the
period. Common equivalent shares are anti-dilutive when their
conversion would increase earnings per share. Dilutive common
equivalent shares consist primarily of stock options and restricted stock
awards.
Employee
equity share options, nonvested shares, and similar equity instruments granted
by the Company are treated as potential common shares outstanding in computing
diluted earnings per share. Diluted shares outstanding would include
the dilutive effect of in-the-money options, calculated based on the average
share price for each period using the treasury stock method, had there been any
during the period. Under the treasury stock method, the amount the
employee (or purchaser of the written call options) must pay for exercising
stock options, the amount of compensation cost for future service that the
Company has not yet recognized, and the amount of tax benefits that would be
recorded in additional paid-in capital when the award becomes deductible are
assumed to be used to repurchase shares. Additionally, under the
treasury stock method the amount the purchaser of the written call options must
pay for exercising stock options is assumed to be used to repurchase
shares.
The
following table presents the calculation of basic and diluted earnings per share
(in thousands, except per share data):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,506
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
(5,327
|
)
|
|
$
|
(11,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic and diluted
|
|
|
60,288
|
|
|
|
59,916
|
|
|
|
60,209
|
|
|
|
61,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.18
|
)
|
The
following potential common shares have been excluded from the calculation of
diluted earnings per share for all periods presented because they are
anti-dilutive (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Anti-dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to
purchase common stock
|
|
|
6,126
|
|
|
|
6,181
|
|
|
|
5,475
|
|
|
|
6,267
|
|
|
Unvested
restricted stock purchase rights
|
|
|
16
|
|
|
|
402
|
|
|
|
164
|
|
|
|
702
|
|
|
Total
|
|
|
6,142
|
|
|
|
6,583
|
|
|
|
5,639
|
|
|
|
6,969
|
|
8. Comprehensive
Loss
Comprehensive
loss is comprised of net loss and other non-owner changes in stockholders’
equity, including foreign currency translation gains or losses and unrealized
gains or losses on available-for-sale marketable securities. The
following table presents the components of comprehensive loss (in
thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net
loss
|
|
$
|
(2,506
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
(5,327
|
)
|
|
$
|
(11,012
|
)
|
|
Unrealized
gain on marketable securities and investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
Foreign
currency translation loss
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
Comprehensive
loss
|
|
$
|
(2,510
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
(5,333
|
)
|
|
$
|
(11,008
|
)
|
9. Stockholders’
Equity and Stock-Based Compensation
Stock
option plans
In
December 2007, the Company’s stockholders approved the 2007 Equity Incentive
Plan (“2007 Plan”). The 2007 Plan replaced the Company’s 1998 Stock
Plan (the “1998 Plan”) and the 1999 Director Option Plan (the “Directors’
Plan”), which are collectively referred to as the “Equity Plans”. The
Equity Plans will continue to govern awards previously granted under each
respective plan. There were initially 5,250,000 shares of common
stock reserved for issuance under the 2007 Plan, subject to increase for stock
options or awards previously issued under the Equity Plans which expire or are
cancelled. At June 30, 2010, a total of 1,476,665 shares of common
stock were available for issuance under the 2007 Plan. The 2007 Plan
provides that each share award granted with an exercise price less than the fair
market value on the date of grant will be counted as two shares towards the
shares reserved and each such share award forfeited or repurchased by the
Company will increase the shares reserved by two shares.
Under
the 2007 Plan, the Board of Directors may grant to employees, consultants and
directors an option to purchase shares of the Company’s Common Stock and/or
awards of the Company’s common stock at terms and prices determined by the Board
of Directors. The Board of Directors approved that each non-employee
director who has been a member of the Board of Directors for at least nine
months prior to the date of the annual stockholders’ meeting will be granted a
right to purchase 10,000 restricted shares at $0.001 per share at such annual
stockholders’ meeting. The restricted shares will vest 50 percent
immediately and the remaining 50 percent on the one year anniversary of the
grant.
The
2007 Plan will terminate in 2017. Options granted under the 2007 Plan
must be issued at a price equal to at least the fair market value of the
Company’s common stock at the date of grant. All vested options
granted under the 2007 Plan may be exercised at any time within 10 years of the
date of grant or within 90 days of termination of employment, or such other time
as may be provided in the stock option agreement, and vest over a vesting
schedule determined by the Board of Directors. The Company’s policy
is to issue new shares upon exercise of options under the 2007
Plan.
The following table
summarizes option and restricted stock purchase rights activities from December
31, 2008 through June 30, 2010:
|
|
|
|
|
|
|
|
|
Stock Options
Outstanding
|
|
|
|
|
Available
for
Grant
|
|
|
Restricted
Stock
Outstanding
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
($
000's)
|
|
|
Balance at
December 31, 2008
|
|
|
1,905,725
|
|
|
|
866,664
|
|
|
|
8,650,821
|
|
|
$
|
2.91
|
|
|
|
6.27
|
|
|
$
|
611
|
|
|
Granted
|
|
|
(1,977,050
|
)
|
|
|
49,000
|
|
|
|
1,879,050
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(205,196
|
)
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock released
|
|
|
-
|
|
|
|
(426,505
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock repurchased
|
|
|
153,332
|
|
|
|
(76,666
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
3,027,628
|
|
|
|
-
|
|
|
|
(3,067,462
|
)
|
|
$
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2009
|
|
|
3,109,635
|
|
|
|
412,493
|
|
|
|
7,257,213
|
|
|
$
|
2.09
|
|
|
|
7.58
|
|
|
$
|
1,291
|
|
|
Granted
|
|
|
(2,122,750
|
)
|
|
|
74,000
|
|
|
|
1,974,750
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(118,237
|
)
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock released
|
|
|
-
|
|
|
|
(260,331
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock repurchased
|
|
|
5,000
|
|
|
|
(2,500
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
484,780
|
|
|
|
-
|
|
|
|
(513,202
|
)
|
|
$
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2010
|
|
|
1,476,665
|
|
|
|
223,662
|
|
|
|
8,600,524
|
|
|
$
|
1.81
|
|
|
|
7.71
|
|
|
$
|
1,446
|
|
|
Exercisable at
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
3,843,267
|
|
|
$
|
2.54
|
|
|
|
6.06
|
|
|
$
|
539
|
|
Stock
Based Compensation Expense
The following table
summarizes employee stock-based compensation expense resulting from stock
options and stock purchase rights (in thousands):
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Included in
cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media cost of
revenue
|
|
$
|
44
|
|
|
$
|
68
|
|
|
$
|
99
|
|
|
$
|
118
|
|
|
E-commerce
cost of revenue
|
|
|
32
|
|
|
|
19
|
|
|
|
58
|
|
|
|
36
|
|
|
Total
included in cost of revenue
|
|
|
76
|
|
|
|
87
|
|
|
|
157
|
|
|
|
154
|
|
|
Included in
operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing
|
|
|
202
|
|
|
|
107
|
|
|
|
350
|
|
|
|
261
|
|
|
Research and
development
|
|
|
110
|
|
|
|
94
|
|
|
|
185
|
|
|
|
164
|
|
|
General and
administrative
|
|
|
363
|
|
|
|
339
|
|
|
|
738
|
|
|
|
729
|
|
|
Total
included in operating expenses
|
|
|
675
|
|
|
|
540
|
|
|
|
1,273
|
|
|
|
1,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
$
|
751
|
|
|
$
|
627
|
|
|
$
|
1,430
|
|
|
$
|
1,308
|
|
The fair value of
the option grants has been calculated on the date of grant using the
Black-Scholes option pricing model. The expected life for the three
and six months ended June 30, 2010 and June 30, 2009 was based on historical
settlement patterns. Expected volatility was based on historical
implied volatility in the Company’s stock. The interest rate for
periods within the contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant. The following table
summarizes the weighted-average assumptions for stock options
granted:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Expected life
(years)
|
|
|
5.90
|
|
|
|
5.81
|
|
|
|
5.89
|
|
|
|
5.80
|
|
|
Risk-free
interest rate
|
|
|
2.77
|
%
|
|
|
2.96
|
%
|
|
|
2.76
|
%
|
|
|
2.89
|
%
|
|
Volatility
|
|
|
62.7
|
%
|
|
|
68.9
|
%
|
|
|
62.8
|
%
|
|
|
68.4
|
%
|
|
Dividend
yield
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
Weighted-average
fair value at grant date
|
|
$
|
0.90
|
|
|
$
|
0.80
|
|
|
$
|
0.89
|
|
|
$
|
0.78
|
|
As stock-based
compensation expense recognized in the Condensed Consolidated Statement of
Operations for the three and six months ended June 30, 2010 and June 30, 2009 is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures based on historical experience.
10. Acquisitions
Geek.com
In May 2010, the
Company acquired the Geek.com web site for $1.0 million in
cash. Geek.com is an online technology resource and community for
technology enthusiasts and professionals. Geek.com is an important
addition to the Geeknet network of owned and operated web sites. It expands
traffic and provides a platform to penetrate Geeknet's mainstream consumer
advertising categories. Adding Geek.com to the Geeknet network further
demonstrates the Company's commitment to the global geek community.
The Company has
allocated the $1.0 million purchase price to the intangible assets acquired
based on their estimated fair values. The excess purchase price over
those fair values was recorded as goodwill. In determining the purchase price,
the Company considered the audience and traffic patterns of Geek.com and the
opportunity for the Company to monetize Geek.com through its direct and indirect
sales channels as well as through its E-commerce business.
The fair values
assigned to intangible assets acquired are based on management estimates and
assumptions, including third-party valuations that utilize established valuation
techniques appropriate for internet domains and web sites. The fair
value of the domain name and web site was estimated by applying the cost
approach. This fair value measurement is based on significant inputs
that are not observable in the market and thus represents a Level 3
measurement. Key assumptions include the estimated costs to develop
the web site. The purchase price has been allocated as follows (in
thousands):
|
Identified
intangible assets
|
|
$
|
746
|
|
|
Goodwill
|
|
|
254
|
|
|
|
|
$
|
1,000
|
|
The identified
intangible assets are comprised of Geek.com's domain name and have a useful life
of three years.
Geek.com’s revenue
and earnings included in the Company’s consolidated statement of operations for
the six months ended June 30, 2010, and the revenue and net loss of the combined
entity had the acquisition date been January 1, 2009 or January 1, 2010 are as
follows (in thousands):
|
|
|
Revenue
|
|
|
Net income
(loss)
|
|
|
Actual from
May 12, 2010 to June 30, 2010
|
|
$
|
34
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
pro forma:
|
|
|
|
|
|
|
|
|
|
January 1,
2010 to June 30, 2010
|
|
|
30,085
|
|
|
|
(5,314
|
)
|
|
January 1,
2009 to December 31, 2009
|
|
|
65,891
|
|
|
|
14,139
|
|
Ohloh
Corporation
In June 2009, the
Company acquired 100% of Ohloh Corporation (“Ohloh”) for $2.6 million in
cash. Visitors to Ohloh's web site, Ohloh.net, supply data regarding
open source projects and developers. Ohloh augments this
user-contributed data with data gleaned from its web-crawling
technology. The Company utilizes Ohloh's database of open source
software and developers to enhance its understanding of the Open Source Software
(“OSS”) community and generate additional revenue from advertisers who utilize
Ohloh’s data to reach their desired audience. The acquisition of
Ohloh enhances the Company’s position in and reach into the OSS
community.
The Company has
allocated the purchase price to the tangible and intangible assets acquired and
liabilities assumed, based on their estimated fair values. The excess
purchase price over those fair values was recorded as goodwill. The
acquisition provided the Company with a web crawling technology, including the
data collected, its team of engineers and equipment to operate the
business. The Company believed that the data gathered by Ohloh
enhances its position as a leading OSS company and provides valuable insights
into the markets its customers are targeting. The Company also
believed that there was a market to sell the data generated by the
technology. These opportunities were significant contributing factors
to the establishment of the purchase price.
The fair values
assigned to tangible and intangible assets acquired and liabilities assumed are
based on management estimates and assumptions, including third-party valuations
that utilize established valuation techniques appropriate for the
high-technology industry. The fair value of the developed technology
was estimated by applying the income approach and a market
approach. This fair value measurement is based on significant inputs
that are not observable in the market and thus represents a Level 3
measurement. Key assumptions include the expected cash flows to be
generated from this developed technology over its remaining life and the
discount rate of 35 percent. The purchase price has been allocated as
follows (in thousands):
|
Financial
assets
|
|
$
|
5
|
|
|
Equipment
|
|
|
23
|
|
|
Identified
intangible assets
|
|
|
958
|
|
|
Financial
liabilities
|
|
|
(43
|
)
|
|
Total
identifiable net assets
|
|
|
943
|
|
|
Goodwill
|
|
|
1,670
|
|
|
|
|
$
|
2,613
|
|
A summary of the
allocation of identified intangible assets is as follows (in
thousands):
|
|
Useful life
|
|
Fair Value
|
|
|
Developed
technology
|
3
years
|
|
$
|
958
|
|
|
Total
intangible assets
|
|
|
$
|
958
|
|
11. Segment
and Geographic Information
The Company’s
operating segments are significant strategic business units that offer different
products and services. The Company has two operating
segments: Media and E-commerce.
The Company’s Media
segment consists of web sites serving technology professionals and technology
enthusiasts and the Company’s E-commerce segment provides online sales of a
variety of retail products of interest to these communities and general
consumers. The Company’s websites that comprise the Media segment
include: SourceForge, Slashdot, Geek.com, Ohloh and freshmeat.
|
(in
thousands)
|
|
Media
|
|
|
E-commerce
|
|
|
Total
Company
|
|
|
Three
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
4,751
|
|
|
$
|
10,558
|
|
|
$
|
15,309
|
|
|
Cost of
revenue
|
|
$
|
1,831
|
|
|
$
|
8,792
|
|
|
$
|
10,623
|
|
|
Gross
margin
|
|
$
|
2,920
|
|
|
$
|
1,766
|
|
|
$
|
4,686
|
|
|
Loss from
operations
|
|
$
|
(1,836
|
)
|
|
$
|
(704
|
)
|
|
$
|
(2,540
|
)
|
|
Depreciation
and amortization
|
|
$
|
500
|
|
|
$
|
61
|
|
|
$
|
561
|
|
|
Three
Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
4,341
|
|
|
$
|
7,444
|
|
|
$
|
11,785
|
|
|
Cost of
revenue
|
|
$
|
1,718
|
|
|
$
|
6,152
|
|
|
$
|
7,870
|
|
|
Gross
margin
|
|
$
|
2,623
|
|
|
$
|
1,292
|
|
|
$
|
3,915
|
|
|
Income (loss)
from operations
|
|
$
|
(2,447
|
)
|
|
$
|
61
|
|
|
$
|
(2,386
|
)
|
|
Depreciation
and amortization
|
|
$
|
522
|
|
|
$
|
33
|
|
|
$
|
555
|
|
|
Six
Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
9,046
|
|
|
$
|
20,942
|
|
|
$
|
29,988
|
|
|
Cost of
revenue
|
|
$
|
3,612
|
|
|
$
|
17,610
|
|
|
$
|
21,222
|
|
|
Gross
margin
|
|
$
|
5,434
|
|
|
$
|
3,332
|
|
|
$
|
8,766
|
|
|
Loss from
operations
|
|
$
|
(4,134
|
)
|
|
$
|
(1,233
|
)
|
|
$
|
(5,367
|
)
|
|
Depreciation
and amortization
|
|
$
|
970
|
|
|
$
|
119
|
|
|
$
|
1,089
|
|
|
Six
Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
8,118
|
|
|
$
|
14,038
|
|
|
$
|
22,156
|
|
|
Cost of
revenue
|
|
$
|
3,625
|
|
|
$
|
11,762
|
|
|
$
|
15,387
|
|
|
Gross
margin
|
|
$
|
4,493
|
|
|
$
|
2,276
|
|
|
$
|
6,769
|
|
|
Loss from
operations
|
|
$
|
(5,432
|
)
|
|
$
|
(114
|
)
|
|
$
|
(5,546
|
)
|
|
Depreciation
and amortization
|
|
$
|
1,095
|
|
|
$
|
63
|
|
|
$
|
1,158
|
|
During the time
period covered by the table above, the Company marketed its Media products in
the United States through its direct sales force, its E-commerce products
through its online web site and with respect to international Media sales,
through its subsidiary in the United Kingdom and representatives based in the
United Kingdom, Europe and Australia.
12. Litigation
In January 2001,
the Company, two of its former officers, and Credit Suisse First Boston, the
lead underwriter in the Company's initial public offering ("IPO"), were named as
defendants in a shareholder lawsuit filed in the United States District Court
for the Southern District of New York, later consolidated and captioned In re VA
Software Corp. Initial Public Offering Securities Litigation,
01-CV-0242. The plaintiffs' class action suit seeks unspecified
damages on behalf of a purported class of purchasers of the Company's common
stock from the time of the Company's initial public offering in December 1999
through December 2000.
Among other things,
this complaint alleged that the prospectus pursuant to which shares of common
stock were sold in the Company's initial public offering contained certain false
and misleading statements or omissions regarding the practices of the
Underwriters with respect to their allocation of shares of common stock in these
offerings and their receipt of commissions from customers related to such
allocations. Various plaintiffs have filed actions asserting similar
allegations concerning the initial public offerings of approximately 300 other
issuers. These various cases pending in the Southern District of New
York have been coordinated for pretrial proceedings as In re Initial Public
Offering Securities Litigation, 21 MC 92.
In April 2002,
plaintiffs filed a consolidated amended complaint in the action against the
Company, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Defendants in the coordinated proceeding filed
motions to dismiss. In October 2002, the Company's officers were
dismissed from the case without prejudice pursuant to a
stipulation. On February 19, 2003, the Court granted in part and
denied in part the motion to dismiss, but declined to dismiss the claims against
the Company.
In June 2004, a
stipulation of settlement and release of claims against the issuer defendants,
including the Company, was submitted to the Court for approval. On
August 31, 2005, the Court preliminarily approved the settlement. In
December 2006, the appellate court overturned the certification of classes in
the six test cases, which included the Company's case, that were selected by the
underwriter defendants and plaintiffs in the coordinated
proceedings. Because class certification was a condition of the
settlement, it was unlikely that the settlement would receive final Court
approval. On June 25, 2007, the Court entered an order terminating
the proposed settlement based upon a stipulation among the parties to the
settlement.
Plaintiffs filed
amended master allegations and amended complaints and moved for class
certification in the six focus cases. Defendants moved to dismiss the
amended complaints and opposed class certification. On March 26,
2008, the Court denied the defendants' motion to dismiss the amended
complaints.
The parties have
reached a global settlement of the litigation. On October 5, 2009,
the Court entered an order certifying a settlement class and granting final
approval of the settlement. Under the settlement, the insurers will
pay the full amount of settlement share allocated to the Company, and the
Company will bear no financial liability. The Company, as well as the
officer and director defendants who were previously dismissed from the action
pursuant to a stipulation, will receive complete dismissals from the
case. A group of objectors has appealed the Court's October 5, 2009
order to the Second Circuit of Court Appeals. If for any reason the
settlement does not become effective and litigation resumes, the Company
believes that it has meritorious defenses to plaintiffs' claims and intends to
defend the action vigorously. The Second Circuit Court of Appeals has not yet a
schedule for briefing on the appeals.
On October 3, 2007,
a purported Geeknet shareholder filed a complaint for violation of Section 16(b)
of the Securities Exchange Act of 1934, which prohibits short-swing trading,
against the Company's IPO underwriters. The complaint,
Vanessa Simmonds v. Credit Suisse
Group, et al.
, Case No. C07-1583, in District Court for the Western
District of Washington, seeks the recovery of short-swing
profits. The Company is named as a nominal defendant. No
recovery is sought from the Company. The plaintiff, Vanessa Simmonds,
has filed similar lawsuits in the District Court for the Western District of
Washington alleging short-swing trading in the stock of 54 other companies. On
July 25, 2008, a majority of the named issuer companies, including Geeknet,
jointly filed a motion to dismiss plaintiff's claims. On March 12,
2009, the Court issued an order granting the motion to dismiss and a judgment in
the favor of the moving issuers. On April 10, 2009, Ms. Simmonds appealed the
order and judgment dismissing her claims to the United States Court of Appeal
for the Ninth Circuit. The appeal is pending.
The Company is
subject to various claims and legal actions arising in the ordinary course of
business. The Company reviews all claims and accrues a liability for
those matters where it believes that the likelihood that a loss will occur is
probable and the amount of loss is reasonably estimable.
13. Guarantees
and Indemnifications
The following is a
summary of the Company’s agreements, including Indirect Guarantees of
Indebtedness of Others, some of which are specifically grandfathered because the
guarantees were in effect prior to December 31, 2002. Accordingly, the
Company has not recorded any liabilities for these agreements as of June 30,
2010.
As permitted under
Delaware law, the Company has agreements whereby the Company’s officers and
directors are indemnified for certain events or occurrences while the officer or
director is, or was, serving at the Company’s request in such capacity. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, the Company
has obtained director and officer liability insurance designed to limit the
Company’s exposure and to enable the Company to recover a portion of any future
amounts paid. As a result of the Company’s insurance policy coverage, the
Company believes the estimated fair value of these indemnification agreements is
minimal. Accordingly, the Company has no liabilities recorded for these
agreements as of June 30, 2010.
The Company enters
into standard indemnification agreements in the ordinary course of business.
Pursuant to these agreements, the Company indemnifies, holds harmless, and
agrees to reimburse the indemnified party for losses suffered or incurred by the
indemnified party, generally, the Company’s business partners, subsidiaries
and/or customers, in connection with any patent, copyright or other intellectual
property infringement claim by any third party with respect to the Company’s
products. The term of these indemnification agreements is generally perpetual
any time after execution of the agreement. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has not incurred
significant costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is insignificant. Accordingly, the Company has no
liabilities recorded for these agreements as of June 30, 2010.
14. Subsequent
Event
On August 3, 2010,
the Board of Directors approved a 1:10 reverse stock split of the Company's
common stock. This stock split is subject to stockholder
approval.