Quarterly Report

Geeknet, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	77-0399299
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

PART I

GEEKNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)

		March 31,				December 31,
		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	22,996			$	28,943
Short-term investments			9,219				9,408
Accounts receivable, net of allowance of $0 and $0, respectively			4,262				4,299
Inventories			5,435				5,280
Prepaid expenses and other current assets			3,419				3,564
Restricted cash			1,000				1,000
Total current assets			46,331				52,494
Property and equipment, net			3,161				2,569
Other long-term assets			4,742				5,088
Total assets		$	54,234			$	60,151
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,666			$	5,763
Accrued restructuring liabilities			518				1,238
Deferred revenue			961				928
Accrued liabilities and other			2,842				3,854
Total current liabilities			7,987				11,783
Other long-term liabilities			99				103
Total liabilities			8,086				11,886
Commitments and contingencies (Notes 12 and 13)
Stockholders’ equity:
Common stock			61				61
Treasury stock			(492	)			(492	)
Additional paid-in capital			799,624				798,917
Accumulated other comprehensive income			10				13
Accumulated deficit			(753,055	)			(750,234	)
Total stockholders’ equity			46,148				48,265
Total liabilities and stockholders’ equity		$	54,234			$	60,151

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

---

 

GEEKNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

		Three Months Ended March 31,
		2010				2009
Revenue:
Media revenue, including $0 and $200 of related party revenue, respectively		$	4,295			$	3,777
E-commerce revenue			10,384				6,594
Revenue			14,679				10,371
Cost of revenue:
Media cost of revenue			1,781				1,907
E-commerce cost of revenue			8,818				5,610
Cost of revenue			10,599				7,517
Gross margin			4,080				2,854
Operating expenses:
Sales and marketing			3,162				2,315
Research and development			1,530				1,594
General and administrative			2,124				2,105
Amortization of intangible assets			91				-
Total operating expenses			6,907				6,014
Loss from operations			(2,827	)			(3,160	)
Interest and other income (expense), net, including other than temporary impairment of non-marketable equity securities of $0 and $4,585, respectively			5				(4,330	)
Loss before income taxes			(2,822	)			(7,490	)
Income tax benefit			(1	)			(64	)
Net loss		$	(2,821	)		$	(7,426	)
Net loss per share:
Basic and diluted		$	(0.05	)		$	(0.12	)
Shares used in per share calculations:
Basic and diluted			60,128				63,339

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

---

 

GEEKNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

		Three Months Ended March 31,
		2010				2009
Cash flows from operating activities:
Net loss		$	(2,821	)		$	(7,426	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			528				603
Stock-based compensation expense			679				681
Provision for excess and obsolete inventory			17				(8	)
(Gain) loss on sale of assets			18				(226	)
Impairment of investments			-				4,585
Changes in assets and liabilities:
Accounts receivable			37				885
Inventories			(172	)			290
Prepaid expenses and other assets			502				30
Accounts payable			(2,097	)			(2,622	)
Accrued restructuring liabilities			(720	)			(686	)
Deferred revenue			33				19
Accrued liabilities and other			(1,012	)			(330	)
Other long-term liabilities			(4	)			2
Net cash used in operating activities			(5,012	)			(4,203	)
Cash flows from investing activities:
Purchase of property and equipment			(1,048	)			(66	)
Proceeds from sales of intangible assets, net			-				172
Purchase of  intangible assets			(13	)			-
Maturities or sale of marketable securities			100				559
Net cash provided by (used in) investing activities			(961	)			665
Cash flows from financing activities:
Proceeds from issuance of common stock			28				4
Net cash provided by financing activities			28				4
Effect of exchange rate changes on cash and cash equivalents			(2	)			-
Net decrease in cash and cash equivalents			(5,947	)			(3,534	)
Cash and cash equivalents, beginning of period			28,943				40,511
Cash and cash equivalents, end of period		$	22,996			$	36,977

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5

---

 

GEEKNET, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.  Basis of Presentation

Overview

Geeknet, Inc. (“Geeknet” or the “Company”), 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 Online Media, E-commerce, Software and Online Images businesses.  In December 2005, the Company sold its Online Images business to WebMediaBrands Inc. and in April 2007, the Company sold its Software business to CollabNet, Inc. (“CollabNet”).  On May 24, 2007 the Company changed its name to SourceForge, Inc.  In June 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.

The interim financial information presented in this Form 10-Q is not audited and is not necessarily indicative of the Company’s future consolidated financial position, results of operations or cash flows.  The accompanying condensed consolidated balance sheet as of December 31, 2009 has been derived from audited financial statements included on Form 10-K, and the interim unaudited condensed consolidated financial statements contained in this Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual financial statements.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations.  In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2010, its results of operations for the three months ended March 31, 2010 and March 31, 2009 and its cash flows for the three months ended March 31, 2010 and March 31, 2009 have been made.  These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC.

2.  Summary of Significant Accounting Policies

Except as discussed below, there have been no significant changes to the Company’s critical accounting estimates during the three months ended March 31, 2010 as compared to what was previously disclosed in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Adopted Accounting Pronouncements

In January 2010, the FASB issued a new standard, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. This standard is effective for the Company’s 2010 calendar year reporting, except for Level 3 reconciliation disclosures which are effective for the Company’s 2011 calendar year reporting. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

 

6

---

 

Recent Accounting Pronouncements

In September 2009, the FASB issued an update to the existing multiple-element revenue arrangements guidance. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This update will be effective for the Company’s first quarterly reporting period of 2011, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the impact of this new accounting update on its consolidated financial statements.

In June 2009, the FASB issued a new standard which requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This standard is effective for 2011. The Company does not expect that the adoption of this standard will have a material impact on our consolidated financial statements.

Use of Estimates in Preparation of Consolidated Financial Statements

The preparation of the Company’s consolidated financial statements and related notes requires the Company to make estimates, which include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  The Company has based its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances and the Company evaluates its estimates on a regular basis and makes changes accordingly.  Historically, the Company’s estimates relative to its critical accounting estimates have not differed materially from actual results, however actual results may differ from these estimates under different conditions.

A critical accounting estimate is based on judgments and assumptions about matters that are highly uncertain at the time the estimate is made.  Different estimates that reasonably could have been used, or changes in accounting estimates, could materially impact the financial statements.

Principles of Consolidation

The interim financial information presented in this Quarterly Report on Form 10-Q includes the accounts of Geeknet and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  At March 31, 2010, the Company owned approximately 9% of CollabNet consisting of CollabNet’s Series C-1 preferred stock.  As the Company holds less than 20% of the voting stock of CollabNet and does not otherwise exercise significant influence over them, the investment is accounted for under the cost method.  CollabNet is a developer of software used in collaborative software development.

The Company had no related-party revenue from CollabNet for the three months ended March 31, 2010 and $0.2 million for the three months ended March 31, 2009.

Foreign Currency Translation

The Company has wholly-owned foreign subsidiaries in the United Kingdom and Belgium.  The functional currency of these foreign subsidiaries is the local country’s currency, which is the primary currency in which the subsidiary generates and expends cash.  We translate the financial statements of consolidated entities whose functional currency is not the U.S. dollar into U.S. dollars.  Assets and liabilities are translated at exchange rates prevailing at the financial statement date and income and expenses are translated using the average exchange rate for the period.  Gains and losses resulting from translation and the effect of exchange rate changes on intercompany transactions of a long term nature are reported in other comprehensive income as a component of stockholders’ equity.  As of March 31, 2010, the Company did not hold any foreign currency derivative instruments.

Segment and Geographic Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions about how to allocate resources and assess performance.  The Company’s chief decision-making group is the Chief Executive Officer and the executive team.  The Company currently operates as two reportable business segments:   Media and E-commerce.

 

7

---

 

The Company markets its products in the United States through its direct sales force and its online web properties and with respect to international Media sales, through its subsidiary in the United Kingdom and representatives in the United Kingdom, Europe and Australia.  Revenue for the three months ended March 31, 2010 and March 31, 2009, respectively, was generated primarily from sales to customers in the United States.

Cash and Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents.  Cash and cash equivalents consist principally of cash deposited in money market and checking accounts.

Investments

Investments in highly-liquid financial instruments with remaining maturities greater than three months and less than one year are classified as short-term investments.  Financial instruments with remaining maturities greater than one year are classified as long-term investments.

Marketable securities classified as available-for-sale are reported at market value, with net unrealized gains or losses recorded in accumulated other comprehensive income (loss), a separate component of stockholders' equity, until realized.  Realized gains and losses on investments are computed based upon specific identification and are included in interest and other income (expense), net.  Investments designated as trading securities are stated at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings.  Non-marketable equity securities are accounted for at historical cost.

Other-Than-Temporary Impairment.  

All of the Company’s available-for-sale investments and non-marketable equity securities are subject to a periodic impairment review.  Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary.  This determination requires significant judgment.  For publicly-traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including a review of the closing price over the previous six months, general market conditions and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for recovery.  For non-marketable equity securities, the impairment analysis requires the identification of events or circumstances that would likely have a significant adverse effect on the fair value of the investment, including revenue and earnings trends, overall business prospects and general market conditions in the investees’ industry or geographic area.  Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value.  In March 2009, the Company recorded an impairment loss of $4.6 million related to its investment in CollabNet, which is included in interest and other income (expense), net.

Inventories

Inventories related to the Company’s E-commerce business consist solely of finished goods that are valued at the lower of cost or market using the average cost method.  Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are amortized over the lesser of the estimated useful lives or the corresponding lease term.

Goodwill and Intangibles

Intangible assets are amortized on a straight-line basis over their estimated lives of three to five years.  The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful lives of these intangible assets may not be recoverable.  When events or circumstances indicate that the goodwill and intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted net income over the remaining useful life of the intangible assets in measuring whether they are recoverable.  No events or circumstances occurred that would indicate a possible impairment in the carrying value of intangible assets at March 31, 2010.

 

8

---

 

Goodwill and intangible assets are as follows (in thousands):

		March 31, 2010												December 31, 2009
		Gross				Accumulated				Net				Gross				Accumulated				Net
		asset				amortization				asset				asset				amortization				asset
Goodwill		$	62,032			$	(60,362	)		$	1,670			$	62,032			$	(60,362	)		$	1,670
Identified intangible assets:
Domain and trade names			6,072				(5,957	)			115				6,059				(5,946	)			113
Purchased technology			3,492				(2,801	)			691				3,492				(2,721	)			771
			9,564				(8,758	)			806				9,551				(8,667	)			884
Total goodwill and identified intangible assets		$	71,596			$	(69,120	)		$	2,476			$	71,583			$	(69,029	)		$	2,554

The future amortization expense of identified intangibles is as follows (in thousands):

Year ending December 31,		Amount
2010		$	279
2011			363
2012			164
		$	806

Revenue Recognition

The Company recognizes revenue as follows:

Media Revenue

Media revenue is derived primarily from advertising on the Company’s various web sites.  These advertisements include various forms of rich media and banner advertising, text links and sponsorships.  The Company recognizes Media revenue as advertising is delivered over the period in which the advertisements are displayed, provided that persuasive evidence of an arrangement exists, no significant obligations remain, the fee is fixed or determinable, and collection of the receivable is reasonably assured.  The Company’s obligations may include guarantees of a minimum number of impressions (the number of times that an advertisement is viewed by visitors to the Company’s web sites).  To the extent that minimum guaranteed impressions are not delivered in the specified time frame, the Company does not recognize the corresponding revenue until the guaranteed impressions are delivered.  Traffic to the Company’s Media web sites is seasonal, with relatively lower levels of traffic experienced during the summer months of the northern hemisphere.

E-commerce Revenue

E-commerce revenue is derived from the online sale of consumer goods.  The Company recognizes E-commerce revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured.  The Company generally recognizes E-commerce revenue when products are shipped and title transfers to the customer.  The Company grants customers a limited right to return E-commerce products. No reserve for returns were recorded at March 31, 2010. The Company recorded a returns reserve of $0.3 million at December 31, 2009.

The Company’s E-commerce business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the calendar year-end holiday shopping season.  In the past several years, a substantial portion of the Company’s E-commerce revenue has occurred in the Company’s fourth calendar quarter which begins on October 1 and ends on December 31.  As is typical in the retail industry, the Company generally experiences lower monthly E-commerce revenue during the first nine months of the year.  The Company’s E-commerce revenue in a particular period is not necessarily indicative of future E-commerce revenue for a subsequent quarter or its full year.

 

9

---

 

Concentrations of Credit Risk and Significant Customers

The Company’s investments are held with two reputable financial institutions; both institutions are headquartered in the United States.  The Company’s investment policy limits the amount of risk exposure.  Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and trade receivables.  The Company provides credit, in the normal course of business, to a number of companies and performs ongoing credit evaluations of its customers.  The credit risk in the Company’s trade receivables is substantially mitigated by its credit evaluation process and reasonably short collection terms.  The Company maintains reserves for potential credit losses and such losses have been within management’s expectations.  As of March 31, 2010, no customer accounted for more than 10% of the Company’s gross accounts receivable.  As of December 31, 2009, one advertising agency accounted for 10.5% of gross accounts receivable.

Google Inc. accounted for 6.8% and 12.5% of revenue for the three months ended March 31, 2010 and the three months ended March 31, 2009, respectively.

3. Composition of Certain Balance Sheet Components

Property and equipment, net, consist of the following (in thousands):

		March 31,				December 31,
		2010				2009
Computer and office equipment (useful lives of 2 to 4 years)		$	5,549			$	5,475
Furniture and fixtures (useful lives of 2 to 4 years)			225				210
Leasehold improvements (useful lives of lesser of estimated life or lease term)			93				93
Software (useful lives of  2 to 5 years)			461				390
Distribution equipment in-progress			859				-
Total property and equipment			7,187				6,168
Less: Accumulated depreciation and amortization			(4,026	)			(3,599	)
Property and equipment, net		$	3,161			$	2,569

Distribution equipment in-progress represents partial payments on the equipment which is being installed at our new third-party contract-fulfillment and warehouse provider.

Other long-term assets consist of the following (in thousands):

		March 31,				December 31,
		2010				2009
Equity investment		$	1,979			$	1,979
Goodwill			1,670				1,670
Intangible assets, net			806				884
Other			287				555
Other long-term assets		$	4,742			$	5,088

 

10

---

 

Accrued liabilities and other consist of the following (in thousands):

		March 31,				December 31,
		2010				2009
Accrued employee compensation and benefits		$	1,826			$	2,386
Other accrued liabilities			1,016				1,468
Accrued liabilities and other		$	2,842			$	3,854

4. Investments

The Company classifies its investments as available-for-sale or trading at the time they are acquired and reports them at fair value with net unrealized gains or losses reported, net of tax, using the specific identification method as other comprehensive gain or loss in stockholders’ equity or other income in the statement of operations.  See Note 5 – Fair Value Measurements.

The Company’s cash, cash equivalents and investments consist of the following (in thousands):

		March 31, 2010												December 31, 2009
										Estimated												Estimated
		Adjusted Cost				Unrealized Loss				Fair Value				Adjusted Cost				Unrealized Loss				Fair Value
Cash and cash equivalents:
Cash		$	2,422			$	-			$	2,422			$	6,000			$	-			$	6,000
Money market funds			20,574				-				20,574				22,943				-				22,943
Total cash and cash equivalents		$	22,996			$	-			$	22,996			$	28,943			$	-			$	28,943
Short-term investments:
Corporate securities			8				-				8				8				-				8
Government securities			10,650				(1,439	)			9,211				10,750				(1,350	)			9,400
Total short-term investments		$	10,658			$	(1,439	)		$	9,219			$	10,758			$	(1,350	)		$	9,408
Restricted cash		$	1,000			$	-			$	1,000			$	1,000			$	-			$	1,000

At March 31, 2010, 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.

 

11

---

 

5. Fair Value Measurements

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of March 31, 2010 (in thousands):

		Fair Value Measurements at Reporting Date Using
		Level 1				Level 2				Level 3				Total
Money market fund deposits		$	20,574			$	-			$	-			$	20,574
Corporate debt			-				-				8				8
Municipal bonds			-				-				9,211				9,211
ARS Right			-				-				1,439				1,439
Total		$	20,574			$	-			$	10,658			$	31,232
Amounts included in:
Cash and cash equivalents		$	20,574			$	-			$	-			$	20,574
Short-term investments			-				-				9,219				9,219
Other assets			-				-				1,439				1,439
Total		$	20,574			$	-			$	10,658			$	31,232

Level 3 assets consist primarily of municipal bonds with an auction reset feature (“auction-rate securities” or “ARS”) whose underlying assets are student loans which are substantially backed by the federal government.  Auction-rate securities are long-term floating rate bonds tied to short-term interest rates.  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 March 31, 2010, 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 with a par value of $10.7 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 following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3) (in thousands):

		Fair Value Measurements at Reporting Date Using significant Unobservable Inputs (Level 3) Financial Assets
		ARS				ARS Right				Other
Balance at December 31, 2009		$	9,400			$	1,350			$	8
Gain on other current assets			-				89				-
Loss on investments			(89	)			-				-
Sales/Maturities			(100	)			-				-
Balance at March 31, 2010		$	9,211			$	1,439			$	8

6.  Restructuring Costs

In October 2007, the Company relocated its corporate headquarters to Mountain View, California.  In conjunction with this relocation, the Company recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at its former corporate headquarters located in Fremont, California.  In conjunction with the sale of its Software business in April 2007, the Company accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of its Software business, which was included in the gain on disposal of discontinued operations.  In fiscal 2001 and 2002, the Company adopted plans to exit its hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce its general and administrative overhead costs.  The restructuring liability of $0.5 million at March 31, 2010 represents the remaining lease payments, net of sub-lease rent, which continue through May 2010.

 

12

---

 

Below is a summary of the changes to the restructuring liability (in thousands):

		Balance at Beginning of Period				Cash Payments				Other				Balance at End of Period
For the three months ended March 31, 2010		$	1,238			$	(724	)		$	4			$	518

7.  Computation of Per Share Amounts

 

Basic earnings per common share is computed using the weighted-average number of common shares outstanding (adjusted for treasury stock and common stock subject to repurchase activity) during the period.  Diluted earnings per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period.  Common equivalent shares are anti-dilutive when their conversion would increase earnings per share.  Dilutive common equivalent shares consist primarily of stock options and restricted stock awards.

 

Employee equity share options, nonvested shares, and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share.  Diluted shares outstanding would include the dilutive effect of in-the-money options, calculated based on the average share price for each period using the treasury stock method, had there been any during the period.  Under the treasury stock method, the amount the employee (or purchaser of the written call options) must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.  Additionally, under the treasury stock method the amount the purchaser of the written call options must pay for exercising stock options is assumed to be used to repurchase shares.

The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data):

		Three Months Ended March 31,
		2010				2009
Net loss		$	(2,821	)		$	(7,426	)
Weighted average shares - basic and diluted			60,128				63,339
Net loss per share:
Basic and diluted		$	(0.05	)		$	(0.12	)

 

13

---

 

The following potential common shares have been excluded from the calculation of diluted earnings per share for all periods presented because they are anti-dilutive (in thousands):

		Three Months Ended March 31,
		2010				2009
Anti-dilutive securities:
Options to purchase common stock			4,805				8,619
Unvested restricted stock purchase rights			13				836
Total			4,818				9,455

8.  Comprehensive Loss

Comprehensive loss is comprised of net loss and other non-owner changes in stockholders’ equity, including foreign currency translation gains or losses and unrealized gains or losses on available-for-sale marketable securities.  The following table presents the components of comprehensive loss (in thousands):

		Three Months Ended March 31,
		2010				2009
Net loss		$	(2,821	)		$	(7,426	)
Unrealized gain on marketable securities and  investments			-				4
Foreign currency translation loss			(2	)			-
Comprehensive loss		$	(2,823	)		$	(7,422	)

9.  Stockholders’ Equity and Stock-Based Compensation

Stock option plans

In December 2007, the Company’s stockholders approved the 2007 Equity Incentive Plan (“2007 Plan”).  The 2007 Plan replaced the Company’s 1998 Stock Plan (the “1998 Plan”) and the 1999 Director Option Plan (the “Directors’ Plan”), which are collectively referred to as the “Equity Plans”.  The Equity Plans will continue to govern awards previously granted under each respective plan.  There were initially 5,250,000 shares of common stock reserved for issuance under the 2007 Plan, subject to increase for stock options or awards previously issued under the Equity Plans which expire or are cancelled.  At March 31, 2010, a total of 3,040,640 shares of common stock were available for issuance under the 2007 Plan.  The 2007 Plan provides that each share award granted with an exercise price less than the fair market value on the date of grant will be counted as two shares towards the shares reserved and each such share award forfeited or repurchased by the Company will increase the shares reserved by two shares.

Under the 2007 Plan, the Board of Directors may grant to employees, consultants and directors an option to purchase shares of the Company’s Common Stock and/or awards of the Company’s common stock at terms and prices determined by the Board of Directors.  The Board of Directors approved that each non-employee director who has been a member of the Board of Directors for at least nine months prior to the date of the annual stockholders’ meeting will be granted a right to purchase 10,000 restricted shares at $0.001 per share at such annual stockholders’ meeting.  The restricted shares will vest 50 percent immediately and the remaining 50 percent on the one year anniversary of the grant.

The 2007 Plan will terminate in 2017.  Options granted under the 2007 Plan must be issued at a price equal to at least the fair market value of the Company’s common stock at the date of grant.  All vested options granted under the 2007 Plan may be exercised at any time within 10 years of the date of grant or within 90 days of termination of employment, or such other time as may be provided in the stock option agreement, and vest over a vesting schedule determined by the Board of Directors.  The Company’s policy is to issue new shares upon exercise of options under the 2007 Plan.

 

14

---

 

The following table summarizes option and restricted stock purchase rights activities from December 31, 2008 through March 31, 2010:

										Stock Options Outstanding
		Available for Grant				Restricted Stock  Outstanding				Number Outstanding				Weighted- Average Exercise Price per Share				Weighted- Average Remaining Contractual Term				Aggregate Intrinsic Value  ($ 000's)
Balance at December 31, 2008			1,905,725				866,664				8,650,821			$	2.91				6.27			$	611
Granted			(1,977,050	)			49,000				1,879,050			$	1.21
Exercised			-				-				(205,196	)		$	1.26
Restricted stock  released			-				(426,505	)			-			$	-
Restricted stock repurchased			153,332				(76,666	)			-			$	-
Cancelled			3,027,628				-				(3,067,462	)		$	3.92
Balance at December 31, 2009			3,109,635				412,493				7,257,213			$	2.09				7.58			$	1,291
Granted			(255,250	)			-				255,250			$	1.39
Exercised			-				-				(26,281	)		$	1.12
Restricted stock  released			-				(6,000	)			-			$	-
Restricted stock repurchased			-				-				-			$	-
Cancelled			186,255				-				(190,504	)		$	5.94
Balance at March 31, 2010			3,040,640				406,493				7,295,678			$	1.97				7.55			$	2,565
Exercisable at March 31, 2010											3,488,265			$	2.88				6.12			$	758

Stock Based Compensation Expense

 

The following table summarizes employee stock-based compensation expense resulting from stock options and stock purchase rights (in thousands):

 

		Three Months Ended March 31,
		2010				2009
Included in cost of revenue:
Media cost of revenue		$	55			$	50
E-commerce cost of revenue			26				17
Total included in cost of revenue			81				67
Included in operating expenses:
Sales and marketing			148				154
Research and development			75				70
General and administrative			375				390
Total included in operating expenses			598				614
Total stock-based compensation expense		$	679			$	681

 

The fair value of the option grants has been calculated on the date of grant using the Black-Scholes option pricing model.  The expected life for the three months ended March 31, 2010 and March 31, 2009 was based on historical settlement patterns.  Expected volatility was based on historical implied volatility in the Company’s stock.  The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.  The following table summarizes the weighted-average assumptions for stock options granted:

 

15

---

 

		Three Months Ended March 31,
		2010				2009
Expected life (years)			5.81				5.68
Risk-free interest rate			2.70	%			2.04	%
Volatility			63.3	%			62.4	%
Dividend yield		None				None
Weighted-average fair value at grant date		$	0.82			$	0.54

As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three months ended March 31, 2010 and March 31, 2009 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures based on historical experience.

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.  The Company also believes that there is a market to sell the data generated by the technology.  These opportunities were significant contributing factors to the establishment of the purchase price.

The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management estimates and assumptions, including third-party valuations that utilize established valuation techniques appropriate for the high-technology industry.  The fair value of the developed technology was estimated by applying the income approach and a market approach.  This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement.  Key assumptions include the expected cash flows to be generated from this developed technology over its remaining life and the discount rate of 35 percent.  The Company will test goodwill for impairment on December 31, the last day of the Company’s fiscal year.  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

 

16

---

 

A summary of the allocation of identified intangible assets is as follows (in thousands):

		Useful life		Fair Value
Developed technology		3 years		$	958
Total intangible assets				$	958

11.  Segment and Geographic Information

The Company’s operating segments are significant strategic business units that offer different products and services.  The Company has two operating segments:  Media and E-commerce.

The Company’s Media segment consists of web sites serving technology professionals and technology enthusiasts and the Company’s E-commerce segment provides online sales of a variety of retail products of interest to these communities and general consumers.  The Company’s websites that comprise the Media segment include: SourceForge, Slashdot, 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”.

(in thousands)		Media				E-commerce				Total Company
Three Months Ended March 31, 2010
Revenue from external customers		$	4,295			$	10,384			$	14,679
Cost of revenue		$	1,781			$	8,818			$	10,599
Gross margin		$	2,514			$	1,566			$	4,080
Loss from operations		$	(2,299	)		$	(528	)		$	(2,827	)
Depreciation and amortization		$	472			$	56			$	528
Three Months Ended March 31, 2009
Revenue from external customers		$	3,777			$	6,594			$	10,371
Cost of revenue		$	1,907			$	5,610			$	7,517
Gross margin		$	1,870			$	984			$	2,854
Loss from operations		$	(2,985	)		$	(175	)		$	(3,160	)
Depreciation and amortization		$	573			$	30			$	603

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. 

12.  Litigation

In January 2001, the Company, two of its former officers, and Credit Suisse First Boston, the lead underwriter in the Company's initial public offering ("IPO"), were named as defendants in a shareholder lawsuit filed in the United States District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242.  The plaintiffs' class action suit seeks unspecified damages on behalf of a purported class of purchasers of the Company's common stock from the time of the Company's initial public offering in December 1999 through December 2000.

Among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company's initial public offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations.  Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers.  These various cases pending in the Southern District of New York have been coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92.

 

17

---

 

In April 2002, plaintiffs filed a consolidated amended complaint in the action against the Company, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.  Defendants in the coordinated proceeding filed motions to dismiss.  In October 2002, the Company's officers were dismissed from the case without prejudice pursuant to a stipulation.  On February 19, 2003, the Court granted in part and denied in part the motion to dismiss, but declined to dismiss the claims against the Company.

In June 2004, a stipulation of settlement and release of claims against the issuer defendants, including the Company, was submitted to the Court for approval.  On August 31, 2005, the Court preliminarily approved the settlement.  In December 2006, the appellate court overturned the certification of classes in the six test cases, which included the Company's case, that were selected by the underwriter defendants and plaintiffs in the coordinated proceedings.  Because class certification was a condition of the settlement, it was unlikely that the settlement would receive final Court approval.  On June 25, 2007, the Court entered an order terminating the proposed settlement based upon a stipulation among the parties to the settlement.

Plaintiffs filed amended master allegations and amended complaints and moved for class certification in the six focus cases.  Defendants moved to dismiss the amended complaints and opposed class certification.  On March 26, 2008, the Court denied the defendants' motion to dismiss the amended complaints.

The parties have reached a global settlement of the litigation.  On October 5, 2009, the Court entered an order certifying a settlement class and granting final approval of the settlement.  Under the settlement, the insurers will pay the full amount of settlement share allocated to the Company, and the Company will bear no financial liability.  The Company, as well as the officer and director defendants who were previously dismissed from the action pursuant to a stipulation, will receive complete dismissals from the case.  A group of objectors has appealed the Court's October 5, 2009 order to the Second Circuit Court of Appeals.  If for any reason the settlement does not become effective and litigation resumes, the Company believes that it has meritorious defenses to plaintiffs' claims and intends to defend the action vigorously. The Second Circuit Court of Appeals has not yet set a schedule for briefing on the appeals.

On October 3, 2007, a purported Geeknet shareholder filed a complaint for violation of Section 16(b) of the Securities Exchange Act of 1934, which prohibits short-swing trading, against the Company's IPO underwriters.  The complaint, Vanessa Simmonds v. Credit Suisse Group, et al. , Case No. C07-1583, in District Court for the Western District of Washington, seeks the recovery of short-swing profits.  The Company is named as a nominal defendant.  No recovery is sought from the Company.  The plaintiff, Vanessa Simmonds, has filed similar lawsuits in the District Court for the Western District of Washington alleging short-swing trading in the stock of 54 other companies. On July 25, 2008, a majority of the named issuer companies, including Geeknet, jointly filed a motion to dismiss plaintiff's claims.  On March 12, 2009, the Court issued an order granting the motion to dismiss and a judgment in the favor of the moving issuers. On April 10, 2009, Ms. Simmonds appealed the order and judgment dismissing her claims to the United States Court of Appeal for the Ninth Circuit.  The appeal is pending.

The Company is subject to various claims and legal actions arising in the ordinary course of business.  The Company reviews all claims and accrues a liability for those matters where it believes that the likelihood that a loss will occur is probable and the amount of loss is reasonably estimable.

13.  Guarantees and Indemnifications

The following is a summary of the Company’s agreements, including Indirect Guarantees of Indebtedness of Others, some of which are specifically grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, the Company has not recorded any liabilities for these agreements as of March 31, 2010.

As permitted under Delaware law, the Company has agreements whereby the Company’s officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has obtained director and officer liability insurance designed to limit the Company’s exposure and to enable the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2010.

 

18

---

 

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally, the Company’s business partners, subsidiaries and/or customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2010.

14.  Subsequent Event

In April 2010, the Company entered into a five year agreement with a third-party contract-fulfillment and warehouse provider to replace its existing third-party provider, effective in the Company’s third quarter which ends September 30, 2010.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties.  Words such as “may,” “could,” “anticipate,” “potential,” “intend,” “expect,” “believe,” “in our view,” and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; and sources of revenue; gross margins; financial performance and results of operations; technological trends in, and demand for online advertising; management's strategy, plans and objectives for future operations; 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 and to make any share repurchases.  Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in the Risk Factors contained in the section of this Quarterly Report on Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations."  We undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

 

There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2010 as compared to what was previously disclosed in Management’s Discussion and Analysis of  Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

Overview

We are an online network for the global geek community, comprised of technology professionals, technology enthusiasts and general consumers of technology -oriented goods, services and media.  Our site include: SourceForge, Slashdot, ThinkGeek, Ohloh and freshmeat.  We provide our audience with content, culture, connections and commerce.

 

19

---