(unaudited)
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, 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. On
August 5, 2010, the Company changed its ticker symbol to GKNT.
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,
consisting of normal recurring adjustments, necessary to present fairly the
Company’s financial position as of September 30, 2010, its results of operations
for the three and nine months ended September 30, 2010 and September 30, 2009
and its cash flows for the nine months ended September 30, 2010 and September
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 nine months ended September
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 Financial Accounting Standards Board (“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 does not expect that the
adoption of this accounting update will have a material impact on its results of
operations or 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 September 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
it, 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 nine
months ended September 30, 2010. Related-party revenue associated
with CollabNet was $0.1 million and $0.5 million for the three and nine months
ended September 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 September 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 Europe,
Australia and Asia. Revenue for the three and nine months ended
September 30, 2010 and September 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 historical closing prices, 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 September 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):
|
|
|
September 30, 2010
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
|
asset
|
|
|
amortization
|
|
|
asset
|
|
|
Goodwill
|
|
$
|
62,291
|
|
|
$
|
(60,362
|
)
|
|
$
|
1,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain
and trade names
|
|
|
6,922
|
|
|
|
(6,074
|
)
|
|
|
848
|
|
|
Purchased
technology
|
|
|
2,535
|
|
|
|
(2,535
|
)
|
|
|
-
|
|
|
|
|
|
9,457
|
|
|
|
(8,609
|
)
|
|
|
848
|
|
|
Total
goodwill and identified intangible assets
|
|
$
|
71,748
|
|
|
$
|
(68,971
|
)
|
|
$
|
2,777
|
|
|
|
|
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
|
|
$
|
83
|
|
|
2011
|
|
|
330
|
|
|
2012
|
|
|
316
|
|
|
2013
|
|
|
119
|
|
|
|
|
$
|
848
|
|
Revenue
Recognition
The
Company recognizes revenue as follows:
Media
Revenue
Media
revenue is derived primarily from advertising on the Company’s various web sites
or from lead generation information provided to the
customer. Advertisements include various forms of rich media and
banner advertising, text links and sponsorships, while lead generation
information utilizes advertising and other methods to deliver leads to a
customer. The Company recognizes Media advertising revenue, over the
contractual campaign period, as advertisements are displayed and recognizes lead
generation revenue as leads are delivered to the customer, 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 collectability 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 September 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. 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. The
Company’s E-commerce revenue in a particular period is not necessarily
indicative of future E-commerce revenue for a subsequent quarter or the 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, if any, and such losses have
been consistent with management’s expectations. As of September 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 September 30, 2010 and September 30, 2009, no one customer
represented more than 10% of revenue. For the nine months ended
September 30, 2010, no one customer represented more than 10% of revenue while
Google Inc. represented 10.0% of revenue for the nine months ended September 30,
2009.
|
3.
|
Composition
of Certain Balance Sheet Components
|
Property
and equipment, net, consist of the following (in thousands):
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Computer
and office equipment (useful lives of 2 to 4 years)
|
|
$
|
5,566
|
|
|
$
|
5,475
|
|
|
Distribution
equipment (useful lives of 5 years)
|
|
|
3,388
|
|
|
|
-
|
|
|
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)
|
|
|
562
|
|
|
|
390
|
|
|
Total
property and equipment
|
|
|
9,868
|
|
|
|
6,168
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(4,920
|
)
|
|
|
(3,599
|
)
|
|
Property
and equipment, net
|
|
$
|
4,948
|
|
|
$
|
2,569
|
|
Other
long-term assets consist of the following (in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Equity
investment
|
|
$
|
1,979
|
|
|
$
|
1,979
|
|
|
Goodwill
|
|
|
1,929
|
|
|
|
1,670
|
|
|
Intangible
assets, net
|
|
|
848
|
|
|
|
884
|
|
|
Note
receivable
|
|
|
711
|
|
|
|
-
|
|
|
Other
|
|
|
489
|
|
|
|
555
|
|
|
Other
long-term assets
|
|
$
|
5,956
|
|
|
$
|
5,088
|
|
Accrued
liabilities and other consist of the following (in thousands):
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued
employee compensation and benefits
|
|
$
|
1,989
|
|
|
$
|
2,386
|
|
|
Other
accrued liabilities
|
|
|
623
|
|
|
|
1,468
|
|
|
Accrued
liabilities and other
|
|
$
|
2,612
|
|
|
$
|
3,854
|
|
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):
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Adjusted
Cost
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,214
|
|
|
$
|
-
|
|
|
$
|
3,214
|
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
|
Money
market funds
|
|
|
14,761
|
|
|
|
-
|
|
|
|
14,761
|
|
|
|
22,943
|
|
|
|
-
|
|
|
|
22,943
|
|
|
Total
cash and cash equivalents
|
|
$
|
17,975
|
|
|
$
|
-
|
|
|
$
|
17,975
|
|
|
$
|
28,943
|
|
|
$
|
-
|
|
|
$
|
28,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
|
Government
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,750
|
|
|
|
(1,350
|
)
|
|
|
9,400
|
|
|
Total
short-term investments
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
10,758
|
|
|
$
|
(1,350
|
)
|
|
$
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
In June
2010, the Company exercised its right to require UBS AG (“UBS”) to repurchase
its Auction Rate Securities at par value ("ARS Right"). In
conjunction with the completion of the Company's facility lease in May 2010, the
associated $1 million letter of credit was canceled and the cash restriction was
released.
|
5.
|
Fair
Value Measurements
|
The
Company measures certain financial assets including cash equivalents, trading
securities and notes receivable at their fair value. The fair value of these
financial assets was determined based on three levels of inputs, of which the
first two are considered observable and the last unobservable, as
follows:
Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
Level 2 -
Inputs other than Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The
following table represents the Company’s fair value hierarchy for its financial
assets as of September 30, 2010 (in thousands):
|
|
|
Fair Value Measurements at Reporting Date
Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Money
market fund deposits
|
|
$
|
14,761
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,761
|
|
|
Corporate
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,761
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
14,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
14,761
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,761
|
|
|
Short-term
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,761
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
14,769
|
|
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):
|
|
|
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
of assets
|
|
|
(10,207
|
)
|
|
|
(543
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8
|
|
During
the nine months ended September 30, 2010, the Company sold its auction-rate
securities with a par value of $10.8 million to UBS at par value.
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 nine
months ended September 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 nine months ended September 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,850
|
)
|
|
$
|
(4,537
|
)
|
|
$
|
(9,177
|
)
|
|
$
|
(15,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic and diluted
|
|
|
60,464
|
|
|
|
59,909
|
|
|
|
60,295
|
|
|
|
61,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.25
|
)
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Anti-dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
|
|
6,048
|
|
|
|
6,512
|
|
|
|
5,672
|
|
|
|
6,411
|
|
|
Unvested
restricted stock purchase rights
|
|
|
28
|
|
|
|
147
|
|
|
|
-
|
|
|
|
356
|
|
|
Total
|
|
|
6,076
|
|
|
|
6,659
|
|
|
|
5,672
|
|
|
|
6,767
|
|
Comprehensive
loss is comprised of net loss and other non-owner changes in stockholders’
equity, including foreign currency translation adjustments 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Net
loss
|
|
$
|
(3,850
|
)
|
|
$
|
(4,537
|
)
|
|
$
|
(9,177
|
)
|
|
$
|
(15,549
|
)
|
|
Unrealized
gain on marketable securities and investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
Foreign
currency translation adjustment
|
|
|
2
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
Comprehensive
loss
|
|
$
|
(3,848
|
)
|
|
$
|
(4,537
|
)
|
|
$
|
(9,181
|
)
|
|
$
|
(15,545
|
)
|
|
9.
|
Stockholders’
Equity and Stock-Based Compensation
|
Stock
Split
On
October 14, 2010, the shareholders approved amendments to the Amended and
Restated Certificate of Incorporation which would amend the Company's Amended
and Restated Certificate of Incorporation to effect a one-for-ten reverse stock
split of all outstanding shares of common stock, reduce the total number of
shares of common stock the Company is authorized to issue to 25,000,000 and
reduce the total number of shares of preferred stock that the Company is
authorized to issue to 1,000,000. This stock split is expected to
become effective in November 2010. Upon the effectiveness of the reverse stock
split, every ten shares of the Company's common stock outstanding will be
combined into one share of common stock. The total number of shares of common
stock outstanding will be reduced from approximately 62.5 million shares to
approximately 6.3 million shares and the number of authorized shares of common
stock will be reduced from 250 million shares to 25 million shares. The reverse
split will not affect the Company's equity, nor will it affect the Company’s
market capitalization. However, as a result of the reverse stock split, the
Company’s previously reported earnings per share amounts will increase by a
magnitude of ten as a result of the reverse split. All share and per
share amounts in these notes to unaudited condensed consolidated financial
statements are presented on a pre-split basis.
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 September 30, 2010, a total of 3,127,036 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 $0.001 per share at such annual
stockholders’ meeting. The restricted shares will vest 50 percent
immediately and the remaining 50 percent on the one year anniversary of the
grant.
The 2007
Plan will terminate in 2017. Options granted under the 2007 Plan must
be issued at a price equal to at least the fair market value of the Company’s
common stock at the date of grant. All vested options granted under
the 2007 Plan may be exercised at any time within 10 years of the date of grant
or within 90 days of termination of employment, or such other time as may be
provided in the stock option agreement, and vest over a vesting schedule
determined by the Board of Directors. The Company’s policy is to
issue new shares upon exercise of options under the 2007 Plan.
The
following table summarizes option and restricted stock purchase rights
activities from December 31, 2008 through September 30, 2010:
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
Available
for Grant
|
|
|
Restricted
Stock
Outstanding
|
|
|
Number
Outstanding
|
|
|
Weighted-
Average
Exercise
Price per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
($ 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
|
|
|
(2,864,750
|
)
|
|
|
74,000
|
|
|
|
2,716,750
|
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(207,235
|
)
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock released
|
|
|
-
|
|
|
|
(332,330
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock repurchased
|
|
|
140,996
|
|
|
|
(70,498
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
2,741,155
|
|
|
|
-
|
|
|
|
(2,769,577
|
)
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2010
|
|
|
3,127,036
|
|
|
|
83,665
|
|
|
|
6,997,151
|
|
|
$
|
1.77
|
|
|
|
4.78
|
|
|
$
|
4,414
|
|
|
Exercisable
at September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
4,660,165
|
|
|
$
|
1.95
|
|
|
|
2.57
|
|
|
$
|
3,022
|
|
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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Included
in cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
cost of revenue
|
|
$
|
(1
|
)
|
|
$
|
73
|
|
|
$
|
98
|
|
|
$
|
191
|
|
|
E-commerce
cost of revenue
|
|
|
15
|
|
|
|
19
|
|
|
|
73
|
|
|
|
55
|
|
|
Total
included in cost of revenue
|
|
|
14
|
|
|
|
92
|
|
|
|
171
|
|
|
|
246
|
|
|
Included
in operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
46
|
|
|
|
109
|
|
|
|
396
|
|
|
|
370
|
|
|
Research
and development
|
|
|
61
|
|
|
|
103
|
|
|
|
246
|
|
|
|
267
|
|
|
General
and administrative
|
|
|
400
|
|
|
|
397
|
|
|
|
1,138
|
|
|
|
1,126
|
|
|
Total
included in operating expenses
|
|
|
507
|
|
|
|
609
|
|
|
|
1,780
|
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stock-based compensation expense
|
|
$
|
521
|
|
|
$
|
701
|
|
|
$
|
1,951
|
|
|
$
|
2,009
|
|
During
the three months ended September 30, 2010, the Company accelerated the vesting
of certain executives’ stock options as provided by their settlement
agreement. This acceleration was accounted for as an option
modification and the expense of $0.4 million is included in stock-based
compensation expense.
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 nine months ended September 30, 2010 and September 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Expected
life (years)
|
|
|
5.55
|
|
|
|
5.84
|
|
|
|
5.80
|
|
|
|
5.82
|
|
|
Risk-free
interest rate
|
|
|
1.84
|
%
|
|
|
2.84
|
%
|
|
|
2.51
|
%
|
|
|
2.86
|
%
|
|
Volatility
|
|
|
62.9
|
%
|
|
|
65.0
|
%
|
|
|
62.8
|
%
|
|
|
66.0
|
%
|
|
Dividend
yield
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
Weighted-average
fair value at grant date
|
|
$
|
0.76
|
|
|
$
|
0.72
|
|
|
$
|
0.86
|
|
|
$
|
0.74
|
|
As stock-based compensation expense
recognized in the Condensed Consolidated Statement of Operations for the three
and nine months ended September 30, 2010 and September 30, 2009 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures based on historical experience.
Geek.com
In May
2010, the Company acquired Geek.com 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 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 were based on management estimates
and assumptions, including third-party valuations that use 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 was 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.
On a
pro-forma basis 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 loss
|
|
|
January
1, 2010 to September 30, 2010
|
|
|
44,798
|
|
|
|
(9,164
|
)
|
|
January
1, 2009 to December 31, 2009
|
|
|
65,891
|
|
|
|
(13,903
|
)
|
Ohloh
Corporation
In June
2009, the Company acquired Ohloh Corporation (“Ohloh”) for $2.6 million in
cash. Visitors to Ohloh's web site, Ohloh.net, supply data about open
source projects and developers. Ohloh augmented this user-contributed
data with data gathered from its web-crawling technology. The Company
used Ohloh's database of open source software and developers to enhance its
understanding of the Open Source Software (“OSS”) community and generated
additional revenue from advertisers who used Ohloh’s data to reach their desired
audience. The acquisition of Ohloh was intended to enhance the
Company’s position in and reach into the OSS community.
The
Company 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 fair
values assigned to tangible and intangible assets acquired and liabilities
assumed are based on management estimates and assumptions, including third-party
valuations that use 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 was 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
|
|
The $1.0
million of identified intangible assets were allocated to developed technology,
which was being amortized over a three year useful life.
On
September 30, 2010, the Company sold the Ohloh website, including the developed
technology and related equipment required to operate the website to Black Duck
for consideration of $1.3 million in cash and a convertible promissory note in
the principal amount of $1.3 million, bearing annual interest at 3.25 percent
and due on September 30, 2013. A portion of the cash, $0.3 million,
was deposited in an escrow account to secure certain representations, warranties
and covenants made by the Company to Black Duck. The escrow funds,
less any claims, will be released to Geeknet as follows: (1) 25% on October 31,
2010, (2) 25% on November 30, 2010, (3) and the remaining 50% on September 30,
2011. The sale of the Ohloh website resulted in a $1.4 million gain,
which is included in the Gain (loss) on sale of asset.
The note
receivable is subordinate to existing Black Duck debt, is secured by Black Duck
assets, other than those securing Black Duck's senior debt, and is convertible
into common or preferred stock in the event of a future financing activity, or
acquisition of Black Duck. The Company valued the note
receivable at $0.7 million using a discounted cash flow model based on interest
rates of similar instruments adjusted for the credit, liquidity and security
premiums on the note, and the timing and amount of expected cash
flows.
|
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, and freshmeat.
|
(in thousands)
|
|
Media
|
|
|
E-commerce
|
|
|
Other
|
|
|
Total
Company
|
|
|
Three
Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
4,067
|
|
|
$
|
10,646
|
|
|
$
|
-
|
|
|
$
|
14,713
|
|
|
Cost
of revenue
|
|
$
|
1,774
|
|
|
$
|
10,178
|
|
|
$
|
-
|
|
|
$
|
11,952
|
|
|
Gross
margin
|
|
$
|
2,293
|
|
|
$
|
468
|
|
|
$
|
-
|
|
|
$
|
2,761
|
|
|
Loss
from operations
|
|
$
|
(1,346
|
)
|
|
$
|
(2,553
|
)
|
|
$
|
-
|
|
|
$
|
(3,899
|
)
|
|
Depreciation
and amortization
|
|
$
|
547
|
|
|
$
|
129
|
|
|
$
|
-
|
|
|
$
|
676
|
|
|
Three
Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
3,683
|
|
|
$
|
7,104
|
|
|
$
|
-
|
|
|
$
|
10,787
|
|
|
Cost
of revenue
|
|
$
|
1,630
|
|
|
$
|
6,053
|
|
|
$
|
-
|
|
|
$
|
7,683
|
|
|
Gross
margin
|
|
$
|
2,053
|
|
|
$
|
1,051
|
|
|
$
|
-
|
|
|
$
|
3,104
|
|
|
Loss
from operations
|
|
$
|
(3,632
|
)
|
|
$
|
(407
|
)
|
|
$
|
(523
|
)
|
|
$
|
(4,562
|
)
|
|
Depreciation
and amortization
|
|
$
|
445
|
|
|
$
|
34
|
|
|
$
|
-
|
|
|
$
|
479
|
|
|
Nine
Months Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
13,113
|
|
|
$
|
31,588
|
|
|
$
|
-
|
|
|
$
|
44,701
|
|
|
Cost
of revenue
|
|
$
|
5,386
|
|
|
$
|
27,788
|
|
|
$
|
-
|
|
|
$
|
33,174
|
|
|
Gross
margin
|
|
$
|
7,727
|
|
|
$
|
3,800
|
|
|
$
|
-
|
|
|
$
|
11,527
|
|
|
Loss
from operations
|
|
$
|
(5,498
|
)
|
|
$
|
(3,786
|
)
|
|
$
|
-
|
|
|
$
|
(9,284
|
)
|
|
Depreciation
and amortization
|
|
$
|
1,517
|
|
|
$
|
248
|
|
|
$
|
-
|
|
|
$
|
1,765
|
|
|
Nine
Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$
|
11,801
|
|
|
$
|
21,142
|
|
|
$
|
-
|
|
|
$
|
32,943
|
|
|
Cost
of revenue
|
|
$
|
5,255
|
|
|
$
|
17,815
|
|
|
$
|
-
|
|
|
$
|
23,070
|
|
|
Gross
margin
|
|
$
|
6,546
|
|
|
$
|
3,327
|
|
|
$
|
-
|
|
|
$
|
9,873
|
|
|
Loss
from operations
|
|
$
|
(9,064
|
)
|
|
$
|
(521
|
)
|
|
$
|
(523
|
)
|
|
$
|
(10,108
|
)
|
|
Depreciation
and amortization
|
|
$
|
1,539
|
|
|
$
|
98
|
|
|
$
|
-
|
|
|
$
|
1,637
|
|
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 Europe, Australia and Asia.
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 were coordinated for pretrial
proceedings as In re Initial Public Offering Securities Litigation, 21 MC
92.
In 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 2003, the Court granted in part and denied in
part the motion to dismiss, but declined to dismiss the claims against the
Company. In 2006, an appellate court overturned the certification of
classes in six focus cases, which included the Company's case, that were
selected by the underwriter defendants and plaintiffs in the coordinated
proceedings. Plaintiffs filed amended master allegations and amended
complaints and again moved for class certification in the six focus
cases. Defendants moved to dismiss the amended complaints and opposed
class certification. In 2008, the Court denied the defendants' motion
to dismiss the amended complaints.
The
parties have reached a global settlement of the litigation. Under the
settlement, the insurers will pay the full amount of settlement share allocated
to the Company, the Company will bear no financial liability and the
Company and other defendants will receive complete dismissals from the
case. On October 5, 2009, the Court entered an order certifying a
settlement class and granting final approval of the settlement. The Second
Circuit Court of Appeals set an October 6, 2010 deadline for filing an appeal
and only one objector filed an appeal by such date. 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.
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 October 5, 2010, oral arguments appealing
the order were heard by the United States Court of Appeal for the Ninth
Circuit. The Court's ruling 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.
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 potential exposure and to enable the Company to recover a
portion of any future amounts that may be required to be 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 not recorded any liabilities for these agreements as of September
30, 2010.
The
Company enters into standard indemnification agreements with Company’s business
partners, subsidiaries 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 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. The term of these indemnification agreements is generally
perpetual. The maximum potential amount of future payments the Company could be
required to make under these indemnification agreements is unlimited. To date,
the Company has not incurred significant costs to defend any 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 not recorded any liabilities for these agreements
as of September 30, 2010.
In
conjunction with the sale of Ohloh to Black Duck, the Company has agreed to
indemnify Black Duck for damages arising from the breach of representations or
warranty made by the Company. The indemnification is limited to the
$0.3 million, which has been held in an escrow account and Black Duck may not
make an indemnification claim until their aggregate losses under the
indemnification provisions exceed $0.04 million. The term of the indemnification
is through September 30, 2011. The Company believes that it has complied with
all of those items for which it has agreed to indemnify Black
Duck. Accordingly, the Company has no liabilities recorded for this
indemnification as of September 30, 2010.
14. Subsequent
Event
On
October 14, 2010, the shareholders approved amendments to the Amended and
Restated Certificate of Incorporation which would amend the Company's Amended
and Restated Certificate of Incorporation to effect a one-for-ten reverse stock
split of all outstanding shares of common stock, reduce the total number of
shares of common stock the Company is authorized to issue to 25,000,000 and
reduce the total number of shares of preferred stock that the Company is
authorized to issue to 1,000,000. This stock split is expected to
become effective in November 2010.