Attached files
file | filename |
---|---|
EX-31.1 - Geeknet, Inc | v192375_ex31-1.htm |
EX-31.2 - Geeknet, Inc | v192375_ex31-2.htm |
EX-32.1 - Geeknet, Inc | v192375_ex32-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2010
|
|
Or
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the transition period
from to .
|
Commission
File Number: 000-28369
Geeknet,
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
77-0399299
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
650
Castro Street, Suite 450, Mountain View, California, 94041
(Address,
including zip code, of principal executive offices)
(650)
694-2100
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 par value
(Title of
Class)
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No
¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ¨ No
¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check
one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
|
Indicate by check
mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes ¨ No x
The Registrant had
60,635,497 shares of Common Stock, $0.001 par value per share, outstanding as of
July 30, 2010.
Table
of Contents
Page
No.
|
||
3
|
||
3
|
||
4
|
||
5
|
||
6
|
||
20
|
||
32
|
||
32
|
||
32
|
||
34
|
||
44
|
||
45
|
||
45
|
||
Certifications
|
2
(In
thousands, unaudited)
June
30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash and cash
equivalents
|
$ | 24,971 | $ | 28,943 | ||||
Short-term
investments
|
3,015 | 9,408 | ||||||
Accounts
receivable, net of allowance of $0 and $0, respectively
|
4,694 | 4,299 | ||||||
Inventories
|
6,895 | 5,280 | ||||||
Prepaid
expenses and other current assets
|
2,963 | 3,564 | ||||||
Restricted
cash
|
- | 1,000 | ||||||
Total current
assets
|
42,538 | 52,494 | ||||||
Property and
equipment, net
|
4,731 | 2,569 | ||||||
Other
long-term assets
|
5,716 | 5,088 | ||||||
Total
assets
|
$ | 52,985 | $ | 60,151 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 4,919 | $ | 5,763 | ||||
Deferred
revenue
|
1,189 | 928 | ||||||
Accrued
liabilities and other
|
2,377 | 3,854 | ||||||
Accrued
restructuring liabilities
|
- | 1,238 | ||||||
Total current
liabilities
|
8,485 | 11,783 | ||||||
Other
long-term liabilities
|
94 | 103 | ||||||
Total
liabilities
|
8,579 | 11,886 | ||||||
Commitments
and contingencies (Notes 12 and 13)
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock
|
61 | 61 | ||||||
Treasury
stock
|
(590 | ) | (492 | ) | ||||
Additional
paid-in capital
|
800,488 | 798,917 | ||||||
Accumulated
other comprehensive income
|
8 | 13 | ||||||
Accumulated
deficit
|
(755,561 | ) | (750,234 | ) | ||||
Total
stockholders’ equity
|
44,406 | 48,265 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 52,985 | $ | 60,151 |
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
3
GEEKNET,
INC.
(In
thousands, except per share amounts, unaudited)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue:
|
||||||||||||||||
Media
revenue, including $0, $200, $0 and $400 of related party revenue,
respectively
|
$ | 4,751 | $ | 4,341 | $ | 9,046 | $ | 8,118 | ||||||||
E-commerce
revenue
|
10,558 | 7,444 | 20,942 | 14,038 | ||||||||||||
Revenue
|
15,309 | 11,785 | 29,988 | 22,156 | ||||||||||||
Cost of
revenue:
|
||||||||||||||||
Media cost of
revenue
|
1,831 | 1,718 | 3,612 | 3,625 | ||||||||||||
E-commerce
cost of revenue
|
8,792 | 6,152 | 17,610 | 11,762 | ||||||||||||
Cost of
revenue
|
10,623 | 7,870 | 21,222 | 15,387 | ||||||||||||
Gross
margin
|
4,686 | 3,915 | 8,766 | 6,769 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Sales and
marketing
|
3,551 | 1,952 | 6,713 | 4,267 | ||||||||||||
Research and
development
|
1,613 | 2,078 | 3,143 | 3,672 | ||||||||||||
General and
administrative
|
2,049 | 2,244 | 4,173 | 4,349 | ||||||||||||
Amortization
of intangible assets
|
114 | 27 | 205 | 27 | ||||||||||||
Restructuring
|
(101 | ) | - | (101 | ) | - | ||||||||||
Total
operating expenses
|
7,226 | 6,301 | 14,133 | 12,315 | ||||||||||||
Loss from
operations
|
(2,540 | ) | (2,386 | ) | (5,367 | ) | (5,546 | ) | ||||||||
Interest and
other income (expense), net, including other than temporary impairment of
non-marketable equity securities of $0, $0, $0 and $4,585,
respectively
|
22 | (1,231 | ) | 27 | (5,561 | ) | ||||||||||
Loss before
income taxes
|
(2,518 | ) | (3,617 | ) | (5,340 | ) | (11,107 | ) | ||||||||
Income tax
benefit
|
(12 | ) | (31 | ) | (13 | ) | (95 | ) | ||||||||
Net
loss
|
$ | (2,506 | ) | $ | (3,586 | ) | $ | (5,327 | ) | $ | (11,012 | ) | ||||
Net loss per
share:
|
||||||||||||||||
Basic and
diluted
|
$ | (0.04 | ) | $ | (0.06 | ) | $ | (0.09 | ) | $ | (0.18 | ) | ||||
Shares used
in per share calculations:
|
||||||||||||||||
Basic and
diluted
|
60,288 | 59,916 | 60,209 | 61,618 |
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
4
GEEKNET,
INC.
(In
thousands, unaudited)
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash flows
from operating activities:
|
||||||||
Net
loss
|
$ | (5,327 | ) | $ | (11,012 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
1,089 | 1,158 | ||||||
Stock-based
compensation expense
|
1,430 | 1,308 | ||||||
Provision for
bad debts
|
- | 87 | ||||||
Provision for
excess and obsolete inventory
|
14 | 13 | ||||||
Loss on sale
of assets
|
18 | 1,020 | ||||||
Impairment of
investments
|
- | 4,585 | ||||||
Non-cash
restructuring
|
(101 | ) | - | |||||
Changes in
assets and liabilities:
|
||||||||
Accounts
receivable
|
(395 | ) | 1,077 | |||||
Inventories
|
(1,629 | ) | (13 | ) | ||||
Prepaid
expenses and other assets
|
83 | 260 | ||||||
Accounts
payable
|
(844 | ) | (1,784 | ) | ||||
Deferred
revenue
|
261 | 124 | ||||||
Accrued
restructuring liabilities
|
(1,137 | ) | (1,363 | ) | ||||
Accrued
liabilities and other
|
(1,477 | ) | (636 | ) | ||||
Other
long-term liabilities
|
(9 | ) | 23 | |||||
Net cash used
in operating activities
|
(8,024 | ) | (5,153 | ) | ||||
Cash flows
from investing activities:
|
||||||||
Change in
restricted cash
|
1,000 | - | ||||||
Purchase of
property and equipment
|
(3,063 | ) | (250 | ) | ||||
Proceeds from
sales of intangible assets, net
|
- | 172 | ||||||
Purchase
of intangible assets
|
(122 | ) | - | |||||
Maturities or
sale of marketable securities
|
7,200 | 559 | ||||||
Business
acquisitions, net of cash acquired
|
(1,000 | ) | (2,613 | ) | ||||
Net cash
provided by (used in) investing activities
|
4,015 | (2,132 | ) | |||||
Cash flows
from financing activities:
|
||||||||
Proceeds from
issuance of common stock
|
141 | 4 | ||||||
Repurchase of
common stock
|
(98 | ) | (3,127 | ) | ||||
Net cash
provided by (used in) financing activities
|
43 | (3,123 | ) | |||||
Effect of
exchange rate changes on cash and cash equivalents
|
(6 | ) | - | |||||
Net decrease
in cash and cash equivalents
|
(3,972 | ) | (10,408 | ) | ||||
Cash and cash
equivalents, beginning of period
|
28,943 | 40,511 | ||||||
Cash and cash
equivalents, end of period
|
$ | 24,971 | $ | 30,103 |
The accompanying
notes are an integral part of these condensed consolidated financial
statements.
5
GEEKNET,
INC.
(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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
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 |
13
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 $0.001 per share at such annual
stockholders’ meeting. The restricted shares will vest 50 percent
immediately and the remaining 50 percent on the one year anniversary of the
grant.
The
2007 Plan will terminate in 2017. Options granted under the 2007 Plan
must be issued at a price equal to at least the fair market value of the
Company’s common stock at the date of grant. All vested options
granted under the 2007 Plan may be exercised at any time within 10 years of the
date of grant or within 90 days of termination of employment, or such other time
as may be provided in the stock option agreement, and vest over a vesting
schedule determined by the Board of Directors. The Company’s policy
is to issue new shares upon exercise of options under the 2007
Plan.
14
The following table
summarizes option and restricted stock purchase rights activities from December
31, 2008 through June 30, 2010:
Stock Options
Outstanding
|
||||||||||||||||||||||||
Available
for
Grant
|
Restricted
Stock
Outstanding
|
Number
Outstanding
|
Weighted-
Average
Exercise
Price
per
Share
|
Weighted-
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
($
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 |
15
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 |
16
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 |
17
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.
18
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.
19
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.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Special
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Words such as “may,” “could,” “anticipate,”
“potential,” “intend,” “expect,” “believe,” “in our view,” and variations of
such words and similar expressions, are intended to identify such
forward-looking statements, which include, but are not limited to, statements
regarding our expectations and beliefs regarding future revenue growth; and
sources of revenue; gross margins; financial performance and results of
operations; technological trends in, and demand for online advertising;
management's strategy, plans and objectives for future operations; our ability
to attract and retain highly qualified personnel; our investment in our brand
recognition and developing of our web properties; competition, competitors and
our ability to compete; liquidity and capital resources; changes in foreign
currency exchange rates; the outcome of any litigation to which we are a party;
our accounting policies; timing of charges related to our new third party
contract-fulfillment and warehouse provider; and sufficiency of our cash
resources and investments to meet our operating and working capital requirements
and to make any share repurchases. Actual results may differ
materially from those expressed or implied in such forward-looking statements
due to various factors, including those set forth in the Risk Factors contained
in the section of this Quarterly Report on Form 10-Q entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." We undertake no obligation to update the forward-looking
statements to reflect events or circumstances occurring after the date of this
Quarterly Report on Form 10-Q.
Critical
Accounting Estimates
There have been no
significant changes in our critical accounting estimates during the three and
six months ended June 30, 2010 as compared to what was previously disclosed in
Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the year
ended December 31, 2009.
Overview
We are 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. Our sites include:
SourceForge, Slashdot, ThinkGeek, Geek.com, Ohloh and freshmeat. We
provide our audience with content, culture, connections and
commerce.
20
We were
incorporated in California in January 1995 and reincorporated in Delaware in
December 1999. From the date of our incorporation through October
2001, we sold Linux-based hardware systems and services under the name VA Linux
Systems, Inc. In December 2001, we changed our name to VA Software
Corporation to reflect our decision to pursue Media, E-commerce, Software and
Online Images businesses. In December 2005, we sold our Online Images
business to WebMediaBrands Inc. and in April 2007, we sold our Software business
to CollabNet, Inc. (“CollabNet”). On May 24, 2007 we changed our name
to SourceForge, Inc. In June 2009, we acquired Ohloh Corporation, a
directory of open source projects and developers and in November 2009, we
changed our name to Geeknet, Inc. In May 2010, we acquired Geek.com,
an online information resource and community for technology enthusiasts and
professionals.
Our business
consists of two operating segments: Media and
E-commerce. Our Media segment is comprised of a network of web sites
targeted at the global geek community. Our audience of technology
professionals and technology enthusiasts relies on our 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. Our
E-commerce segment sells geek-themed retail products to technology enthusiasts
and general consumers through our ThinkGeek web site.
Our Media revenue
is derived primarily from advertising products delivered on our web
properties. The strategy for our Media business is to increase our
awareness, improve our sites and capture, analyze and draw insights from our
data. We are investing in awareness by targeting the media community,
who are the primary buyers for our advertising services. We believe
this investment will improve our brand recognition in the marketing and
advertising communities. We continue to invest in our web properties,
primarily SourceForge where we launched a more modern platform in July
2009. In order to offer more software to our visitors, in April 2010,
we launched our new Download service on SourceForge. Downloads have
always been a part of SourceForge. They generate a significant amount
of traffic and allow us to target highly relevant advertisements at visitors who
visit SourceForge to download software. The new Download service is
intended to be more appealing to a broader group of free, open source
projects. We also improved our project statistics system, to provide
additional information to the engineers who write open source software and use
these statistics to develop enhancements to projects. In July 2010,
we launched a series of improvements to our platform for developers of Open
Source projects. These improvements provide a completely redesigned
set of tools, including an issue tracker, wiki, source code management, and
discussion system. This updated forge also offers flexibility by allowing
developers to integrate and use third party tools directly on the
platform.
We currently use
the following key metrics which are derived from data provided by Google
Analytics to measure our Media business:
Three Months Ended
|
||||||||
June 30,
2010
|
June 30,
2009
|
|||||||
Unique
Visitors per Month (in thousands)
(1)(2)
|
38,868 | 35,109 | ||||||
Visits per
Unique Visitor per Month
|
1.8 | 1.7 | ||||||
Visits per
Month (in thousands) (2)
|
68,740 | 60,101 | ||||||
Pages per
Visit
|
2.3 | 2.4 | ||||||
Page Views
per Month (in thousands) (2)
|
158,697 | 144,375 | ||||||
Revenue per
Thousand Pages (RPM)
|
$ | 9.98 | $ | 10.02 | ||||
Revenue per
User (RPU) (3)
|
$ | 0.49 | $ | 0.49 |
|
(1)
|
– Unique
Visitor is the aggregate average unique visitors for all Online Media
sites during the period presented. This does not consider possible
duplicate visitors who may visit more than one of our web sites during the
month.
|
|
(2)
|
– Per month
amounts are the average calculated as the total amount for the period
divided by the months in the
period.
|
|
(3)
|
– Revenue per
User (“RPU”) is an annualized amount based on revenue and unique users
during the period presented.
|
A key element of
our growth plans is to increase engagement. Our metrics around
engagement per user are an important measure, and we are focused on both growing
the number of unique visitors and deepening the average levels of
engagement.
21
Media companies
have historically reported page views as a metric seeking to measure users’
level of engagement. A web technology, known as asynchronous
JavaScript and XML (“AJAX”) allows users to browse web sites without loading a
new page, page views have generally declined for the same, or even higher, level
of activity. We have begun to implement this technology, and as we
increase our adoption and change our sites to continue to make them easier to
use and more accessible, we may experience associated fluctuations in page
views. As the measures of engagement utilized by media companies
evolve to include elements such as time spent per visit or number of visits per
month in addition to or in lieu of page views, we expect that our reported
metrics may also evolve. In addition, as we modernize and insert more
intelligence into our web properties to enhance the user experience, we remove
pages from the user flow which decreases page views.
Our E-commerce
business strategy is to increase revenue by expanding the range of new and
innovative products we sell, including products developed by us, and by
attracting increased traffic to our site. We have recently increased
the pace at which we launch new products and target the launch of at least one
new product each business day. We attract traffic to our sites using
a variety of traditional online and direct retail marketing channels, direct
mail and email to our customers and followers. We also publish and
communicate with our customers and followers using Twitter
(twitter.com/thinkgeek) and Facebook (facebook.com/thinkgeek).
Our E-commerce
sales continue to be primarily attributable to customers located in the United
States of America.
Results
of Operations
The application of
accounting standards is central to a company's reported financial position,
results of operations and cash flows. We review our annual and
quarterly results, along with key accounting policies, with our audit committee
prior to the release of financial results. We do not use
off-balance-sheet arrangements with unconsolidated related parties, nor do we
use other forms of off-balance-sheet arrangements such as research and
development arrangements.
The following table
sets forth our operating results for the periods indicated as a percentage of
revenue, represented by selected items from the unaudited condensed consolidated
statements of operations. This table should be read in conjunction
with the condensed consolidated financial statements and the accompanying notes
included in this Quarterly Report on Form 10-Q.
22
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Consolidated
Statements of Operations Data:
|
||||||||||||||||
Media
revenue
|
31.0 | % | 36.8 | % | 30.2 | % | 36.6 | % | ||||||||
E-commerce
revenue
|
69.0 | 63.2 | 69.8 | 63.4 | ||||||||||||
Revenue
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Media cost of
revenue
|
12.0 | 14.6 | 12.0 | 16.4 | ||||||||||||
E-commerce
cost of revenue
|
57.4 | 52.2 | 58.7 | 53.0 | ||||||||||||
Cost of
revenue
|
69.4 | 66.8 | 70.7 | 69.4 | ||||||||||||
Gross
margin
|
30.6 | 33.2 | 29.3 | 30.6 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Sales and
marketing
|
23.2 | 16.6 | 22.4 | 19.3 | ||||||||||||
Research and
development
|
10.5 | 17.6 | 10.5 | 16.6 | ||||||||||||
General and
administrative
|
13.4 | 19.0 | 13.9 | 19.6 | ||||||||||||
Amortization
of intangible assets
|
0.7 | 0.2 | 0.7 | 0.1 | ||||||||||||
Restructuring
costs
|
(0.7 | ) | - | (0.3 | ) | - | ||||||||||
Total
operating expenses
|
47.1 | 53.4 | 47.2 | 55.6 | ||||||||||||
Loss from
operations
|
(16.5 | ) | (20.2 | ) | (17.9 | ) | (25.0 | ) | ||||||||
Interest and
other income (expense), net
|
0.1 | (10.5 | ) | 0.1 | (25.1 | ) | ||||||||||
Loss before
income taxes
|
(16.4 | ) | (30.7 | ) | (17.8 | ) | (50.1 | ) | ||||||||
Income tax
benefit
|
(0.1 | ) | (0.3 | ) | - | (0.4 | ) | |||||||||
Net
loss
|
(16.3 | )% | (30.4 | )% | (17.8 | )% | (49.7 | )% |
Revenue
The following table
summarizes our revenue by business segment:
Three Months Ended
|
Six Months Ended
|
% Change
|
||||||||||||||||||||||
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||
($ in
thousands)
|
||||||||||||||||||||||||
Media
revenue
|
$ | 4,751 | $ | 4,341 | $ | 9,046 | $ | 8,118 | 9 | % | 11 | % | ||||||||||||
E-commerce
revenue
|
10,558 | 7,444 | 20,942 | 14,038 | 42 | % | 49 | % | ||||||||||||||||
Revenue
|
$ | 15,309 | $ | 11,785 | $ | 29,988 | $ | 22,156 | 30 | % | 35 | % |
Sales for the three
and six months ended June 30, 2010 and June 30, 2009 were primarily to customers
located in the United States of America.
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.
23
Revenue
by Segment
Media
Revenue
Three Months Ended
|
Six Months Ended
|
% Change
|
||||||||||||||||||||||
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||
($ in
thousands)
|
||||||||||||||||||||||||
Direct
sales
|
$ | 3,363 | $ | 3,030 | $ | 6,452 | $ | 5,255 | 11 | % | 23 | % | ||||||||||||
Ad
Networks
|
1,029 | 1,075 | 1,991 | 2,434 | (4 | )% | (18 | )% | ||||||||||||||||
Other
|
359 | 236 | 603 | 429 | 52 | % | 41 | % | ||||||||||||||||
Media
revenue
|
$ | 4,751 | $ | 4,341 | $ | 9,046 | $ | 8,118 | 9 | % | 11 | % |
Our Media revenue
is derived primarily from advertising products delivered on our web
properties. Direct sales revenue is generated from orders received by
our United States based sales team, which may also include advertisements to be
delivered globally. Ad Networks revenue represents revenue from our
Ad Network partners who sell our inventory globally to customers through
automated systems and includes revenue from international resellers who use
automated systems. Other revenue represents orders received from our
international resellers, sales of reports on data underlying the open source
community as well as referral fees and revenue earned from subscriptions to our
web properties.
Direct sales
revenue for the three months ended June 30, 2010 increased $0.3 million as
compared with the three months ended June 30, 2009. The increase was
primarily due to increases in revenue of $1.0 million from customers who
increased their advertising levels during the three months ended June 30, 2010
as compared with the three months ended June 30, 2009 and $0.6 million from
customers who did not advertise in the three months ended June 30, 2009, offset
in part by a $1.3 million decrease in revenue from advertisers whose campaigns
were not renewed or who chose to advertise at lower levels during the three
months ended June 30, 2010. Since we obtain higher prices for direct
sales revenue, we allocate our available ad units first to direct sales
campaigns and then to ad networks. To the extent that direct sales
campaigns decline, we would allocate additional ad units to ad networks, which
would increase revenue from ad networks. The increase in Other
revenue during the three months ended June 30, 2010 as compared to the three
months ended June 30, 2009 was primarily due to an increase in revenue from our
international resellers.
Direct sales
revenue for the six months ended June 30, 2010 increased $1.2 million as
compared with the six months ended June 30, 2009. The increase was
primarily due to increases in revenue of $2.7 million from customers who
increased their advertising levels during the six months ended June 30, 2010 as
compared with the six months ended June 30, 2009 and $0.6 million from customers
who did not advertise in the six months ended June 30, 2009, offset in part by a
$2.1 million decrease in revenue from advertisers whose campaigns were not
renewed or who chose to advertise at lower levels during the six months ended
June 30, 2010. The decrease in Ad Networks revenue for the six months
ended June 30, 2010 as compared to the six months ended June 30, 2009 was due to
decreased revenue from Google primarily due to a decrease in the number of ad
units we made available to Google. Since we obtain higher prices for
direct sales revenue, we allocate our available ad units first to direct sales
campaigns and then to ad networks. To the extent that direct sales
campaigns decline, we would allocate additional ad units to ad networks, which
would increase revenue from ad networks. The increase in Other
revenue during the three months ended June 30, 2010 as compared to the three
months ended June 30, 2009 was primarily due to an increase in revenue from our
international resellers.
The demand for
traditional online advertising, which are those advertising units defined by The
Interactive Advertising Bureau, is not growing at a rate sufficient to meet our
revenue growth plans. We have supplemented this traditional online
advertising by introducing higher-priced premium advertising
products. We believe that in order to grow revenue, we must continue
to focus on creating new and innovative advertising products.
24
E-commerce
Revenue
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||||
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June
30,
2009
|
|||||||||||||||||||||
E-commerce
revenue (in thousands)
|
$ | 10,558 | $ | 7,444 | $ | 20,942 | $ | 14,038 | 42 | % | 49 | % | ||||||||||||
Percentage of
total revenue
|
69 | % | 63 | % | 70 | % | 63 | % | ||||||||||||||||
Number of
orders shipped
|
178,833 | 124,776 | 363,380 | 240,562 | 43 | % | 51 | % | ||||||||||||||||
Average order
size (in dollars)
|
$ | 63 | $ | 63 | $ | 62 | $ | 62 | 0 | % | 0 | % |
E-commerce revenue
is derived from the online sale of consumer goods, including shipping, net of
any returns and allowances. The increase in E-commerce revenue during
the three months ended June 30, 2010, as compared to the three months ended June
30, 2009, was primarily due to a 43% increase in the number of shipments
year-over-year. The increase in the number of shipments was primarily
driven by increased demand for ThinkGeek’s innovative products.
The increase in
E-commerce revenue during the six months ended June 30, 2010, as compared to the
six months ended June 30, 2009, was primarily due to a 51% increase in the
number of shipments year-over-year. The increase in the number of
shipments was primarily driven by increased demand for ThinkGeek’s innovative
products.
Cost
of Revenue/Gross Margin
Three Months Ended
|
Six Months Ended
|
% Change
|
||||||||||||||||||||||
($ in thousands)
|
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
Three
Months
|
% Change
Six Months
|
||||||||||||||||||
Cost of
revenue
|
$ | 10,623 | $ | 7,870 | $ | 21,222 | $ | 15,387 | 35 | % | 38 | % | ||||||||||||
Gross
margin
|
4,686 | 3,915 | 8,766 | 6,769 | 20 | % | 30 | % | ||||||||||||||||
Gross margin
%
|
31 | % | 33 | % | 29 | % | 31 | % |
Cost of revenue
consists of personnel costs and related overhead associated with developing and
delivering external content for our media sites, cost of equipment and
co-location costs to deliver external media content and product and operating
costs associated with our E-commerce business.
Gross margins
declined for both the three and six months ended June 30, 2010 as compared with
the three and six months ended June 30, 2009, primarily due to the revenue mix
between Media and E-commerce revenue. E-commerce revenue has
significantly lower gross margins than Media revenue.
Cost
of Revenue/Gross Margin by Segment
Media
Cost of Revenue/Gross Margin
Three Months Ended
|
Six Months Ended
|
% Change
|
||||||||||||||||||||||
($ in thousands)
|
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
Three
Months
|
% Change
Six Months
|
||||||||||||||||||
Media cost of
revenue
|
$ | 1,831 | $ | 1,718 | $ | 3,612 | $ | 3,625 | 7 | % | 0 | % | ||||||||||||
Media gross
margin
|
2,920 | 2,623 | 5,434 | 4,493 | 11 | % | 21 | % | ||||||||||||||||
Media gross
margin %
|
61 | % | 60 | % | 60 | % | 55 | % | ||||||||||||||||
Headcount
|
18 | 19 | 18 | 19 |
Media cost of
revenue consists of personnel costs and related overhead associated with
maintaining and supporting the sites, delivering advertising campaigns and
developing the editorial content of the sites, co-location and depreciation
costs for delivering site content, and the costs of serving and running
advertising campaigns.
25
The increase in
Media gross margin percentages for the three months ended June 30, 2010, as
compared to the three months ended June 30, 2009, was primarily driven by the
increased Media revenue, offset in part by increased cost of revenue, primarily
due to increased co-location costs and personnel costs.
The increase in
Media gross margin percentages for the six months ended June 30, 2010, as
compared to the six months ended June 30, 2009, was primarily driven by
increased Media revenue.
E-commerce
Cost of Revenue/Gross Margin
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
||||||||||||||||||||||
($ in
thousands)
|
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
% Change
Six Months
|
|||||||||||||||||||
E-commerce
cost of revenue
|
$ | 8,792 | $ | 6,152 | $ | 17,610 | $ | 11,762 | 43 | % | 50 | % | ||||||||||||
E-commerce
gross margin
|
1,766 | 1,292 | 3,332 | 2,276 | 37 | % | 46 | % | ||||||||||||||||
E-commerce
gross margin %
|
17 | % | 17 | % | 16 | % | 16 | % | ||||||||||||||||
Headcount
|
27 | 24 | 27 | 24 |
E-commerce cost of
revenue consists of product costs, shipping and fulfillment costs and operating
costs, and includes personnel costs associated with the E-commerce operations
and merchandising functions. E-commerce gross margin percentages
remained essentially flat for the three and six months ended June 30, 2010 as
compared to the three and six months ended June 30, 2009.
The increase in
E-commerce cost of revenue during the three months ended June 30, 2010, as
compared to the three months ended June 30, 2009, was primarily due to increases
in product costs of $1.4 million, shipping and fulfillment costs of $0.8 million
and operating costs of $0.4 million.
The increase in
E-commerce cost of revenue during the six months ended June 30, 2010, as
compared to the six months ended June 30, 2009, was primarily due to increases
in product costs of $3.3 million, shipping and fulfillment costs of $1.8 million
and operating costs of $0.8 million.
The increase in
product, shipping and fulfillment costs was due to an increase in
revenue. The increase in operating expenses was primarily due to
additional headcount and related costs to provide customer service and to
identify and source new products.
We expect
E-commerce cost of revenue to increase in absolute dollars as E-commerce
operating costs increase in the future, while E-commerce gross margin
percentages may decline as we incur additional operating costs to support our
strategy of increasing revenue.
Operating
Expenses
Sales
and Marketing Expenses
Sales and marketing
(“S&M”) expenses consist primarily of personnel and related overhead
expenses, including sales commission, for personnel engaged in sales, marketing
and sales support functions, and includes costs associated with market research,
promotional activities, events and trade show attendance.
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||||
($ in
thousands)
|
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
||||||||||||||||||||
Media
S&M
|
$ | 2,364 | $ | 1,548 | $ | 4,664 | $ | 3,466 | 53 | % | 35 | % | ||||||||||||
E-commerce
S&M
|
1,187 | 404 | 2,049 | 801 | 194 | % | 156 | % | ||||||||||||||||
Sales and
marketing
|
$ | 3,551 | $ | 1,952 | $ | 6,713 | $ | 4,267 | 82 | % | 57 | % | ||||||||||||
Percentage of
total revenue
|
23 | % | 17 | % | 22 | % | 19 | % | ||||||||||||||||
Headcount
|
33 | 25 | 33 | 25 |
26
The increase in
S&M expenses in the three months ended June 30, 2010, as compared to the
three months ended June 30, 2009, was primarily due to an increase in headcount
and related expenses of $0.9 million, an increase in discretionary marketing
expenses of $0.5 million and an increase in credit card fees of $0.1
million. The increase in headcount was primarily due to an increase
in E-commerce headcount of 8 heads as well as the transfer of 3 Media R&D
heads into our product marketing group earlier in 2010 and severance costs of
$0.2 million related to a reorganization of our Media sales and product
marketing team. The increase in discretionary expenses was primarily
due to increased E-commerce direct mail and online marketing expenses and Media
market research and trade show event expenses.
The increase in
S&M expenses in the six months ended June 30, 2010, as compared to the six
months ended June 30, 2009, was primarily due to an increase in headcount and
related expenses of $1.5 million, an increase in discretionary marketing
expenses of $0.8 million and an increase in credit card fees of $0.1
million. The increase in headcount was primarily due to an increase
in E-commerce headcount of 8 heads and the transfer of 3 Media R&D heads
into our product marketing group earlier in 2010. The increase in
discretionary expenses was due to increased E-commerce direct mail and online
marketing expenses, expenses associated with our name branding and Media market
research and events.
We expect future
S&M expenses to increase in absolute dollars as we continue to expand our
discretionary marketing, programs, primarily for our E-commerce
business. In addition, credit card processing expenses for our
E-commerce business will increase due to increased revenue.
Research
and Development Expenses
Research and
development (“R&D”) expenses consist primarily of personnel and related
overhead expenses for software engineers involved in our Media
segment. We expense all of our R&D costs as they are
incurred.
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||||
($ in
thousands)
|
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
||||||||||||||||||||
Media
R&D
|
$ | 1,285 | $ | 1,948 | $ | 2,493 | $ | 3,416 | (34 | )% | (27 | )% | ||||||||||||
E-commerce
R&D
|
328 | 130 | 650 | 256 | 152 | % | 154 | % | ||||||||||||||||
Research and
development
|
$ | 1,613 | $ | 2,078 | $ | 3,143 | $ | 3,672 | (22 | )% | (14 | )% | ||||||||||||
Percentage of
total revenue
|
11 | % | 18 | % | 10 | % | 17 | % | ||||||||||||||||
Headcount
|
29 | 43 | 29 | 43 |
R&D expense
decreased by $0.5 million in the three and six months ended June 30, 2010, as
compared to the three and six months ended June 30, 2009. The decrease in R&D
expenses primarily was due to lower personnel and related costs and lower
consulting costs. Personnel and related costs decreased due to a
decrease of 17 heads in Media, including 3 of our R&D personnel who
assumed positions in product marketing, offset in part by an increase of 3 heads
in E-commerce. The decrease in consulting costs is due to expenses
incurred in the redesign of our SourceForge.net platform, which was released in
July 2009.
General
and Administrative Expenses
General and
administrative (“G&A”) expenses consist of salaries and related expenses for
finance and accounting, human resources and legal personnel, professional fees
for accounting and legal services as well as insurance and other public company
related costs.
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||||
($ in
thousands)
|
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
||||||||||||||||||||
General and
administrative
|
$ | 2,049 | $ | 2,244 | $ | 4,173 | $ | 4,349 | (9 | )% | (4 | )% | ||||||||||||
Percentage of
total revenue
|
13 | % | 19 | % | 14 | % | 20 | % | ||||||||||||||||
Headcount
|
20 | 21 | 20 | 21 |
27
G&A expenses
decreased by $0.2 million during the three and six months ended June 30, 2010 as
compared to the three and six months ended June 30, 2009 primarily due to
decreases in legal and accounting fees, resulting from our fiscal year change in
2009.
Restructuring
Costs
In October 2007, we
relocated our corporate headquarters to Mountain View, California. In
conjunction with this relocation, we recorded a restructuring charge of $2.2
million for the remaining facility space and leasehold improvements at our
former corporate headquarters located in Fremont, California. In
conjunction with the sale of our Software business in April 2007, we accrued a
restructuring charge of $0.6 million for the excess facility space used in the
operation of this business, which was included in the gain on disposal of
discontinued operations. In fiscal 2001 and 2002, we adopted plans to
exit our hardware systems and hardware-related software engineering and
professional services businesses, as well as exit a sublease agreement and to
reduce our general and administrative overhead costs. In May 2010, we
completed our payments under the facility lease. The $0.1 million
restructuring gain in the three months ended June 30, 2010 relates primarily to
proceeds from the sale of office furniture at the facility. In
conjunction with our 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 | ) | $ | - |
Interest
and other income (expense), net
Below is a summary
of Interest and other income (expense), net (in thousands):
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
% Change
Six Months
|
|||||||||||||||||||||
June 30,
2010
|
June 30,
2009
|
June 30,
2010
|
June 30,
2009
|
|||||||||||||||||||||
Interest
income
|
$ | 29 | $ | 34 | $ | 60 | $ | 88 | (15 | )% | (32 | )% | ||||||||||||
Interest
expense
|
(1 | ) | (19 | ) | (5 | ) | (41 | ) | (95 | )% | (88 | )% | ||||||||||||
Other than
temporary impairment of
non-marketable equity securities
|
- | - | - | (4,585 | ) | * | (100 | )% | ||||||||||||||||
Loss on
disposal of asset
|
- | (1,246 | ) | - | (1,246 | ) | (100 | )% | (100 | )% | ||||||||||||||
Other income
(expense), net
|
(6 | ) | - | (28 | ) | 223 | * | (113 | )% | |||||||||||||||
Interest and
other income (expense), net
|
$ | 22 | $ | (1,231 | ) | $ | 27 | $ | (5,561 | ) | (102 | )% | (100 | )% |
*
– Not meaningful
The decrease in
interest income for the three and six months ended June 30, 2010, as compared to
the three and six months ended June 30, 2009, was primarily due to lower
investment balances.
Interest expense
for the three and six months ended June 30, 2010 and June 30, 2009 results
primarily from accretion of our accrued restructuring charge.
28
The
other-than-temporary impairment of non-marketable equity securities relates to
our investment in CollabNet, Inc. (“CollabNet”). In March 2009, we determined an
impairment indicator existed for this investment and as a result we performed a
fair value analysis of this investment. In determining whether a decline in
value of our investment in CollabNet had occurred and was other than temporary,
we considered available evidence, including the general market conditions,
CollabNet’s financial condition, near-term prospects, market comparables and
future financing requirements. The valuation also takes into account
CollabNet’s capital structure, liquidation preferences for its capital and other
economic variables, which require management’s judgment to evaluate. Based on
the results, we determined that the estimated fair value of our investment in
CollabNet was $2.0 million and accordingly, we recognized an
other-than-temporary impairment charge of $4.6 million.
Loss on disposal of
asset is due to our deprecation of the Marketplace platform from the
SourceForge.net platform during the three months ended June 30.
2010.
Other income
(expense), net for the three and six months ended June 30, 2010 is primarily due to the
write-off of obsolete computer equipment, while other income (expense) net for
the six months ended June 30, 2009 is primarily due to the $0.2 million gain on
our sale of the Linux.com domain name to The Linux Foundation.
Income
Taxes
Three Months Ended
|
Six Months Ended
|
% Change
Three
Months
|
||||||||||||||||||||||
June 30,
2010
|
June 30,
2009
|
June 30,
2010 |
June 30,
2009
|
% Change
Six Months
|
||||||||||||||||||||
($ in
thousands)
|
||||||||||||||||||||||||
Income tax
benefit
|
$ | (12 | ) | $ | (31 | ) | $ | (13 | ) | $ | (95 | ) | (61 | )% | (86 | )% |
Income taxes
consist primarily of state income taxes relating to a jurisdiction in which our
E-commerce business operates and where we are unable to file a consolidated tax
return. The decrease in the benefit for income taxes for the three
and six months ended June 30, 2010, as compared to the three and six months
ended June 30, 2009, was due to the increase in pre-tax loss. As of
June 30, 2010, we had federal and state net operating loss carry-forwards for
tax reporting purposes available to offset future taxable income. A
valuation allowance has been recorded for the total deferred tax assets as a
result of uncertainties regarding realization of the assets based on the lack of
consistent profitability to date and the uncertainty of future
profitability. The federal and state net operating loss
carry-forwards expire at various dates through 2029 and 2019, respectively, to
the extent that they are not utilized.
Liquidity
and Capital Resources
Six Months Ended June 30,
|
||||||||
($ in
thousands)
|
2010
|
2009
|
||||||
Net cash
provided by (used in):
|
||||||||
Continuing
operations:
|
||||||||
Operating
activities
|
$ | (8,024 | ) | $ | (5,153 | ) | ||
Investing
activities
|
4,015 | (2,132 | ) | |||||
Financing
activities
|
43 | (3,123 | ) | |||||
Effect of
exchange rate changes on cash and cash equivalents
|
(6 | ) | - | |||||
Net decrease
in cash and cash equivalents
|
$ | (3,972 | ) | $ | (10,408 | ) |
Our principal
sources of cash as of June 30, 2010 are our existing cash, cash equivalents and
investments of $28.0 million. Cash and cash equivalents
decreased by $4.0 million at June 30, 2010 when compared to December 31,
2009. This total decrease during the six months ended June 30, 2010
was primarily due to cash used to fund net operating losses and working capital
requirements, as well as the purchase of $3.2 million of equipment and
intangible assets and the $1.0 million acquisition of Geek.com., offset in part
by the proceeds from the sale of auction rate securities of $7.2 million and the
release of restricted cash of $1.0 million.
Operating
Activities
Cash used in
operating activities increased by $2.9 million during the six months ended June
30, 2010 as compared to the six months ended June 30, 2009 primarily due to cash
used for working capital resulting from increases in inventory of $1.6 million
and a cash used for accounts receivable of $1.5 million.
29
Net cash used in
operating activities was $8.0 million for the six months ended June 30,
2010. Net cash used in operating activities was primarily due to our
net operating loss of $2.9 million after the effects of non-cash charges of
stock-based compensation expense of $1.4 million, depreciation and amortization
expense of $1.1 million and restructuring expense of $0.1 million. Additionally,
changes in operating assets and liabilities included cash used for accounts
payable of $0.8 million, accrued liabilities of $1.5 million, accrued
restructuring liabilities of $1.1 million, increase in accounts receivable of
$0.4 million and increases in inventory of $1.6 million, offset partially by
cash provided by decreases in deferred revenue of $0.3 million. The decrease of
accounts payable was primarily due to the seasonality of our e-commerce
business.
Net cash used in
operating activities was $5.2 million for the six months ended June 30,
2009. Net cash used in operating activities was primarily due to our
net operating loss of $2.9 million after the effects of non-cash impairment
charge of $4.6 million, stock-based compensation of $1.3 million, depreciation
expense of $1.2 million, the gain on our sale of the Linux.com domain name to
The Linux Foundation of $0.2 million and a loss on disposal of assets, of $1.2
million, related to the depreciation of the Marketplace platform from the
SourceForge.net platform. Additionally, changes in operating assets
and liabilities included cash used for accounts payable of $1.8 million, and
accrued restructuring liabilities of $1.4 million, offset partially by cash
provided by decreases in accounts receivable of $1.0 million. The
decrease of accounts payable was primarily due to the seasonality of our
e-commerce business and the decrease in accounts receivable is primarily due to
the decline of Online Media revenue.
Investing
Activities
Our investing
activities primarily include purchases and sales of marketable securities, and
purchases of property and equipment.
Cash provided by
investing activities for the six months ended June 30, 2010 is comprised of the
sale of $7.2 million of auction rate securities to UBS AG (“UBS”) at par value
and a $1.0 million reduction in restricted cash resulting from the conclusion of
our former corporate headquarter lease in Fremont, California, offset in part by
$3.1 million for the purchase of property and equipment, primarily due to
payments for distribution equipment which is being installed at our new
third-party contract-fulfillment and warehouse provider, and $1.0 million for
the acquisition of Geek.com.
Cash usage for the
six months ended June 30, 2009 included $2.6 million for the acquisition of
Ohloh and $0.2 million for the purchase of property and equipment, offset in
part by proceeds from the sale of Linux.com of $0.2 million and maturities of
marketable securities of $0.6 million.
Financing
Activities
Our financing
activities during the six months ended June 30, 2010 were comprised primarily of
proceeds from the sale of our common stock through equity incentive
plans.
Our financing
activities during the six months ended June 30, 2009 were primarily comprised of
cash used to repurchase shares of our common stock under the repurchase program
which ended in October 2009, offset in part by proceeds from the sale of our
common stock through equity incentive plans.
Restricted
Cash
We have no
restricted cash at June 30, 2010, as the $1.0 million letter of credit expired
upon completion of our former corporate headquarter lease in Fremont, California
in May 2010.
Auction
Rate Securities and ARS Right
At June 30, 2010,
we have $3.0 million of municipal bond investments with an auction reset feature
(“auction-rate securities” or “ARS”). The underlying assets of these
auction-rate securities are student loans which are substantially backed by the
Federal government. On June 30, 2010, we exercised our 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.
30
We valued the ARS
using a discounted cash flow approach. The assumptions used in preparing the
discounted cash flow model were based on data available as of June 30, 2010 and
include estimates of interest rates, timing and amount of cash flows, credit and
liquidity premiums, and expected holding periods of the ARS.
Liquidity
Our liquidity and
capital requirements depend on numerous factors, including market acceptance of
our products, the resources we devote to developing, marketing, selling and
supporting our products, the timing and expense associated with expanding our
distribution channels, capital projects to expand our support systems and
infrastructure, our repurchase of common stock, potential acquisitions and other
factors.
We expect to devote
capital resources to continue our research and development efforts, to invest in
our sales, support, marketing and product development organizations, to enhance
and introduce marketing programs, to invest in capital projects, to continue to
support our operations and related support systems and infrastructure, to
repurchase of common stock, to fund strategic acquisitions and for other general
corporate activities. We believe that our existing cash balances will
be sufficient to fund our operations during the next 12 months under our current
business strategy. See “Risks Related to our Financial Results” in
the Risk Factors section of this Quarterly Report on Form 10-Q.
Contractual
Obligations
The contractual
obligations presented in the table below represent our estimates of future
payments under fixed contractual obligations and commitments. Changes in our
business needs, cancellation provisions and other factors may result in actual
payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments. The following table summarizes our fixed
contractual obligations and commitments as of June 30, 2010 (in
thousands):
Years ending December 31,
|
||||||||||||||||
Total
|
2010
|
2011 and
2012
|
2013 and
2014
|
|||||||||||||
Gross
Operating Lease Obligations
|
$ | 3,664 | $ | 1,188 | $ | 1,947 | $ | 529 | ||||||||
Sublease
Income
|
(502 | ) | (112 | ) | (390 | ) | - | |||||||||
Net Operating
Lease Obligations
|
3,162 | 1,076 | 1,557 | 529 | ||||||||||||
Purchase
Obligations
|
9,254 | 9,254 | - | - | ||||||||||||
Total
Obligations
|
$ | 12,416 | $ | 10,330 | $ | 1,557 | $ | 529 |
In April 2010, we
entered into a five year agreement with a third-party contract-fulfillment and
warehouse provider to replace our existing third-party provider, which will be
effective in our third quarter ending September 30, 2010.
Financial
Risk Management
As a primarily
U.S.-centric company, we face limited exposure to adverse movements in foreign
currency exchange rates and we do not engage in hedging activity. We
do not anticipate significant currency gains or losses in the near
term. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial
results.
We maintain
investment portfolio holdings of various issuers, types and maturities. These
securities are classified as available-for-sale or trading. These securities are
not leveraged.
Subsequent
Events
On August 3, 2010, our Board of Directors approved a 1:10
reverse stock split of our common stock. This stock split
is subject to stockholder approval.
On
August 4, 2010, Scott L. Kauffman resigned as our President and Chief Executive
Officer. Ken Langone, our Chairman of the Board of Directors, has been appointed
as the Executive Chairman and Interim CEO.
31
We have applied to
the Nasdaq Global Market to change our ticker symbol to GKNT. This
change is expected to be effective on August 5, 2010.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
The primary
objective of our investment activities is to preserve principal. Some
of the securities that we have invested in may be subject to market
risk. This means that a change in prevailing interest rates may cause
the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the principal
amount of our investment will probably decline. To minimize this
risk, we maintain a portfolio of cash equivalents, short-term investments and
long-term investments in limited category of securities, primarily treasury
money market funds and government debt securities. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate.
At June 30, 2010,
we had $3.0 million of investments with a weighted average interest rate of 1.39
percent.
We have operated
primarily in the United States, and virtually all sales have been made in U.S.
dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
We do not currently
hold any derivative instruments and do not engage in hedging
activities.
Item 4. Controls and
Procedures
|
a)
|
Evaluation of disclosure
controls and procedures.
|
The Company’s
management evaluated, with the participation of its Chief Executive Officer
(CEO) and its Chief Financial Officer (CFO), the effectiveness of the design and
operation of its disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “’34
Act”)) as of the end of the period covered by this report.
Disclosure controls
and procedures are designed with the objective of ensuring that
(i) information required to be disclosed in the Company’s reports filed
under the ’34 Act is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms and (ii) information is
accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Internal
control procedures, which are designed with the objective of providing
reasonable assurance that the Company’s transactions are properly authorized,
its assets are safeguarded against unauthorized or improper use and its
transactions are properly recorded and reported, all to permit the preparation
of the Company’s financial statements in conformity with generally accepted
accounting principles. To the extent that elements of our internal
control over financial reporting are included within our disclosure controls and
procedures, they are included in the scope of our quarterly controls
evaluation.
Based on that
evaluation, the CEO and CFO concluded that as of the end of the period covered
by this report, the disclosure controls and procedures were
effective.
|
b)
|
Changes in internal controls
over financial reporting.
|
There were no
changes in the Company’s internal controls over financial reporting (as defined
in Rule 13a-15(f) of the ’34 Act) as of the date of this report that have
materially affected, or are reasonably likely to materially affect, its internal
controls over financial reporting.
Item 1. Legal Proceedings
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.
32
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 Court of 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 set 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.
33
Item 1A. Risk Factors
CURRENT AND
PROSPECTIVE INVESTORS IN GEEKNET SECURITIES SHOULD CAREFULLY CONSIDER THE RISKS
DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. IN ADDITION, THESE RISKS
ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS OF WHICH WE ARE NOT
PRESENTLY AWARE OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. OUR BUSINESS COULD BE HARMED BY ANY OF THESE RISKS. THE
TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND
INVESTORS MAY LOSE ALL OR PART OF THEIR INVESTMENT.
Risks
Related To Our Media Business
If
our Media business fails to attract and retain users, particularly users who
create and post original content on our web properties, our financial results
will be adversely affected.
Our reliance upon
user-generated content requires that we develop and maintain tools and services
designed to facilitate:
·
|
creation of
user-generated
content,
|
·
|
participation
in discussion surrounding such user-generated
content,
|
·
|
evaluation of
user-generated content, and
|
·
|
distribution
of user-generated content.
|
If our development
efforts fail to facilitate such activities on our web properties, the level of
user engagement and interaction will not increase and may
decline. Even if we succeed in facilitating such activities on our
sites, we cannot assure that such improvements will be deployed in a timely or
cost-effective manner.
If we fail to
increase user engagement and interaction on our web properties, we will not
attract and retain a loyal user base that is desirable to advertisers, which
will adversely affect our Media business and our ability to maintain or grow our
revenue.
We
intend to expand our offerings in international markets in which we have limited
experience and rely primarily on business partners.
We have recently
hired two salespeople in London to manage our sales efforts outside the United
States. We also have agreements with representatives to sell our
international inventory in Europe and Australia and may enter into agreements
with additional or different firms to sell our international advertising
impressions. As we expand into these new international markets, we
have limited experience in marketing our products and services in such
markets. We rely on the efforts and abilities of our employee and
representatives in such markets. Certain international markets may be
slower than domestic markets in the development and adoption of online
advertising programs and as a result our offerings in international markets may
not develop at a rate that supports our level of investment.
If
our Media business fails to deliver innovative programs and products, we may not
be able to attract and retain advertisers, which will adversely affect our
financial results.
Our advertisers
continually seek new and innovative advertising products on which to spend their
advertising budgets. In order to grow our direct sales revenue, we
will need to introduce new and innovative advertising products and programs
which appeal to these advertisers. The successful development and
production of such advertising products or programs is subject to numerous
uncertainties, including our ability to:
34
·
|
enable
advertisers to showcase products, services and/or brands to their intended
audience and to generate revenue from such
audiences;
|
·
|
anticipate
and successfully respond to emerging trends in online advertising;
and
|
·
|
attract and
retain qualified marketing and technical
personnel.
|
We cannot assure
that our programs and products will appeal to our advertisers or enable us to
attract and retain advertisers and generate revenue consistent with our
estimates or sufficient to sustain operations. In addition, we cannot assure
that any new marketing programs and products will be developed in a timely or
cost-effective manner. If we are unable to deliver innovative marketing programs
and products that allow us to expand our advertiser base, we may not be able to
generate sufficient revenue to grow our Media business.
New
technologies could block our advertisements, which would harm our operating
results.
Technologies have
been developed and are likely to continue to be developed that can block the
display of our online advertising products. Our Media revenue is
derived from fees paid to us by advertisers in connection with the display of
advertisements on web pages. As a result, advertisement-blocking
technology could reduce the number of advertisements that we are able to deliver
and, in turn, our advertising revenues and operating results may also be
reduced.
Decreases
or delays in advertising spending could harm our ability to generate advertising
revenue, which would adversely affect our financial results.
Our advertisers can
generally terminate their contracts with us at any time. Our
advertisers’ spending patterns tend to be cyclical, reflecting overall
macroeconomic conditions, seasonality and company-specific budgeting and buying
patterns. Our advertisers are also concentrated in the technology sector
and the economic conditions in this sector also impact their spending
decisions. Because we derive a large part of our Media revenue from
these advertisers, decreases in or delays of advertising spending could reduce
our revenue or negatively impact our ability to grow our revenue.
The
market in which our SourceForge platform participates is becoming more
competitive, and if we do not compete effectively our Media business could be
harmed.
Our SourceForge.net
platform hosts Open Source software projects, and we derive the majority of our
Media revenue by selling advertising campaigns on this site. Because
the cost to develop and host websites has declined over time, an increasing
number of companies, organizations and individuals have begun hosting Open
Source code and offering Open Source software development-related services. In
addition, Google offers Open Source code hosting capabilities that may be viewed
as competitive to SourceForge.net’s offering. Because Google enjoys
substantial competitive advantages in the online space generally, including
powerful brand identity, established marketing relationships, larger visitor
base, and greater financial, technical, and other resources, we may be unable to
compete effectively with Google’s offering. Our competitors may be able to
respond more quickly and effectively than we can to new or changing Open Source
software opportunities, technologies, standards, or user requirements.
Because of our competitors’ advantages, even if our services are more effective
than those of our competitors, users might accept the services of our
competitors in lieu of ours. If we fail to compete effectively, our Media
business could be negatively impacted.
If
we fail to execute our direct sales strategy, our revenue will be adversely
affected.
Our direct sales
force is increasingly focused on selling our premium advertising products to a
select group of advertisers. If we fail to achieve increased spending
levels from these advertisers, we may not meet our revenue
goals. Additionally, we refer and will continue to refer other
advertisers to our ad network partners. If such advertisers do not
utilize our ad network partners to advertise on our sites our revenue will be
adversely impacted.
35
We
face competition from traditional media companies, and we may not be included in
the advertising budgets of advertisers, which could harm our operating
results.
We face competition
from companies that have better brand awareness and long-term relationships with
current and potential advertisers. Advertisers with fixed budgets may
allocate only a portion of their budgets to Internet advertising. If
we fail to convince these advertisers and their advertising agencies to spend
their advertising budgets with us, or if our existing advertisers reduce the
amount they spend on our programs, our operating results would be
harmed.
We
have made and continue to make significant investments in our web properties and
services offered thereon, which may fail to become profitable
endeavors.
We have made and
will continue to make significant investments in research, development and
marketing for our web properties and services offered thereon. Investments in
new technology are inherently speculative. We continue to focus on initiatives
to accelerate the pace of improvements to our web properties. These
efforts require substantial investments of our time and resources and may be
hindered by unforeseen delays and expenses. Our efforts may not be
successful in achieving our desired objective and, even if we achieve the
desired objective, our audience or our advertisers may not respond positively to
these improvements. Failure to grow revenue sufficiently to offset
the significant investments will materially and adversely affect our business
and operating results.
Unplanned
system interruptions, capacity constraints or failure to effect efficient
transmission of user communications and data over the Internet could harm our
business and reputation.
The success of our
Media business largely depends on the efficient and uninterrupted operation of
the computer and communications hardware and network systems that power our web
properties. We do not currently have a formal disaster recovery plan and
substantially all of our computer and communications systems are located in a
single data center near Chicago, Illinois. Our systems and operations
remain vulnerable to damage or interruption from fire, power loss,
telecommunications failure and similar events.
We experience
unplanned service interruptions with all our online sites. Service
interruptions may be caused by a variety of factors, including capacity
constraints, single points of hardware failure, software design flaws and bugs,
and third party denial of service attacks. Although we continue to work to
improve the performance and uptime of our web properties, and have taken steps
to mitigate these risks, we expect that service interruptions will continue to
occur from time to time. If our web properties experience frequent or
lengthy service interruptions, our business and reputation will be seriously
harmed.
Risks
Related To Our E-commerce Business
We
are subject to risks as a result of our reliance on foreign sources of
production for certain products.
In order to offer
cost-effective and innovative products, we are increasingly relying on
manufacturers located outside of the United States, most of which are located in
Asia (primarily China), to supply us with these products in sufficient
quantities — based on our forecasted customer demand — and to deliver these
products in a timely manner.
Our arrangements
with these manufacturers are generally limited to purchase orders tied to
specific lots of goods. We are subject to the risks of relying on
products manufactured outside the United States, including political unrest,
trade restrictions, customs and inspections an duties, local business practice
and political issues. Additionally, significant reliance on foreign
sources of productions increases the risk of issues relating to compliance with
domestic or international labor standards, compliance with domestic or
international manufacturing and product safety standards, currency fluctuations,
restrictions on the transfer of funds, work stoppages or slowdowns and other
labor issues, economic uncertainties including inflation and government
regulations, availability and costs of raw materials, potentially adverse tax
consequences and other uncertainties. China, in particular, has recently
experienced rapid social, political and economic change, and further changes may
adversely affect our ability to procure our products from Chinese
suppliers.
Our ability to
obtain goods on a cost effective basis is also subject to our ability to
maintain relationships with our suppliers and our ability to negotiate and
maintain supply arrangements on favorable terms. The Chinese Yuan (“CNY”)
exchange rate to the U.S. Dollar (“USD”) has not historically been
volatile. In the event that the CNY/USD exchange rate were to change
substantially, our suppliers could attempt to renegotiate our purchase orders
with them and increase our costs. In addition, because our purchases are usually
on a case by case basis, we are subject to the risk of unexpected changes in
pricing or supply from these suppliers. We may also be unable to develop
beneficial relationships with new vendors in the future.
36
We
are exposed to significant inventory risks as a result of seasonality, new
product launches, rapid changes in product cycles and changes in consumer tastes
with respect to our products offered at our ThinkGeek E-commerce web
site.
In order to be
successful, we must accurately predict our customers’ tastes and avoid
over-stocking or under-stocking products. Demand for products can change
significantly between the time inventory is ordered and the date of sale. In
addition, when we begin selling a new product, it is particularly difficult to
forecast product demand accurately. The acquisition of certain types of
inventory, especially inventory of custom manufactured products, or inventory
from certain sources, may require significant lead-time and prepayment, and such
inventory may not be returnable. We carry a broad selection and significant
inventory levels of certain products and we may be unable to sell products in
sufficient quantities or during the relevant selling seasons. Failure
to properly assess our inventory needs will adversely affect our financial
results.
Increased
focus on sales and use tax could subject us to liability for past sales and
cause our future sales to decrease.
We do not collect
sales or other taxes on shipments of most of our goods into most states in the
United States or internationally. The relocation of our fulfillment
center or customer service centers or any future expansion of them, along with
other aspects of our business, may result in additional sales and other tax
obligations. We do not collect consumption tax (including value added
tax, goods and services tax, and provincial sales tax) as applicable on goods
and services sold that are delivered outside of the United
States. One or more states or foreign countries may seek to impose
sales or other tax collection obligations on out-of-jurisdiction E-commerce
companies. A successful assertion by one or more states or foreign countries
that we should collect sales or other taxes on the sale of merchandise or
services could result in substantial tax liabilities for past sales, decrease
our ability to compete with traditional retailers, and otherwise harm our
business.
Currently, U.S.
Supreme Court decisions restrict the imposition of obligations to collect state
and local sales and use taxes with respect to sales made over the Internet.
However, a number of states, as well as the U.S. Congress, have been considering
initiatives that could limit or supersede the Supreme Court’s position regarding
sales and use taxes on Internet sales. If any of these initiatives are
successful, we could be required to collect sales and use taxes in additional
states. The imposition by state and local governments of various taxes upon
Internet commerce could create administrative burdens for us, put us at a
competitive disadvantage if they do not impose similar obligations on all of our
online competitors and decrease our future sales.
We
may be subject to product liability claims if people or property are harmed by
the products we sell on our E-commerce web site, which could be costly to defend
and subject us to significant damage claims.
Some of the
products we offer for sale on our E-commerce web site, such as consumer
electronics, toys, computers and peripherals, toiletries, beverages, food items
and clothing, may expose us to product liability claims relating to personal
injury, death or property damage caused by such products, and may require us to
take actions such as product recalls. Although we maintain liability
insurance, we cannot be certain that our coverage will be adequate for
liabilities actually incurred or that insurance will continue to be available to
us on economically reasonable terms, or at all. In addition, some of our vendor
agreements with our suppliers do not indemnify us from product liability, and
even if some agreements provide for indemnification, it may be prohibitively
costly to avail ourselves of the benefits of the protection.
If
we do not maintain sufficient E-commerce inventory levels, or if we are unable
to deliver our E-commerce products to our customers in sufficient quantities,
our E-commerce business operating results will be adversely
affected.
We must be able to
deliver our merchandise in sufficient quantities to meet the demands of our
customers and deliver this merchandise to customers in a timely manner. We must
be able to maintain sufficient inventory levels, particularly during the peak
holiday selling seasons. If we fail to achieve these goals, we may be unable to
meet customer demand, and our financial results will be adversely
affected.
37
We
are dependent upon a single third-party fulfillment and warehouse
provider. The satisfaction of our customers is highly dependent upon
fulfillment of orders in a professional and timely manner, so any decrease in
the quality of service offered by our fulfillment and warehouse provider will
adversely affect our reputation and the growth of our E-commerce
business.
Our E-commerce
business’s ability to receive inbound inventory and ship completed orders
efficiently to our customers is substantially dependent on a third-party
contract-fulfillment and warehouse provider. We currently utilize the
services of Dotcom Distribution, Inc. (“Dotcom Distribution”), located in
Edison, New Jersey. In April 2010, we entered into an agreement
with a new third-party contract-fulfillment and warehouse
provider. We expect to start shipping product from this provider in
our third calendar quarter which ends on September 30, 2010. In
conjunction with this change we will incur additional costs, including systems
costs, costs to relocate inventory to the new provider and costs resulting from
maintaining two warehouses until the expiration of the Dotcom Distribution
agreement in November 2010. This change of providers will require
significant efforts by our E-commerce management's engineering and operations
teams which could distract them from effectively managing the
business. If we are not able to effectively complete the transition,
or do not complete the transition in a timely manner, our revenue and financial
results will be adversely affected and our reputation will be seriously
harmed.
Unplanned
system interruptions and capacity constraints could harm our revenue and
reputation.
Our E-commerce
business is dependent on the uninterrupted and highly-available operation of our
web site. We experience periodic service interruptions with our E-commerce
web site. Service interruptions may be caused by a variety of
factors, including capacity constraints, software design flaws and bugs, and
third party denial of service attacks. If we fail to provide
customers with such access to our web site at the speed and performance which
they require, our E-commerce sales would be adversely affected and our business
reputation may be seriously harmed.
We do not currently
have a formal disaster recovery plan and our E-commerce related computer and
communications systems are located in a single data center near Chicago,
Illinois. Our systems and operations remain vulnerable to damage or
interruption from fire, power loss, telecommunications failure and similar
events. If our ThinkGeek.com web site experiences frequent or lengthy
service interruptions, our business and reputation will be seriously
harmed.
Risks
Related To Our Financial Results
Certain
factors specific to our businesses over which we have limited or no control may
nonetheless adversely impact our total revenue and financial
results.
The primary factors
over which we have limited or no control that may adversely impact our total
revenue and financial results include the following:
·
|
specific
economic conditions relating to online advertising and/or E-commerce
spending;
|
·
|
the
discretionary nature of our Media customers’ purchase and budget
cycles;
|
·
|
our ability
to deliver advertisements which meet our customers’
requirements;
|
·
|
the spending
habits of our E-commerce customers;
|
·
|
the size and
timing of Media customer orders;
|
·
|
long media
sales cycles;
|
·
|
our ability
to retain skilled engineering, marketing and sales
personnel;
|
·
|
our ability
to demonstrate and maintain attractive online user
demographics;
|
38
·
|
the addition
or loss of specific advertisers and the size and timing of advertising
purchases by individual customers;
and
|
·
|
our ability
to keep our web properties operational at a reasonable
cost.
|
If our revenue and
operating results fall below our expectations, the expectations of securities
analysts or the expectations of investors, the trading price of our common stock
will likely be materially and adversely affected. You should not rely on the
results of our business in any past periods as an indication of our future
financial performance.
If
we fail to satisfy the Nasdaq Global Market’s listing requirements, then we will
face possible delisting, which could result in a limited public market for our
common stock and make obtaining future equity financing more difficult for
us.
The Nasdaq Global
Market requires companies to maintain a minimum closing bid price of $1.00 and a
specified minimum market value. Although our common stock has
recently traded above $1.00, we have also recently experienced periods where our
stock traded below the $1.00 minimum closing bid price. If we are
unable to satisfy Nasdaq's requirements for continued listing on the Nasdaq
Global Market, our securities may be delisted from the Nasdaq Global Market.
There can be no assurances that we will satisfy the standards to regain
compliance. The delisting of our common stock from the Nasdaq Global Market may
have a material adverse effect on us by, among other things,
reducing:
·
|
the liquidity
of our common stock; the market price of our common stock; the number of
institutional and other investors that will consider investing in our
common stock;
|
·
|
the number of
market makers in our common stock;
|
·
|
the
availability of information concerning the trading prices and volume of
our common stock;
|
·
|
the
availability of information concerning the trading prices and volume of
our common stock;
|
·
|
the number of
broker-dealers willing to execute trades in shares of our common stock;
and
|
·
|
our ability
to obtain equity financing for the continuation of our
operations.
|
Future
changes in financial accounting standards, including pronouncements and
interpretations of accounting pronouncements on revenue recognition, share-based
payments, fair value measurements and financial instruments, may cause adverse
unexpected revenue fluctuations and/or affect our reported results of
operations.
From time to time,
the Financial Accounting Standards Board (“FASB”) may issue updates to the FASB
Accounting Standards Codification. A change in an accounting policy can
have a significant effect on our reported results and may even affect our
reporting of transactions completed before a change is announced.
Accounting policies affecting our business, including rules relating to fair
value accounting, revenue recognition, share-based payments and financial
instruments have recently been revised or are under review. The SEC has
announced that they will issue a proposed a roadmap regarding the potential use
of financial statements prepared in accordance with International Financial
Reporting Standards (“IFRS“). IFRS is a comprehensive series of accounting
standards published by the International Accounting Standards Board. Under the
proposed roadmap, we could be required in 2014 to prepare financial statements
in accordance with IFRS, and the SEC will make a determination in 2011 regarding
the mandatory adoption of IFRS. Required changes in our application of
accounting pronouncements could cause changes in our reported results of
operations and our financial condition.
39
If
we fail to adequately monitor and minimize our use of existing cash, we may need
additional capital to fund continued operations beyond the next 12
months.
We used $8.0
million of cash from operating activities during the six months ended June 30,
2010, and we have historically experienced annual cash shortfalls. Unless we
monitor and minimize the level of use of our existing cash, cash equivalents and
marketable securities, we may require additional capital to fund continued
operations beyond the next 12 months. In addition, our existing marketable
securities may not provide us with adequate liquidity when
needed. While we believe we will not require additional capital to
fund continued operations for the next 12 months, we may require additional
funding within this time frame, and this additional funding, if needed, may not
be available on terms acceptable to us, or at all. A slowdown in online
advertising and/or E-commerce spending, a change in our third-party
contract-fulfillment provider, as well as other factors that may arise, could
affect our future capital requirements and the adequacy of our available funds.
As a result, we may be required to raise additional funds through private or
public financing facilities, strategic relationships or other arrangements. Any
additional equity financing would likely be dilutive to our stockholders. Debt
financing, if available, may involve restrictive covenants on our operations and
financial condition. Our inability to raise capital when needed could seriously
harm our business.
We
have a history of losses and may incur net losses in the foreseeable future.
Failure to attain consistent profitability may materially and adversely affect
the market price of our common stock and our ability to raise capital and
continue operations.
We generated a net
loss of $5.3 million during the six months ended June 30, 2010, and we have an
accumulated deficit of $755.6 million as of June 30, 2010. Additionally,
we may incur net losses in the future. Failure to attain profitability on
a sustained basis may materially and adversely affect the market price of our
common stock and our ability to raise capital and continue operations beyond the
next 12 months.
Risks
Related To Competition
Our
competition is intense. Our failure to compete successfully could
adversely affect our revenue and financial results.
The market for
Internet content and services is intensely competitive and rapidly evolving. It
is not difficult to enter this market and current and new competitors can launch
new Internet sites at relatively low cost. We compete with various
media businesses for advertising revenue, including newspaper, radio, magazine
and Internet media companies.
We derive a
significant portion of our revenue from E-commerce, for which we compete with
other E-commerce companies as well as traditional brick and mortar retailers.
Increases in shipping costs or the taxation of Internet commerce may make our
products uncompetitive when compared with traditional “brick and mortar”
retailers. We may fail to compete successfully with current or future
competitors. Moreover, increased competition could result in price reductions,
reduced margins or loss of market share, any of which could have a material
adverse effect on our future revenue and financial results. If we do not compete
successfully for new users and advertisers, our financial results may be
materially and adversely affected.
Risks
Related To Intellectual Property
We
are vulnerable to claims that our web properties infringe third-party
intellectual property rights. Any resulting claims against us could be
costly to defend or subject us to significant damages.
We expect that our
web properties will increasingly be subject to infringement claims as the number
of competitors in our industry segment grows and the functionality of web
properties in different Internet industry segments overlap. The scope of United
States patent protection for software is not well defined and will evolve as the
United States Patent and Trademark Office grants additional patents. Because
patent applications in the United States are not publicly disclosed until the
patent is issued, applications may have been filed that would relate to our
products. In addition, we may receive patent infringement claims as
companies increasingly seek to patent their software. Our developers may fail to
perform patent searches and may therefore unwittingly infringe on third-party
patent rights. We cannot prevent current or future patent holders or other
owners of intellectual property from suing us and others seeking monetary
damages or an injunction against our web offerings. A patent holder may
deny us a license or force us to pay royalties. In either event, our operating
results could be seriously harmed. In addition, employees hired from competitors
might utilize proprietary and trade secret information from their former
employers without our knowledge, even though our employment agreements and
policies clearly prohibit such practices.
40
Any litigation
regarding our intellectual property, with or without merit, could be costly and
time consuming to defend, divert the attention of our management and key
personnel from our business operations and cause interruption in our web
offerings. Claims of intellectual property infringement may require us to enter
into royalty and licensing agreements that may not be available on terms
acceptable to us, or at all. In addition, parties making claims against us may
be able to obtain injunctive or other equitable relief that could effectively
block our ability to offer one or more of our web sites, or services thereon in
the United States and abroad and could result in an award of substantial damages
against us. Defense of any lawsuit or failure to obtain any required license
could delay release of our products and increase our costs. If a successful
claim is made against us and we fail to develop or license a substitute
technology, our business, results of operations, financial condition or cash
flows could be immediately and materially adversely affected.
If
we fail to adequately protect our intellectual property rights, competitors may
use our technology and trademarks, which could weaken our competitive position,
reduce our revenue, and increase our costs.
We rely on a
combination of copyright, trademark and trade secret laws, employee and
third-party nondisclosure agreements, and other arrangements to protect our
proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to copy our web sites, or products and services
offered thereon or obtain and use information that we regard as proprietary to
create sites that compete against ours. Some license provisions protecting
against unauthorized use, copying, transfer, and disclosure of our licensed
programs may be unenforceable under the laws of certain jurisdictions and
foreign countries.
In addition, the
laws of some countries do not protect proprietary rights to the same extent as
do the laws of the United States. To the extent that we increase our
international activities, our exposure to unauthorized copying and use of our
web properties and proprietary information will increase.
Our collection of
trademarks is important to our business. The protective steps we take or have
taken may be inadequate to deter misappropriation of our trademark rights. We
have filed applications for registration of and registered some of our
trademarks in the United States and internationally. Effective trademark
protection may not be available in every country in which we offer or intend to
offer our products and services. Failure to protect our trademark rights
adequately could damage our brand identity and impair our ability to compete
effectively. Furthermore, defending or enforcing our trademark rights could
result in the expenditure of significant financial and managerial
resources.
Our success depends
significantly upon our proprietary technology and information. Despite our
efforts to protect our proprietary technology and information, it may be
possible for unauthorized third parties to copy certain portions of our
offerings or to reverse engineer or otherwise obtain and use our proprietary
technology or information. In our E-commerce business, we periodically discover
products that are counterfeit reproductions of our products or designs, or that
otherwise infringe our intellectual property rights. The actions we
take to establish and protect our intellectual property rights may not be
adequate to prevent imitation of our offerings by others or prevent others from
seeking to block sales of our offerings as violations of proprietary rights.
Existing copyright laws afford only limited protection, and the laws of certain
foreign countries may not protect intellectual property rights to the same
extent as do United States laws. Litigation may be necessary to protect our
proprietary technology and information. Such litigation may be costly and
time-consuming and if we are unsuccessful in challenging a party on the basis of
intellectual property infringement, our sales and intellectual property rights
could adversely be affected and result in a shift of customer preference away
from our offerings.
In addition, we
cannot be certain that others will not develop substantially equivalent or
superseding proprietary technology, or that equivalent offerings will not be
marketed in competition with our offerings, thereby substantially reducing the
value of our proprietary rights. Currently, we do not have any software,
utility, or design patents and we cannot assure that we will develop proprietary
offerings or technologies that are patentable, that any patent, if issued, would
provide us with any competitive advantages or would not be challenged by third
parties, or that the patents of others will not adversely affect our ability to
do business.
Other
Risks Related To Our Overall Business
We
are exposed to risks associated with worldwide economic slowdowns and related
uncertainties.
We are subject to
macroeconomic fluctuations in the U.S. economy and
elsewhere. Concerns about consumer and investor confidence, volatile
corporate profits and reduced capital spending, international conflicts,
terrorist and military activity, civil unrest and pandemic illness could cause a
slowdown in sales revenue. In addition, political and social turmoil related to
international conflicts and terrorist acts may put further pressure on economic
conditions in the United States and abroad.
41
Recent
macroeconomic issues involving the broader financial markets, including the
housing and credit system and general liquidity issues in the securities
markets, have negatively impacted the economy and may negatively affect our
business. In addition, weak economic conditions and declines in
consumer spending and consumption may harm our operating
results. Purchases of our online advertising and E-commerce products
are discretionary. If the economic climate deteriorates, customers or
potential customers could delay, reduce or forego their purchases of our
products and services, which could impact our business in a number of ways,
including lower prices for our products and services and reduced or delayed
sales. There could be a number of follow-on effects from the current
financial crisis on our business, including insolvency of key suppliers
resulting in product delays; delays in customer payments of outstanding accounts
receivable and/or customer insolvencies; counterparty failures negatively
impacting our operations; and increased expense or inability to obtain future
financing.
If the negative
macroeconomic conditions persist, or if the economy enters a prolonged period of
decelerating growth, our results of operations may be harmed.
We
may be subject to claims as a result of information published on, posted on or
accessible from our Internet sites, which could be costly to defend and subject
us to significant damage claims.
We may be subject
to claims of defamation, negligence, copyright or trademark infringement
(including contributory infringement) or other claims relating to the
information contained on our Internet sites, whether written by third parties or
us.
Claims of
defamation have been brought against online services in the past and can be
costly to defend regardless of the merit of the lawsuit. Although
federal legislation protects online services from some claims when third parties
write the material, this protection is limited. Furthermore, the law
in this area remains in flux and varies from state to state. We receive
notification from time to time of potential claims, but have not been named as a
party to litigation involving such claims. While no formal defamation complaints
have been filed against us to date, our business could be seriously harmed if
one were asserted.
Claims of
infringement or other violations of intellectual property rights are common
among Internet, media and technology companies because such companies often own
large numbers of patents, copyrights, trademarks and trade
secrets. Such claims often result in litigation, which is time
consuming and can be costly to litigate, regardless of the merits of the claim
or the eventual outcome of the claim. In addition, any time one of
our online services links to or hosts material in which others allegedly own
copyrights, we face the risk of being sued for copyright infringement or related
claims. Because hosting of third party content comprises the majority
of the online services that we offer, the risk of harm from such lawsuits could
be substantial. Intellectual property claims are often time-consuming
and may also be expensive to litigate or settle.
In addition to
substantial defense costs, to the extent claims against us are successful, we
may have to pay substantial monetary damages or discontinue one or more of our
services or practices that are found to be in violation of another party’s
rights. We may also acquire licenses or pay royalties in order to
continue such practices, which may increase our operating expenses and have an
adverse impact on our results of operations.
We
may not detect weaknesses in our internal control over financial reporting in a
timely manner, or at all.
Pursuant to Section
404 of the Sarbanes-Oxley Act of 2002, we are required to evaluate the
effectiveness of our internal control over financial reporting as well as our
disclosure controls and procedures each fiscal year. As of December
31, 2009 management has concluded that our internal control over financial
reporting and our disclosure controls and procedures were
effective. We will need to continue to evaluate, upgrade and enhance
our internal controls. Because of inherent limitations, our internal
control over financial reporting may not prevent or detect misstatements, errors
or omissions, and any projections of any evaluation of effectiveness of internal
controls to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions or that the degree of compliance
with our policies or procedures may deteriorate. We cannot be certain
in future periods that other control deficiencies that may constitute one or
more “significant deficiencies” (as defined by the relevant auditing standards)
or material weaknesses in our internal control over financial reporting will not
be identified. If we fail to maintain the adequacy of our internal
controls, including any failure to implement or difficulty in implementing
required or new or improved controls, our business and results of operations
could be harmed, the results of operations we report could be subject to
adjustments, we may not be able to provide reasonable assurance as to our
financial results or the effectiveness of our internal controls and/or we may
not be able to meet our reporting obligations.
42
If
we are unable to implement appropriate systems, procedures and controls, we may
not be able to successfully offer our services and grow our
business.
Our ability to
successfully offer our services and grow our business requires an effective
planning and management process. We periodically update our operations and
financial systems, procedures and controls, however; we still rely on manual
processes and procedures that may not scale commensurately with our business
growth. Our systems will continue to require automation, modifications and
improvements to respond to current and future changes in our business. If we
cannot grow our businesses, and manage that growth effectively, or if we fail to
implement in a timely manner appropriate internal systems, procedures, controls
and necessary automation and improvements to these systems, our businesses will
suffer.
If
we lose key personnel or fail to integrate replacement personnel successfully,
our ability to manage our business could be impaired.
Our future success
depends upon the continued service of our key management, technical, sales, and
other critical personnel. Our officers and other key personnel are
employees-at-will, and we cannot assure that we will be able to retain
them. Key personnel have left our company in the past and there likely
will be additional departures of key personnel from time to time in the
future. The loss of any key employee could result in significant
disruptions to our operations, including adversely affecting the timeliness of
product releases, the successful implementation and completion of company
initiatives, and the results of our operations. Competition for these
individuals is intense, and we may not be able to attract, assimilate or retain
highly qualified personnel. Competition for qualified personnel in our
industry and the San Francisco Bay Area, as well as other geographic markets, in
which we recruit, is intense. In the Internet and high technology
industries, qualified candidates often consider equity awards in compensation
arrangements and fluctuations in our stock price may make it difficult to
recruit, retain, and motivate employees. In addition, the integration of
replacement personnel could be time consuming, may cause additional disruptions
to our operations, and may be unsuccessful.
Our
stock price has been volatile historically and may continue to be
volatile.
The trading price
of our common stock has been and may continue to be subject to wide
fluctuations. During the quarter ended June 30, 2010, the closing sale prices of
our common stock on the NASDAQ Global Market ranged from $1.24 to $1.61 per
share and the closing sale price on June 30, 2010, the last trading day of the
quarter, was $1.24 per share. Our stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating results,
announcements of technological innovations or new products and media properties
by us or our competitors, changes in financial estimates and recommendations by
securities analysts, the operating and stock price performance of other
companies that investors may deem comparable to us, and news reports relating to
trends in our markets or general economic conditions.
In addition, the
stock market in general, and the market prices for Internet-related companies in
particular, have experienced volatility that often has been unrelated to the
operating performance of such companies. These broad market and industry
fluctuations may adversely affect the price of our stock, regardless of our
operating performance. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability to retain key
employees, all of whom have been granted stock options.
Sales
of our common stock by a significant stockholder may cause the price of our
common stock to decrease.
Several of our
stockholders own significant portions of our common stock. If these stockholders
were to sell substantial amounts of their holdings of our common stock, then the
market price of our common stock could be negatively impacted. The effect of
such sales, or of significant portions of our stock being offered or made
available for sale, could result in strong downward pressure on our stock
price. Investors should be aware that they could experience
significant short-term volatility in our stock if such stockholders decide to
sell a substantial amount of their holdings of our common stock at once or
within a short period of time.
43
Our
networks may be vulnerable to unauthorized persons accessing our systems, which
could disrupt our operations and result in the theft of our proprietary
information.
A party who is able
to circumvent our security measures could misappropriate proprietary information
or cause interruptions or malfunctions in our Internet operations. We may be
required to expend significant capital and resources to protect against the
threat of security breaches or to alleviate problems caused by breaches in
security.
Increasing
regulation of the Internet or imposition of sales and other taxes on products or
services sold or distributed over the Internet could harm our
business.
The E-commerce
market on the Internet is relatively new and rapidly evolving. While this is an
evolving area of the law in the United States and overseas, currently there are
relatively few laws or regulations that directly apply to commerce on the
Internet. Changes in laws or regulations governing the Internet and E-commerce,
including, without limitation, those governing an individual’s privacy rights,
pricing, content, encryption, security, acceptable payment methods and quality
of products or services could have a material adverse effect on our business,
operating results and financial condition. Taxation of Internet commerce, or
other charges imposed by government agencies or by private organizations, may
also be imposed. Recently New York State has adopted legislation which attempts
to impose sales tax collection and reporting obligation on Internet companies.
Any of these regulations could have an adverse effect on our future sales and
revenue growth.
Business
disruptions could affect our future operating results.
Our operating
results and financial condition could be materially and adversely affected in
the event of a major earthquake, fire or other catastrophic
event. Our corporate headquarters and certain other critical business
operations are located in California, near major earthquake faults. A
catastrophic event that results in the destruction of any of our critical
business or information technology systems could severely affect our ability to
conduct normal business operations and as a result our future operating results
could be adversely affected.
System
disruptions could adversely affect our future operating results.
Our ability to
attract and maintain relationships with users, advertisers, merchants and
strategic partners will depend on the satisfactory performance, reliability and
availability of our Internet channels and network infrastructure. Our Internet
advertising revenue relates directly to the number of advertisements delivered
to our users. System interruptions or delays that result in the unavailability
of Internet pages or slower response times for users would reduce the number of
advertisements delivered to such users and reduce the attractiveness of our web
properties to users, strategic partners and advertisers or reduce the number of
impressions delivered and thereby reduce revenue. In the past year, all of our
web properties have experienced unplanned service interruptions. We will
continue to suffer future interruptions from time to time whether due to
capacity constraints, natural disasters, telecommunications failures, other
system failures, rolling blackouts, viruses, hacking or other events. System
interruptions or slower response times could have a material adverse effect on
our revenue and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
Items
2(a) and 2(b) are not applicable.
(c)
Issuer Purchases of Equity Securities
The following table
sets forth information regarding the Company’s purchases of its common stock
during the three months ended June 30, 2010.
44
Total Number of
Shares
Purchased
|
Average Price
Paid Per Share
|
|||||||
Period
|
(1) |
(1)
|
||||||
April 1, 2010
to April 30, 2010
|
- | $ | - | |||||
May 1, 2010
to May 31, 2010
|
- | $ | - | |||||
June 1, 2010
to June 30, 2010
|
71,182 | $ | 1.38 | |||||
Total
|
71,182 | $ | 1.38 |
(1) Represent
shares repurchased to satisfy tax withholding obligations arising on the vesting
of shares of restricted stock.
Item 6. Exhibits
Exhibit No.
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act Of 2002.
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
GEEKNET,
INC.
|
||
By:
|
/s/
|
SCOTT L. KAUFFMAN
|
Scott L.
Kauffman
|
||
President
and Chief Executive Officer
|
||
By:
|
/s/
|
PATRICIA S. MORRIS
|
Patricia S.
Morris
|
||
Senior
Vice President and Chief Financial
Officer
|
Date: August 4,
2010
45
EXHIBIT
INDEX
Exhibit No.
|
Description
|
|||
31.1
|
—
|
Certification
of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
||
31.2
|
—
|
Certification
of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
||
32.1
|
|
—
|
|
Certification
Of Chief Executive Officer and Chief Financial Officer Pursuant To 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 Of The
Sarbanes-Oxley Act Of 2002.
|