UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549





Form 10-K





x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934.orFor the fiscal year ended December 31, 2010


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

incorporation or organization)
(I.R.S. Employer

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)





Securities registered pursuant to Section 12(b) of the Act:





Common Stock, $0.001 par value
The Nasdaq Stock Market LLC (Nasdaq Global Market)(Title of Class)
(Name of each exchange on which registered)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes ̈
Nox





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes ̈
Nox





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.


Yesx
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x





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


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 ̈
Nox




As of February 14, 2011, there were 6,273,023 shares of the registrant’s Common Stock outstanding. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2010 (based on the closing price for the Common Stock on the NASDAQ Global Market for such date) was approximately $52.3 million. Shares of common stock held by each of our officers and directors and by each person or group who owns 5% or more of our outstanding common stock have been excluded in that such persons or groups may be deemed to be our affiliate. This determination of affiliate status is not necessarily a conclusive determination for other purposes.





DOCUMENTS INCORPORATED BY REFERENCE




Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders which will be held on May 9, 2011, and which will be filed pursuant to Regulation 14A within 120 days after the registrant’s year ended December 31, 2010, are incorporated by reference into Part III of this Form 10-K.








Table of Contents





PagePART IItem 1

BusinessOverview

1Sales and Marketing

2Research and Development

2Competition

2Intellectual Property Rights

3Seasonality

3Employees

3Item 1A

Risk Factors

4Item 1B

Unresolved Staff Comments

11Item 2

Properties

11Item 3

Legal Proceedings

12Item 4

(Removed and Reserved)

12PART IIItem 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13Item 6

Selected Financial Data

14Item 7

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

15Item 7A

Quantitative and Qualitative Disclosures About Market Risk

27Item 8

Financial Statements and Supplementary Data

28Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

49Item 9A

Controls and Procedures

49Item 9B

Other Information

50PART IIIItem 10

Directors, Executive Officers and Corporate Governance

51Item 11

Executive Compensation

51Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

51Item 13

Certain Relationships and Related Transactions, and Director Independence

51Item 14

Principal Accounting Fees and Services.

51PART IVItem 15

Exhibits and Financial Statement Schedule

52Signatures

53





PART I


ITEM 1. Business





Special Note Regarding Forward-Looking Statements


This Form 10-K contains forward-looking statements that involve risks and uncertainties. Words such as “may,” “could,” “anticipate,” “potential,” “intend,” “expect,” “believe,” “in our view,” and variations of such words and similar expressions, are intended to identify such forward-looking statements, which include, but are not limited to, statements regarding our expectations and beliefs regarding future revenue growth; and sources of revenue; gross margins; financial performance and results of operations; technological trends in, and demand for online advertising and lead generation products; management's
strategy, plans and objectives for future operations; employee relations and our ability to attract and retain highly qualified personnel; our intent to continue to invest in establishing our brand identity and developing of our web properties; competition, competitors and our ability to compete; liquidity and capital resources; changes in foreign currency exchange rates; the outcome of any litigation to which we are a party; our accounting policies; and sufficiency of our cash resources and investments to meet our operating and working capital requirements and to make any share repurchases. Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors, including those set forth in this Business section under “Competition” and in the Risk Factors contained in Item 1.A of this Form 10-K. We undertake no
obligation to update the forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-K.





Introduction


Geeknet, Inc. (“Geeknet”, the “Company”, “we”, “our” or “us”) is an online network for the global geek community that is comprised of technology professionals, technology enthusiasts and general consumers of technology-oriented goods, services and media. Our web 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. On May 24, 2007, we changed our name to SourceForge, Inc., and in November 2009 we changed our name to Geeknet, Inc. to project a more accurate reflection of our business, primarily to the advertising community. On August 5, 2010, we changed our ticker symbol to “GKNT”.





On November 10, 2010 we effected a 1-for-10 reverse stock split of all outstanding shares of common stock, reduced the total number of shares of common stock that the Company is authorized to issue to 25,000,000 and reduced the total number of shares of preferred stock that the Company is authorized to issue to 1,000,000. We have adjusted all share and per share amounts in this report to give effect to the reverse stock split.





We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.





You can access other information at our Investor Relations web site at investors.geek.net. The content of this web site is not intended to be incorporated by reference into this report or any other report we file with the SEC. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC, and have made our annual reports on Form 10-K available on our web site since November 2002.





Business Overview


Our business consists of two operating segments: E-commerce and Media. Our E-commerce segment sells geek-themed retail products to technology enthusiasts and general consumers through our ThinkGeek web site. Our Media segment is comprised of a network of web sites targeted at the global geek community. Our audience of technology professionals and technology enthusiasts relies on our web sites — SourceForge, Slashdot and freshmeat — to create, improve, compare and distribute Open Source software, and to debate and discuss current issues relating to technology.





E-commerce


Our E-commerce business sells a variety of retail products of interest to technology enthusiasts and general consumers through our ThinkGeek.com web site. We offer a broader range of unique products in a single web property than are typically available in traditional brick-and-mortar stores, 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 customers are able to buy gadgets, apparel, caffeinated products, electronics, toys and other specialty items with a single check-out. Consumers can access the information directly through our web site or contact our customer care representatives and experts by e-mail at
orders@thinkgeek.com or by telephone at 1-888-GEEKSTUFF. A third-party contract warehouse provider located in Lockbourne, Ohio receives purchased inventory and customer returns and fulfills our customers’ orders.





Our E-commerce segment represented 81%, 75%, 74% and 67% of net revenue from continuing operations for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.





Media


Our Media business connects millions of influential technology professionals and technology enthusiasts. These web sites serve more than 48 million unique visitors per month worldwide. (Source: Google Analytics, December 2010). Technology professionals and technology enthusiasts turn to our Media sites to create, improve, compare and distribute Open Source software and to debate and discuss current issues facing the technology community. Our Media business is supported by advertisers who want to reach our unique audience of visitors to our web sites. Our web sites are described below:





•
SourceForge provides the Open Source community with a peer production platform to develop, host and distribute Open Source software worldwide. As of December 31, 2010, SourceForge hosted more than 381,000 Open Source projects and had 3.0 million registered users. The majority of our traffic originates from countries outside the United States. SourceForge served 40.6 million unique visitors in December 2010.


1


•
Slashdot serves technology professionals and technology enthusiasts with timely, peer-produced and peer-moderated technology news and discussion. Slashdot’s lively and robust on-line conversations and interactions leverage its innovative comment and moderation system. Slashdot served 7.6 million unique visitors in December 2010.





•
Freshmeat indexes downloadable Linux, Unix and cross-platform software for a worldwide IT audience. Freshmeat served 0.6 million unique visitors in December 2010.





During 2010, we sold the Ohloh and Geek.com web sites. The results of Geek.com and the loss on disposal are reported as discontinued operations.





Our Media segment represented 19%, 25%, 26% and 33% of net revenue from continuing operations for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.





Sales and Marketing





E-commerce


Our E-commerce marketing and promotion strategy is focused on acquiring new customers and building brand loyalty with existing customers. This strategy is designed to increase customer traffic to our online store, add new customers while improving customer loyalty and increase incremental revenue opportunities through repeat purchases. We intend to continue to use the unique capabilities of the Internet, including social networking sites such as Facebook, Twitter and YouTube, as a means to increase awareness of our brand while encouraging new and repeat customers to visit our web sites. We participate in traditional online marketing activities such as email, search, affiliates and social media. We also create printed
catalogs which we mail to customers and include in orders shipped to customers. Our Geek Points customer retention program is designed to build customer loyalty. Through this program, customers are rewarded for shopping with us. When the customers sign up for Geek Points they earn points on all of their purchases from our ThinkGeek.com web site. Rewards for Geek Points participants include special promotions and discounts.





Media


We sell display advertising and lead generation programs on our Media web sites through our United States-based direct sales organization, ad networks (primarily Google Inc.’s AdSense for Content) and international representatives in Europe, Australia and Asia. Our direct sales force is geographically distributed across the United States. We believe that targeting business-to-business technology companies and their advertising agencies will enable us to increase our revenue per page.




Since 2009, we have offered limited lead generation programs to customers. We provide these programs though third-parties and the revenue we derive from these programs has not been significant. In the third quarter of 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.




In 2010, we established a presence in London, United Kingdom to develop strategies to increase the monetization of our international traffic, and have agreements with representatives in Europe, Australia and Asia to market and sell our advertising products.




Our marketing team is responsible for brand marketing and sales development, managing and optimizing our utilization of ad networks, metrics and analysis, public relations and corporate communication. In 2009 we developed a new corporate identity and continue our efforts to create awareness of that identity among advertising agencies and clients who buy advertising on our web sites.





Research and Development





E-commerce


We have implemented a broad array of services and systems for customer service, product searching, customer communication, order processing and order fulfillment functions. These services and systems use a combination of our own proprietary technologies and commercially-available, licensed technologies. We focus our internal development efforts on creating and enhancing the specialized, proprietary software to improve our customers’ experience and ease of use and to increase the functionality of our ThinkGeek.com web site.





Our core online merchandise catalog, customer interaction, order collection, fulfillment and back-end systems are proprietary to ThinkGeek. The systems are designed to provide connectivity to our distribution center allowing for same day shipment of in-stock items. These include an inventory tracking system, a real-time order tracking system, an executive information system and an inventory replenishment system. Our Internet servers use secure sockets layer (SSL) technology to help conduct secure communications and transactions. We continue to invest in improving the E-commerce customer service, order processing, shipping and tracking systems.





Media


We believe that the success of our Media business will depend on our ability to enhance our web sites and underlying technology to meet the needs of a rapidly-evolving marketplace and increasingly-sophisticated and demanding customers. We have strengthened and modernized the infrastructure and architecture underlying our web sites. For example, we are in the midst of deploying improvements to SourceForge.net that are designed to facilitate global distribution of software and to improve the development experience of our users.





Competition





E-commerce


The market for retail products similar to those offered by ThinkGeek is highly competitive. We compete with online or mail-order retailers (e.g., X-tremegeek, Firebox (UK), iwantoneofthose.com, jinx.com and Computergear) and with Internet portals and online service providers that feature shopping services (e.g., Amazon.com and Yahoo!). More recently, some online retailers have developed sites targeted to the computer enthusiast and computer gaming markets. We believe that there are a number of competitive factors in our market, including company credibility, product selection and availability, convenience, price, web site features, functionality and performance, ease of purchasing, customer service and reliability and speed
of order shipment.





Many of the competitors in our E-commerce business have substantial competitive advantages, including greater resources that can be devoted to the development, promotion and sale of their online products, more established sales channels, greater software and web site development experience, and greater name recognition.


2


To be competitive, we must respond promptly and effectively to the challenges of technological change, evolving standards and our competitors’ innovations by continuing to enhance our services and products. Any pricing pressures or loss of potential customers resulting from our failure to compete effectively would reduce our revenue.





Media


The market for Internet media services provided by the Media business is highly competitive. Advertisers have many alternatives available to reach their target audience, including print (e.g., Ziff Davis Media’s eWeek and International Data Group’s Computerworld), general portal sites (e.g., aol.com, yahoo.com and msn.com) and other web sites focused on vertical markets (e.g., Federated Media; CBS Interactive’s cnet.com and techrepublic.com; QuinStreet, Inc.’s internet.com, EarthWeb.com and DevX.com; and TechTarget’s network of web sites) and general business sites (e.g., BusinessWeek.com, Forbes.com and Fortune.com). In July 2006, Google Inc. (“Google”) began offering Open Source code hosting capabilities that may be viewed as competitive to SourceForge.net’s offering; other companies and organizations also offer Open Source code hosting, Open Source code search, and Open Source software development-related services. This competition may impact traffic to our SourceForge web site. We also compete with an increasing number of sites that host and support Open Source development activities, such as Github.com and Berlios.de, and compete with online technology
news and information community sites such as news.google.com, Digg.com and Reddit.com.





Many of the competitors in our Media business have substantial competitive advantages, including greater resources that can be devoted to the development, promotion and sale of their online services, more established sales forces and channels, greater software and web site development experience and greater name recognition.





Intellectual Property Rights





We protect our intellectual property through a combination of copyright, trademark, patent and trade secret laws, employee and third-party nondisclosure agreements, and other methods of protection.





Geeknet, SourceForge, Slashdot, ThinkGeek, freshmeat, and their associated logos are some of our trademarks that we use in the United States and in other countries.





Because the media publishing industry is characterized by rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new feature development, name recognition and reliable web sites are more important to establishing and maintaining a technology leadership position than the various legal protections of our technology.





Seasonality





Our E-commerce business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the holiday shopping season. As a result, a substantial portion of our E-commerce revenue occurred in our fourth quarter, which began on October 1, 2010 and ended on December 31, 2010 for our 2010 calendar year. As is typical in the retail industry, we generally experience lower E-commerce revenue during the other quarters. Therefore, our E-commerce revenue in a particular quarter is not necessarily indicative of future E-commerce revenue for a subsequent quarter or our full year.





Our Media business experiences lower web traffic — often accompanied by reduced advertising spending — during the summer due to various holidays in the United States and Europe.





Employees





We believe our success will depend in part on our continued ability to attract and retain highly-qualified personnel in a competitive market for experienced and talented software engineers and sales and marketing personnel. Our employees are not represented by any collective bargaining organization; we have never experienced a work stoppage; and we believe that our relations with our employees are good. As of December 31, 2010, our employee base totaled 122, including 43 in operations, 35 in sales and marketing, 24 in research and development and 20 in finance and administration. We will relocate our corporate headquarters from Mountain View, California to Fairfax, Virginia in March 2011 and have begun to hire a new
corporate team in Fairfax, Virginia.


3


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 our E-commerce business 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;





·
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 E-commerce service providers and traditional brick and mortar retailers;





·
procure adequate 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 adequate 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 E-commerce business. See also additional risks related to competition set forth elsewhere in these Risk Factors.





Our E-commerce 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 E-Commerce 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 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 E-commerce business.





Our E-commerce 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 contract-fulfillment and warehouse provider. In August 2010, we began shipping products to customers worldwide using the services of Exel, Inc. (“Exel”), located in Lockbourne, Ohio. Prior to August 2010, we utilized another third-party fulfillment and warehouse provider. This change of providers required significant efforts by our E-commerce management's engineering and operations teams, and although we are currently fully transitioned to Exel, the transition still requires further effort in order to ensure that we
are able to efficiently receive products from vendors and ship orders to customers. If we are not able to effectively complete the transition, our revenue and financial results will be adversely affected and our reputation will be adversely affected.





In addition, if Exel fails to meet our future distribution and fulfillment needs, our relationship with and reputation among our E-commerce customers will suffer and this will adversely affect our E-commerce 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 E-commerce financial results would be adversely affected.


4


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





Our E-commerce business is dependent on the uninterrupted and highly-available operation of our web site. We experience periodic service interruptions with our E-commerce web site. Service interruptions may be caused by a variety of factors, including capacity constraints, software design flaws and bugs, and third party denial of service attacks. If we fail to provide customers with such access to our web site at the speed and performance which they require, our E-commerce sales and business reputation will be adversely affected.





We do not currently have a formal disaster recovery plan and our E-commerce related computer and communications systems are located in a single data center near Chicago, Illinois. Our systems and operations remain vulnerable to damage or interruption from fire, power loss, telecommunications failure and similar events. If our 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, 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 E-commerce web site, which could be costly to defend and subject us to significant damage claims.





Some of the products we offer for sale on our E-commerce web site, such as consumer electronics, toys, computers and peripherals, toiletries, beverages, food items and clothing, may expose us to product liability claims relating to personal injury, death or property damage caused by such products, and may require us to take actions such as product recalls. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our vendor agreements with our suppliers do not indemnify us from product liability, and even if some agreements provide
for indemnification, it may be prohibitively costly to avail ourselves of the benefits of the protection.





Increased focus on sales and use tax could subject us to liability for past sales and cause our future sales to decrease.





We do not collect sales or other taxes on shipments of most of our goods into most states in the United States or internationally. The relocation of our fulfillment center or customer service centers or any future expansion of them, along with other aspects of our business, may result in additional sales and other tax obligations. We do not collect consumption tax (including value added tax, goods and services tax, and provincial sales tax) as applicable on goods and services sold that are delivered outside of the United States. One or more states or foreign countries may seek to impose sales or other tax collection obligations on out-of-jurisdiction E-commerce companies. A successful assertion by one or more states or
foreign countries that we should collect sales or other taxes on the sale of merchandise or services could result in substantial tax liabilities for past sales, decrease our ability to compete with traditional retailers, and otherwise harm our business.





Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If any of these initiatives are successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online
competitors and decrease our future sales.


5


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.




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 the 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 cannot assure you that we will 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:


6


·
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.





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.


7


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 online advertising or E-commerce spending;





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





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





·
the spending habits of our E-commerce customers;





·
the size and timing of Media customer orders;





·
long media sales cycles;





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





·
our ability to demonstrate and maintain attractive online user demographics;





·
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 $2.9 million and $5.7 million of cash from operating activities during the years ended December 31, 2010 and December 31, 2009, respectively. 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 E-commerce spending or online advertising, increased working capital requirements for our E-commerce 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 $4.4 million for the year ended December 31, 2010, and we have an accumulated deficit of $754.7 million as of December 31, 2010. 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.


8


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.





In addition, our E-Commerce 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 Media and E-Commerce 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.





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 and registered some of our trademarks in the United States and internationally. Effective trademark protection may not be available in every country in which we offer or intend to offer our products and services. Failure to protect our trademark rights adequately could damage our brand identity and impair our ability to compete effectively. Furthermore, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.





Our success depends significantly upon our proprietary technology and information. Despite our efforts to protect our proprietary technology and information, it may be possible for unauthorized third parties to copy certain portions of our offerings or to reverse engineer or otherwise obtain and use our proprietary technology or information. In our E-commerce business, we periodically discover products that are counterfeit reproductions of our products or designs, or that otherwise infringe our intellectual property rights. The actions we take to establish and protect our intellectual property rights may not be adequate to prevent imitation of our offerings by others or prevent others from seeking to block sales of our
offerings as violations of proprietary rights. Existing copyright laws afford only limited protection, and the laws of certain foreign countries may not protect intellectual property rights to the same extent as do United States laws. Litigation may be necessary to protect our proprietary technology and information. Such litigation may be costly and time-consuming and if we are unsuccessful in challenging a party on the basis of intellectual property infringement, our sales and intellectual property rights could adversely be affected and result in a shift of customer preference away from our offerings.


9


In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent offerings will not be marketed in competition with our offerings, thereby substantially reducing the value of our proprietary rights. Currently, we do not have any software, utility, or design patents and we cannot assure that we will develop proprietary offerings or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business.





Other Risks Related To Our Overall Business





We are exposed to risks associated with worldwide economic slowdowns and related uncertainties.





We are subject to macroeconomic fluctuations in the U.S. economy and elsewhere. Concerns about consumer and investor confidence, volatile corporate profits and reduced capital spending, international conflicts, terrorist and military activity, civil unrest and pandemic illness could cause a slowdown in sales revenue. In addition, political and social turmoil related to international conflicts and terrorist acts may put further pressure on economic conditions in the United States and abroad.





Recent macroeconomic issues involving the broader financial markets, including the housing and credit system and general liquidity issues in the securities markets, have negatively impacted the economy and may negatively affect our business. In addition, weak economic conditions and declines in consumer spending and consumption may harm our operating results. Purchases of our E-commerce 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.





We may be subject to claims as a result of information published on, posted on or accessible from our Internet sites, which could be costly to defend and subject us to significant damage claims.





We may be subject to claims of defamation, negligence, copyright or trademark infringement (including contributory infringement) or other claims relating to the information contained on our Internet sites, whether written by third parties or us.





Claims of defamation have been brought against online services in the past and can be costly to defend regardless of the merit of the lawsuit. Although federal legislation protects online services from some claims when third parties write the material, this protection is limited. Furthermore, the law in this area remains in flux and varies from state to state. We receive notification from time to time of potential claims, but have not been named as a party to litigation involving such claims. While no formal defamation complaints have been filed against us to date, our business could be seriously harmed if one were asserted.





Claims of infringement or other violations of intellectual property rights are common among Internet, media and technology companies because such companies often own large numbers of patents, copyrights, trademarks and trade secrets. Such claims often result in litigation, which is time consuming and can be costly to litigate, regardless of the merits of the claim or the eventual outcome of the claim. In addition, any time one of our online services links to or hosts material in which others allegedly own copyrights, we face the risk of being sued for copyright infringement or related claims. Because hosting of third party content comprises the majority of the online services that we offer, the risk of harm from such
lawsuits could be substantial. Intellectual property claims are often time-consuming and may also be expensive to litigate or settle.





In addition to substantial defense costs, to the extent claims against us are successful, we may have to pay substantial monetary damages or discontinue one or more of our services or practices that are found to be in violation of another party’s rights. We may also acquire licenses or pay royalties in order to continue such practices, which may increase our operating expenses and have an adverse impact on our results of operations.





We may not detect weaknesses in our internal control over financial reporting in a timely manner, or at all.





Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404"), we are required to evaluate the effectiveness of our internal control over financial reporting as well as our disclosure controls and procedures each fiscal year. As of December 31, 2010 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.


10


If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.





Our future success depends upon the continued service of our key management, technical, sales, and other critical personnel. Our officers and other key personnel are employees-at-will, and we cannot assure that we will be able to retain them. Key personnel have left our company in the past and there likely will be additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful implementation and completion of company initiatives, and the results of our operations. Competition for these individuals is intense, and we may not be able to attract,
assimilate or retain highly qualified personnel. Competition for qualified personnel in our industry, as well as other geographic markets, in which we recruit, is intense. In the Internet and high technology industries, qualified candidates often consider equity awards in compensation arrangements and fluctuations in our stock price may make it difficult to recruit, retain, and motivate employees. In addition, the integration of replacement personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful.





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





The trading price of our common stock has been and may continue to be subject to wide fluctuations. During our year ended December 31, 2010, the closing sale prices of our common stock on the NASDAQ Global Market ranged from $11.60 to $26.88 per share and the closing sale price on December 31, 2010, the last trading day of our year ended December 31, 2010, was $25.03 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 overseas, currently there are relatively few laws or regulations that directly apply to commerce on the Internet. Changes in laws or regulations governing the Internet and E-commerce, including, without limitation, those governing an individual’s privacy rights, pricing, content, encryption, security, acceptable payment methods and quality of products or services could have a material adverse effect on our business, operating results and financial condition. Taxation of Internet commerce, or other charges imposed by government agencies or by private organizations, may also be imposed. Recently New York State has
adopted legislation which attempts to impose sales tax collection and reporting obligation on Internet companies. Any of these regulations could have an adverse effect on our future sales and revenue growth.





System disruptions could adversely affect our future operating results.





Our ability to attract and maintain relationships with users, advertisers, merchants and strategic partners will depend on the satisfactory performance, reliability and availability of our Internet channels and network infrastructure. Our Internet advertising revenue relates directly to the number of advertisements delivered to our users. System interruptions or delays that result in the unavailability of Internet pages or slower response times for users would reduce the number of advertisements delivered to such users and reduce the attractiveness of our web properties to users, strategic partners and advertisers or reduce the number of impressions delivered and thereby reduce revenue. In the past year, all of our web
properties have experienced unplanned service interruptions. We will continue to suffer future interruptions from time to time whether due to capacity constraints, natural disasters, telecommunications failures, other system failures, rolling blackouts, viruses, hacking or other events. System interruptions or slower response times could have a material adverse effect on our revenue and financial condition.





Item 1B. Unresolved Staff Comments





None.




Item 2. Properties





Our principal locations are as follows:





Location

Purpose

Approximate

Size

(in square feet)

Expiration

of

LeaseFairfax, Virginia

E-commerce segment operations


15,316

2014Mountain View, California

Corporate headquarters; Media sales and marketing, finance and administration, research and development


14,583

2012Dexter, Michigan

Research and development center for Media segment


4,300

2012San Francisco, California

Media sales, marketing, operations and finance


3,150

2012New York, New York

Media sales and marketing


3,282

2012Seattle, Washington

Sub-leased for remaining lease term


2,498

2011


11




We will relocate our corporate headquarters from Mountain View, California to Fairfax, Virginia effective March 1, 2011. In conjunction with this move, we have sub-leased our Mountain View, California location for the remaining lease term. We believe that our existing properties are in good condition and are adequate and suitable for the conduct of our businesses.





Item 3. Legal Proceedings





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





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





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 Second Circuit Court of Appeals. The Plaintiffs have filed motions to dismiss the appeals and those motions 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 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 District Court for the Western District of Washington alleging short-swing trading in the stock of 54 other companies. On July 25, 2008, a majority of the named issuer
companies, including Geeknet, jointly filed a motion to dismiss plaintiff's claims. On March 12, 2009, the Court issued an order granting the motion to dismiss and a judgment in the favor of the moving issuers. On April 10, 2009, Ms. Simmonds appealed the order and judgment dismissing her claims to the United States Court of Appeal for the Ninth Circuit. On January 18, 2011, the Ninth Circuit Court of Appeals voted unanimously to deny Simmonds’s petition for a rehearing en banc. The matter is pending a petition for a writ of certiorari to the U.S. Supreme Court.





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 intends to vigorously defend itself. Due to the uncertainty surrounding the litigation process,
the Company is unable to reasonably estimate the ultimate outcome of these claims at this time or the range of a possible loss, and therefore has not accrued for any potential loss





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





Item 4. (Removed and Reserved)


12


PART II





Item 5. Marketfor Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





Our common stock is traded on the NASDAQ Global Market under the symbol GKNT. As of February 14, 2011, there were 147 holders of record of our common stock. We have not declared any cash dividends since our inception and do not expect to pay any dividends in the foreseeable future. The high and low closing sales prices, as reported by NASDAQ, of our common stock are as follows:





Year Ended


Year EndedDecember 31, 2010


December 31, 2009Quarter

High


Low


High


LowFourth Quarter

$
26.88


$
16.50


$
13.30


$
11.00Third Quarter

$
19.80


$
11.60


$
14.60


$
10.70Second Quarter

$
16.10


$
12.40


$
15.50


$
8.00First Quarter

$
15.70


$
12.00


$
12.50


$
8.10





The foregoing reflects interdealer prices without retail markup, markdown, or commissions and may not necessarily reflect actual transactions.





On October 14, 2010, our shareholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a 1-for-10 reverse stock split of all outstanding shares of our common stock, reduce the total number of shares of common stock that we are authorized to issue to 25,000,000 and reduce the total number of shares of preferred stock that we are authorized to issue to 1,000,000. The reverse stock split became effective on November 10, 2010.





Stock Performance Graph





Set forth below is a line graph comparing the percentage change in the cumulative return to the stockholders of our Common Stock with the cumulative return of the NASDAQ Stock Market (U.S.) Index, the S&P 600 SmallCap Internet Retail Index and the RDG Internet Composite (“RDG”) Index for the period commencing July 31, 2005 and ending on December 31, 2010. Returns for the indices are weighted based on market capitalization at the beginning of each measurement point.








13


Item 6. Selected Financial Data





You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this Form 10-K.





The statement of operations data for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 and the balance sheet data as of December 31, 2010 and December 31, 2009 are derived from the audited financial statements and related notes appearing elsewhere in this Form 10-K. The statement of operations data for the years ended July 31, 2007 and July 31, 2006 and the balance sheet data as of December 31, 2008, July 31, 2007 and July 31, 2006 are derived from audited financial statements not appearing in this Form 10-K. Net revenue, cost of revenue and operating expenses data excludes the results of Geek.com, which was sold in December 2010, our Software
business, which was sold in April 2007 and our Online Images business, which was sold in December 2005. The historical results are not necessarily indicative of results that may be expected for any future period.





Summary Financial Information


(In thousands, except per share data)





Year Ended


Five Months Ended


Year EndedDecember 31,


December 31,


July 31,


July 31,


July 31,2010


2009


2008


2008


2007


2006Selected Consolidated Statements of Operations Data:Net revenue from continuing operations

$
94,619


$
65,577


$
32,475


$
55,326


$
45,599


$
33,658Cost of revenue from continuing operations


69,240



45,104



21,941



35,128



25,933



19,337Gross margin from continuing operations


25,379



20,473



10,534



20,198



19,666



14,321Income (loss) from continuing operations


(4,200
)


(14,021
)


1,080



(4,326
)


5,955



3,923Income (loss) from discontinued operations, net of income taxes


(248
)


-



-



-



2,773



7,039Net income (loss)

$
(4,448
)

$
(14,021
)

$
1,080


$
(4,326
)

$
8,728


$
10,962Income (loss) per share from continuing operations:Basic

$
(0.69
)

$
(2.31
)

$
0.16


$
(0.64
)

$
0.90


$
0.63Diluted

$
(0.69
)

$
(2.31
)

$
0.16


$
(0.64
)

$
0.87


$
0.61Income (loss) per share from discontinued operations:Basic

$
(0.04
)

$
-


$
-


$
-


$
0.42


$
1.13Diluted

$
(0.04
)

$
-


$
-


$
-


$
0.40


$
1.09Net income (loss) per share:Basic

$
(0.73
)

$
(2.31
)

$
0.16


$
(0.64
)

$
1.32


$
1.76Diluted

$
(0.73
)

$
(2.31
)

$
0.16


$
(0.64
)

$
1.27


$
1.69Shares used in per share calculation:Basic


6,073



6,080



6,653



6,747



6,625



6,233Diluted


6,073



6,080



6,665



6,747



6,849



6,470Selected Balance Sheet data at period-end:Cash, cash equivalents and investments

$
35,341


$
38,351


$
50,021


$
52,702


$
56,640


$
53,043Working capital

$
37,852


$
40,711


$
40,421


$
42,933


$
44,103


$
51,265Total assets

$
66,757


$
60,151


$
74,166


$
74,533


$
76,863


$
63,212Liabilities, net of current portion

$
77


$
103


$
1,423


$
2,610


$
4,121


$
5,693Total stockholders’ equity

$
47,872


$
48,265


$
62,567


$
63,652


$
65,094


$
49,378


14


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations





The following discussion and analysis should be read in conjunction with “Selected Consolidated Financial Data” and our financial statements and the related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including the risks discussed in “Item 1A. Risk Factors” and elsewhere in this Form 10-K. See Part I — Item 1 — “Special Note Regarding Forward-Looking Statements.”





Overview





We are an online network for the global geek community, 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.





In 2009, we changed our fiscal year-end from July 31 to December 31 retroactive to December 31, 2008. Our discussion and analysis of results of operations compares the years ended December 31, 2010 to the year ended December 31, 2009 as well as the year ended December 31, 2009 to the fiscal year ended July 31, 2008. We have also presented the five month transition period ended December 31, 2008 and unaudited information for the comparable five month period ended December 31, 2007.





We were incorporated in California in January 1995 and reincorporated in Delaware in December 1999. From the date of our incorporation through October 2001, we sold Linux-based hardware systems and services under the name VA Linux Systems, Inc. On May 24, 2007 we changed our name to SourceForge, Inc., and in November 2009 we changed our name to Geeknet, Inc. to project a more accurate reflection of our business, primarily to the advertising community. On August 5, 2010, we changed our ticker symbol to “GKNT”. On November 10, 2010 we effected a 1-for-10 reverse stock split. We have adjusted all share and per share amounts in this report to give effect to the reverse stock split.





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, 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 technology 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.





Our E-commerce business strategy is to increase revenue by expanding the range of new and innovative products we sell, including products developed by us, and by attracting increased traffic to our site. We attract traffic to our sites using a variety of traditional online and direct retail marketing channels, direct mail and email to our customers and followers. We also communicate with our customers through social networks such as Facebook and Twitter. In August 2010, we changed our third-party contract-fulfillment and warehouse provider and invested in modern automated distribution equipment.





We currently use the following key metrics to measure our E-Commerce business:





Year Ended


Five Months EndedDecember 31,


July 31,


December 31,2010


2009


2008


2008


2007Daily Unique Visitors (in thousands)(1)


53,111



36,414



29,483



13,905



12,495Orders Received (in thousands)


1,239



766



510



360



291Conversion Rate


2.33
%


2.10
%


1.73
%


2.59
%


2.33
%Average Order Value(2)

$
63.74


$
66.19


$
74.05


$
67.97


$
74.47





(1)
Daily Unique Visitors is the aggregate visitors to our E-Commerce site during the period presented. This metric includes visitors who visit our E-Commerce site on more than one day during the period.


(2)
Average Order Value is based on orders received.





Our Media business strategy is targeted to business-to-business technology companies and their advertising agencies with the goal of increasing revenue per page. For the past year we have offered limited lead generation programs to customers. We provide these programs though third-parties and the revenue we derive from these programs has not been significant. During the third quarter of 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 two salespeople in London, United Kingdom, who are developing and implementing strategies to increase international revenue, and 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. In April 2010, we launched our new Download service on SourceForge. The downloading of open source projects has always been a part of SourceForge. Downloads generate a significant amount of traffic and allow us to target highly relevant advertisements to those visitors who visit SourceForge to download software. The new Download service was intended to be more appealing to a broader group of leaders of free, open source projects. We also improved our project statistics system, to provide additional information to the engineers who write open source software and use these statistics to develop enhancements to projects. In July 2010, we launched a series of
improvements to our platform for developers of Open Source projects. These improvements provide a completely redesigned set of tools, including an issue tracker, wiki, source code management, and discussion system. This updated platform also offers flexibility by allowing developers to integrate and use third party tools directly on the platform. We have also enhanced the SourceForge usability and improved site performance.





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


15





Year Ended


Five Months EndedDecember 31,


July 31,


December 31,2010(4)


2009


2008


2008


2007Unique Visitors per Month (in thousands)(1)(2)


43,960



35,422



33,542



36,141



33,053Visits per Unique Visitor per Month


1.7



1.8



1.9



1.8



1.9Visits per Month (in thousands) (2)


73,650



62,076



63,416



63,933



62,554Pages per Visit


2.0



2.2



2.4



2.4



2.5Page Views per Month (in thousands) (2)


149,678



136,332



151,346



153,915



153,683Revenue per Thousand Pages (RPM)

$
10.18


$
10.08


$
10.19


$
11.02


$
9.38Revenue per User (RPU) (3)

$
0.42


$
0.47


$
0.55


$
0.56


$
0.52





(1)
Unique Visitors per Month is the aggregate average unique visitors for all our Media sites during the period presented. This does not consider possible duplicate visitors who may visit more than one of our web sites during the month.


(2)
Per month amounts are the average calculated as the total amount for the period divided by the months in the period.


(3)
Revenue per User (“RPU”) is an annualized amount based on revenue and unique users during the period presented.


(4)
Excludes the Geek.com discontinued operations





A key element of our growth plans is to increase our user engagement. Our metrics around engagement are an important measure, and we are focused on both growing the number of unique visitors and deepening the average levels of engagement.





Critical Accounting Policies





Accounting policies, methods and estimates are an integral part of the consolidated financial statements prepared by management and are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly
significant include revenue recognition policies, the assessment of impairment of goodwill and long-lived assets, restructuring reserves for excess facilities for non-cancelable leases, income taxes, stock-based compensation and contingencies and litigation.





Revenue Recognition





E-commerce Revenue


E-commerce revenue is derived from the online sale of consumer goods. We recognize E-commerce revenue from the sale of consumer goods when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured. In general, we recognize E-commerce revenue when products are shipped and title transfers to the customer. We generally grant customers a 30-day right to return products and based on historical experience, we have recorded reserve for estimated returns of $0.4 million and $0.3 million at December 31, 2010 and December 31, 2009, respectively.





Media Revenue


Media revenue is derived primarily from advertising on our various web sites or from lead generation information provided to our customers. 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. We recognize Media advertising revenue as advertisements are displayed over the contractual campaign period, and recognize lead generation revenue as leads are delivered to our 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. Our
obligations may include guarantees of a minimum number of impressions (the number of times that an advertisement is viewed by visitors to our web sites). To the extent that minimum guaranteed impressions are not delivered in the specified time frame, we do not recognize the corresponding revenue until the guaranteed impressions are delivered.





Inventories





Inventories related to our E-commerce segment consist solely of finished goods that are valued at the lower of cost, using the weighted average cost method, or market. We reduce estimated excess and obsolete inventories to their net realizable values.





Long-Lived Assets





We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the carrying value of the asset exceeds the estimated undiscounted future cash flows, a loss is recorded as the excess of the asset’s carrying value over fair value. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less costs to sell.





Goodwill





We evaluate goodwill for impairment annually and when an event occurs or circumstances change that indicates that the carrying value may not be recoverable. Our annual testing date is December 31. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying net assets, including goodwill, to the fair value of the reporting unit. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered to be impaired and a second step is performed to measure the amount
of the impairment loss. The preparation of the goodwill impairment analysis requires us to make significant estimates and assumptions with respect to the determination of fair values of reporting units and tangible and intangible assets. These estimates and assumptions, which include future values, are often subjective and may differ significantly from period to period based on changes in the overall economic environment, changes in our business and changes in our strategy or our internal forecasts. We utilize third-party valuation experts to assess the reasonableness of our assumptions and to perform certain portions of our goodwill impairment analysis.


16


Stock-Based Compensation





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





Calculating compensation expense requires the input of subjective assumptions, including the expected term of the option grant, stock price volatility, and the pre-vesting option forfeiture rate. We estimate the expected life of options granted based on historical exercise patterns. We estimate stock price volatility based on historical volatility in our stock. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock-based awards that are granted, exercised, or cancelled.





Contingencies and Litigation





We are subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of any loss contingency required is assessed and recorded, if probable, after careful analysis of each individual matter. The required loss contingencies may change in the future as the facts and circumstances of each matter change.





Results of Operations





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





Year Ended


Five Months EndedDecember 31,


July 31,


December 31,2010


2009


2008


2008


2007(unaudited)Consolidated Statements of Operations Data:E-commerce revenue


80.7
%


74.9
%


66.6
%


73.9
%


74.6
%Media revenue


19.3



25.1



33.4



26.1



25.4Net revenue


100.0
%


100.0
%


100.0
%


100.0
%


100.0
%E-commerce cost of revenue


66.2



58.2



50.4



56.6



53.5Media cost of revenue


7.0



10.6



13.1



11.0



9.2Cost of revenue


73.2



68.8



63.5



67.6



62.7Gross margin


26.8



31.2



36.5



32.4



37.3Operating expenses:Sales and marketing


16.1



18.0



15.1



13.3



11.6Research and development


6.5



12.4



7.9



7.8



5.2General and administrative


10.1



13.4



20.1



11.6



13.3Amortization of intangible assets


0.3



0.3



-



-



-(Gain) loss on sale of assets


(1.5
)


1.6



-



-



-Restructuring costs


(0.1
)


(0.1
)


3.9



-



5.0Total operating expenses


31.4



45.6



47.0



32.7



35.1Income (loss) from operations


(4.6
)


(14.4
)


(10.5
)


(0.3
)


2.2Interest and other income (expense), net


-



(6.8
)


2.9



4.1



4.0Income (loss) from continuing operations before income taxes


(4.6
)


(21.2
)


(7.6
)


3.8



6.2Provision (benefit) for income taxes


(0.2
)


0.2



0.2



0.5



0.8Income (loss) from continuing operations


(4.4
)%


(21.4
)%


(7.8
)%


3.3
%


5.4
%





Net Revenue





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)E-commerce revenue

$
76,335


$
49,091


$
36,820


$
23,994


$
21,148



55
%


33
%


13
%Media revenue


18,284



16,486



18,506



8,481



7,205



11
%


(11
)%


18
%Net revenue

$
94,619


$
65,577


$
55,326


$
32,475


$
28,353



44
%


19
%


15
%





Revenue for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 was primarily from customers located in the United States of America.





For the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 no one customer represented 10% or greater of net revenue. We do not anticipate that any one customer will represent more than 10% of future annual net revenue.


17


E-commerce Revenue





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007(unaudited)Revenue (in thousands)

$
76,335


$
49,091


$
36,820


$
23,994


$
21,148



55
%


33
%


13
%Percentage of total net revenue


81
%


75
%


67
%


74
%


75
%Number of orders shipped


1,302,966



788,531



518,429



368,393



296,723



65
%


52
%


24
%Average order size (in dollars)

$
58.59


$
62.26


$
71.02


$
68.00


$
74.00



(6
)%


(12
)%


(8
)%





E-commerce revenue is derived from the online sale of consumer goods, including shipping, net of any returns and allowances. International revenue from our E-Commerce business comprised approximately 18%, 17%, 15% and 19% of total E-commerce revenue for the year ended December 31, 2010, the year ended December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.





The growth in E-commerce revenue for the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to increased consumer awareness of our web site as a result of broader product offerings, an increase in the number of custom developed products such as the Electronic Rock Guitar shirt, iPhone case with flip out keyboard and the Star Trek Enterprise Pizza cutter. Online marketing, catalog marketing and media coverage of our web site contributed to a larger customer base. This larger customer base as well as web site enhancements, including improved search capability and customer communication features, drove a 45% increase in the number of unique visitors to our web site. This increase in
unique visitors resulted in a 62% increase in the number of orders received during the year ended December 31, 2010. The average order size decreased by 4% in the fiscal year ended December 31, 2010 when compared to the prior year.





The growth in E-commerce revenue for the year ended December 31, 2009 as compared to the year ended July 31, 2008 was primarily due to increased consumer awareness of our web site as a result of broader product offerings, an increased number of custom developed products such as the Electronic Rock Guitar Shirt and the Tauntaun Sleeping Bag, online marketing, print catalogs and media coverage of our web site. This increased awareness of our site attracted a larger customer base, which drove a 24% increase in the number of unique visitors to our web site, resulting in a 50% increase in the number of orders received. The increase in orders received was partially offset by a 11% decrease in the average order size during the
year ended December 31, 2009 as compared to the prior fiscal year ended July 31, 2008 due to the mix of products with lower selling prices.





The growth in E-commerce revenue during the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was primarily due to a 24% increase in the number of shipments year-over-year, offset in part by an 8% decrease in the average value of those shipments. The increase in the number of shipments was primarily driven by demand for new products, including newly released products such as the Electronic Drum Kit and the Personal Soundtrack Shirt. The decrease in average shipment value was due to a combination of lower price points of the mix of products purchased, lower shipping revenue per order as customers took advantage of our free shipping promotions and a general decrease in shipping fees
charged to customers.





We expect E-commerce revenue to continue to grow as we increase the number of orders received by visitors to our site.





Media Revenue





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)Direct sales

$
13,334


$
11,531


$
14,325


$
5,418


$
5,698



16
%


(20
)%


(5
)%Ad Networks


3,973



4,200



3,341



2,576



1,209



(5
)%


26
%


113
%Other


977



755



840



487



298



29
%


(10
)%


63
%Media revenue

$
18,284


$
16,486


$
18,506


$
8,481


$
7,205



11
%


(11
)%


18
%





Media revenue is derived primarily from advertising products delivered on our web properties and more recently from the delivery of leads resulting from lead generation programs.





·
Direct sales revenue is generated from orders received by our United States based sales team, which may also include advertisements to be delivered globally,





·
Ad Networks revenue represents revenue from our Ad Network partners, primarily Google Inc., who sell our inventory globally to customers through automated systems and includes revenue from international resellers who use automated systems, and





·
Other represents orders received from our international resellers and to a lesser extent sales of data and referral fees.





Direct sales revenue for the year ended December 31, 2010 increased $1.8 million as compared with the year ended December 31, 2009. The increase was primarily due to $1.0 million in revenue from customers who did not advertise in the year ended December 31, 2009 and $4.2 million from customers who increased their advertising levels during the year ended December 31, 2010 as compared with the year ended December 31, 2009, offset in part by a $3.4 million decrease in revenue from advertisers whose campaigns were not renewed or who chose to advertise at lower levels during the year ended December 31, 2010. The decrease in Ad Networks revenue for the year ended December 31, 2010 as compared to the year ended December 31, 2009
was primarily due to decreased revenue from our from Really Simple Syndication ("RSS") partner. Other revenue increased by $0.2 million during the year ended December 31, 2010 as compared to the year ended December 31, 2009 due to increased revenue from our reseller partners as a result of increased customer account penetration as well as increased rates due to more active management of our resellers.





Direct sales revenue for the year ended December 31, 2009 decreased $2.8 million as compared with the year ended July 31, 2008. The decrease was primarily due to a $7.0 million decrease in revenue from advertisers whose campaigns were not renewed or who chose to advertise at lower levels during the year ended December 31, 2009, offset in part by increases in revenue of $1.7 million from customers who did not advertise in the year ended July 31, 2008 and $2.5 million from customers who increased their advertising levels during the year ended December 31, 2009 as compared with the year ended July 31, 2008. The increase in Ad Networks revenue for the year ended December 31, 2009 as compared to the year ended July 31, 2008 was
due to increased revenue from Google primarily due to optimization of our web sites to increase yields from Google. Since we obtain higher prices for direct sales revenue, we allocate our available ad units first to direct sales campaigns and then to ad networks. To the extent that direct sales campaigns decline, we would allocate additional ad units to ad networks, which would increase revenue from ad networks. The decrease in other revenue during the year ended December 31, 2009 as compared to the year ended July 31, 2008 was primarily due to a decrease in revenue from our international resellers.


18


Direct sales revenue for the five months ended December 31, 2008 decreased $0.3 million as compared with the five months ended December 31, 2007. The decrease was primarily due to decreases of $2.5 million in revenue from advertisers whose campaigns were not renewed or who chose not to advertise during the five months ended December 31, 2008, offset in part by an increase of $2.2 million from advertisers who advertised more or who did not participate in campaigns during the five months ended December 31, 2007. The increase in Ad Networks revenue for the five months ended December 31, 2008 as compared to the five months ended December 31, 2007 was due to increased revenue from Google as a result of optimization of our web
sites to increase yields from our Google programs. The increase in Other for the five months ended December 31, 2008 as compared to the five months ended December 31, 2007 was primarily due to an increase in revenue generated by our United Kingdom’s reseller and to a lesser extent to revenue from other resellers.





We expect our Media revenue to increase in the future as we expand our international presence, increase our monetization of international traffic and expand our lead generation and other new programs.





Cost of Revenue/Gross Margin





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)Cost of revenue

$
69,240


$
45,104


$
35,128


$
21,941


$
17,789



54
%


28
%


23
%Gross margin


25,379



20,473



20,198



10,534



10,564



24
%


1
%


0
%Gross margin %


27
%


31
%


37
%


32
%


37
%Headcount


43



40



39



38



34





Gross margin percentage decreased in the year ended December 31, 2010 as compared to the year ended December 31, 2009 and in the year ended December 31, 2009 as compared to the year ended July 31, 2008. The decrease in gross margin percentages was primarily due to our business unit mix as well as declining gross margins in our E-Commerce business. Our E-commerce business has significantly lower gross margins than our Media business. Our E-commerce revenue increased to 81% of total net revenue for the year ended December 31, 2010 from 75% of total net revenue for the year ended December 31, 2009 and 67% of net revenue for the year ended July 31, 2008. The decrease in gross margin percentage in the year ended July 31, 2008 as
compared to the year ended July 31, 2007 was primarily due to our business unit mix as well as to a decrease in our Media gross margin percentage, resulting from the significant increase in Media cost of revenue.





Gross margin percentage decreased for the five months ended December 31, 2008 as compared with the five months ended December 31, 2007, due to the decrease in our E-commerce and Media gross margin percentages, which are discussed further in the next section.





Cost of Revenue/Gross Margin by Segment





E-commerce Cost of Revenue/Gross Margin





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)E-commerce cost of revenue

$
62,630


$
38,151


$
27,860


$
18,374


$
15,179



64
%


37
%


21
%E-commerce gross margin


13,705



10,940



8,960



5,620



5,969



25
%


22
%


(6
)%E-commerce gross margin %


18
%


22
%


24
%


23
%


28
%Headcount


30



25



19



17



14





E-commerce cost of revenue consists of product costs, shipping and fulfillment costs and personnel and related overhead associated with the operations and merchandising functions.





E-commerce gross margin percentage for the year ended December 31, 2010 decreased from the year ended December 31, 2009 due to higher customer discounts as well as increased inbound shipping costs, fulfillment costs and merchandising and customer support costs. The higher customer discounts were due to increased availability of promotion codes to repeat customers and catalog recipients. The increase in E-commerce cost of revenue in absolute dollars in year ended December 31, 2010 as compared to year ended December 31, 2009 was primarily due to increased product costs of $13.5 million, shipping costs of $5.3 million, fulfillment and packing costs of $2.9 million, and merchandising and customer support costs of $2.4 million.
Increases in product costs were the result of increased E-commerce revenue levels, shipping costs were related to the increased volume of orders shipped as well as inefficiencies in the shipping process following our change of third-party contract-fulfillment and warehouse provider, and the increase in fulfillment costs were related to increased number of orders processed and start-up costs related to the new third-party contract-fulfillment and warehouse provider. The increase in merchandising and customer support costs was due primarily to increased personnel required to support our broader product offering and increased volumes as well as costs incurred in moving our inventory to new third-party warehouse provider.





E-commerce gross margin percentage decreased in the year ended December 31, 2009 as compared to the year ended July 31, 2008 primarily due to our investment in our merchandising and operations teams. E-commerce cost of revenue in the year ended December 31, 2009 increased as compared to the year ended July 31, 2008 consistent with increased E-commerce revenue levels; however, our operating costs increased as we added additional headcount to enhance our merchandising team and to support our expected revenue growth.


19


The increase in E-commerce cost of revenue during the five months ended December 31, 2008, as compared to five months ended December 31, 2007 was primarily due to increased product costs, shipping and fulfillment costs and operating costs. These increases were primarily the result of an increase in the number of orders. The decrease in the gross margin percentage was primarily due to lower product gross margins resulting from sales of slower moving inventory at discounted margins and other incentives offered and increased operating expenses, primarily due to additional headcount and related costs to provide customer service and to identify and source new products and to a lesser extent to increases in shipping and
fulfillment costs as a percentage of the reduced average order size.





We expect E-commerce cost of revenue in absolute dollars to increase proportionately with E-commerce revenue.





Media Cost of Revenue/Gross Margin





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)Media cost of revenue

$
6,610


$
6,953


$
7,268


$
3,567


$
2,610



(5
)%


(4
)%


37
%Media gross margin


11,674



9,533



11,238



4,914



4,595



22
%


(15
)%


7
%Media gross margin %


64
%


58
%


61
%


58
%


64
%Headcount


13



15



20



21



20





Media cost of revenue consists of personnel and related overhead, equipment and bandwidth associated with the operation of our data center, personnel costs and related overhead associated with developing the editorial content of our sites and personnel and related overhead and third-party costs associated with delivering revenue producing products. Media cost of revenue includes both costs which do not vary directly with revenue (fixed costs), such as equipment, personnel and editorial costs, as well as costs which are more directly affected by revenue (variable costs), such as bandwidth for delivering content and ad-serving costs. While our fixed costs will generally not vary directly with revenue, they may increase to the
extent that we expand or upgrade the equipment necessary to operate our network or if we add additional sites to our network of web sites. Our variable costs generally vary based on the delivery of web pages, content, the number of advertisements delivered and the size of the advertisement. To the extent that we are able to increase our revenue without increasing our fixed costs, our gross margins will increase; however, to the extent that we purchase equipment in anticipation of increased activity, we may experience decreased gross margins.





The increase in Media gross margin percentage for the fiscal year ended December 31, 2010 as compared to the fiscal year ended December 31, 2009 was primarily due to increased revenue of $2.0 million as well as a decrease in cost of revenue of $0.1 million. The decrease in cost of revenue was primarily due to decreases in software amortization of $0.3 million and reduced facilities related costs of $0.1 million offset in part by an increase in data center co-location costs of $0.3 million. Our software amortization costs decreased due to amortization of our SourceForge.net Marketplace Platform ending in June 2009 as we deprecated the functionality from SourceForge.net. Our facilities related costs decreased due to lower
average headcount during the year. Our data center costs increased due to additional services requested from the service provider.





The decrease in Media gross margin percentage for the year ended December 31, 2009 as compared to the fiscal year ended July 31, 2008 was primarily due to a decrease in Media revenue of $2.0 million, offset slightly by lower cost of revenue of $0.3 million. The decrease in cost of revenue was primarily due to decreases in co-location costs of $0.3 million, headcount and related costs of $0.2 million, and ad serving costs of $0.2 million, offset in part by an increase in depreciation and amortization of equipment and software of $0.4 million. Our co-location costs decreased primarily due to savings resulting from the closure of our data center in Santa Clara, California, upon completion of our relocation to the new data
center near Chicago, Illinois. Our headcount and related costs decreased primarily due a reduction in our ad operations group in the early part of 2009 and our ad serving costs decrease is primarily due to our site redesign, which eliminated a significant number of advertising impressions from our pages. Our depreciation and amortization costs increased due to equipment and related software purchased for our data center and amortization of internally developed software.





The decrease in Media gross margin percentages for the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was primarily driven by increases in depreciation and amortization expense of $0.6 million, personnel related expenses of $0.2 million and co-location expenses of $0.1 million. Depreciation and amortization expense increased due to depreciation of the equipment we purchased for our data center and amortization of internally developed software. Our personnel expenses increased as we added headcount to develop and serve our premium products, which require more effort to produce.





We expect Media cost of revenue to decrease in absolute dollars primarily due to a reduction in depreciation expense related to our data center equipment and consequently, to the extent that revenues remain constant or increase, we expect our Media gross margins will increase.





Operating Expenses





Sales and Marketing Expenses





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





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)E-commerce S&M

$
6,910


$
3,347


$
1,685


$
1,307


$
827



106
%


99
%


58
%Media S&M


8,367



8,428



6,661



3,019



2,446



(1
)%


27
%


23
%Total Sales and Marketing

$
15,277


$
11,775


$
8,346


$
4,326


$
3,273



30
%


41
%


32
%Percentage of total net revenue


16
%


18
%


15
%


13
%


12
%Headcount


35



28



28



32



21





The increase in absolute dollars spent on sales and marketing in the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily due to increases in headcount and related expenses of $1.5 million, marketing expenses of $1.4 million and credit card fees of $0.6 million. The increase in headcount was due to additional personnel in our Media sales and E-Commerce marketing organizations. The increase in discretionary marketing expenses was primarily due to increased E-commerce marketing expenses of $1.8 million, resulting from a $0.9 million increase in on-line search engine marketing, the printing and mailing of our E-commerce catalogs which are now full page catalogs, fees paid to affiliates and
consultants, which were offset in part by lower discretionary Media marketing expenses of $0.4 million, primarily due to fewer trade shows attended in the year ended December 31, 2010. The increase in credit card fees was due to an increase in our E-commerce revenue.


20


The increase in absolute dollars spent on sales and marketing in year ended December 31, 2009 as compared to year ended July 31, 2008 was primarily due to increases in headcount and related expenses of $1.2 million, marketing expenses of $1.6 million and credit card fees of $0.5 million. The increase in headcount and related expense was due to additional personnel in our E-commerce and Media marketing organizations, offset in part by headcount reductions in our Media sales organization, including severance costs of $0.3 million related to the reduction of 7 Media sales and marketing personnel during the fourth quarter of 2009. The increase in discretionary marketing expenses was primarily due to increased E-commerce
marketing expenses of $0.7 million, resulting from discretionary online and direct mail marketing, approximately $0.5 million related to our name branding and the promotion of our Geeknet brand and increased discretionary Media marketing expenses of $0.4 million, including events and trade show attendance. The increase in credit card fees was due to an increase in our E-commerce revenue.





The increase in S&M expenses in the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was primarily due to increases in headcount and related expenses of $0.5 million, marketing expenses of $0.2 million and credit card fees of $0.2 million. The increase in headcount was primarily due to an increase in sales personnel. The increase in marketing expenses was due to printing and mailing of our E-commerce catalog and other discretionary marketing programs and the increase in credit card fees was due to an increase in our E-commerce revenue.





We believe that our sales and marketing expenses in absolute dollars will increase in the future as we increase our revenue, expand our marketing organization and marketing programs and expand our international Media sales force. We do not expect that sales and marketing expenses will change significantly as a percentage of revenue.





Research and Development Expenses





Research and development (“R&D”) expenses consist primarily of personnel and related overhead expenses for software engineers involved in developing our E-commerce and Media web sites. We expense all of our R&D costs as they are incurred; however, costs related to internally developed software, including personnel related expenses, are capitalized.





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)E-commerce R&D

$
1,514


$
869


$
387


$
255


$
147



74
%


125
%


73
%Media R&D


4,634



7,234



3,995



2,273



1,337



(36
)%


81
%


70
%Total Research & Development

$
6,148


$
8,103


$
4,382


$
2,528


$
1,484



(24
)%


85
%


70
%Percentage of total net revenue


6
%


12
%


8
%


8
%


5
%Headcount


24



39



32



35



25





Costs related to the planning and post implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life as charges to cost of revenue. No internal use software costs were capitalized for the years ended December 31, 2010 and December 31, 2009 and the five month period ended December 31, 2008 as the costs incurred in development have not been significant. During the year ended July 31, 2008, we capitalized $0.7 million of software development costs relating to the development of our SourceForge.net Marketplace platform.





R&D expense decreased in absolute dollars in the year ended December 31, 2010 compared to the year ended December 31, 2009 primarily due to a decrease in our Media R&D expenses, offset in part by an increase in our E-Commerce R&D expenses. The decrease in Media expense was primarily due to a decrease of 16 heads and their related overhead expenses of $2.2 million as well as a decrease in contractors‘ expenses of $0.3 million due to expenses incurred during 2009 in the redesign of our SourceForge.net platform, which was released in July 2009. The increase in E-commerce expense was due to increased personnel who were hired to update and add additional functionality to our ThinkGeek.com web site.





The increase in R&D expense in absolute dollars in the year ended December 31, 2009 compared to the year ended July 31, 2008 was due to increases in both our E-commerce and Media R&D expenses. The increase in Media expense was primarily due to increased investment in personnel and related overhead expenses incurred to modernize our web sites and services, and the increase in E-commerce expense was due to increased personnel who were hired to update and add additional functionality for our ThinkGeek.com web site. In 2009 we began modernizing our SourceForge.net and ThinkGeek.com web sites.





R&D expense increased by $1.0 million in absolute dollars in the five months ended December 31, 2008, as compared to the five months ended December 31, 2007. Media accounted for the majority of the increase including $0.3 million due to increased headcount related costs. Additionally, during the five months ended December 31, 2007, certain development efforts of $0.6 million qualified for capitalization as development phase costs related to internally-developed software. Our E-commerce R&D expense increased due to increases in headcount to further develop the web sites and their capabilities.





We expect that R&D expenses may decline slightly in absolute dollars and may also decline as a percentage of revenue in the future.





General and Administrative Expenses





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





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)General & Administrative

$
9,551


$
8,843


$
11,126


$
3,780


$
3,773



8
%


(21
)%


0
%Percentage of total net revenue


10
%


13
%


20
%


12
%


13
%Headcount


20



20



21



19



19


21


The increase in G&A expenses in absolute dollars in the year ended December 31, 2010 as compared to the year ended December 31, 2009 was primarily related to severance costs of $1.0 million and legal fees of $0.3 million, partially offset by decreases in employee related expenses of $0.3 million, accounting and tax fees of $0.1 million, consulting expenses of $0.1 million and bad debt expenses of $0.1 million. The increase in severance costs was due to the resignation of our former Chief Executive Officer and severance expense recorded for our corporate team in Mountain View, California as a result of the planned relocation of our corporate headquarters to Fairfax, Virginia. The decrease in employee related expenses was
due to lower compensation expense resulting from our reduction in August 2010 and lower stock compensation expense. The decrease in G&A expense as a percentage of net revenue was primarily due to the significant increase in revenues.





The decrease in G&A expenses in absolute dollars in year ended December 31, 2009 as compared to year ended July 31, 2008 was primarily related to decreases in personnel related expenses of $1.9 million, legal related expenses of $0.3 million, insurance of $0.1 million and annual meeting expenses of $0.1 million, offset in part by increases in accounting and tax expenses of $0.2 million. Our decrease in personnel related expenses was primarily due to decreases in stock-based compensation expense of $1.2 million and severance costs of $0.7 million, related to the resignation of our former Chief Executive Officer in the prior year. The decrease in G&A expense as a percentage of net revenue was also due to the decrease
in G&A expenses. Our decrease in legal related expenses was primarily due to the resolution of the Okerman legal matter in the prior year. Our decrease in annual meeting expenses and increase in accounting and tax expenses resulted primarily from the change in our fiscal year to December 31.





General and administrative expenses did not change significantly during the five months ended December 31, 2008 as compared to the five months ended December 31, 2007. During the five months ended December 31, 2008, increases in recruiting expenses of $0.2 million were offset by reductions in bad debt expenses of $0.1 million and facilities related expenses of $0.1 million. The increase in recruiting expenses was due to recruiting fees for our new chief executive officer and the decrease in facilities fees is due to expenses related to the relocation of our corporate headquarters incurred during the five months ended December 31, 2007.





We do not expect G&A expenses to change significantly from 2009 levels in absolute dollars, and we also expect G&A expenses to decrease as a percentage of revenue in the future.





Restructuring Costs





In October 2007, we relocated our corporate headquarters to Mountain View, California. During fiscal year 2008, which ended on July 31, 2008 under our prior fiscal calendar, we recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at our former corporate headquarters located in Fremont, California. In conjunction with the sale of our Software business in April 2007, we accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of our Software business, which was included in the gain on disposal of discontinued operations. In fiscal 2001 and 2002, we adopted plans to exit our hardware systems and hardware-related software
engineering and professional services businesses, as well as exit a sublease agreement and to reduce our general and administrative overhead costs. At December 31, 2010 all restructuring liabilities have been settled and no restructuring liabilities remain.





Below is a summary of the restructuring charges (in thousands):





Year Ended


Five Months EndedDecember 31,


July 31,


December 31,2010


2009


2008


2008


2007Cash provision:













(unaudited)Facilities charges

$
(27
)

$
(62
)

$
2,057


$
-


$
1,414Cash proceeds from sales of furniture


(74
)


-



-



-



-Non-cash:Write-off of equipment and leasehold improvements


-



-



122



-



-$
(101
)

$
(62
)

$
2,179


$
-


$
1,414





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




Balance at

Beginning

of Period


Restructuring

Charges


Cash

payments


Other


Balance at

End of

PeriodFor the year ended July 31, 2008

$
5,048


$
2,179


$
(2,585
)

$
590


$
5,232For the five months ended December 31, 2008

$
5,232


$
-


$
(1,163
)

$
47


$
4,116For the year ended December 31, 2009

$
4,116


$
(62
)

$
(2,881
)

$
65


$
1,238For the year ended December 31, 2010

$
1,238


$
(101
)

$
(1,141
)

$
4


$
-





Other represents the reclassification of excess of straight-line rent expense over the cash payments to the restructuring reserve of $0.7 million, offset in part by the write-off of leasehold improvements of $0.1 million.





Share-Based Compensation Expense





During the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, we recognized $2.3 million, $2.7 million, $1.2 million and $3.6 million in stock-based compensation expense from continuing operations, respectively, related to options and awards granted to employees and directors. The decrease in stock based compensation in the year ended December 31, 2010 as compared with the year ended December 31, 2009 is primarily due to the completion of our recognition of stock based compensation expense related to a significant pool of stock options granted in prior years. The decrease in stock-based compensation in the year ended December 31, 2009 as compared
with the year ended July 31, 2008 is due to approximately $1.0 million of expense related to the modifications in the terms of stock option and awards granted to our former CEO as well as the impact of a change in our forfeiture rate assumption.


22


Related Party Transactions





We own approximately 9% of the outstanding capital stock of CollabNet, Inc. (“CollabNet”), which is recorded at $2.0 million. Our holdings in CollabNet consist of shares of CollabNet’s Series C-1 preferred stock. As we hold less than 20% of the voting stock of CollabNet and do not otherwise exercise significant influence over CollabNet, this investment is accounted for under the cost method. CollabNet is a developer of software used in collaborative software development.





We continually evaluate whether events or circumstances have occurred that indicate the remaining value of our investment may be impaired. For the years ended December 31, 2010 and July 31, 2008, no impairment was recorded on our investment. During the year ended December 31, 2009, we recorded an impairment loss of $4.6 million related to our investment in CollabNet. There is no quoted market price for this investment; accordingly, we estimate fair value is estimated based on an annual appraisal performed by a third party valuation firm.





There was no related-party revenue from CollabNet for the year ended December 31, 2010. There were $0.5 million and $0.9 million of related-party revenue associated with CollabNet for the years ended December 31, 2009 and July 31, 2008, respectively. There were $0.3 million and $0.4 million of related-party revenue associated with CollabNet for the five month period ended December 31, 2008 and December 31, 2007, respectively.





(Gain) loss on sale of assets




Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,

December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)(Gain) loss on sale of assets

$
(1,391
)

$
1,020


$
8


$
-



-



(236
)%


*



*


* – Not meaningful





The gain on sale of assets for the year ended December 31, 2010 was primarily due to a gain on the sale of our Ohloh.net intangible assets in September 2010. The loss on sale of assets for the year ended December 31, 2009 was due to our deprecation of the Marketplace platform from the SourceForge.net platform





Interest and Other Income, Net





Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year 2010 to


Year 2009 to


Five Months2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to 2007($ in thousands)













(unaudited)Interest Income

$
63


$
165


$
2,250


$
231


$
1,224



(62
)%


(93
)%


(81
)%Interest Expense


(5
)


(65
)


(190
)


(47
)


(77
)


(92
)%


(66
)%


(39
)%Other income (expense), net


(14
)


10



(430
)


1,169



(4
)


(240
)%


(102
)%


*Interest and other income (expense), net

$
44


$
110


$
1,630


$
1,353


$
1,143Other than temporary impairmentof non-marketable equity securities

$
-


$
(4,585
)

$
-


$
-


$
-



*



*



*





* – Not meaningful





Interest income decreased in the year ended December 31, 2010 as compared to the year ended December 31, 2009 as a result of reduced yields on our investments resulting from lower interest rates and our decision to invest in short-term treasuries, which generally have lower yields. Interest expense decreased in the year ended December 31, 2010 as compared to the year ended December 31, 2009 as a result of interest expense on a legal settlement which was paid in 2008. Other income (expense) decreased in the December 31, 2010 as compared to the year ended December 31, 2009, primarily due to realized losses on investments.





Interest income decreased in the year ended December 31, 2009 as compared to the year ended July 31, 2008 as a result of significantly reduced yields on our investments resulting from lower interest rates and our decision to invest in short-term treasuries, which generally have lower yields. Interest expense decreased in the year ended December 31, 2009 as compared to the year ended July 31, 2008 as a result of interest expense on a legal settlement which was paid in 2008. The other-than-temporary impairment of non-marketable equity securities relates to our investment in CollabNet. In March 2009, we determined an impairment indicator existed for this investment and as a result we performed a fair value analysis of this
investment. In determining whether a decline in value of our investment in CollabNet had occurred and was other than temporary, we considered available evidence, including the general market conditions, CollabNet’s financial condition, near-term prospects, market comparables and future financing requirements. The valuation also takes into account CollabNet’s capital structure, liquidation preferences for its capital and other economic variables, which require management’s judgment to evaluate. Based on the results, we determined that the estimated fair value of our investment in CollabNet was $2.0 million and accordingly, we recognized an other-than-temporary impairment charge of $4.6 million. The loss on disposal of asset is due to our deprecation of the Marketplace platform from the SourceForge.net platform.





The decrease in interest income for the five months ended December 31, 2008, as compared to the five months ended December 31, 2007, was due to reduced yields on our investments resulting from lower interest rates and our decision to invest in short-term treasuries, which generally have lower yields. Interest expense for the five months ended December 31, 2008, results from accretion of our accrued restructuring charge, while interest expense for the five months ended December 31, 2007 was primarily due to interest expense on a legal settlement which was paid in January 2008. The increase in other income for the five months ended December 31, 2008 was primarily due to the $0.6 million impact resulting from our fair value
accounting for certain of our financial assets and a $0.5 million gain on the sale of our investment in VA Linux Systems Japan, K.K. (“VA Japan”). The effect of our fair value accounting is a result of our recording the fair value of the right to sell our auction-rate securities to UBS at par value. The gain on the sale of our investment is the result of our sale of our investment in VA Linux Japan K.K. for $0.9 million in December 2008.


23




Income Taxes


Year Ended


Five Months Ended


% Change


% Change


% ChangeDecember 31,


July 31,


December 31,


Year2010 to


Year 2009to


FiveMonths2010


2009


2008


2008


2007


2009


Fiscal 2008


2008 to2007($ in thousands)

(unaudited)Provision (benefit) for income taxes

$
(167
)

$
140


$
128


$
173


$
219



(219
)%


9
%


(21
)%
  Income tax provision consists of Federal and state income tax expense on taxable income.  Our state income tax is based on our taxable income or loss in each jurisdiction and we may not have net operating loss carryforwards available to offset taxable income in certain states.  We provide for state income taxes in the New Jersey state jurisdiction based on our E-commerce income in that state, and to the extent that our E-commerce business unit is profitable, we may record an income tax provision, even though we generate losses on a consolidated basis.  Our tax benefit for the year ended December 31, 2010 relates primarily to a Federal tax refund due to our ability to carry back certain losses
to a prior year and to a state tax benefit resulting from a change in the apportionment factors related to our New Jersey state returns.
 
 As of December 31, 2010, we had $277.7 million of federal net operating loss carry-forwards available to offset future federal taxable income, which expire at various dates through 2030.  Approximately $23.2 million of federal net operating losses usage is limited pursuant to section 382 of the Internal Revenue Code due to certain changes in our ownership which occurred between 1996 and 1999, and a change in ownership resulting from our June 2000 acquisition of Andover.net. We also have California net operating loss carryforwards of approximately $77.2 million to offset future California taxable income, which expire at various dates beginning in 2017.  We have not recognized any benefit from these net
operating loss carry-forwards because a valuation allowance has been recorded for the total deferred tax assets as a result of uncertainties regarding realization of the assets based on our limited history of profitability and the uncertainty of future profitability.
 
 Liquidity and Capital Resources
 
 Year Ended


Five Months EndedDecember 31,


July 31,


December 31,2010


2009


2008


2008


2007($ in thousands)













(unaudited)Net cash provided by (used in):Continuing operationsOperating activities

$
(2,937
)

$
(5,727
)

$
866


$
1,935


$
5,360Investing activities


6,934



(2,905
)


32,727



20



11,322Financing activities


1,805



(2,936
)


(138
)


(3,348
)


(52
)Discontinued operations


592



-



92



-



50Effect of exchange rate changes on cash and cash equivalents


(4
)


-



-



-



-Net increase (decrease) in cash and cash equivalents

$
6,390


$
(11,568
)

$
33,547


$
(1,393
)

$
16,680
  Our principal sources of cash as of December 31, 2010 were our existing cash, cash equivalents and investments of $35.3 million.
 
 During the year ended December 31, 2010, we used $2.9 million of cash for operating activities, $4.3 million of cash for purchases of property, equipment and intangible assets and $1.0 million of cash for an acquisition, partially offset by the proceeds from the sale of auction rate securities of $10.2 million, the release of restricted cash of $1.0 million, proceeds from the sale of Geek.com and Ohloh intangible assets of $1.7 million and proceeds from the issuance of common stock upon the exercise of stock options, net of repurchases, of $1.8 million.
 
 During the year ended December 31, 2009, we used $5.7 million of cash for operating activities, $2.6 million of cash for an acquisition, $3.2 million of cash for the repurchase of common stock and $1.0 million of cash for purchases of property and equipment, partially offset by maturities of marketable securities of $0.7 million and proceeds from the sale of Linux.com of $0.2 millionresulting in an overall decrease in cash and investments of $11.6 million.
 
 Our net cash generated from continuing operations during the year ended July 31, 2008 was $0.9 million. We also generated cash from net sales of securities of $36.5 million during the year ended July 31, 2008 and through the collection of accounts receivable from discontinued operations in the amount of $0.09 million.  These cash proceeds were offset by purchases of property and equipment of $3.8 million and repurchases of common stock of $0.2 million resulting in an overall increase in cash and investments of $33.5 million for the year ended July 31, 2008.
 
 Net cash from operating activities was $1.9 million for the five months ended December 31, 2008.  Net cash provided by operating activities was primarily due to net income of $1.1 million, increased by non-cash stock-based compensation of $1.2 million and depreciation expenses of $1.0 million, offset by a non-cash gain on sale of our investment in VA Japan of $0.5 million and change in fair value of financial assets of $0.6 million, related to our right to require our investment manager to purchase certain investments.  Additionally, changes in operating assets and liabilities had a negligible offsetting effect to operating cash flows.
 
 Net cash provided by operating activities of $5.4 million for the five months ended December 31, 2007 was primarily due to net income of $1.5 million, non-cash restructuring charges of $1.4 million, stock-based compensation of $0.9 million and depreciation expenses of $0.4 million, resulting from network equipment purchased for our new data center, and a decrease in accounts receivable of $1.5 million, partially offset by increases in inventory of $1.4 million and decreases in accrued liabilities and other long-term liabilities of $1.3 million.  The decrease in accounts receivable was primarily the result of improved collection efforts.  The increase in inventory was due to our E-commerce
business’s higher product sales and efforts to sell inventory during their holiday season and the decreases in accrued liabilities and other long-term liabilities are primarily related to the reclassification of $1.0 million of accrued rent related to our Fremont, California facility to restructuring reserve.
 
 Operating Activities
 
 Year ended December 31, 2010
 
 Net cash used in operating activities was $2.9 million for the year ended December 31, 2010. Net cash used in operating activities was primarily due to our net operating loss from continuing operations of $0.6 million after the effects of non-cash charges of stock-based compensation expense of $2.3 million, depreciation and amortization expense of $2.3 million, return for allowance of $0.4 million, and gain on sale of assets of $1.4 million. Additionally, changes in operating assets and liabilities included cash used for accrued liabilities of $0.6 million, accrued restructuring liabilities of $1.2 million, increases in inventory of $8.1 million and accounts receivable of $0.8 million, offset in part by cash provided by
increases in accounts payable of $7.2 million, prepaid expenses and other assets of $0.4 million and deferred revenue of $0.9 million.
 
 24
 The cash provided by accounts payable is the result of higher levels of inventory received and higher marketing expenses in the fourth quarter of fiscal year ended December 31, 2010. The cash used for accounts receivable is primarily due to higher Media revenue during the last three months of 2010; the cash used for inventory is primarily the result of higher inventory levels as we broaden our product range and we maintain higher inventory levels as we expand our inventory sources outside of the United States which require longer lead times; and the cash used for restructuring liabilities is due to cash payments on facilities included in the restructuring reserve.
 
 Year ended December 31, 2009
 
 Net cash used in operating activities was $5.7 million for the year ended December 31, 2009.  Net cash used in operating activities was primarily due to our net operating loss of $3.3 million after the effects of non-cash charges, including an impairment charge of $4.6 million, stock-based compensation expense of $2.7 million, depreciation and amortization expense of $2.2 million, return for allowance of $0.3 million, a loss on disposal of assets of $1.2 million, related to the depreciation of the Marketplace platform from the SourceForge.net platform and a gain on our sale of the Linux.com domain name to The Linux Foundation of $0.2 million.  Additionally, changes in operating assets and liabilities
included cash used for accrued restructuring liabilities of $2.8 million, increases in inventory of 2.0 million and increases in prepaid expenses and other assets of $0.5 million, offset partially by cash provided by accounts payable and accrued liabilities of $2.6 million and an increase in deferred revenue of $0.3 million.  The increase in inventory due to purchases of inventory by our E-commerce business in order to provide adequate inventory levels for anticipated demand, and the increase in prepaid and other assets are primarily related to inventory prepayments to vendors.
 
 Year ended July 31, 2008
 
 Net cash provided by operating activities of $0.9 million for the year ended July 31, 2008 was primarily due to loss from continuing operations of $4.3 million offset by non-cash stock-based compensation expense of $3.6 million, restructuring expenses of $2.2 million, depreciation and amortization expense of $1.5 million and loss on disposal of investment of $0.4 million as well as cash provided by accounts receivable of $0.7 million, prepaid expenses and other assets of $0.5 million and accounts payable of $0.4 million.  This was partially offset by an increase in inventory of $1.0 million and decreases in accrued restructuring of $1.9 million and accrued and long-term liabilities of $1.4 million.
 
 The cash provided by accounts receivable is primarily due to better collection efforts and increased revenue in our Media business and the cash provided by prepaid expenses is due to reduced accrued interest balances resulting from the change in our investment portfolio to treasury bills and also reflects the reclassification of prepaid sublease rental income to the restructuring reserve.  The cash used for inventory is primarily due to increased inventory levels to support increases in our E-commerce revenue and for higher levels of those products with long-lead times.  The change in accrued restructuring includes $0.6 million of non-cash increase related to the reclassification of excess of
straight-line rent expense over the cash payments as well as cash payments on our former corporate headquarters located in Fremont, California.  The cash used for accrued and long-term liabilities is due to lower accrued liability balances and also reflects the reclassification of $1.0 million of accrued rent expense to the restructuring reserve.
 
 Five months ended December 31, 2008
 
 Net cash from operating activities was $1.9 million for the five months ended December 31, 2008.  Net cash provided by operating activities was primarily due to net income of $1.1 million, increased by non-cash stock-based compensation of $1.2 million and depreciation expenses of $1.0 million, offset by a non-cash gain on sale of our investment in VA Linux Systems Japan, K.K. of $0.5 million and change in fair value of financial assets of $0.6 million, related to our right to require our investment manager to purchase certain investments.  Additionally, changes in operating assets and liabilities had a negligible offsetting effect to operating cash flows.
 
 Five months ended December 31, 2007
 
 Net cash provided by operating activities of $5.4 million for the five months ended December 31, 2007 was primarily due to net income of $1.5 million, non-cash restructuring charges of $1.4 million, stock-based compensation of $0.9 million and depreciation expenses of $0.4 million, resulting from network equipment purchased for our new data center, and a decrease in accounts receivable of $1.5 million, partially offset by increases in inventory of $1.4 million and decreases in accrued liabilities and other long-term liabilities of $1.3 million.  The decrease in accounts receivable was primarily the result of improved collection efforts.  The increase in inventory was due to our E-commerce
business’s higher product sales and efforts to sell inventory during their holiday season and the decreases in accrued liabilities and other long-term liabilities are primarily related to the reclassification of $1.0 million of accrued rent related to our Fremont, California facility to restructuring reserve.
 
 We expect to utilize cash to fund investments in our business, working capital requirements for our business growth and to pay off our remaining lease obligations for our Fremont, California facility.
 
 Investing Activities
 
 Our investing activities primarily include purchases of property and equipment and purchases and sales of marketable securities.
 
 Cash provided by investing activities for the year ended December 31, 2010 is due to the sale of $10.2 million of auction rate securities to UBS AG (“UBS”),  a $1.0 million reduction in restricted cash resulting from the conclusion of our former corporate headquarter lease in Fremont, California and the proceeds from the sale of the Ohloh tangible and intangible assets of $1.0 million, offset in part by $4.2 million for the purchase of property and equipment, primarily payments for distribution equipment installed at our third-party contract-fulfillment and warehouse provider and $1.0 million for the acquisition of Geek.com.
 
 Cash usage for the year ended December 31, 2009 included $2.6 million for the acquisition of Ohloh and $1.0 million for the purchase of property and equipment, offset in part by maturities of marketable securities of $0.7 million.
 
 Cash usage related to purchases of property and equipment for the year ended July 31, 2008 of $3.8 million was primarily due to software and equipment purchased for our new data center of $2.7 million and internally developed software of $0.7 million and to a lesser extent additional leasehold improvements for our corporate facilities in Mountain View, California.
 
 Cash usage related to purchases of property and equipment for the five months ended December 31, 2008 was primarily due to purchase of property and equipment of $0.9 million, for our data center.  We also generated proceeds of $0.9 million from the sale of our investment in VA Linux Systems Japan, K.K.
 
 25
 Cash usage related to property and equipment purchases of $2.1 million for the five months ended December 31, 2007 was primarily due to the purchase of $1.4 million of equipment, internally developed software of $0.6 million and to a lesser extent leasehold improvement purchases.  The purchase of equipment was primarily related to equipment purchases for our data center and to a lesser extent to leasehold improvements related to the relocation of our corporate headquarters to Mountain View.  We also generated net proceeds of $13.4 million from the sale of marketable securities investments which were converted to cash and cash equivalents.
 
 Financing Activities
 
 Our financing activities are primarily comprised of cash proceeds from the sale of our common stock through employee benefit plans.
 
 Our financing activities during the year ended December 31, 2009 and the five months ended December 31, 2008, included cash of $3.0 million and $3.2 million, respectively, used to repurchase shares of our common stock under the repurchase program approved by our Board of Directors in November 2008, offset in part by proceeds from the sale of our common stock through equity incentive plans.  The stock repurchase program expired in October 2009.
 
 For the years ended December 31, 2010, December 31, 2009 and July 31, 2008, respectively, exchange rate changes had an immaterial effect on cash and cash equivalents.  We do not expect that exchange rate changes will have a material effect on cash and cash equivalents in the near future.
 
 As of December 31, 2009, we had an outstanding letter of credit of approximately $1.0 million, related to the Fremont, California facility lease, which was recorded in the “Restricted cash” section of the consolidated balance sheet.  At the conclusion of the facility lease in May 2010, the letter of credit was cancelled and the cash restriction was removed.
 
 Liquidity
 
 Our liquidity and capital requirements depend on numerous factors, including our investment in inventory to support the E-commerce business, market acceptance of our online products, the resources we devote to developing, marketing, selling and supporting our online products, the timing and expense associated with expanding our distribution channels, potential acquisitions and other factors.
 
 We expect to devote capital resources to continue our research and development efforts, to invest in our sales, support, marketing and product development organizations, to enhance and introduce marketing programs, to invest in capital projects to continue to support our operations, distribution and related support systems and infrastructure, and for other general corporate activities and investments.  We believe that our existing cash balances will be sufficient to fund our operations through the year ending December 31, 2011 under our current business strategy.
 
 Stock Repurchase Program
 
 In February 2011, we announced an "odd lot" share repurchase program under which our Board of Directors approved the repurchase of up to $1 million of our common stock through March 18, 2011.
 
 Contractual Obligations
 
 The contractual obligations presented in the table below represent our estimates of future payments under fixed contractual obligations, purchase orders (primarily for our E-commerce inventory) and commitments. Changes in our business needs, cancellation provisions and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. The following table summarizes our fixed contractual obligations and commitments as of December 31, 2010 (in thousands):
 
 Years ending December 31,Total


2011


2012 and

2013


2014 and

2015Gross Operating Lease Obligations

$
2,785


$
1,224


$
1,347


$
214Sublease Income


(1,593
)


(822
)


(771
)


-Net Operating Lease Obligations


1,192



402



576



214Purchase Obligations


12,050



12,050



-



-Total Obligations

$
13,242


$
12,452


$
576


$
214
 
 Sublease income represents payments expected to be received from our subtenants.  As of December 31, 2010, our facility in Mountain View, California is sublet through the remainder of the lease term.
 
 Financial Risk Management
 
 As a primarily U.S.-centric company, we face limited exposure to adverse movements in foreign currency exchange rates and we do not engage in hedging activity.  We do not anticipate significant currency gains or losses in the near term.  These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.
 
 We maintain investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale or trading. These securities are not leveraged.
 
 Recent Accounting Pronouncements
 
 In December 2010, the FASB issued Accounting Standards Update No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350)—Intangibles—Goodwill and Other (ASU 2010-28). ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This standard is effective for 2011. We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.
 
 26
 In September 2009, the FASB issued a new standard which updates the existing multiple-element revenue arrangements guidance. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This guidance will be effective for us in the first quarter of 2011. We do not believe that the adoption of this new accounting update will have a significant impact on our
consolidated financial statements.
 
 In August 2009, the FASB provided further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This standard was adopted in 2009. The adoption of this standard did not have an impact on our consolidated financial statements.
 
 In June 2009, the FASB issued a new standard which requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This standard is effective for 2011. We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements.
 
 In January 2010, the FASB issued a new standard, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. This standard is effective for our 2010 calendar year reporting, except for Level 3 reconciliation disclosures which are effective for our 2011 calendar year reporting. We do not expect that the adoption of this standard will have a material impact on our consolidated financial
statements.
 
 Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
 The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk.  Some of the securities that we have invested in may be subject to market risk.  This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate.
 
 We have operated primarily in the United States, and virtually all sales have been made in U.S. dollars.  Accordingly, we have not had any material exposure to foreign currency rate fluctuations.
 
 The estimated fair value of our cash, cash equivalents and investments approximate carrying value.  We do not currently hold any derivative instruments and do not engage in hedging activities.
  27
  Item 8.  Financial Statements and Supplementary Data
 
 TABLE OF CONTENTS
 
 PageReport of KPMG LLP, Independent Registered Public Accounting Firm

29Report of Stonefield Josephson, Inc. Independent Registered Public Accounting Firm

30Consolidated Balance Sheets

31Consolidated Statements of Operations

32Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)

33Consolidated Statements of Cash Flows

34Notes to Consolidated Financial Statements

35Schedule II – Valuation and Qualifying Accounts

55
 
 All other schedules are omitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto.
  28
  REPORT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 The Board of Directors and Stockholders
 Geeknet, Inc.:
 
 We have audited the accompanying consolidated balance sheet of Geeknet, Inc. and subsidiaries (the Company) as of December 31, 2010, and the related consolidated statements of operations, stockholders’ equity and other comprehensive income (loss) and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited financial statement schedule II as listed under Item 15 for the year ended December 31, 2010. We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audit.
 
 We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
 
 A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Geeknet, Inc. and subsidiaries as of December 31, 2010, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule for the year ended December 31, 2010, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, Geeknet, Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
 /s/ KPMG LLP
 
 Mountain View, California
 February 24, 2011
  29
  REPORT OF STONEFIELD JOSEPHSON, INC. INDEPENDENT REGISTERED
 PUBLIC ACCOUNTING FIRM
 
 To The Board of Directors and Stockholders of Geeknet, Inc.:
 
 We have audited the accompanying consolidated balance sheets of Geeknet, Inc. (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for the year ended December 31, 2009, five months ended December 31, 2008 and the year ended July 31, 2008.  Our audit also included the financial statement schedule listed in the Index at Item 15.The Company is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and schedule are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements and schedule include examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedule, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall consolidated financial statements and schedule presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Geeknet, Inc. as of December 31, 2009, and the results of its operations and its cash flows for the year ended December 31, 2009, five months ended December 31, 2008 and the year ended July 31, 2008, in conformity with accounting principles generally accepted in the United States.In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
  /s/ Stonefield Josephson, Inc.
 
 San Francisco, California
 February 25, 2010
  30
  GEEKNET, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except per share information)
 
 December 31,


December 31,2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
35,333


$
28,943Short-term investments


8



9,408Accounts receivable, net of allowance of $0 and $0, respectively


5,078



4,299Inventories, net


13,322



5,280Prepaid expenses and other current assets


2,919



3,564Restricted cash


-



1,000Total current assets


56,660



52,494Property and equipment, net


5,114



2,569Other long-term assets


4,983



5,088Total assets

$
66,757


$
60,151LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Accounts payable

$
13,381


$
5,763Deferred revenue


1,836



928Accrued liabilities and other


3,591



3,854Accrued restructuring liabilities


-



1,238Total current liabilities


18,808



11,783Other long-term liabilities


77



103Total liabilities


18,885



11,886Commitments and contingencies (Note 5)Stockholders’ equity:Preferred stock, $0.001 par value; 1,000 shares authorized; no shares issued or outstanding


-



-Common stock, $0.001 par value; authorized — 25,000;  issued- 6,365 and 6,135 shares, respectively; outstanding — 6,273 and 6,052 shares, respectively


6



61Treasury stock


(622
)


(492
)Additional paid-in capital


803,160



798,917Accumulated other comprehensive income


10



13Accumulated deficit


(754,682
)


(750,234
)Total stockholders’ equity


47,872



48,265Total liabilities and stockholders’ equity

$
66,757


$
60,151
  The accompanying notes are an integral part of these consolidated financial statements.
  31
  GEEKNET, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 
 Year Ended


Five Months Ended


Year EndedDecember 31,


December 31,


July 31,2010


2009


2008


2008Net revenue:E-commerce revenue

$
76,335


$
49,091


$
23,994


$
36,820Media revenue, including $0, $545, $311 and $890 of related party revenue, respectively


18,284



16,486



8,481



18,506Total net revenue


94,619



65,577



32,475



55,326Cost of revenue:E-commerce cost of revenue


62,630



38,151



18,374



27,860Media cost of revenue


6,610



6,953



3,567



7,268Total cost of revenue


69,240



45,104



21,941



35,128Gross margin


25,379



20,473



10,534



20,198Operating expenses:Sales and marketing


15,277



11,775



4,326



8,346Research and development


6,148



8,103



2,528



4,382General and administrative


9,551



8,843



3,780



11,126Amortization of intangible assets


306



200



-



1(Gain) loss on sale of assets


(1,391
)


1,020



-



(8
)Restructuring costs


(101
)


(62
)


-



2,179Total operating expenses


29,790



29,879



10,634



26,026Loss from operations


(4,411
)


(9,406
)


(100
)


(5,828
)Interest and other income (expense), net


44



110



1,353



1,630Other than temporary impairmentof non-marketable equity securities


-



(4,585
)


-



-Income (loss) from continuing operations before income taxes


(4,367
)


(13,881
)


1,253



(4,198
)Provision (benefit) for income taxes


(167
)


140



173



128Income (loss) from continuing operations


(4,200
)


(14,021
)


1,080



(4,326
)Discontinued operations:Loss from operations, net of taxes


(193
)


-



-



-Loss on sale, net of taxes


(55
)


-



-



-Loss from discontinued operations


(248
)


-



-



-Net income (loss)

$
(4,448
)

$
(14,021
)

$
1,080


$
(4,326
)Income (loss) per share from continuing operations:Basic

$
(0.69
)

$
(2.31
)

$
0.16


$
(0.64
)Diluted

$
(0.69
)

$
(2.31
)

$
0.16


$
(0.64
)Loss per share from discontinued operations:Basic

$
(0.04
)

$
-


$
-


$
-Diluted

$
(0.04
)

$
-


$
-


$
-Net income (loss) per share:Basic

$
(0.73
)

$
(2.31
)

$
0.16


$
(0.64
)Diluted

$
(0.73
)

$
(2.31
)

$
0.16


$
(0.64
)Shares used in per share calculations:Basic


6,073



6,080



6,653



6,747Diluted


6,073



6,080



6,665



6,747
  The accompanying notes are an integral part of these consolidated financial statements.
  32
 
 GEEKNET, INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND OTHER COMPREHENSIVE INCOME (LOSS)
 (In thousands)
 
 AccumulatedAdditional


Other





TotalCommon Stock


Treasury


Paid-in


Comprehensive


Accumulated


Stockholders'Shares


Amount


Stock


Capital


Income (Loss)


Deficit


EquityBALANCE AT JULY 31, 2007


6,867



69



(4
)


797,422



(26
)


(732,367
)


65,094Issuance of common stock


61



-



-



51



-



-



51Repurchase of restricted stock


(38
)


-



(189
)


-



-



-



(189
)Stock based compensation


-



-



-



3,593



-



-



3,593Net loss


-



-



-



-



-



(4,326
)


(4,326
)Unrealized loss on marketable securities


-



-



-



-



(571
)


-



(571
)Comprehensive loss


























(4,897
)BALANCE AT JULY 31, 2008


6,890


$
69


$
(193
)

$
801,066


$
(597
)

$
(736,693
)

$
63,652Issuance of common stock


9



-



-



-



-



-



-Repurchase of restricted stock


(30
)


-



(138
)


-



-



-



(138
)Repurchase of common stock


(452
)


(4
)


-



(3,206
)


-



-



(3,210
)Stock based compensation


-



-



-



1,177



-



-



1,177Cummulative effect of adoption of new accounting principle


-



-



-



-



600



(600
)


-Net income


-



-



-



-



-



1,080



1,080Unrealized gain on marketable securities


-



-



-



-



6



-



6Comprehensive lncome


























1,086BALANCE AT DECEMBER 31, 2008


6,417


$
65


$
(331
)

$
799,037


$
9


$
(736,213
)

$
62,567Issuance of common stock


25



-



-



259



-



-



259Repurchase of restricted stock


(20
)


-



(161
)


-



-



-



(161
)Repurchase of common stock


(370
)


(4
)


-



(3,030
)


-



-



(3,034
)Stock based compensation


-



-



-



2,651



-



-



2,651Net loss


-



-



-



-



-



(14,021
)


(14,021
)Unrealized gain on marketable securities


-



-



-



-



4



-



4Comprehensive loss


























(14,017
)BALANCE AT DECEMBER 31, 2009


6,052


$
61


$
(492
)

$
798,917


$
13


$
(750,234
)

$
48,265Issuance of common stock


231



1



-



1,961



-



-



1,962Repurchase of restricted stock


(9
)


-



(130
)


-



-



-



(130
)Repurchase of fractional shares


(1
)


-



-



(27
)


-



-



(27
)Par value change resulting from reverse stock split


-



(56
)


-



56



-



-



-Stock based compensation


-



-



-



2,253



-



-



2,253Net loss


-



-



-



-



-



(4,448
)


(4,448
)Foreign currency translation adjustment


-



-



-



-



(3
)


-



(3
)Comprehensive loss


























(4,451
)BALANCE AT DECEMBER 31, 2010


6,273


$
6


$
(622
)

$
803,160


$
10


$
(754,682
)

$
47,872
 
 The accompanying notes are an integral part of these consolidated financial statements.
  33
  GEEKNET, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 
 Year Ended


Five Months Ended


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008Cash flows from operating activities from continuing operations:Net income (loss)

$
(4,448
)

$
(14,021
)

$
1,080


$
(4,326
)Loss from discontinued operations


248



-



-



-Income (loss) from continuing operations


(4,200
)


(14,021
)


1,080



(4,326
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


2,277



2,157



960



1,481Stock-based compensation expense


2,253



2,651



1,177



3,593Provision for bad debts


-



46



(52
)


154Provision for excess and obsolete inventory


42



17



(77
)


43Provision for returns


350



258



167



-(Gain) Loss on sale of assets


(1,391
)


1,020



-



8(Gain) Loss on sale of investments


-



-



(548
)


413Change in fair value of financial assets


-



-



(600
)


-Impairment of investments


-



4,585



-



-Changes in assets and liabilities:Accounts receivable


(779
)


78



47



742Inventories


(8,084
)


(2,033
)


(202
)


(976
)Prepaid expenses and other assets


361



(471
)


(568
)


497Accounts payable


7,209



1,735



1,238



435Deferred revenue


908



337



6



(148
)Accrued restructuring liabilities


(1,238
)


(2,878
)


(1,116
)


309Accrued liabilities and other


(619
)


858



420



(671
)Other long-term liabilities


(26
)


(66
)


3



(688
)Net cash provided by (used in) operating activities from continuing operations


(2,937
)


(5,727
)


1,935



866Cash flows from investing activities from continuing operations:Change in restricted cash


1,000



-



-



-Purchase of property and equipment


(4,191
)


(1,001
)


(907
)


(3,774
)Purchase of marketable securities


-



-



(8
)


(40,885
)Maturities or sales of investments and marketable securities


10,207



659



935



77,386Acquisition of a business, net of cash acquired


(1,000
)


(2,613
)


-



-Proceeds from sales of intangible assets, net


1,040



172



-



-Purchase of  intangible assets


(122
)


(122
)


-



-Net cash provided by (used in) investing activities from continuing operations


6,934



(2,905
)


20



32,727Cash flows from financing activities from continuing operations:Proceeds from issuance of common stock


1,962



259



-



51Repurchase of fractional shares


(27
)


-



-



-Repurchase of stock


(130
)


(3,195
)


(3,348
)


(189
)Net cash provided by (used in) financing activities from continuing operations


1,805



(2,936
)


(3,348
)


(138
)Cash flows from discontinued operations:Net cash provided by (used in) operating activities


(48
)


-



-



92Net cash provided by investing activities


640



-



-



-Net cash provided by discontinued operations


592



-



-



92Effect of exchange rate changes on cash & equivalents


(4
)


-



-



-Net increase (decrease) in cash and cash equivalents


6,390



(11,568
)


(1,393
)


33,547Cash and cash equivalents, beginning of year


28,943



40,511



41,904



8,357Cash and cash equivalents, end of year

$
35,333


$
28,943


$
40,511


$
41,904
  The accompanying notes are an integral part of these consolidated financial statements.
  34
  GEEKNET, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1.      Organization and Operations of the Company:
 
 Overview
 
 Geeknet, Inc. (“Geeknet” or the “Company”) is an online network for the global geek community, which is comprised of technology professionals, technology enthusiasts and general consumers of technology-oriented goods, services and media.  The Company’s E-commerce segment 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 September 2009, the Company acquired Ohloh Corporation (“Ohloh”), a directory of open source projects and developers, and in November 2009 the Company changed its name to Geeknet to
project a more accurate reflection of its business, primarily to the advertising community. 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.
 
 In April 2009, the Company changed its fiscal year-end from July 31 to December 31 retroactive to December 31, 2008.  These financial statements reflect the results for the calendar years ended December 31, 2010, December 31, 2009, the five month transition period from August 1, 2008 through December 31, 2008, and the fiscal year ended July 31, 2008.
 
 2.      Summary of Significant Accounting Policies:
 
 Use of Estimates in Preparation of Consolidated Financial Statements
 
 The preparation of consolidated financial statements in conformity with accounting principles generally accepted by the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of such financial statements, as well as the reported amounts of revenue and expenses during the periods indicated.  Actual results could differ from those estimates. Except as discussed below, there have been no significant changes to the Company’s critical accounting estimates during the year ended December 31, 2010.
 
 Adopted Accounting Pronouncements
 
 Effective July 1, 2009, the Company adopted the “Financial Accounting Standards Board (“FASB”) Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification (the “Codification” ) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Accounting Standards Generally Accepted in the United States (“U.S. GAAP”).  Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants.  All guidance contained in the Codification carries an equal level of authority.  The Codification superseded all existing non-SEC accounting and reporting standards.  All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative.  The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASUs”).  The FASB will not consider ASUs as authoritative in their own right.  ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification.  References made to FASB guidance throughout this document have been
updated for the Codification.  The adoption of codification did not have an impact on the Company’s financial position or results of operations.
  Effective August 1, 2008, the Company adopted new standards related to Fair Value Measurements and Disclosures for all Financial Assets and Liabilities and all non Financial Assets and Liabilities and the Fair Value Option for Financial Assets and Financial Liabilities.  The Company has elected the fair value option for its Auction Rate Securities.  In conjunction with the adoption of this standard, the Company reduced accumulated other comprehensive loss by $0.6 million and accounted for this as a cumulative effect of a change in accounting principle which was recorded as an increase in its Accumulated Deficit.
 
 In August 2009, the FASB provided further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and 3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The Company adopted this standard in 2009. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.
 
 Recent Accounting Pronouncements
 
 In December 2010, the FASB issued Accounting Standards Update No. 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (Topic 350)—Intangibles—Goodwill and Other (ASU 2010-28). ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. This standard is effective for 2011. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
 
 In January 2010, the FASB issued a new standard, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. This standard is effective for the Company’s 2010 calendar year reporting, except for Level 3 reconciliation disclosures which are effective for the Company’s 2011 calendar year reporting. The adoption of this standard did not have a material impact on its
consolidated financial statements.
 
 35
 In September 2009, the FASB issued an update to the existing multiple-element revenue arrangements guidance. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This update will be effective for the Company’s first quarterly reporting period of 2011. The Company does not expect the adoption of this new accounting update will have a material impact on its
consolidated financial statements.
 
 In June 2009, the FASB issued a new standard which requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This statement requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This standard is effective for 2011. The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.
 
 Reclassifications
 
 Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation. These reclassifications have no impact on previously reported net loss or cash flows.  The gain or loss on sale of assets which was previously included in other income is now included in total operating expenses.
 
 Principles of Consolidation
 
 These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.
 
 Related Party Transactions
 
 The Company owns approximately 9% of the outstanding capital stock of CollabNet, consisting of CollabNet’s Series C-1 preferred stock, which is recorded at $2.0 million.  As the Company holds less than 20% of the voting stock and does not otherwise exercise significant influence over it, this investment is accounted for using the cost method.  CollabNet is a developer of software used in collaborative software development.
 
 There was no related-party revenue during the year ended December 31, 2010 and $0.5 million, $0.3 million and $0.9 million of related-party revenue from continuing operations associated with CollabNet for the year ended December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.
 
 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 in the same accounting period that the re-measurement occurred.
 
 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 E-commerce business units.  The Company currently operates as two reportable business segments:  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.
 
 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 an impairment review whenever events or circumstances indicate that their fair value is less than their carrying value.  Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary.  This determination requires significant judgment.  For publicly-traded investments, impairment is determined based upon the specific facts and circumstances present at the time, including a review of the closing price over the previous six months, general market conditions and the Company’s intent and ability to hold the investment for a period of time
sufficient to allow for recovery.  For non-marketable equity securities, the impairment analysis requires the identification of events or circumstances that would likely have a significant adverse effect on the fair value of the investment, including revenue and earnings trends, overall business prospects and general market conditions in the investees’ industry or geographic area.  The Company uses third-party valuation experts to assess the reasonableness of its assumptions and to perform certain portions of the impairment analysis.  Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case the investment is written down to its impaired value. There was no impairment for the year ended December 31, 2010. For the year ended December 31,
2009, the Company recorded impairment loss of $4.6 million related to its non-marketable equity investment in CollabNet, Inc.
 
 36
  Cash, cash equivalents and investments consist of the following (in thousands):
 
 December 31, 2010


December 31, 2009Adjusted

Cost


Unrealized

Loss


Estimated

Fair Value


Adjusted

Cost


Unrealized

Loss


Estimated

Fair ValueCash and cash equivalents:Cash

$
5,072


$
-


$
5,072


$
6,000


$
-


$
6,000Money market funds


30,261



-



30,261



22,943



-



22,943Total cash and cash equivalents

$
35,333


$
-


$
35,333


$
28,943


$
-


$
28,943Short-term investments:Corporate securities


8



-



8



8



-



8Government securities


-



-



-



10,750



(1,350
)


9,400Total short-term investments

$
8


$
-


$
8


$
10,758


$
(1,350
)

$
9,408Restricted cash

$
-


$
-


$
-


$
1,000


$
-


$
1,000
 
 The contractual maturities of debt securities classified as trading securities at December 31, 2010 are as follows (in thousands):
 
 Due between  90 days and one year

$
8Due more than one year


-Total investments

$
8
  Fair Value Measurements
 
 The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2010 (in thousands):
 
 Fair Value Measurements at Reporting Date UsingLevel 1


Level 2


Level 3


TotalMoney market fund deposits

$
30,261


$
-


$
-


$
30,261Corporate debt


-



-



8



8Total

$
30,261


$
-


$
8


$
30,269Amounts included in:Cash and cash equivalents

$
30,261


$
-


$
-


$
30,261Short-term investments


-



-



8



8Total

$
30,261


$
-


$
8


$
30,269
 
 37
 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

AssetsARS


ARS Right


OtherBalance at December 31, 2009

$
9,400


$
1,350


$
8Gain on other current assets


-



(807
)


-Loss on investments


807



-



-Sales/Maturities of assets


(10,207
)


(543
)


-Balance at December 31, 2010

$
-


$
-


$
8
 
 Trade Accounts Receivable
 
 Trade accounts receivable are recorded at the invoiced amount and are not interest bearing.  The Company will record an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables.  The Company also reviews its trade receivables by aging category to identify specific customers with known disputes or collectibility issues.  The Company exercises judgment when determining the adequacy of these reserves and evaluates historical bad debt trends, general economic conditions in the United States and internationally, and changes in customer financial conditions.
 
 Inventories
 
 Inventories related to the Company’s E-commerce segment consist solely of finished goods that are valued at the lower of cost, using the weighted average cost method, or market.  Provisions, when required, are made to reduce excess and obsolete inventories to their estimated net realizable values.
 
 Restricted Cash
 
 The Company has no restricted cash at December 31, 2010.  At December 31, 2009, the Company had a restricted cash balance with its bank to support a $1.0 million letter of credit, which was used to collateralize its former headquarters building lease in Fremont, California.  In May 2010, the letter of credit expired and the cash restriction was removed.
 
 Property and Equipment
 
 Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are amortized over the lesser of the estimated useful lives or the corresponding lease term.  Property and equipment consist of the following (in thousands):
 
 December31,


December31,2010


2009Computer and office equipment (useful lives of 2 to 4 years)

$
5,685


$
5,475Distribution equipment (useful live of 5 years)


3,911



-Furniture and fixtures (useful lives of 2 to 4 years)


226



210Leasehold improvements (useful lives of lesser of estimated life or lease term)


207



93Software (useful lives of  2 to 5 years)


579



390Total property and equipment


10,608



6,168Less: Accumulated depreciation and amortization


(5,494
)


(3,599
)Property and equipment, net

$
5,114


$
2,569
 
 Depreciation and amortization expense for continuing operations for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 was $2.3 million, $2.2 million, $1.0 million and $1.5 million, respectively.
 
 Goodwill and Intangible Assets
 
 Goodwill, which is entirely related to our Media segment, is carried at cost.
 
 Intangible assets are amortized on a straight-line basis over three to five years. Intangible asset amortization was $0.5 million and $0.2 million during the years ended December 31, 2010 and December 31, 2009, respectively.  Intangible asset amortization was insignificant for the five months ended December 31, 2008 and the year ended July 31, 2008.  Intangible assets at December 31, 2010 relates primarily to domain and trade names associated with the Company's Media business.  This balance is included in “Other Long-Term Assets” in the Consolidated Balance Sheets.
 
 The Company evaluates goodwill and intangible assets for impairment annually and when an event occurs or circumstances change that indicates that the carrying value may not be recoverable. The annual testing date is December 31. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying net assets, including goodwill, to the fair value of the reporting unit. The fair value of the reporting unit is estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered to be impaired and a second step is
performed to measure the amount of the impairment loss.  The preparation of the goodwill impairment analysis requires the Company to make significant estimates and assumptions with respect to the determination of fair values of reporting units and tangible and intangible assets. These estimates and assumptions, which include future values, are often subjective and may differ significantly from period to period based on changes in the overall economic environment, changes in its business and changes in its strategy or its internal forecasts.  The Company utilizes third-party valuation experts to assess the reasonableness of its assumptions and to perform certain portions of the impairment analysis.  Based on these assessments, there was no indication of impairment for the year ended December 31, 2010, the year ended December 31, 2009, the five months ended
December 31, 2008 or the year ended July 31, 2008.
 
 38
 The changes in the carrying amount of the intangible assets are as follows (in thousands):
 
 December 31, 2010


December 31, 2009Gross


Accumulated





Gross


Accumulatedasset


amortization


Net asset


asset


amortization


Net assetGoodwill

$
62,037


$
(60,362
)

$
1,675


$
62,032


$
(60,362
)

$
1,670Identified intangible assets:Domain and trade names


6,176



(6,012
)


164



6,059



(5,946
)


113Purchased technology


2,535



(2,535
)


-



3,492



(2,721
)


7718,711



(8,547
)


164



9,551



(8,667
)


884Total goodwill and identified intangible assets

$
70,748


$
(68,909
)

$
1,839


$
71,583


$
(69,029
)

$
2,554
 
 Revenue Recognition
 
 The Company recognizes revenue as follows:
 
 E-commerce Revenue
 E-commerce revenue is derived from the online sale of consumer goods.  The Company recognizes E-commerce revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectibility is reasonably assured.  The Company generally recognizes E-commerce revenue when products are shipped and title transfers to the customer.  The Company grants customers a limited right to return E-commerce products.  The Company has recorded reserves of $0.4 million and $0.3 million for such returns at December 31, 2010 and December 31, 2009, respectively.
 
 Media Revenue
 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 and 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.  Traffic to the Company’s Media web sites is seasonal, with relatively lower levels of traffic experienced during the summer months of the northern hemisphere.
 
 Advertising Expenses
 
 The Company expenses advertising costs as incurred.  Total advertising expenses for continuing operations were $4.1 million, $2.8 million, $0.9 million and $1.5 million for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively. During the years ended December 31, 2010 and December 31, 2009 the Company's E-Commerce business segment incurred advertising expense of $0.7 million and $0.1 million with a customer of its Media business segment.
 
 Software Development Costs
 
 Costs related to the planning and post-implementation phases of internal use software products are recorded as an operating expense. Direct costs incurred in the development phase are capitalized and amortized over the product’s estimated useful life as charges to cost of revenue.
 
 No costs were capitalized for the years ended December 31, 2010 and December 31, 2009 and the five months ended December 31, 2008 as such costs are not significant.  The Company capitalized internal use software costs of $0.7 million during the year ended July 31, 2008.
 
 Computation of Per Share Amounts
 
 Basic income (loss) per common share is computed using the weighted-average number of common shares outstanding (adjusted for treasury stock and common stock subject to repurchase activity) during the period.  Diluted income (loss) per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period.  Common equivalent shares are anti-dilutive when their conversion would increase earnings per share.  Dilutive common equivalent shares consist primarily of stock options and restricted stock awards.  For the years ended December 31, 2010, December 31, 2009 and July 31, 2008, the Company excluded all stock options and
restricted stock awards from the calculation of diluted net loss per common share because all such securities are antidilutive.
  The Company considers employee equity share options, nonvested shares, and similar equity instruments as potential common shares outstanding in computing diluted earnings per share.  Diluted shares outstanding would include the dilutive effect of in-the-money options, calculated based on the average share price for each fiscal period using the treasury stock method, had there been any during the period.  Under the treasury stock method, the amount the employee (or purchaser of the written call options) must pay for exercising stock options and the amount of compensation cost for future service that is not yet recognized 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.
 
 39
 The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
 
 Year Ended


Five Months

Ended


YearEndedDecember 31,


December31,


July 31,2010


2009


2008


2008Income (loss) from continuing operations

$
(4,200
)

$
(14,021
)

$
1,080


$
(4,326
)Ioss from discontinued operations


(248
)


-



-



-Net income (loss)

$
(4,448
)

$
(14,021
)

$
1,080


$
(4,326
)Weighted average shares - basic


6,073



6,080



6,653



6,747Effect of dilutive potential common shares


-



-



12



-Weighted average shares - diluted


6,073



6,080



6,665



6,747Income (loss) per share from continuing operations:Basic

$
(0.69
)

$
(2.31
)

$
0.16


$
(0.64
)Diluted

$
(0.69
)

$
(2.31
)

$
0.16


$
(0.64
)Ioss per share from discontinued operations:Basic

$
(0.04
)

$
-


$
-


$
-Diluted

$
(0.04
)

$
-


$
-


$
-Net income (loss) per share:Basic

$
(0.73
)

$
(2.31
)

$
0.16


$
(0.64
)Diluted

$
(0.73
)

$
(2.31
)

$
0.16


$
(0.64
)
 
 The following potential common shares have been excluded from the calculation of diluted net income (loss) per share for all periods presented because they are anti-dilutive (in thousands):
 
 Year Ended


Five Months

Ended


Year EndedDecember 31,


December31,


July 31,2010


2009


2008


2008Anti-dilutive securities:Options to purchase common stock


537



610



627



547Unvested restricted stock purchase rights


8



16



93



66Total


545



626



720



613
 
 Comprehensive Income (Loss)
 
 Comprehensive income (loss) is comprised of net income (loss) and other non-owner changes in stockholders’ equity, including foreign currency translation gains or losses and unrealized gains or losses on available-for-sale marketable securities.
 
 Supplier Concentration
 
 While no supplier concentration exists in the Company’s Media or E-commerce businesses, certain of the Company’s E-commerce business’s manufacturers are located outside of the United States, most of which are located in Asia (primarily China). The Company’s E-commerce business’s ability to receive inbound inventory and ship completed orders to its customers is substantially dependent on a single third-party contract-fulfillment and warehouse provider.
 
 Concentrations of Credit Risk and Significant Customers
 
 The Company’s investments are held with two reputable financial institutions; both institutions are headquartered in the United States.  The Company’s investment policy limits the amount of risk exposure.
 
 Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. The Company provides credit, in the normal course of business, to a number of companies and performs ongoing credit evaluations of its customers. The credit risk in the Company’s trade receivables is substantially mitigated by its credit evaluation process and reasonably short collection terms.  The Company maintains reserves for potential credit losses, if any, and such losses have been within management’s expectations.  As of December 31, 2010, no one advertising agency represented more than 10% of gross accounts receivables. At December 31, 2009 and December 31, 2008,
an advertising agency accounted for 10.5% and 11% of gross accounts receivable, respectively.
 
 For the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively, no one customer represented 10% or greater of net revenue.
 
 40
 3.      Balance Sheet Components
 
 Other Long-Term Assets
 
 Other Long Term Assets consisted of the following (in thousands):
 
 December 31,2010


2009Non marketable equity investment

$
1,979


$
1,979Goodwill


1,675



1,670Note receivable


711



-Intangible assets, net


164



884Other


454



555Other long-term assets

$
4,983


$
5,088
 
 
 Accrued liabilities and other
 
 Accrued liabilities and other consisted of the following (in thousands):
 
 December 31,2010


2009Accrued employee compensation and benefits

$
2,252


$
2,386Other accrued liabilities


1,339



1,468Accrued liabilities and other

$
3,591


$
3,854
 
 4.      Restructuring Costs
 
 In October 2007, the Company relocated its corporate headquarters to Mountain View, California.  During fiscal year 2008, which ended on July 31, 2008 under its prior fiscal calendar, the Company recorded a restructuring charge of $2.2 million for the remaining facility space and leasehold improvements at its former corporate headquarters located in Fremont, California.  In conjunction with the sale of its Software business in April 2007, the Company accrued a restructuring charge of $0.6 million for the excess facility space used in the operation of its Software business, which was included in the gain on disposal of discontinued operations.  In fiscal 2001 and 2002, the Company adopted plans
to exit its hardware systems and hardware-related software engineering and professional services businesses, as well as exit a sublease agreement and to reduce its general and administrative overhead costs.
 
 Below is a summary of the restructuring charges (in thousands):
 
 Year Ended


Five Months

Ended


YearEndedDecember 31,


December31,


July 31,2010


2009


2008


2008Cash provision:Facilities charges

$
(27
)

$
(62
)

$
-


$
2,057Cash proceeds from sales of furniture

$
(74
)Non-cash:Write-off of equipment and leasehold improvements


-



-



-



122$
(101
)

$
(62
)

$
-


$
2,179
  Below is a summary of the changes to the restructuring liability (in thousands):
 
 Balance at

Beginning

of Period


Other


Restructuring

Charges


Cash

payments


Balance at

End ofPeriodFor the year ended July 31, 2008

$
5,048


$
590


$
2,179


$
(2,585
)

$
5,232For the five months ended Deccember 31, 2008

$
5,232


$
47


$
-


$
(1,163
)

$
4,116For the year ended December 31, 2009

$
4,116


$
65


$
(62
)

$
(2,881
)

$
1,238For the year ended December 31, 2010

$
1,238


$
4


$
(101
)

$
(1,141
)

$
-
 
 5.      Commitments and Contingencies
 
 The Company leases its facilities under operating leases that expire at various dates through 2014.  Future minimum lease payments under non-cancelable operating leases, net of sublease income, as of December 31, 2010 are as follows (in thousands):
  41
  Gross

Operating

Leases


Sublease

Income


Net

Operating

Leases2011


1,224



(822
)


4022012


1,032



(771
)


2612013


315



-



3152014


214



-



214Total minimum lease obligations

$
2,785


$
(1,593
)

$
1,192
 
 Gross rent expense for the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 was approximately $1.3 million, $1.0 million, $0.4 million and $1.4 million, respectively.  This rent expense was offset by sublease income of $0.2 million, $0.1 million and $0.4 million for the years ended December 31, 2010, December 31, 2009 and July 31, 2008, respectively.  There was no sublease income for the five months ended December 31, 2008.
 
 6.      Litigation
 
 In January 2001, the Company, two of its former officers, and Credit Suisse First Boston, the lead underwriter in the Company's initial public offering ("IPO"), were named as defendants in a shareholder lawsuit filed in the United States District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242.  The plaintiffs' class action suit seeks unspecified damages on behalf of a purported class of purchasers of the Company's common stock from the time of the Company's initial public offering in December 1999 through December 2000.
 
 Among other things, this complaint alleged that the prospectus pursuant to which shares of common stock were sold in the Company's initial public offering contained certain false and misleading statements or omissions regarding the practices of the Underwriters with respect to their allocation of shares of common stock in these offerings and their receipt of commissions from customers related to such allocations.  Various plaintiffs have filed actions asserting similar allegations concerning the initial public offerings of approximately 300 other issuers.  These various cases were coordinated for pretrial proceedings as In re Initial Public Offering Securities Litigation, 21 MC 92.
 
 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 Second Circuit Court of Appeals.  The Plaintiffs have filed motions to dismiss
the appeals and those motions 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 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 District Court for the Western District of Washington alleging short-swing trading in the stock of 54 other companies. On July 25, 2008, a
majority of the named issuer companies, including Geeknet, jointly filed a motion to dismiss plaintiff's claims.  On March 12, 2009, the Court issued an order granting the motion to dismiss and a judgment in the favor of the moving issuers. On April 10, 2009, Ms. Simmonds appealed the order and judgment dismissing her claims to the United States Court of Appeal for the Ninth Circuit.  On January 18, 2011, the Ninth Circuit Court of Appeals voted unanimously to deny Simmonds’s petition for a rehearing en banc. The matter is pending a petition for a writ of certiorari to the U.S. Supreme Court.
 
 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.  The Company intends to vigorously defend itself.  Due to the uncertainty surrounding the litigation
process, the Company is unable to reasonably estimate the ultimate outcome of these claims at this time or the range of a possible loss, and therefore has not accrued for any potential loss.
 
 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 December 31, 2010 no liability was recorded for outstanding matters.
 
 7.      Retirement Savings Plan
 
 The Company maintains an employee savings and retirement plan which is qualified under Section 401(k) of the Internal Revenue Code and is available to substantially all full-time employees of the Company.  The plan provides for tax deferred salary deductions and after-tax employee contributions.  Contributions include employee salary deferral contributions and discretionary employer contributions.  To date, there have been no employer discretionary contributions.
 
 8.      Common Stock
 
 Stock Repurchase Program
  In October 2008, the Company’s Board of Directors authorized a stock repurchase program authorizing the Company to repurchase up to $10 million of its common stock over the 12-month period which ended October 2009.  Repurchased shares were cancelled and retired.  Under this program the Company repurchased and retired 0.8 million shares of common stock at a weighted-average price of $7.60 per share for an aggregate purchase price of $6.2 million.
 
 Stock Option Plans
 
 In December 2007, the Company’s stockholders approved the 2007 Equity Incentive Plan (“2007 Plan”).  The 2007 Plan replaced the Company’s 1998 Stock Plan (the “1998 Plan”) and the 1999 Director Option Plan (the “Directors’ Plan”), 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.  At December 31, 2010, a total of
15,246 shares of common stock were available for issuance under the 2007 Plan.  The 2007 Plan provides that each share award granted with an exercise price less than the fair market value on the date of grant will be counted as two shares towards the shares reserved and each such share award forfeited or repurchased by the Company will increase the shares reserved by two shares.
 
 42
 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 or awards 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.
 
 As of December 31, 2010, the Company had reserved shares of its common stock for future issuance as follows:
 
 1998 Stock Option Plan and Assumed Plans


127,5751999 Director Option Plan


40,2502007 Equity Plan


306,833474,658
  The following table summarizes option and restricted stock activities from July 31, 2006 through December 31, 2009:
 
 Stock Options OutstandingAvailablefor

Grant


Restricted

Stock


Number

Outstanding


Weighted-Average

ExercisePrice

perShare


Weighted-Average

Remaining

Contractual

Term


Aggregate

Intrinsic

Value

($ 000's)Balance at July 31, 2007


913,190



131,750



657,024


$
42.60



6.07


$
4,131Authorized


525,000Granted


(246,548
)


58,000



130,548


$
20.30Exercised


-



-



(3,128
)

$
16.50Restricted stock  released


-



(35,042
)


-


$
-Restricted stock repurchased


52,500



(26,250
)


-


$
-Cancelled


(816,405
)


-



(163,725
)

$
41.20Balance at July 31, 2008


427,737



128,458



620,719


$
38.50



5.48


$
62Granted


(279,050
)


9,000



261,050


$
7.20Exercised


-



-



-


$
-Restricted stock  released


-



(30,458
)


-


$
-Restricted stock repurchased


25,333



(20,333
)


-


$
-Cancelled


16,552



-



(16,687
)

$
38.00Balance at December 31, 2008


190,572



86,667



865,082


$
29.10



6.27


$
611Granted


(197,705
)


4,900



187,905


$
12.10Exercised


-



-



(20,519
)

$
12.60Restricted stock  released


-



(42,651
)


-


$
-Restricted stock repurchased


15,334



(7,667
)


-


$
-Cancelled


302,763



-



(306,747
)

$
39.20Balance at December 31, 2009


310,964



41,249



725,721


$
20.88



7.58


$
1,291Granted


(632,769
)


163,650



305,469


$
15.32Exercised


-



-



(230,723
)

$
8.51Restricted stock  released


-



(33,428
)


-


$
-Restricted stock repurchased


14,084



(7,042
)


-


$
-Cancelled


322,967



-



(325,809
)

$
24.05Balance at December 31, 2010


15,246



164,429



474,658


$
20.72



7.15


$
3,573Exercisable at December 31, 2010










233,756


$
26.88



5.05


$
1,083Vested and expected to vest at December 31, 2010



433,795


$
21.25
 
 43
 Restricted stock includes both RSAs and RSUs.  At December 31, 2010, the Company had 156,250 outstanding RSUs, which vest over a three year period.  There were no RSUs outstanding at December 31, 2009.  At December 31, 2010 and December 31, 2009 the Company had outstanding RSAs of 8,179 and 41,249, respectively, which are included in Common Stock.  The total intrinsic value of options exercised was negligible during the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008.  The Company issues new shares upon the exercise of options.  For the years ended December 31, 2010 and December 31, 2009,
the five months ended December 31, 2008 and the year ended July 31, 2008 no tax benefit was realized from exercised options.
 
 The options outstanding and currently exercisable by exercise price at December 31, 2010 were as follows (in thousands, except years and per-share amounts):
 
 OPTIONS OUTSTANDING


OPTIONS EXERCISABLERange of Exercise

Prices

Number

Outstanding


Weighted

Average

Remaining

Life (inyears)


Weighted

Average

ExercisePrice


Shares


Weighted

Average

ExercisePrice$   8.30

-

$ 11.70


16,175



7.43


$
10.79



8,143


$
10.51$ 11.70

-

$ 11.90


55,979



8.17



11.90



21,072



11.90$ 12.00

-

$ 13.90


63,769



8.12



13.32



19,289



12.99$ 14.00

-

$ 14.50


56,380



8.97



14.18



16,695



14.09$ 14.70

-

$ 14.90


62,504



9.27



14.75



2,500



14.90$ 15.00

-

$ 18.50


51,762



7.72



16.42



21,028



16.81$ 18.70

-

$ 24.99


50,209



5.69



21.55



28,702



22.27$ 24.99

-

$ 40.20


51,354



2.88



31.93



50,978



31.96$ 40.20

-

$ 41.20


51,291



5.65



41.02



50,174



41.04$ 41.50

-

$ 52.00


15,235



5.79



48.96



15,175



48.98$   8.30



$ 52.00


474,658



7.15


$
20.72



233,756


$
26.88
  The total intrinsic value of stock options outstanding and stock options exercisable as of December 31, 2010 was $3.6 million and $1.1 million, respectively. The aggregate intrinsic value in the above table is calculated as the excess of the December 31, 2010 official closing price of the Company’s stock of $25.03 per share as reported by the NASDAQ Global Market over the exercise price of the shares. The weighted-average remaining contractual life of options exercisable as of December 31, 2010 was 5.05 years.  The total number of in-the-money options exercisable as of December 31, 2010 was 0.1 million.
 
 The total fair value of options vested during the years ended December 31, 2010 and December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008 were insignificant.  As of December 31, 2010, total compensation cost not yet recognized and the weighted-average remaining term is as follows (amounts in thousands)
 
 Expense notyet

recognized


RemainingTerm(years)Stock Options

$
2,313



3.0Restricted Stock Units

$
2,938



3.0Restricted Stock Awards

$
113



0.5
  Valuation and Expense Information
 
 The following table summarizes stock-based compensation expense recorded (in thousands):
 
 Year Ended


Five Months Ended


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008E-commerce cost of revenue

$
97


$
79


$
29


$
59Media cost of revenue


109



240



99



190Included in cost of revenue


206



319



128



249Sales and marketing


458



513



221



474Research and development


298



343



130



204General and administrative


1,291



1,476



698



2,666Included in operating expenses


2,047



2,332



1,049



3,344Total share-based compensation expense

$
2,253


$
2,651


$
1,177


$
3,593
 
 In conjunction with the resignation of certain executives in August 2010 and September 2010, the Company accelerated vesting of options to purchase 88,000 shares and extended the exercise period of 29,000 options.  In conjunction with the resignation of the Company’s former Chief Executive Officer in June 2008, the Company extended the exercise period for the former CEO’s options to purchase 181,000 shares of the Company’s common stock by 12 months (following the completion of the former CEO’s consulting agreement) and accelerated vesting of his restricted stock purchase rights for 32,000 shares.  As a result of these modifications the Company recorded additional stock-based
compensation of $0.4 million and $1.0 million during the years ended December 31, 2010 and July 31, 2008.
  44
  The fair value of RSAs and RSUs has been calculated based on the grant date fair value of the Company's common stock.  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 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:
 
 Year Ended


Five Months Ended


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008Expected life (years)


5.60



5.82



5.63



4.45Risk-free interest rate


2.3
%


2.8
%


1.9
%


3.6
%Volatility


63
%


66
%


62
%


60
%Dividend yield

None


None


None


NoneWeighted-average fair value at grant date

$
8.70


$
7.40


$
3.90


$
10.40
  As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.
 
 9.      Income Taxes
 
 The Company provides for income taxes using an asset and liability approach, where deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable.
 
 Income (loss) from continuing operations before income taxes consists of the following components (in thousands):
 
 Year ended


Five MonthsEnded


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008($ in thousands)United States

$
(4,391
)

$
(13,881
)

$
1,253


$
(4,198
)Foreign


24



-



-



-$
(4,367
)

$
(13,881
)

$
1,253


$
(4,198
)
  During the years ended December 31, 2010, December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, the Company paid income taxes of $0.1 million, $0.1 million, $0.2 million and $0.1 million, respectively.
 
 A summary of total tax expense, by classification, included in the accompanying consolidated statements of income is as follows (in thousands):
 
 Year ended


Five MonthsEnded


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008($ in thousands)Current:Federal

$
(44
)

$
-


$
-


$
(24
)State


(128
)


140



173



152Foreign


5



-



-



-$
(167
)

$
140


$
173


$
128
  Deferred tax assets (liabilities) consist of the following (in thousands):
 
 Year ended December 31,2010


2009($ in thousands)Deferred tax assets:Accruals and reserves

$
3,309


$
4,179Net operating loss carryforwards


96,090



95,676Research and development credit carryforward


3,141



2,624Gross deferred tax asset


102,540



102,479Valuation allowance


(102,540
)


(102,479
)Net deferred tax asset

$
-


$
-
 
 At December 31, 2010, management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance was recorded.
  45
  Reconciliation of the statutory federal income tax to the Company’s effective tax is as follows:
 
 Year ended


Five MonthsEnded


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008Tax at Federal statutory rate


34.0
%


34.0
%


34.0
%


34.0
%State, net of Federal benefit


2.9
%


(0.7
)%


9.1
%


(2.3
)%Stock compensation


(2.9
)%


(2.1
)%


10.7
%


0.0
%Research and development credit


5.6
%


1.1
%


(11.5
)%


(5.2
)%Return to Provision and True-ups


3.1
%


0.0
%


(11.7
)%


0.0
%Change in valuation allowance


(36.6
)%


(30.3
)%


(30.0
)%


(29.5
)%Other


(2.5
)%


(2.9
)%


0.8
%


0.0
%Provision for taxes


3.6
%


(0.9
)%


1.4
%


(3.0
)%
 
 As of December 31, 2010, the Company has approximately $277.7 million of federal net operating losses available to offset future federal taxable income, which expire at various dates through fiscal year 2030.  This amount includes approximately $12.5 million of net operating loss carryforwards from the acquisition of Andover.net in fiscal 2000.  The deferred tax assets related to this of approximately $5.6 million may be used to reduce the tax provision if and when realized.  Approximately $23.2 million of federal net operating losses usage is limited pursuant to section 382 of the Internal Revenue Code due to certain changes in the Company's ownership which occurred between 1996 and 1999, and
a change in ownership resulting from the Company's June 2000 acquisition of Andover.net.  The Company also has California net operating loss carryforwards of approximately $77.2 million to offset future California taxable income, which expire at various dates beginning in 2017.  The net operating loss carryforwards stated above are reflective of various federal and state tax limitations.  As of December 31, 2010, the Company has gross Federal and California state research and development credit carryforwards of $2.7 million and $2.2 million, respectively.
 
 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
 
 Year ended


Five MonthsEnded


YearEndedDecember 31,


December 31,


July 31,2010


2009


2008


2008Unrecognized tax benefits at beginning of period

$
810


$
718


$
647


$
638Gross increases to current period tax positions


180



92



71



9Gross increases to prior period tax positions


244



-



-



-Unrecognized tax benefits at end of period

$
1,234


$
810


$
718


$
647
  The Company classifies interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of its income tax expense. During the years ended December 31, 2010 and December 31, 2009, the five month transition period ended December 31, 2008 and the year ended July 31, 2008, no interest or penalties were recognized.  The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. There are no unrecognized tax benefits that would affect the actual tax rate at December 31, 2010.
 
 10.   Acquisitions and Discontinued Operations
 
 Geek.com
 In May 2010, the Company's Media segment acquired Geek.com for $1.0 million in cash.  Geek.com is an online technology resource and community for technology enthusiasts and professionals.  Geek.com was acquired to expand the Company's traffic and to provide a platform to penetrate Geeknet's mainstream consumer advertising categories.
 
 The acquisition was treated as the acquisition of a business and 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 were based on management estimates and assumptions, including third-party valuations that use 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

$
746Goodwill


254$
1,000
 
 The identified intangible assets are comprised of Geek.com's domain name and had a useful life of three years.
 
 In conjunction with the Company's decision to focus its Media web sites on the business community, the Company sold the Geek.com business to Ziff Davis, Inc. for $0.8 million on December 31, 2010.  The Company received $0.6 million in cash and $0.2 million in an escrow account with respect to certain standard representations and warranties made by the Company.  The escrow funds, net of any claims, will be returned on December 31, 2011 and are included in the calculation of the proceeds on sale of Geek.com due to the Company’s assessment, beyond a reasonable doubt, that no liabilities will arise under the indemnification provisions of the agreement with Ziff Davis, Inc.  The sale of
Geek.com has been treated as a discontinued operation in the accompanying consolidated financial statements.
 
 46
 Income from discontinued operations consists of direct revenue and direct expenses of Geek.com, including cost of revenue, as well as other fixed and allocated costs. The loss on sale of assets includes the goodwill recorded on the acquisition of Geek.com.  A summary of the operating results of Geek.com included in discontinued operations in the accompanying condensed consolidated statements of income is as follows (in thousands):
 
 Year Ended

December 31,2010Revenue

$
156Loss from operations before income taxes

$
(193
)Income taxes


-Loss from operations, net of income taxes

$
(193
)Loss on sale of assets, net of income taxes

$
(55
)
  Ohloh Corporation
 In June 2009, the Company's Media segment acquired Ohloh Corporation (“Ohloh”) for $2.6 million in cash.  Visitors to Ohloh's web site, Ohloh.net, supply data about open source projects and developers.  Ohloh augmented this user-contributed data with data gathered from its web-crawling technology.  The Company used Ohloh's database of open source software and developers to enhance its understanding of the Open Source Software (“OSS”) community and generated additional revenue from advertisers who used Ohloh’s data to reach their desired audience.  The acquisition of Ohloh was intended to enhance the Company’s position in and reach into the OSS
community.
 
 The Company allocated the purchase price to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values.  The excess purchase price over those fair values was recorded as goodwill.  The acquisition provided the Company with a web crawling technology, including the data collected, its team of engineers and equipment to operate the business.
 
 The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management estimates and assumptions, including third-party valuations that use established valuation techniques appropriate for the high-technology industry.  The fair value of the developed technology was estimated by applying the income approach and a market approach.  This fair value measurement is based on significant inputs that are not observable in the market and thus represents a Level 3 measurement.  Key assumptions include the expected cash flows to be generated from this developed technology over its remaining life and the discount rate of 35 percent.  The purchase
price was allocated as follows (in thousands):
 
 Financial assets

$
5Equipment


23Identified intangible assets


958Financial liabilities


(43
)Total identifiable net assets


943Goodwill


1,670$
2,613
  The $1.0 million of identified intangible assets were allocated to developed technology, which was being amortized over a three year useful life.
 
 On September 30, 2010, the Company sold the Ohloh website, including the developed technology and related equipment required to operate the website to Black Duck Software, Inc. ("Black Duck") for consideration of $1.3 million in cash and a convertible promissory note in the principal amount of $1.3 million, bearing annual interest at 3.25 percent and due on September 30, 2013.  A portion of the cash, $0.3 million, was deposited in an escrow account to secure certain representations, warranties and covenants made by the Company to Black Duck.  As of December 31, 2010, the Company has received 25% of the escrow funds with the remaining amounts to be received as follows:  25% in January 2011 and
50% on September 30, 2011.  The sale of the Ohloh website, which did not meet the criteria for a discontinued operation, resulted in a $1.4 million gain, which is included in the Gain (loss) on sale of asset.
 
 The note receivable is subordinate to existing Black Duck debt, is secured by Black Duck assets, other than those securing Black Duck's senior debt, and is convertible into common or preferred stock in the event of a future financing activity, or acquisition of Black Duck.  The Company valued the note receivable at $0.7 million using a discounted cash flow model based on interest rates of similar instruments adjusted for the credit, liquidity and security premiums on the note, and the timing and amount of expected cash flows.
 
 11.  Segment and Geographic Information
 
 The Company’s operating segments are significant strategic business units that offer different products and services.  The Company has two operating segments:  E-commerce and Media.
 
 The Company’s E-commerce segment provides online sales of a variety of retail products of interest to technology professionals and technology enthusiasts and general consumers and the Media segment consists of web sites serving these communities.  The Company’s websites that comprise the Media segment include: SourceForge, Slashdot and freshmeat.  Those corporate expenses that are not allocated to the individual operating segments and are not considered by the Company’s chief decision-making group in evaluating the performance of the operating segments are included in “Other”.
 
 47
 The accounting policies of the segments are consistent with those described in the summary of significant accounting policies.  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 E-commerce business units.  The Company’s chief decision-making group excludes any intersegment sales and assets when evaluating the performance of the segments.  The Company’s assets and liabilities are not allocated or reviewed by the chief decision-making group for either operating segment.  The depreciation of the Company’s property, equipment and leasehold
improvements are allocated based on headcount, unless specifically identified by operating segment.
 
 (in thousands)

E-commerce


Media


Other


TotalCompanyYear Ended December 31, 2010Revenue from external customers

$
76,335


$
18,284


$
-


$
94,619Cost of revenue

$
62,630


$
6,610


$
-


$
69,240Gross margin

$
13,705


$
11,674


$
-


$
25,379Income (loss) from operations

$
733


$
(5,144
)

$
-


$
(4,411
)Depreciation and amortization

$
496


$
1,781


$
-


$
2,277Year Ended December 31, 2009Revenue from external customers

$
49,091


$
16,486


$
-


$
65,577Cost of revenue

$
38,151


$
6,953


$
-


$
45,104Gross margin

$
10,940


$
9,533


$
-


$
20,473Income (loss) from operations

$
2,787


$
(12,193
)

$
-


$
(9,406
)Depreciation and amortization

$
145


$
2,535


$
(523
)

$
2,157Five Months Ended December 31, 2008Revenue from external customers

$
23,994


$
8,481


$
-


$
32,475Cost of revenue

$
18,374


$
3,567


$
-


$
21,941Gross margin

$
5,620


$
4,914


$
-


$
10,534Income (loss) from operations

$
2,843


$
(2,943
)

$
-


$
(100
)Depreciation and amortization

$
44


$
916


$
-


$
960Year Ended July 31, 2008Revenue from external customers

$
36,820


$
18,506


$
-


$
55,326Cost of revenue

$
27,860


$
7,268


$
-


$
35,128Gross margin

$
8,960


$
11,238


$
-


$
20,198Operating income (loss)

$
3,561


$
(7,210
)

$
(2,179
)

$
(5,828
)Depreciation expense

$
75


$
1,406


$
-


$
1,481
  During the time period covered by the table above, the Company marketed its E-commerce products through its online web site and its Media products in the United States through its direct sales force.  International Media sales were marketed through representatives based in the United Kingdom, Europe, Asia and Australia.  International revenue from the E-commerce segment comprised approximately 18%, 17%, 15% and 19% of total E-commerce revenue for the year ended December 31, 2010, the year ended December 31, 2009, the five months ended December 31, 2008 and the year ended July 31, 2008, respectively.  International revenue for the Media segment was less than 10% of total Media revenue for all periods
presented.  International revenue consists of E-commerce shipments outside the United States of America and revenue from Media customers located outside the United States of America.
  12.  Subsequent Event
 
 In February 2011, the Company announced an "odd lot" share repurchase program under which the Board of Directors approved the repurchase of up to $1 million of the Company's common stock through March 18, 2011.
 
 48
 Quarterly Consolidated Financial Data
 (Unaudited, in Thousands, except per share amounts)
 
 The Company’s quarters end on March 31, June 30, September 30 and December 31 of each calendar year.
 
 For the three months endedMarch 31


June 30


September 30


December 31Year 2010Net revenue

$
14,679


$
15,274


$
14,659


$
50,007Gross margin


4,080



4,687



2,788



13,824Income (loss) from continuing operations


(2,821
)


(2,484
)


(3,761
)


4,866Net income (loss)

$
(2,821
)

$
(2,506
)

$
(3,850
)

$
4,729Net income (loss) per share from continuing operations:Basic

$
(0.47
)

$
(0.41
)

$
(0.62
)

$
0.78Diluted

$
(0.47
)

$
(0.41
)

$
(0.62
)

$
0.77Net income (loss) per share:Basic

$
(0.47
)

$
(0.41
)

$
(0.64
)

$
0.76Diluted

$
(0.47
)

$
(0.41
)

$
(0.64
)

$
0.75Year 2009Net revenue

$
10,371


$
11,785


$
10,787


$
32,634Gross margin


2,854



3,915



3,104



10,600Income (loss) from operations


(2,934
)


(3,632
)


(4,562
)


1,722Net income (loss)

$
(7,426
)

$
(3,586
)

$
(4,537
)

$
1,528Net income (loss) per share:Basic

$
(1.17
)

$
(0.60
)

$
(0.76
)

$
0.25Diluted

$
(1.17
)

$
(0.60
)

$
(0.76
)

$
0.25
  Loss from continuing operations includes severance expense of $0.4 million, $1.9 million and $0.3 million during the three months ended June 30, 2010, September 30, 2010 and December 31, 2010, respectively. The three months ended September 30, 2010 also includes a $1.4 million gain on sale of assets.
 
 Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
 As discussed in our current report on Form 8-K filed on September 16, 2010, the Audit Committee of our Board of Directors dismissed Stonefield Josephson, Inc. (“SJ”) as its independent registered public accounting firm effective September 14, 2010 and on September 15, 2010, the Audit Committee engaged KPMG LLP as its new independent registered public accounting firm.
 
 The reports of SJ on our financial statements for the year ended December 31, 2009, the five month transition period ended December 31, 2008 and the year ended July 31, 2008 contained no adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope or accounting principles.  During the year ended December 31, 2009, the five month transition period ended December 31, 2008 and the year ended July 31, 2008 and through September 14, 2010, there were no disagreements with SJ on any matter of accounting principles or practices, financial statement disclosure or auditing scope of procedure, which disagreements, if not resolved to the satisfaction of SJ would have
caused SJ to make reference thereto in connection with its reports on our financial statements for such periods.
 
 Item 9A. Controls and Procedures
 
 Evaluation of Disclosure Controls and Procedures
 
 The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2010. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that as of December 31, 2010, the Company’s disclosure controls and procedures were effective.
 
 Changes in Internal Control over Financial Reporting
 
 No change in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the  Securities Exchange Act) occurred during the year ended December 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 49
 Management’s Report on Internal Control over Financial Reporting
 
 Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
 
 The Company’s internal control over financial reporting is supported by written policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
 
 In connection with the preparation of the Company’s annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over
financial reporting. As a result of this assessment, management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting was effective based on those criteria.
 
 Our independent registered public accounting firm, KPMG LLP, has issued an attestation report on management’s assessment of our internal control over financial reporting, which is included in this Annual Report on Form 10-K.
 
 Limitations on Effectiveness of Controls
 
 The Company’s management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or
fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures.
 
 Item 9B.  Other Information
 
 The annual meeting of stockholders for 2011 is scheduled to be held on May 9, 2011.  Under our bylaws as currently in effect notices of stockholder proposals must be received no later than the close of business by the 10th day following the date on which public announcement of the date of such meeting is first made in order to be timely.  Accordingly, notices of stockholder proposals with respect to the 2011 annual meeting of stockholders must be received by March 13, 2011 in order to be timely.
  50
  PART III
 
 Item 10.  Directors, Executive Officers and Corporate Governance
 
 The information called for by this item is incorporated by reference to the sections entitled “Certain Beneficial Owners,” “Security Ownership of Directors and Executive Officers” and “Information About The Directors, Nominees And Executive Officers” in the Company’s 2010 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on May 9, 2011.
 
 Code of Ethics
 
 In addition to the Company’s Code of Business Conduct and Ethics that is applicable to all employees and directors, the Company has adopted a Code of Ethics for Principal Executive and Senior Financial Officers.  The Company has posted the text of its Code of Ethics for Principal Executive and Senior Financial Officers on its Internet web site at:investors.geek.net/governance.cfm
 
 We will post on this section of our website any amendment to our Code of Ethics for Principal Executive and Senior Financial Officers that are required to be disclosed by the rules of the SEC or The NASDAQ Stock Market.
 
 Item 11.  Executive Compensation
 
 The information called for by this item is incorporated by reference to the section entitled “Compensation of Directors and Executive Officers” in the Company’s 2010 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on May 9, 2011.
 
 Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
 Equity Compensation Plans
 
 The information called for by this item is incorporated by reference to the sections entitled “Certain Beneficial Owners” and “Security Ownership of Directors and Executive Officers” in the Company’s 2010 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on May 9, 2011.
 
 The following table summarizes our equity compensation plans as of December 31, 2010, all of which have been approved by our stockholders:
 
 A


B


CPlan Category

Number of securities to be

issued upon exercise of

outstanding options


Weighted average

exercise price of

outstanding options


Number of securities remaining available for

future issuance under equity compensation plan

(excluding securities reflected in column A)Equity compensation plans

approved by stockholders


474,658
(1)(2)

$
20.72



15,246
 
 (1)
Includes 306,833 options outstanding under the Company’s 2007 Equity Plan, 127,575 options outstanding under the Company’s 1998 Stock Plan and 40,250 options outstanding under the Company’s 1999 Director’s Plan.
 (2)
Does not include 156,250 restricted stock units outstanding under the Company's 2007 Equity Plan.
 
 Item 13.  Certain Relationships and Related Transactions, and Director Independence
 
 The information called for by this item is incorporated by reference to the section entitled “Certain Relationships and Related Transactions” in the Company’s 2010 Proxy Statement, which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on May 9, 2011.
 
 Item 14.  Principal Accounting Fees and Services
 
 The information called for by this item is incorporated by reference to the section entitled “Principal Accountant Fees and Services” in the Company’s 2010 Proxy Statement,  which will be delivered to stockholders in connection with the Company’s annual stockholders’ meeting to be held on May 9, 2011.
  51
  PART IV
 
 Item 15.  Exhibits and Financial Statement Schedule
 
 (a)
The following documents are filed as part of this report:
 
 1.
All Financial Statements:
  See the Consolidated Financial Statements and notes thereto in Item 8 above.
  2.
Schedule II — Valuation and Qualifying Accounts are filed as part of this Form 10-K.
 
 3.
Exhibits:
 
 See the Exhibit Index.
 
 (b)
Exhibits: We have filed, or incorporated into this Report by reference, the exhibits listed on the accompanying Exhibit Index immediately following the signature page to this Form 10-K.
 
 (c)
Financial Statement Schedules: See Item 15(a) above.
  52
  SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 GEEKNET, INC.By:
/s/ KENNETH G. LANGONEKenneth G. LangonePresident and Chief Executive OfficerDate: February 22, 2011
  53
  POWER OF ATTORNEY
 
 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kenneth G. Langone and Kathryn K. McCarthy, and each of them, his true and lawful attorneys-in-fact, each with full power of substitution, for him and all capacities, to sign any amendments to this report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission and does hereby ratify and confirm all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
 
 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
 Signature

Title

Date/s/Kenneth G. Langone

President, Chief Executive Officer and

February 22, 2011Kenneth G. Langone

Chairman of the Board of Directors/s/Kathryn K. McCarthy

Executive Vice President and Chief Financial Officer

February 22, 2011Kathryn K. McCarthy

(principal financial officer)/s/Matthew C. Blank

Director

February 18, 2011Matthew C. Blank/s/Andrew Anker

Director

February 19, 2011Andrew Anker/s/Matt Carey

Director

February 21, 2011Matt Carey/s/Peter A. Georgescu

Director

February 18, 2011Peter A. Georgescu/s/Robert M. Neumeister, Jr.

Director

February 18, 2011Robert M. Neumeister, Jr./s/Frank A. Riddick, III

Director

February 21, 2011Frank A. Riddick, III/s/Derek Smith

Director

February 18, 2011Derek Smith/s/Michael Solomon

Director

February 18, 2011Michael Solomon/s/David B. Wright

Director

February 18, 2011David B. Wright
  54
  GEEKNET, INC.
 
 SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
 (In thousands)
 
 Description

Balance

Beginningof

Period


Chargedto

Costsand

Expenses


Deductions


BalanceEnd

ofPeriodAllowance for doubtful accountsYear Ended July 31, 2007

$
122



7



53


$
76Year Ended July 31, 2008

$
76



154



178


$
52Five Months Ended December 31, 2008

$
52







52


$
-Year Ended December 31, 2009

$
-



97



97


$
-Year Ended December 31, 2010

$
-



-



-


$
-
  55
  Exhibit

Number

EXHIBIT INDEX2.1(2)
—
Asset Purchase Agreement by and between VA Software Corporation and CollabNet, Inc., dated April 24, 20073.1
—
Amended and Restated Certificate of Incorporation of the Registrant3.2
—
Amended and Restated Bylaws of the Registrant3.3(4)
—
Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Registrant3.4(13)
—
Certificate of Ownership and Merger of Geeknet, Inc. with and into SourceForge, Inc., dated November 4, 20093.5(14)
—
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Registrant3.6
—
Amendment to the Amended and Restated Bylaws of the Registrant dated February 9, 20103.7(16)
—
Amendment to the Amended and Restated Bylaws of the Registrant dated August 20, 20104.1(1)
—
Specimen Common Stock Certificate10.1(1) ‡
—
Form of Indemnification Agreement between the Registrant and each of its directors and officers10.2(1) ‡
—
1998 Stock Plan and forms of agreement thereunder10.4(1) ‡
—
1999 Director Option Plan10.9(3)
—
Asset Purchase Agreement dated December 23, 2005 by and between JupiterImages Corporation, the Registrant, and Animation Factory, Inc.10.11(5)
—
Mountain View City Center Net Office Lease by and between the Registrant and Eagle Square Partners dated July 14, 200710.14(6) ‡
—
2007 Equity Incentive Plan10.15(7) ‡
—
2007 Equity Incentive Plan Award Agreements10.16(8) ‡
—
Separation Agreement and Release by and between Ali Jenab and the Registrant dated June 9, 200810.17(9) ‡
—
Consulting Agreement by and between Ali Jenab and the Registrant dated as of June 9, 200810.19(10) ‡
—
Offer Letter dated December 3, 2008 by and between the Registrant and Scott L. Kauffman10.20(11) ‡
—
Restated Employment Agreement, dated April 9, 2009, by and between the Company and Patricia S. Morris10.21(12) ‡
—
Restated Employment Agreement, dated April 9, 2009, by and between the Company and Caroline Offutt10.23(15) ‡
—
Employment Agreement, effective as of December 16, 2010, by and between the Company and Kathryn McCarthy10.24(17)
—
Office Lease Agreement between PS Business Parks, L.P. and ThinkGeek, Inc., dated June 26, 200910.25(18) ‡
—
Restricted Stock Award Agreement between the Registrant and Kathryn McCarthy, dated December 30, 201023.1
—
Consent of KPMG LLP, Independent Registered Public Accounting Firm23.2
—
Consent of Stonefield Josephson, Inc., Independent Registered Public Accounting Firm24.1
—
Power of Attorney (see signature page)31. 1
—
Certification of Chief Executive Officer Pursuant to Section 302 of The Sarbanes-Oxley Act Of 200231.2
—
Certification of Chief Financial Officer Pursuant to Section 302 of The Sarbanes-Oxley Act Of 200232.1
—
Certification of Chief Executive Officer Pursuant to Section 906 of The Sarbanes-Oxley Act Of 200232.2
—
Certification of Chief Financial Officer Pursuant to Section 906 of The Sarbanes-Oxley Act Of 2002
 
 ‡
Denotes a management contract or compensatory plan or arrangement.
 
 (1)
Incorporated by reference to the corresponding exhibit of Registrant’s form S-1 and the amendment thereto (Commission registration no. 333-88687).
 
 (2)
Incorporated by reference from Exhibit 10.14 of Registrant’s Annual Report on Form 10-K for the period ended June 28, 2000 filed on October 26, 2000 (Commission file number 000-28369).
 (3)
Incorporated by reference from Exhibit 2.1 of Registrant’s Quarterly Report on Form 10-Q for the period ended January 31, 2006 filed on April 10, 2006 (Commission file number 000-28369).
 
 (4)
Incorporated by reference from Exhibit 3.3 of Registrant’s Quarterly Report on Form 10-Q for the period ended October 27, 2001 filed on December 7, 2001 (Commission file number 000-28369).
  
  (5)
Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on July 18, 2007.
 
 (6)
Incorporated by reference from Appendix A of Registrant’s Definitive Proxy Statement on Schedule 14A filed on November 1, 2007 (Commission file number 000-28369).
 
 (7)
Incorporated by reference from Exhibits 10.1 through 10.4 of Registrant’s Current Report on Form 8-K filed on December 31, 2007.
 
 (8)
Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on June 10, 2008.
 
 (9)
Incorporated by reference from Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on June 10, 2008.
 
 (10)
Incorporated by reference from Exhibit 10.3 of Registrant’s Current Report on Form 8-K filed on December 4, 2008.
 
 (11)
Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on April 9, 2009.
 
 (12)
Incorporated by reference from Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on April 9, 2009.
 
 (13)
Incorporated by reference from Exhibit 3.2 of Registrant’s Current Report on Form 8-K filed on November 4, 2009.
 
 (14)
Incorporated by reference from Exhibit 3.1 of Registrant’s Current Report on Form 8-K filed on November 4, 2009.
 
 (15)
Incorporated by reference from Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on December 20, 2010.
 
 (16)
Incorporated by reference from Exhibit 3.2 of Registrant’s Current Report on Form 10-Q filed on November 8, 2010 (Commission file number 000-28369).
 
 (17)
Incorporated by reference from Exhibit 23.1 of Registrant’s Annual Report on Form 10-K filed on February 26, 2010 (Commission file number 000-28369).
 
 (18)
Incorporated by reference from Exhibit 4.1 of Registrant’s Registration Statement on Form S-8 file on January 3, 2011 Annual Report on Form 10-K filed on February 26, 2010 (Commission file number 000-28369).