UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
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or
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For
the fiscal year ended December 31, 2009
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For
the transition period from
to
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Commission
File Number: 000-28369
Geeknet,
Inc.
(Exact
name of Registrant as specified in its charter)
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Delaware
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77-0399299
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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650
Castro Street, Suite 450, Mountain View, CA 94041
(Address,
including zip code, of principal executive offices)
(650)
694-2100
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, $0.001 par value
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The
Nasdaq Stock Market LLC (Nasdaq Global Market)
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(Title
of Class)
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(Name
of each exchange on which
registered)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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.
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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check
one):
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Large
accelerated filer
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Accelerated
filer
x
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Non-accelerated
filer
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Smaller
reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
As of
February 24, 2010, there were
60,545,579
shares of the registrant’s Common Stock outstanding. The aggregate market
value of the Common Stock held by non-affiliates of the registrant as of June
30, 2009 (based on the closing price for the Common Stock on the NASDAQ Global
Market for such date) was approximately $57.9 million. Shares of common
stock held by each of our officers and directors and by each person or group who
owns 5% or more of our outstanding common stock have been excluded in that such
persons or groups may be deemed to be our affiliate. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders which will be
held on May 4, 2010, and which will be filed pursuant to Regulation 14A within
120 days after the registrant’s year ended December 31, 2009, are incorporated
by reference into Part III of this Form 10-K.
Table
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PART I
ITEM 1. Business
Special
Note Regarding Forward-Looking Statements
This
Form 10-K 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;
sales and
marketing expenses; research and development expenses; absence of cash flows
from discontinued operations; bearer risk associated with our ARS Right with
UBS;
financial performance and results of operations; technological
trends in, and demand for online advertising; changes to our relationship
with third-party vendors; management's strategy, plans and objectives for
future operations; employee relations and our ability to attract and retain
highly qualified personnel; our intent to continue to invest in establishing our
brand identity 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; and sufficiency of our cash resources and investments
to meet our operating and working capital requirements. Actual results may
differ materially from those expressed or implied in such forward-looking
statements due to various factors, including those set forth in this Business
section under “Competition” and in the Risk Factors contained in Item 1.A of
this Form 10-K. We undertake no obligation to update the forward-looking
statements to reflect events or circumstances occurring after the date of this
Form 10-K.
Introduction
We are
an online network for the global geek community, comprised of technology
professionals, technology enthusiasts and general consumers of
technology-oriented goods, services and media. Our sites include:
SourceForge, Slashdot, ThinkGeek, Ohloh and freshmeat. We provide our
audiences with content, culture, connections and commerce.
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 and on Slashdot to peer-produce and
peer-moderate technology news and discussion. Our E-commerce segment
sells geek-themed retail products to technology enthusiasts and general
consumers through our ThinkGeek web site.
We were
incorporated in California in January 1995 and reincorporated in Delaware in
December 1999. From the date of its 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
(“Ohloh”), a directory of open source projects and developers, and in November
2009 we changed our name to Geeknet to project a more accurate reflection of our
business, primarily to the advertising community.
We are
subject to the informational requirements of the Securities Exchange Act of 1934
(the “Exchange Act”). Therefore, we file periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the “SEC”). Such reports, proxy statements and other information may be
obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE,
Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site (http://sec.gov) that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC.
You can
access other information at our Investor Relations web site at
http://geek.net/investors. The content of this web site is not
intended to be incorporated by reference into this report or any other report we
file with the SEC. We make available, free of charge, copies of our annual
report on Form 10-K as soon as reasonably practicable after filing such material
electronically or otherwise furnishing it to the SEC, and have made our annual
reports on Form 10-K available on our web site since November 2002.
Business Overview
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, Slashdot, Ohloh
and freshmeat — to create, improve, compare and distribute Open Source software,
and to debate and discuss current issues relating to technology. Our
E-commerce segment sells geek-themed retail products to technology enthusiasts
and general consumers through our ThinkGeek web site.
Media
Our
Media business connects millions of influential technology professionals and
technology enthusiasts. These web sites serve more than 37 million unique
visitors per month worldwide. (Source: Google Analytics, December
2009). Technology professionals and technology enthusiasts turn to
our Media sites to create improve, compare and distribute Open Source software
and to debate and discuss current issues facing the technology community.
Our Media business is supported by advertisers who want to reach our unique
audience of visitors to our web sites. Our web sites are described
below:
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SourceForge
provides the Open Source community with a peer production platform to
develop, host and distribute Open Source software worldwide. As of
December 31, 2009, SourceForge hosted more than 208,000 Open Source
projects and had 2.4 million registered users. The majority of
our traffic originates from countries outside the United
States. SourceForge served 31.7 million unique visitors in
December 2009.
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Slashdot
serves technology professionals and technology enthusiasts with timely,
peer-produced and peer-moderated technology news and discussion.
Slashdot’s lively and robust on-line conversations and interactions
leverage its innovative comment and moderation system. Slashdot
served 3.8 million unique visitors in December
2009.
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Ohloh
is one of the largest, most accurate and up-to-date software directories
available on the web. Ohloh served 1.4 million unique visitors
in December 2009.
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Freshmeat
indexes downloadable Linux, Unix and cross-platform software for a
worldwide IT audience. Freshmeat served 0.6 million unique
visitors in December 2009.
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During
2009 we sold our Linux.com web site to the Linux Foundation.
Our
Media segment represented 25%, 26%, 33% and 38% of net revenue from continuing
operations for the year ended December 31, 2009, the five months ended December
31, 2008 and the years ended July 31, 2008 and July 31, 2007,
respectively.
E-commerce
Our
E-commerce business sells a variety of retail products of interest to technology
enthusiasts and general consumers through our ThinkGeek.com web site. We
offer a significantly broader range of unique products in a single web property
than are available in traditional brick-and-mortar stores, introduce a range of
new products to our audience on a regular basis and also develop, manufacture
and sell our own “Invented at ThinkGeek” custom products. Our
customers are able to buy gadgets, apparel, caffeinated products, electronics,
toys and other specialty items with a single check-out. Consumers can
access the information directly through our web site or contact our customer
care representatives and experts by e-mail at orders@thinkgeek.com or by
telephone at 1-888-GEEKSTUFF. A third-party contract warehouse
provider located in New Jersey receives product and fulfills our customers’
orders. We are considering changing our third-party contract-fulfillment
and warehouse provider. A decision to change providers will result in
additional costs and the transition will also require significant effort by the
management of our E-commerce business.
Our
E-commerce segment represented 75%, 74%, 67% and 62% of net revenue from
continuing operations for the year ended December 31, 2009, the five months
ended December 31, 2008 and the years ended July 31, 2008 and July 31, 2007,
respectively.
Sales and Marketing
Media
We sell
advertising on our Media web sites through our United States-based direct sales
organization, ad networks (primarily Google Inc.’s AdSense for Content) and
international and other third-party representatives. Our direct sales
force is geographically distributed across the United States. In 2010 we hired
an International Commercial Director in London to manage our European sales
efforts.
Our
marketing team is responsible for brand marketing and sales development,
managing and optimizing our utilization of ad networks, metrics and analysis,
public relations and corporate communication. We have recently developed a new
corporate identity and have started efforts to create awareness of that identity
among advertising agencies and clients who buy advertising on our web
sites.
E-commerce
Our
E-commerce marketing and promotion strategy is focused on acquiring new
customers and building brand loyalty with existing customers. This
strategy is designed to increase customer traffic to our online store, add new
customers while improving customer loyalty and increase incremental revenue
opportunities through repeat purchases. We intend to continue to use the
unique capabilities of the Internet as a means to increase awareness of our
brand while encouraging new and repeat customers to visit our web sites.
We participate in traditional online marketing activities such as email, search,
affiliates and social media. We also create printed catalogs which we
mail to customers and include in orders shipped to customers. Our
Geek Points customer retention program is designed to build customer
loyalty. Through this program, customers are rewarded for shopping with
us. When the customers sign up for Geek Points they earn points on all of
their purchases from our ThinkGeek.com web site. Rewards for Geek Points
participants include special promotions, discounts and access to products
available only to those customers enrolled in the program.
Research and Development
Media
We
believe that the success of our Media business will depend on our ability to
enhance our web sites and underlying technology to meet the needs of a
rapidly-evolving marketplace and increasingly-sophisticated and demanding
customers. We have strengthened and modernized, the infrastructure and
architecture underlying our web sites. For example, we are in the
midst of deploying improvements to SourceForge.net that are designed to
facilitate global distribution of software and to improve the development
experience of our users.
E-commerce
We have
implemented a broad array of services and systems for customer service, product
searching, customer communication, order processing and order fulfillment
functions. These services and systems use a combination of our own
proprietary technologies and commercially-available, licensed technologies. We
focus our internal development efforts on creating and enhancing the
specialized, proprietary software to improve our customers’ experience and ease
of use and to increase the functionality of our ThinkGeek.com web
site.
Our core
online merchandise catalog, customer interaction, order collection, fulfillment
and back-end systems are proprietary to ThinkGeek. The systems are
designed to provide connectivity to our distribution center allowing for same
day shipment of in-stock items. These include an inventory tracking system, a
real-time order tracking system, an executive information system and an
inventory replenishment system. Our Internet servers use secure sockets layer
(SSL) technology to help conduct secure communications and transactions.
We continue to invest in improving the E-commerce customer service, order
processing, shipping and tracking systems.
Competition
Media
The
market for Internet media services provided by the Media business is highly
competitive. Advertisers have many alternatives available to reach their
target audience, including print (e.g., Ziff Davis Media’s
eWeek
and International Data
Group’s
Computerworld
),
general portal sites (e.g., aol.com, yahoo.com and msn.com) and other web sites
focused on vertical markets (e.g., Federated Media; CBS Interactive’s
cnet.com
and
techrepublic.com
; QuinStreet,
Inc.’s
internet.com
,
EarthWeb.com
and
DevX.com
; and TechTarget’s
network of web sites) and general business sites (e.g., BusinessWeek.com,
Forbes.com and Fortune.com). In July 2006, Google Inc. (“Google”) began
offering Open Source code hosting capabilities that may be viewed as competitive
to SourceForge.net’s offering; other companies and organizations also offer Open
Source code hosting, Open Source code search, and Open Source software
development-related services. This competition may impact traffic to our
SourceForge web site. We also compete with an increasing number of
sites that host and support Open Source development activities, such as
Github.com and Berlios.de, and compete with online technology news and
information community sites such as news.google.com, Digg.com and
Reddit.com.
Many of
the competitors in our Media business have substantial competitive advantages,
including greater resources that can be devoted to the development, promotion
and sale of their online services, more established sales forces and channels,
greater software and web site development experience and greater name
recognition.
E-commerce
The
market for retail products similar to those offered by ThinkGeek is highly
competitive. We compete with online or mail-order retailers (e.g.
X-tremegeek, Firebox (UK), iwantoneofthose.com, jinx.com and Computergear) and
with Internet portals and online service providers that feature shopping
services (e.g., Amazon.com and Yahoo!). More recently, some online
retailers have developed sites targeted to the computer enthusiast and computer
gaming markets.
We
believe that there are a number of competitive factors in our market, including
company credibility, product selection and availability, convenience, price, web
site features, functionality and performance, ease of purchasing, customer
service and reliability and speed of order shipment.
Many of
the competitors in our E-commerce business have substantial competitive
advantages, including greater resources that can be devoted to the development,
promotion and sale of their online products, more established sales channels,
greater software and web site development experience, and greater name
recognition.
To be
competitive, we must respond promptly and effectively to the challenges of
technological change, evolving standards and our competitors’ innovations by
continuing to enhance our services and products. Any pricing pressures or
loss of potential customers resulting from our failure to compete effectively
would reduce our revenue.
Intellectual Property Rights
We
protect our intellectual property through a combination of copyright, trademark,
patent and trade secret laws, employee and third-party nondisclosure agreements,
and other methods of protection.
Geeknet,
SourceForge, Slashdot, ThinkGeek, Ohloh, freshmeat, and their associated logos
are some of our trademarks that we use in the United States and in other
countries.
Because
the media publishing industry is characterized by rapid technological change, we
believe that factors such as the technological and creative skills of our
personnel, new feature development, name recognition and reliable web sites are
more important to establishing and maintaining a technology leadership position
than the various legal protections of our technology.
Seasonality
Our
E-commerce business is highly seasonal. In the past several years,
reflecting the general pattern associated with the retail industry of peak sales
and earnings during the holiday shopping season, a substantial portion of our
E-commerce revenue occurred in our fourth quarter, which began on October 1,
2009 and ended on December 31, 2009 for our calendar 2009 year. As is
typical in the retail industry, we generally experience lower E-commerce revenue
during the other quarters. Therefore, our E-commerce revenue in a
particular quarter is not necessarily indicative of future E-commerce revenue
for a subsequent quarter or our full year.
Our
Media business experiences lower traffic — often accompanied by reduced
advertising spending — during the summer holiday months in the United States and
Europe.
Employees
We
believe our success will depend in part on our continued ability to attract and
retain highly-qualified personnel in a competitive market for experienced and
talented software engineers and sales and marketing personnel. Our
employees are not represented by any collective bargaining organization; we have
never experienced a work stoppage; and we believe that our relations with our
employees are good. As of December 31, 2009, our employee base totaled
127, including 40 in operations, 28 in sales and marketing, 39 in research and
development and 20 in finance and administration.
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:
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creation
of user-generated content,
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participation
in discussion surrounding such user-generated
content,
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evaluation
of user-generated content, and
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distribution
of user-generated content.
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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.
In
January 2010, we hired an International Commercial Director in London to manage
our European sales efforts. 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.
The
significant increase in available inventory for traditional online advertising
products, which are those advertising units defined by the Interactive
Advertising Bureau, and the resultant commoditization of these products, has had
a significant adverse effect on our direct sales revenue. In order to
grow our direct sales revenue, we will need to introduce new and innovative
advertising products and programs. The successful development and
production of such advertising products or programs is subject to numerous
uncertainties, including our ability to:
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enable
advertisers to showcase products, services and/or brands to their intended
audience and to generate revenue from such
audiences;
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anticipate
and successfully respond to emerging trends in online advertising;
and
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attract
and retain qualified marketing and technical
personnel.
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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 SourceForge.net 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.
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 inspections and 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.
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.
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. If Dotcom Distribution fails to meet our future
distribution and fulfillment needs, our relationship with and reputation among
our E-commerce customers will suffer and this will adversely affect our
E-commerce growth. Additionally, if Dotcom Distribution cannot meet our
distribution and fulfillment needs, particularly during the peak holiday selling
seasons, or our contract with Dotcom Distribution is terminated, we may fail to
secure a suitable replacement or second-source distribution and fulfillment
provider on comparable terms, which would adversely affect our E-commerce
financial results.
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.
We
are considering changing to a new third-party contract-fulfillment and warehouse
provider. If we change providers, our revenue and financial results,
as well as our reputation, could be adversely impacted.
We are
considering changing from Dotcom Distribution to a new third-party
contract-fulfillment and warehouse provider. If we change providers,
we will incur additional costs, such as the procurement of systems, relocation
of inventory to the new third-party warehouse, residual costs from maintaining
two warehouses until the expiration of the Dotcom Distribution agreement
in November 2010, among other costs. Any decision would also be
contingent upon management identifying a suitable provider, which maintains
adequate systems and processes to allow for receiving of inventory and
fulfillment of customer orders. A decision to change providers would
require significant efforts by our E-commerce management, engineering and
operations teams which could distract them from effectively managing the
business. If we change providers and are not able effectively
complete the transition, or do not complete the transition in a timely manner,
our revenue and financial results as well as our reputation will be adversely
affected.
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:
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specific
economic conditions relating to online advertising and/or E-commerce
spending;
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the
discretionary nature of our Media customers’ purchase and budget
cycles;
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our
ability to deliver advertisements which meet our customers’
requirements;
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the
spending habits of our E-commerce
customers;
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the
size and timing of Media customer
orders;
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long
media sales cycles;
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our
ability to retain skilled engineering, marketing and sales
personnel;
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our
ability to demonstrate and maintain attractive online user
demographics;
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the
addition or loss of specific advertisers and the size and timing of
advertising purchases by individual customers;
and
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our
ability to keep our web properties operational at a reasonable
cost.
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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.
Disruptions
and liquidity issues in the credit market may unfavorably impact our financial
condition and results of operations.
We
invest excess funds in specific instruments and issuers approved for inclusion
in our cash and short-term investments accounts pursuant to a written investment
policy established by our Board of Directors and overseen by the Audit Committee
of our Board of Directors. Our investment criteria are to invest only
in top tier quality investments or federally sponsored
investments. Top tier quality investments are determined by our
investment advisors in conjunction with ratings of those investments provided by
outside ratings agencies as well as our investment advisors’ internal credit
specialists. Our cash is invested in overnight investments and
investments that will mature within ninety days after the end of our reporting
period. Our investment portfolio consists of instruments that mature
between ninety-one days and 36 years after the end of our reporting
period.
We may
be impacted by the following risks:
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our
investment portfolio contains auction rate securities, which have recently
experienced liquidity issues due to the failure of
auctions;
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we
have experienced and may continue to experience temporary or permanent
declines in the value of certain investments which would be reflected in
our financial statements; and
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we
may not be able to reasonably value or assess our investments if there is
not a liquid resale market for those
investments.
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We
report changes in the market value of investments as gains or
losses. In the event any investments do not mature as scheduled, we
may be required to recognize additional losses on the investment and our results
of operations would be adversely affected.
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:
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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;
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the
number of market makers in our common
stock;
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the
availability of information concerning the trading prices and volume of
our common stock;
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the
availability of information concerning the trading prices and volume of
our common stock;
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the
number of broker-dealers willing to execute trades in shares of our common
stock; and
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our
ability to obtain equity financing for the continuation of our
operations.
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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
(“IASB”). 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.
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
$5.7 million of cash from operating activities during the year ended December
31, 2009 and although we generated cash from continuing operations for the years
ended July 31, 2008, and 2007, respectively, we have historically experienced
annual cash shortfalls. We used $2.6 million of cash for an acquisition and $3.2
million of cash for the repurchase of common stock during the year ended
December 31, 2009. 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 $14.0 million for the year ended December 31, 2009, and
we have an accumulated deficit of $750.2 million as of December 31, 2009.
Additionally, we expect to 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 also
derive 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.
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.
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 ("Section 404"), 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.
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 our year ended December 31, 2009, the
closing sale prices of our common stock on the NASDAQ Global Market ranged from
$0.80 to $1.55 per share and the closing sale price on December 31, 2009, the
last trading day of our year ended December 31, 2009, was $1.19 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.
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 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our
principal locations are as follows:
|
|
|
|
|
|
|
|
|
|
Location
|
|
Purpose
|
|
Approximate
Size
(in square feet)
|
|
Expiration
of
Lease
|
|
|
|
|
|
|
|
|
|
|
|
Mountain
View, California
|
|
Corporate
headquarters; Media sales and marketing, finance and administration,
research and development
|
|
|
14,583
|
|
2012
|
|
|
Fairfax,
Virginia
|
|
E-commerce
segment operations
|
|
|
15,316
|
|
2014
|
|
|
Dexter,
Michigan
|
|
Research
and development center for Media segment
|
|
|
4,300
|
|
2010
|
|
|
Seattle,
Washington
|
|
Research
and development for Media segment
|
|
|
2,498
|
|
2011
|
|
|
Fremont,
California
|
|
Former
corporate headquarters
|
|
|
139,311
|
|
2010
|
|
We
believe that our existing properties are in good condition and suitable for the
conduct of our business.
Item 3. 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.
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 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.
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.
Item 4. Submission of Matters to a Vote of Security
Holders
Not
applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is traded on the NASDAQ Global Market under the symbol LNUX.
As of February 24, 2010, there were 710 holders of record of our common
stock. We have not declared any cash dividends since our inception and do
not expect to pay any dividends in the foreseeable future. The high and
low closing sales prices, as reported by NASDAQ, of our common stock are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
July 31, 2008
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
1.33
|
|
|
$
|
1.10
|
|
|
$
|
1.39
|
|
|
$
|
0.58
|
|
|
$
|
1.82
|
|
|
$
|
1.31
|
|
|
Third
Quarter
|
|
$
|
1.46
|
|
|
$
|
1.07
|
|
|
$
|
1.50
|
|
|
$
|
1.27
|
|
|
$
|
2.17
|
|
|
$
|
1.58
|
|
|
Second
Quarter
|
|
$
|
1.55
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
$
|
2.65
|
|
|
$
|
1.64
|
|
|
First
Quarter
|
|
$
|
1.25
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
$
|
3.93
|
|
|
$
|
2.09
|
|
The
foregoing reflects interdealer prices without retail markup, markdown, or
commissions and may not necessarily reflect actual transactions.
Stock
Performance Graph
Set
forth below is a line graph comparing the percentage change in the cumulative
return to the stockholders of our Common Stock with the cumulative return of the
NASDAQ Stock Market (U.S.) Index, the Goldman Sachs Technology Internet (“GSTI”)
Index and the RDG Internet Composite (“RDG”) Index for the period commencing
July 31, 2004 and ending on December 31, 2009. Returns for the indices are
weighted based on market capitalization at the beginning of each measurement
point.
Item 6. Selected Financial Data
You
should read the selected consolidated financial data set forth below in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our financial statements and the related notes
included elsewhere in this Form 10-K.
The
statement of operations data for the year ended December 31, 2009, the five
months ended December 31, 2008 and the years ended July 31, 2008 and July 31,
2007 and the balance sheet data as of December 31, 2009 and December 31, 2008
are derived from the audited financial statements and related notes appearing
elsewhere in this Form 10-K. The statement of operations data for the
years ended July 31, 2006 and July 31, 2005 and the
balance sheet data as of July 31, 2007, July 31, 2006 and July 31, 2005 are
derived from audited financial statements not appearing in this Form 10-K.
Net revenue, cost of revenue and operating expenses data excludes the results of
our Software business, which was sold in April 2007 and our Online Images
business, which was sold in December 2005. The historical results are not
necessarily indicative of results that may be expected for any future
period.
Summary
Financial Information
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue from continuing operations
|
|
$
|
65,577
|
|
|
$
|
32,475
|
|
|
$
|
55,326
|
|
|
$
|
45,599
|
|
|
$
|
33,658
|
|
|
$
|
23,048
|
|
|
Cost
of revenue from continuing operations
|
|
|
45,104
|
|
|
|
21,941
|
|
|
|
35,128
|
|
|
|
25,933
|
|
|
|
19,337
|
|
|
|
14,911
|
|
|
Gross
margin from continuing operations
|
|
|
20,473
|
|
|
|
10,534
|
|
|
|
20,198
|
|
|
|
19,666
|
|
|
|
14,321
|
|
|
|
8,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
(14,021
|
)
|
|
|
1,080
|
|
|
|
(4,326
|
)
|
|
|
5,955
|
|
|
|
3,923
|
|
|
|
(257
|
)
|
|
Income
(loss) from discontinued operations, net of income tax expense
(benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,773
|
|
|
|
7,039
|
|
|
|
(4,437
|
)
|
|
Net
income (loss)
|
|
$
|
(14,021
|
)
|
|
$
|
1,080
|
|
|
$
|
(4,326
|
)
|
|
$
|
8,728
|
|
|
$
|
10,962
|
|
|
$
|
(4,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
-
|
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.09
|
|
|
$
|
0.06
|
|
|
$
|
-
|
|
|
Income
(loss) per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
|
Diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
$
|
0.11
|
|
|
$
|
(0.07
|
)
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.13
|
|
|
$
|
0.18
|
|
|
$
|
(0.08
|
)
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.13
|
|
|
$
|
0.17
|
|
|
$
|
(0.08
|
)
|
|
Shares
used in per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,801
|
|
|
|
66,525
|
|
|
|
67,469
|
|
|
|
66,254
|
|
|
|
62,328
|
|
|
|
61,454
|
|
|
Diluted
|
|
|
60,801
|
|
|
|
66,648
|
|
|
|
67,469
|
|
|
|
68,489
|
|
|
|
64,704
|
|
|
|
61,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet data at period-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and investments
|
|
$
|
38,351
|
|
|
$
|
50,021
|
|
|
$
|
52,702
|
|
|
$
|
56,640
|
|
|
$
|
53,043
|
|
|
$
|
38,420
|
|
|
Working
capital
|
|
$
|
40,711
|
|
|
$
|
40,421
|
|
|
$
|
42,933
|
|
|
$
|
44,103
|
|
|
$
|
51,265
|
|
|
$
|
34,369
|
|
|
Total
assets
|
|
$
|
60,151
|
|
|
$
|
74,166
|
|
|
$
|
74,533
|
|
|
$
|
76,863
|
|
|
$
|
63,212
|
|
|
$
|
47,381
|
|
|
Liabilities,
net of current portion
|
|
$
|
103
|
|
|
$
|
1,423
|
|
|
$
|
2,610
|
|
|
$
|
4,121
|
|
|
$
|
5,693
|
|
|
$
|
7,378
|
|
|
Total
stockholders’ equity
|
|
$
|
48,265
|
|
|
$
|
62,567
|
|
|
$
|
63,652
|
|
|
$
|
65,094
|
|
|
$
|
49,378
|
|
|
$
|
31,665
|
|
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with “Selected
Consolidated Financial Data” and our financial statements and the related notes
included elsewhere in this Form 10-K. This discussion contains
forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors including the risks
discussed in “Item 1A. Risk Factors” and elsewhere in this Form
10-K. See Part I — Item 1 — “Special Note Regarding Forward-Looking
Statements.”
Overview
We are
an online network for the global geek community, comprised of technology
professionals, technology enthusiasts and general consumers of
technology-oriented goods, services and media. We own and operate a
network of media web properties, serving the technology professional and
enthusiast, software development and Open Source communities. Through
our ThinkGeek, Inc. subsidiary, we also provide online sales of a variety of
retail products of interest to these communities. We serve a global
online audience and provide the tech-obsessed with content, connections and
commerce. Our network of web properties include: SourceForge,
Slashdot, ThinkGeek, Ohloh and freshmeat.
On April
29, 2009, we changed our fiscal year-end from July 31 to December 31 retroactive
to December 31, 2008. Our discussion and analysis of results of
operations compares the year ended December 31, 2009 to the fiscal year ended
July 31, 2008 as well as the fiscal year ended July 31, 2008 to the fiscal year
ended July 31, 2007. We have also presented the five month transition
period ended December 31, 2008 and unaudited information for the comparable five
month period ended December 31, 2007.
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.
Our
business consists of two operating segments: Media and E-commerce.
Our Media segment provides web properties that serve as platforms for the
creation, review and distribution of online peer produced
content. Our audience of technology professionals and technology
enthusiasts relies on our web properties SourceForge, Slashdot, Ohloh, and
freshmeat to create, improve, compare and distribute Open Source software and to
debate and discuss current issues relating
to technology. Our E-commerce segment sells technology themed
retail products for technology enthusiasts through our ThinkGeek.com web
site.
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 are also investing in our web properties, primarily
SourceForge.net where we launched a more modern platform in July
2009.
We
currently use the following key metrics which are derived from data provided by
Google Analytics to measure our Media business:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unique
Visitors per Month (in thousands)
(1)(2)
|
|
|
35,422
|
|
|
|
33,542
|
|
|
|
33,928
|
|
|
|
36,141
|
|
|
|
33,053
|
|
|
Visits
per Unique Visitor per Month
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
1.9
|
|
|
|
1.8
|
|
|
|
1.9
|
|
|
Visits
per Month (in thousands)
(2)
|
|
|
62,076
|
|
|
|
63,416
|
|
|
|
65,779
|
|
|
|
63,933
|
|
|
|
62,554
|
|
|
Pages
per Visit
|
|
|
2.2
|
|
|
|
2.4
|
|
|
|
2.7
|
|
|
|
2.4
|
|
|
|
2.5
|
|
|
Page
Views per Month (in thousands)
(2)
|
|
|
136,332
|
|
|
|
151,346
|
|
|
|
180,831
|
|
|
|
153,915
|
|
|
|
153,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
per Thousand Pages (RPM)
|
|
$
|
9.00
|
|
|
$
|
10.19
|
|
|
$
|
8.06
|
|
|
$
|
11.02
|
|
|
$
|
9.38
|
|
|
Revenue
per User (RPU)
(3)
|
|
$
|
0.42
|
|
|
$
|
0.55
|
|
|
$
|
0.52
|
|
|
$
|
0.56
|
|
|
$
|
0.52
|
|
|
|
(1)
|
Unique
Visitors per Month is the aggregate average unique visitors for all our
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.
Media
companies have historically reported page views as a metric seeking to measure
users’ level of engagement. Since the introduction of a new web
technology, known as asynchronous JavaScript and XML (“AJAX”) which 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 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 communicate with our customers through social networks such as Facebook and
Twitter. In addition, we launched a site redesign on ThinkGeek’s 10
year anniversary in August 2009.
Sales
for both of our operating segments continue to be primarily attributable to
customers located in the United States of America.
Critical
Accounting Policies
Accounting
policies, methods and estimates are an integral part of the consolidated
financial statements prepared by management and are based upon management’s
current judgments. Those judgments are normally based on knowledge and
experience with regard to past and current events and assumptions about future
events. Certain accounting policies, methods and estimates are
particularly sensitive because of their significance to the financial statements
and because of the possibility that future events affecting them may differ
markedly from management’s current judgments. While there are a number of
accounting policies, methods and estimates affecting our financial statements,
areas that are particularly significant include revenue recognition policies,
the assessment of impairment of goodwill and long-lived assets, restructuring
reserves for excess facilities for non-cancelable leases, income taxes,
stock-based compensation and contingencies and litigation.
Revenue
Recognition
Media
Revenue
Media
revenue is primarily derived from sales of advertising on our various web
properties. We recognize 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.
E-commerce
Revenue
E-commerce
revenue is derived from the online sale of consumer goods. We
recognize E-commerce revenue from the sale of consumer goods when persuasive
evidence of an arrangement exists, delivery has occurred, the sale price is
fixed or determinable, and collectibility is reasonably assured. In
general, the Company recognizes E-commerce revenue when products are shipped and
title transfers to the customer. We grant customers a 30-day right to
return products and we have recorded returns reserves of $0.3 million and $0.2
million at December 31, 2009 and December 31, 2008, respectively.
Long-Lived
Assets
We
continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of long-lived assets may not be
recoverable. When factors indicate that long-lived assets should be
evaluated for possible impairment, we use an estimate of the related
undiscounted future cash flows over the remaining life of the long-lived assets
in measuring whether they are recoverable. If the carrying value of the
asset exceeds the estimated undiscounted future cash flows, a loss is recorded
as the excess of the asset’s carrying value over fair value. Long-lived
assets and certain identifiable intangible assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell.
Goodwill
We
evaluate goodwill for impairment annually and when an event occurs or
circumstances change that indicates that the carrying value may not be
recoverable. Our annual testing date is December 31. Impairment of goodwill is
tested at the reporting unit level by comparing the reporting unit’s carrying
net assets, including goodwill, to the fair value of the reporting unit. The
fair value of the reporting unit is estimated using a combination of the income,
or discounted cash flows, approach and the market approach, which utilizes
comparable companies’ data. If the carrying amount of the reporting unit exceeds
its fair value, goodwill is considered to be impaired and a second step is
performed to measure the amount of the impairment loss. The
preparation of the goodwill impairment analysis requires us to make significant
estimates and assumptions with respect to the determination of fair values of
reporting units and tangible and intangible assets. These estimates and
assumptions, which include future values, are often subjective and may differ
significantly from period to period based on changes in the overall economic
environment, changes in our business and changes in our strategy or our internal
forecasts. We utilize independent valuation experts to assess the
reasonableness of our assumptions and to perform certain portions of our
goodwill impairment analysis.
Restructuring
Costs
In
October 2007, we relocated our corporate headquarters to Mountain View,
California. During our fiscal year ended July 31, 2008, 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 our Software 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. We have a restructuring liability of $1.2 million as of
December 31, 2009 which represents the remaining accrual from non-cancelable
lease payments, less estimated sublease rent, for our former corporate
headquarters in Fremont, California. These lease payments continue
through May 2010.
Stock-Based
Compensation
We
measure compensation cost for stock awards at fair value and recognize the
expense net of estimated forfeitures for those shares expected to vest over the
service period of the award.
Calculating
compensation expense requires the input of subjective assumptions, including the
expected term of the option grant, stock price volatility, and the pre-vesting
option forfeiture rate. We estimate the expected life of options granted based
on historical exercise patterns. We estimate stock price volatility based on
historical implied volatility in our stock. In addition, we are
required to estimate the expected forfeiture rate and only recognize expense for
those shares expected to vest. We estimate the forfeiture rate based on
historical experience of our stock-based awards that are granted, exercised, or
cancelled.
Contingencies
and Litigation
We are
subject to proceedings, lawsuits and other claims. We assess the
likelihood of any adverse judgments or outcomes to these matters as well as
ranges of probable losses. A determination of the amount of any loss
contingency required is assessed and recorded, if probable, after careful
analysis of each individual matter. The required loss contingencies may
change in the future as the facts and circumstances of each matter
change.
Results
of Operations
The
following table sets forth our operating results for the periods indicated as a
percentage of net revenue, represented by selected items from the consolidated
statements of operations. This table should be read in conjunction with
the consolidated financial statements and the accompanying notes included in
this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
revenue
|
|
|
25.1
|
%
|
|
|
33.4
|
%
|
|
|
38.4
|
%
|
|
|
26.1
|
%
|
|
|
25.4
|
%
|
|
E-commerce
revenue
|
|
|
74.9
|
|
|
|
66.6
|
|
|
|
61.6
|
|
|
|
73.9
|
|
|
|
74.6
|
|
|
Net
revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Media
cost of revenue
|
|
|
10.6
|
|
|
|
13.1
|
|
|
|
10.4
|
|
|
|
11.0
|
|
|
|
9.2
|
|
|
E-commerce
cost of revenue
|
|
|
58.2
|
|
|
|
50.4
|
|
|
|
46.5
|
|
|
|
56.6
|
|
|
|
53.5
|
|
|
Cost
of revenue
|
|
|
68.8
|
|
|
|
63.5
|
|
|
|
56.9
|
|
|
|
67.6
|
|
|
|
62.7
|
|
|
Gross
margin
|
|
|
31.2
|
|
|
|
36.5
|
|
|
|
43.1
|
|
|
|
32.4
|
|
|
|
37.3
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
18.0
|
|
|
|
15.1
|
|
|
|
13.4
|
|
|
|
13.3
|
|
|
|
11.6
|
|
|
Research
and development
|
|
|
12.4
|
|
|
|
7.9
|
|
|
|
8.3
|
|
|
|
7.8
|
|
|
|
5.2
|
|
|
General
and administrative
|
|
|
13.4
|
|
|
|
20.1
|
|
|
|
14.1
|
|
|
|
11.6
|
|
|
|
13.3
|
|
|
Amortization
of intangible assets
|
|
|
0.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Restructuring
costs
|
|
|
(0.1
|
)
|
|
|
3.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.0
|
|
|
Total
operating expenses
|
|
|
44.0
|
|
|
|
47.0
|
|
|
|
35.8
|
|
|
|
32.7
|
|
|
|
35.1
|
|
|
Income
(loss) from operations
|
|
|
(12.8
|
)
|
|
|
(10.5
|
)
|
|
|
7.3
|
|
|
|
(0.3
|
)
|
|
|
2.2
|
|
|
Interest
and other income (expense), net
|
|
|
(8.4
|
)
|
|
|
3.0
|
|
|
|
6.4
|
|
|
|
4.1
|
|
|
|
4.0
|
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
(21.2
|
)
|
|
|
(7.5
|
)
|
|
|
13.7
|
|
|
|
3.8
|
|
|
|
6.2
|
|
|
Provision
for income taxes
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.8
|
|
|
Income
(loss) from continuing operations
|
|
|
(21.4
|
)%
|
|
|
(7.7
|
)%
|
|
|
13.1
|
%
|
|
|
3.3
|
%
|
|
|
5.4
|
%
|
Net
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
to 2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Media
revenue
|
|
$
|
16,486
|
|
|
$
|
18,506
|
|
|
$
|
17,496
|
|
|
$
|
8,481
|
|
|
$
|
7,205
|
|
|
|
(11
|
)%
|
|
|
6
|
%
|
|
|
18
|
%
|
|
E-commerce
revenue
|
|
|
49,091
|
|
|
|
36,820
|
|
|
|
28,103
|
|
|
|
23,994
|
|
|
|
21,148
|
|
|
|
33
|
%
|
|
|
31
|
%
|
|
|
13
|
%
|
|
Net
revenue
|
|
$
|
65,577
|
|
|
$
|
55,326
|
|
|
$
|
45,599
|
|
|
$
|
32,475
|
|
|
$
|
28,353
|
|
|
|
19
|
%
|
|
|
21
|
%
|
|
|
15
|
%
|
Revenue
for the year ended December 31, 2009, the five months ended December 31, 2008
and the years ended July 31, 2008 and July 31, 2007 was primarily from customers
located in the United States of America.
For the
year ended December 31, 2009, the five months ended December 31, 2008 and the
years ended July 31, 2008 and July 31, 2007, no one customer represented 10% or
greater of net revenue. We do not anticipate that any one customer will
represent more than 10% of future annual net revenue.
Media
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
to 2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Direct
sales
|
|
$
|
11,531
|
|
|
$
|
14,325
|
|
|
$
|
13,548
|
|
|
$
|
5,418
|
|
|
$
|
5,698
|
|
|
|
(20
|
)%
|
|
|
6
|
%
|
|
|
(5
|
)%
|
|
Ad
Networks
|
|
|
4,200
|
|
|
|
3,341
|
|
|
|
3,101
|
|
|
|
2,576
|
|
|
|
1,209
|
|
|
|
26
|
%
|
|
|
8
|
%
|
|
|
113
|
%
|
|
Other
|
|
|
755
|
|
|
|
840
|
|
|
|
847
|
|
|
|
487
|
|
|
|
298
|
|
|
|
(10
|
)%
|
|
|
(1
|
)%
|
|
|
63
|
%
|
|
Media
revenue
|
|
$
|
16,486
|
|
|
$
|
18,506
|
|
|
$
|
17,496
|
|
|
$
|
8,481
|
|
|
$
|
7,205
|
|
|
|
(11
|
)%
|
|
|
6
|
%
|
|
|
18
|
%
|
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,
and
|
|
|
·
|
Other
represents orders received from our international resellers and to a
lesser extent sales of data and referral
fees.
|
Direct
sales revenue for the year ended December 31, 2009 decreased $2.8 million as
compared with the year ended July 31, 2008. The decrease was
primarily due to a $7.0 million decrease in revenue from advertisers whose
campaigns were not renewed or who chose to advertise at lower levels during the
year ended December 31, 2009, offset in part by increases in revenue of $1.7
million from customers who did not advertise in the year ended July 31, 2008 and
$2.5 million from customers who increased their advertising levels during the
year ended December 31, 2009 as compared with the year ended July 31,
2008. The increase in Ad Networks revenue for the year ended December
31, 2009 as compared to the year ended July 31, 2008 was due to increased
revenue from Google primarily due to optimization of our web sites to increase
yields from 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 decrease in other revenue
during the year ended December 31, 2009 as compared to the year ended July 31,
2008 was primarily due to a decrease in revenue from our international
resellers.
Direct
sales revenue for the year ended July 31, 2008 increased $0.8 million as
compared with the year ended July 31, 2007. The increase was
primarily due to increases in revenue of $2.9 million from customers who did not
advertise in the year ended July 31, 2007 and $3.7 million from customers who
increased their advertising levels during the year ended July 31, 2008 as
compared with the year ended July 31, 2007, offset in part by a $5.8
million decrease in revenue from advertisers whose campaigns were not renewed or
who chose to advertise at lower levels during the year ended July 31,
2008. The increase in Ad Networks revenue for the year ended July 31,
2008 as compared to the year ended July 31, 2007 was primarily due to increased
revenue from Google. Other revenue remained essentially flat for the
year ended July 31, 2008 as compared to the year ended July 31,
2007.
Direct
sales revenue for the five months ended December 31, 2008 decreased $0.3 million
as compared with the five months ended December 31, 2007. The
decrease was primarily due to decreases of $2.5 million in revenue from
advertisers whose campaigns were not renewed or who chose not to advertise
during the five months ended December 31, 2008, offset in part by an increase of
$2.2 million from advertisers who advertised more or who did not participate in
campaigns during the five months ended December 31, 2007. The
increase in Ad Networks revenue for the five months ended December 31, 2008 as
compared to the five months ended December 31, 2007 was due to increased revenue
from Google as a result of optimization of our web sites to increase yields from
our Google programs. The increase in Other for the five months ended
December 31, 2008 as compared to the five months ended December 31, 2007 was
primarily due to an increase in revenue generated by our United Kingdom’s
reseller and to a lesser extent to revenue from other resellers.
We
believe that our audience of technology professionals and technology enthusiasts
who rely on our web properties, along with our favorable online visitor
demographics, makes us an attractive advertising vehicle. We expect
our Media revenue to increase in the future as we continue to develop new
products which appeal to advertisers and optimize our web properties to increase
monetization of ad network and international traffic.
E-commerce
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
to 2007
|
|
|
2008 to 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
(in
thousands)
|
|
$
|
49,091
|
|
|
$
|
36,820
|
|
|
$
|
28,103
|
|
|
$
|
23,994
|
|
|
$
|
21,148
|
|
|
|
33
|
%
|
|
|
31
|
%
|
|
|
13
|
%
|
|
Percentage
of total net revenue
|
|
|
75
|
%
|
|
|
67
|
%
|
|
|
62
|
%
|
|
|
74
|
%
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of orders shipped
|
|
|
788,531
|
|
|
|
518,429
|
|
|
|
431,919
|
|
|
|
368,393
|
|
|
|
296,723
|
|
|
|
52
|
%
|
|
|
20
|
%
|
|
|
24
|
%
|
|
Average
order size (in dollars)
|
|
$
|
62.26
|
|
|
$
|
71.02
|
|
|
$
|
65.07
|
|
|
$
|
68.00
|
|
|
$
|
74.00
|
|
|
|
(12
|
)%
|
|
|
9
|
%
|
|
|
(8
|
)%
|
E-commerce
revenue is derived from the online sale of consumer goods, including shipping,
net of any returns and allowances.
The
growth in E-commerce revenue for the year ended December 31, 2009 as compared to
the year ended July 31, 2008 was primarily due to increased consumer awareness
of our web site as a result of broader product offerings, increasing in the
number of “Invented at ThinkGeek” products such as the Electronic Rock Guitar
Shirt and the Tauntaun Sleeping Bag, online marketing, print catalogs and media
coverage of our web site. This increased awareness of our site
attracted a larger customer base, which drove a 24% increase in the number of
unique visitors to our web site, resulting in a 52% increase in the number of
orders shipped. The increase in orders shipped was partially offset
by a 12% decrease in the average order size during the year ended December 31,
2009 as compared to the prior fiscal year ended July 31, 2008 due to the mix of
products with lower selling prices.
The
growth in E-commerce revenue for the year ended July 31, 2008 as compared to the
year ended July 31, 2007 was primarily due to increased consumer awareness of
our web site as a result of broader product offerings, an increase in the number
of custom developed products such as the Wi-Fi Detector Shirt and the 8-bit Tie,
catalog marketing and media coverage of our web site which attracted a larger
customer base. This larger customer base as well as web site
enhancements, including improved search capability and customer communication
features, drove a 9% increase in the number of unique visitors to our web
site. This increase in unique visitors resulted in a 20% increase in
the number of orders shipped during the fiscal year ended July 31,
2008. The average order size increased by 9% in the fiscal year ended
July 31, 2008 when compared to the prior fiscal year.
The
growth in E-commerce revenue during the five months ended December 31, 2008, as
compared to the five months ended December 31, 2007, was primarily due to a 24%
increase in the number of shipments year-over-year, offset in part by an 8%
decrease in the average value of those shipments. The increase in the
number of shipments was primarily driven by demand for new products, including
ThinkGeek’s newly released products such as the Electronic Drum Kit and the
Personal Soundtrack Shirt. The decrease in average shipment value was
due to a combination of lower price points of the mix of products purchased,
lower shipping revenue per order as customers took advantage of our free
shipping promotions and a general decrease in shipping fees charged to
customers.
We
expect E-commerce revenue to continue to grow as we increase the number of
orders received by visitors to our site.
Cost
of Revenue/Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
45,104
|
|
|
$
|
35,128
|
|
|
$
|
25,933
|
|
|
$
|
21,941
|
|
|
$
|
17,789
|
|
|
|
28
|
%
|
|
|
35
|
%
|
|
|
23
|
%
|
|
Gross
margin
|
|
|
20,473
|
|
|
|
20,198
|
|
|
|
19,666
|
|
|
|
10,534
|
|
|
|
10,564
|
|
|
|
1
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
|
Gross
margin %
|
|
|
31
|
%
|
|
|
37
|
%
|
|
|
43
|
%
|
|
|
32
|
%
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
40
|
|
|
|
39
|
|
|
|
33
|
|
|
|
38
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin percentage decreased in the year ended December 31, 2009 as compared to
the year ended July 31, 2008 and in the year ended July 31, 2008 as compared to
the year ended July 31, 2007. The decrease in gross margin percentage
in the year ended December 31, 2009 as compared to the year ended July 31, 2008
was primarily due to our business unit mix. Our E-commerce business
has significantly lower gross margins than our Media business. Our
E-commerce revenue increased to 75% of total net revenue for the year ended
December 31, 2009, from 67% of net revenue for the year ended July 31,
2008. The decrease in gross margin percentage in the year ended July
31, 2008 as compared to the year ended July 31, 2007 was primarily due to our
business unit mix as well as to a decrease in our Media gross margin percentage,
resulting from the significant increase in Media cost of revenue.
Gross
margin percentage decreased for the five months ended December 31, 2008 as
compared with the five months ended December 31, 2007, due to the decrease in
our E-commerce and Media gross margin percentages, which are discussed further
in the next section.
Cost
of Revenue/Gross Margin by Segment
Media
Cost of Revenue/Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Media
cost of revenue
|
|
$
|
6,953
|
|
|
$
|
7,268
|
|
|
$
|
4,733
|
|
|
$
|
3,567
|
|
|
$
|
2,610
|
|
|
|
(4
|
)%
|
|
|
54
|
%
|
|
|
37
|
%
|
|
Media
gross margin
|
|
|
9,533
|
|
|
|
11,238
|
|
|
|
12,763
|
|
|
|
4,914
|
|
|
|
4,595
|
|
|
|
(15
|
)%
|
|
|
(12
|
)%
|
|
|
7
|
%
|
|
Media
gross margin %
|
|
|
58
|
%
|
|
|
61
|
%
|
|
|
73
|
%
|
|
|
58
|
%
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
15
|
|
|
|
20
|
|
|
|
19
|
|
|
|
21
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
cost of revenue consists of personnel and related overhead, equipment and
bandwidth associated with the operation of our data center, personnel costs and
related overhead associated with developing the editorial content of our sites
and personnel and related overhead and third-party costs associated with
delivering revenue producing products. Media cost of revenue includes
both costs which do not vary directly with revenue (fixed costs), such as
equipment, personnel and editorial costs, as well as costs which are more
directly affected by revenue (variable costs), such as bandwidth for delivering
content and ad-serving costs. While our fixed costs will generally
not vary directly with revenue, they may increase to the extent that we expand
or upgrade the equipment necessary to operate our network or if we add
additional sites to our network of web sites. Our variable costs
generally vary based on the delivery of web pages, content, the number of
advertisements delivered and the size of the advertisement. To the
extent that we are able to increase our revenue without increasing our fixed
costs, our gross margins will increase; however, to the extent that we expand
our equipment in anticipation of increased activity, we may experience decreased
gross margins.
The
decrease in Media gross margin percentage for the year ended December 31, 2009
as compared to the fiscal year ended July 31, 2008 was primarily due to a
decrease in Media revenue of $2.0 million, offset slightly by lower cost of
revenue of $0.3 million. The decrease in cost of revenue was primarily due
to decreases in co-location costs of $0.3 million, headcount and related costs
of $0.2 million, and ad serving costs of $0.2 million, offset in part by an
increase in depreciation and amortization of equipment and software of $0.4
million. Our co-location costs decreased primarily due to savings
resulting from the closure of our data center in Santa Clara, California, upon
completion of our relocation to the new data center near Chicago,
Illinois. Our headcount and related costs decreased primarily due a
reduction in our ad operations group in the early part of 2009 and our ad
serving costs decrease is primarily due to our site redesign, which eliminated a
significant number of advertising impressions from our pages. Our
depreciation and amortization costs increased due to equipment and related
software purchased for our data center and amortization of internally developed
software.
The
decrease in Media gross margin percentage for the fiscal year ended July 31,
2008 as compared to the fiscal year ended July 31, 2007 was primarily due to the
higher cost of revenue of $2.5 million. The increase in cost of revenue
was primarily due to increases in data center co-location costs of $0.9 million,
amortization of equipment and software of $0.9 million, headcount and related
overhead costs of $0.5 million, and ad serving costs of $0.2 million. Our data
center costs increased due to the relocation of our Santa Clara, California data
center to a new larger data center near Chicago, Illinois. Our
depreciation and amortization costs increased due to equipment and related
software purchased for our data center and amortization of internally developed
software. Headcount and related costs increased due to increased
personnel, primarily related to our ad serving operations and the transfer of an
executive to network operations. Our ad serving cost increase was
primarily due to the implementation and adoption of technology which provides
for the automation of customer quotes, approval of the resulting order and
transfer of the order to our ad server.
The
decrease in Media gross margin percentages for the five months ended December
31, 2008, as compared to the five months ended December 31, 2007, was primarily
driven by increases in depreciation and amortization expense of $0.6 million,
personnel related expenses of $0.2 million and co-location expenses of $0.1
million. Depreciation and amortization expense increased due to
depreciation of the equipment we purchased for our data center and amortization
of internally developed software. Our personnel expenses increased as
we added headcount to develop and serve our premium products, which require more
effort to produce.
We
expect Media cost of revenue to increase in absolute dollars as we expand our ad
operations to deliver products to our web properties. To the extent
that Media revenue does not increase proportionately, our Media gross margins
may decline.
E-commerce
Cost of Revenue/Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
E-commerce
cost of revenue
|
|
$
|
38,151
|
|
|
$
|
27,860
|
|
|
$
|
21,200
|
|
|
$
|
18,374
|
|
|
$
|
15,179
|
|
|
|
37
|
%
|
|
|
31
|
%
|
|
|
21
|
%
|
|
E-commerce
gross margin
|
|
|
10,940
|
|
|
|
8,960
|
|
|
|
6,903
|
|
|
|
5,620
|
|
|
|
5,969
|
|
|
|
22
|
%
|
|
|
30
|
%
|
|
|
(6
|
)%
|
|
E-commerce
gross margin %
|
|
|
22
|
%
|
|
|
24
|
%
|
|
|
25
|
%
|
|
|
23
|
%
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
25
|
|
|
|
19
|
|
|
|
14
|
|
|
|
17
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-commerce
cost of revenue consists of product costs, shipping and fulfillment costs and
personnel and related overhead associated with the operations and merchandising
functions.
E-commerce
gross margin percentage decreased in year ended December 31, 2009 as compared to
year ended July 31, 2008 primarily due to our investment in our merchandising
and operations teams. E-commerce cost of revenue in year ended
December 31, 2009 increased as compared to year ended July 31, 2008 consistent
with increased E-commerce revenue levels; however, our operating costs increased
as we added additional headcount to enhance our merchandising team and to
support our expected revenue growth.
E-commerce
gross margin percentage decreased in year ended July 31, 2008 as compared to
year ended July 31, 2007 due to shipping revenue comprising a higher percent as
a result of increases in shipping costs. We generate a significantly
lower gross margin on shipping revenue than product
revenue. E-commerce cost of revenue in year ended July 31, 2008
increased as compared to year ended July 31, 2007 consistent with increased
E-commerce revenue levels; however, increased shipping cost resulted in a
slightly lower gross margin percentage. The increase in E-commerce
cost of revenue in absolute dollars in year ended July 31, 2008 as compared to
year ended July 31, 2007 was primarily due to increased product costs of $4.0
million, shipping costs of $1.6 million, fulfillment costs of $0.5 million, and
merchandising costs of $0.5 million. Increases in product costs were
the result of increased E-commerce revenue levels, shipping costs were related
to the increased volume of orders shipped as well as significant increases in
shipping rates resulting from increased fuel prices, and the increase in
fulfillment costs were related to increased number of orders processed and an
increased range of product offerings.
The
increase in E-commerce cost of revenue during the five months ended December 31,
2008, as compared to five months ended December 31, 2007 was primarily due to
increased product costs, shipping and fulfillment costs and operating
costs. These increases were primarily the result of an increase in
the number of orders. The decrease in the gross margin percentage was
primarily due to lower product gross margins resulting from sales of slower
moving inventory at discounted margins and other incentives offered and
increased operating expenses, primarily due to additional headcount and related
costs to provide customer service and to identify and source new products and to
a lesser extent to increases in shipping and fulfillment costs as a percentage
of the reduced average order size.
We
expect E-commerce cost of revenue in absolute dollars to increase
proportionately with E-commerce revenue. In addition, we expect E-commerce
overall gross margins will remain relatively constant. We are also
considering changing our third-party contract-fulfillment and warehouse
provider. If we change providers, we will incur significant costs and
expenses. If we do not generate sufficient revenue or sustain cost
savings to offset these costs and expenses, our cost of revenue will increase
and our gross margins will decline.
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, as well as costs associated with
advertising and promotional activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
Marketing
|
|
$
|
11,775
|
|
|
$
|
8,346
|
|
|
$
|
6,108
|
|
|
$
|
4,326
|
|
|
$
|
3,282
|
|
|
|
41
|
%
|
|
|
37
|
%
|
|
|
32
|
%
|
|
Percentage of
total net revenue
|
|
|
18
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
28
|
|
|
|
28
|
|
|
|
20
|
|
|
|
32
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in absolute dollars spent on sales and marketing in year ended December
31, 2009 as compared to year ended July 31, 2008 was primarily due to increases
in headcount and related expenses of $1.2 million, marketing expenses of $1.6
million and credit card fees of $0.5 million. The increase in headcount and
related expense was due to additional personnel in our E-commerce and Media
marketing organizations, offset in part by headcount reductions in our Media
sales organization, including severance costs of $0.3 million related to the
reduction of 7 Media sales and marketing personnel during the fourth quarter of
2009. The increase in discretionary marketing expenses was primarily
due to increased E-commerce marketing expenses of $0.7 million, resulting from
discretionary online and direct mail marketing, approximately $0.5 million
related to our name branding and the promotion of our Geeknet brand and
increased discretionary Media marketing expenses of $0.4 million, including
events and trade show attendance.
The
increase in absolute dollars spent on sales and marketing in year ended July 31,
2008 as compared to year ended July 31, 2007 was primarily due to increases in
headcount and related expenses of $1.8 million and marketing expenses of $0.2
million. The increase in headcount was due to additional personnel in our Media
sales and marketing organizations and the increase in headcount related expense
was due to stock-based compensation and travel expense for training and customer
visits. The increase in discretionary marketing expenses was primarily due to
increased E-commerce marketing expenses of $0.4 million, resulting from the
printing and mailing of our E-commerce catalogs, fees paid to affiliates and
consultants, which were offset in part by lower discretionary Media marketing
expenses of $0.2 million.
The
increase in S&M expenses in the five months ended December 31, 2008, as
compared to the five months ended December 31, 2007, was primarily due to
increases in headcount and related expenses of $0.5 million, marketing expenses
of $0.2 million and credit card fees of $0.2 million. The increase in
headcount
was
primarily due to an increase in sales personnel. The increase in
marketing expenses was due to printing and mailing of our E-commerce catalog and
other discretionary marketing programs and the increase in credit card fees was
due to an increase in our E-commerce revenue.
We
believe that our sales and marketing expenses in absolute dollars will increase
in the future as we increase our revenue, expand our marketing organization and
marketing programs and expand our international Media sales force. We do
not expect that sales and marketing expenses will change significantly as a
percentage of revenue.
Research
and Development Expenses
Research
and development (“R&D”) expenses consist primarily of personnel and related
overhead expenses for software engineers involved in developing our Media and
E-commerce web sites. We expense all of our R&D costs as they are
incurred; however, costs related to internally developed software, including
personnel related expenses, are capitalized.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Media
R&D
|
|
$
|
7,234
|
|
|
$
|
3,995
|
|
|
$
|
3,531
|
|
|
$
|
2,273
|
|
|
$
|
1,337
|
|
|
|
81
|
%
|
|
|
13
|
%
|
|
|
70
|
%
|
|
E-commerce
R&D
|
|
|
869
|
|
|
|
387
|
|
|
|
240
|
|
|
|
255
|
|
|
|
147
|
|
|
|
125
|
%
|
|
|
61
|
%
|
|
|
73
|
%
|
|
Total
Research & Development
|
|
$
|
8,103
|
|
|
$
|
4,382
|
|
|
$
|
3,771
|
|
|
$
|
2,528
|
|
|
$
|
1,484
|
|
|
|
85
|
%
|
|
|
16
|
%
|
|
|
70
|
%
|
|
Percentage
of total net revenue
|
|
|
12
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
39
|
|
|
|
32
|
|
|
|
28
|
|
|
|
35
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
related to the planning and post implementation phases of internal use software
products are recorded as an operating expense. Direct costs incurred in the
development phase are capitalized and amortized over the product’s estimated
useful life as charges to cost of revenue. No internal use software
costs were capitalized for the year ended December 31, 2009. During
the years ended July 31, 2008 and July 31, 2007, we capitalized $0.7 million and
$1.8 million, respectively, of software development costs relating to the
development of our SourceForge.net Marketplace platform.
The
increase in R&D expense in absolute dollars in the year ended December 31,
2009 compared to the year ended July 31, 2008 was due to increases in both our
Media and E-commerce R&D expenses. The increase in Media expense was
primarily due to increased investment in personnel and related overhead expenses
incurred to modernize our web sites and services, and the increase in E-commerce
expense was due to increased personnel who were hired to update and add
additional functionality for our ThinkGeek.com web site. In 2009 we
began modernizing our SourceForge.net and ThinkGeek web sites.
The
increase in R&D expense in absolute dollars in year ended July 31, 2008
compared to year ended July 31, 2007 was primarily due to increases in both our
Media and E-commerce R&D expenses. The increase in Media expense was
primarily due to increased personnel and related overhead expenses incurred to
modernize our web sites and services, and the increase in E-commerce expense was
due to increased personnel who were hired to update and add additional
functionality for our ThinkGeek.com web site.
R&D
expense increased by $1.0 million in absolute dollars in the five months ended
December 31, 2008, as compared to the five months ended December 31,
2007. Media accounted for the majority of the increase including $0.3
million due to increased headcount related costs. Additionally,
during the five months ended December 31, 2007, certain development efforts of
$0.6 million qualified for capitalization as development phase costs related to
internally-developed software. Our E-commerce R&D expense
increased due to increases in headcount to further develop the web sites and
their capabilities.
We
expect that R&D expenses may decline slightly in absolute dollars and will
also decline as a percentage of revenue in the future.
General
and Administrative Expenses
General
and administrative (“G&A”) expenses consist of salaries and related expenses
for finance and accounting, human resources and legal personnel, professional
fees for accounting and legal services as well as insurance and other public
company related costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
General
& Administrative
|
|
$
|
8,843
|
|
|
$
|
11,126
|
|
|
$
|
6,443
|
|
|
$
|
3,780
|
|
|
$
|
3,773
|
|
|
|
(21
|
)%
|
|
|
73
|
%
|
|
|
0
|
%
|
|
Percentage
of total net revenue
|
|
|
13
|
%
|
|
|
20
|
%
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headcount
|
|
|
20
|
|
|
|
21
|
|
|
|
20
|
|
|
|
19
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
decrease in G&A expenses in absolute dollars in year ended December 31, 2009
as compared to year ended July 31, 2008 was primarily related to decreases in
personnel related expenses of $1.9 million, legal related expenses of $0.3
million, insurance of $0.1 million and annual meeting expenses of $0.1 million,
offset in part by increases in accounting and tax expenses of $0.2
million. Our decrease in personnel related expenses were
primarily due to decreases in stock-based compensation expense of $1.2 million
and severance costs of $0.7 million, related to the resignation of our former
Chief Executive Officer in the prior year. The decrease in G&A
expense as a percentage of net revenue was also due to the decrease in G&A
expenses. Our decrease in legal related expenses was primarily due to
the resolution of the Okerman legal matter in the prior year. Our
decrease in annual meeting expenses and increase in accounting and tax expenses
resulted primarily from the change in our fiscal year to December
31.
The
increase in G&A expenses in absolute dollars in year ended July 31, 2008 as
compared to year ended July 31, 2007 was primarily related to stock-based
compensation expense of $1.5 million and increased severance costs of $0.8
million, primarily related to the resignation of our former Chief Executive
Officer, legal fees of $0.5 million, including $0.4 million related to the
resolution of the Okerman legal matter, recruiting, advisor and Board of
Director fees of $0.2 million, and higher bad debt expenses of $0.2 million
resulting from increased revenue levels, and G&A expenses of $1.8 million
which were allocated to our discontinued Software business in 2007, partially
offset by a decrease in accounting fees of $0.3 million. The
increase in G&A expense as a percentage of net revenue was primarily due to
the significant increase in G&A expenses.
General
and administrative expenses did not change significantly during the five months
ended December 31, 2008 as compared to the five months ended December 31,
2007. During the five months ended December 31, 2008, increases in
recruiting expenses of $0.2 million were offset by reductions in bad debt
expenses of $0.1 million and facilities related expenses of $0.1
million. The increase in recruiting expenses was due to recruiting
fees for our new chief executive officer and the decrease in facilities fees is
due to expenses related to the relocation of our corporate headquarters incurred
during the five months ended December 31, 2007.
We do
not expect G&A expenses to change significantly from 2009 levels in absolute
dollars, and we also expect G&A expenses to decrease as a percentage of
revenue in the future.
Restructuring
Costs
In
October 2007, we relocated our corporate headquarters to Mountain View,
California. During fiscal year 2008, which ended on July 31, 2008
under our prior fiscal calendar, 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 our Software 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. The restructuring liability of
$1.2 million at December 31, 2009 represents the remaining lease payments, net
of sub-lease rent, which continue through May 2010.
Below is
a summary of the restructuring charges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007 (1)
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cash
provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
charges
|
|
$
|
(62
|
)
|
|
$
|
2,057
|
|
|
$
|
581
|
|
|
$
|
-
|
|
|
$
|
1,414
|
|
|
Non-cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off
of equipment and leasehold improvements
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
(62
|
)
|
|
$
|
2,179
|
|
|
$
|
581
|
|
|
$
|
-
|
|
|
$
|
1,414
|
|
(1) –
Included in discontinued operations
Below
is a summary of the changes to the restructuring liability (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Period
|
|
|
Restructuring
Charges
|
|
|
Cash
payments
|
|
|
Other
|
|
|
Balance at
End of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended July 31, 2007
|
|
$
|
6,107
|
|
|
$
|
581
|
|
|
$
|
(1,640
|
)
|
|
$
|
-
|
|
|
$
|
5,048
|
|
|
For
the year ended July 31, 2008
|
|
$
|
5,048
|
|
|
$
|
2,179
|
|
|
$
|
(2,585
|
)
|
|
$
|
590
|
|
|
$
|
5,232
|
|
|
For
the five months ended December 31, 2008
|
|
$
|
5,232
|
|
|
$
|
-
|
|
|
$
|
(1,163
|
)
|
|
$
|
47
|
|
|
$
|
4,116
|
|
|
For
the year ended December 31, 2009
|
|
$
|
4,116
|
|
|
$
|
(62
|
)
|
|
$
|
(2,881
|
)
|
|
$
|
65
|
|
|
$
|
1,238
|
|
Other
represents the reclassification of excess of straight-line rent expense over the
cash payments to the restructuring reserve of $0.7 million, offset in part by
the write-off of leasehold improvements of $0.1 million.
Components
of the total accrued restructuring liability are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term
|
|
|
Long Term
|
|
|
Total
Liability
|
|
|
As
of December 31, 2008
|
|
$
|
2,862
|
|
|
$
|
1,254
|
|
|
$
|
4,116
|
|
|
As
of December 31, 2009
|
|
$
|
1,238
|
|
|
$
|
-
|
|
|
$
|
1,238
|
|
Share-Based
Compensation Expense
During
the year ended December 31, 2009, the five months ended December 31, 2008 and
the years ended July 31, 2008 and July 31, 2007, we recognized $2.7 million,
$1.2 million, $3.6 million and $1.4 million in stock-based compensation expense
from continuing operations, respectively, related to options and awards granted
to employees and directors. The decrease in stock-based compensation
in the year ended December 31, 2009 as compared with the year ended July 31,
2008 is due to approximately $1.0 million of expense related to the
modifications in the terms of stock option and awards granted to our former CEO
as well as the impact of a change in our forfeiture rate
assumption.
Related
Party Transactions
We own
approximately 9% of the outstanding capital stock of CollabNet, Inc
(“CollabNet”). Our holdings in CollabNet consist of shares 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 CollabNet, this investment is accounted for under the
cost method. CollabNet is a developer of software used in
collaborative software development.
We
continually evaluate whether events or circumstances have occurred that indicate
the remaining value of our investment may be impaired. In March 2009, the
Company recorded an impairment loss of $4.6 million related to its investment in
CollabNet. During the years ended July 31, 2008 and July 31, 2007, no impairment
was recorded on this investment. There is no quoted market price for this
investment; accordingly, fair value is estimated by management based on an
annual appraisal performed by an independent valuation firm.
There
were $0.5 million, $0.9 million and $0.3 million of related-party revenue from
continuing operations associated with CollabNet for the years ended December 31,
2009, July 31, 2008 and July 31, 2007, respectively. There were $0.3
million and $0.4 million of related-party revenue from continuing operations
associated with CollabNet for the five month period ended December 31, 2008 and
December 31, 2007, respectively.
Interest
and Other Income, Net and Other than temporary impairment of non-marketable
equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
Five Months Ended
|
|
|
%
Change
|
|
|
%
Change
|
|
|
%
Change
|
|
|
|
|
December
31,
|
|
|
July
31,
|
|
|
December
31,
|
|
|
Year
2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five
Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to
2007
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$
|
165
|
|
|
$
|
2,250
|
|
|
$
|
2,898
|
|
|
$
|
231
|
|
|
$
|
1,224
|
|
|
|
(93
|
)%
|
|
|
(22
|
)%
|
|
|
(81
|
)%
|
|
Interest
Expense
|
|
|
(65
|
)
|
|
|
(190
|
)
|
|
|
(4
|
)
|
|
|
(47
|
)
|
|
|
(77
|
)
|
|
|
(66
|
)%
|
|
|
4650
|
%
|
|
|
(39
|
)%
|
|
Loss on
disposal of asset
|
|
|
(1,246
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
Other income
(expense), net
|
|
|
236
|
|
|
|
(422
|
)
|
|
|
2
|
|
|
|
1,169
|
|
|
|
(4
|
)
|
|
|
(156
|
)%
|
|
|
*
|
|
|
|
*
|
|
|
Interest and
other income (expense), net
|
|
$
|
(910
|
)
|
|
$
|
1,638
|
|
|
$
|
2,896
|
|
|
$
|
1,353
|
|
|
$
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other than
temporary impairment
of
non-marketable equity securities
|
|
$
|
(4,585
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
*
– Not meaningful
Interest
income decreased in the year ended December 31, 2009 as compared to the year
ended July 31, 2008 as a result of significantly reduced yields on our
investments resulting from lower interest rates and our decision to invest in
short-term treasuries, which generally have lower yields. Interest
expense decreased in the year ended December 31, 2009 as compared to the year
ended July 31, 2008 as a result of interest expense on a legal settlement which
was paid in 2008. 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. The loss on disposal of asset is due to our deprecation of
the Marketplace platform from the SourceForge.net platform.
Interest
income decreased in the year ended July 31, 2008 as compared to the year ended
July 31, 2007 as a result of reduced yields on our investments resulting from
lower interest rates and our decision to invest in short-term treasuries, which
generally have lower yields. Interest expense increased in the year
ended July 31, 2008 as compared to the year ended July 31, 2007 as a result of
interest expense on a legal settlement which was paid in 2008. Other
income (expense) decreased in the year ended July 31, 2008 as compared to the
year ended July 31, 2007, primarily due to realized losses on
investments.
The
decrease in interest income for the five months ended December 31, 2008, as
compared to the five months ended December 31, 2007, was due to reduced yields
on our investments resulting from lower interest rates and our decision to
invest in short-term treasuries, which generally have lower
yields. Interest expense for the five months ended December 31, 2008,
results from accretion of our accrued restructuring charge, while interest
expense for the five months ended December 31, 2007 was primarily due to
interest expense on a legal settlement which was paid in January
2008. The increase in other income for the five months ended December
31, 2008 was primarily due to the $0.6 million impact resulting from our fair
value accounting for certain of our financial assets and a $0.5 million gain on
the sale of our investment in VA Linux Systems Japan, K.K. (“VA
Japan”). The effect of our fair value accounting is a result of our
recording the fair value of the right to sell our auction-rate securities to UBS
at par value. The gain on the sale of our investment is the result of
our sale of our investment in VA Linux Japan K.K. for $0.9 million in December
2008.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
% Change
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
Year 2009 to
|
|
|
Fiscal 2008 to
|
|
|
Five Months
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fiscal 2008
|
|
|
2007
|
|
|
2008 to 2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
140
|
|
|
$
|
128
|
|
|
$
|
285
|
|
|
$
|
173
|
|
|
$
|
219
|
|
|
|
9
|
%
|
|
|
(55
|
)%
|
|
|
(21
|
)%
|
Income
tax provision consists of Federal and state income tax expense on taxable
income. Our state income tax is based on our taxable income or loss
in each jurisdiction and we may not have net operating loss carryforwards
available to offset taxable income in certain states. We provide for
state income taxes in the New Jersey state jurisdiction based on our E-commerce
income in that state, and to the extent that our E-commerce business unit is
profitable, we may record an income tax provision, even though we generate
losses on a consolidated basis.
As of
December 31, 2009, we had $267.0 million of federal net operating loss
carry-forwards available to offset future federal taxable income, which expire
at various dates through 2029. Approximately $23.2 million of federal net
operating losses usage is limited pursuant to section 382 of the Internal
Revenue Code due to certain changes in our ownership which occurred between 1996
and 1999, and a change in ownership resulting from our June 2000 acquisition of
Andover.net. We also have California net operating loss carryforwards of
approximately $83.2 million to offset future California taxable income, which
expire at various dates through 2017. We have not recognized any
benefit from these net operating loss carry-forwards because a valuation
allowance has been recorded for the total deferred tax assets as a result of
uncertainties regarding realization of the assets based on our limited history
of profitability and the uncertainty of future profitability.
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
|
|
December 31,
|
|
|
July 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Net
cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,727
|
)
|
|
$
|
866
|
|
|
$
|
4,213
|
|
|
$
|
1,935
|
|
|
$
|
5,360
|
|
|
Investing
activities
|
|
|
(2,905
|
)
|
|
|
32,727
|
|
|
|
(12,620
|
)
|
|
|
20
|
|
|
|
11,322
|
|
|
Financing
activities
|
|
|
(2,936
|
)
|
|
|
(138
|
)
|
|
|
4,219
|
|
|
|
(3,348
|
)
|
|
|
(52
|
)
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
92
|
|
|
|
(2,208
|
)
|
|
|
-
|
|
|
|
50
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(11,568
|
)
|
|
$
|
33,547
|
|
|
$
|
(6,396
|
)
|
|
$
|
(1,393
|
)
|
|
$
|
16,680
|
|
Our
principal sources of cash as of December 31, 2009 were our existing cash, cash
equivalents and investments of $38.4 million, which excludes restricted cash of
$1.0 million (refer to financing activities below for a discussion on restricted
cash). We used $5.7 million of cash for operating activities, $2.6 million of
cash for an acquisition, $3.2 million of cash for the repurchase of common stock
and $1.0 million of cash for purchases of property and equipment, partially
offset by maturities of marketable securities of $0.7 million and proceeds from
the sale of Linux.com of $0.2 million
resulting in an
overall decrease in cash and investments of $11.6 million during the year ended
December 31, 2009.
Our net
cash generated from continuing operations during the year ended July 31, 2008
was $0.9 million. We also generated cash from net sales of securities of
$36.5 million during the year ended July 31, 2008 and through the
collection of accounts receivable from discontinued operations in the amount of
$0.09 million. These cash proceeds were offset by purchases of
property and equipment of $3.8 million and repurchases of common stock of $0.2
million resulting in an overall increase in cash and investments of $33.5
million for the year ended July 31, 2008.
Cash and
cash equivalents decreased by $6.4 million and we had net purchases of
securities of $10.0 million during the year ended July 31, 2007, resulting in an
overall increase in cash and investments of $3.6 million during the year ended
July 31, 2007. This overall increase was primarily due to cash generated from
continuing operations of $4.2 million and proceeds from the issuance of common
stock upon the exercise of stock options of $4.2 million, offset in part by
capitalized internally developed software of $1.8 million and purchases of
property and equipment of $0.8 million and cash used in discontinued operations
of $2.2 million.
Net cash
from operating activities was $1.9 million for the five months ended December
31, 2008. Net cash provided by operating activities was primarily due
to net income of $1.1 million, increased by non-cash stock-based compensation of
$1.2 million and depreciation expenses of $1.0 million, offset by a non-cash
gain on sale of our investment in VA Japan of $0.5 million and change in fair
value of financial assets of $0.6 million, related to our right to require our
investment manager to purchase certain investments. Additionally,
changes in operating assets and liabilities had a negligible offsetting effect
to operating cash flows.
Net cash
provided by operating activities of $5.4 million for the five months ended
December 31, 2007 was primarily due to net income of $1.5 million, non-cash
restructuring charges of $1.4 million, stock-based compensation of $0.9 million
and depreciation expenses of $0.4 million, resulting from network equipment
purchased for our new data center, and a decrease in accounts receivable of $1.5
million, partially offset by increases in inventory of $1.4 million and
decreases in accrued liabilities and other long-term liabilities of $1.3
million. The decrease in accounts receivable was primarily the result
of improved collection efforts. The increase in inventory was due to
our E-commerce business’s higher product sales and efforts to sell inventory
during their holiday season and the decreases in accrued liabilities and other
long-term liabilities are primarily related to the reclassification of $1.0
million of accrued rent related to our Fremont, California facility to
restructuring reserve.
Discontinued
Operations
Cash
flow from discontinued operations has been reported separately for operating,
investing and financing activities in the Consolidated Statements of Cash
Flows.
The
absence of cash flows from discontinued operations in our ongoing operations is
not expected to materially impact our future cash flow or liquidity due to the
relatively modest amounts historically contributed by the discontinued
operations.
Operating
Activities
Year
ended December 31, 2009
Net cash
used in operating activities was $5.7 million for the year ended December 31,
2009. Net cash used in operating activities was primarily due to our
net operating loss of $3.3 million after the effects of non-cash charges,
including an impairment charge of $4.6 million, stock-based compensation expense
of $2.7 million, depreciation and amortization expense of $2.2 million, return
for allowance of $0.3 million, a loss on disposal of assets of $1.2 million,
related to the depreciation of the Marketplace platform from the SourceForge.net
platform and a gain on our sale of the Linux.com domain name to The Linux
Foundation of $0.2 million. Additionally, changes in operating assets
and liabilities included cash used for accrued restructuring liabilities of $2.8
million, increases in inventory of 2.0 million and increases in prepaid expenses
and other assets of $0.5 million, offset partially by cash provided by accounts
payable and accrued liabilities of $2.6 million and an increase in deferred
revenue of $0.3 million. The increase in inventory due to purchases
of inventory by our E-commerce business in order to provide adequate inventory
levels for anticipated demand, and the increase in prepaid and other assets are
primarily related to inventory prepayments to vendors.
Year
ended July 31, 2008
Net cash
provided by operating activities of $0.9 million for the year ended July 31,
2008 was primarily due to loss from continuing operations of $4.3 million offset
by non-cash stock-based compensation expense of $3.6 million, restructuring
expenses of $2.2 million, depreciation and amortization expense of $1.5 million
and loss on disposal of investment of $0.4 million as well as cash provided by
accounts receivable of $0.7 million, prepaid expenses and other assets of $0.5
million and accounts payable of $0.4 million. This was partially
offset by an increase in inventory of $1.0 million and decreases in accrued
restructuring of $1.9 million and accrued and long-term liabilities of $1.4
million.
The
cash provided by accounts receivable is primarily due to better collection
efforts and increased revenue in our Media business and the cash provided by
prepaid expenses is due to reduced accrued interest balances resulting from the
change in our investment portfolio to treasury bills and also reflects the
reclassification of prepaid sublease rental income to the restructuring
reserve. The cash used for inventory is primarily due to increased
inventory levels to support increases in our E-commerce revenue and for higher
levels of those products with long-lead times. The change in accrued
restructuring includes $0.6 million of non-cash increase related to the
reclassification of excess of straight-line rent expense over the cash payments
as well as cash payments on our former corporate headquarters located in
Fremont, California. The cash used for accrued and long-term
liabilities is due to lower accrued liability balances and also reflects the
reclassification of $1.0 million of accrued rent expense to the restructuring
reserve.
Year
ended July 31, 2007
Net cash
provided by operating activities of $4.2 million for the year ended July 31,
2007 was primarily due to income from continuing operations of $6.0 million,
stock-based compensation of $1.4 million, an increase in accounts payable of
$1.3 million, depreciation and amortization of $0.6 million and an increase in
deferred revenue of $0.4 million. This was partly offset by cash used
for increases in accounts receivable of $2.5 million, inventory of $0.9 million
and prepaid expenses and other assets of $0.7 million and decreases in
restructuring liabilities of $1.6 million and other long-term liabilities of
$0.3 million.
The cash
provided by accounts payable is the result of higher levels of inventory
received and higher marketing expenses in the fourth quarter of fiscal year
ended July 31, 2007 and deferred revenue is primarily due to a program credit on
a Media agreement entered into in fiscal year ended July 31,2007. The
cash used for accounts receivable is primarily due to higher revenue and slower
collection efforts in our Media business; inventory is primarily the result of
higher inventory levels as we broaden our product range and we maintain higher
inventory levels as we expand our inventory sources outside of the United States
which require longer lead times; prepaid expenses and other current assets is
due to higher levels of prepayments for inventory related to our E-commerce
business, resulting from our increased purchases of product from suppliers
located in countries where deposits or prepayments are customarily required to
order product; restructuring liabilities is due to cash payments on facilities
included in the restructuring reserve; and other long-term liabilities is due to
a reduction in deferred rent expense.
Five
months ended December 31, 2008
Net cash
from operating activities was $1.9 million for the five months ended December
31, 2008. Net cash provided by operating activities was primarily due
to net income of $1.1 million, increased by non-cash stock-based compensation of
$1.2 million and depreciation expenses of $1.0 million, offset by a non-cash
gain on sale of our investment in VA Linux Systems Japan, K.K. of $0.5 million
and change in fair value of financial assets of $0.6 million, related to our
right to require our investment manager to purchase certain
investments. Additionally, changes in operating assets and
liabilities had a negligible offsetting effect to operating cash
flows.
Five
months ended December 31, 2007
Net cash
provided by operating activities of $5.4 million for the five months ended
December 31, 2007 was primarily due to net income of $1.5 million, non-cash
restructuring charges of $1.4 million, stock-based compensation of $0.9 million
and depreciation expenses of $0.4 million, resulting from network equipment
purchased for our new data center, and a decrease in accounts receivable of $1.5
million, partially offset by increases in inventory of $1.4 million and
decreases in accrued liabilities and other long-term liabilities of $1.3
million. The decrease in accounts receivable was primarily the result
of improved collection efforts. The increase in inventory was due to
our E-commerce business’s higher product sales and efforts to sell inventory
during their holiday season and the decreases in accrued liabilities and other
long-term liabilities are primarily related to the reclassification of $1.0
million of accrued rent related to our Fremont, California facility to
restructuring reserve.
We
expect to utilize cash to fund investments in our business, working capital
requirements for our business growth and to pay off our remaining lease
obligations for our Fremont, California facility.
Investing
Activities
Our
investing activities primarily include purchases of property and equipment and
purchases and sales of marketable securities.
Cash
usage for the year ended December 31, 2009 included $2.6 million for the
acquisition of Ohloh and $1.0 million for the purchase of property and
equipment, offset in part by maturities of marketable securities of $0.7
million.
Cash
usage related to purchases of property and equipment for the year ended July 31,
2008 of $3.8 million was primarily due to software and equipment purchased for
our new data center of $2.7 million and internally developed software of $0.7
million and to a lesser extent additional leasehold improvements for our new
corporate facilities in Mountain View, California.
Cash
usage related to purchases of property and equipment for the year ended July 31,
2007 of $2.6 million, was primarily due to internally developed software related
to our SourceForge.net Marketplace platform of $1.8 million and to a lesser
extent additional equipment purchases.
Cash
usage related to purchases of property and equipment for the five months ended
December 31, 2008 was primarily due to purchase of property and equipment of
$0.9 million, for our data center. We also generated proceeds of $0.9
million from the sale of our investment in VA Linux Systems Japan,
K.K.
Cash
usage related to property and equipment purchases of $2.1 million for the five
months ended December 31, 2007 was primarily due to the purchase of $1.4 million
of equipment, internally developed software of $0.6 million and to a lesser
extent leasehold improvement purchases. The purchase of equipment was
primarily related to equipment purchases for our data center and to a lesser
extent to leasehold improvements related to the relocation of our corporate
headquarters to Mountain View. We also generated net proceeds of
$13.4 million from the sale of marketable securities investments which were
converted to cash and cash equivalents.
Financing
Activities
Our
financing activities have primarily included cash proceeds from the sale of our
common stock through employee benefit plans.
Our
financing activities during the year ended December 31, 2009 were primarily
comprised of cash used to repurchase shares of our common stock under the
repurchase program approved by our Board of Directors in November 2008, offset
in part by proceeds from the sale of our common stock through equity incentive
plans. The stock repurchase program expired in October
2009.
For the
years ended December 31, 2009, July 31, 2008 and July 31, 2007, respectively,
exchange rate changes had an immaterial effect on cash and cash
equivalents. We expect that exchange rate changes will have an immaterial
effect on cash and cash equivalents in the near future due to our focus on
U.S.-based business.
As of
December 31, 2009 and July 31, 2008, we had an outstanding letter of credit of
approximately $1.0 million, related to the Fremont, California facility
lease. The amount related to this letter of credit is recorded in the
“Restricted cash” section of the consolidated balance sheet.
Our
liquidity and capital requirements depend on numerous factors, including our
investment in inventory to support the E-commerce business, market acceptance of
our online products, the resources we devote to developing, marketing, selling
and supporting our online products, the timing and expense associated with
expanding our distribution channels, 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, and for other general corporate activities and
investments. A change in our third-party contract-fulfillment and
warehouse provider will require significant capital resources. We
believe that our existing cash balances will be sufficient to fund our
operations through the year ending December 31, 2010 under our current business
strategy.
Auction
Rate Securities and ARS Right
At
December 31, 2009, all of our investments were recorded at fair value. As
defined by fair value, a significant portion of our investments were classified
as either Level 1 or Level 2; however, we classified $9.4 million of municipal
bond investments with an auction reset feature (“auction-rate securities” or
“ARS”) as Level 3. The underlying assets of these auction-rate securities are
student loans which are substantially backed by the Federal
government.
Since
February 2008, auctions for ARS have failed and, consequently, the investments
are not currently liquid. At December 31, 2009, all of our ARS were
rated AAA by at least one credit rating agency. We do not expect to
need to access these funds in the short-term; however, in the event we need to
access these funds, they are not expected to be accessible until one of the
following occurs: a successful auction, the issuer redeems the issue, a buyer is
found outside of the auction process or the underlying securities
mature. In October 2008, we accepted an offer from UBS, our
investment advisor, granting us the right to require UBS to purchase our ARS at
their par value of $10.8 million anytime during the two-year period beginning
June 30, 2010 (“ARS Right”). UBS has also established a program which
allows us to establish a no net cost line of credit and borrow up to 75 percent
of the market value of the ARS at interest rates equal to the return we receive
on the underlying ARS securities.
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
December 31, 2009 and include estimates of interest rates, timing and amount of
cash flows, credit spread related yield and illiquidity premiums, and expected
holding periods of the ARS. These assumptions are volatile and
subject to change as the underlying sources of these assumptions and market
conditions change.
We
valued our ARS and the ARS Right at fair value. Since the ARS Right
is directly related to our ARS investments, we elected to recognize the changes
in the fair value of the ARS and the ARS Right as a gain or loss in
operations. We valued the ARS Right using Level 3 inputs as the
difference between the par value and the fair value of the ARS, as adjusted for
any bearer risk associated with UBS’s financial ability to repurchase the ARS
beginning June 30, 2010. We currently believe that the bearer risk
associated with UBS is insignificant and have not made any adjustment to the
fair value of the ARS Right for bearer risk.
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 December 31, 2009 (in
thousands):
|
|
|
|
|
|
Years ending December 31,
|
|
|
|
|
Total
|
|
|
2010
|
|
|
2011 and
2012
|
|
|
2013 and
2014
|
|
|
Gross Operating Lease Obligations
|
|
$
|
4,908
|
|
|
$
|
2,642
|
|
|
$
|
1,737
|
|
|
$
|
529
|
|
|
Sublease
Income
|
|
|
(1,089
|
)
|
|
|
(699
|
)
|
|
|
(390
|
)
|
|
|
-
|
|
|
Net
Operating Lease Obligations
|
|
|
3,819
|
|
|
|
1,943
|
|
|
|
1,347
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
Obligations
|
|
|
3,688
|
|
|
|
3,688
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
Obligations
|
|
$
|
7,507
|
|
|
$
|
5,631
|
|
|
$
|
1,347
|
|
|
$
|
529
|
|
Sublease
income represents our expectations of payments to be received from our
subtenants. As of December 31, 2009, a portion of our excess facility is
sublet through May 2010, the remainder of its lease term and a portion of our
corporate facility is sublet through September 2012.
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.
Recent
Accounting Pronouncements
In
September 2009, the FASB
issued
a new standard which
updates
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
guidance
will
be effective for
us
in
the
first
quarter
of 2011
,
with early adoption permitted provided that the revised guidance is
retroactively applied to the beginning of the year of adoption.
We
are
currently assessing the impact of this new accounting update on
our
consolidated
financial statements.
In August 2009, the FASB
provide
d
further guidance on how to measure the
fair value of a liability, an area where practitioners have been seeking further
guidance. It primarily does three things: 1) sets forth the types of valuation
techniques to be used to value a liability when a quoted price in an active
market for the identical liability is not available, 2) clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability and 3) clarifies
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. This standard
was adopted in
2009. The adoption of this standard
did
not
have an
impact
on our
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
.
We do not expect that the adoption of
this standard will have a material impact on our
consolidated financial
statements.
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
our 2010 calendar year
reporting, except for Level
3 reconciliation disclosures which are effective for
our 2011 calendar year
reporting
. We do not expect
that the adoption of this standard will have a material impact on our
consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
The
primary objective of our investment activities is to preserve principal while at
the same time maximizing the income we receive from our investments without
significantly increasing risk. 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.
At
December 31, 2009, we had $9.4 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. Since February
2008, auctions for ARS have failed and the investments are not currently liquid;
however, UBS AG (“UBS”), our investment advisor has agreed to purchase our ARS
at their par value of $10.8 million anytime during the two-year period beginning
June 30, 2010 (“ARS Right”). Consequently, we have classified these
ARS as short-term investments. UBS has also established a program
which allows us to establish a no net cost line of credit and borrow up to 75
percent of the market value of the ARS at interest rates equal to the return we
receive on the underlying ARS securities. At December 31, 2009, all
of our ARS were rated AAA by at least one credit rating agency.
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
December 31, 2009 and include estimates of interest rates, timing and amount of
cash flows, credit and liquidity premiums, and expected holding periods of the
ARS. These assumptions are volatile and subject to change as the
underlying sources of these assumptions and market conditions
change.
At
December 31, 2009, we had $9.4 million of investments with a weighted average
interest rate of 1.53 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.
The
estimated fair value of our cash, cash equivalents and investments approximate
carrying value. We do not currently hold any derivative instruments and do
not engage in hedging activities.
Item 8. Financial Statements and Supplementary
Data
TABLE
OF CONTENTS
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Page
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29
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30
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31
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32
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33
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34
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56
|
All
other schedules are omitted because they are not applicable, not required, or
because the required information is included in the consolidated financial
statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To The
Board of Directors and Stockholders of Geeknet, Inc.:
We have
audited the accompanying consolidated balance sheets of Geeknet, Inc. (the
“Company”) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and other comprehensive income
(loss), and cash flows for each of the years ended December 31, 2009, July 31,
2008 and July 31, 2007 and the five months ended December 31,
2008. We also have audited the Company’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Our audits also included the
financial statement schedule listed in the Index at Item 15(a). The Company is
responsible for these consolidated financial statements and schedule, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Management’s Report on Internal Control over
Financial Reporting”. Our responsibility is to express an opinion on these
consolidated financial statements and schedule and an opinion on the Company’s
internal control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements and schedule are free of material misstatement
and whether effective internal control over financial reporting was maintained
in all material respects. Our audits of the consolidated financial statements
and schedule include examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements and schedule, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall consolidated financial statements and schedule
presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Geeknet, Inc. as of December
31, 2009 and 2008, and the results of their operations and their cash
flows for each of the years ended December 31, 2009, July 31, 2008 and July
31, 2007 and the five months ended December 31, 2008, in conformity with
accounting principles generally accepted in the United States. In our opinion,
the financial statement schedule referred to above, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Also in our opinion, Geeknet, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control - Integrated Framework issued
by COSO.
/s/
Stonefield Josephson, Inc.
San
Francisco, California
February
25, 2010
GEEKNET, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except per share information)
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
28,943
|
|
|
$
|
40,511
|
|
|
Short-term
investments
|
|
|
9,408
|
|
|
|
563
|
|
|
Accounts
receivable, net of allowance of $0 and $0, respectively
|
|
|
4,299
|
|
|
|
4,418
|
|
|
Inventories
|
|
|
5,280
|
|
|
|
3,264
|
|
|
Prepaid
expenses and other current assets
|
|
|
3,564
|
|
|
|
1,841
|
|
|
Restricted
cash
|
|
|
1,000
|
|
|
|
-
|
|
|
Total
current assets
|
|
|
52,494
|
|
|
|
50,597
|
|
|
Property
and equipment, net
|
|
|
2,569
|
|
|
|
4,748
|
|
|
Long-term
investments
|
|
|
-
|
|
|
|
8,947
|
|
|
Restricted
cash, non-current
|
|
|
-
|
|
|
|
1,000
|
|
|
Other
long-term assets
|
|
|
5,088
|
|
|
|
8,874
|
|
|
Total
assets
|
|
$
|
60,151
|
|
|
$
|
74,166
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
5,763
|
|
|
$
|
4,021
|
|
|
Accrued
restructuring liabilities
|
|
|
1,238
|
|
|
|
2,862
|
|
|
Deferred
revenue
|
|
|
928
|
|
|
|
591
|
|
|
Accrued
liabilities and other
|
|
|
3,854
|
|
|
|
2,702
|
|
|
Total
current liabilities
|
|
|
11,783
|
|
|
|
10,176
|
|
|
Other
long-term liabilities
|
|
|
103
|
|
|
|
1,423
|
|
|
Total
liabilities
|
|
|
11,886
|
|
|
|
11,599
|
|
|
Commitments
and contingencies (Note 5)
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock , $0.001 par value; authorized -- 250,000; issued- 61,346
and 64,872 shares, resp
ectively;
outstanding -- 60,524 and 64,173 shares, respectively
|
|
|
61
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock
|
|
|
(492
|
)
|
|
|
(331
|
)
|
|
Additional
paid-in capital
|
|
|
798,917
|
|
|
|
799,037
|
|
|
Accumulated
other comprehensive income
|
|
|
13
|
|
|
|
9
|
|
|
Accumulated
deficit
|
|
|
(750,234
|
)
|
|
|
(736,213
|
)
|
|
Total
stockholders’ equity
|
|
|
48,265
|
|
|
|
62,567
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
60,151
|
|
|
$
|
74,166
|
|
The accompanying notes are an integral
part of these consolidated financial statements
.
GEEKNET, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media revenue,
including $545, $311, $890 and $361 of related party revenue,
respectively
|
|
$
|
16,486
|
|
|
$
|
8,481
|
|
|
$
|
18,506
|
|
|
$
|
17,496
|
|
|
E-commerce
revenue
|
|
|
49,091
|
|
|
|
23,994
|
|
|
|
36,820
|
|
|
|
28,103
|
|
|
Total net
revenue
|
|
|
65,577
|
|
|
|
32,475
|
|
|
|
55,326
|
|
|
|
45,599
|
|
|
Cost of
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media cost of
revenue
|
|
|
6,953
|
|
|
|
3,567
|
|
|
|
7,268
|
|
|
|
4,733
|
|
|
E-commerce
cost of revenue
|
|
|
38,151
|
|
|
|
18,374
|
|
|
|
27,860
|
|
|
|
21,200
|
|
|
Total cost of
revenue
|
|
|
45,104
|
|
|
|
21,941
|
|
|
|
35,128
|
|
|
|
25,933
|
|
|
Gross
margin
|
|
|
20,473
|
|
|
|
10,534
|
|
|
|
20,198
|
|
|
|
19,666
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and
marketing
|
|
|
11,775
|
|
|
|
4,326
|
|
|
|
8,346
|
|
|
|
6,108
|
|
|
Research and
development
|
|
|
8,103
|
|
|
|
2,528
|
|
|
|
4,382
|
|
|
|
3,771
|
|
|
General and
administrative
|
|
|
8,843
|
|
|
|
3,780
|
|
|
|
11,126
|
|
|
|
6,443
|
|
|
Amortization
of intangible assets
|
|
|
200
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
Restructuring
costs
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
2,179
|
|
|
|
-
|
|
|
Total
operating expenses
|
|
|
28,859
|
|
|
|
10,634
|
|
|
|
26,034
|
|
|
|
16,322
|
|
|
Income (loss)
from operations
|
|
|
(8,386
|
)
|
|
|
(100
|
)
|
|
|
(5,836
|
)
|
|
|
3,344
|
|
|
Interest and
other income (expense), net
|
|
|
(910
|
)
|
|
|
1,353
|
|
|
|
1,638
|
|
|
|
2,896
|
|
|
Other than
temporary impairment of non-marketable equity securities
|
|
|
(4,585
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Income (loss)
from continuing operations before income taxes
|
|
|
(13,881
|
)
|
|
|
1,253
|
|
|
|
(4,198
|
)
|
|
|
6,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
140
|
|
|
|
173
|
|
|
|
128
|
|
|
|
285
|
|
|
Income (loss)
from continuing operations
|
|
|
(14,021
|
)
|
|
|
1,080
|
|
|
|
(4,326
|
)
|
|
|
5,955
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,801
|
)
|
|
Gain on sale,
net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,574
|
|
|
Income from
discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,773
|
|
|
Net income
(loss)
|
|
$
|
(14,021
|
)
|
|
$
|
1,080
|
|
|
$
|
(4,326
|
)
|
|
$
|
8,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.09
|
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.09
|
|
|
Income per
share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.13
|
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.13
|
|
|
Shares used in
per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,801
|
|
|
|
66,525
|
|
|
|
67,469
|
|
|
|
66,254
|
|
|
Diluted
|
|
|
60,801
|
|
|
|
66,648
|
|
|
|
67,469
|
|
|
|
68,489
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
GEEKNET, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME
(LOSS)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
BALANCE AT
JULY 31, 2006
|
|
|
64,507
|
|
|
|
65
|
|
|
|
(4
|
)
|
|
|
790,437
|
|
|
|
(25
|
)
|
|
|
(741,095
|
)
|
|
|
49,378
|
|
|
Issuance of
common stock
|
|
|
4,163
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4,214
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,218
|
|
|
Stock based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,558
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,558
|
|
|
Tax benefits
associated with exercise of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,728
|
|
|
|
8,728
|
|
|
Unrealized
loss on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,727
|
|
|
BALANCE AT
JULY 31, 2007
|
|
|
68,670
|
|
|
|
69
|
|
|
|
(4
|
)
|
|
|
797,422
|
|
|
|
(26
|
)
|
|
|
(732,367
|
)
|
|
|
65,094
|
|
|
Issuance of
common stock
|
|
|
611
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
|
Repurchase of
restricted stock
|
|
|
(375
|
)
|
|
|
-
|
|
|
|
(189
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(189
|
)
|
|
Stock based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,593
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,593
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,326
|
)
|
|
|
(4,326
|
)
|
|
Unrealized
loss on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(571
|
)
|
|
|
-
|
|
|
|
(571
|
)
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,897
|
)
|
|
BALANCE AT
JULY 31, 2008
|
|
|
68,906
|
|
|
$
|
69
|
|
|
$
|
(193
|
)
|
|
$
|
801,066
|
|
|
$
|
(597
|
)
|
|
$
|
(736,693
|
)
|
|
$
|
63,652
|
|
|
Issuance of
common stock
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Repurchase of
restricted stock
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
(138
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(138
|
)
|
|
Repurchase of
common stock
|
|
|
(4,523
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(3,206
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,210
|
)
|
|
Stock based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,177
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,177
|
|
|
Cummulative
effect of adoption of new accounting principle
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
|
|
|
(600
|
)
|
|
|
-
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,080
|
|
|
|
1,080
|
|
|
Unrealized
gain on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
Comprehensive
lncome
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,086
|
|
|
BALANCE AT
DECEMBER 31, 2008
|
|
|
64,173
|
|
|
$
|
65
|
|
|
$
|
(331
|
)
|
|
$
|
799,037
|
|
|
$
|
9
|
|
|
$
|
(736,213
|
)
|
|
$
|
62,567
|
|
|
Issuance of
common stock
|
|
|
254
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259
|
|
|
Repurchase of
restricted stock
|
|
|
(203
|
)
|
|
|
-
|
|
|
|
(161
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(161
|
)
|
|
Repurchase of
common stock
|
|
|
(3,700
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(3,030
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,034
|
)
|
|
Stock based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,651
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,021
|
)
|
|
|
(14,021
|
)
|
|
Unrealized
gain on marketable securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
|
-
|
|
|
|
4
|
|
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,017
|
)
|
|
BALANCE AT
DECEMBER 31, 2009
|
|
|
60,524
|
|
|
$
|
61
|
|
|
$
|
(492
|
)
|
|
$
|
798,917
|
|
|
$
|
13
|
|
|
$
|
(750,234
|
)
|
|
$
|
48,265
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
GEEKNET, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows
from operating activities from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(14,021
|
)
|
|
$
|
1,080
|
|
|
$
|
(4,326
|
)
|
|
$
|
8,728
|
|
|
Income from
discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,773
|
|
|
Income (loss)
from continuing operations
|
|
|
(14,021
|
)
|
|
|
1,080
|
|
|
|
(4,326
|
)
|
|
|
5,955
|
|
|
Adjustments to
reconcile net income (loss) from continuing operations to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,157
|
|
|
|
960
|
|
|
|
1,481
|
|
|
|
574
|
|
|
Stock-based
compensation expense
|
|
|
2,651
|
|
|
|
1,177
|
|
|
|
3,593
|
|
|
|
1,443
|
|
|
Tax benefit
from employee option plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
213
|
|
|
Provision for
bad debts
|
|
|
46
|
|
|
|
(52
|
)
|
|
|
154
|
|
|
|
27
|
|
|
Provision for
excess and obsolete inventory
|
|
|
17
|
|
|
|
(77
|
)
|
|
|
43
|
|
|
|
(33
|
)
|
|
Provision for
return for allowance
|
|
|
258
|
|
|
|
167
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss on
disposal of assets
|
|
|
1,020
|
|
|
|
-
|
|
|
|
8
|
|
|
|
42
|
|
|
(Gain) Loss on
sale of investments
|
|
|
-
|
|
|
|
(548
|
)
|
|
|
413
|
|
|
|
-
|
|
|
Non-cash
restructuring expense
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
2,179
|
|
|
|
-
|
|
|
Change in fair
value of financial assets
|
|
|
-
|
|
|
|
(600
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Impairment of
investments
|
|
|
4,585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Changes in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
78
|
|
|
|
47
|
|
|
|
742
|
|
|
|
(2,493
|
)
|
|
Inventories
|
|
|
(2,033
|
)
|
|
|
(202
|
)
|
|
|
(976
|
)
|
|
|
(928
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(471
|
)
|
|
|
(568
|
)
|
|
|
497
|
|
|
|
(679
|
)
|
|
Accounts
payable
|
|
|
1,735
|
|
|
|
1,238
|
|
|
|
435
|
|
|
|
1,252
|
|
|
Accrued
restructuring liabilities
|
|
|
(2,816
|
)
|
|
|
(1,116
|
)
|
|
|
(1,870
|
)
|
|
|
(1,640
|
)
|
|
Deferred
revenue
|
|
|
337
|
|
|
|
6
|
|
|
|
(148
|
)
|
|
|
440
|
|
|
Accrued
liabilities and other
|
|
|
858
|
|
|
|
420
|
|
|
|
(671
|
)
|
|
|
300
|
|
|
Other
long-term liabilities
|
|
|
(66
|
)
|
|
|
3
|
|
|
|
(688
|
)
|
|
|
(260
|
)
|
|
Net cash
provided by (used in) operating activities from continuing
operations
|
|
|
(5,727
|
)
|
|
|
1,935
|
|
|
|
866
|
|
|
|
4,213
|
|
|
Cash flows
from investing activities from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
property and equipment
|
|
|
(1,001
|
)
|
|
|
(907
|
)
|
|
|
(3,774
|
)
|
|
|
(2,626
|
)
|
|
Purchase of
marketable securities
|
|
|
-
|
|
|
|
(8
|
)
|
|
|
(40,885
|
)
|
|
|
(81,331
|
)
|
|
Maturities or
sales of investments and marketable securities
|
|
|
659
|
|
|
|
935
|
|
|
|
77,386
|
|
|
|
71,337
|
|
|
Acquisition of
a business, net of cash acquired
|
|
|
(2,613
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Proceeds from
sales of intangible assets, net
|
|
|
172
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Purchase
of intangible assets
|
|
|
(122
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Net cash
provided by (used in) investing activities from continuing
operations
|
|
|
(2,905
|
)
|
|
|
20
|
|
|
|
32,727
|
|
|
|
(12,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows
from financing activities from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
issuance of common stock
|
|
|
259
|
|
|
|
-
|
|
|
|
51
|
|
|
|
4,219
|
|
|
Repurchase of
stock
|
|
|
(3,195
|
)
|
|
|
(3,348
|
)
|
|
|
(189
|
)
|
|
|
-
|
|
|
Net cash
provided by (used in) financing activities from continuing
operations
|
|
|
(2,936
|
)
|
|
|
(3,348
|
)
|
|
|
(138
|
)
|
|
|
4,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows
from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used
in operating activities
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
|
|
(1,550
|
)
|
|
Net cash used
in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(658
|
)
|
|
Net cash
provided by (used in) discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
|
|
(2,208
|
)
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
|
(11,568
|
)
|
|
|
(1,393
|
)
|
|
|
33,547
|
|
|
|
(6,396
|
)
|
|
Cash and cash
equivalents, beginning of year
|
|
|
40,511
|
|
|
|
41,904
|
|
|
|
8,357
|
|
|
|
14,753
|
|
|
Cash and cash
equivalents, end of year
|
|
$
|
28,943
|
|
|
$
|
40,511
|
|
|
$
|
41,904
|
|
|
$
|
8,357
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
GEEKNET, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
and Operations of the Company:
Overview
Geeknet, Inc. (“Geeknet” or the
“Company”), previously known as SourceForge, Inc., is an online network for the
global geek community, 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, and
on Slashdot to peer-produce and peer-moderate technology news and
discussion. 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 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. In September 2009, the Company acquired Ohloh
Corporation (“Ohloh”), a directory of open source projects and developers, and
in November 2009 the Company changed its name to Geeknet to project a more
accurate reflection of its business, primarily to the advertising
community.
As
a result of the sale of the Company’s Software business to CollabNet and the
sale of its Online Images business to WebMediaBrands Inc, the Company
no longer has operations in these segments. All financial information
related to the Software and Online Images businesses have been presented as
discontinued operations in the accompanying condensed consolidated financial
statements. See Note 12 — Discontinued Operations.
On
April 29, 2009, the Company changed its fiscal year-end from July 31 to December
31 retroactive to December 31, 2008. These financial statements
reflect the results for the calendar year ended December 31, 2009, the five
month transition period from August 1, 2008 through December 31, 2008, and the
fiscal years ended July 31, 2008 and July 31, 2007.
2. Summary
of Significant Accounting Policies:
Use
of Estimates in Preparation of Consolidated Financial Statements
The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted by the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of such financial statements, as well as the reported amounts of revenue and
expenses during the periods indicated. Actual results could differ from
those estimates. Except as discussed below, there have been no significant
changes to the Company’s critical accounting estimates during the year ended
December 31, 2009.
Adopted
Accounting Pronouncements
Effective July 1,
2009, the Company adopted the “Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification” and the Hierarchy of Generally Accepted
Accounting Principles, which establishes the FASB Accounting Standards
Codification (the “Codification” ) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with Accounting Standards
Generally Accepted in the United States (“U.S. GAAP”). Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative U.S. GAAP for SEC registrants. All
guidance contained in the Codification carries an equal level of
authority. The Codification superseded all existing non-SEC
accounting and reporting standards. All other non-grandfathered,
non-SEC accounting literature not included in the Codification is
non-authoritative. The FASB will not issue new standards in the form
of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their
own right. ASUs will serve only to update the Codification, provide
background information about the guidance and provide the bases for conclusions
on the change(s) in the Codification. References made to FASB
guidance throughout this document have been updated for the
Codification. The adoption of codification did not have an impact on
the Company’s financial position or results of operations.
Effective August 1,
2008, the Company adopted new standards related to Fair Value Measurements and
Disclosures for all Financial Assets and Liabilities and all non Financial
Assets and Liabilities and the Fair Value Option for Financial Assets and
Financial Liabilities. The Company has elected the fair value option
for its Auction Rate Securities. In conjunction with the adoption of
this standard, the Company reduced accumulated other comprehensive loss by $0.6
million and accounted for this as a cumulative effect of a change in accounting
principle which was recorded as an increase in its Accumulated
Deficit.
Effective
April 1, 2009, the Company adopted a new accounting standard for subsequent
events. The update modifies the names of the two types of subsequent events
either as recognized subsequent events (previously referred to in practice as
Type I subsequent events) or non-recognized subsequent events (previously
referred to in practice as Type II subsequent events). In addition, the standard
modifies the definition of subsequent events to refer to events or transactions
that occur after the balance sheet date, but before the financial statements are
issued (for public entities) or available to be issued (for nonpublic entities).
It also requires the disclosure of the date through which subsequent events have
been evaluated. The update did not result in significant changes in the practice
of subsequent event disclosures, and therefore the adoption did not have any
impact on the Company’s consolidated financial statements.
In August 2009, the
FASB provided further guidance on how to measure the fair value of a liability,
an area where practitioners have been seeking further guidance. It primarily
does three things: 1) sets forth the types of valuation techniques to be used to
value a liability when a quoted price in an active market for the identical
liability is not available, 2) clarifies that when estimating the fair value of
a liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability and 3) clarifies that both a quoted price
in an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no
adjustments to the quoted price of
the asset are required are Level 1 fair value measurements. The Company adopted
this standard in 2009. The adoption of this standard did not have an impact on
the Company’s consolidated financial statements.
Recent
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 does not expect that the adoption of this standard
will have a material impact on its consolidated financial
statements.
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 our consolidated financial statements.
Reclassifications
Certain
reclassifications have been made to the prior year consolidated financial
statements to conform to the current year presentation. These reclassifications
have no impact on previously reported net loss or cash flows.
Principles
of Consolidation
These consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Related
Party Transactions
The Company owns
approximately 9% of the outstanding capital stock of CollabNet, consisting of
CollabNet’s Series C-1 preferred stock. As the Company holds less
than 20% of the voting stock and does not otherwise exercise significant
influence over it, this investment is accounted for using the cost
method. CollabNet is a developer of software used in collaborative
software development.
There were $0.5
million, $0.3 million, $0.9 million and $0.3 million of related-party revenue
from continuing operations associated with CollabNet for the year ended December
31, 2009, the five months ended December 31, 2008 and the years ended July 31,
2008 and July 31, 2007, respectively.
Foreign
Currency Translation
The Company has
liquidated all of its wholly-owned foreign subsidiaries other than SourceForge
Europe, which is located in Belgium. The functional currency of
SourceForge Europe is the Euro, which is Belgium’s local
currency. For the periods presented, no revenue or expenses resulted
from the foreign entity. At December 31, 2009 the Company has a
foreign cash balance of $0.02 million. Remaining balance sheet
accounts are translated into U.S. dollars at exchange rates prevailing at
balance sheet dates. Expenses are translated into U.S. dollars at
average rates for the period. Gains and losses resulting from
translation are charged or credited in other comprehensive income as a component
of stockholders’ equity. As of December 31, 2009, the Company did not
hold any foreign currency derivative instruments.
Segment
and Geographic Information
Operating segments
are identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision-maker, or decision-making group, in making decisions about how to
allocate resources and assess performance. The Company’s chief decision-making
group is the Chief Executive Officer and the executive team. The
Company currently operates as two reportable business segments: Media
and E-commerce.
The Company markets
its products in the United States through its direct sales force and its online
web properties and with respect to international Media sales, through
representatives in the United Kingdom, Europe and Australia. Revenue
for the years ended December 31, 2009, July 31, 2008 and July 31, 2007 were
primarily generated 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 as
well as treasury bills.
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. The Company uses independent valuation experts to assess the
reasonableness of our assumptions and to perform certain portions of the
impairment analysis. 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. There were no impairments of the investments
during the five months ended December 31, 2008 or the years ended July 31, 2008
and July 31, 2007.
Cash, cash
equivalents and investments consist of the following (in
thousands):
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Adjusted
|
|
|
Gross Unreal-
|
|
|
Estimated
|
|
|
Adjusted
|
|
|
Gross Unreal-
|
|
|
Estimated
|
|
|
|
|
Cost
|
|
|
ized Losses
|
|
|
Fair Value
|
|
|
Cost
|
|
|
ized Losses
|
|
|
Fair Value
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,000
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
|
$
|
4,898
|
|
|
$
|
-
|
|
|
$
|
4,898
|
|
|
Money market
funds
|
|
|
22,943
|
|
|
|
-
|
|
|
|
22,943
|
|
|
|
35,613
|
|
|
|
-
|
|
|
|
35,613
|
|
|
Total cash and
cash equivalents
|
|
$
|
28,943
|
|
|
$
|
-
|
|
|
$
|
28,943
|
|
|
$
|
40,511
|
|
|
$
|
-
|
|
|
$
|
40,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
securities
|
|
|
8
|
|
|
|
-
|
|
|
|
8
|
|
|
|
567
|
|
|
|
(4
|
)
|
|
|
563
|
|
|
Government
securities
|
|
|
10,750
|
|
|
|
(1,350
|
)
|
|
|
9,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
short-term investments
|
|
$
|
10,758
|
|
|
$
|
(1,350
|
)
|
|
$
|
9,408
|
|
|
$
|
567
|
|
|
$
|
(4
|
)
|
|
$
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,850
|
|
|
|
(1,903
|
)
|
|
|
8,947
|
|
|
Total
long-term investments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,850
|
|
|
$
|
(1,903
|
)
|
|
$
|
8,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash, non current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
$
|
1,000
|
|
At December 31,
2009, the Company has recorded its government securities as short-term
investments based on its right to require UBS AG (“UBS”) to repurchase these
investments on June 30, 2010.
The
contractual maturities of debt securities classified as trading securities at
December 31, 2009 are as follows (in thousands):
|
Due
between 90 days and one year
|
|
$
|
9,408
|
|
|
Due more than
one year
|
|
|
-
|
|
|
Total
investments
|
|
$
|
9,408
|
|
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 December 31, 2009 (in thousands):
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Money market
fund deposits
|
|
$
|
22,943
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,943
|
|
|
Corporate
debt
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
8
|
|
|
Municipal
bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
9,400
|
|
|
|
9,400
|
|
|
ARS
Right
|
|
|
-
|
|
|
|
-
|
|
|
|
1,350
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,943
|
|
|
$
|
-
|
|
|
$
|
10,758
|
|
|
$
|
33,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
22,943
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,943
|
|
|
Short-term
investments
|
|
|
-
|
|
|
|
-
|
|
|
|
9,408
|
|
|
|
9,408
|
|
|
Other current
assets
|
|
|
-
|
|
|
|
-
|
|
|
|
1,350
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,943
|
|
|
$
|
-
|
|
|
$
|
10,758
|
|
|
$
|
33,701
|
|
Level 3 assets
include 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. In
February 2008, auctions began to fail for these securities and each auction
since then has failed. Consequently, the investments are not
currently liquid. At December 31, 2009, all of the Company’s ARS were
rated AAA, the highest credit rating, by at least one rating
agency. The Company has a right to sell at par value (the “ARS
Right”), auction-rate securities originally at $10.8 million to UBS, its
investment advisor, at any time during a two-year period beginning June 30,
2010. The Company has valued the ARS Right as the difference between
the par value and the fair value of its ARS, as adjusted for any bearer risk
associated with UBS’s financial ability to repurchase the ARS beginning June 30,
2010.
The ARS were valued
utilizing a discounted cash flow approach. The assumptions used in
preparing the discounted cash flow model are based on data available as of
December 31, 2009 and include estimates of interest rates, timing and amount of
cash flows, credit and liquidity premiums, and expected holding periods of the
ARS. These assumptions are volatile and subject to change as the
underlying sources of these assumptions and market conditions
change.
In August 2008, the
Company adopted an accounting standard, under
which Company elected the fair value option for its ARS and the ARS
Right. Since the ARS Right is directly related to the ARS
investments, the Company elected the fair value option for these financial
assets. Upon adoption of this standard, the Company reduced its
Accumulated Other Comprehensive Loss by $0.6 million and accounted for this as a
cumulative effect of a change in accounting principle which was recorded as an
increase in its Accumulated Deficit. 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
January 1, 2009
|
|
$
|
8,947
|
|
|
$
|
1,903
|
|
|
$
|
8
|
|
|
Loss on other
current assets
|
|
|
-
|
|
|
|
(553
|
)
|
|
|
-
|
|
|
Gain on other
current assets
|
|
|
|
|
|
|
100
|
|
|
|
-
|
|
|
Gain on
investments
|
|
|
553
|
|
|
|
-
|
|
|
|
-
|
|
|
Sales/Maturities
|
|
|
(100
|
)
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2009
|
|
$
|
9,400
|
|
|
$
|
1,350
|
|
|
$
|
8
|
|
Trade
Accounts Receivable
Trade accounts
receivable are recorded at the invoiced amount and are not interest bearing.
The Company will record an allowance for doubtful accounts to reserve for
potentially uncollectible trade receivables. The Company also reviews its
trade receivables by aging category to identify specific customers with known
disputes or collectibility issues. The Company exercises judgment when
determining the adequacy of these reserves and evaluates historical bad debt
trends, general economic conditions in the United States and internationally,
and changes in customer financial conditions.
Inventories
Inventories related
to the Company’s E-commerce segment consist solely of finished goods that are
valued using the average cost method. Provisions, when required, are made
to reduce excess and obsolete inventories to their estimated net realizable
values.
Restricted
Cash
The Company had an
outstanding letter of credit of $1.0 million at December 31, 2009 and 2008,
which is used to collateralize its former headquarters building lease in
Fremont, California. The Company has a restricted cash balance with its
bank to support this letter of credit which expired in May 2010.
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. Property and equipment consist of the following (in
thousands):
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Computer and
office equipment (useful lives of 2 to 4 years)
|
|
$
|
5,475
|
|
|
$
|
5,846
|
|
|
Furniture and
fixtures (useful lives of 2 to 4 years)
|
|
|
210
|
|
|
|
92
|
|
|
Leasehold
improvements (useful lives of lesser of estimated life or lease
term)
|
|
|
93
|
|
|
|
58
|
|
|
Software
(useful lives of 2 to 5 years)
|
|
|
390
|
|
|
|
2,778
|
|
|
Total property
and equipment
|
|
|
6,168
|
|
|
|
8,774
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(3,599
|
)
|
|
|
(4,026
|
)
|
|
Property and
equipment, net
|
|
$
|
2,569
|
|
|
$
|
4,748
|
|
Depreciation and
amortization expense for the year ended December 31, 2009, the five months ended
December 31, 2008 and the years ended July 31, 2008 and July 31, 2007 was $2.2
million, $1.0 million, $1.5 million, and $0.6 million,
respectively.
Goodwill
and Intangible Assets
Goodwill is carried
at cost.
Intangible assets
are amortized on a straight-line basis over three to five years. Intangible
asset amortization was $0.2 million during the year ended December 31,
2009. Intangible asset amortization was insignificant for the five
months ended December 31, 2008 and the years ended July 31, 2008 and July 31,
2007. The intangible asset at December 31, 2009 relates primarily to
the acquisition of Ohloh Corporation in June 2009 and domain and trade names
associated with its current Media business. This balance has been included
in “Other Long-Term Assets” in the Consolidated Balance Sheets.
The Company
evaluates goodwill and intangible assets for impairment annually and when an
event occurs or circumstances change that indicates that the carrying value may
not be recoverable. The annual testing date is December 31. Impairment of
goodwill is tested at the reporting unit level by comparing the reporting unit’s
carrying net assets, including goodwill, to the fair value of the reporting
unit. The fair value of the reporting unit is estimated using a combination of
the income, or discounted cash flows, approach and the market approach, which
utilizes comparable companies’ data. If the carrying amount of the reporting
unit exceeds its fair value, goodwill is considered to be impaired and a second
step is performed to measure the amount of the impairment loss. The
preparation of the goodwill impairment analysis requires the Company to make
significant estimates and assumptions with respect to the determination of fair
values of reporting units and tangible and intangible assets. These estimates
and assumptions, which include future values, are often subjective and may
differ significantly from period to period based on changes in the overall
economic environment, changes in its business and changes in its strategy or our
internal forecasts. The Company utilizes independent valuation
experts to assess the reasonableness of its assumptions and to perform certain
portions of the impairment analysis.
The changes in the
carrying amount of the intangible assets are as follows (in
thousands):
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
|
asset
|
|
|
amortization
|
|
|
Net asset
|
|
|
asset
|
|
|
amortization
|
|
|
Net asset
|
|
|
Goodwill
|
|
$
|
62,032
|
|
|
$
|
(60,362
|
)
|
|
$
|
1,670
|
|
|
$
|
60,362
|
|
|
$
|
(60,362
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identified
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domain and
trade names
|
|
|
6,059
|
|
|
|
(5,946
|
)
|
|
|
113
|
|
|
|
5,933
|
|
|
|
(5,933
|
)
|
|
|
-
|
|
|
Purchased
technology
|
|
|
3,492
|
|
|
|
(2,721
|
)
|
|
|
771
|
|
|
|
2,534
|
|
|
|
(2,534
|
)
|
|
|
-
|
|
|
|
|
|
9,551
|
|
|
|
(8,667
|
)
|
|
|
884
|
|
|
|
8,467
|
|
|
|
(8,467
|
)
|
|
|
-
|
|
|
Total goodwill
and identified intangible assets
|
|
$
|
71,583
|
|
|
$
|
(69,029
|
)
|
|
$
|
2,554
|
|
|
$
|
68,829
|
|
|
$
|
(68,829
|
)
|
|
$
|
-
|
|
Impairment
of Long-Lived Assets
As of December 31, 2009,
the Company has an investment in CollabNet. The Company continually
evaluates whether events or circumstances have occurred that indicate the
remaining value of these investment may be impaired. There is no quoted
price for this investment; accordingly, fair value was estimated by management
based on an annual appraisal performed by an independent valuation firm.
In March 2009, the Company recorded an impairment loss of $4.6 million related
to this investment. At December 31, 2009, the Company re-evaluated
this investment for impairment. Based on an independent valuation,
management determined there was no additional impairment of this
investment.
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 banner and rich
media advertising, text links and sponsorships. The Company
recognizes Media revenue as advertising is delivered over the period in which
the advertisements are displayed, provided that persuasive evidence of an
arrangement exists, no significant obligations remain, the fee is fixed or
determinable, and collection of the receivable is reasonably
assured. The Company’s obligations may include guarantees of a
minimum number of impressions (the number of times that an advertisement is
viewed by visitors to the Company’s web sites). To the extent that
minimum guaranteed impressions are not delivered in the specified time
frame, the Company does not recognize
the corresponding revenue until the guaranteed impressions are
delivered. Traffic to the Company’s Media web sites is seasonal, with
relatively lower levels of traffic experienced during the summer months of the
northern hemisphere.
E-commerce
Revenue
E-commerce revenue
is derived from the online sale of consumer goods. The Company
recognizes E-commerce revenue from product sales when persuasive evidence of an
arrangement exists, delivery has occurred, the sale price is fixed or
determinable, and collectibility is reasonably assured. The Company
generally recognizes E-commerce revenue when products are shipped and title
transfers to the customer. The Company grants customers a limited
right to return E-commerce products. The Company has recorded
reserves of $0.3 million and $0.2 million for such returns at December 31, 2009
and December 31, 2008, respectively.
Advertising
Expenses
The Company expenses
advertising costs as incurred. Total advertising expenses for continuing
operations were $2.8 million, $0.9 million, $1.5 million and $1.0 million for
the year ended December 31, 2009, the five months ended December 31, 2008 and
the years ended July 31, 2008 and July 31, 2007, respectively.
Stock-Based
Compensation
The Company
estimates the fair value of share-based payment awards on the date of grant
using an option-pricing model. The value of awards that are
ultimately expected to vest is recognized as expense over the requisite service
periods in the Company’s Consolidated Statements of Operations.
Software
Development Costs
Costs related to the
planning and post-implementation phases of internal use software products are
recorded as an operating expense. Direct costs incurred in the development phase
are capitalized and amortized over the product’s estimated useful life as
charges to cost of revenue.
No costs were
capitalized for the year ended December 31, 2009 and the five months ended
December 31, 2008. The Company capitalized internal use software
costs of $0.7 million and $1.8 million, respectively, during the years ended
July 31, 2008 and July 2007.
Development costs
incurred in the research and development of new software products are expensed
as incurred until technological feasibility in the form of a working model has
been established at which time such costs are capitalized, subject to a net
realizable value evaluation. Technological feasibility is established
upon the completion of an integrated working model. The Company’s
software development is related to its discontinued Software business and was
completed concurrent with the establishment of technological
feasibility. Accordingly, all software development costs have been
charged to discontinued operations in the accompanying Consolidated Statements
of Operations.
Computation
of Per Share Amounts
Basic income (loss)
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 income (loss) 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. For the years ended December 31,
2009 and July 31, 2008, the Company excluded all stock options and restricted
stock awards from the calculation of diluted net loss per common share because
all such securities are antidilutive.
The Company
considers employee equity share options, nonvested shares, and similar equity
instruments 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 fiscal 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 is 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 net income (loss) per share (in
thousands, except per share data):
|
|
|
Year Ended
|
|
|
Five Months
Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
from continuing operations
|
|
$
|
(14,021
|
)
|
|
$
|
1,080
|
|
|
$
|
(4,326
|
)
|
|
$
|
5,955
|
|
|
Income from
discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,773
|
|
|
Net income
(loss)
|
|
$
|
(14,021
|
)
|
|
$
|
1,080
|
|
|
$
|
(4,326
|
)
|
|
$
|
8,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic
|
|
|
60,801
|
|
|
|
66,525
|
|
|
|
67,469
|
|
|
|
66,254
|
|
|
Effect of
dilutive potential common shares
|
|
|
-
|
|
|
|
123
|
|
|
|
-
|
|
|
|
2,235
|
|
|
Weighted
average shares - diluted
|
|
|
60,801
|
|
|
|
66,648
|
|
|
|
67,469
|
|
|
|
68,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss)
per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.09
|
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per
share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.13
|
|
|
Diluted
|
|
$
|
(0.23
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.13
|
|
The
following potential common shares have been excluded from the calculation of
diluted net income (loss) per share for all periods presented because they are
anti-dilutive (in thousands):
|
|
|
Year Ended
|
|
|
Five Months
Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Anti-dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to
purchase common stock
|
|
|
6,099
|
|
|
|
6,270
|
|
|
|
5,469
|
|
|
|
3,191
|
|
|
Unvested
restricted stock purchase rights
|
|
|
164
|
|
|
|
931
|
|
|
|
663
|
|
|
|
-
|
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
|
6,263
|
|
|
|
7,201
|
|
|
|
6,132
|
|
|
|
3,191
|
|
Comprehensive
Income (Loss)
Comprehensive income
(loss) is comprised of net income (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.
Income
Taxes
Effective August 1,
2007, the Company adopted a statement which clarified the accounting for
uncertainty in income taxes recognized and prescribed a comprehensive model for
how a company should recognize, measure, present and disclose in its financial
statements uncertain tax positions that the Company has taken or expects to take
on a tax return. The adoption of these provisions did not result in
any adjustment in the liability for unrecognized income tax
benefits. As of August 1, 2007, the Company reduced its unrecognized
tax benefits by $0.6 million. Since a full valuation allowance was
provided for these unrecognized tax benefits, there was no impact on retained
earnings as of August 1, 2007.
Supplier
Concentration
While no supplier
concentration exists in the Company’s Media or E-commerce businesses, some
of the Company’s E-commerce business's manufacturers are located outside of the
United States, most in Asia (primarily China). The Company’s E-commerce
business’s ability to receive inbound inventory and ship completed orders to its
customers is substantially dependent on a single third-party
contract-fulfillment and warehouse provider.
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. As of December
31, 2009, short-term investments include $9.4 million of auction rate securities
which have failed to provide liquidity. See Note 2 — Cash, Cash Equivalents and
Investments.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of 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
December 31, 2009 one advertising agency accounted for 10.5% of gross accounts
receivables. As of December 31, 2008, one advertising agency accounted for 11%
of gross accounts receivable.
For the year ended
December 31, 2009, the five months ended December 31, 2008 and the years ended
July 31, 2008 and July 31, 2007, respectively, no one customer represented 10%
or greater of net revenue. Going forward, the Company does not anticipate
that any one customer will represent more than 10% of annual net
revenue.
3. Balance
Sheet Components
Other
Long-Term Assets
Other Long Term
Assets consisted of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Equity
investment
|
|
$
|
1,979
|
|
|
$
|
6,564
|
|
|
Goodwill
|
|
|
1,670
|
|
|
|
-
|
|
|
Intangible
assets, net
|
|
|
884
|
|
|
|
-
|
|
|
ARS
Right
|
|
|
-
|
|
|
|
1,903
|
|
|
Other
|
|
|
555
|
|
|
|
407
|
|
|
Other
long-term assets
|
|
$
|
5,088
|
|
|
$
|
8,874
|
|
Accrued
liabilities and other
Accrued liabilities
and other consisted of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued
employee compensation and benefits
|
|
$
|
2,386
|
|
|
$
|
1,373
|
|
|
Other accrued
liabilities
|
|
|
1,468
|
|
|
|
1,329
|
|
|
Accrued
liabilities and other
|
|
$
|
3,854
|
|
|
$
|
2,702
|
|
4. Restructuring
Costs
In October 2007, the
Company relocated its corporate headquarters to Mountain View,
California. During fiscal year 2008, which ended on July 31, 2008
under our prior fiscal calendar, 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 our 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. The
restructuring liability of $1.2 million at December 31, 2009 represents the
remaining lease payments, net of sub-lease rent, which continue through May
2010.
Below is a summary
of the restructuring charges (in thousands):
|
|
|
Year Ended
|
|
|
Five Months
Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
(1)
|
|
|
Cash
provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
charges
|
|
$
|
(62
|
)
|
|
$
|
-
|
|
|
$
|
2,057
|
|
|
$
|
581
|
|
|
Non-cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off of
equipment and leasehold improvements
|
|
|
-
|
|
|
|
-
|
|
|
|
122
|
|
|
|
-
|
|
|
|
|
$
|
(62
|
)
|
|
$
|
-
|
|
|
$
|
2,179
|
|
|
$
|
581
|
|
(1)
– Included in discontinued operations
Below is a summary
of the changes to the restructuring liability (in thousands):
|
|
|
Balance at
Beginning of
Period
|
|
|
Other
|
|
|
Restructuring
Charges
|
|
|
Cash
payments
|
|
|
Balance
at
End
of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended July 31, 2007
|
|
$
|
6,107
|
|
|
$
|
-
|
|
|
$
|
581
|
|
|
$
|
(1,640
|
)
|
|
$
|
5,048
|
|
|
For the year
ended July 31, 2008
|
|
$
|
5,048
|
|
|
$
|
590
|
|
|
$
|
2,179
|
|
|
$
|
(2,585
|
)
|
|
$
|
5,232
|
|
|
For the five
months ended Deccember 31, 2008
|
|
$
|
5,232
|
|
|
$
|
47
|
|
|
$
|
-
|
|
|
$
|
(1,163
|
)
|
|
$
|
4,116
|
|
|
For the year
ended December 31, 2009
|
|
$
|
4,116
|
|
|
$
|
65
|
|
|
$
|
(62
|
)
|
|
$
|
(2,881
|
)
|
|
$
|
1,238
|
|
Components of the
total accrued restructuring liability are as follows (in
thousands):
|
|
|
Short Term
|
|
|
Long Term
|
|
|
Total Liability
|
|
|
As of December
31, 2008
|
|
$
|
2,862
|
|
|
$
|
1,254
|
|
|
$
|
4,116
|
|
|
As of December
31, 2009
|
|
$
|
1,238
|
|
|
$
|
-
|
|
|
$
|
1,238
|
|
The Company’s
restructuring liability is comprised of non-cancelable operating lease payments,
net of sublease income, of $1.2 million for the month ended May 31,
2010.
5. Commitments
and Contingencies
The Company leases
its facilities under operating leases that expire at various dates through
fiscal year 2012. Future minimum lease payments under non-cancelable
operating leases, net of sublease income, as of December 31, 2009 are as follows
(in thousands):
|
|
|
Gross
Operating
Leases
|
|
|
Sublease
Income
|
|
|
Net
Operating
Leases
|
|
|
Included in
Restructuring
Liability
|
|
|
2010
|
|
$
|
2,642
|
|
|
$
|
699
|
|
|
$
|
1,943
|
|
|
$
|
1,114
|
|
|
2011
|
|
|
957
|
|
|
|
223
|
|
|
|
734
|
|
|
|
-
|
|
|
2012
|
|
|
780
|
|
|
|
167
|
|
|
|
613
|
|
|
|
-
|
|
|
2013
|
|
|
315
|
|
|
|
-
|
|
|
|
315
|
|
|
|
-
|
|
|
2014
|
|
|
214
|
|
|
|
-
|
|
|
|
214
|
|
|
|
-
|
|
|
Total minimum
lease obligations
|
|
$
|
4,908
|
|
|
$
|
1,089
|
|
|
$
|
3,819
|
|
|
$
|
1,114
|
|
Gross rent expense
for the year ended December 31, 2009, the five months ended December 31, 2008
and the years ended July 31, 2008 and July 31, 2007 was approximately $1.0
million, $0.4 million, $1.4 million and $2.5 million, respectively. This
rent expense was offset by sublease income of $0.1 million, $0.4 million and
$1.5 million for the year ended December 31, 2009 and the years ended July 31,
2008 and July 31, 2007, respectively. There was no sublease income
for the five months ended December 31, 2008. No rent expense was
recorded for the year ended December 31, 2009, the five months ended December
31, 2008 and the year ended July 31, 2008 as a result of idle facilities
charges. The idle facilities charge for the year ended July 31, 2007 has
been included in discontinued operations in the consolidated statements of
operations.
6. Litigation
In January 2001, the
Company, two of its former officers, and Credit Suisse First Boston, the lead
underwriter in the Company's initial public offering ("IPO"), were named as
defendants in a shareholder lawsuit filed in the United States District Court
for the Southern District of New York, later consolidated and captioned In re VA
Software Corp. Initial Public Offering Securities Litigation,
01-CV-0242. The plaintiffs' class action suit seeks unspecified
damages on behalf of a purported class of purchasers of the Company's common
stock from the time of the Company's initial public offering in December 1999
through December 2000.
Among other things,
this complaint alleged that the prospectus pursuant to which shares of common
stock were sold in the Company's initial public offering contained certain false
and misleading statements or omissions regarding the practices of the
Underwriters with respect to their allocation of shares of common stock in these
offerings and their receipt of commissions from customers related to such
allocations. Various plaintiffs have filed actions asserting similar
allegations concerning the initial public offerings of approximately 300 other
issuers. These various cases pending in the Southern District of New
York have been coordinated for pretrial proceedings as In re Initial Public
Offering Securities Litigation, 21 MC 92.
In April 2002,
plaintiffs filed a consolidated amended complaint in the action against the
Company, alleging violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934. Defendants in the coordinated proceeding filed
motions to dismiss. In October 2002, the Company's officers were
dismissed from the case without prejudice pursuant to a
stipulation. On February 19, 2003, the Court granted in part and
denied in part the motion to dismiss, but declined to dismiss the claims against
the Company.
In June 2004, a
stipulation of settlement and release of claims against the issuer defendants,
including the Company, was submitted to the Court for approval. On
August 31, 2005, the Court preliminarily approved the settlement. In
December 2006, the appellate court overturned the certification of classes in
the six test cases, which included the Company's case, that were selected by the
underwriter defendants and plaintiffs in the coordinated
proceedings. Because class certification was a condition of the
settlement, it was unlikely that the settlement would receive final Court
approval. On June 25, 2007, the Court entered an order terminating
the proposed settlement based upon a stipulation among the parties to the
settlement.
Plaintiffs filed
amended master allegations and amended complaints and moved for class
certification in the six focus cases. Defendants moved to dismiss the
amended complaints and opposed class certification. On March 26,
2008, the Court denied the defendants' motion to dismiss the amended
complaints.
The parties have
reached a global settlement of the litigation. On October 5, 2009,
the Court entered an order certifying a settlement class and granting final
approval of the settlement. Under the settlement, the insurers will
pay the full amount of settlement share allocated to the Company, and the
Company will bear no
financial
liability. The Company, as well as the officer and director
defendants who were previously dismissed from the action pursuant to a
stipulation, will receive complete dismissals from the case. A group
of objectors has appealed the Court's October 5, 2009 order to the Second
Circuit of 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.
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.
7. Retirement
Savings Plan
The Company
maintains an employee savings and retirement plan which is qualified under
Section 401(k) of the Internal Revenue Code and is available to substantially
all full-time employees of the Company. The plan provides for tax deferred
salary deductions and after-tax employee contributions. Contributions
include employee salary deferral contributions and discretionary employer
contributions. To date, there have been no employer discretionary
contributions.
8. Common
Stock
Stock
Repurchase Program
In
October 2008, the Company’s Board of Directors authorized a stock repurchase
program authorizing the Company to repurchase up to $10 million of its common
stock over the 12-month period which ended October 2009. Repurchased
shares were cancelled and retired. Under this program the Company
repurchased and retired 8.2 million shares of common stock at a weighted-average
price of $0.76 per share for an aggregate purchase price of $6.2
million.
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 December 31, 2009, a total of 3,109,635 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 Compensation Committee of the Board of Directors also
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 $0.001
per share at such annual stockholders’ meeting. The restricted shares
will vest 50 percent immediately and the remaining 50 percent on the one year
anniversary of the grant.
The 2007 Plan will
terminate in 2017. Options granted under the 2007 Plan must be issued
at a price equal to at least the fair market value of the Company’s common stock
at the date of grant. All vested options granted under the 2007 Plan
may be exercised at any time within 10 years of the date of grant or within 90
days of termination of employment, or such other time as may be provided in the
stock option agreement, and vest over a vesting schedule determined by the Board
of Directors. The Company’s policy is to issue new shares upon
exercise of options under the 2007 Plan.
As of December 31,
2009, the Company had reserved shares of its common stock for future issuance as
follows:
|
1998 Stock
Option Plan and Assumed Plans
|
|
|
1,945,670
|
|
|
1999 Director
Option Plan
|
|
|
482,500
|
|
|
2007 Equity
Plan
|
|
|
4,829,043
|
|
|
|
|
|
7,257,213
|
|
The following table
summarizes option and restricted stock activities from July 31, 2006 through
December 31, 2009:
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
Available
for Grant
|
|
|
Restricted
Stock
Outstanding
|
|
|
Number
Outstanding
|
|
|
Weighted-Average
Exercise
Price
per
Share
|
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
($ 000's)
|
|
|
Balance at
July 31, 2006
|
|
|
10,924,386
|
|
|
|
-
|
|
|
|
8,953,415
|
|
|
$
|
3.56
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(2,661,475
|
)
|
|
|
1,507,500
|
|
|
|
1,153,975
|
|
|
$
|
4.21
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
(2,820,406
|
)
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
Restricted
stock released
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Restricted
stock repurchased
|
|
|
165,000
|
|
|
|
(165,000
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
703,989
|
|
|
|
-
|
|
|
|
(716,738
|
)
|
|
$
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
July 31, 2007
|
|
|
9,131,900
|
|
|
|
1,317,500
|
|
|
|
6,570,246
|
|
|
$
|
4.26
|
|
|
|
6.07
|
|
|
$
|
4,131
|
|
|
Authorized
|
|
|
5,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(2,465,480
|
)
|
|
|
580,000
|
|
|
|
1,305,480
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(31,280
|
)
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock released
|
|
|
-
|
|
|
|
(350,420
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock repurchased
|
|
|
525,000
|
|
|
|
(262,500
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(8,164,048
|
)
|
|
|
-
|
|
|
|
(1,637,250
|
)
|
|
$
|
4.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
July 31, 2008
|
|
|
4,277,372
|
|
|
|
1,284,580
|
|
|
|
6,207,196
|
|
|
$
|
3.85
|
|
|
|
5.48
|
|
|
$
|
62
|
|
|
Granted
|
|
|
(2,790,500
|
)
|
|
|
90,000
|
|
|
|
2,610,500
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock released
|
|
|
-
|
|
|
|
(304,583
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock repurchased
|
|
|
253,333
|
|
|
|
(203,333
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
165,520
|
|
|
|
-
|
|
|
|
(166,875
|
)
|
|
$
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Exercisable at
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
3,294,704
|
|
|
$
|
3.21
|
|
|
|
5.88
|
|
|
$
|
334
|
|
Restricted stock
outstanding is included in common stock outstanding. The total
intrinsic value of options exercised was negligible during the year ended
December 31, 2009, the five months ended December 31, 2008 and the year ended
July 31, 2008, and $8.6 million for the year ended July 31, 2007. The
Company issues new shares upon the exercise of options. For the year
ended December 31, 2009, the five months ended December 31, 2008 and the year
ended July 31, 2008 no tax benefit was realized from exercised
options. During the years ended July 31, 2007 the Company realized
tax benefits of $0.2 million from exercised options.
The
options outstanding and currently exercisable by exercise price at December 31,
2009 were as follows (in thousands, except years and per-share
amounts):
|
|
|
OPTIONS OUTSTANDING
|
|
|
OPTIONS EXERCISABLE
|
|
|
Range of Exercise
Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Life (in
years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
$ 0.63
- $ 0.63
|
|
|
2,250
|
|
|
|
8.92
|
|
|
$
|
0.63
|
|
|
|
563
|
|
|
$
|
0.63
|
|
|
$ 0.67
- $ 1.16
|
|
|
171
|
|
|
|
5.12
|
|
|
|
1.01
|
|
|
|
94
|
|
|
|
0.98
|
|
|
$ 1.19
- $ 1.19
|
|
|
962
|
|
|
|
9.49
|
|
|
|
1.19
|
|
|
|
99
|
|
|
|
1.19
|
|
|
$ 1.20
- $ 1.30
|
|
|
748
|
|
|
|
8.89
|
|
|
|
1.27
|
|
|
|
99
|
|
|
|
1.27
|
|
|
$ 1.32
- $ 1.56
|
|
|
752
|
|
|
|
7.69
|
|
|
|
1.44
|
|
|
|
331
|
|
|
|
1.44
|
|
|
$ 1.60
- $ 2.85
|
|
|
735
|
|
|
|
4.89
|
|
|
|
2.23
|
|
|
|
674
|
|
|
|
2.24
|
|
|
$ 2.98
- $ 4.03
|
|
|
786
|
|
|
|
5.04
|
|
|
|
3.60
|
|
|
|
685
|
|
|
|
3.55
|
|
|
$ 4.07
- $ 5.20
|
|
|
726
|
|
|
|
6.66
|
|
|
|
4.30
|
|
|
|
623
|
|
|
|
4.30
|
|
|
$ 8.75 - $ 54.11
|
|
|
123
|
|
|
|
0.68
|
|
|
|
20.45
|
|
|
|
123
|
|
|
|
20.45
|
|
|
$
64.12 - $ 64.12
|
|
|
4
|
|
|
|
0.09
|
|
|
|
64.12
|
|
|
|
4
|
|
|
|
64.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.63
$ 64.12
|
|
|
7,257
|
|
|
|
7.58
|
|
|
$
|
2.09
|
|
|
|
3,295
|
|
|
$
|
3.21
|
|
The total intrinsic
value of stock options outstanding and stock options exercisable as of December
31, 2009 was $1.3 million and $0.3 million, respectively. The aggregate
intrinsic value in the above table is calculated as the excess of the December
31, 2009 official closing price of the Company’s stock of $1.19 per share as
reported by the NASDAQ Global Market over the exercise price of the shares. The
weighted-average remaining contractual life of options exercisable as of
December 31, 2009 was 5.97 years. The total number of in-the-money options
exercisable as of December 31, 2009 was 0.8 million.
The total fair value
of options vested during the year ended December 31, 2009, the five months ended
December 31, 2008 and the years ended July 31, 2008 and July 31, 2007 were
insignificant. The total fair value of options vested during the year
ended July 31, 2007 was $0.3 million. As of December 31, 2009, total
compensation cost related to nonvested stock options not yet recognized was $2.6
million which is expected to be recognized over a weighted-average term of three
years.
Valuation
and Expense Information
The following table
summarizes stock-based compensation expense recorded for employee stock options
(in thousands):
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Media cost of
revenue
|
|
$
|
240
|
|
|
$
|
99
|
|
|
$
|
190
|
|
|
$
|
76
|
|
|
E-commerce
cost of revenue
|
|
|
79
|
|
|
|
29
|
|
|
|
59
|
|
|
|
25
|
|
|
Included in
cost of revenue
|
|
|
319
|
|
|
|
128
|
|
|
|
249
|
|
|
|
101
|
|
|
Sales and
marketing
|
|
|
513
|
|
|
|
221
|
|
|
|
474
|
|
|
|
236
|
|
|
Research and
development
|
|
|
343
|
|
|
|
130
|
|
|
|
204
|
|
|
|
113
|
|
|
General and
administrative
|
|
|
1,476
|
|
|
|
698
|
|
|
|
2,666
|
|
|
|
993
|
|
|
Included in
operating expenses
|
|
|
2,332
|
|
|
|
1,049
|
|
|
|
3,344
|
|
|
|
1,342
|
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
share-based compensation expense
|
|
$
|
2,651
|
|
|
$
|
1,177
|
|
|
$
|
3,593
|
|
|
$
|
1,877
|
|
In conjunction with
the resignation of the Company’s former Chief Executive Officer in June 2008,
the Company extended the exercise period for the former CEO’s options to
purchase 1.8 million shares of the Company’s common stock by 12 months
(following the completion of the former CEO’s consulting agreement) and
accelerated vesting of his restricted stock purchase rights for 0.3 million
shares. As a result of these modifications the Company recorded
additional stock-based compensation of $1.0 million during the year ended July
31, 2008.
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 years
ended December 31, 2009 and July 31, 2008 was based on historical settlement
patterns. For the year ended July 31, 2007, the Company used the
simplified method for determining the expected term of options
granted. 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:
|
|
|
Year Ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Expected life
(years)
|
|
|
5.82
|
|
|
|
5.63
|
|
|
|
4.45
|
|
|
|
6.13
|
|
|
Risk-free
interest rate
|
|
|
2.8
|
%
|
|
|
1.9
|
%
|
|
|
3.6
|
%
|
|
|
4.8
|
%
|
|
Volatility
|
|
|
66
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
|
|
71
|
%
|
|
Dividend
yield
|
|
None
|
|
|
None
|
|
|
None
|
|
|
None
|
|
|
Weighted-average
fair value at grant date
|
|
$
|
0.74
|
|
|
$
|
0.39
|
|
|
$
|
1.04
|
|
|
$
|
2.84
|
|
As stock-based
compensation expense recognized in the Consolidated Statement of Operations for
the years ended December 31, 2009, July 31, 2008 and July 31, 2007 is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. Forfeitures were estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Forfeitures were estimated based on historical
experience.
9. Income
Taxes
The Company provides
for income taxes using an asset and liability approach, under which deferred
income taxes are provided based upon enacted tax laws and rates applicable
to periods in which the taxes become payable.
Income (loss) from
continuing operations before income taxes consists of the following components
(in thousands):
|
|
|
Year ended
|
|
|
Five Months
Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(13,881
|
)
|
|
$
|
1,253
|
|
|
$
|
(4,198
|
)
|
|
$
|
6,240
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
(13,881
|
)
|
|
$
|
1,253
|
|
|
$
|
(4,198
|
)
|
|
$
|
6,240
|
|
The components of
the provision for income taxes from continuing operations for the years ended
July 31, 2008, July 31, 2007 and July 31, 2006 are as follows (in
thousands):
|
|
|
Year ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
140
|
|
|
$
|
173
|
|
|
$
|
128
|
|
|
$
|
285
|
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
|
$
|
140
|
|
|
$
|
173
|
|
|
$
|
128
|
|
|
$
|
359
|
|
During the year
ended December 31, 2009, the five months ended December 31, 2008 and the years
ended July 31, 2008 and July 31, 2007, the Company paid income taxes of $0.1
million, $0.2 million, $0.1 million and $0.2 million, respectively.
A summary of total
tax expense, by classification, included in the accompanying consolidated
statements of income is as follows (in thousands):
|
|
|
Year ended
|
|
|
Five Months
Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(24
|
)
|
|
$
|
137
|
|
|
State
|
|
|
140
|
|
|
|
173
|
|
|
|
152
|
|
|
|
148
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
140
|
|
|
$
|
173
|
|
|
$
|
128
|
|
|
$
|
285
|
|
Deferred tax assets
(liabilities) consist of the following (in thousands):
|
|
|
Year ended December 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
($ in
thousands)
|
|
|
|
|
|
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
|
Accruals and
reserves
|
|
$
|
4,179
|
|
|
$
|
4,646
|
|
|
Net operating
loss carryforwards
|
|
|
95,676
|
|
|
|
90,815
|
|
|
Research and
development credit carryforward
|
|
|
3,434
|
|
|
|
3,141
|
|
|
Gross deferred
tax asset
|
|
|
103,289
|
|
|
|
98,602
|
|
|
Valuation
allowance
|
|
|
(103,289
|
)
|
|
|
(98,602
|
)
|
|
Net deferred
tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation of
the statutory federal income tax to the Company’s effective tax is as
follows:
|
|
|
Year ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Tax at Federal
statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
State, net of
Federal benefit
|
|
|
(0.7
|
)
|
|
|
9.1
|
|
|
|
(2.3
|
)
|
|
|
1.2
|
|
|
Stock
compensation
|
|
|
(2.1
|
)
|
|
|
10.7
|
|
|
|
0.0
|
|
|
|
3.6
|
|
|
Research and
development credit
|
|
|
1.1
|
|
|
|
(11.5
|
)
|
|
|
(5.2
|
)
|
|
|
(1.2
|
)
|
|
Return to
Provision and True-ups
|
|
|
0.0
|
|
|
|
(11.7
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
Change in
valuation allowance
|
|
|
(30.3
|
)
|
|
|
(30.0
|
)
|
|
|
(29.5
|
)
|
|
|
(35.0
|
)
|
|
Unreconciled
Difference
|
|
|
0.0
|
|
|
|
(0.3
|
)
|
|
|
0.0
|
|
|
|
0.0
|
|
|
Other
|
|
|
(2.9
|
)
|
|
|
1.1
|
|
|
|
0.0
|
|
|
|
0.5
|
|
|
Provision for
taxes
|
|
|
(0.9
|
)%
|
|
|
1.4
|
%
|
|
|
(3.0
|
)%
|
|
|
3.1
|
%
|
At December 31,
2009, management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance was
recorded.
As of December 31,
2009, the Company has approximately $267.0 million of federal net operating
losses available to offset future federal taxable income, which expire at
various dates through fiscal year 2029. This amount includes
approximately $12.5 million of net operating loss carryforwards from the
acquisition of Andover.net in fiscal 2000. The deferred tax assets
related to this of approximately $5.6 million as of June 7, 2000, may be used to
reduce the tax provision if and when realized. Approximately $23.2
million of federal net operating losses usage is limited pursuant to section 382
of the Internal Revenue Code due to certain changes in the Company's ownership
which occurred between 1996 and 1999, and a change in ownership resulting from
the Company's June 2000 acquisition of Andover.net. The Company also
has California net operating loss carryforwards of approximately $83.2 million
to offset future California taxable income, which expire at various dates
through fiscal year 2017. The net operating loss carryforwards stated
above are reflective of various federal and state tax limitations.
A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
|
|
|
Year ended
|
|
|
Five Months Ended
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
July 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized
tax benefits at begin of period
|
|
$
|
718
|
|
|
$
|
647
|
|
|
$
|
638
|
|
|
Gross
increases to current period tax positions
|
|
|
92
|
|
|
|
71
|
|
|
|
9
|
|
|
Unrecognized
tax benefits at end of period
|
|
$
|
810
|
|
|
$
|
718
|
|
|
$
|
647
|
|
The Company
classifies interest expense and penalties related to unrecognized tax benefits
and interest income on tax overpayments as components of its income tax expense.
During the years ended December 31, 2009, the five month transition period ended
December 31, 2008 and the year ended July 31, 2008, no interest or penalties
were recognized. The Company does not expect its unrecognized tax
benefits to change significantly over the next 12 months. There are no
unrecognized tax benefits that would affect the actual tax rate at December 31,
2009.
10. Acquisition
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 intends to utilize 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 is 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 believes the data gathered by Ohloh
will enhance its position as a leading
OSS company and
provide valuable insights into the markets its customers are
targeting. 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
|
|
The
amounts of Ohloh’s revenue and earnings included in the Company’s consolidated
statement of operations for the year ended December 31, 2009, and the revenue
and net loss of the combined entity had the acquisition date been January 1,
2008 or January 1, 2009 are as follows (in thousands):
|
|
|
Revenue
|
|
|
Net (loss)
|
|
|
Actual from
June 4, 2009 to December 31, 2009
|
|
$
|
68
|
|
|
$
|
(129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
pro forma (unaudited):
|
|
|
|
|
|
|
|
|
|
January 1,
2009 to December 31, 2009
|
|
|
65,634
|
|
|
|
(14,314
|
)
|
|
January 1,
2008 to December 31, 2008
|
|
|
59,491
|
|
|
|
(5,315
|
)
|
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, Ohloh and freshmeat. Those corporate
expenses that are not allocated to the individual operating segments and are not
considered by the Company’s chief decision-making group in evaluating the
performance of the operating segments are included in “Other”.
The accounting
policies of the segments are consistent with those described in the summary of
significant accounting policies. All intersegment sales have been stated
separately in the table below. The Company’s chief decision-making group
consists of the Chief Executive Officer and the executive team. The
Company’s chief decision-making group excludes all intersegment sales when
evaluating the performance of the segments. The Company’s assets and
liabilities are not discretely allocated or reviewed by operating segment.
The depreciation of the Company’s property, equipment and leasehold improvements
are allocated based on headcount, unless specifically identified by operating
segment.
|
(in thousands)
|
|
Media
|
|
|
E-commerce
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total Company
|
|
|
Year
Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
16,486
|
|
|
$
|
49,091
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
65,577
|
|
|
Cost of
revenue
|
|
$
|
6,953
|
|
|
$
|
38,151
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,104
|
|
|
Gross
margin
|
|
$
|
9,533
|
|
|
$
|
10,940
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,473
|
|
|
Income (loss)
from operations
|
|
$
|
(12,193
|
)
|
|
$
|
3,807
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(8,386
|
)
|
|
Depreciation
and amortization
|
|
$
|
2,535
|
|
|
$
|
145
|
|
|
$
|
(523
|
)
|
|
$
|
-
|
|
|
$
|
2,157
|
|
|
Five
Months Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
8,481
|
|
|
$
|
23,994
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,475
|
|
|
Cost of
revenue
|
|
$
|
3,567
|
|
|
$
|
18,374
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,941
|
|
|
Gross
margin
|
|
$
|
4,914
|
|
|
$
|
5,620
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,534
|
|
|
Income (loss)
from operations
|
|
$
|
(2,943
|
)
|
|
$
|
2,843
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(100
|
)
|
|
Depreciation
and amortization
|
|
$
|
916
|
|
|
$
|
44
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
960
|
|
|
Year
Ended July 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
18,506
|
|
|
$
|
36,820
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
55,326
|
|
|
Cost of
revenue
|
|
$
|
7,268
|
|
|
$
|
27,860
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,128
|
|
|
Gross
margin
|
|
$
|
11,238
|
|
|
$
|
8,960
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,198
|
|
|
Operating
income (loss)
|
|
$
|
(7,210
|
)
|
|
$
|
3,553
|
|
|
$
|
(2,179
|
)
|
|
$
|
-
|
|
|
$
|
(5,836
|
)
|
|
Depreciation
expense
|
|
$
|
1,406
|
|
|
$
|
75
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,481
|
|
|
Year
Ended July 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from
external customers
|
|
$
|
17,496
|
|
|
$
|
28,103
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,599
|
|
|
Revenue from
intersegments
|
|
$
|
211
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(211
|
)
|
|
$
|
-
|
|
|
Cost of
revenue
|
|
$
|
4,733
|
|
|
$
|
21,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,933
|
|
|
Gross
margin
|
|
$
|
12,974
|
|
|
$
|
6,903
|
|
|
$
|
-
|
|
|
$
|
(211
|
)
|
|
$
|
19,666
|
|
|
Operating
income
|
|
$
|
177
|
|
|
$
|
3,336
|
|
|
$
|
-
|
|
|
$
|
(169
|
)
|
|
$
|
3,344
|
|
|
Depreciation
expense
|
|
$
|
381
|
|
|
$
|
18
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
399
|
|
During the time
period covered by the table above, the Company marketed its Media products in
the United States through its direct sales force and its E-commerce products
through its online web site and with respect to international Media sales,
through representatives based in the United Kingdom, Europe and Australia.
Revenue for the year ended December 31, 2009, the five month period ended
December 31, 2008 and the years ended July 31, 2008 and July 31, 2007 was
primarily generated from customers in the United States of America.
12. Discontinued
Operations
In April 2007, the
Company sold substantially all of the assets and certain liabilities of its
Software business to CollabNet, Inc. (“CollabNet”) in exchange for a minority
equity interest in CollabNet, comprised of 11,733,777 shares of its Series C-1
Preferred Stock, originally valued at $6.6 million, which was included in “Other
Assets” in the Consolidated Balance Sheets.
As specified in the
agreement, the assets sold to CollabNet consisted primarily of intellectual
property and property and equipment. In conjunction with the sale,
the Company terminated those employees of its Software business who were not
offered employment by CollabNet and also recorded a restructuring reserve for
the excess facility space formerly used by its Software business. The
Company’s gain on the sale of this business, which is included in its results
for the year ended July 31, 2007, is as follows (in thousands):
|
Proceeds from
sale:
|
|
|
|
|
CollabNet,
Inc. Series C-1 Preferred Stock
|
|
$
|
6,564
|
|
|
Cash
|
|
|
19
|
|
|
Total
proceeds
|
|
|
6,583
|
|
|
Costs and
expenses
|
|
|
(676
|
)
|
|
Net
proceeds
|
|
|
5,907
|
|
|
Net book value
of assets and liabilities sold
|
|
|
1,533
|
|
|
Severance and
benefits of terminated employees
|
|
|
(1,080
|
)
|
|
Idle space
restructuring charge
|
|
|
(581
|
)
|
|
Other
|
|
|
(57
|
)
|
|
Gain on sale,
before income taxes
|
|
|
5,722
|
|
|
Provision for
income taxes
|
|
|
148
|
|
|
Gain on sale,
net of income taxes
|
|
$
|
5,574
|
|
Income from
discontinued operations consists of direct revenue and direct expenses of the
Software businesses, including cost of revenue, as well as other fixed and
allocated costs. A summary of the operating results of the discontinued
operations for the year ended July 31, 2007 which are included in the
accompanying consolidated statements of operations is as follows (in
thousands):
|
Revenue
|
|
$
|
5,236
|
|
|
|
|
|
|
|
|
Loss from
operations
|
|
$
|
(2,875
|
)
|
|
Income
taxes
|
|
|
(74
|
)
|
|
Loss from
operations, net of income taxes
|
|
$
|
(2,801
|
)
|
|
|
|
|
|
|
|
Gain from sale
of assets
|
|
$
|
5,722
|
|
|
Income
taxes
|
|
|
148
|
|
|
Gain from
sale, net of income taxes
|
|
$
|
5,574
|
|
Quarterly
Consolidated Financial Data
(Unaudited,
in Thousands, except per share amounts)
On April 29, 2009,
the Company changed its fiscal year-end from July 31 to December 31 retroactive
to December 31, 2008. The Company’s quarters end on March 31, June
30, September 30 and December 31 of each calendar year.
|
|
|
For the three months ended
|
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
Calendar
Year 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
10,371
|
|
|
$
|
11,785
|
|
|
$
|
10,787
|
|
|
$
|
32,634
|
|
|
Gross
margin
|
|
|
2,854
|
|
|
|
3,915
|
|
|
|
3,104
|
|
|
|
10,600
|
|
|
Income (loss)
from operations
|
|
|
(3,160
|
)
|
|
|
(2,386
|
)
|
|
|
(4,562
|
)
|
|
|
1,722
|
|
|
Net income
(loss)
|
|
$
|
(7,426
|
)
|
|
$
|
(3,586
|
)
|
|
$
|
(4,537
|
)
|
|
$
|
1,528
|
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar
Year 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
11,388
|
|
|
$
|
11,798
|
|
|
$
|
11,472
|
|
|
$
|
24,789
|
|
|
Gross
margin
|
|
|
3,661
|
|
|
|
4,624
|
|
|
|
4,228
|
|
|
|
7,657
|
|
|
Income (loss)
from operations
|
|
|
(1,313
|
)
|
|
|
(3,804
|
)
|
|
|
(2,525
|
)
|
|
|
1,095
|
|
|
Net income
(loss):
|
|
$
|
(916
|
)
|
|
$
|
(3,753
|
)
|
|
$
|
(2,664
|
)
|
|
$
|
2,552
|
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Not
applicable.
Item 9A. Controls and Procedures
Evaluation of
Disclosure Controls and Procedures
The Company’s
management, with the participation of the Company’s chief executive officer and
chief financial officer, evaluated the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of December 31, 2009. Based on this
evaluation, the Company’s chief executive officer and chief financial officer
concluded that as of December 31, 2009, the Company’s disclosure controls and
procedures were effective.
Changes in
Internal Control over Financial Reporting
No change in the
Company’s internal controls over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act) occurred during
the year ended December 31, 2009, that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
Management’s
Report on Internal Control over Financial Reporting
Management is
responsible for establishing and maintaining adequate internal control over
financial reporting and for the assessment of the effectiveness of internal
control over financial reporting. As defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, internal control over financial
reporting is a process designed by, or under the supervision of, the Company’s
principal executive and principal financial officers and effected by the
Company’s Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
The Company’s
internal control over financial reporting is supported by written policies and
procedures that: (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles and that receipts and
expenditures of the company are being made only in accordance with
authorizations of the Company’s management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
In connection with
the preparation of the Company’s annual financial statements, management of the
Company has undertaken an assessment of the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009 based on
criteria established in
Internal
Control – Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the “COSO Framework”). Management’s
assessment included an evaluation of the design of the Company’s internal
control over financial reporting and testing of the operational effectiveness of
the Company’s internal control over financial reporting. As a result of this
assessment, management has concluded that, as of December 31, 2009, the
Company’s internal control over financial reporting was effective based on those
criteria.
Our independent
registered public accounting firm, Stonefield Josephson, Inc., has issued an
attestation report on management’s assessment of our internal control over
financial reporting, which is included in this Annual Report on Form
10-K.
Limitations on
Effectiveness of Controls
The Company’s
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls or our internal control over
financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of the effectiveness of controls to future periods are subject to
risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures.
Item 9B. Other Information
The annual meeting
of stockholders for 2010 is scheduled to be held on May 4,
2010. Under our bylaws as currently in effect, because we did not
hold an annual meeting of stockholders in 2009 as a result of the change in our
fiscal year, notices of stockholder proposals must be received no later than the
close of business by the 10th day following the date on which public
announcement of the date of such meeting is first made in order to be
timely. Accordingly, notices of stockholder proposals with respect to
the 2010 annual meeting of stockholders must be received by March 8, 2010 in
order to be timely.
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
The information
called for by this item is incorporated by reference to the sections entitled
“Certain Beneficial Owners,” “Security Ownership of Directors and Executive
Officers” and “Information About The Directors, Nominees And Executive Officers”
in the Company’s 2009 Proxy Statement, which will be delivered to stockholders
in connection with the Company’s annual stockholders’ meeting to be held on May
4, 2010.
Code of
Ethics
In addition to the
Company’s Code of Business Conduct and Ethics that is applicable to all
employees and directors, the Company has adopted a Code of Ethics for Principal
Executive and Senior Financial Officers. The Company has posted the text
of its Code of Ethics for Principal Executive and Senior Financial Officers on
its Internet web site at:
http://geek.net/index.php/download_file/-/view/34/
We will post on this
section of our website any amendment to our Code of Ethics for Principal
Executive and Senior Financial Officers that are required to be disclosed by the
rules of the SEC or The Nasdaq Stock Market.
Item 11. Executive Compensation
The information
called for by this item is incorporated by reference to the section entitled
“Compensation of Directors and Executive Officers” in the Company’s 2009 Proxy
Statement, which will be delivered to stockholders in connection with the
Company’s annual stockholders’ meeting to be held on May 4, 2010.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Equity
Compensation Plans
The information
called for by this item is incorporated by reference to the sections entitled
“Certain Beneficial Owners” and “Security Ownership of Directors and Executive
Officers” in the Company’s 2009 Proxy Statement, which will be delivered to
stockholders in connection with the Company’s annual stockholders’ meeting to be
held on May 4, 2010.
The following table
summarizes our equity compensation plans as of December 31, 2009, all of which
have been approved by our stockholders:
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options
(1)
|
|
|
Weighted average
exercise price of
outstanding options
|
|
|
Number of securities remaining available for
future issuance under equity compensation plan
(excluding securities reflected in column A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by stockholders
|
|
|
7,228,791
|
(2)
|
|
$
|
1.94
|
|
|
|
3,109,635
|
|
|
(1)
|
The table does
not include information for equity compensation plans assumed by the
Company in acquisitions. As of December 31, 2009, a total of 28,422 shares
of the Company’s common stock remain issuable and outstanding upon
exercise of options granted under a plan assumed by the Company in its
acquisition of OSTG, Inc. The weighted average exercise price of all
outstanding options granted under this plan at December 31, 2009 is
$40.21. The Company does not grant additional awards under this assumed
plan.
|
|
(2)
|
Includes
4,829,043 options outstanding under the Company’s 2007 Equity Plan,
1,917,248 options outstanding under the Company’s 1998 Stock Plan and
482,500 options outstanding under the Company’s 1999 Director’s
Plan.
|
Item 13. Certain Relationships and Related Transactions, and
Director Independence
The information
called for by this item is incorporated by reference to the section entitled
“Certain Relationships and Related Transactions” in the Company’s 2009 Proxy
Statement, which will be delivered to stockholders in connection with the
Company’s annual stockholders’ meeting to be held on May 4, 2010.
Item 14. Principal Accounting Fees and
Services
The information
called for by this item is incorporated by reference to the section entitled
“Principal Accountant Fees and Services” in the Company’s 2009 Proxy
Statement, which will be delivered to stockholders in connection with the
Company’s annual stockholders’ meeting to be held on May 4,
2010.
PART IV
Item 15. Exhibits, Financial Statement
Schedule
|
(a)
|
The following
documents are filed as part of this
report:
|
|
|
1.
|
All Financial
Statements:
|
See
the Consolidated Financial Statements and notes thereto in Item 8
above.
|
|
2.
|
Schedule II —
Valuation and Qualifying Accounts are filed as part of this Form
10-K.
|
|
(b)
|
Exhibits
:
We have filed, or incorporated into this Report by reference, the exhibits
listed on the accompanying Exhibit Index immediately following the
signature page to this Form
10-K.
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|
(c)
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Financial
Statement Schedules
: See Item 15(a)
above.
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SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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.
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GEEKNET,
INC.
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By:
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/s/ SCOTT L.
KAUFFMAN
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Scott L.
Kauffman
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President
and Chief Executive
Officer
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POWER OF
ATTORNEY
KNOW ALL PERSONS BY
THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Scott L. Kauffman and Patricia S. Morris, and each of
them, his true and lawful attorneys-in-fact, each with full power of
substitution, for him and all capacities, to sign any amendments to this report
on Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and does
hereby ratify and confirm all that each of said attorneys-in-fact or their
substitute or substitutes may do or cause to be done by virtue
hereof.
Pursuant to the
requirement of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
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Signature
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Title
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Date
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/s/
SCOTT L. KAUFFMAN
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President and
Chief Executive Officer
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February 25,
2010
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Scott L.
Kauffman
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/s/
PATRICIA S. MORRIS
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Senior Vice President and Chief Financial Officer
(principle
accounting officer)
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February 26,
2010
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Patricia S.
Morris
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/s/
ROBERT M. NEUMEISTER, JR.
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Chairman of
the Board of Directors
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February 23,
2010
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Robert M.
Neumeister, Jr.
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/s/
ANDREW ANKER
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Director
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February 23,
2010
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Andrew
Anker
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/s/
ROBERT A. BOWMAN
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Director
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February 26,
2010
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Robert A.
Bowman
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/s/
SCOTT E. HOWE
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Director
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February 23,
2010
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Scott E.
Howe
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/s/
SUZANNE M. PRESENT
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Director
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February 23,
2010
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Suzanne M.
Present
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/s/
MICHAEL SILECK
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Director
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February 22,
2010
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Michael
Sileck
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/s/
DAVID B. WRIGHT
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Director
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February 23,
2010
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David B.
Wright
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Geeknet, Inc.
SCHEDULE
II — VALUATION AND QUALIFYING ACCOUNTS
|
Description
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Balance
Beginning
of
Period
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Charged
to
Costs
and
Expenses
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Deductions
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Balance
End
of
Period
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Year Ended
July 31, 2007
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Allowance for
doubtful accounts
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$
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122
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7
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53
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$
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76
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Allowance for
excess and obsolete inventory
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$
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96
|
|
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(38
|
)
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1
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$
|
57
|
|
|
Year Ended
July 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Allowance for
doubtful accounts
|
|
$
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76
|
|
|
|
154
|
|
|
|
178
|
|
|
$
|
52
|
|
|
Allowance for
excess and obsolete inventory
|
|
$
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57
|
|
|
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44
|
|
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1
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$
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100
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Five Months
Ended December 31, 2008
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Allowance for
doubtful accounts
|
|
$
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52
|
|
|
|
|
|
|
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52
|
|
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$
|
-
|
|
|
Allowance for
excess and obsolete inventory
|
|
$
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100
|
|
|
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(76
|
)
|
|
|
1
|
|
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$
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23
|
|
|
Year Ended
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
doubtful accounts
|
|
$
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-
|
|
|
|
97
|
|
|
|
97
|
|
|
$
|
-
|
|
|
Allowance for
excess and obsolete inventory
|
|
$
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23
|
|
|
|
38
|
|
|
|
20
|
|
|
$
|
41
|
|
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Exhibit
Number
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EXHIBIT INDEX
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2.1(7)
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—
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Asset Purchase
Agreement by and between VA Software Corporation and CollabNet, Inc.,
dated April 24, 2007
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|
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3.1(1)
|
—
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Amended and
Restated Certificate of Incorporation of the Registrant
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|
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3.2(18)
|
—
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Amended and
Restated Bylaws of the Registrant
|
|
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3.3(8)
|
—
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Certificate of
Amendment to the Second Amended and Restated Certificate of Incorporation
of the Registrant
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3.4(19)
|
—
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Certificate of
Ownership and Merger of Geeknet, Inc. with and into SourceForge, Inc.,
dated November 4, 2009
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|
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4.1(1)
|
—
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Specimen
Common Stock Certificate
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|
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10.1(1)
‡
|
—
|
Form of
Indemnification Agreement between the Registrant and each of its directors
and officers
|
|
|
|
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10.2(1)
‡
|
—
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1998 Stock
Plan and forms of agreement thereunder
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|
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10.4(1)
‡
|
—
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1999 Director
Option Plan
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10.5†(2)
|
—
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Master Lease
Agreement between Registrant and Renco Investment Company, dated April 6,
2000
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10.6(3)
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—
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Consent of
Linus Torvalds
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10.7(4)
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—
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Sublease
between the Registrant and @Road, Inc., dated June 9,
2004.
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10.8(5)
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—
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Consent to
Sublease Agreement between the Registrant, @Road, Inc. and Renco
Investment Company, dated June 9, 2004.
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10.9(6)
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—
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Asset Purchase
Agreement dated December 23, 2005 by and between JupiterImages
Corporation, the Registrant, and Animation Factory,
Inc.
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|
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10.11(11)
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—
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Mountain View
City Center Net Office Lease by and between the Registrant and Eagle
Square Partners dated July 14, 2007
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|
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10.14(10)
‡
|
—
|
2007 Equity
Incentive Plan
|
|
|
|
|
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10.15(11)
‡
|
—
|
2007 Equity
Incentive Plan Award Agreements
|
|
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|
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10.16(12)
‡
|
—
|
Separation
Agreement and Release by and between Ali Jenab and the Registrant dated
June 9, 2008
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|
|
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|
|
10.17(13)
‡
|
—
|
Consulting
Agreement by and between Ali Jenab and the Registrant dated as of June 9,
2008
|
|
|
|
|
|
10.19(14)
‡
|
—
|
Offer Letter
dated December 3, 2008 by and between the Registrant and Scott L.
Kauffman
|
|
10.20(15)
‡
|
—
|
Restated
Employment Agreement, dated April 9, 2009, by and between the Company and
Patricia S. Morris
|
|
|
|
|
|
10.21(16)
‡
|
—
|
Restated
Employment Agreement, dated April 9, 2009, by and between the Company and
Caroline Offutt
|
|
|
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|
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10.22(17)
‡
|
—
|
Restated
Employment Agreement, dated April 9, 2009, by and between the Company and
Jonathan Sobel
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|
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10.23
|
—
|
Office Lease
Agreement between PS Business Parks, L.P. and ThinkGeek, Inc., dated June
26, 2009
|
|
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|
|
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23.1
|
—
|
Consent of
Stonefield Josephson, Inc., Independent Registered Public Accounting
Firm
|
|
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24.1
|
—
|
Power of
Attorney (see signature page)
|
|
|
|
|
|
31.
1
|
—
|
Certification
of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley
Act Of 2002
|
|
|
|
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31.2
|
—
|
Certification
of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley
Act Of 2002
|
|
|
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|
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32.1
|
—
|
Certification
of Chief Executive Officer Pursuant to Section 906 of The Sarbanes-Oxley
Act Of 2002
|
|
|
|
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32.2
|
—
|
Certification
of Chief Financial Officer Pursuant to Section 906 of The Sarbanes-Oxley
Act Of 2002
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|
†
|
Confidential
treatment has been requested by the Registrant as to certain portions of
this exhibit. The omitted portions have been separately filed with the
Commission.
|
|
‡
|
Denotes a
management contract or compensatory plan or
arrangement.
|
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(1)
|
Incorporated
by reference to the corresponding exhibit of Registrant’s form S-1 and the
amendment thereto (Commission registration no.
333-88687).
|
|
(2)
|
Incorporated
by reference from Exhibit 10.14 of Registrant’s Annual Report on Form 10-K
for the period ended June 28, 2000 filed on October 26, 2000 (Commission
file number 000-28369).
|
|
(3)
|
Incorporated
by reference from Exhibit 10.18 of Registrant’s Quarterly Report on Form
10-Q for the period ended January 28, 2000 filed on March 13, 2000
(Commission file number
000-28369).
|
|
(4)
|
Incorporated
by reference from Exhibit 10.42 of Registrant’s Annual Report on Form 10-K
for the period ended July 31, 2004 filed on October 31, 2005 (Commission
file number 000-28369).
|
|
(5)
|
Incorporated
by reference from Exhibit 10.43 of Registrant’s Annual Report on Form 10-K
for the period ended July 31, 2004 filed on October 31, 2005 (Commission
file number 000-28369).
|
|
(6)
|
Incorporated
by reference from Exhibit 2.1 of Registrant’s Quarterly Report on Form
10-Q for the period ended January 31, 2006 filed on April 10, 2006
(Commission file number 000-28369).
|
|
(7)
|
Incorporated
by reference from Exhibit 2.1 of Registrant’s Current Report on Form 8-K
filed on April 25, 2007.
|
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(8)
|
Incorporated
by reference from Exhibit 3.3 of Registrant’s Quarterly Report on Form
10-Q for the period ended October 27, 2001 filed on December 7, 2001
(Commission file number 000-28369).
|
|
(9)
|
Incorporated
by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K
filed on July 18, 2007.
|
|
(10)
|
Incorporated
by reference from Appendix A of Registrant’s Definitive Proxy Statement on
Schedule 14A filed on November 1, 2007 (Commission file number
000-28369).
|
|
(11)
|
Incorporated
by reference from Exhibits 10.1 through 10.4 of Registrant’s Current
Report on Form 8-K filed on December 31,
2007.
|
|
(12)
|
Incorporated
by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K
filed on June 10, 2008.
|
|
(13)
|
Incorporated
by reference from Exhibit 10.2 of Registrant’s Current Report on Form 8-K
filed on June 10, 2008.
|
|
(14)
|
Incorporated
by reference from Exhibit 10.3 of Registrant’s Current Report on Form 8-K
filed on December 4, 2008
|
|
(15)
|
Incorporated
by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K
filed on April 9, 2009
|
|
(16)
|
Incorporated
by reference from Exhibit 10.2 of Registrant’s Current Report on Form 8-K
filed on April 9, 2009
|
|
(17)
|
Incorporated
by reference from Exhibit 10.3 of Registrant’s Current Report on Form 8-K
filed on April 9, 2009
|
|
(18)
|
Incorporated
by reference from Exhibit 3.2 of Registrant’s Current Report on Form 8-K
filed on November 4, 2009
|
|
(19)
|
Incorporated
by reference from Exhibit 3.1 of Registrant’s Current Report on Form 8-K
filed on November 4, 2009
|
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