Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
GKNT > SEC Filings for GKNT > Form 10-K on 26-Feb-2014All Recent SEC Filings

Show all filings for GEEKNET, INC

Form 10-K for GEEKNET, INC


26-Feb-2014

Annual Report


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 "Special Note Regarding Forward-Looking Statements."

Overview

We sell collectibles, apparel, gadgets, electronics, toys and other retail products for technology enthusiasts and general consumers through our website and certain exclusive products to our wholesale customers. We offer a broad range of unique products in a single web property that are typically not available in traditional brick-and-mortar stores. We introduce a range of new products to our audience on a regular basis and sell our own innovative GeekLabs products developed in-house. We have several wholesale partnerships with brick-and-mortar retailers that allow us to reach a broader consumer audience and expand our unique brand awareness. We have recently established new relationships and strengthened existing partnerships with certain specialty retail store chains with locations throughout the United States and Canada.

Our 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 ThinkGeek revenue has occurred in the fourth quarter ending December 31. As is typical in the retail industry, we generally experience lower monthly revenue during the first nine months of the year.

Our business strategy is to increase revenue by expanding the range of new and innovative products we sell, including our exclusive GeekLabs products, to manage gross margin dollars at the product level, and to increase traffic to our website and customer conversion.

Our marketing strategy is focused on acquiring new customers efficiently and building brand loyalty with existing customers to encourage repeat purchases. We market to prospects and customers through all core online marketing channels:
email, paid search, affiliate marketing, online display advertising, and social media. Our promotional strategy is focused on providing a range of special offers and sales designed to maximize profitable incremental sales using tried-and-true direct marketing techniques. These offers are programmed around specific themes, including product launches and holidays. We also utilize social networking platforms such as Facebook, Twitter, Pinterest, Google+, and YouTube to communicate with customers, increase brand awareness and generate interest in our new product launches.

Prior to September 17, 2012, we had two operating segments: e-Commerce and Media. On September 17, 2012 (the "Closing Date"), Geeknet entered into an Asset Purchase Agreement (the "Purchase Agreement") with Dice Holdings, Inc. ("Dice") and two of Dice's subsidiaries, Dice Career Solutions, Inc. and eFinancialCareers Limited (collectively, the "Buyers") pursuant to which the Buyers purchased our Media business, including the SourceForge, Slashdot and Freecode websites (the "Purchased Business") and assumed certain related liabilities. In accordance with the terms of the Purchase Agreement, the Buyers paid us $20.0 million in cash, of which $3.0 million was deposited by the Buyers into an escrow account for a period of twelve months after the Closing Date in order to secure our indemnification obligations to the Buyers for breaches of our representations, warranties, covenants and other obligations under the Purchase Agreement. During the third quarter of 2013, the Company received the $3.0 million held in escrow.

The Purchase Agreement contains customary representations, warranties and covenants. Subject to certain exceptions and limitations, each party has agreed to indemnify the other for breaches of representations, warranties and covenants and other specified matters. The Purchase Agreement generally limits the Company's liability for breaches of representations and warranties made in the Purchase Agreement to an aggregate of $10.0 million. The Purchase Agreement also contains covenants requiring us not to solicit or hire certain employees of the Buyers or compete with the Purchased Business for a period of three years. The Company's representations and warranties made under the Purchase Agreement generally expired on September 17, 2013, although certain representations, warranties and covenants survive pursuant to the terms of the Purchase Agreement. The Company and Dice also


agreed to provide certain transition services to one another through December 31, 2013, and the Company has completed providing these services to Dice.

During 2013, we restructured certain areas of the business and hired five new members of the senior leadership team. We believe the knowledge, creativity, experience and passion these talented individuals bring to the business will continue to have a positive impact on our operations in 2014. In addition, effective for the year ended December 31, 2013, we reorganized our management reporting and reportable business segments into two operating segments: Website and Wholesale.

We currently use the following key metrics to measure our sales derived from our website:

                                                   Year Ended December 31,
                                                2013          2012        2011
Daily unique visitors (in thousands) (1)      91,212        89,330       73,076
Number of orders received (in thousands) (2)   2,015         2,009        1,639
Conversion rate                                 2.21 %        2.25 %       2.24 %
Average order value received (3) (5)         $    59       $    58      $    58

Number of orders shipped (in thousands) (4)    2,020         2,010        1,706
Average order value shipped (3) (5)          $    57       $    56      $    55

(1) Unique visitors is the total of unique visitors for the website during the periods presented. This data is accumulated daily and can include the same unique visitor on different days. We track unique visitors and the volume of traffic to our website to help us determine the effectiveness of our online marketing efforts.

(2) The number of orders received represents all orders placed on the website during each period shown and does not necessarily correlate to revenue recognized during the period. For example, some orders placed on the website at the end of a reporting period are recognized as revenue in the subsequent reporting period because delivery had not yet occurred.

(3) Average order value received or shipped is calculated by the total sales for orders received or shipped divided by the number of orders received or shipped, excluding wholesale orders. Average order value can vary depending on, but not limited to, seasonality, promotions, the competitive environment and economic conditions.

(4) The number of orders shipped represents all orders associated with the amount of revenue recognized for ThinkGeek for the period presented, excluding wholesale revenue.

(5) Average order value received and Average order value shipped has previously been shown including wholesale orders. Due to the increase in our wholesale revenues in the current year, we determined showing these amounts excluding wholesale orders will provide a more comparable basis. As such, Average order value received and Average order value shipped has been adjusted in all periods shown to reflect this change.

In addition to our website sales, we also had sales through our wholesale channel of $22.4 million, $7.0 million, and $5.4 million for the years ended December 31, 2013, 2012, and 2011, respectively. These wholesale revenues primarily consisted of sales of certain unique licensed ThinkGeek products.

Due to the fact that we are an e-commerce business, we have systems and processes in place to protect our business, website and customer information from cyber attacks or breaches. In March 2013, there was a Distributed Denial of Service ("DDoS") cyber attack on our website that we were able to mitigate after several hours. Loss of revenue from the DDoS was insignificant. The systems and processes we have in place, and strive to continually improve, are designed to reduce the impact or prevent a cyber security attack or breach; however, they do not provide absolute security.

Critical Accounting Estimates

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 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 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, orders in transit, provision for returns, inventory valuation, Geek Point accruals, stock-based compensation and income taxes.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured. Net revenue for the Website segment is derived from the online sale of consumer goods. Website net revenue includes shipping and is presented net of returns and allowances, discounts and sales taxes. Net revenue for the Wholesale segment is derived primarily from the sale of certain exclusive products through our wholesale channel. Wholesale net revenue is presented net of discounts or allowances.

Website revenue is deferred for orders shipped but not delivered before the end of the period. The amount recorded as deferred revenue is estimated because of our high volume of transactions and the use of multiple shipping carriers. These estimates are used to determine what orders that shipped at the end of the reporting period were delivered and should be recognized as revenue. When calculating these estimates, we consider historical experiences of shipping transit times for domestic and international orders using different carriers. On average, shipping transit times are approximately one to eight business days. As of December 31, 2013 and December 31, 2012, $1.6 million and $1.3 million, respectively, were recognized as deferred revenue for orders shipped at the end of the reporting period but not yet delivered to the customer.

We reserve an amount for estimated returns on website orders at the end of each reporting period. We give website customers a 90-day right to return purchased products. These estimates are based on historical patterns and trends of customer returns. Reserves for returns at December 31, 2013 and December 31, 2012 were $0.5 million, respectively.

Inventory Valuation
Inventories consist primarily of finished goods that are valued at the lower of cost, using the weighted average cost method, or market. We review inventories each quarter and, when required, reduce estimated excess and obsolete inventories to their net realizable values.

Geek Points Accruals

We maintain a customer loyalty program by issuing Geek Points to participating customers for certain purchases of products. Customers can redeem their Geek Points toward future purchases in accordance with program rules and promotions. Geek Points expire three years from the date they are earned. The Company accrues the cost of anticipated redemptions using an estimated redemption rate calculated based on historical experiences and trends. The cost of the redemptions is included in cost of revenues on the Company's consolidated statements of operations. During the first half of 2013, we evaluated the program and revised certain terms and conditions that took effect on August 1, 2013.

Stock-Based Compensation

We measure compensation cost for stock awards at grant date fair value and recognize the expense net of estimated forfeitures for shares expected to vest over the service period of the award.

Calculating compensation expense for stock options requires the input of subjective assumptions, including the expected term of the stock option grant, stock price volatility, interest rates and the forfeiture rate. The fair value of the option grants are calculated on the date of grant using the Black-Scholes option pricing model. The expected life is based on historical settlement patterns. Expected volatility is based on the historical implied volatility of our 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. We estimate the forfeiture rate based on historical trends of our stock-based awards that cancel.

Income Taxes

We have recognized a deferred tax asset associated with previously reported net operating losses, which can result in a future tax benefit. A valuation allowance is recognized if it is more-likely-than-not that some portion


or all of the deferred tax asset will not be realized. We have recognized a valuation allowance for the full amount of the deferred tax asset as there is insufficient evidence to support that it is more-likely-than-not that the assets will be realized. We review our valuation allowance at each reporting period using, but not limited to, forecasted financial information to determine if the deferred tax assets could more-likely-than-not be realized and after considering the impact of limits on the use of net operating loss carryforwards in accordance with Internal Revenue Code Section 382.

We provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more-likely-than-not to be sustained upon examination by taxing authorities.

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 and Discontinued 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 December 31,
                                                     2013          2012          2011
Consolidated Statements of Operations Data:
Net revenue                                          100.0  %      100.0  %      100.0  %
Cost of revenue                                       80.4          82.3          84.4
Gross margin                                          19.6  %       17.7  %       15.6  %
Operating expenses:
Sales and marketing                                    8.6           7.7           8.8
Technology and design                                  4.4           3.3           1.9
General and administrative                             6.7           8.4           9.6
Total operating expenses                              19.7  %       19.4  %       20.3  %
Loss from operations                                  (0.1 )        (1.7 )        (4.7 )
Gain on sale of non-marketable securities                -           3.4             -
Interest and other (expense) income, net                 -          (0.1 )           -
(Loss) income from continuing operations before
income taxes                                          (0.1 )         1.6          (4.7 )
Income tax benefit                                       -             -          (1.1 )
Net (loss) income from continuing operations          (0.1 )%        1.5  %       (3.5 )%
(Loss) income from discontinued operations, net
of tax                                                   -  %       10.2  %        2.0  %
Net (loss) income                                     (0.2 )%       11.7  %       (1.5 )%

Net Revenue

Net revenue is derived from the online sale of consumer goods ("Website") and through our wholesale channel ("Wholesale"). Net revenue includes shipping and is presented net of returns and allowances and sales taxes. These consumer goods are typically collectibles, apparel, electronics, toys, gadgets, edibles, geek-themed and other specialty or unique items. Our customers are technology enthusiasts and general consumers. We sell and ship our products domestically and internationally.


Table of Contents

                        Year Ended December 31,                           Year Ended December 31,
                          2013               2012        % Change           2012             2011         % Change
($ in thousands)
Website revenue   $     115,909          $  111,938            4 %    $      111,938     $   93,691            19 %
Wholesale revenue        22,353               6,975          220 %             6,975          5,366            30 %
Net revenue       $     138,262          $  118,913           16 %    $      118,913     $   99,057            20 %

Net revenue increased $19.3 million during the year ended December 31, 2013 as compared to the prior period. This was primarily due to an increase in revenue through our wholesale channel and an increase in website revenue driven by higher daily unique visitors and average order value shipped. Net revenue increased $19.9 million during the year ended December 31, 2012 as compared to the prior year, primarily due to an increase in the number of orders placed through our website and a slight increase in the revenue through our wholesale channel.
During 2013, we introduced a number of new products that included unique theme-based products developed in our GeekLabs. Our best selling products during 2013 were licensed products that related to Minecraft, Doctor Who, Star Wars and Star Trek. Our internally developed Minecraft foam pickaxe and Minecraft foam sword continued to be best sellers throughout the year. Other popular licensed products this year were the Doctor Who TARDIS throw blanket, the Bag of Holding messenger bag, Portal themed products, and the Star Trek pizza cutter. We are authorized to sell our unique GeekLabs products with licensed themes such as StarWars, StarTrek or Minecraft through the relationships we have with Lucas Films, CBS and Mojang, respectively.
Website
Website revenue increased $4.0 million and $18.2 million during the years ended December 31, 2013 and December 31, 2012, as compared to their respective prior periods. Daily unique visitors increased from 89.3 million to 91.2 million and average order value for shipped orders from the website improved from $56 to $57 during the year ended December 31, 2013 as compared to the prior year. These improvements are due to increased sales of GeekLabs and exclusive products, customers taking advantage of certain sales promotions and free shipping, and website enhancements that allow customers to more easily identify products of interest.
ThinkGeek products are sold in the United States and internationally. Website revenues for international orders were $24.2 million, $22.3 million, and $13.6 million for the years ended December 31, 2013, 2012, and 2011, respectively. The increase in international sales is primarily attributable to our offering a more economical international shipping option throughout the year. Wholesale
Wholesale revenue increased $15.4 million and $1.6 million during the years ended December 31, 2013 and December 31, 2012, as compared to their respective prior periods. This increase is the result of strengthened relationships with our existing clients and acquiring new clients who have particular interest in certain unique licensed ThinkGeek products. During 2013, we executed wholesale agreements with several large retailers. These retailers are in the toy, gaming and pop culture industries and have many brick-and-mortar locations throughout the United States and Canada. Some of our current wholesale clients are Target, Walmart, Toys "R" Us, f.y.e., Meijer, Books-A-Million and Hot Topic. We continue to diversify our product offerings by introducing new products, including our innovative GeekLabs products and expanding licensing partnerships. Cost of Revenue / Gross Margin

Cost of revenue consists of product, shipping and fulfillment costs and personnel and related overhead expenses associated with the operations and merchandising functions.


Table of Contents

                       Year Ended December 31,                         Year Ended December 31,
                        2013              2012        % Change          2012              2011         % Change
($ in thousands)
Cost of Revenue
Website cost of
revenue            $     96,458       $   92,758            4 %    $     92,758       $   79,568           17 %
Wholesale cost of
revenue                  14,687            5,090          189 %           5,090            4,034           26 %
Total cost of
revenue            $    111,145       $   97,848           14 %    $     97,848       $   83,602           17 %

Gross Margin
Total gross margin $     27,117       $   21,065           29 %    $     21,065       $   15,455           36 %
Total gross margin
%                          19.6 %           17.7 %                         17.7 %           15.6 %
Website gross
margin %                   16.8 %           17.1 %                         17.1 %           15.1 %
Wholesale gross
margin %                   34.3 %           27.0 %                         27.0 %           24.8 %

Gross margin as a percentage of revenues for the year ended December 31, 2013 increased by approximately two percentage points from the year ended December 31, 2012. This increase is primarily due to higher sales of our unique GeekLabs products which generally have higher gross margins and improved margins from sales through our wholesale channel, despite higher royalty fees as a percentage of revenues. Gross margin as a percentage of revenues for the year ended December 31, 2012 increased by approximately two percentage points from the year ended December 31, 2011, due to a decrease in personnel and related overhead expenses. During the first quarter of 2012, we began outsourcing our customer service department. We also redirected a portion of our workforce from merchandising, included as cost of revenue, to developing our own innovative products in our GeekLabs, included in technology and design. Also contributing to better margins was the reduction of shipping costs due to renegotiations with our largest shipping supplier.

We are continually analyzing gross margins by product and category levels to ensure that product mix and product costs are in line with our gross margin expectations. We work to manage gross margins through negotiations with our vendors to reduce product, materials and in-bound shipping costs.

Website
Gross margin as a percentage of revenue for Website remained constant at approximately 17% when comparing the year ended December 31, 2013 to December 31, 2012. Gross margin as a percentage of revenue for Website increased by two percentage points for the year ended December 31, 2012 as compared to December 31, 2011 primarily due to lower shipping costs as a percentage of revenue.

Website cost of revenues increased $3.7 million during the year ended December 31, 2013, as compared to the year ended December 31, 2012 primarily due to an increase in shipping costs of $3.1 million and an increase in royalty fees of $1.5 million. These costs were partially offset by a decrease in product costs of $0.5 million and cost savings of approximately $0.5 million in our customer service department. Shipping costs increased as a result of higher sales in the current year, and offering free upgraded shipping to our customers during the holiday season.

Website cost of revenues increased $13.2 million during the year ended December 31, 2012, as compared to the year ended December 31, 2011 primarily due to an increase in product costs of $11.7 million, an increase of royalty fees of $0.8 million and an increase in shipping costs of $0.7 million. The aforementioned increases were due to the increase in revenues and the number of orders. Royalties increased due to a higher volume of sales of our licensed product lines.

Wholesale
Gross margin as a percentage of revenue for Wholesale increased by approximately seven percentage points when comparing the year ended December 31, 2013 to December 31, 2012. This increase is primarily due to lower product costs as a percentage of revenue, partially offset by higher royalty fees and higher packaging and fulfillment costs as percentages of revenue. Wholesale product costs are lower as a percentage of revenue because we primarily sell GeekLabs products through our wholesale channel which generally have higher product margins. Gross margin as a percentage of revenue for Wholesale increased by approximately two percentage points for the year ended


Table of Contents

December 31, 2012 as compared to December 31, 2011 primarily due to lower product and shipping costs as a percentage of revenue, partially offset by higher royalty fees as a percentage of revenue.
Wholesale cost of revenues increased $9.6 million during the year ended December 31, 2013, as compared to the year ended December 31, 2012 primarily due to an increase in product costs of $4.4 million, an increase in royalty fees of $3.5 million, and an increase in packaging and fulfillment costs of $1.2 million. Product and packaging and fulfillment costs increased as a result of higher sales to our wholesale clients in the current year period compared to the prior year period. Royalty payments to our third-party licensors increased primarily as a result of higher sales of licensed products through our wholesale channel. Wholesale cost of revenues increased $1.1 million during the year ended December 31, 2012, as compared to the year ended December 31, 2011 primarily due to an increase of royalty fees of $0.8 million. Royalties increased due to a higher volume of sales of our licensed product lines.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of personnel and related overhead
expenses, including sales commissions, marketing and sales support functions, as
well as costs associated with advertising and promotional activities.
. . .
  Add GKNT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for GKNT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.