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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended June 30, 2011
   
 
Or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
   
 
For the transition period from           to           .

Commission File Number: 000-28369

Geeknet, Inc.
(Exact name of Registrant as specified in its charter)

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

11216 Waples Mill Rd., Suite 100, Fairfax, VA 22030
(Address, including zip code, of principal executive offices)

(877) 433-5638
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).  (Check one):

Large accelerated filer ¨
 
Accelerated filer x
Non-accelerated filer ¨
 
Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x

The Registrant had 6,330,661 shares of Common Stock, $0.001 par value per share, outstanding as of July 29, 2011.



 
 

 

Table of Contents

   
Page No.
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
3
   
Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010
3
   
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and June 30, 2010
4
   
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010
5
   
Notes to Unaudited Condensed Consolidated Financial Statements
6
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 4.
Controls and Procedures
30
   
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings
30
Item 1A.
Risk Factors
30
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
Item 6.
Exhibits
43
Signatures
44
Certifications
 
 
 
2

 
 
PART I

GEEKNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
 
ASSETS
 
Current assets:
           
Cash and cash equivalents
  $ 24,923     $ 35,333  
Short-term investments
    8       8  
Accounts receivable, net of allowance of $3 and $0, respectively
    6,813       5,078  
Inventories
    9,311       13,322  
Prepaid expenses and other current assets
    4,110       2,919  
Total current assets
    45,165       56,660  
Property and equipment, net
    5,020       5,114  
Other long-term assets
    4,916       4,983  
Total assets
  $ 55,101     $ 66,757  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
               
Accounts payable
  $ 4,686     $ 13,381  
Deferred revenue
    2,668       1,836  
Accrued liabilities and other
    1,923       3,591  
Total current liabilities
    9,277       18,808  
Other long-term liabilities
    82       77  
Total liabilities
    9,359       18,885  
Commitments and contingencies (Note 11)
               
Stockholders’ equity:
               
Common stock, $0.001 par value; authorized — 25,000;  issued- 6,426 and 6,365 shares, respectively; outstanding — 6,331 and 6,273 shares, respectively
    6       6  
Treasury stock
    (811 )     (622 )
Additional paid-in capital
    805,752       803,160  
Accumulated other comprehensive income
    5       10  
Accumulated deficit
    (759,210 )     (754,682 )
Total stockholders’ equity
    45,742       47,872  
Total liabilities and stockholders’ equity
  $ 55,101     $ 66,757  

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 June
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue:
                       
ThinkGeek revenue
  $ 14,319     $ 10,558     $ 29,524     $ 20,942  
Media revenue
    5,751       4,716       10,462       9,011  
Revenue
    20,070       15,274       39,986       29,953  
Cost of revenue:
                               
ThinkGeek cost of revenue
    13,209       8,792       26,843       17,610  
Media cost of revenue
    1,459       1,795       2,805       3,576  
Cost of revenue
    14,668       10,587       29,648       21,186  
Gross margin
    5,402       4,687       10,338       8,767  
Operating expenses:
                               
Sales and marketing
    3,302       3,551       6,669       6,713  
Research and development
    1,309       1,613       2,286       3,143  
General and administrative
    2,927       2,049       5,899       4,173  
Amortization of intangible assets
    20       93       41       184  
Restructuring
    -       (101 )     -       (101 )
Total operating expenses
    7,558       7,205       14,895       14,112  
Loss from operations
    (2,156 )     (2,518 )     (4,557 )     (5,345 )
Interest and other income (expense), net
    15       22       7       27  
Loss from continuing operations before income taxes
    (2,141 )     (2,496 )     (4,550 )     (5,318 )
Income tax benefit
    -       (12 )     (23 )     (13 )
Loss from continuing operations
    (2,141 )     (2,484 )     (4,527 )     (5,305 )
Loss from discontinued operations
    -       (22 )     -       (22 )
Net loss
  $ (2,141 )   $ (2,506 )   $ (4,527 )   $ (5,327 )
                                 
Loss per share from continuing operations:
                               
Basic and diluted
  $ (0.34 )   $ (0.42 )   $ (0.72 )   $ (0.88 )
Loss per share from discontinued operations:
                               
Basic and diluted
  $ -     $ -     $ -     $ -  
Net loss per share:
                               
Basic and diluted
  $ (0.34 )   $ (0.42 )   $ (0.72 )   $ (0.88 )
                                 
Shares used in per share calculations:
                               
Basic and diluted
    6,306       6,029       6,294       6,021  

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)

   
Six Months Ended June 30,
 
   
2011
   
2010
 
             
Cash flows from operating activities from operations:
           
Net Loss
  $ (4,527 )   $ (5,327 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    1,056       1,089  
Stock-based compensation expense
    1,913       1,430  
Provision for bad debts
    3       -  
Provision for excess and obsolete inventory
    221       14  
Loss on sale of assets
    -       18  
Non-cash restructuring expense
    -       (101 )
Changes in assets and liabilities:
               
Accounts receivable
    (1,738 )     (395 )
Inventories
    3,790       (1,629 )
Prepaid expenses and other assets
    (1,165 )     83  
Accounts payable
    (8,695 )     (844 )
Accrued restructuring liabilities
    -       (1,137 )
Deferred revenue
    832       261  
Accrued liabilities and other
    (1,668 )     (1,477 )
Other long-term liabilities
    4       (9 )
Net cash used in operating activities
    (9,974 )     (8,024 )
Cash flows from investing activities from operations:
               
Change in restricted cash
    -       1,000  
Purchase of property and equipment
    (921 )     (3,063 )
Purchase of  intangible assets
    -       (122 )
Maturities or sale of marketable securities
    -       7,200  
Acquistion of a business, net of acquired
    -       (1,000 )
Net cash (used in) provided by investing activities from operations:
    (921 )     4,015  
Cash flows from financing activities from operations:
               
Proceeds from issuance of common stock
    679       141  
Repurchase of common stock
    (189 )     (98 )
Net cash provided by financing activities from operations:
    490       43  
Effect of exchange rate changes on cash and cash equivalents
    (5 )     (6 )
Net decrease in cash and cash equivalents
    (10,410 )     (3,972 )
Cash and cash equivalents, beginning of period
    35,333       28,943  
Cash and cash equivalents, end of period
  $ 24,923     $ 24,971  

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 e-commerce segment, consisting solely of ThinkGeek, Inc., sells geek-themed retail products to technology enthusiasts and general consumers through its ThinkGeek web site.  Geeknet’s audience of technology professionals and technology enthusiasts relies on its web sites — SourceForge and freshmeat — to create, improve, compare and distribute Open Source software and on Slashdot to peer-produce and peer-moderate technology news and discussion.

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 May 2007, the Company changed its name to SourceForge, Inc. In November 2009, the Company changed its name to Geeknet to project a more accurate reflection of its business, primarily to the advertising community.

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, 2010 has been derived from audited financial statements included on Form 10-K, and the interim unaudited condensed consolidated financial statements contained in this Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual financial statements.  Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations.  In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2011, its results of operations for the three and six months ended June 30, 2011 and June 30, 2010 and its cash flows for the six months ended June 30, 2011 and June 30, 2010 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, 2010, included in the Company’s Annual Report on Form 10-K filed with the SEC.

2. 
Summary of Significant Accounting Policies

Except as discussed below, there have been no significant changes to the Company’s critical accounting estimates during the three and six months ended June 30, 2011 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, 2010.

On November 10, 2010, the Company effected a 1-for-10 reverse stock split.  All share and per share amounts in this report have been adjusted to give effect to the reverse stock split.  In conjunction with the reverse stock split, the common stock par value remained constant at $0.001 per share.  Following the reverse stock split, a portion of the common stock was transferred to additional paid in capital

Loss from discontinued operations consists of direct revenue and direct expenses of Geek.com, including cost of revenue. For the three and six months ended June 30, 2010, Geek.com had revenue of $25 thousand and expenses of $26 thousand. For the same periods amortization of intangible assets was $21 thousand.

 
6

 

Adopted Accounting Pronouncements
On January 1, 2011, the Company prospectively adopted accounting standard update (“ASU”) 2009-13, which amends Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition.  Under this standard, Media revenue in arrangements with multiple deliverables is allocated using estimated selling prices, whereas prior to January 1, 2011, the Company's rate card was used to allocate such revenue and in some instances the residual method was used to allocate revenue.  The adoption of ASU 2009-13 did not have a significant impact on the Company's 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, and these include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.  The Company has based its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances and the Company evaluates its estimates on a regular basis and makes changes accordingly.  Historically, the Company’s estimates relative to its critical accounting estimates have not differed materially from actual results, however actual results may differ from these estimates under different conditions.

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

Principles of Consolidation
The interim financial information presented in this Quarterly Report on Form 10-Q includes the accounts of Geeknet and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  At June 30, 2011, 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.

Foreign Currency Translation
The Company has wholly-owned subsidiaries in the United Kingdom and Belgium.  The functional currency of each subsidiary is the local currency.  Balance sheet accounts are translated into U.S. dollars at exchange rates prevailing at balance sheet dates.  Revenue and expenses are translated into U.S. dollars at average rates for the period.  Adjustments resulting from translation are charged or credited in other comprehensive income as a component of stockholders’ equity.  For all non-functional currency account balances, the re-measurement of such balances to the functional currency is recorded as a foreign exchange gain or loss, which is included in interest and other income, net.

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 Office of the Chief Executive Officer which includes the Chief Executive Officer, the Chief Financial Officer and the heads of the Media and ThinkGeek business units.  The Company currently operates as two reportable business segments:  ThinkGeek e-commerce and Media.

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.
 
 
7

 
 
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.

Inventories
Inventories related to the Company’s ThinkGeek e-commerce business consist solely of finished goods that are valued at the lower of cost, using the weighted average cost method, or market.  We review inventories quarterly and, when required, provisions 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
Goodwill, which is entirely related to our Media segment, is carried at cost. 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 undiscounted cashflows over the remaining useful life of the intangible assets in measuring whether they are recoverable.  No events or circumstances occurred that would indicate a possible impairment in the carrying value of intangible assets at June 30, 2011.

Goodwill and intangible assets are as follows (in thousands):
 
   
June 30, 2011
   
December 31, 2010
 
   
Gross
   
Accumulated
   
Net
   
Gross
   
Accumulated
   
Net
 
   
asset
   
amortization
   
asset
   
asset
   
amortization
   
asset
 
Goodwill
  $ 62,037     $ (60,362 )   $ 1,675     $ 62,037     $ (60,362 )   $ 1,675  
                                                 
Identified intangible assets:
                                               
Domain and trade names
    6,176       (6,052 )     124       6,176       (6,012 )     164  
Purchased technology
    2,535       (2,535 )     -       2,535       (2,535 )     -  
      8,711       (8,587 )     124       8,711       (8,547 )     164  
Total goodwill and identified intangible assets
  $ 70,748     $ (68,949 )   $ 1,799     $ 70,748     $ (68,909 )   $ 1,839  
 
 
8

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

Year ending December 31,
 
Amount
 
2011
  $ 41  
2012
    67  
2013
    15  
    $ 123  

Revenue Recognition
The Company recognizes revenue as follows:

ThinkGeek
ThinkGeek revenue is derived from the online sale of consumer goods.  The Company recognizes ThinkGeek revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectability is reasonably assured.  The Company recognizes ThinkGeek revenue when products are delivered and title transfers to the customer.  The Company grants customers a limited right to return products.  The Company has recorded provisions of $0.3 million for such returns at June 30, 2011. At June 30, 2010 the reserve was zero.

The Company’s ThinkGeek 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 ThinkGeek revenue has occurred in the Company’s fourth quarter which begins on October 1 and ends on December 31.  As is typical in the retail industry, the Company generally experiences lower monthly revenue during the first nine months of the year.  The Company’s ThinkGeek revenue in a particular period is not necessarily indicative of future revenue for a subsequent quarter or a full year.

Media
Media revenue is derived primarily from advertising on the Company’s various web sites or from lead generation information provided to the customer.  Advertisements include various forms of rich media and banner advertising, text links and sponsorships, while lead generation information utilizes advertising and other methods to deliver leads to a customer.  The Company recognizes Media advertising revenue over the contractual campaign period as advertisements are displayed. The Company recognizes lead generation revenue as leads are delivered to the customer, provided that persuasive evidence of an arrangement exists, no significant obligations remain, the fee is fixed or determinable, and collection of the receivable is reasonably assured.  The Company’s obligations may include guarantees of a minimum number of impressions (the number of times that an advertisement is viewed by visitors to the Company’s web sites).  To the extent that minimum guaranteed impressions are not delivered in the specified time frame, the Company does not recognize the corresponding revenue until the guaranteed impressions are delivered.

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. At December 31, 2010, no customer accounted for more than 10% of the Company's gross accounts receivable. At June 30, 2011, Neo@Ogilvy accounted for 20% of our outstanding receivables balance.

For the three months ended June 30, 2011 and June 30, 2010, no one customer represented more than 10% of revenue.  For the six months ended June 30, 2011 and June 30, 2010 no one customer represented more than 10% of revenue.
 
 
9

 
 
Reclassifications
Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current year presentation. These reclassifications have no impact on previously reported net loss or cash flows.  The gain or loss on sale of assets which was previously included in other income is now included in total operating expenses.

3.
Composition of Certain Balance Sheet Components

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

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Computer and office equipment (useful lives of 2 to 4 years)
  $ 6,030     $ 5,685  
Distribution equipment (useful live of 5 years)
    4,321       3,911  
Furniture and fixtures (useful lives of 2 to 4 years)
    316       226  
Leasehold improvements (useful lives of lesser of estimated life or lease term)
    282       207  
Software (useful lives of  2 to 5 years)
    580       579  
Total property and equipment
    11,529       10,608  
Less: Accumulated depreciation and amortization
    (6,509 )     (5,494 )
Property and equipment, net
  $ 5,020     $ 5,114  

Distribution equipment includes payments on the equipment which was installed at the Company's new third-party fulfillment and warehouse provider. This equipment has been placed in service at a total cost of $3.3 million. Also included in distribution equipment is $0.4 million of payments for the build out of additional warehouse capacity in order to better meet demand.

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

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Equity investment
  $ 1,979     $ 1,979  
Goodwill
    1,675       1,675  
Note receivable
    711       711  
Intangible assets, net
    123       164  
Other
    427       454  
Other long-term assets
  $ 4,915     $ 4,983  

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

   
June 30,
   
December 31,
 
   
2011
   
2010
 
Accrued employee compensation and benefits
  $ 1,664     $ 2,252  
Other accrued liabilities
    259       1,339  
Accrued liabilities and other
  $ 1,923     $ 3,591  

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.
 
 
10

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

   
June 30, 2011
   
December 31, 2010
 
    Adjusted     Unrealized    
Estimated
    Adjusted     Unrealized    
Estimated
 
   
Cost
   
Loss
   
Fair Value
   
Cost
   
Loss
   
Fair Value
 
Cash and cash equivalents:
                                   
Cash
  $ 1,661     $ -     $ 1,661     $ 5,072     $ -     $ 5,072  
Money market funds
    23,262       -       23,262       30,261       -       30,261  
Total cash and cash equivalents
  $ 24,923     $ -     $ 24,923     $ 35,333     $ -     $ 35,333  
                                                 
Short-term investments:
                                               
Corporate securities
    8       -       8       8       -       8  
Total short-term investments
  $ 8     $ -     $ 8     $ 8     $ -     $ 8  
 
5.
Fair Value Measurements

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of June 30, 2011 (in thousands):

   
Fair Value Measurements at Reporting Date Using
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Money market fund deposits
  $ 23,262     $ -     $ -     $ 23,262  
Corporate debt
    -       -       8       8  
                                 
Total
  $ 23,262     $ -     $ 8     $ 23,270  
                                 
Amounts included in:
                               
Cash and cash equivalents
  $ 23,262     $ -     $ -     $ 23,262  
Short-term investments
    -       -       8       8  
                                 
Total
  $ 23,262     $ -     $ 8     $ 23,270  

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.

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
 
Balance at December 31, 2010
  $ 8  
Sales/Maturities
    -  
         
Balance at June 30, 2011
  $ 8  
 
 
11

 
 
6. 
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 reduce the loss 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 must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.  Additionally, under the treasury stock method the amount the purchaser of the written call options must pay for exercising stock options is assumed to be used to repurchase shares.

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net loss
  $ (2,141 )   $ (2,506 )   $ (4,527 )   $ (5,327 )
Net loss per share:
                               
Basic and diluted
  $ (0.34 )   $ (0.42 )   $ (0.72 )   $ (0.88 )
                                 
Net loss from continuing operations
  $ (2,141 )   $ (2,506 )   $ (4,527 )   $ (5,327 )
Net loss per share from continuing operations:
                               
Basic and diluted
  $ (0.34 )   $ (0.42 )   $ (0.72 )   $ (0.88 )
                                 
Loss from discontinued operations
  $ -     $ (22 )   $ -     $ (22 )
                                 
Net loss per share from discontinued operations:
                               
Basic and diluted
  $ -     $ -     $ -     $ -  
                                 
Weighted average shares - basic and diluted
    6,306       6,029       6,294       6,021  

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
 
                       
Anti-dilutive securities:
    116       613       143       548  
Options to purchase common stock
    -       16       53       164  
Restricted stock awards and restricted stock units total
    116       629       196       712  
 
 
12

 
 
7. 
Comprehensive Loss

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net loss
  $ (2,141 )   $ (2,506 )   $ (4,527 )   $ (5,327 )
Unrealized gain on marketable securities and  investments
    -       -       -       -  
Foreign currency translation loss
    (4 )     (4 )     (5 )     (6 )
Comprehensive loss
  $ (2,145 )   $ (2,510 )   $ (4,532 )   $ (5,333 )

8. 
Stockholders’ Equity and Stock-Based Compensation

Common Stock
During the three months ended June 30, 2011, the Company repurchased 1,945 shares of its common stock at a weighted-average price of $25.93 under an "odd lot" share repurchase program.

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 525,000 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.  On June 29, 2011 a registration statement was filed for the purpose of registering an additional 200,000 shares of Common Stock to be issued as a result of an increase in the number of shares issuable under the 2007 Plan. At June 30, 2011, a total of 179,830 shares were available for issuance.  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 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, granting of Restricted Stock Awards ("RSA") or vesting of Restricted Stock Units ("RSU") under the 2007 Plan. The following table summarizes option and restricted stock purchase rights activities from December 31, 2009 through June 30, 2011:
 
 
13

 
 
               
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, 2009
    310,964       41,249       725,721     $ 20.88       7.58     $ 1,291  
Granted
    (632,769 )     163,650       305,469     $ 15.32                  
Exercised
    -       -       (230,723 )   $ 8.51                  
Restricted stock  released
    -       (33,428 )     -     $ -                  
Restricted stock repurchased
    14,084       (7,042 )     -     $ -                  
Cancelled
    322,967       -       (325,809 )   $ 24.05                  
                                                 
Balance at December 31, 2010
    15,246       164,429       474,658     $ 20.72       7.15     $ 3,573  
Authorized
    200,000                                          
Granted
    (301,852 )     336,201       98,200     $ 26.59                  
Exercised
    -       -       (50,144 )   $ 17.42                  
Restricted stock  released
    -       (28,470 )     -     $ -                  
Restricted stock repurchased
    -       -       -     $ -                  
Cancelled
    266,436       (78,125 )     (110,186 )   $ 28.30                  
                                                 
Balance at June 30, 2011
    179,830       394,035       412,528     $ 20.49       7.96     $ 3,184  
Exercisable at June 30, 2011
                    162,086     $ 22.20       6.09     $ 1,336  

Stock Based Compensation Expense
 
The following table summarizes employee stock-based compensation expense resulting from stock options and stock purchase rights (in thousands):
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Included in cost of revenue:
                       
ThinkGeek cost of revenue
  $ 57     $ 44     $ 80     $ 99  
Media cost of revenue
    22       32       43       58  
Total included in cost of revenue
    79       76       123       157  
Included in operating expenses:
                               
Sales and marketing
    19       202       82       350  
Research and development
    31       110       47       185  
General and administrative
    1,055       363       1,661       738  
Total included in operating expenses
    1,105       675       1,790       1,273  
Included in discontinued operations
    -       -       -       -  
                                 
Total stock-based compensation expense
  $ 1,184     $ 751     $ 1,913     $ 1,430  
 
 
14

 
 
The fair value of the option grants has been calculated on the date of grant using the Black-Scholes option pricing model.  The expected life for the three and six months ended June 30, 2011 and June 30, 2010 was based on historical settlement patterns.  Expected volatility was based on historical implied volatility in the Company’s stock.  The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.  The following table summarizes the weighted-average assumptions for stock options granted:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Expected life (years)
    4.41       5.9       4.35       5.89  
Risk-free interest rate
    1.30 %     2.77 %     1.52 %     2.76 %
Volatility
    65.3 %     62.7 %     65.3 %     62.8 %
Dividend yield
 
None
   
None
   
None
   
None
 
Weighted-average fair value at grant date
  $ 13.96     $ 9.00     $ 13.83     $ 8.90  

As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2011 and June 30, 2010 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures based on historical experience.

9. 
Acquisitions

Geek.com
In May 2010, the Company acquired the Geek.com web site for $1.0 million in cash.  Geek.com is an online technology resource and community for technology enthusiasts and professionals.

The Company allocated the $1.0 million purchase price to the intangible assets acquired based on their estimated fair values.  The excess purchase price over those fair values was recorded as goodwill. In determining the purchase price, the Company considered the audience and traffic patterns of Geek.com and the opportunity for the Company to monetize Geek.com through its direct and indirect sales channels as well as through its E-commerce business.

The fair values assigned to intangible assets acquired are based on management estimates and assumptions, including third-party valuations that utilize established valuation techniques appropriate for internet domains and web sites.  The fair value of the domain name and web site was estimated by applying the cost approach.  This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement.  Key assumptions include the estimated costs to develop the web site.  The purchase price was allocated as follows (in thousands):

Identified intangible assets
  $ 746  
Goodwill
    254  
    $ 1,000  

The identified intangible assets are comprised of Geek.com's domain name and have a useful life of three years. In December 2010 the Company sold the Geek.com business to Ziff Davis, Inc. for $0.8 million.  The net loss from Geek.com has been treated as a discontinued operation in the accompanying consolidated financial statements.

10. 
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.
 
 
15

 
 
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 and freshmeat.

(in thousands)
 
E-commerce
   
Media
   
Total
Company
 
Three Months Ended June 30, 2011
                 
Revenue from external customers
  $ 14,319     $ 5,751     $ 20,070  
Cost of revenue
  $ 13,209     $ 1,459     $ 14,668  
Gross margin
  $ 1,110     $ 4,292     $ 5,402  
Loss from operations
  $ (2,352 )   $ 196     $ (2,156 )
Depreciation and amortization
  $ 272     $ 243     $ 515  
Three Months Ended June 30, 2010
                       
Revenue from external customers
  $ 10,558     $ 4,716     $ 15,274  
Cost of revenue
  $ 8,792     $ 1,795     $ 10,587  
Gross margin
  $ 1,766     $ 2,921     $ 4,687  
Loss from operations
  $ (704 )   $ (1,814 )   $ (2,518 )
Depreciation and amortization
  $ 61     $ 500     $ 561  
Six Months Ended June 30, 2011
                       
Revenue from external customers
  $ 29,524     $ 10,462     $ 39,986  
Cost of revenue
  $ 26,843     $ 2,805     $ 29,648  
Gross margin
  $ 2,681     $ 7,657     $ 10,338  
Operating loss
  $ (4,091 )   $ (466 )   $ (4,557 )
Depreciation and amortization
  $ 545     $ 511     $ 1,056  
Six Months Ended June 30, 2010
                       
Revenue from external customers
  $ 20,942     $ 9,011     $ 29,953  
Cost of revenue
  $ 17,610     $ 3,576     $ 21,186  
Gross margin
  $ 3,332     $ 5,435     $ 8,767  
Operating loss
  $ (1,233 )   $ (4,112 )   $ (5,345 )
Depreciation and amortization
  $ 119     $ 970     $ 1,089  

During the time period covered by the table above, the Company marketed its Media products in the United States through its direct sales force. ThinkGeek products were marketed through its online web site and with respect to international Media sales, through its subsidiary in the United Kingdom and representatives based in the United Kingdom, Europe and Australia.
 
11. 
Commitments and Contingencies
 
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 U.S. District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242.  The plaintiffs' class action suit seeks unspecified damages on behalf of a purported class of purchasers of the Company's common stock from the time of the Company's initial public offering in December 1999 through December 2000.
 
Among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company's initial public offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations.  Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers.  These various cases were coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92.
 
 
16

 
 
In 2008, the parties 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 U.S. Second Circuit Court of Appeals.  The Plaintiffs have filed motions to dismiss the appeals, some of which have been granted and some of which are still pending.  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 the U.S. District Court for the Western District of Washington, seeks the recovery of short-swing profits.  The Company is named as a nominal defendant and no recovery is sought from the Company.  The plaintiff, Vanessa Simmonds, has filed similar lawsuits in the U.S. 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 U.S. Court of Appeals for the Ninth Circuit.  On December 2, 2010, U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal with respect to certain claims and remanded others to the district court.  On January 18, 2011, the Ninth Circuit Court of Appeals voted unanimously to deny Simmonds’s petition for a rehearing en banc. On June 27, 2011, the U.S. Supreme Court denied Simmonds’s petition for a writ of certiorari with respect to the dismissed claims and granted the underwriters’ petition for a writ of certiorari with respect to the remanded claims.
 
On November 17, 2010, the Company filed a lawsuit against Tightrope Interactive claiming among other things trademark infringement, cyber piracy and violation of the California Consumer Protection against Computer Spyware Act regarding Tightrope Interactive’s use of certain software provided by VLC, a French non-profit whose software project is hosted on SourceForge.net.  On December 14, 2010, Tightrope Interactive answered the complaint and filed counterclaims alleging the Company sent a wrongful Digital Millennium Copyright Act request to take down Tightrope Interactive material and seeking unspecified damages.  The Company believes that the resolution of this matter will not have a material adverse impact on its consolidated financial position and results of operation.
 
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.  At June 30, 2011, no liability was recorded for outstanding matters.

Guarantees and Indemnifications
 
The following is a summary of the Company’s agreements, including Indirect Guarantees of Indebtedness of Others, some of which are specifically grandfathered because the guarantees were in effect prior to December 31, 2002. Accordingly, the Company has not recorded any liabilities for these agreements as of June 30, 2011.

As permitted under Delaware law, the Company has agreements whereby the Company’s officers and directors are indemnified for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has obtained director and officer liability insurance designed to limit the Company’s exposure and to enable the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of June 30, 2011.
 
 
17

 
 
The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally, the Company’s business partners, subsidiaries and/or customers, in connection with any patent, copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of June 30, 2011.

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  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 this Quarterly Report on Form 10-Q  We undertake no obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Critical Accounting Estimates
 
There have been no significant changes in our critical accounting estimates during the three and six months ended June 30, 2011 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, 2010.
 
Overview

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

Our e-commerce segment sells geek-themed retail products to technology enthusiasts and general consumers through our ThinkGeek web site.  Our audience of technology professionals and technology enthusiasts relies on our web sites: SourceForge and freshmeat to create, improve, compare and distribute Open Source software and on Slashdot to peer-produce and peer-moderate technology news and discussion.

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 November 2009, we changed our name to Geeknet, Inc.
 
 
18

 
 
Our business consists of two operating segments: e-commerce and Media.  Our e-commerce segment sells technology-themed retail products for technology enthusiasts through our ThinkGeek.com web site.  We offer a broader range of unique products in a single web property than are available in traditional brick-and-mortar stores. We introduce a range of new products to our audience on a regular basis and develop, manufacture and sell our own “Invented at ThinkGeek” custom products.  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 enthusiasts relies on our web properties, SourceForge, Slashdot, and freshmeat, to create, improve, compare and distribute Open Source software and to research, debate and discuss current issues relating to the technology marketplace.

ThinkGeek’s business strategy is to increase revenue by expanding the range of new and innovative products we sell, including products developed by us, and by increasing traffic to our site. We also develop, manufacture and sell our own “Invented at ThinkGeek “custom products. 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 continue to use the capabilities of the internet, including social networking sites such as Facebook, Twitter and YouTube, to increase brand awareness and also to communicate with our customers.

 In 2010, we changed our third-party fulfillment and warehouse provider and invested in modern automated distribution equipment in Lockbourne, Ohio. This will allow us to continue to develop our distribution capabilities to provide a high level of service to our customers.

We currently use the following key metrics to measure ThinkGeek’s business:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
 
                         
Daily Unique Visitors (in thousands) (1)
    15,991       12,517       29,605       22,702  
Orders Received (in thousands)
    245       173       514       344  
Conversion Rate
    1.53 %     1.38 %     1.74 %     1.52 %
Average Order Value Orders Received
  $ 64     $ 64     $ 61     $ 62  


 
(1)
       Unique Visitor is the aggregate average unique visitors for all Online Media sites during the period presented. This does not consider possible duplicate visitors who may visit more than one of our web sites during the month or may visit from a different device or platform. Beginning in the third quarter 2011, we will be making changes to our site to account for this calculation and the number of Unique Visitors.

Our Media business connects millions of influential technology professionals and enthusiasts. Our strategy is targeted to business-to-business technology companies and their advertising agencies with the goal of increasing revenue per page.  During 2010, we hired individuals with the experience and capability of providing a greater variety of lead generation programs directly to our customers.  We believe that customers value lead generation programs and that these programs will have the potential to constitute a growing source of future revenue.  We are also focused on increasing the monetization of our international traffic and currently have a sales team in London, United Kingdom, to develop and implement strategies to increase international revenue and we have agreements with representatives in Europe, Australia and Asia to market and sell our advertising products.

We continue to invest in our web properties, primarily SourceForge and Slashdot.  In March 2011, we launched an open source version of our platform for developers of Open Source projects, named Allura.  The new version includes source code repositories, bug reports, discussions, mailing lists, wiki pages and blogs.  It demonstrates our commitment to the Open Source community.   The improvements to Slashdot included site redesign and improved site performance.  
 
 
19

 
 
We currently use the following key metrics which are derived from data provided by Google Analytics to measure our Media business:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
 
                         
Unique Visitors per Month (in thousands) (1)(2)
    47,804       38,868       48,618       39,530  
Visits per Unique Visitor per Month (1)
    1.6       1.8       1.6       1.7  
Visits per Month (in thousands) (2)
    76,815       69,763       78,206       67,190  
Pages per Visit (1)
    2.0       2.0       2.4       2.4  
Page Views per Month (in thousands) (1)(2)
    155,788       140,752       163,108       144,071  
                                 
Revenue per Thousand Pages (RPM)
    12.31       11.25     $ 10.59     $ 9.31  
Revenue per User (RPU) (3)
    0.48       0.49     $ 0.54     $ 0.52  


(1)
Unique Visitor is the aggregate average unique visitors for all Online Media sites during the period presented. This does not consider possible duplicate visitors who may visit more than one of our web sites during the month or may visit from a different device or platform. Beginning in the third quarter 2011, we will be making changes to our site to account for this calculation and the number of Unique Visitors, Visits per Unique Visitor and Visits per Month may decrease while Pages per Visit may increase.  This change will not affect Page Views per Month.

(2)
Per month amounts are the average calculated as the total amount for the period divided by the months in the period. The 2010 numbers have been changed for comparative purposes and do not include RSS feeds. RSS feeds are no longer tracked by Google Analytics.

(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. 

Results of Operations

  The following table sets forth our operating results for the periods indicated as a percentage of revenue, represented by selected items from the unaudited condensed consolidated statements of operations.  This table should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q.
 
 
20

 
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Consolidated Statements of Operations Data:
                       
ThinkGeek revenue
    71.3 %     69.1 %     73.8 %     69.9 %
Media revenue
    28.7 %     30.9 %     26.2 %     30.1 %
Revenue
    100.0 %     100.0 %     100.0 %     100.0 %
ThinkGeek cost of revenue
    65.8       57.6       67.1       58.8  
Media cost of revenue
    7.3       11.8       7.0       11.9  
Cost of revenue
    73.1 %     69.4 %     74.1 %     70.7 %
Gross margin
    26.9 %     30.6 %     25.9 %     29.3 %
Operating expenses:
                               
Sales and marketing
    16.5       23.2       16.7       22.4  
Research and development
    6.5       10.6       5.7       10.5  
General and administrative
    14.6       13.4       14.8       13.9  
Amortization of intangible assets
    0.1       0.6       0.1       0.6  
Restructuring costs
    -       (0.7 )     -       (0.3 )
Total operating expenses
    37.7 %     47.1 %     37.3 %     47.1 %
Loss from operations
    (10.8 )%     (16.5 )%     (11.4 )%     (17.8 )%
Interest and other income (expense), net
    0.1 %     0.1 %     0.0 %     0.1 %
Loss before income taxes
    (10.7 )%     (16.4 )%     (11.4 )%     (17.7 )%
Income tax benefit
    0.0 %     (0.1 )%     (0.1 )%     0.0 %
Net loss
    (10.7 )%     (16.3 )%     (11.3 )%     (17.7 )%

Revenue

The following table summarizes our revenue by business segment:

   
Three Months Ended
   
Six Months Ended
   
% Change
       
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
($ in thousands)
                                   
ThinkGeek revenue
  $ 14,319     $ 10,558     $ 29,524     $ 20,942       36 %     41 %
Media revenue
  $ 5,751     $ 4,716     $ 10,462     $ 9,011       22 %     16 %
Revenue
  $ 20,070     $ 15,274     $ 39,986     $ 29,953       31 %     33 %

Sales for the three and six months ended June 30, 2011 and June 30, 2010 were primarily to customers located in the United States of America.

For the three months ended June 30, 2011 and June 30, 2010, no one customer represented more than 10% of revenue.  For the six months ended June 30, 2011 and June 30, 2010 no one customer represented more than 10% of revenue.
 
 
21

 
 
Revenue by Segment

ThinkGeek

   
Three Months Ended
   
Six Months Ended
   
% Change
       
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
                                     
ThinkGeek revenue (in thousands)
  $ 14,319     $ 10,558     $ 29,524     $ 20,942       36 %     41 %
Percentage of total revenue
    71 %     69 %     74 %     70 %                
Number of orders shipped
    253,999       178,833       538,110       363,380       42 %     48 %
Average order size shipped
  $ 59     $ 59     $ 56     $ 58       5 %     (3 )%

ThinkGeek revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances and credit card chargebacks.  The increase in ThinkGeek revenue during the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, was primarily due to a 42% increase in the number of shipments year-over-year.  ThinkGeek revenue for the second quarter increased 36% to $14.3 million, from $10.6 million for the same period last year.  Our investments in the business continue to yield terrific new products and new customers. We have increased our investments in sales and marketing, merchandising and operations to support our growth. In 2011 we upgraded our inventory leadership and our processes and we are continuing to improve our efficiency. We decided to discontinue certain products to focus on bringing in exciting new products. We implemented our checkout re-write to ensure scalability and flexibility of our website and we plan to launch a mobile site during the second half of the year.

The increase in ThinkGeek’s revenue during the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, was primarily due to a 48% increase in the number of shipments year-over-year.  The increase in the number of shipments was primarily driven by increased demand for ThinkGeek’s innovative products.

 Media

   
Three Months Ended
   
Six Months Ended
   
% Change
       
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
($ in thousands)
                                   
Direct sales
  $ 4,014     $ 3,363     $ 7,447     $ 6,452       19 %     15 %
Ad Networks
    1,211       1,029       2,349       1,991       18 %     18 %
Other
    526       324       666       568       62 %     17 %
Media revenue
  $ 5,751     $ 4,716     $ 10,462     $ 9,011       22 %     16 %

Our Media revenue is derived primarily from advertising products delivered on our web properties.  Direct sales revenue is generated from orders received by our United States based sales team and may also include advertisements to be delivered globally.  Ad Networks revenue represents revenue from our Ad Network partners, primarily Google Inc., who sell our inventory globally to customers through automated systems and includes revenue from international resellers who use automated systems.  Other revenue represents orders received from our international direct sales team and resellers, sales of reports on data underlying the open source community as well as referral fees and revenue earned from subscriptions to our web properties.

Direct sales revenue for the three months ended June 30, 2011 was higher by $0.7 million when compared to the three months ended June 30, 2010. This was primarily due to new customer spend of $1.5 million while existing customers added $0.4 million, offset by a $1.0 million decrease in revenue from advertisers whose campaigns were not renewed. The increase in Ad Networks revenue for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 was higher due to revenue from Google Inc. This was driven by the larger number of ad units we made available to them.  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.  The increase in Other revenue during the three months ended June 30, 2011 when compared to the three months ended June 30, 2010 was due to higher international display revenue and our increased focus on Lead Generation sales as a complement to our display advertising. Our international revenue continues to grow through the efforts of our direct sales force and expanded reseller relationships in Europe and Asia.
 
 
22

 
 
Direct sales revenue for the six months ended June 30, 2011 increased $1.0 million as compared with the six months ended June 30, 2010.  The majority of the increase was due to new customer spend of $1.9 million offset by a $0.7 million decrease from advertisers whose campaigns were not renewed. Existing customers added $0.1 million in revenue when comparing the six months ended June 30, 2011 to the same period last year. The increase in Ad Networks revenue for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 was due to increased revenue from Google Inc., due to an increase in the number of ad units we made available to them.  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. The increase in Other revenue during the six months ended June 30, 2011 when compared to the six months ended June 30, 2010 was primarily due to higher international display revenue and our increased focus on Lead Generation sales as a complement to our display advertising. Our international revenue continues to grow through the efforts of our direct sales force and expanded reseller relationships in Europe and Asia.

Cost of Revenue/Gross Margin

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
Cost of revenue
  $ 14,668     $ 10,587     $ 29,648     $ 21,186       39 %     40 %
Gross margin
    5,402       4,687       10,338       8,767       15 %     18 %
Gross margin %
    27 %     31 %     26 %     29 %                
 
Cost of revenue consists of personnel costs and related overhead associated with developing and delivering external content for our media sites, cost of equipment and co-location costs to deliver external media content and product and operating costs associated with our ThinkGeek business.

Gross margins declined for both the three and six months ended June 30, 2011 as compared with the three and six months ended June 30, 2010, primarily due to the revenue mix between Media and ThinkGeek revenue.  ThinkGeek revenue has significantly lower gross margins than Media revenue.

Cost of Revenue/Gross Margin by Segment

ThinkGeek Cost of Revenue/Gross Margin

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
ThinkGeek cost of revenue
  $ 13,209     $ 8,792     $ 26,843     $ 17,610       50 %     52 %
ThinkGeek gross margin
    1,110       1,766       2,681       3,332       (37 )%     (20 )%
ThinkGeek gross margin %
    8 %     17 %     9 %     16 %                
Headcount
    36       27       36       27                  

ThinkGeek cost of revenue consists of product, shipping and fulfillment, and operating costs.  It also includes personnel costs associated with the operations and merchandising functions. ThinkGeek’s revenue increased 41% year over year driving the cost of revenue higher.  Cost of revenue increased $9.2 million during the six months ended June 30, 2011, as compared to the six months ended June 30, 2010.  The increase was primarily due to higher product, shipping and fulfillment, and operating costs of $4.9 million, $2.9 million, and $0.9 million, respectively.
 
 
23

 
 
The ThinkGeek cost of revenue increased $4.4 million during the three months ended June 30, 2011, as compared to the three months ended June 30, 2010. Driving this increase was a 36% quarter over quarter increase in revenue.  The change in the cost of revenue for the quarter was primarily due to higher product, shipping and fulfillment, and operating costs of $2.3 million, $1.1 million and $0.5 million, respectively.  ThinkGeek’s product gross margin of 8% is below our 2010 gross margin and can be attributed primarily to discontinued inventory discounts, inbound shipping expenses and write downs of obsolete inventory.

Media Cost of Revenue/Gross Margin

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
Media cost of revenue
  $ 1,459     $ 1,795     $ 2,805     $ 3,576       (19 )%     (22 )%
Media gross margin
    4,292       2,921       7,657       5,435       47 %     41 %
Media gross margin %
    75 %     62 %     73 %     60 %                
Headcount
    15       18       15       18                  

Media cost of revenue consists of personnel costs and related overhead associated with maintaining and supporting the sites, delivering advertising campaigns and developing the editorial content of the sites, co-location and depreciation costs for delivering site content, and the costs of serving and running advertising campaigns.

The increase in Media gross margin percentages for the three months ended June 30, 2011, as compared to the three months ended June 30, 2010, was primarily driven by the increased Media revenue and a decrease in cost of revenue, primarily due to decreased personnel costs.

The increase in Media gross margin percentages for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, was primarily driven by increased Media revenue and a decrease in cost of revenue, primarily due to decreased personnel costs.

Operating Expenses

Sales and Marketing Expenses

Sales and marketing (“S&M”) expenses consist primarily of personnel and related overhead expenses, including sales commission, for personnel engaged in sales, marketing and sales support functions, and includes costs associated with advertising and promotional activities.

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
ThinkGeek S&M
  $ 1,662     $ 1,187     $ 3,142     $ 2,049       40 %     53 %
Media S&M
    1,640       2,364       3,527       4,664       (31 )%     (24 )%
Sales and marketing
  $ 3,302     $ 3,551     $ 6,669     $ 6,713       (7 )%     (1 )%
Percentage of total revenue
    16 %     23 %     17 %     22 %                
Headcount
    33       33       33       33                  

The sales and marketing expenses decreased $0.2 million primarily due to lower personnel costs. The Media segment reduced marketing labor costs by $0.6 million quarter over quarter. This decrease was partially offset by higher ThinkGeek credit card fees of $0.1 million and higher promotional fees of $0.3 million related to 42% revenue growth.

Total sales and marketing expenses remained relatively unchanged for the six months ended June 30, 2011 when compared to the six months ended June 30, 2010. The Media segment was able to reduce its labor and related costs by $0.8 million quarter over quarter partially offset by increased marketing expenses for the ThinkGeek segment of $0.6 million. ThinkGeek costs increased $0.2 million for the six months ended June 30, 2011 when compared to the same period last year. ThinkGeek’s costs will continue to rise if we continue to experience rapid growth. For the six months ended June 30, 2011, ThinkGeek experienced 36% growth when compared to the same period last year.
 
 
24

 
 
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 ThinkGeek and Media web sites.  We expense all of our R&D costs as they are incurred.

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
ThinkGeek R&D
  $ 455     $ 328     $ 827     $ 650       39 %     27 %
Media R&D
    854       1,285       1,459       2,493       (34 )%     (41 )%
Research and development
  $ 1,309     $ 1,613     $ 2,286     $ 3,143       (19 )%     (27 )%
Percentage of total revenue
    7 %     11 %     6 %     10 %                
Headcount
    30       29       30       29                  

R&D expense decreased by $0.3 million in the three months ended June 30, 2011 as compared to the three months ended June 30, 2010.  The decrease in R&D expenses was primarily due to lower personnel costs and lower consulting costs.  Personnel and related costs decreased due to a reduction of Media headcount offset by an increase of headcount at ThinkGeek.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of salaries and related expenses for management, finance and accounting, human resources and legal personnel, professional fees for accounting and legal services as well as insurance and other public company related costs.

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
General and administrative
  $ 2,927     $ 2,049     $ 5,899     $ 4,173       43 %     41 %
Percentage of total revenue
    15 %     13 %     15 %     14 %                
Headcount
    19       20       19       20                  

G&A expenses increased by $0.9 during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. It also increased by $1.7 million for the six months ended June 30, 2011 as compared to same period last year. These changes were driven by higher stock-based compensation for key executives and expenditures to support the proxy and the Annual Shareholder’s Meeting.
 
 
25

 
 
Interest and other income (expense), net

Below is a summary of Interest and other income (expense), net (in thousands):

   
Three Months Ended
   
Six Months Ended
   
% Change
       
($ in thousands)
 
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
                                     
Interest income
  $ 1     $ 29     $ 1     $ 60       (97 )%     (98 )%
Interest expense
    -       (1 )     -       (5 )     (100 )%     (100 )%
Other income (expense), net
    14       (6 )     6       (28 )     (333 )%     *  
Interest and other income (expense), net
  $ 15     $ 22     $ 7     $ 27       (32 )%     (74 )%
*–Not meaningful

The decrease in interest income for the three and six months ended June 30, 2011, as compared to the three and six months ended June 30, 2010, was primarily due to lower investment balances.

Interest expense for the three and six months ended June 30, 2011 and June 30, 2010 results primarily from accretion of our accrued restructuring charge.

The other-than-temporary impairment of non-marketable equity securities relates to our investment in CollabNet, Inc. (“CollabNet”). In March 2009, we determined an impairment indicator existed for this investment and as a result we performed a fair value analysis of this investment. In determining whether a decline in value of our investment in CollabNet had occurred and was other than temporary, we considered available evidence, including the general market conditions, CollabNet’s financial condition, near-term prospects, market comparables and future financing requirements.  The valuation also takes into account CollabNet’s capital structure, liquidation preferences for its capital and other economic variables, which require management’s judgment to evaluate. Based on the results, we determined that the estimated fair value of our investment in CollabNet was $2.0 million and accordingly, we recognized an other-than-temporary impairment charge of $4.6 million.

Loss on disposal of asset is due to our deprecation of the Marketplace platform from the SourceForge.net platform during the three months ended June 30, 2010.

Other income (expense), net for the three months and six months ended June 30, 2010 is primarily due to the write-off of obsolete computer equipment, while other income (expense) net for the six months ended June 30, 2010 is primarily due to the $0.2 million gain on our sale of the Linux.com domain name to The Linux Foundation.

Income Taxes

Provision for income taxes

   
Three Months Ended
   
Six Months Ended
   
% Change
       
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
   
Three
Months
   
% Change
Six Months
 
($ in thousands)
                                   
Income tax benefit
  $ -     $ (12 )   $ (23 )   $ (13 )     (100 )%     77 %

Income taxes consist primarily of state income taxes relating to a jurisdiction in which our ThinkGeek business operates and where we are unable to file a consolidated tax return.  As of June 30, 2011, we had federal and state net operating loss carry-forwards for tax reporting purposes available to offset future taxable income.  A valuation allowance has been recorded for the total deferred tax assets as a result of uncertainties regarding realization of the assets based on the lack of consistent profitability to date and the uncertainty of future profitability.  The federal and state net operating loss carry-forwards expire at various dates through 2029 and 2019, respectively, to the extent that they are not utilized.
 
 
26

 
 
Liquidity and Capital Resources

   
Six Months Ended June 30,
 
($ in thousands)
 
2011
   
2010
 
Net cash provided by (used in):
           
Continuing operations:
           
Operating activities
  $ (9,974 )   $ (8,024 )
Investing activities
    (921 )     4,015  
Financing activities
    490       43  
Effect of exchange rate changes on cash and cash equivalents
    (5 )     (6 )
Net decrease in cash and cash equivalents
  $ (10,410 )   $ (3,972 )

Our principal sources of cash as of June 30, 2011 are our existing cash, cash equivalents and investments of $24.9 million.  Cash and cash equivalents decreased by $10.4 million at June 30, 2011 when compared to December 31, 2010.  This total decrease during the six months ended June 30, 2011 was primarily due to cash used to fund net operating losses and working capital requirements, as well as the purchase of $0.9 million of equipment.

Operating Activities

Cash used in operating activities increased by $1.9 million during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. Cash provided by inventories increased by $5.4 million offset by cash used for accounts payable of $7.8 million and cash used for accounts receivable of $1.3 million. Cash used for accounts payable was much higher than the same period last year due to the seasonality and growth of the ThinkGeek business.

Net cash used in operating activities was $10 million for the six months ended June 30, 2011.  Net cash used in operating activities was primarily due to our net operating loss of $4.5 million after the effects of non-cash charges of stock-based compensation expense of $1.9 million and depreciation and amortization expense of $1.1 million. Additionally, changes in operating assets and liabilities included cash used for accounts payable of $8.7 million, accrued liabilities of $1.7 million and an increase in accounts receivable of $1.7 million. This was partially offset with cash provided by inventory of $3.8 million and deferred revenue of $0.8 million. The decrease of accounts payable was primarily due to the seasonality and growth of our ThinkGeek business.

Net cash used in operating activities was $8.0 million for the six months ended June 30, 2010.  Net cash used in operating activities was primarily due to our net operating loss of $2.5 million after the effects of non-cash charges of stock-based compensation expense of $1.4 million, depreciation and amortization expense of $1.1 million and restructuring expense of $0.1 million. Additionally, changes in operating assets and liabilities included cash used for accounts payable of $0.8 million, accrued liabilities of $1.5 million, accrued restructuring liabilities of $1.1 million, increase in accounts receivable of $0.4 million and increases in inventory of $1.6 million, offset partially by cash provided by decreases in deferred revenue of $0.3 million. The decrease of accounts payable was primarily due to the seasonality of our e-commerce business.

Investing Activities

Our investing activities primarily include purchases of property and equipment and purchases and sales of marketable securities.

Cash used in investing activities for the six months ended June 30, 2011 is $0.9 million. This is comprised of the $0.4 million for the expansion of our distribution equipment at our third party contract-fulfillment and warehouse provider and computers, office equipment and lease-hold improvements of $0.5 million.

Cash provided by investing activities for the six months ended June 30, 2010 is comprised of the sale of $7.2 million of auction rate securities to UBS AG (“UBS”) at par value and a $1.0 million reduction in restricted cash resulting from the conclusion of our former corporate headquarter lease in Fremont, California, offset in part by $3.1 million for the purchase of property and equipment, primarily due to payments for distribution equipment which is being installed at our new third-party contract-fulfillment and warehouse provider and $1.0 million for the acquisition of Geek.com.
 
 
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Financing Activities

Our financing activities during the six months ended June 30, 2011 were comprised primarily of proceeds from the sale of our common stock through equity incentive plans.

Our financing activities during the six months ended June 30, 2010 were primarily comprised of cash used to repurchase shares of our common stock under the repurchase program which ended in October 2009, offset in part by proceeds from the sale of our common stock through equity incentive plans.

Restricted Cash

We have no restricted cash as of June 30, 2011 or December 31, 2010, as the $1.0 million letter of credit expired upon completion of our former corporate headquarter lease in Fremont, California in May 2010.

Auction Rate Securities and ARS Right

At June 30, 2010, we had $3.0 million of municipal bond investments with an auction reset feature.  The underlying assets of these auction-rate securities are student loans which are substantially backed by the Federal government.  On June 30, 2010, we exercised our right to sell, at par value, auction-rate securities with a par value of $3.6 million, to UBS.  The transaction settled on July 1, 2010.

We valued the ARS using a discounted cash flow approach. The assumptions used in preparing the discounted cash flow model were based on data available as of June 30, 2010 and include estimates of interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS.

Liquidity

Our liquidity and capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling, sourcing and supporting our products. Also the timing and expense associated with expanding our distribution channels, capital projects to expand our support systems and infrastructure, our repurchase of common stock, potential acquisitions and other factors.

We expect to devote capital resources to continue our research and development efforts, to invest in our sales, support, marketing and product development organizations, to enhance and introduce marketing programs, to invest in capital projects, to continue to support our operations and related support systems and infrastructure, to repurchase of common stock, to fund strategic acquisitions and for other general corporate activities.  We believe that our existing cash balances will be sufficient to fund our operations during the next 12 months under our current business strategy.  See “Risks Related to our Financial Results” in the Risk Factors section of this Quarterly Report on Form 10-Q.
 
 
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Contractual Obligations

The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations and commitments. Changes in our business needs, cancellation provisions and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. The following table summarizes our fixed contractual obligations and commitments as of June 30, 2011 (in thousands):

         
Years ending December 31,
 
   
Total
   
2011
   
2012 and
2013
   
2014 and
2015
 
Gross Operating Lease Obligations
  $ 2,170     $ 470     $ 1,445     $ 255  
Sublease Income
    (1,007 )     (403 )     (604 )     -  
Net Operating Lease Obligations
    1,163       67       841       255  
                                 
Purchase Obligations
    1,365       1,365       -       -  
Total Obligations
  $ 2,528     $ 1,432     $ 841     $ 255  

In April 2010, we entered into a five year agreement with a third-party fulfillment and warehouse provider to replace our existing third-party provider, which was effective during our third quarter ending September 30, 2010.  In June 2011 we amended the agreement changing certain terms and conditions and extended the agreement to six years in duration.  In addition, we have contracted for the build out of additional warehouse capacity in order to better meet demand. This additional space will allow us to accommodate more products and be more efficient during our peak times. Also in the 2nd quarter of 2011 we leased additional office space to accommodate the corporate headquarters moving from California to Northern Virginia.

Financial Risk Management

We currently 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.

We do not use off-balance-sheet arrangements with unconsolidated related parties, nor do we use other forms of off-balance-sheet arrangements such as research and development arrangements

Item 3.Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal.  Some of the securities that we have invested in may be subject to market risk.  This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate.  For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline.  To minimize this risk, we maintain a portfolio of cash equivalents, short-term investments and long-term investments in a limited category of securities, primarily treasury money market funds and government debt securities.  In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

We have operated primarily in the United States, and virtually all sales have been made in U.S. dollars.  Accordingly, we have not had any material exposure to foreign currency rate fluctuations.

We do not currently hold any derivative instruments and do not engage in hedging activities.
 
 
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Item 4.  Controls and Procedures

 
a)
Evaluation of disclosure controls and procedures.
The Company’s management evaluated, with the participation of its Chief Executive Officer (CEO) and its Chief Financial Officer (CFO), the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “’34 Act”)) as of the end of the period covered by this report.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the Company’s reports filed under the ’34 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal control procedures, which are designed with the objective of providing reasonable assurance that the Company’s transactions are properly authorized, its assets are safeguarded against unauthorized or improper use and its transactions are properly recorded and reported, all to permit the preparation of the Company’s financial statements in conformity with generally accepted accounting principles.  To the extent that elements of our internal control over financial reporting are included within our disclosure controls and procedures, they are included in the scope of our quarterly controls evaluation.

Based on that evaluation, the CEO and CFO concluded that as of the end of the period covered by this report, the disclosure controls and procedures were effective.

 
b)
Changes in internal controls over financial reporting.
There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) of the ’34 Act) as of the date of this report that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.

PART II

Item 1.  Legal Proceedings
The disclosure under the caption “Litigation” in Note 11. Commitments and Contingencies to the Consolidated Financial Statements is incorporated by reference into this Item 1.

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 E-commerce Business

If ThinkGeek fails to launch new and innovative products, the demand for our products may be limited, and our revenue will be adversely affected.

In order to attract customers to our site, we must continually release new and innovative products, including products developed by us.  In addition to the direct revenue we derive from sales of these products, the release of new and innovative products garners media coverage and drives customers to our site.  The successful development, sourcing, manufacturing and merchandising of products is subject to numerous risks and uncertainties, including our ability to:

 
· 
accurately predict our customers’ demand for a product;
 
 
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· 
deliver our merchandise in sufficient quantities and in a timely manner to meet our customers’ demands;

 
· 
maintain sufficient inventory levels, particularly during the peak holiday selling seasons;

 
· 
anticipate and successfully respond to new preferences by our customers;

 
· 
expand into new markets;

 
· 
compete with other ThinkGeek service providers and traditional brick and mortar retailers;

 
· 
procure appropriate volumes of these products at price points acceptable to our customers; and

 
· 
attract and retain qualified merchandising and product development personnel.

There can be no assurance that our new products will appeal to customers or that customer demand for these products will be sufficient to generate revenue consistent with our estimates.  In addition, there can be no assurance that new products will be developed in a timely or cost-effective manner, or that we will be able to procure appropriate quantities of such products.  If we are unable to deliver new and innovative products that allow us to increase demand, we may not be able to generate sufficient revenue to grow our ThinkGeek business.  See also additional risks related to competition set forth elsewhere in these Risk Factors.

Our ThinkGeek business is highly seasonal.  In addition, 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.

Our ThinkGeek business is highly seasonal, with a disproportionate amount of our sales occurring in the fourth quarter, which begins on October 1 and ends on December 31.  In order to be successful, we must accurately predict our customers’ tastes and demands so that we can avoid purchasing too much or too little inventory.  If we purchase too much inventory, we may be required discount those products or write-off products which we are unable to sell, which will reduce our gross margins.  If we purchase too little inventory, we may fail to meet our customers’ demand and lose potential orders, which will adversely affect our financial results.

In addition, when we launch a new product, it is particularly difficult to accurately forecast customer demand.  Certain products, especially custom manufactured products, or products purchased from outside the United States, may require significant lead-time, may require payment or partial payment prior to shipment of the product, and may not be returnable. We carry a broad selection of products 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 such inventory needs could adversely affect our financial results.

We are dependent upon a single third-party fulfillment and warehouse provider.  Our customer satisfaction 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 ThinkGeek e-commerce business.

Our ThinkGeek business’ ability to receive inbound inventory and ship completed orders efficiently and in a timely manner to our customers is substantially dependent on a single third-party fulfillment and warehouse provider.  We ship products to customers worldwide using the services of Exel, Inc. (“Exel”), located in Lockbourne, Ohio.

If Exel fails to meet our distribution and fulfillment needs, our relationship with and reputation among our ThinkGeek e-commerce customers will suffer and this will adversely affect our ThinkGeek revenue.  Additionally, if Exel is unable to meet our distribution and fulfillment needs, particularly during the holiday season, or our contract with Exel is terminated, we may be required to secure a second-source or replacement fulfillment and warehouse provider.  If we fail to secure such a fulfillment and warehouse provider or are unable to secure a fulfillment and warehouse provider on comparable terms our reputation and our ThinkGeek e-commerce financial results would be adversely affected.
 
 
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If we fail to realize anticipated operating efficiencies at our third-party fulfillment and warehouse provider, our operating results will be adversely affected.

In August 2010, we began shipping products to customers worldwide using the services of Exel, located in Lockbourne, Ohio.  This change of providers required significant efforts by our ThinkGeek management's engineering and operations teams, and although we are currently fully transitioned to Exel, the transition still requires further effort in order to realize operating efficiencies.  In June 2011, we contracted for the build out of additional warehouse capacity in order to better meet demand. This additional space will allow us to accommodate more products and be more efficient during our peak times. If we are unable to realize such operating efficiencies, our shipping and fulfillment costs may not decline as a percent of revenues and our ThinkGeek gross margins and operating income would be adversely affected.

Unplanned system interruptions and capacity constraints could harm our revenue and reputation.

Our ThinkGeek business is dependent on the uninterrupted and highly-available operation of our web site.  We experience periodic service interruptions with our ThinkGeek 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 ThinkGeek sales and business reputation will be adversely affected.

We do not currently have a formal disaster recovery plan and our ThinkGeek 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 web site experiences frequent or lengthy service interruptions, our business and reputation could be adversely affected.

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 of the United States, including political unrest, trade restrictions, customs and import/export regulations, local business practice and geo-political issues, such as political and social unrest and economic instability.  Additionally, significant reliance on foreign sources of production increases the risk of issues relating to compliance with domestic or international labor standards, customs and import/export laws and regulations, 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 changes 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 may be subject to product liability claims if people or property are harmed by the products we sell on our ThinkGeek 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 ThinkGeek 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.
 
 
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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, continue to consider 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. Illinois and California have both recently passed such legislation impacting our ability to conduct business in these states through affiliate arrangements.

Risks Related To Our Media Business

If our Media business fails to attract and retain users, particularly users who create and post original content on our web properties, our financial results will be adversely affected.

Our reliance upon user-generated content requires that we develop and maintain tools and services designed to facilitate:

 
·
creation of user-generated content,

 
·
participation in discussion surrounding such user-generated content,

 
·
evaluation of user-generated content, and

 
·
distribution of user-generated content.

If our development efforts fail to facilitate such activities on our web properties, the level of user engagement and interaction will not increase and may decline.  Even if we succeed in facilitating such activities on our sites, there can be no assurance 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.  Our inability to maintain such a loyal user base and the advertisers which desire to reach them which will adversely affect our Media business and our ability to maintain or grow our revenue.

We rely on a limited number of Open Source projects for a significant portion of our traffic, if we fail to retain such Open Source projects, our Media revenue will be adversely affected.

We generate revenue from advertisements which are displayed when a visitor engages with SourceForge.net to obtain information and or to download software from an Open Source project.  A significant portion of the page views on SourceForge.net is generated from a limited number of Open Source projects which are hosted on SourceForge.net.  The loss of the hosting of an Open Source project may result in a significant loss of page views and the resulting loss of revenue.  There can be no assurance that such Open Source projects will continue to be hosted on our websites or that users will continue to be attracted to, view and download such Open Source projects.  To the extent that we are unable to retain these Open Source projects on our websites for any reason, then our advertising revenue will decline, and our Media revenue may be adversely affected.
 
 
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We intend to expand our offerings in international markets in which we have limited experience and are subject to international business risks.

We continue to expand our international operations of our Media business.  During 2010, we hired salespeople in London, United Kingdom to manage our sales efforts outside the United States.  We also have agreements with business partners to sell our international inventory in Europe, Australia and Asia and may enter into agreements with additional or different firms to sell our international advertising impressions.  We rely on the efforts and abilities of our employees and representatives to market our products and services in such markets.  We may not be able to hire, train, retain, and manage the personnel necessary to successfully market our products and service and expand our operations into international markets, which may limit the growth of our Media business.

In certain international markets, we have little or no operating experience and we may not be successful.  Certain international markets may be slower than domestic markets in the development and adoption of the online advertising programs we offer and, as a result, our revenue in those markets may not develop at a rate that supports our level of investment.  In addition, we face competition in these international markets from established companies that may have a substantial competitive advantage over us because of their more established local brand names and knowledge of consumer preferences.

Moreover, as we expand into international markets, our Media business will be subject to foreign business and financial risks, including:

 
·
Currency exchange rate fluctuations;

 
·
Compliance with a variety of international laws and regulations, such as data privacy, employment regulations, trade barriers and restrictions on the import and export of technologies;

 
·
Absence in some jurisdictions of effective laws to protect our intellectual property rights;

 
·
New regulatory requirements or changes in policies and local laws that materially affect the demand for our services or directly affect our foreign operations;

 
·
Local economic and political conditions, including recessions in foreign economies and inflation risk; and

 
·
Civil disturbance, terrorism or other catastrophic events that reduce business activity in other parts of the world.

Any of these risks may adversely impact our Media business and also have an adverse affect on our revenue and operating results.

If our Media business fails to deliver innovative programs and products, including our lead generation program, we may not be able to attract and retain advertisers, which will adversely affect our financial results.

Our advertisers continually seek new and innovative advertising products on which to spend their advertising budgets.  In order to grow our direct sales revenue, we will need to introduce new and innovative advertising products and programs that appeal to these advertisers.  We have recently hired individuals with experience in lead generation programs to develop our capability to deliver these programs to our advertisers and expect that an increasing portion of our Media revenue will be derived from these lead generation programs.  If we are unable to successfully execute our lead generation strategy, our Media business revenue will not meet our expectations and our operations will be adversely impacted.  The successful development and production of new and innovative advertising products or programs is subject to numerous uncertainties, including our ability to:
 
 
34

 
 
 
·
enable advertisers to showcase products, services and/or brands to their intended audience and to generate revenue from such audiences;

 
·
develop the capability to satisfy advertiser requirements for lead generation programs;

 
·
anticipate and successfully respond to emerging trends in online advertising; and

 
·
attract and retain qualified marketing and technical personnel.

There can be no assurance 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, there can be no assurance 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.

The market in which our SourceForge platform operates 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, such as Github, 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 materially adversely affected.

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.

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 lead generation and 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.
 
 
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We have made and continue to make significant investments in our web properties and services offered thereon, but these 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.

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.

Risks Related To Our Financial Results

Certain factors specific to our businesses over which we have limited or no control may nonetheless adversely impact our total revenue and financial results.

The primary factors over which we have limited or no control that may adversely impact our total revenue and financial results include the following:

 
·
specific economic conditions relating to ThinkGeek or online advertising spending;

 
·
the spending habits of our ThinkGeek customers;

 
·
the discretionary nature of our Media customers’ purchase and budget cycles;

 
·
our ability to deliver advertisements which meet our customers’ requirements;

 
·
the size and timing of Media customer orders;

 
·
our ability to retain skilled engineering, marketing and sales personnel;

 
·
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

 
·
our ability to keep our web properties operational at a reasonable cost.

If our revenue and operating results fall below our expectations, the expectations of securities analysts or the expectations of investors, the trading price of our common stock will likely be materially and adversely affected. You should not rely on the results of our business in any past periods as an indication of our future financial performance.

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 $10 million of cash for operating activities during the six months ended June 30, 2011.  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 ThinkGeek spending or online advertising or an increased working capital requirement for our ThinkGeek inventory, 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 $2.1 million during the three months ended June 30, 2011, and we have an accumulated deficit of $759 million as of June 30, 2011.  Additionally, we may continue 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.
 
 
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In addition, our ThinkGeek business is rapidly evolving and intensely competitive.  We have many competitors, including other e-commerce businesses 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. Additionally, our current and future competitors may have greater resources, more customers and greater brand recognition than we do. These competitors may secure better terms from vendors, adopt more competitive pricing for their products, and devote more resources to their technology infrastructure, product development, order fulfillment and distribution facilities and marketing and advertising campaigns.  In addition, as we expand into new markets and broaden our product offering, our competition may intensify as our current and future competitors enter into similar markets and offer similar products.  Moreover, local competitors in these new markets may have a substantial competitive advantage over us because of their greater focus on and knowledge of local customers and their preferences, as well as their greater brand recognition.

Increased competition in our ThinkGeek and Media businesses 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, advertisers and customers, 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 unknowingly 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, patent 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.
 
 
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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 ThinkGeek 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 may not be able to 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 ThinkGeek products, display advertising and lead generation services 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.
 
 
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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 June 30, 2011 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 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.
 
 
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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 may not 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, as well as other geographic markets, in which we recruit, is intense.  In the Internet and high technology industries, qualified candidates often consider equity awards in compensation arrangements and fluctuations in our stock price may make it difficult to recruit, retain, and motivate employees.  In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.

Our stock price has been volatile historically and may continue to be volatile.

The trading price of our common stock has been and may continue to be subject to wide fluctuations. During the three and six months ended June 30, 2011, the closing sale prices of our common stock on the NASDAQ Global Market ranged from $24.10 to $30 per share and the closing sale price on June 30, 2011, the last trading day of our first quarter, was $26.72 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.

Internet commerce is rapidly evolving. While this is an evolving area of the law in the United States and International, regulations governing the Internet, e-commerce and the Media business, including, without limitation, those governing an individual’s privacy rights, pricing, content, encryption, security, acceptable payment methods and standards and the 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 several states have 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.
 
 
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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.

 
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2(a) and 2(b) are not applicable.

(c) Issuer Purchases of Equity Securities
The following table sets forth information regarding the Company’s purchases of its common stock during the three months ended June 30, 2011.

   
Total Number of
Shares Purchased
   
Average Price
Paid Per Share
 
Period
  (1)     (1)  
April 1, 2011 to April 30, 2011
    -     $ -  
May 1, 2011 to May 31, 2011
    1,945     $ 25.93  
June 1, 2011 to June 30, 2011
    948     $ 30.05  
                 
Total
    2,893     $ 27.28  

 
1.
Includes 1945 share repurchased under the Company's odd-lot repurchase program, which expired in April 2011, but due to a delay in processing were paid for in May 2011. In addition 948 shares were repurchased to satisfy tax withholding obligations that arose on the vesting of shares of restricted stock.
 
 
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Item 6. Exhibits

Exhibit No.
 
Description
31.1
 
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
GEEKNET, INC.
       
 
By:
/s/
KENNETH G. LANGONE
     
Kenneth G. Langone
     
President and Chief Executive Officer
       
 
By:
/s/
KATHRYN K.  MCCARTHY
     
Kathryn K. McCarthy
     
Executive Vice President and Chief Financial Officer
Date: August 8, 2011
     
 
 
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