UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-25977
L Q CORPORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0421089
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
888 Seventh Ave., 17TH floor, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 974-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filler and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The number of shares outstanding of the registrant's common stock as of November
10, 2006 was 3,214,408.
L Q CORPORATION, INC.
INDEX
PART I. FINANCIAL INFORMATION.....................................................................................1
ITEM 1. FINANCIAL STATEMENTS .................................................................................1
Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December
31, 2005
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2006 (unaudited) and 2005
(unaudited)
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2006 (unaudited) and 2005
(unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..............16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................20
ITEM 4. CONTROLS AND PROCEDURES.............................................................................20
PART II. OTHER INFORMATION.......................................................................................21
ITEM 1. LEGAL PROCEEDINGS...................................................................................21
ITEM 6. EXHIBITS............................................................................................21
SIGNATURES.......................................................................................................22
ITEM 1. FINANCIAL STATEMENTS
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2006 2005
(unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 2,077 $ 5,746
Accounts receivable, net of allowance for doubtful
accounts of $69 and $0, respectively .................................... 1,472 1,097
Inventories ................................................................ 594 855
Other current assets ....................................................... 154 96
--------- ---------
Total current assets ..................................................... 4,297 7,794
Fixed assets, net .......................................................... 262 14
Goodwill ................................................................... 464 999
Intangible assets, net ..................................................... 475 --
Security deposit ........................................................... 22 --
--------- ---------
Total assets ............................................................. $ 5,520 $ 8,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 979 $ --
Accrued expenses and other current liabilities ............................. 278 575
Obligations under capital lease ............................................ 25 --
Due to Checkpoint .......................................................... -- 2,581
--------- ---------
Total current liabilities ................................................ 1,282 3,156
Long-term liabilities:
Obligations under capital lease ............................................ 49 --
Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares authorized; 3,214,408 shares
issued and outstanding at September 30, 2006 and
December 31, 2005 ........................................................ 3 3
Additional paid-in capital ................................................. 146,006 146,006
Accumulated deficit ........................................................ (141,729) (140,267)
Accumulated other comprehensive loss ....................................... (91) (91)
--------- ---------
Total stockholders' equity ............................................... 4,189 5,651
--------- ---------
Total liabilities and stockholders' equity ............................... $ 5,520 $ 8,807
========= =========
See accompanying notes to condensed consolidated financial statements.
1
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2006 2005 2006 2005
------- ------- ------- -------
Revenues ........................................................................ $ 1,658 $ -- $ 4,860 $ --
Cost of goods sold .............................................................. 960 -- 2,731 --
------- ------- ------- -------
Gross profit ................................................................. 698 -- 2,129 --
------- ------- ------- -------
Operating expenses:
Selling, general and administrative expenses ................................. 961 229 2,737 636
Technical and engineering expenses ........................................... 354 -- 941 --
------- ------- ------- -------
Total operating expenses ..................................................... 1,315 229 3,678 636
Loss from operations ............................................................ (617) (229) (1,549) (636)
Other income (expense), net ..................................................... 25 63 87 166
------- ------- ------- -------
Net loss ..................................................................... $ (592) $ (166) $(1,462) $ (470)
======= ======= ======= =======
Net loss per share:
Basic and diluted ............................................................ $ (0.18) $ (0.05) $ (0.45) $ (0.15)
======= ======= ======= =======
Weighted average shares ...................................................... 3,214 3,214 3,214 3,214
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
2
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Nine Months Ended
September 30,
------------------------------
2006 2005
---------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $(1,462) $ (470)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ......................................... 90 --
Provision for doubtful accounts ....................................... 69 --
Stock-based compensation .............................................. 22 --
Increase (decrease) in cash attributable to changes in operating assets
and liabilities:
Accounts receivable ..................................................... (444) --
Inventories ............................................................. 261 --
Other current assets .................................................... (58) 38
Accounts payable ........................................................ 979 --
Accrued expenses and other current liabilities .......................... (319) (57)
------- -------
Net cash used in operating activities ................................. (862) (489)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets ................................................ (221) --
Payment of security deposit ............................................. (22) --
Reimbursement from Checkpoint ........................................... 28 --
Acquisition of ACPG ..................................................... (2,581) --
------- -------
Net cash used in investing activities ................................. (2,796) --
------- -------
CASH FLOWS USED IN FINANCING ACTIVITIES,
principal payments on capital lease ..................................... (11) --
------- -------
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS .................... -- (13)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................. (3,669) (502)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 5,746 6,432
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 2,077 $ 5,930
======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Reduction in the estimated fair value of fixed assets acquired ........ $ (14) $ --
======= =======
Decrease in Goodwill due to the adjustment of the estimated fair value
of fixed assets acquired ............................................. $ 14 $ --
======= =======
Fixed assets acquired under capital lease obligation .................. $ 85 $ --
======= =======
See accompanying notes to condensed consolidated financial statements.
3
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
OVERVIEW
L Q Corporation, Inc. ("we" or the "Company") was incorporated in California as
"Liquid Audio, Inc." in January 1996 and reincorporated in Delaware in April
1999. In July 1999, we completed our initial public offering of common stock.
Our name was formally changed to "L Q Corporation, Inc." on January 7, 2004. Our
principal executive offices are located at 888 Seventh Avenue, 17th Floor, New
York, NY 10019 and our telephone number is (212) 974-5730.
Until the sale of substantially all of our assets to eBay, Inc. in January 2003,
we provided an open platform that enabled the digital delivery of media over the
Internet.
From January 2003 until December 30, 2005, we did not operate any business and
were settling our remaining claims and liabilities while reviewing alternatives
for the use or disposition of our remaining assets.
Our common stock is reported currently on The NASDAQ OTC Bulletin Board. Our
common stock was traded on The NASDAQ National Market, but was delisted on June
5, 2003. The market price per share of our stock increased significantly
following the implementation of our 1:250 reverse stock split and our 35:1
forward stock split effective as of June 8, 2004. The market price of our common
stock as of November 10, 2006 was $1.25 per share.
As disclosed in a Current Report on Form 8-K filed by the Company on July 12,
2006, the Board of Directors of the Company approved an amendment of the
services agreement between Barington Capital Group, L.P. ("Barington") and the
Company dated as of November 18, 2004 (as amended, the "Services Agreement").
The amendment extended the terms of the Services Agreement until December 31,
2007. The Services Agreement was previously set to expire by its terms on June
30, 2006.
As disclosed in a Current Report on Form 8-K filed by the Company on September
15, 2006, Sielox, LLC ("Sielox") entered into a strategic alliance agreement
with Costar Video Systems, LLC ("Costar"), a subsidiary of Dynabazaar, Inc.
("Dynabazaar"), dated as of September 15, 2006, pursuant to which the companies
agreed to explore mutually beneficial opportunities to work together, including,
without limitation, through a joint venture, joint sales or joint marketing
arrangements, or other business arrangements or strategic alliance. Costar
designs, sources and distributes video and imaging products for the security and
industrial markets. Sielox and Costar are also parties to a distribution
agreement, dated July 31, 2006, pursuant to which Sielox was appointed as an
authorized distributor of certain products of Costar.
As disclosed in a Current Report on Form 8-K filed by the Company on October 20,
2006, James A. Mitarotonda delivered to the Secretary of the Company notice of
his resignation as a director and Chairman of the Board of the Company,
effective as of the close of business on October 23, 2006. Mr. Mitarotonda had
no disagreements with the Company on any matter relating to the Company's
operations, policies or practices, and resigned in order to ensure that he had
adequate time to devote to his other professional responsibilities. On October
23, 2006, the Board of Directors of the Company appointed Steven Berns, a
director of the Company, to serve as Chairman of the Board of the Company,
effective as of the close of business on October 23, 2006. On October 23, 2006,
the Board of Directors of the Company elected Dianne K. McKeever to serve as a
director of the Company, effective as of the close of business on October 23,
2006. Ms. McKeever has been a research analyst at Barington since October 2001.
Barington and a group of other investors which have joined with Barington in the
filing of a statement on Schedule 13D collectively own greater than 10% of the
outstanding common stock of the Company. Mr. Mitarotonda is Chairman, President
and Chief Executive Officer of a corporation that is the general partner of
Barington. Sebastian E. Cassetta, who serves as a director, President and Chief
Executive Officer of the Company, is Senior Managing Director and the Chief
Operating Officer of Barington. Mr. Cassetta is also the Chief Executive Officer
of Costar. The Company is party to the Services Agreement, as noted above, under
which Barington provides, among other things, certain administrative, accounting
and other services on the Company's behalf. Barington is a party to a similar
services agreement with Dynabazaar and Barington and a group of other investors
which have joined with Barington in the filing of a statement on Schedule 13D
collectively own greater than 10% of the outstanding common stock of Dynabazaar.
4
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Checkpoint Acquisition
On January 6, 2006, the newly formed wholly-owned subsidiary of the Company,
Sielox completed the acquisition from Checkpoint Systems, Inc. ("Checkpoint") of
substantially all of the net assets of Checkpoint's Access Control Products
Group ("ACPG") division, effective as of the close of business on December 30,
2005. The acquisition of the net assets of ACPG are included in the consolidated
balance sheet as of December 31, 2005 and the operations of the business are
reflected in the consolidated Statement of Operations for the three and nine
months ended September 30, 2006.
The ACPG business, which operates as Sielox(TM) under the Company's management,
develops, designs and distributes open architecture access control software,
programmable controllers (electronic circuit boards) and related accessories
such as readers and ID cards, which can be configured to monitor, manage and
control physical access to building perimeters and interior locations.
SES Resources, Ltd.
On January 6, 2006, the Company's newly formed majority owned subsidiary, SES
Resources International, Inc. ("SES"), completed the acquisition of
substantially all of the assets of SES Resources, Ltd., a start up consulting
venture, effective as of December 30, 2005. The assets of SES Resources, Ltd.
consisted primarily of various trademarks. It was determined that these
trademarks had a fair value of zero. Consideration given in exchange for these
assets was a 19.5% ownership interest in SES. The newly formed business unit
specializes in delivering critical strategic security and business protection
solutions based on best practices developed by accomplished retired law
enforcement agents and in association with an advisory panel comprised of senior
executive service level government risk assessment and law enforcement
professionals ("Advisory Panel"). SES's primary areas of specialization are
expected to include: corporate investigations (e.g. know your customer, know
your employee, know your vendor reviews); due diligence reviews; forensic
accounting; anti-money laundering investigatory services consistent with the
requirements of the Patriot Act; anti-counterfeiting and intellectual property
protection; corporate health and wellness consultancy; emergency preparedness
and contingency planning; executive staffing solutions; and education and
government security training services. The operations of the business are
reflected in the Consolidated Statements of Operations for the three and nine
months ended September 30, 2006.
The Advisory Panel will provide SES with strategic and operational advice,
identify expert talent throughout the United States and internationally, and
manage and staff client assignments. The Advisory Panel is in the process of
being formed and currently includes Michael J. Thomas, a senior executive
service level agent from the U.S. Internal Revenue Service, the former Chief of
Police of Boca Raton, Florida and David Edelson MD, FACP, a medical doctor who
is presently Assistant Clinical Professor at Albert Einstein College of
Medicine. The Advisory Panel is chaired by one of the owners/founders of SES
Resources Ltd. and vice chaired by Sebastian Cassetta, former Vice President and
Director of Brinks Inc. and, as of May 16, 2006, the President and Chief
Executive Officer of the Company. SES is in the process of adding additional
members to the Advisory Panel from various law enforcement agencies.
LIQUIDITY ($ IN THOUSANDS)
The Company has incurred losses and negative cash flows from operations every
year since inception. For the nine months ended September 30, 2006, the Company
incurred a net loss of $1,462 and negative cash flows from operations of $862.
As of September 30, 2006, the Company had an accumulated deficit of
approximately $142,000. The Company feels its existing cash and cash equivalents
are sufficient to fund the Company's current operations and satisfy its other
obligations for at least the next twelve months. The Company believes these
other obligations will primarily relate to costs associated with the
satisfaction of any potential legal judgments or settlements, investments in
software development and engineering related to the operations of Sielox and
other expenses related to the operations of SES. Such operational related
expenses are expected to require the use of the Company's liquidity.
5
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the Company for
the three and nine months ended September 30, 2006 (unaudited) and September 30,
2005 (unaudited) have been prepared on a basis consistent with our audited
consolidated financial statements for the year ended December 31, 2005. The
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These condensed consolidated interim financial statements should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2005, which are contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission ("SEC") on March 31, 2006. The
condensed consolidated interim financial statements, in the opinion of
management, reflect all adjustments (including all normal recurring accruals)
necessary to present fairly the Company's financial position, results of
operations and cash flows for the interim periods ended September 30, 2006 and
2005. The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries Sielox and SES, respectively.
Significant intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS ($ IN THOUSANDS)
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents, including highly
rated money market funds with daily liquidity. At September 30, 2006, and
throughout the nine month period, balances of cash at financial institutions
exceeded the federally insured limit. The Company has not experienced any losses
in such accounts and believes it is not subject to any significant credit risk
on cash and cash equivalents. The following schedule summarizes the estimated
fair value of the Company's cash and cash equivalents:
September 30, December 31,
2006 (unaudited) 2005
----------------- -----------------
Cash and cash equivalents:
Cash.................... $ 75 $ 19
Money market funds...... 2,002 5,727
----------------- -----------------
$ 2,077 $ 5,746
================= =================
CONCENTRATION OF CREDIT RISK ($ IN THOUSANDS)
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short term investments and accounts receivable. Substantially all of the
Company's cash and cash equivalents are invested in a highly liquid money market
fund.
6
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FAIR VALUE OF FINANCIAL INSTRUMENTS ($ IN THOUSANDS)
The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accrued expenses payable are carried at cost. The
Company's financial instruments approximate fair value due to their relatively
short maturities. The Company does not hold or issue financial instruments for
trading purposes.
STOCK-BASED COMPENSATION ($ IN THOUSANDS)
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Accounting for Stock-Based Compensation
(Revised)." This statement requires companies to record compensation expense for
share-based awards issued to employees and directors in exchange for services
provided. The amount of compensation expense is based on the estimated fair
value of the awards on their grant dates and is recognized, on a straight line
basis, over the applicable vesting period. In addition, SFAS No. 123(R) requires
forfeitures of share-based awards to be estimated at the time of grant and
revised, if necessary, in subsequent periods if those estimates change based on
the actual amount of forfeitures. In the pro-forma information required under
SFAS No. 123 for periods prior to January 1, 2006, the Company accounted for
forfeitures as they occurred.
The fair value of stock options is determined using an option-pricing model that
takes into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and the
expected dividends on it, and the risk free interest rate over the expected life
of the option.
In the nine months ended September 30, 2006, the Company recognized compensation
expense of $22 in the Company's condensed consolidated financial statements, all
of which was for stock options. This amount includes compensation expense for
stock options which were granted prior to January 1, 2006 but were not yet
vested as of that date. Such compensation expense was estimated in accordance
with the provisions of SFAS No. 123(R). The compensation expense also includes
the expense recognized for stock options granted subsequent to January 1, 2006.
Such compensation expense was estimated based on the grant date fair value in
accordance with provisions of SFAS No. 123(R). Compensation expense increased by
$15 during the nine months ended September 30, 2006 as a result of implementing
SFAS No. 123(R).
On January 6, 2006, in conjunction with the completion of the purchase of the
ACPG division of Checkpoint and SES Resources, Ltd., the Company awarded 123,000
stock option grants. These options were granted to employees of Sielox and SES,
together with members of the Advisory panel and executive officers. Due to the
resignation of former CEO William Fox, 40,000 of those options awarded were
forfeited. In addition, approximately 66,000 previously outstanding options were
forfeited as a result of Mr. Fox's resignation. Due to the resignation of former
director and Chairman of the Board James A. Mitarotonda, approximately 160,000
previously outstanding options were forfeited.
Consistent with the disclosure provisions of SFAS No. 123, the Company's net
loss and basic and diluted net loss per share would have been adjusted for the
three and nine months ended September 30, 2005 to the pro forma amounts
indicated below in thousand, except per share amounts.
7
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 2005 September 30, 2005
(unaudited) (unaudited)
------------------ ------------------
Net loss - as reported ........................................................... $(166) $(470)
Less stock-based compensation (income) expense determined under
fair value based method, net of tax effects .................................... (6) (17)
----- -----
Net loss - including the effect of stock-based compensation expense .............. $(172) $(487)
===== =====
Basic and diluted net loss per share - as reported ............................... ($0.05) ($0.15)
Basic and diluted net loss per share - pro forma ................................. ($0.05) ($0.15)
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements
under SFAS No. 109, "Accounting for Income Taxes." Under FIN 48, the tax effects
of a position taken on a tax return should be recognized only if it is
"more-likely-than-not" that the position would be sustained based solely on its
technical merits as of the reporting date. FIN 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition, and also requires significant new
annual disclosures in the notes to the consolidated financial statements.
Differences between the amounts recognized in the statements of financial
position prior to the adoption of FIN 48 and the amounts reported after adoption
must be accounted for as a cumulative-effect adjustment recorded to the
beginning balance of retained earnings. FIN 48 is effective for fiscal years
beginning after December 15, 2006. As such, the Company is required to adopt FIN
48 at the beginning of its fiscal year 2007. The Company is currently evaluating
the various requirements of FIN 48, but we have not yet determined the impact,
if any, on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a single authoritative definition of fair
value, sets out a framework for measuring fair value, and requires additional
disclosures about fair-value measurements. SFAS 157 applies only to fair value
measurements that are already required or permitted by other accounting
standards (except for measurements of share-based payments) and is expected to
increase the consistency of those measurements. Accordingly, SFAS 157 does not
require any new fair value measurements. However, for some entities, the
application of SFAS 157 will change current practice. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. We do not expect the adoption of SFAS 157 to have a material
impact on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin 108, "Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 clarifies the staff's views regarding the process of quantifying
financial statement misstatements. SAB 108 allows registrants to adjust prior
year financial statements for immaterial errors in the carrying amount of assets
and liabilities as of the beginning of this fiscal year, with an offsetting
adjustment being made to the opening balance of retained earnings. SAB 108 is
effective for fiscal years ending on or after November 15, 2006 with earlier
adoption encouraged. We do not expect the adoption of SAB 108 to have a material
impact on our consolidated financial statements.
NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS):
ACPG ACQUISITION
On January 6, 2006, Sielox acquired certain assets and assumed certain
liabilities of the ACPG division of Checkpoint with an effective date as of the
close of business on December 30, 2005. Prior to the ACPG acquisition, the
Company was a public shell which had no operations. With the consummation of the
ACPG acquisition, the Company became the parent company of an operating
business. The aggregate purchase price, including acquisition costs of
approximately $300, was approximately $2,900.
8
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS) (CONTINUED):
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of the date of acquisition.
DECEMBER 31, 2005 ($ IN THOUSANDS)
----------------------------------
Accounts Receivable $ 1,097
Inventories 855
Proprietary Technology 449
Customer Relationships 72
Goodwill 464
Other assets 37
-------
Total assets acquired 2,974
Current liabilities (89)
-------
Net assets acquired $ 2,885
=======
Goodwill and intangible assets arose from the ACPG acquisition. The aggregate of
the purchase price plus acquisition costs of approximately $2,900 exceeded the
fair market value of all identifiable net assets. An independent appraisal was
conducted of all tangible and intangible assets (including, but not limited to,
inventory, fixed assets, developed software, hardware designs, customer lists,
patents, trademarks and trade names, etc.) received as a result of the
acquisition of ACPG. The results of this appraisal gave rise to, among other
things, goodwill. Goodwill of approximately $464 and intangible assets of
approximately $521 were recorded, net of purchase price adjustments made through
the quarter ended September 30, 2006, based on the independent appraisal. Based
on the results of the independent appraisal on the intangible assets acquired,
the Company booked amortization of $46 which was charged to operations for the
nine months ended September 30, 2006.
9
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS) (CONTINUED):
The following unaudited pro forma information presents results of operations of
the Company as if the acquisition of ACPG occurred as of January 1, 2005.
Although prepared on a basis consistent with the Company's consolidated
financial statements, these unaudited pro forma results do not purport to be
indicative of the actual results of operations of the combined companies which
would have been achieved had these events occurred at the beginning of the
periods presented nor are they indicative of future results.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 (UNAUDITED) SEPTEMBER 30, 2005 (UNAUDITED)
----------------------------- ------------------------------
($ in thousands) ($ in thousands)
Net Sales $ 1,648 $ 4,814
Cost of Goods Sold (894) (2,475)
------- -------
Gross Profit 754 2,339
Selling, General and Administrative Expenses 1,151 3,455
------- -------
Loss from Operations (397) (1,116)
Interest Income 50 153
Pro forma Adjustment in Interest Income (43)(A) (110)(A)
Pro forma Adjustment for Amortization Expense (15)(B) (46)(B)
Other Income, Net 13
------- -------
Net Loss-Pro forma ($ 405) ($1,106)
======= =======
Net loss per share - as reported $ (0.06) $ (0.09)
Net loss per share - proforma $ (0.13) $ (0.34)
Weighted average shares 3,214 3,214
(A) Interest income has been reduced based on cash balances that would have
existed had the acquisition occurred at the beginning of the period.
(B) Amortization expense has been recorded based upon the results of the
independent appraisal of the intangible assets acquired.
10
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - BALANCE SHEET COMPONENTS:
INVENTORIES, NET
The components of inventories are as follows ($ in thousands):
September 30, December 31,
2006 (unaudited) 2005
---------------- -------------
Finished goods ...................... $386 $581
Raw materials ....................... 208 274
---- ----
$594 $855
==== ====
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The components of accrued expenses and other current liabilities are as follows
($ in thousands):
September 30, December 31,
2006 (unaudited) 2005
---------------- -------------
Accrued Expenses and Other Current Liabilities
Consulting and professional services ............ $199 $486
Warranty Reserve ................................ 10 25
Compensation .................................... 21 -
Other ........................................... 48 64
---- ----
$278 $575
==== ====
11
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 -GOODWILL AND INTANGIBLE ASSETS, NET:
The intangible assets acquired as a result of the ACPG acquisition have been
adjusted as of September 30, 2006 from December 31, 2005 as a result of the
completion of an independent appraisal, adjustments to the estimated fair values
of the assets acquired, and post closing adjustments to the purchase price. The
components of intangible assets acquired as a result of the ACPG acquisition are
as follows ($ in thousands):
September 30, December 31,
2006 2005
(unaudited)
------------------------------- ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ --------------- ------------
Amortized intangible assets
Proprietary Technology ................................... $449 $ 42 $ - $ -
Existing Customer Relationships .......................... 72 4 - -
---- ---- ---- ---
Total .................................................. 521 $ 46 - $ -
==== ===
Unamortized intangible assets
Goodwill ................................................. 464 999
---- ----
Total .................................................. $985 $999
==== ====
Amortization expense for the three and nine months ended September 30, 2006 was
$46. As the intangible assets acquired in connection with the ACPG acquisition
were acquired with an effective date of December 31, 2005, there was no
amortization expense for the year ended December 31, 2005. Estimated
amortization expense applicable to amortizable intangible assets for each of the
next 5 years is $61.
All intangible assets of the Company are attributable to the Sielox, LLC
reporting segment and the weighted average amortization for the Company's
intangible assets is 9 years. The estimated useful life for Proprietary
Technology and Existing Relationships is 15 and 8 years, respectively.
NOTE 5- COMPREHENSIVE LOSS:
Comprehensive loss includes net loss and other comprehensive loss. Other
comprehensive loss includes accumulated translation adjustments. The components
of comprehensive loss are as follows ($ in thousands):
Three months ended Sep 30, Nine months ended Sep 30,
(unaudited) (unaudited)
---------------------------- -----------------------------
2006 2005 2006 2005
---- ---- ---- ----
Comprehensive loss:
Net Loss $ (592) $ (166) $ (1,462) $ (470)
Foreign currency translation - - - 13
------ ------ -------- ------
Total $ (592) $ (166) $ (1,462) $ (457)
====== ====== ======== ======
NOTE 6 - NET LOSS PER SHARE:
Basic and diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding during
the period. The calculation of diluted net loss per share excludes potential
common shares if the effect is anti-dilutive. Potential common shares consist of
unvested restricted common stock and incremental common shares issuable upon the
exercise of stock options. The Company had a total of 308,000 and 349,000 of
such options outstanding at September 30, 2006 and 2005, respectively.
12
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - SEGMENT REPORTING ($ IN THOUSANDS):
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the method in which companies report information
about operating segments in financial statements. SFAS No. 131 focuses on the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major customers. The Company has determined that it operated in two
and zero operating segment(s) at September 30, 2006 and 2005, respectively.
The following table represents total net revenues of each of the Company's
reporting segments for the three and nine months ended September 30, 2006 and
2005:
Three months ended Sep 30, Nine months ended Sep 30,
(unaudited) (unaudited)
-------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
Sielox, LLC $ 1,658 $ - $ 4,854 $ -
SES International Resources, Inc. - - 6 -
------- ---- ------- ---
Total $ 1,658 $ - $ 4,860 $ -
======= ==== ======= ===
The following table represents the total loss of each of the Company's reporting
segments for the three and nine months ended September 30, 2006 and 2005:
Three months ended Sep 30, Nine months ended Sep 30,
(unaudited) (unaudited)
-------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
Sielox, LLC $ (326) $ - $ (655) $ -
SES International Resources, Inc. (49) - (157) -
General Corporate (217) (166) (650) (470)
------- ------ -------- -----
Total $ (592) $ (166) $ (1,462) (470)
======= ====== ======== =====
The following table represents the total assets of each of the Company's
reporting segments at September 30, 2006 and December 31, 2005, respectively:
September 30, 2006 December 31, 2005
(unaudited)
------------------ -----------------
Sielox, LLC $3,377 $2,687
SES International Resources, Inc. 5 --
General Corporate 2,138 6,120
------ ------
Total $5,520 $8,807
====== ======
13
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8- OBLIGATIONS UNDER CAPITAL LEASE:
The Company leases certain equipment under a capital lease expiring in 2009. The
assets and liabilities under that capital lease are recorded at the lower of the
present value of the minimum lease payments or the fair value of the assets. The
assets are amortized over their estimated useful lives. Amortization of assets
under capital leases is included in depreciation and amortization expense for
the nine months ended September 30, 2006.
At September 30, 2006 and December 31, 2005, fixed assets included $85 and $0,
respectively, and accumulated amortization included $12 and $0, respectively,
related to assets recorded under the capital lease.
Aggregate future minimum lease payments at September 30, 2006 are as follows:
TWELVE MONTH PERIOD ENDING SEPTEMBER 30, (unaudited)
2007 $ 36
2008 36
2009 20
----------
Total future minimum lease payments 92
Amount representing interest 18
----------
Present value of future minimum
lease payments 74
Less current portion 25
----------
$ 49
==========
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
Legal proceedings
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against certain of our former officers and directors, and various of
the underwriters in our initial public offering ("IPO") and secondary offering.
The lawsuits have been filed by individual shareholders who purport to seek
class action status on behalf of all other similarly situated persons who
purchased the common stock of the Company between July 8, 1999 and December 6,
2000. The lawsuits allege that certain underwriters of the IPO solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with the Company's IPO which failed to accurately disclose the amount and nature
of the commissions and fees paid to the underwriter defendants. On or about
October 8, 2002, the Court entered an Order dismissing the claims asserted
against certain individual defendants in the consolidated actions without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934, as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities Act of 1933, as amended. The parties
have negotiated and executed a definitive settlement agreement. The proposed
settlement provides that the class members in the class action cases brought
against the participating issuer defendants will be guaranteed a recovery of $1
billion by insurers of the participating issuer defendants. If recoveries
totaling $1 billion or more are obtained by the class members from the
underwriter defendants, however, the monetary obligations to the class members
under the proposed settlement will be satisfied. In addition, the Company and
any other participating issuer defendants will be required to assign to the
14
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
class members certain claims that they may have against the underwriters of
their IPO's. The proposed settlement contemplates that any amounts necessary to
fund the settlement or settlement-related expenses would come from participating
issuers' directors and officers liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. If ultimately approved by the Court,
the proposed settlement would result in the dismissal, with prejudice, of all
claims in the litigation against the Company and all of the other issuer
defendants who have elected to participate in the proposed settlement, together
with the current or former officers and directors of participating issuers who
were named as individual defendants. The proposed settlement does not provide
for the resolution of any claims against the underwriter defendants, and the
litigation as against those defendants is continuing. Consummation of the
proposed settlement remains conditioned upon obtaining approval by the Court. On
September 1, 2005, the Court preliminarily approved the proposed settlement,
directed that notice of the terms of the proposed settlement be provided to
class members, and scheduled a fairness hearing. On April 24, 2006, the Court
held a fairness hearing in connection with the motion for final approval of the
proposed settlement at which objections to the proposed settlement were heard.
The Court did not issue a ruling at the fairness hearing. The settlement remains
subject to a number of conditions, including final approval of the Court.
Contingencies
On January 6, 2006, the Company's wholly-owned subsidiary, Sielox, acquired
Checkpoint's ACPG division. The acquisition had an effective date of December
30, 2005. The total cash consideration given to Checkpoint for the transaction
was approximately $2.6 million, of which approximately $2.5 million was paid
directly to Checkpoint and $100,000 was paid to an escrow agent on January 6,
2006.
This cash is held by the escrow agent and will be delivered by the agent to
Checkpoint after a period of one year subsequent to the acquisition date
assuming no claims for indemnification are made against Checkpoint.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements within the meaning of Federal securities laws. You can identify these
statements because they use forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue," "believe," and "intend" or other
similar words. These words, however, are not the exclusive means by which you
can identify these statements. You can also identify forward-looking statements
because they discuss future expectations, contain projections of results of
operations or of financial conditions, characterize future events or
circumstances or state other forward-looking information. We have based all
forward-looking statements included in Management's Discussion and Analysis on
information currently available to us, and we assume no obligation to update any
such forward-looking statements. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, actual results could differ materially from those projected in the
forward-looking statements. Potential risks and uncertainty include, but are not
limited to, those set forth in the Company's Annual Report on Form 10-K for the
year ended December 31, 2005, filed with the Securities and Exchange Commission
("SEC") which is incorporated by reference herein.
While we believe that the discussion and analysis in this report is adequate for
a fair presentation of the information, we recommend that you read this
discussion and analysis in conjunction with the "Management's Discussion and
Analysis" included in our Annual Report on Form 10-K for the year ended December
31, 2005 filed with the SEC.
OVERVIEW
Overview
L Q Corporation, Inc. ("we" or the "Company") was incorporated in California as
"Liquid Audio, Inc." in January 1996 and reincorporated in Delaware in April
1999. In July 1999, we completed our initial public offering of common stock.
Our name was formally changed to "L Q Corporation, Inc." on January 7, 2004. Our
principal executive offices are located at 888 Seventh Avenue, 17th Floor, New
York, NY 10019, and our telephone number is (212) 974-5730.
Until the sale of substantially all our assets to eBay, Inc. in January 2003, we
provided an open platform that enabled the digital delivery of media over the
Internet.
From January 2003 until December 30, 2005, we did not operate any business and
were settling our remaining claims and liabilities while reviewing alternatives
for the use or disposition of our remaining assets.
Our common stock is reported currently on The NASDAQ OTC Bulletin Board. Our
common stock was traded on The NASDAQ National Market, but was delisted on June
5, 2003. The market price per share of our stock increased significantly
following the implementation of the 1:250 reverse stock split and our 35:1
forward stock split effective as of June 8, 2004. The market price of our common
stock as of November 10, 2006 was $ per share.
As disclosed in a Current Report Form 8-K filed by the Company on July 12,
2006, the Board of Directors of the Company approved an amendment of the
services agreement between Barington and the Company dated as of November 18,
2004 (as amended, the "Services Agreement"). The amendment extended the term of
the Services Agreement until December 31, 2007. The Services Agreement was
previously set to expire by its terms on June 30, 2006.
As disclosed in a Current Report on Form 8-K filed by the Company on September
15, 2006, Sielox, entered into a strategic alliance agreement with Costar Video
Systems, LLC ("Costar"), a subsidiary of Dynabazaar, Inc. ("Dynabazaar"), dated
as of September 15, 2006, pursuant to which the companies agreed to explore
mutually beneficial opportunities to work together, including, without
limitation, through a joint venture, joint sales or joint marketing arrangement,
or other business arrangement or strategic alliance. Costar designs, sources and
distributes video and imaging products for the security and industrial markets.
Sielox and Costar are also parties to a distribution agreement, dated July 31,
2006, pursuant to which Sielox was appointed as an authorized distributor of
certain products of Costar.
16
As disclosed in a Current Report on Form 8-K filed by the Company on October 20,
2006, James A. Mitarotonda delivered to the Secretary of the Company notice of
his resignation as a director and Chairman of the Board of the Company,
effective as of the close of business on October 23, 2006. Mr. Mitarotonda had
no disagreements with the Company on any matter relating to the Company's
operations, policies or practices, and resigned in order to ensure that he had
adequate time to devote to his other professional responsibilities. On October
23, 2006, the Board of Directors of the Company appointed Steven Berns, a
director of the Company, to serve as Chairman of the Board of the Company,
effective as of the close of business on October 23, 2006. On October 23, 2006,
the Board of Directors of the Company elected Dianne K. McKeever to serve as a
director of the Company, effective as of the close of business on October 23,
2006. Ms. McKeever has been a research analyst at Barington since October 2001.
Barington and a group of other investors which have joined with Barington in the
filing of a statement on Schedule 13D collectively own greater than 10% of the
outstanding common stock of the Company. Mr. Mitarotonda is Chairman, President
and Chief Executive Officer of a corporation that is the general partner of
Barington. Sebastian E. Cassetta, who serves as a director, President and Chief
Executive Officer of the Company, is Senior Managing Director and the Chief
Operating Officer of Barington. Mr. Cassetta is also the Chief Executive Officer
of Costar. The Company is party to the Services Agreement, as noted above, under
which Barington provides, among other things, certain administrative, accounting
and other services on the Company's behalf. Barington is a party to a similar
services agreement with Dynabazaar and Barington and a group of other investors
which have joined with Barington in the filing of a statement on Schedule 13D
collectively own greater than 10% of the outstanding common stock of Dynabazaar.
Acquistions
On January 6, 2006, the newly formed wholly owned subsidiary of the Company,
Sielox, LLC ("Sielox"), completed the acquisition from Checkpoint Systems, Inc.
("Checkpoint") of substantially all of the net assets of its Access Control
Products Group ("ACPG") division, effective as of the close of business on
December 30, 2005. The acquisition of the net assets of ACPG are included in the
consolidated statement of financial position as of December 31, 2005 and the
operations of the business are reflected in the Statement of Operations for the
nine months ended September 30, 2006.
Also on January 6, 2006, our newly formed majority-owned subsidiary, SES
Resources International Inc. ("SES"), completed the acquisition of substantially
all of the assets of SES Resources Ltd, a start up consulting venture, effective
as of December 30, 2005. The assets of SES Resources Ltd, consisted primarily of
various trademarks. It was determined that these trademarks had a fair value of
zero. Consideration given in exchange for these assets was 19.5% ownership
interest in SES. The newly formed business unit specializes in delivering
critical strategic security and business protection solutions based on best
practices developed by accomplished retired law enforcement agents and in
association with an advisory panel comprised of senior executive service level
government risk assessment and law enforcement professionals ("Advisory Panel").
SES' primary areas of specialization are expected to include: corporate
investigations (e.g. know your customer, know your employee, know your vendor
reviews); due diligence reviews; forensic accounting; anti-money laundering
investigatory services consistent with the requirements of the Patriot Act;
anti-counterfeiting and intellectual property protection; corporate health and
wellness consultancy; emergency preparedness and contingency planning; executive
staffing solutions; and education and government security training services.
The Advisory Panel will provide SES with strategic and operational advices and
will identify expert talent throughout the United States and internationally, as
well as manage and staff client assignments. The Advisory Panel is in the
process of being formed and currently includes Michael J. Thomas, a senior
executive service level agent from the U.S. Internal Revenue Service, Andrew J.
Scott, the former Chief of Police of Boca Raton, Florida, and David Edelson MD,
FACP, a medical doctor who is presently Assistant Clinical Professor at Albert
Einstein College of Medicine. The Advisory Panel is chaired by one of the
owners/founders of SES Resources, Ltd., and vice chaired by Sebastian Cassetta,
a former Vice President and Director of Brinks Inc., and effective May 16, 2006,
the newly appointed President and chief executive officer of the Company. SES is
in the process of adding additional members to the Advisory Panel from various
law enforcement agencies.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are more fully described in Note 1, "The Company
and Summary of Significant Accounting Policies", to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2005. No changes to these critical polices have taken place during
the quarter ended September 30, 2006.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 ($ IN THOUSANDS)
Total Revenues
Revenue for the three month period ending September 30, 2006 was $1,658 compared
to $0 for the three month period ended September 30, 2005. Revenue for the three
month period ended September 30, 2006 is entirely due to the activities of our
subsidiary Sielox. Revenue for Sielox was $1,658. There was no revenue for the
three month period ended September 30, 2005 due to the discontinuation of our
software license and our music hosting business and the sale of digital music
fulfillment business to Geneva Media, LLC in January 2003.
Operating Expenses
Selling, General and Administrative Selling, general and administrative expenses
increased approximately 320% to $961 for the three months ended September 30,
2006 from $229 in the comparable period of 2005. Substantially all of the
increase can be attributed to expenses relating to the business and operations
of our subsidiaries Sielox and SES. Selling, general and administrative expenses
consist primarily of compensation for personnel, selling commissions, marketing
expenses and payments to outside contractors for general corporate functions,
including finance, information systems, human resources, facilities, legal
management and professional service fees, bad debt expense, occupancy and other
overhead.
Technical and Engineering. Technical and engineering expenses were $354 for the
three months ended September 30, 2006, compared to $0 for the three months ended
September 30, 2005. Technical and engineering expenses consist of expenses
relating to personnel costs and other expenses for software and hardware
engineers and applications.
Other Income (Expense), Net. Substantially all other income is from interest
received from investments in highly-liquid money market funds. Other income was
$25 for the three months ended September 30, 2006 compared to $63 for the three
months ended September 30, 2005. The decrease in other income is directly
attributable to a decline in the cash balances available for investment after we
purchased the ACPG division of Checkpoint. This purchase was completed on
January 6, 2006 with an effective date of December 30, 2005.
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 ($ IN THOUSANDS)
Total Revenues
Revenue for the nine month period ended September 30, 2006 was $4,860 compared
to $0 for the nine month period ending September 30, 2005. Revenue for the nine
month period ending September 30, 2006 is entirely due to the activities of our
subsidiaries Sielox and SES. Revenues were $4,854 for Sielox and $6 for SES.
There was no revenue for the nine month period ending September 30, 2005 due to
the discontinuation of our software license and our music hosting business and
the sale of digital music fulfillment business to Geneva Media, LLC in January
2003.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses increased approximately 330% to $2,737 for the nine months ended
September 30, 2006 from $636 in the comparable period of 2005. Substantially all
of the increase can be attributed to expenses relating to the business and
operations of our subsidiaries, Sielox and SES. Selling, general and
administrative expenses consist primarily of compensation for personnel, selling
commissions, marketing expenses and payments to outside contractors for general
corporate functions, including finance, information systems, human resources,
facilities, legal, management and professional service fees, bad debt expense,
occupancy and other overhead.
18
Technical and Engineering. Technical and engineering expenses were $941 for the
nine months ended September 30, 2006 compared to $0 for the nine months ended
September 30, 2005. Technical and engineering expenses consist of expenses
relating to personnel costs and other expenses for software and hardware
engineers and applications.
Other Income (Expense), Net. Substantially all other income is from interest
received from investment in highly-liquid money market funds. Other income was
$87 for the nine months ended September 30, 2006 compared to $166 for the nine
months ended September 30, 2005. The decrease in other income is directly
attributable to a decline in the cash balances available for investment after we
purchased the ACPG division of Checkpoint. This purchase was completed on
January 6, 2006 with an effective date of December 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES ($ IN THOUSANDS)
As of September 30, 2006, we had approximately $2,077 of cash and cash
equivalents.
Net cash used in operating activities was approximately $862 and approximately
$489 for the nine months ended September 30, 2006 and 2005, respectively.
Substantially all of the increase is attributable to the activities of our
subsidiaries, Sielox and SES. The net loss accounted for $1,462, accounts
receivable and accrued expenses and other current liabilities used $444 and $319
respectively. This decrease in cash used was reduced by an increase in
inventories and accounts payable of $261 and $979 respectively.
Net cash used in investing activities was approximately $2,796 and $0 for the
nine months ended September 30, 2006 and 2005, respectively. Cash used for
investing activities primarily relates to the purchase of the ACPG division of
Checkpoint for $2,581, and the purchase of fixed assets for $221.
Net cash used in financing activities was approximately $11 and $0 for the nine
months ended September 30, 2006 and 2005, respectively. Cash used for financing
activities primarily relates to principal payments on a capital lease.
We also, as permitted under Delaware law and in accordance with our Bylaws,
indemnify our officers and directors for certain events or occurrences, subject
to certain limits, while the officer or director is or was serving at our
request in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a Director and Officer Insurance
Policy that limits our exposure and enables us to recover a portion of any
future amounts paid. As a result of our insurance policy coverage, we believe
the fair value of these indemnification agreements is minimal.
We believe that our existing cash and cash equivalents will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures in
the near future.
RISK FACTORS
THE REGISTRANT'S LIQUIDITY COULD BE IMPAIRED IF OPERATING LOSSES CONTINUE AND/OR
OTHER OBLIGATIONS NEED BE FULFILLED.
The Registrant has incurred losses and negative cash flows from operations for
every year since inception. The ACPG operations have incurred losses in the past
and may incur losses in the future, which may impair the Registrant's liquidity.
As a newly formed organization, SES has no independent record of performance in
the various service categories it has identified. As a new business, SES may not
be successful in being engaged by prospective clients, which would have an
adverse affect on revenues and results of operations and liquidity. In addition,
the Registrant has other obligations primarily related to the costs associated
with the operation as a public company (legal, accounting, insurance, etc.), and
the satisfaction of any potential legal judgments or settlements. Such other
obligations, if required to be funded from other than operating profits, may
impair the Registrant's liquidity.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
No material changes exist to the market risk our investment portfolio of cash
and money market funds faced during the three months ended September 30, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Based on the evaluation of the effectiveness of our disclosure controls and
procedures(as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 as amended, ("Exchange Act")) by our management, with the
participation of our chief executive officer and our chief financial officer, as
of end of the period covered by this report, our chief executive officer and our
chief financial officer have concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms.
No change in our internal control over financial reporting occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against certain of our former officers and directors, and various of
the underwriters in our initial public offering ("IPO") and secondary offering.
The lawsuits have been filed by individual shareholders who purport to seek
class action status on behalf of all other similarly situated persons who
purchased the common stock of the Company between July 8, 1999 and December 6,
2000. The lawsuits allege that certain underwriters of the IPO solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with the Company's IPO which failed to accurately disclose the amount and nature
of the commissions and fees paid to the underwriter defendants. On or about
October 8, 2002, the Court entered an Order dismissing the claims asserted
against certain individual defendants in the consolidated actions without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934, as
amended. As a result, the only claims that remain against the Company are those
arising under Section 11 of the Securities Act of 1933, as amended. The parties
have negotiated and executed a definitive settlement agreement. The proposed
settlement provides that the class members in the class action cases brought
against the participating issuer defendants will be guaranteed a recovery of $1
billion by insurers of the participating issuer defendants. If recoveries
totaling $1 billion or more are obtained by the class members from the
underwriter defendants, however, the monetary obligations to the class members
under the proposed settlement will be satisfied. In addition, LQ Corporation and
any other participating issuer defendants will be required to assign to the
class members certain claims that they may have against the underwriters of
their IPO's. The proposed settlement contemplates that any amounts necessary to
fund the settlement or settlement-related expenses would come from participating
issuers' directors and officers liability insurance policy proceeds as opposed
to funds of the participating issuer defendants themselves. A participating
issuer defendant could be required to contribute to the costs of the settlement
if that issuer's insurance coverage were insufficient to pay that issuer's
allocable share of the settlement costs. If ultimately approved by the Court,
the proposed settlement would result in the dismissal, with prejudice, of all
claims in the litigation against the Company and all of the other issuer
defendants who have elected to participate in the proposed settlement, together
with the current or former officers and directors of participating issuers who
were named as individual defendants. The proposed settlement does not provide
for the resolution of any claims against the underwriter defendants, and the
litigation as against those defendants is continuing. Consummation of the
proposed settlement remains conditioned upon obtaining approval by the Court. On
September 1, 2005, the Court preliminarily approved the proposed settlement,
directed that notice of the terms of the proposed settlement be provided to
class members, and scheduled a fairness hearing. On April 24, 2006, the Court
held a fairness hearing in connection with the motion for final approval of the
proposed settlement at which objections to the proposed settlement were heard.
The Court did not issue a ruling at the fairness hearing. The settlement remains
subject to a number of conditions, including final approval of the Court.
ITEM 6. EXHIBITS
10.87 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of July 12, 2006.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
21
L Q CORPORATION, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 14, 2006 L Q CORPORATION, INC.
By: /s/ Sebastian E. Cassetta
-------------------------------------
Sebastian E. Cassetta
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Melvyn Brunt
-------------------------------------
DATE: November 14, 2006 Melvyn Brunt
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22