Quarterly Report

Table of Contents

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

Form 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)   OF THE   SECURITIES EXCHANGE ACT OF 1934
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934.
 
 
or
 
 
 
For the quarterly period ended June 30, 2012
 
 
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)


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

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

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
 Smaller reporting company ¨

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

The registrant had 6,468,295 shares of Common Stock, $0.001 par value per share, outstanding as of July 31, 2012.



Table of Contents

Table of Contents

 
 
Page
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
Certifications
 
 
 
 

Table of Contents

PART I


GEEKNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

June 30,
2012
 
December 31,
2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
34,609

 
$
36,910

Accounts receivable, net of allowance of $244 and $27 as of June 30, 2012 and December 31, 2011, respectively
5,722

 
6,264

Inventories, net
11,160

 
8,935

Prepaid expenses and other current assets
4,180

 
2,377

Total current assets
55,671

 
54,486

Property and equipment, net
5,545

 
5,717

Other long-term assets
2,027

 
4,089

Total assets
$
63,243

 
$
64,292

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Accounts payable
$
5,264

 
$
6,327

Deferred revenue
3,311

 
3,500

Accrued liabilities and other
1,758

 
3,409

Total current liabilities
10,333

 
13,236

Other long-term liabilities
79

 
71

Total liabilities
10,412

 
13,307

Commitments and Contingencies (Note 8)


 


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 — 6,611 and 6,473 shares, as of June 30, 2012 and December 31, 2011, respectively; outstanding — 6,468 and 6,361 shares as of June 30, 2012 and December 31, 2011, respectively
7

 
7

Treasury stock
(1,431
)
 
(978
)
Additional paid-in capital
810,642

 
807,829

Accumulated other comprehensive income
(3
)
 
(1
)
Accumulated deficit
(756,384
)
 
(755,872
)
Total stockholders’ equity
52,831

 
50,985

Total liabilities and stockholders’ equity
$
63,243

 
$
64,292


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

1

GEEKNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)


Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Net revenue:
 

 
 
 
 
 
e-Commerce revenue
$
17,804


$
14,319

 
$
35,314

 
$
29,524

Media revenue
5,275


5,751

 
10,028

 
10,462

Total net revenue
23,079


20,070

 
45,342

 
39,986

Cost of revenue:
 


 

 
 
 
 

e-Commerce cost of revenue
15,708


13,209

 
30,651

 
26,843

Media cost of revenue
1,186


1,459

 
2,186

 
2,805

Total cost of revenue
16,894


14,668

 
32,837

 
29,648

Gross margin
6,185


5,402

 
12,505

 
10,338

Operating expenses:
 


 

 
 

 
 

Sales and marketing
3,584


3,302

 
6,784

 
6,669

Research and development
1,880


1,309

 
3,770

 
2,286

General and administrative
3,098


2,927

 
6,398

 
5,899

Amortization of intangible assets
21


20

 
43

 
41

Total operating expenses
8,583


7,558

 
16,995

 
14,895

Loss from operations
(2,398
)

(2,156
)
 
(4,490
)
 
(4,557
)
Gain on sale of non-marketable securities
4,021

 
—

 
4,021

 
—

Interest and other income (expense), net
(14
)

15

 
(30
)
 
7

Income (loss) before income taxes
1,609


(2,141
)
 
(499
)
 
(4,550
)
Provision (benefit) for income taxes
—


—

 
13

 
(23
)
Net income (loss)
$
1,609

 
$
(2,141
)
 
$
(512
)
 
$
(4,527
)
Net income (loss) per share:
 


 

 
 

 
 

Basic
$
0.25


$
(0.34
)
 
$
(0.08
)
 
$
(0.72
)
  Diluted
$
0.25

 
$
(0.34
)
 
$
(0.08
)
 
$
(0.72
)
Shares used in per share calculations:
 


 

 
 

 
 

Basic
6,442

 
6,306

 
6,409

 
6,294

Diluted
6,473

 
6,306

 
6,409

 
6,294


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

2


GEEKNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, unaudited)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income (loss)
$
1,609

 
$
(2,141
)
 
$
(512
)
 
$
(4,527
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
14

 
(4
)
 
(2
)
 
(5
)
Comprehensive income (loss)
$
1,623

 
$
(2,145
)
 
$
(514
)
 
$
(4,532
)

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



3

GEEKNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

Six Months Ended June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net loss
$
(512
)
 
$
(4,527
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
1,050

 
1,056

Stock-based compensation expense
2,620

 
1,913

Provision for bad debts
224

 
3

Provision for excess and obsolete inventory
263

 
221

Provision for returns
416

 
492

Gain on sale of non-marketable securities
(4,021
)
 
—

Loss on sale of assets, net
4

 
—

Accounts receivable
318


(1,738
)
Inventories
(2,488
)

3,790

Prepaid expenses and other assets
(1,764
)

(1,165
)
Accounts payable
(1,063
)

(8,760
)
Deferred revenue
(190
)

832

Accrued liabilities and other
(2,065
)

(2,160
)
Other long-term liabilities
8


4

Net cash used in operating activities
(7,200
)

(10,039
)
Cash flows from investing activities:
 


 

Purchase of property and equipment
(848
)

(921
)
Proceeds from sales of intangible assets, net
10


65

Proceeds from sale of non-marketable equity investment
6,000

 
—

Net cash provided by (used in) investing activities
5,162


(856
)
Cash flows from financing activities:
 


 

Proceeds from issuance of common stock
191


679

Repurchase of stock
(452
)

(189
)
Net cash (used in) provided by financing activities
(261
)

490

Effect of exchange rates on cash and cash equivalents
(2
)

(5
)
Net decrease in cash and cash equivalents
(2,301
)

(10,410
)
Cash and cash equivalents, beginning of year
36,910


35,333

Cash and cash equivalents, end of period
$
34,609


$
24,923


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

4

GEEKNET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.      Basis of Presentation

Overview
     
Geeknet, Inc. (“Geeknet” or the “Company”) is an online network for the global geek community, comprised of technology professionals, technology enthusiasts and general consumers of technology-oriented goods, services and media. The Company's e-Commerce segment, consisting solely of ThinkGeek, Inc., sells geek-themed retail products to technology enthusiasts and general consumers through its ThinkGeek website. Geeknet's audience of technology professionals and technology enthusiasts relies on the Company's websites - SourceForge and Freecode - to create, improve, compare and distribute Open Source software and on Slashdot to peer-produce and peer-moderate technology news and discussion.

The interim financial information presented in this Form 10-Q is not audited and is not necessarily indicative of the Company’s future consolidated financial position, results of operations or cash flows. This is due in part to our ThinkGeek business, which 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. The accompanying condensed consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements included on Form 10-K, and the interim unaudited condensed consolidated financial statements contained in this Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual financial statements. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2012, its results of operations for the three and six months ended June 30, 2012 and June 30, 2011 and its cash flows for the six months ended June 30, 2012 and June 30, 2011 have been made. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the fiscal year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K filed with the SEC.

Certain prior period amounts have been reclassified to conform to the current period's presentation. Included in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011, there was $65 thousand included as net cash provided by prepaid expenses and other assets included in operating activities that is now included as proceeds from sales of intangible assets, net in investing activities. This amount relates to a payment in escrow for the sale of Ohloh website, including the developed technology and related equipment, to a third party.

On May 11, 2012, the Company announced that its Board of Directors is exploring strategic alternatives with respect to the Company's Media business, including the SourceForge, Slashdot and Freecode websites. The Company and its advisers are evaluating a range of options to maximize shareholder value, including, but not limited to, a potential sale of the Media business, investing additional capital to expand the Media business, or other possible transactions involving the Media business. There can be no assurance that the exploration of strategic alternatives will result in any transaction. This process is on-going and the Company's Board of Directors, executive management team and advisers continue to review and analyze opportunities for the Media business.

2.      Summary of Significant Accounting Policies:

Use of Estimates in Preparation of Consolidated Financial Statements

Except for the updates discussed below, there have been no significant changes to the Company’s critical accounting policies during the six months ended June 30, 2012.

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.

5


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. Revenue is deferred for orders shipped but not delivered before the end of the period. The amount recorded is estimated because of e-Commerce's high volume of transactions and the use of multiple shipping carriers. These estimates are used to determine what orders, placed at the end of the reporting period, were delivered and should be recognized as revenue. When calculating these estimates, the Company considers historical experiences of shipping transit times for domestic and international orders using different carriers. On average, shipping transit times are approximately one to six business days. As of June 30, 2012 and December 31, 2011, $ 0.5 million and $ 0.9 million , respectively, was recognized as deferred revenue for orders placed at the end of the reporting period, but not yet delivered.

e-Commerce also engages in the sale of gift certificates. When a gift certificate is sold, revenue is deferred until the certificate is redeemed and the products are delivered. Deferred revenue at June 30, 2012 and December 31, 2011 relating to gift certificates was $ 0.6 million and $ 0.7 million , respectively.

e-Commerce reserves an amount for estimated returns at the end of each reporting period. The Company generally gives customers a 90-day right to return products. These estimates are based on historical trends of amounts returned per revenue for a period. Reserves for returns at June 30, 2012 and December 31, 2011 were $0.1 million and $0.7 million , respectively.

The Company voluntarily ceased selling a product in July 2012 because of safety concerns. The Company is offering its customers who have purchased this product, the opportunity to return the product in exchange for a ThinkGeek credit. The Company believes the reserves for returns at June 30, 2012 to be adequate. The Company will adjust its reserves for returns as deemed appropriate based on future product returns.
Media Revenue

Media revenue is derived primarily from advertising on the Company’s various websites or from lead generation information provided to the customer. Advertisements include various forms of rich media and banner advertising, video, 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 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. Revenue recognized is limited to the lesser of actual delivery or on a straight line basis. 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 websites).  The Company defers Media advertising revenue for contracts where the Company has been compensated on certain performance criteria until the Company completes the contractually specified performance. Deferred revenue for the Media segment was $ 2.1 million and $ 1.8 million as of June 30, 2012 and December 31, 2011, respectively.

Adopted Accounting Pronouncements

In June 2011, the FASB issued authoritative guidance that amends previous guidance for the presentation of comprehensive income. It eliminates the option to present other comprehensive income in the statement of changes in equity. Under this revised guidance, an entity has the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The revised guidance also required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. In December 2011, the FASB issued guidance which indefinitely defers the guidance related to the presentation of reclassification adjustments. The Company adopted this standard on January 1, 2012. The adoption of this standard only impacts the presentation of the Company’s consolidated financial statements.

6


In May 2011, the FASB issued authoritative guidance that amends previous guidance for fair value measurement and disclosure requirements. The revised guidance changes certain fair value measurement principles, clarifies the application of existing fair value measurements and expands the disclosure requirements, particularly for Level 3 fair value measurements. The Company adopted this standard on January 1, 2012. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued authoritative guidance that amends previous guidance for goodwill intangibles that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The Company adopted this standard on January 1, 2012. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

3.      Balance Sheet Components

Property and Equipment

Property and equipment consist of the following (in thousands):
 
June 30,
 
December 31,
 
2012
 
2011
Computer and office equipment (useful lives of 2 to 4 years)
$
5,382

 
$
5,143

Distribution equipment (useful life of 5 years)
5,588

 
5,394

Furniture and fixtures (useful lives of 2 to 4 years)
347

 
347

Leasehold improvements (useful lives of lesser of estimated life or lease term)
376

 
365

Software (useful lives of  2 to 5 years)
1,042

 
700

Total property and equipment
12,735

 
11,949

Less: Accumulated depreciation and amortization
(7,190
)
 
(6,232
)
Property and equipment, net
$
5,545

 
$
5,717


Depreciation and amortization expense for property and equipment was $ 0.5 million for each of the three months ended June 30, 2012 and June 30, 2011, respectively, and $ 1.0 million for each of the six months ended June 30, 2012 and June 30, 2011, respectively.

Non-marketable equity investments

As of December 31, 2011, the Company owned approximately 9% of the outstanding capital stock of CollabNet, Inc. (“CollabNet”), which consisted of shares of CollabNet’s Series C-1 preferred stock. This investment was accounted for under the cost method as the Company held less than 20% of the voting stock of CollabNet and did not otherwise exercise significant influence over CollabNet.

On April 5, 2012, the Company sold its Series C-1 preferred stock investment in CollabNet, Inc. to a third party for $ 6.0 million . The carrying value of the investment at the time of the sale was $ 2.0 million and as such, a gain of $ 4.0 million was recognized during the second quarter of 2012.

The carrying value of the investment is included in Other long-term assets and was zero and $2.0 million at June 30, 2012 and December 31, 2011.
 
Accrued liabilities and other

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

7

 
June 30, 2012
 
December 31, 2011
Accrued employee compensation and benefits
$
1,369

 
$
2,175

Other accrued liabilities
389

 
1,234

Accrued liabilities and other
$
1,758

 
$
3,409


4.     Fair Value Measurements

The Company holds certain of its cash and cash equivalents in money market funds which is measured and recorded at fair value on a recurring basis at each reporting period using Level 1 inputs. The following tables show the fair value of the amounts held in money market funds at each reporting period (in thousands).
 
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Money market fund deposits
$
18,264

 
$
—

 
$
—

 
$
18,264

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
Money market fund deposits
$
18,263

 
$
—

 
$
—

 
$
18,263


5.   Computation of Per Share Amounts

Basic earnings per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed using the weighted-average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares are anti-dilutive when their conversion would reduce the loss per share. For the six months ended June 30, 2012 and for the three and six months ended June 30, 2011 , the Company excluded all stock options and restricted stock awards from the calculation of diluted net loss per common share because all such securities were anti-dilutive.
Employee stock options, nonvested shares, and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options, calculated based on the average share price for each period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.
The following table presents the calculation of basic and diluted earnings per share (in thousands, except per share data):

8

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Net income (loss)
$
1,609

 
$
(2,141
)
 
$
(512
)
 
$
(4,527
)
 
 
 
 
 
 
 
 
Weighted average shares - basic
6,442

 
6,306

 
6,409

 
6,294

  Dilutive effect of stock-based awards
31

 
—

 
—

 
—

Weighted average shares - dilutive
6,473

 
6,306

 
6,409

 
6,294

 
 
 
 
 
 
 
 
Net Income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
(0.34
)
 
$
(0.08
)
 
$
(0.72
)
  Diluted
$
0.25

 
$
(0.34
)
 
$
(0.08
)
 
$
(0.72
)
The following potential common shares have been excluded from the calculation of diluted earnings per share for all periods presented because they are anti-dilutive (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Anti-dilutive securities:
 
 
 
 
 
 
 
Options to purchase common stock
259

 
116

 
295

 
548

Unvested restricted stock units
228

 
—

 
201

 
164

Total
487

 
116

 
496

 
712


6.      Stock Compensation

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 canceled.  In May 2011, the Company's stockholders approved the addition of 200,000 shares of common stock available for issuance under the 2007 Plan. At June 30, 2012, a total of 177,371 shares of common stock were available for issuance under the 2007 Plan.  

In May 2012 at the Annual Meeting of Stockholders, the stockholders approved an amendment to the 2007 Plan. The 2007 Plan was amended to change the way restricted stock unit grants reduce the number of shares available for issuance under the 2007 Plan. Prior to the amendment, for each grant or forfeiture of a restricted stock unit, the number of shares available for issuance under the 2007 Plan decreased or increased by two . The amendment changed this 2:1 ratio to a 1:1 ratio.

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 on the date of grant.  All vested stock options 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 as 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.

Stock Options
 
The following table summarizes option activities from December 31, 2011 through June 30, 2012:

9

 
 
Number of Shares
 
Weighted-Average Exercise Price per Share
 
Weighted-Average Remaining Contractual Term (in years)
 
Aggregate Intrinsic Value (in thousands)
 Outstanding as of December 31, 2011
 
411,726

 
$20.47
 
 
 
 
Granted
 
2,000

 
$18.05
 
 
 
 
Exercised
 
(15,074
)
 
$12.71
 
 
 
 
Canceled
 
(98,147
)
 
$20.60
 
 
 
 
Outstanding as of June 30, 2012
 
300,505

 
$20.80
 
7.7
 
$767
Vested or expected to vest at June 30, 2012
 
276,711

 
$20.65
 
7.6
 
$753
Exercisable at June 30, 2012
 
141,113

 
$20.40
 
6.6
 
$519

  The total intrinsic value of options exercised for the three months ended June 30, 2012 and June 30, 2011 was insignificant and $ 0.2 million , respectively, and for the six months ended June 30, 2012 and June 30, 2011 was insignificant and $ 0.5 million , respectively. The Company issues new shares upon the exercise of options. The weighted average grant date fair value for the three months ended June 30, 2012 and June 30, 2011 was $7.86 and $13.96 , respectively. The weighted average grant date fair value for the six months ended June 30, 2012 and June 30, 2011 was $7.86 and $13.83 , respectively.  For the three and six months ended June 30, 2012 and June 30, 2011, no tax benefit was realized from exercised options.

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:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
Expected life (years)
3.06
 
4.41
 
3.06
 
4.35
Risk-free interest rate
0.4%
 
1.3%
 
0.4%
 
1.5%
Volatility
65%
 
65%
 
65%
 
65%
Dividend yield
—
 
—
 
—
 
—

Restricted Stock

Outstanding restricted stock units granted to employees vest over a three year period. Outstanding restricted stock units granted to non-employee directors typically vest in less than a year and represent compensation for serving on the Company's Board of Directors.  The following table summarizes restricted stock activities from December 31, 2011 through June 30, 2012:
 
 
Number of Shares
 
Weighted-Average Grant-Date Fair Value
 Outstanding as of December 31, 2011
388,318

 
$23.65
Granted
142,423

 
$15.80
Restricted Stock Release
(120,140
)
 
$23.76
Canceled
(482
)
 
$14.51
Outstanding as of June 30, 2012
410,119

 
$20.91
 
Stock-Based Compensation Expense


10

The following table summarizes stock-based compensation expense as recorded in the Condensed Consolidated Statements of Operations (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2012
 
2011
 
2012
 
2011
e-Commerce cost of revenue
$
67

 
$
57

 
$
174

 
$
80

Media cost of revenue
13

 
22

 
33

 
43

Included in cost of revenue
80

 
79

 
207

 
123

 
 
 
 
 
 
 
 
Sales and marketing
$
91

 
$
19

 
$
184

 
$
82

Research and development
87

 
31

 
103

 
47

General and administrative
1,062

 
1,055

 
2,126

 
1,661

Included in operating expenses
1,240

 
1,105

 
2,413

 
1,790

 
 
 
 
 
 
 
 
Total stock-based compensation expense
$
1,320

 
$
1,184

 
$
2,620

 
$
1,913


Stock-based compensation expense is recognized, net of estimated forfeitures, on a straight line basis over the vesting period. Forfeitures are estimated at the time of the grant, based on historical trends, and revised in subsequent periods, if necessary.

 As of June 30, 2012, total compensation cost not yet recognized and the weighted-average remaining term is as follows ($ in thousands):
 
Expense not yet
recognized
 
Weighted Average Remaining Term (in years)
Stock Options
$
1,516

 
2.6

Restricted Stock Units
$
5,990

 
1.9

 
7.  Segment 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, technology enthusiasts and general consumers and the Media segment consists of websites serving these communities.  The Company’s websites that comprise the Media segment include: SourceForge, Slashdot and Freecode.  

The operating segments are identified as components of the Company for which separate discrete financial information is available and regularly reviewed 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, Chief Administrative Officer and the Chief Executive Officers of the e-Commerce and Media business units.

11

(in thousands)
e-Commerce
 
Media  
 
Total Company
Three Months Ended June 30, 2012
 
 
 
 
 
  Net revenue
$
17,804

 
$
5,275

 
$
23,079

  Cost of revenue
15,708

 
1,186

 
16,894

  Gross margin
$
2,096

 
$
4,089

 
$
6,185

 
 
 
 
 
 
  Loss from operations
$
(2,092
)
 
$
(306
)
 
$
(2,398
)
Three Months Ended June 30, 2011
 
 
 
 
 
  Net revenue
$
14,319

 
$
5,751

 
$
20,070

  Cost of revenue
13,209

 
1,459

 
14,668

  Gross margin
$
1,110

 
$
4,292

 
$
5,402

 
 
 
 
 
 
  Loss from operations
$
(2,352
)
 
$
196

 
$
(2,156
)
 
 
 
 
 
 
Six Months Ended June 30, 2012
 
 
 
 
 
  Net revenue
$
35,314

 
$
10,028

 
$
45,342

  Cost of revenue
30,651

 
2,186

 
32,837

  Gross margin
$
4,663

 
$
7,842

 
$
12,505

 
 
 
 
 
 
  Loss from operations
$
(3,309
)
 
$
(1,181
)
 
$
(4,490
)
 
 
 
 
 
 
Six Months Ended June 30, 2011
 
 
 
 
 
  Net revenue
$
29,524

 
$
10,462

 
$
39,986

  Cost of revenue
26,843

 
2,805

 
29,648

  Gross margin
$
2,681

 
$
7,657

 
$
10,338

 
 
 
 
 
 
  Loss from operations
$
(4,091
)
 
$
(466
)
 
$
(4,557
)

The Company markets its e-Commerce products through its ThinkGeek online website and its Media products in the United States through its direct sales force.  International Media sales are marketed through our sales offices in Europe and representatives based in Asia and Australia. 
 
8.      Commitments and Contingencies

In January 2001, the Company, two of its former officers, and Credit Suisse First Boston, the lead underwriter in the Company's initial public offering ("IPO"), were named as defendants in a shareholder lawsuit filed in the U.S. District Court for the Southern District of New York, later consolidated and captioned In re VA Software Corp. Initial Public Offering Securities Litigation, 01-CV-0242.  The plaintiffs' class action suit seeks unspecified damages on behalf of a purported class of purchasers of the Company's common stock from the time of the Company's initial public offering in December 1999 through December 2000. On January 9, 2012, the matter was withdrawn with prejudice by the Plaintiffs.
On October 3, 2007, a purported Geeknet (formerly SourceForge, Inc.) 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.  On June 11, 2012, the Plaintiff voluntarily dismissed the action with prejudice.
During July 2012, the Consumer Product Safety Commission ("CPSC") filed an administrative complaint against the maker of a product that is sold on the Company's ThinkGeek website. The CPSC complaint does not name ThinkGeek or Geeknet as a party. This complaint is in its early stages; however, the Company voluntarily ceased selling this product due to the safety concerns raised by the CPSC. The Company is offering its customers who have purchased this product the opportunity to return the product in exchange for a ThinkGeek credit. This exchange is being offered through August 31, 2013. Due to the early stages of this complaint, the ultimate outcome could differ materially from our estimates in the short-term.
The Company is subject to various claims and legal actions arising in the ordinary course of business.  The Company

12

reviews all claims and accrues a liability for those matters where it believes that the likelihood that a loss will occur is probable and the amount of loss is reasonably estimable.  At June 30, 2012 and December 31, 2011, no liability was recorded for outstanding matters.

13


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

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

Critical Accounting Estimates
There have been no significant changes to our critical accounting estimates during the six months ended June 30, 2012 as compared to what was previously disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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 websites include: ThinkGeek, SourceForge, Slashdot, and Freecode. We provide our audiences and customers with content, culture, connections and commerce.

Our business consists of two operating segments: e-Commerce and Media. Our e-Commerce segment sells technology-themed retail products for technology enthusiasts and others through our ThinkGeek website. We offer a broader range of unique products in a single web property than are available in traditional brick-and-mortar stores. We introduce a range of new products to our audience on a regular basis and sell our own innovative products developed in-house ("GeekLabs"). Our Media segment provides web properties that serve as platforms for the creation, review and distribution of online peer produced content. Our audience of technology professionals and enthusiasts relies on our web properties, SourceForge, Slashdot, and Freecode, to create, improve, compare and distribute Open Source software and to research, debate and discuss current issues relating to the technology marketplace. We currently have 59 full-time equivalent employees ("FTE") at e-Commerce and 59 full-time equivalent employees at Media.

ThinkGeek's business strategy is to increase revenue by expanding the range of new and innovative products we sell, including our GeekLabs products, and by increasing traffic to our site and customer conversion. We attract traffic to our sites by using a variety of traditional online and direct retail marketing channels including paid search, and e-mail to our customers and followers. We continue to use the capabilities of the internet, including social networking sites such as Facebook, Twitter and YouTube, to increase brand awareness and to communicate with our customers.

Our ThinkGeek business is highly seasonal, reflecting the general pattern associated with the retail industry of peak sales and earnings during the calendar year-end holiday shopping season. In the past several years, a substantial portion of ThinkGeek revenue has occurred in the fourth quarter ending December 31. As is typical in the retail industry, we generally experience lower monthly revenue during the first nine months of the year.

14


We currently use the following key metrics to measure our e-Commerce business:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Unique visitors (in thousands) (1)
18,590

 
15,991

 
37,087

 
29,605

Number of orders received (in thousands)  (2)
296

 
245

 
603

 
514

Conversion rate
1.59
%
 
1.53
%
 
1.63
%
 
1.74
%
Average order value received  (3)
$
63

 
$
64

 
$
60

 
$
61

 
 
 
 
 
 
 
 
Number of orders shipped (in thousands) (4)
295

 
254

 
613

 
538

Average order value shipped  (3)
$
60

 
$
57

 
$
58

 
$
56


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

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

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

(4) The number of orders shipped represents all orders associated with the amount of revenue recognized for e-Commerce for the period presented.

Our Media segment is a social media destination for millions of influential technology professionals and enthusiasts. Our strategy targets business to business technology companies and their advertising agencies with the goal of increasing revenue per page.  We provide a 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 focused on increasing international traffic to our Media websites and have developed and implemented strategies to increase international revenue. We have an established sales force based in the United States and Europe. We also have executed agreements with representatives in Australia and Asia to market and sell our Media advertising products.

We currently use the following key metrics which are derived from data provided by Google Analytics to measure our Media business:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Unique visitors per month (in thousands) (1)
43,670

 
47,804

 
44,650

 
48,618

Visits per unique visitor per month
1.5
 
1.6

 
1.5
 
1.6

Visits per month (in thousands) (2)
67,184

 
76,815

 
68,877

 
78,206

Pages per visit
2.1

 
2.0

 
2.1

 
2.1

Page views per month (in thousands) (2)
141,999

 
155,788

 
146,633

 
163,108

Revenue per thousand pages (RPM)
$
12.38

 
$
12.31

 
$
11.40

 
$
10.69

Revenue per user (RPU) (3)
$
0.48

 
$
0.48

 
$
0.45

 
$
0.43


(1)
Unique visitors is the monthly average of unique visitors for all of our Media websites during the periods presented. This data is accumulated monthly and can include the same unique visitor in different months or can include the same user that may have visited from a different device or platform. In the third quarter of 2011, we made changes to our websites that affect the way we account for some of the metric data shown in the table above, and may result in the number of Unique visitors, Visits per unique visitor and Visits per month to decrease while Pages per visit may increase. This change will not affect Page views per month.

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

(3)
RPU is an annualized amount based on revenue and unique users during the period presented.

We continue to invest and improve our web properties SourceForge, Slashdot, and Freecode. Last year we launched an open source version of our platform for developers of Open Source projects, named Allura.  This includes

15

source code repositories, bug reports, discussions, mailing lists, wiki pages and blogs.  It demonstrates our commitment to the Open Source community.  Last year we also improved the SourceForge directory and made it easier to find open source software.  The redesigned directory includes a new browse experience, better project summary page, reviews and ratings, and improved search results.  This year we also launched a new mirror directory, enabling an expanded catalog with projects that may not be developed on SourceForge.  This will help users see a greater selection of software to choose from when searching for applications.  On our Slashdot website we made several enhancements which improved the user experience, site performance and scalability. We launched SlashTV which offers video content, generated by us, for technology professionals and IT decision makers that frequent the Slashdot website. We also recently launched SlashCloud, SlashBI and Slashdot Data Center. Cloud computing (SlashCloud) and Business Intelligence (SlashBI) are two new business to business editorial destinations designed to give breaking news, insights and analysis to IT professionals. Slashdot Data Center provides content related to data center hardware, technology, and other news. On our Freecode website, formerly named freshmeat, we completed a site re-brand.
       
On May 11, 2012, we announced that our Board of Directors is exploring strategic alternatives with respect to our Media business, including the SourceForge, Slashdot and Freecode websites. We, along with our advisers, are evaluating a range of options to maximize shareholder value, including, but not limited to, a potential sale of our Media business, investing additional capital to expand the Media business, or other possible transactions involving the Media business. There can be no assurance that the exploration of strategic alternatives will result in any transaction. This process is on-going and our Board of Directors, executive management team and advisers continue to review and analyze opportunities for our Media business.

Critical Accounting Policies

Accounting policies, methods and estimates are an integral part of the condensed 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 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, inventories, the assessment of impairment of goodwill and long-lived assets, stock-based compensation and contingencies and litigation.

Revenue Recognition

The Company recognizes revenue as follows:
 
e-Commerce Revenue

e-Commerce revenue is derived from the online sale of consumer goods. We recognize 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. Revenue is deferred for orders shipped but not delivered before the end of the period. The amount recorded is estimated because of e-Commerce's high volume of transactions and the use of multiple shipping carriers. These estimates are used to determine what orders, placed at the end of the reporting period, were delivered and should be recognized as revenue. When calculating these estimates, we consider historical experiences of shipping transit times for domestic and international orders using different carriers. On average, shipping transit times are approximately one to six business days. As of June 30, 2012 and December 31, 2011, $0.5 million and $0.9 million, respectively, was recognized as deferred revenue for orders placed at the end of the reporting period, but not yet delivered.

e-Commerce also engages in the sale of gift certificates. When a gift certificate is sold, revenue is deferred until the certificate is redeemed and the products are delivered. Deferred revenue at June 30, 2012 and December 31, 2011 relating to gift certificates was $ 0.6 million and $0.7 million, respectively.

e-Commerce reserves an amount for estimated returns at the end of each reporting period. We generally give customers a 90-day right to return products. These estimates are based on historical trends of amounts returned per revenue for a period. Reserves for returns at June 30, 2012 and December 31, 2011 were $0.1 million and $0.7 million, respectively. This decrease was due to the seasonality effect from holiday sales occurring at year end.

16


We voluntarily ceased selling a product in July 2012 because of safety concerns. We are offering our customers who have purchased this product, the opportunity to return the product in exchange for a ThinkGeek credit. We believe the reserves for returns at June 30, 2012 to be adequate. We will adjust our reserves for returns as deemed appropriate based on future product returns.
Media Revenue

Media revenue is derived primarily from advertising on our various websites or from lead generation information provided to the customer. Advertisements include various forms of rich media and banner advertising, video, text links and sponsorships, while lead generation information utilizes advertising and other methods to deliver leads to a customer. We recognize Media advertising revenue over the contractual campaign period and recognize 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. Revenue recognized is limited to the lesser of actual delivery or on a straight line basis. Our 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 websites).  We defer Media advertising revenue for contracts where we have been compensated on certain performance criteria until we complete the contractually specified performance. Deferred revenue for the Media segment was $ 2.1 million and $1.8 million as of June 30, 2012 and December 31, 2011, respectively.

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 review inventories each quarter and, when required, 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 Company has two reporting units, e-Commerce and Media. All goodwill is related the Media 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 a second step is performed to measure the amount of the impairment loss, if any. 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. See the Recent Accounting Pronouncements section elsewhere in this Management's Discussion and Analysis for additional information on a standard update related to goodwill testing that was adopted January 1, 2012.

Stock-Based Compensation

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


17

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


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 condensed consolidated financial statements and the accompanying notes included in this Form 10-Q.

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 
 
e-Commerce revenue
77.1
 %
 
71.3
 %
 
77.9
 %
 
73.8
 %
Media revenue
22.9

 
28.7

 
22.1

 
26.2

Total net revenue
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of revenue:
 
 
 
 
 
 
 
e-Commerce cost of revenue
68.1
 %
 
65.8

 
67.6
 %
 
67.1
 %
Media cost of revenue
5.1

 
7.3

 
4.8

 
7.0

Total cost of revenue
73.2
 %
 
73.1
 %
 
72.4
 %
 
74.1
 %
Gross margin
26.8
 %
 
26.9
 %
 
27.6
 %
 
25.9
 %
Operating expenses:
 

 
 

 
 
 
 
Sales and marketing
15.6

 
16.5

 
15.0

 
16.7

Research and development
8.1

 
6.5

 
8.3

 
5.7

General and administrative
13.4

 
14.6

 
14.1

 
14.8

Amortization of intangible assets
0.1

 
0.1

 
0.1

 
0.1

Total operating expenses
37.2
 %
 
37.7
 %
 
37.5
 %
 
37.3
 %
Loss from operations
(10.4
)
 
(10.8
)
 
(9.9
)
 
(11.4
)
Gain on Sale of non-marketable securities
17.4

 
—

 
8.9

 
—

Interest and other income (expense), net
(0.1
)
 
0.1

 
(0.1
)
 
—

Income (loss) before income taxes
6.9

 
(10.7
)
 
(1.1
)
 
(11.4
)
Provision (benefit) for income taxes
—

 
—

 
—

 
(0.1
)
Net income (loss)
6.9
 %
 
(10.7
)%
 
(1.1
)%
 
(11.3
)%

Net Revenue

 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-Commerce revenue
$
17,804

 
$
14,319

 
24
 %
 
$
35,314

 
$
29,524

 
20
 %
Media revenue
5,275

 
5,751

 
(8
)%
 
10,028

 
10,462

 
(4
)%
Net revenue
$
23,079

 
$
20,070

 
15
 %
 
$
45,342

 
$
39,986

 
13
 %

e-Commerce revenue increased $3.5 million and $5.8 million during the three and six months ended June 30, 2012 as compared to the same prior year periods. This is primarily due an increase in the number unique visitors from the prior year period which led to an increase in the number of orders placed through our ThinkGeek website as well

18

as an increase in business to business volume sales.
The number of unique visitors increased 16% and 25% during the three and six month periods ended June 30, 2012, respectively, as compared to the same prior year periods. The higher volume of visitors is primarily due to our efforts to increase consumer awareness of our ThinkGeek website through advertising and media coverage. Business to business volume sales increased $0.6 million and $0.9 million during the three and six month periods ended June 30, 2012, respectively, as compared to the same prior year periods. We continue to diversify our product offerings by introducing new products, including our innovative GeekLabs products and expanding licensing partnerships.
Media revenue decreased $0.5 million during the three months ended June 30, 2012 as compared to the same period ended June 30, 2011 and decreased $0.4 million during the six months ended June 30, 2012 as compared to the same period ended June 30, 2011. This is primarily due to declines in display advertising, as market rates become increasingly competitive, and due to decreases in unique visitors per month, visits per month and page views per month.

Cost of Revenue / Gross Margin

 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-Commerce cost of revenue
$
15,708

 
$
13,209

 
19
 %
 
$
30,651

 
$
26,843

 
14
 %
Media cost of revenue
1,186

 
1,459

 
(19
)%
 
2,186

 
2,805

 
(22
)%
Total cost of revenue
$
16,894

 
$
14,668

 
15
 %
 
$
32,837

 
$
29,648

 
11
 %
Gross margin
$
6,185

 
$
5,402

 
14
 %
 
$
12,505

 
$
10,338

 
21
 %
Gross margin %
27
%
 
27
%
 
 
 
28
%
 
26
%
 
 

e-Commerce cost of revenues increased $ 2.5 million during the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to higher sales. Also, contributing to the increase is a $0.2 million reserve to inventory for a product that we sell on our ThinkGeek website. The Consumer Product Safety Commission filed an administrative complaint against the maker of this product because of safety concerns, particularly to children. As other retailers have done, we voluntarily suspended the sales of this product in late July 2012. The Company does not anticipate this to have a material impact on e-Commerce revenues. Media cost of revenues decreased $0.3 million during the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to a decrease in personnel and related overhead expenses, depreciation expenses and facility expenses of $0.1 million each, respectively. Depreciation was lower due to certain assets that became fully depreciated during the first half of 2012. Facility expenses that are related to data storage, rent and maintenance costs for our Media website infrastructure and hardware decreased due to renegotiating contracts with certain facilities.

e-Commerce cost of revenues increased $ 3.8 million during the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to higher sales and the $0.2 million reserve to inventory for a certain product as described above. Media cost of revenues decreased $0.6 million during the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to a decrease in depreciation and facilities expenses of $0.3 million, each respectively for the reasons discussed above.

Gross margin as a percentage of revenues for the six months ended June 30, 2012 increased by two percentage points due to our efforts in reducing fulfillment and outbound shipping costs and improvements in inventory management for our e-Commerce segment. Also contributing to the favorable gross margin percentage are decreases in depreciation and facilities expenses in our Media segment.

Operating Expenses

Sales and Marketing Expenses

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

19

 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-Commerce S&M
$
1,798

 
$
1,662

 
8
%
 
$
3,375

 
$
3,142

 
7
 %
Media S&M
1,786

 
1,640

 
9
%
 
3,409

 
3,527

 
(3
)%
Total S&M
$
3,584

 
$
3,302

 
 
 
$
6,784

 
$
6,669

 
 
Percentage of total net revenue
16
%
 
16
%
 
 
 
15
%
 
17
%
 
 

e-Commerce sales and marketing expenses increased $0.1 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to higher personnel and related overhead expenses because of an increase of five FTE in our marketing workforce.

e-Commerce sales and marketing expenses increased $0.2 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to higher personnel and related overhead expenses because of an increase of five FTE in our marketing workforce, partially offset by cost savings in credit card fees.

Media sales and marketing expenses increased $0.1 million for the three months ended June 30, 2012 as compared to the same prior year period primarily due to higher personnel costs in our marketing department. Media sales and marketing expenses decreased $0.1 million for the six months ended June 30, 2012 as compared to the same prior year period primarily due to a decrease in commissions expense.

Research and Development Expenses

Research and development (“R&D”) expenses consist primarily of personnel and related overhead expenses for GeekLabs product developers in our e-Commerce segment and software engineers involved in developing our Media websites.  We expense all of our R&D costs as they are incurred, with the exception of costs related to internally developed software, which are capitalized.

 
Three Months Ended
June 30,
 
 
 
Three Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-Commerce R&D
$
877

 
$
455

 
93
%
 
$
1,675

 
$
827

 
103
%
Media R&D
1,003

 
854

 
17
%
 
2,095

 
1,459

 
44
%
Total R&D
$
1,880

 
$
1,309

 
 
 
$
3,770

 
$
2,286

 
 
Percentage of total net revenue
8
%
 
7
%
 
 
 
8
%
 
6
%
 
 

e-Commerce R&D expense increased $0.4 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to our increased focus on developing our own GeekLabs innovative products. We redirected certain of our workforce and hired new employees for our internal development center, GeekLabs. Media R&D expense increased $0.1 million, primarily due to the hiring of individuals to develop and design features and enhancements on our Media websites.

e-Commerce R&D expense increased $0.8 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to our increased focus on developing our own GeekLabs innovative products. We redirected certain of our workforce and hired new employees for our internal development center, GeekLabs. Media R&D expense increased $0.6 million, primarily due to the hiring of individuals to develop and design features and enhancements on our Media websites.




20

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.
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
General & Administrative
$
3,098

 
$
2,927

 
6
%
 
$
6,398

 
$
5,899

 
8
%
Percentage of total net revenue
13
%
 
15
%
 
 
 
14
%
 
15
%
 
 

G&A expenses increased $0.2 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 . This is primarily due to an increase in professional services expense of $0.2 million, an increase in personnel and related overhead expenses of $0.1 million because of an additional four FTE in our general and administrative workforce and an increase in consulting fees of $0.1 million related primarily to our exploration of strategic alternatives for our Media business. These increases were partially offset by a decrease in bonuses of $0.2 million as we migrated to a profit sharing program.

G&A expenses increased $0.5 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 . This is due to an increase in stock-based compensation of $0.5 million, related to awards granted to new executive team members, an increase in professional services expense of $0.4 million and an increase in bad debt expense of $0.2 million due to collectibility issues with one of our Media customers. These increases were partially offset by nonrecurring severance costs of $0.4 million that occurred in the prior year period related to the relocation of the our headquarters from Mountain View, California to Fairfax, VA and the resignation of our Media Chief Executive Officer and a decrease in bonuses of $0.2 million as we migrated to a profit sharing program.

Gain on sale of non-marketable securities

 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of non-marketable securities
$
4,021

 
$
—

 
nm
 
$
4,021

 
$
—

 
nm

nm= not meaningful
      
As of December 31, 2011, we owned approximately 9% of the outstanding capital stock of CollabNet, Inc. (“CollabNet”), which consist of shares of CollabNet’s Series C-1 preferred stock. This investment was accounted for under the cost method as we held less than 20% of the voting stock of CollabNet and did not otherwise exercise significant influence over CollabNet.

On April 5, 2012, we sold our Series C-1 preferred stock investment in CollabNet, Inc. to a third party for $ 6.0 million . The carrying value of the investment at the time of the sale was $ 2.0 million and as such, a gain of $ 4.0 million was recognized during the second quarter of 2012. The carrying value of the investment was zero and $2.0 million at June 30, 2012 and December 31, 2011.

21


Interest and Other Income (Expense), Net

 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
1

 
$
1

 
—
 %
 
$
2

 
$
1

 
100
 %
Other income (expense), net
(15
)
 
14

 
(207
)%
 
(32
)
 
6

 
(633
)%
Interest and other income (expense), net
$
(14
)
 
$
15

 
(193
)%
 
$
(30
)
 
$
7

 
(529
)%

Interest and other income (expense), net decreased during the three and six months ended June 30, 2012, as compared to the same prior year periods ended June 30, 2011. This is primarily due to foreign currency translation adjustments derived from international sales and transactions in our Media business, a loss on disposal of assets and fees related to our credit facility, slightly offset by a gain from the sale of an intangible asset.

Income Taxes
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
 June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Provision (benefit) for income taxes
$
—

 
$
—

 
—
%
 
$
13

 
$
(23
)
 
(157
)%

Income tax provision consists of state income tax expense on taxable income for the six months ended June 30, 2012.  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 provided for state income taxes in certain states based on our e-Commerce income in those states, and to the extent that our e-Commerce business unit is profitable, we may record an income tax provision, even though we generate losses on a consolidated basis.  

As of December 31, 2011, we had $280.6 million of federal net operating loss carry-forwards available to offset future federal taxable income, which expire at various dates through 2030.  We also have California net operating loss carry forwards of approximately $75.9 million to offset future California taxable income, which expire at various dates beginning in 2017.  California net operating losses have currently been suspended. We have not recognized any benefit from these net operating loss carry-forwards and 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. Additionally, net operating losses could be limited due to change in control.

e-Commerce Segment

e-Commerce Revenue

e-Commerce revenue is derived from the sale of consumer goods at retail on our website ThinkGeek, and includes shipping, net of returns and allowances. These consumer goods are typically electronics, toys, gadgets, apparel, edibles, geek-themed and other specialty or unique items. Our customers are primarily technology enthusiasts and general consumers. We sell and ship our products domestically and internationally.


22

 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
17,804

 
$
14,319

 
24
%
 
$
35,314

 
$
29,524

 
20
%
Percentage of total net revenue
77
%
 
71
%
 
 
 
78
%
 
74
%
 
 
   
e-Commerce revenue increased $3.5 million and $5.8 million during the three and six months ended June 30, 2012 as compared to the same prior year periods. This is primarily due to an increase in the number unique visitors from the prior year period, which led to an increase in the number of orders, and an increase in business to business volume sales.

The number of unique visitors increased 16% and 25% million during the three and six month periods ended June 30, 2012, respectively, as compared to the same prior year periods ended June 30, 2011. The higher volume of visitors is primarily due to our efforts to increase consumer awareness of our ThinkGeek website through advertising and media coverage and further diversify our product offerings by introducing new products, including our innovative GeekLabs products, and expanding licensing partnerships.
  
Business to business volume sales increased $0.6 million and $0.9 million during the three and six month periods ended June 30, 2012, respectively, as compared to the same prior year periods ended June 30, 2011. These increases are the result of the e-Commerce sales team strengthening relationships with our existing business to business clients and acquiring new clients who have particular interest in ThinkGeek products.
e-Commerce products sold on the Thinkgeek website are sold in the U.S. and internationally. The majority of Thinkgeek sales are in the U.S. and were 73% and 79% of total e-Commerce sales for each of the three months ended June 30, 2012 and June 30, 2011, respectively, and 76% and 82% of total e-Commerce sales for each of the six months ended June 30, 2012 and June 30, 2011, respectively. International sales on our Thinkgeek website continue to grow and were 20% and 15% of total e-Commerce sales for each of the three months ended June 30, 2012 and June 30, 2011, respectively, and 19% and 7% for each of the six months ended June 30, 2012 and 2011, respectively. We have been focused on increasing Thinkgeek awareness in other countries and increasing our ability to ship to other countries which have resulted in the increase in sales internationally.
e-Commerce Cost of Revenue / Gross Margin

e-Commerce cost of revenue consists of product , shipping and fulfillment costs and personnel and related overhead expenses associated with the operations and merchandising functions.
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-Commerce cost of revenue
$
15,708

 
$
13,209

 
19
%
 
$
30,651

 
$
26,843

 
14
%
e-Commerce gross margin
2,096

 
1,110

 
89
%
 
4,663

 
2,681

 
74
%
e-Commerce gross margin %
12
%
 
8
%
 
 
 
13
%
 
9
%
 
 

e-Commerce cost of revenues increased $2.5 million and $3.8 million during the three and six months ended June 30, 2012 as compared to the same periods ended June 30, 2011 primarily due to higher sales. Also, contributing to the increase is a $0.2 million reserve to inventory for a product that we voluntarily suspended selling, as described in the section titled Results of Operations. e-Commerce gross margins as a percentage of sales increased four percentage points for the three and six months ended June 30, 2012 compared to the same periods ended June 30, 2011 primarily due to our efforts in reducing fulfillment costs, through renegotiations with our warehouse and fulfillment provider, and reducing our out-bound shipping costs. We also continued to create efficiencies in inventory management throughout the past year which led to fewer discontinued inventory discounts and reduced write downs of obsolete inventory.

23


Also contributing to the increase in gross margins is a decrease in fifteen FTE. During the first quarter of 2012, we began outsourcing our ThinkGeek customer service department, which reduced headcount. We also redirected certain of our workforce from merchandising, included as cost of revenue, to developing our own innovative products in our GeekLabs, included in research and development.

e-Commerce Sales and Marketing

Sales and marketing 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.
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-Commerce S&M
$
1,798

 
$
1,662

 
8
%
 
$
3,375

 
$
3,142

 
7
%
Percentage of e-Commerce revenue
10
%
 
12
%
 
 
 
10
%
 
11
%
 
 

e-Commerce sales and marketing expenses increased $0.1 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 primarily due to higher personnel and related overhead expenses because of an increase of five FTE in our marketing workforce.

e-Commerce sales and marketing expenses increased $0.2 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to higher personnel and related overhead expenses because of an increase of five FTE in our marketing workforce, partially offset by cost savings in credit card fees. During the fourth quarter of 2011, we changed our credit card processing vendor which also resulted in cost reduction.

Sales and marketing as a percentage of e-Commerce sales decreased two percentage points during the three months ended June 30, 2012 as compared to the same period in the prior year period due to a decrease of three percentage points in credit card fees and other marketing expenses, partially offset by a one percentage point increase related to personnel and related overhead expenses.

Sales and marketing as a percentage of e-Commerce sales decreased one percentage point during the six months ended June 30, 2012 as compared to the same period in the prior year period primarily due to a decrease in credit card fees.

e-Commerce Research and Development

We focus much of our research and development on new and innovative products developed by GeekLabs. In addition to the direct revenue we derive from product sales, the release of new and innovative products attracts media coverage and drives customers to our site.
Research and development expenses consist primarily of personnel and related overhead expenses for software engineers involved in developing our ThinkGeek website. 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.
 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
e-commerce R&D
$
877

 
$
455

 
93
%
 
$
1,675

 
$
827

 
103
%
Percentage of e-Commerce revenue
5
%
 
3
%
 
 
 
5
%
 
3
%
 
 



24

e-Commerce R&D expense increased $0.4 million and $0.8 million for the three and six months ended June 30, 2012 as compared to the same periods ended June 30, 2011, respectively, primarily due to our increased focus in testing and developing new GeekLabs innovative products. We redirected certain of our workforce and hired new employees for our internal development center, GeekLabs. Research and development as a percentage of e-Commerce sales increased 2 percentage points in each of the three and six months ended June 30, 2012 as compared to the same prior year periods primarily due to higher personnel and related overhead expenses as a percentage of sales.


Media Segment

Media Revenue

Media revenue is derived primarily from advertising products delivered on our websites, SourceForge, Slashdot and Freecode and from the delivery of leads resulting from lead generation programs. The users of our websites are information technology professionals and enthusiasts. Advertising products offered on our websites include various forms of rich media and banner advertising, video, text links and sponsorships. Lead generation utilizes advertising and other methods to deliver leads to our customers. We have domestic and international customers.

US Direct sales revenue is generated from orders received by our United States based sales team primarily for display advertising and lead generation, which may also include advertisements to be delivered globally. International includes display ad sales or delivering leads to non-US based customers. 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.



 
Three Months Ended
June 30,
 
 
 
Six Months Ended
June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 

 
 

 
 
 
 

 
 

 
 
US Direct
$
3,511

 
$
4,083

 
(14
)%
 
$
6,534

 
$
7,231

 
(10
)%
International
683

 
457

 
49
 %
 
1,353

 
882

 
53
 %
Ad Networks
1,081

 
1,211

 
(11
)%
 
2,141

 
2,349

 
(9
)%
Total
$
5,275

 
$
5,751

 
(8
)%
 
$
10,028

 
$
10,462

 
(4
)%

Media revenue decreased $0.5 million during the three months ended June 30, 2012 as compared to the same period ended June 30, 2011 and decreased $0.4 million during the six months ended June 30, 2012 as compared to the same period ended June 30, 2011. This is primarily due to declines in display advertising, as market rates become increasingly competitive, and due to decreases in unique visitors per month, visits per month and page views per month.

We have committed investments in our products and our sites to increase traffic and downloads. During the first quarter of 2012, we launched SlashTV and during the second quarter of 2012, we launched SlashCloud, SlashBI and Slashdot Data Center. SlashTV provides video content for technology professionals and IT decision makers that frequent the Slashdot website. Cloud computing (SlashCloud) and Business Intelligence (SlashBI) are two new business to business editorial destinations designed to give breaking news, insights and analysis to IT professionals. Slashdot Data Center provides content related to data center hardware, technology, and other news.
 
We have also invested in diversifying our product revenue streams. This year we began offering marketing services. Marketing services attract existing communities, and using our freelance editors we are able not only to generate content for our clients such as white papers, polls, surveys and custom research reports, but also to host assets and facilitate discussions, providing sounding boards and feedback for clients' products and ideas.



25

Media Cost of Sales / Gross Margin

Media cost of revenue consists of personnel and related overhead expenses, equipment and bandwidth associated with the operation of our data center, personnel costs and related overhead associated with developing the editorial content of our websites and personnel and related overhead and third-party costs associated with delivering revenue producing products.
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Media cost of revenue
$
1,186

 
$
1,459

 
(19
)%
 
2,186

 
2,805

 
(22
)%
Media gross margin
4,089

 
4,292

 
(5
)%
 
7,842

 
7,657

 
2
 %
Media gross margin %
78
%
 
75
%
 
 
 
78
%