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 March 31, 2007
|_| 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 000-29423
DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3351937
(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
filer 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 May 11,
2007 was 23,691,756
DYNABAZAAR, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 1
Condensed Consolidated Balance Sheets as of
March 31, 2007 (unaudited) and December 31, 2006 1
Condensed Consolidated Statements of Operations for
the three months ended March 31, 2007 (unaudited)
and 2006 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2007 (unaudited) and
2006 (unaudited) 3
Notes to Condensed Consolidated Financial Statements (unaudited) 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS 21
SIGNATURES 21
ITEM 1. FINANCIAL STATEMENTS
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2007 2006
(unaudited) (audited)
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,770 $ 2,938
Accounts receivable, net of allowance for
doubtful accounts of $9 and $10
in 2007 and 2006 respectively 2,535 2,053
Inventory, net 3,765 3,738
Prepaid expenses 483 496
--------- ---------
Total current assets 9,553 9,225
Fixed assets 134 92
Trade Name 1,587 1,587
Other intangibles, net 2,867 2,903
Deposits 4 4
Long-term prepaid expenses 600 694
--------- ---------
Total assets $ 14,745 $ 14,535
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,490 $ 1,436
Accrued expenses and other current
liabilities 148 185
Line of credit 953 729
--------- ---------
Total current liabilities 2,591 2,350
Long term liability 2,225 2,225
Commitments and Contingency
Stockholders' equity:
Common stock, $0.001 par value; 90,000,000
shares authorized; 29,726,385 shares
issued at March 31, 2007 and
December 31, 2006, respectively 30 30
Additional paid-in capital 151,757 151,757
Accumulated other comprehensive income, net 260 260
Accumulated deficit (137,648) (137,617)
--------- ---------
14,399 14,430
Less: Common stock held in treasury, at cost;
6,034,629 at March 31, 2007 and
December 31, 2006 (4,470) (4,470)
--------- ---------
Total stockholders' equity 9,929 9,960
--------- ---------
Total liabilities and stockholders'
equity $ 14,745 $ 14,535
========= =========
See accompanying notes to condensed consolidated financial statements.
1
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, unaudited)
Three Months Ended
March 31,
-------------------------
2007 2006
--------- ---------
Revenues $ 4,208 $ --
Cost of goods sold 3,328 --
--------- ---------
Gross profit 880 --
Operating expenses, general and
administrative 934 215
--------- ---------
Income (loss) from operations (54) (215)
--------- ---------
Interest income 35 103
Interest expense (12)
--------- ---------
23 103
--------- ---------
Net income (loss) $ (31) $ (112)
========= =========
Net income (loss) per share:
Basic $ (0.00) $ (0.00)
========= =========
Diluted $ (0.00) $ (0.00)
========= =========
Weighted average number of common shares
outstanding:
Basic 23,692 23,410
========= =========
Diluted 23,692 23,410
========= =========
See accompanying notes to condensed consolidated financial statements.
2
DYNABAZAAR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
March 31,
-------------------------
2007 2006
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (31) $ (112)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
Depreciation and amortization 76 --
Provision for doubtful accounts (1)
Issuance of stock options -- 19
Change in cash attributable to changes in
operating assets and liabilities
Accounts receivable (481) --
Inventories (27) --
Prepaid expense 13 (38)
Long term prepaid expenses 94 83
Accounts payable 54 --
Accrued expense and other current liabilities (37) (72)
--------- ---------
Net cash used in operating activities (340) (120)
--------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES,
PURCHASE OF FIXED ASSETS (52) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES,
Proceeds from (payments for) line of credit, net 224 --
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (168) (120)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,938 9,125
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,770 $ 9,005
========= =========
SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:
Cash paid for interest $ 12 $
========= =========
Income taxes $ -- $ --
========= =========
3
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
OVERVIEW
Dynabazaar, Inc. (the "Company") was incorporated in the State of Delaware in
February 1997 as "Fairmarket, Inc." Through September 3, 2003, the Company was
an online auction and promotions technology service provider that enabled
marketers to create results-oriented rewards programs and helped commerce
companies automate the process of selling their excess inventory online to
wholesale and retail buyers. On September 4, 2003, the Company sold
substantially all of its operating assets to eBay, Inc. ("eBay") for
consideration of $4.5 million in cash under the terms and conditions of an asset
purchase agreement the Company entered into with eBay on June 20, 2003.
Following the closing of the asset sale, the Company changed its name from
"Fairmarket, Inc." to "Dynabazaar, Inc."
In connection with the cessation of the Company's online auction business, the
Company relocated its principal executive offices as of January 1, 2004 to 888
Seventh Avenue, 17th Floor, New York, New York 10019, an office maintained by
Barington Capital Group, L.P. ("Barington"), a limited partnership whose general
partner is a corporation of which James Mitarotonda is Chairman, President and
Chief Executive Officer. Mr. Mitarotonda was previously the Company's President
and Chief Executive Officer. He submitted his resignation, effective as of the
close of business on April 20, 2007. He continues to serve as a director of the
Company.
From January 2003 until June 20, 2006, the Company did not operate any business
and was settling its remaining claims and liabilities while reviewing
alternatives for the use or disposition of our remaining assets.
The Company's common stock trades on the NASDAQ OTC Bulletin Board under the
symbol "FAIM.OB". The Company's common stock was quoted on the NASDAQ National
Market, but was delisted on June 24, 2004.
On March 30, 2007, the Company entered into an amendment to the administrative
services agreement with Barington, effective as of January 1, 2007. Under the
amended agreement, which runs through December 31, 2007, Barington is to
continue to be paid a fee of $7,500 per month for performing certain
administrative, accounting and other services on behalf of the Company until the
closing of the transactions contemplated by the Amended and Restated Merger
Agreement at which point the fee is to increase to a rate of $10,000 per month.
4
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT:
As previously disclosed in a Form 8-K filed by the Company on April 23, 2007,
James A. Mitarotonda delivered to the secretary of Dynabazaar, Inc. (the
"Company") notice of his resignation as President and Chief Executive Officer of
the Company, effective as of the close of business on April 20, 2007. Mr.
Mitarotonda, who will continue to serve as a director of the Company, had no
disagreements with the Company on any matters related to the Company's
operations, policies or practices. The Board of Directors of the Company thanks
Mr. Mitarotonda for his dedicated service and valued contributions to the
Company.
On April 20, 2007, the Board of Directors of the Company appointed Sebastian E.
Cassetta to serve as the Company's President and Chief Executive Officer,
effective as of the close of business on April 20, 2007.
On January 5, 2007, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with L Q Corporation, Inc., a Delaware Corporation, and
LQ Merger Corp., a Delaware corporation and wholly-owned subsidiary of the
Company ("LMC"), which Merger Agreement was amended and restated on February 26,
2007 (the "Amended and Restated Merger Agreement"). The Amended and Restated
Merger Agreement provides that, upon the terms and subject to the conditions set
forth in such agreement, LMC will merge with and into L Q Corporation, Inc. with
L Q Corporation, Inc. continuing as the surviving corporation and a wholly-owned
subsidiary of the Company.
Under the terms of the Amended and Restated Merger Agreement, L Q Corporation
stockholders will receive 3.68 shares of Dynabazaar common stock for each share
of L Q Corporation common stock they hold. Upon completion of the merger, L Q
Corporation stockholders will hold approximately 34% of the combined company and
our stockholders will hold approximately 66% of the combined company on a
fully-diluted basis. It is anticipated that the combined company's shares will
continue to trade on the Over-The-Counter Bulletin Board.
Both the Company's and L Q Corporation's Board of Directors approved the Amended
and Restated Merger Agreement in accordance with the recommendation of the
special committees of independent directors formed by the Board of Directors of
each company to evaluate the transaction.
The transaction is subject to stockholder approval and other customary
conditions and is expected to be completed during the second half of 2007. A
special meeting of stockholders of the Company will be announced in the near
future to obtain stockholder approval of the transaction.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION ($ IN THOUSANDS)
The accompanying condensed consolidated financial statements of the Company for
the three months ended March 31, 2007 and 2006 are unaudited and have been
prepared on a basis substantially consistent with our audited consolidated
financial statements for the year ended December 31, 2006. 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, 2006, which are contained in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission (the "SEC") on April 4, 2007
and the amended 10-K filed on April 17, 2007. 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 March 31, 2007 and 2006. The results of operations for the
interim periods are not necessarily indicative of the results of operations to
be expected for the fiscal year.
5
I NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONT:
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 March 31, 2007, and throughout
the three 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:
March 31, December 31,
2007 (unaudited) 2006
---------------- ------------
Cash and cash equivalents:
Cash $ 26 $ 72
Money market funds 2,744 2,866
--------- ---------
$ 2,770 $ 2,938
========= =========
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.
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.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of our
direct and indirect wholly-owned subsidiaries Costar and VSTC. Significant
intercompany transactions and balances have been eliminated.
INCOME TAXES
Effective January 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). There were no unrecognized tax benefits as of January 1, 2007 and as of
March 31, 2007. FIN 48 prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to
be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities. The Company recognizes accrued interest and
penalties related to unrecognized tax benefits as income tax expense. No amounts
were accrued for the payment of interest and penalties at January 1, 2007. There
was no change to this balance at March 31, 2007. Management is currently unaware
of any issues under review that could result in significant payments, accruals
or material deviations from its position. The adoption of the provisions of FIN
48 did not have a material impact on the Company's financial position, results
of operations and cash flows.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No.123(R) Accounting for Stock-Based Compensation. Among
other items, SFAS No. 123(R) requires companies to record compensation expense
for share-based awards issued to employees and directors in exchange for
services provided. The amount of the compensation expense is based on the
estimated fair value of the awards on their grant dates and is recognized over
the applicable vesting period.
6
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.
The Company adopted SFAS No.123(R) using the modified prospective transition
method, which requires the application of the accounting standard to all
share-based awards issued on or after January 1, 2006, and any outstanding
share-based awards that were issued but not vested as of January 1, 2006.
In the three months ended March 31, 2007 and 2006, the Company recognized
stock-based compensation expense of $0 and $19, respectively, in its condensed
consolidated financial statements. This amount includes compensation expense for
fully vested stock options granted subsequent to January 1, 2006 based on the
grant date fair value estimated in accordance with the provisions of SFAS No.
123(R).
7
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACQUISITION:
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), the Company's direct and indirect wholly owned
subsidiaries, completed the acquisition (the "Acquisition") of substantially all
of the assets of Southern Imaging, Inc., a Texas corporation ("Southern
Imaging"), and Video Solutions Technology Center, Inc., a Nevada corporation
("Video Solutions"), pursuant to the transactions contemplated by the asset
purchase agreement, dated as of June 20, 2006, by and between Southern Imaging,
Video Solutions, the shareholders of Southern Imaging, Costar and VSTC. However,
the acquisition is being accounted for as if it was effectively completed on
June 30, 2006. Results of operations of Southern Imaging and Video Solutions are
included in the consolidated financial statements since June 30, 2006.
Costar, the Company's wholly-owned subsidiary which acquired Southern Imaging's
assets, designs, sources and distributes video and imaging products for the
security and industrial markets. VSTC, a wholly owned subsidiary of Costar which
acquired the assets of Video Solutions, provides product design and development,
technical support and repair services for Costar. Estimated consideration for
the Acquisition is up to approximately $9.6 million, consisting of the issuance
at closing of 200,000 shares of our common stock, a cash payment of
approximately $3.8 million (including a finders fee payment of approximately
$154,000, payment of $108,000 to Barington and the payoff of shareholder loans
of approximately $612,000) less the value of the 200,000 shares of Dynabazaar
common stock, the assumption of certain liabilities of approximately $3.5
million, and deferred consideration of up to $4 million in cash, contingent upon
Costar and VSTC achieving certain levels of sales and EBITDA after the closing,
through 2009 of which $2,225 is recorded as a long-term liability. On September
29, 2006, the 200,000 shares of Dynabazaar common stock were issued.
The Company has incorporated contingent consideration into the structure of the
acquisition in June 2006. This arrangement generally results in the payment of
additional consideration to the sellers upon the satisfaction of certain events.
The additional cash payments or share issuances are contingent consideration
accounted for under the Emerging Issues Task Force ("EITF") No. 95-8.
"Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination", and is considered to be
additional purchase consideration and will be accounted for as part of the
purchase price of the firms when the outcome of the contingency is determinable
beyond a reasonable doubt. The sum of the amounts assigned to assets acquired
and liabilities assumed (e.g. fair values) exceeded the cost of the acquired
entity by $2,225 therefore contingent consideration was recorded for that
amount. Contingent consideration in these circumstances may be recorded pursuant
to paragraph 46 of Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations."
There were no material relationships between the Company or its affiliates and
any of the parties to the Asset Purchase Agreement, other than in respect of
such agreement.
8
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - ACQUISITION CONT:
Allocation of Purchase Price
Allocated to:
Trade name $ 1,587
Other intangibles 3,066
Cash 240
Prepaids 105
Deposits 4
Accounts receivables, net 1,875
Inventory 2,623
Property and equipment, net 95
-------
Total 9,595
Liabilities Assumed:
Accounts payable and other (1,634)
Revolver facilities (1,863)
Issuance of common stock (74)
Long term liability (2,225)
-------
Net purchase price $ 3,800
=======
Intangible assets arose from the Costar acquisition. The aggregate of the
estimated purchase price plus acquisition costs of an estimated $9.6 million
exceeded the fair market value for all identifiable net assets. An independent
appraisal was conducted of all intangible assets (including, but not limited to,
distribution agreements, customer lists, patents, trademarks and trade names,
etc.) received as a result of the acquisition of Costar.
Pro Forma Income Statement
The following unaudited pro forma information presents results of operations of
the Company as if the acquisition of Costar occurred as of January 1, 2006: ($
in thousands)
Quarter Ended
March 31, 2006
--------------
Net Sales $ 4,219
Cost of goods sold (3,340)
--------
Gross profit 879
General and administrative expenses 883
--------
Net loss from operations (4)
Interest income 103
Pro forma adjustment in interest income (33)(a)
Pro forma adjustment amortization of intangible assets acquired (67)(b)
--------
Net loss $ (1)
========
Net income (loss) per share - as reported $ (0.00)
Net income (loss) per share - pro forma $ (0.00)
Weighted-average shares 23,410
9
NOTE 2 - ACQUISITION CONT:
(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 represents annual charges to amortization expense for the
intangible assets acquired which are the subject to amortization.
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.
NOTE 3 - INTANGIBLE ASSETS, NET: ($ in thousands)
The intangible assets acquired as a result of the Southern Imaging and Video
Solutions acquisition have been adjusted in the prior year 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 acquisition are as
follows:
March 31, December 31,
2007 2006
(unaudited)
------------------------------ ------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ----------- -------------- -----------
Amortized intangible asset:
Other intangibles, net $3,066 $ 199 $3,066 $ 133
====== ======
Unamortized intangible assets
Trade Name 1,587 1,587
------ ------
Total $4,653 $4,653
====== ======
Amortization expense for the three months ended March 31, 2007 was $66.
Estimated amortization expense applicable to amortizable intangible assets for
each of the next 5 years is $266. The estimated useful life for Existing
Customer Relationships is 6 years.
NOTE 4 - NET INCOME (LOSS) PER SHARE:
The number of shares used to compute basic loss per share and diluted loss per
share relates to additional shares to be issued upon the assumed exercise of
stock options and warrants, net of shares hypothetically repurchased at the
average market price with the proceeds of exercise. For the three months ended
March 31, 2007 and 2006, basic and diluted net loss per common share is computed
based on the weighted average number of common shares outstanding during the
period because the effect of potential common equivalent shares would be
anti-dilutive.
10
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - 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 our common stock between July 8, 1999 and December 6, 2000. A
consolidated amended class action complaint was filed on April 19, 2002. The
complaint alleges that certain underwriters of the IPO solicited and received
excessive and undisclosed fees and commissions in connection with that offering.
The complaint further alleges that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with our 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 us. On or about February 19, 2003, the Court entered an Order
dismissing with prejudice the claims asserted against us under Section 10(b) of
the Exchange Act. As a result, the only claims that remain against us are those
arising under Section 11 of the Securities Act. 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, we 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 us 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. By order entered on September
1, 2005, the Court granted preliminarily approval of the proposed settlement and
directed that notice of the terms of the proposed settlement be provided to
class members. Thereafter, the court held a fairness hearing, on April 24, 2006,
at which objections to the proposed settlement were heard. The Court has yet to
issue a ruling on the motion for final approval. On December 5, 2006, the Court
of Appeals for the Second Circuit reversed the Court's order certifying a class
in six test cases that were selected by the underwriter defendants and
plaintiffs in the coordinated proceeding. On April 6, 2007, the Court of Appeals
denied the plaintiffs' petition for rehearing of the Court's December 5, 2006
ruling but noted that the plaintiffs remain free to ask the District Court to
certify a different class which might meet the standards for class certification
that the Court of Appeals articulated in its December 5, 2006 decision. Because
our proposed settlement with the plaintiffs involves the certification of the
case against us as a class action for settlement purposes, it is unclear what
impact, if any, the Second Circuit's class certification ruling will have on our
case or the viability of the proposed settlement. In the event the settlement is
not finalized, the Company believes that it has meritorious defenses to
plaintiffs' claims and intends to defend the action vigorously.
The expense of defending this litigation may be significant. The amount of time
to resolve these lawsuits is unpredictable and defending us may divert
management's attention from the day-to-day operations of our business, which
could adversely affect our business, results of operations and cash flows. In
addition, an unfavorable outcome in such litigation could have a material
adverse effect on our business, results of operations and cash flows.
11
DYNABAZAAR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 - MAJOR CUSTOMERS AND SUPPLIERS:
For the quarter ended March 31, 2007, the Company had two customers that
contributed 14.8% and 13.3% of sales revenue, for a total of $623 and $560
respectively. As of March 31, 2007, these same two customers owed 14.7% and
12.5% of the outstanding accounts receivable balance.
At March 31, 2007, the Company had two major suppliers that were owed
approximately 51.7% of the total accounts payable, for a total of $1,062 and
$673, respectively.
NOTE 7 - CREDIT LINE ($ in thousands)
The Company maintains a line of credit with the Bank of Texas. The line has a
limit of $2.5 million and interest is charged on the outstanding balance at a
variable rate, which was 8.25% at March 31, 2007. The line is secured by the
Company's accounts receivable and inventories and the agreement requires the
maintenance of financial ratios and monthly payments of accrued interest
calculated on the outstanding balance. As of March 31, 2007 and December 31,
2006, $953 and $729 were outstanding under the line of credit.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY
OVERVIEW AND RECENT EVENTS
Dynabazaar, Inc. (the "Company", "Dynabazaar" or "we") was incorporated in the
State of Delaware in February 1997 as "Fairmarket, Inc." Through September 3,
2003, we were an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and retail buyers. On September 4, 2003, we sold substantially all
of our operating assets to eBay, Inc. ("eBay") for consideration of $4.5 million
in cash under the terms and conditions of an asset purchase agreement we entered
into with eBay on June 20, 2003. Following the closing of the asset sale, we
changed our name from "Fairmarket, Inc." to "Dynabazaar, Inc."
In connection with the cessation of our online auction business, we relocated
our principal executive offices as of January 1, 2004 to 888 Seventh Avenue,
17th Floor, New York, New York 10019, an office maintained by Barington Capital
Group, L.P., a limited partnership whose general partner is a corporation of
which James Mitarotonda is Chairman, President and Chief Executive Officer. Mr.
Mitarotonda was previously the Company's President and Chief Executive Officer.
He submitted his resignation, effective as of the close of business on April 20,
2007. He continues to serve as a director of the Company.
From January 2003 until June 20, 2006, the Company did not operate any business
and was settling its remaining claims and liabilities while reviewing
alternatives for the use or disposition of our remaining assets.
The Company's common stock trades on the NASDAQ OTC Bulletin Board under the
symbol "FAIM.OB". The Company's common stock was quoted on the NASDAQ National
Market, but was delisted on June 24, 2004.
As previously disclosed in a Form 8-K filed by the Company on April 23, 2007,
James A. Mitarotonda delivered to the secretary of Dynabazaar, Inc. (the
"Company") notice of his resignation as President and Chief Executive Officer of
the Company, effective as of the close of business on April 20, 2007. Mr.
Mitarotonda, who will continue to serve as a director of the Company, had no
disagreements with the Company on any matters related to the Company's
operations, policies or practices. The Board of Directors of the Company thanks
Mr. Mitarotonda for his dedicated service and valued contributions to the
Company.
On April 20, 2007, the Board of Directors of the Company appointed Sebastian E.
Cassetta to serve as the Company's President and Chief Executive Officer,
effective as of the close of business on April 20, 2007.
Mr. Cassetta, 57, has served as the Chief Executive Officer of Costar Video
Systems, LLC, a wholly-owned subsidiary of the Company, since June 2006. He has
also served as a director, President and Chief Executive Officer of L Q
Corporation, Inc. (OTCBB:LQCI) since May 2006. Mr. Cassetta was the Chairman and
Chief Executive Officer of SmartServ Online, Inc., a company specializing in the
delivery of content to desktop and wireless devices, from August 1992 to July
2003. Prior to that, he was the President of Burns and Roe Securacom Inc., a
company specializing in engineering and large-scale systems integration, and a
director and vice president of Brinks Inc., an international security company.
He is a former Special Assistant to New York Governor and Vice President Nelson
A. Rockefeller. Mr. Cassetta currently also serves as a Senior Managing Director
and the Chief Operating Officer of Barington Capital Group, L.P. ("Barington"),
a position he has held since August 2003.
On January 5, 2007, the Company entered into an agreement and plan of merger
(the "Merger Agreement") with L Q Corporation, Inc., a Delaware Corporation, and
LQ Merger Corp., a Delaware corporation and wholly-owned subsidiary of the
Company ("LMC"), which Merger Agreement was amended and restated on February 26,
2007 (the "Amended and Restated Merger Agreement"). The Amended and Restated
Merger Agreement provides that, upon the terms and subject to the conditions set
forth in such agreement, LMC will merge with and into L Q Corporation, Inc. with
L Q Corporation, Inc. continuing as the surviving corporation and a wholly-owned
subsidiary of the Company, as further disclosed in Part I, Item 1 of the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission on April 4, 2007, which disclosure is incorporated herein by
reference.
Barington and certain of its affiliates 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 both the Company and L Q Corporation, Inc. The
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Company is party to a services agreement under which Barington performs certain
administrative, accounting and other services on the Company's behalf as further
disclosed in Part III, Item 13 of Amendment No. 1 to the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission on April 17,
2007, which disclosure is incorporated herein by reference.
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BUSINESS
Costar designs, sources and distributes video and imaging products for the
security and industrial markets. The product line for the security market
consists primarily of closed circuit television ("CCTV") cameras, while the
product line for the industrial market is comprised of cameras and lenses
utilized by biomedical and manufacturing companies.
The production of all units distributed by Costar is outsourced to contract
manufacturers, and the majority of revenues are derived from sales of products
under the Costar(TM) brand. The balance of Costar's business is generated from
(a) a private label business and (b) the distribution of other companies'
branded products.
Video Solutions provides product design and development, technical support and
repair services for Costar.
BUSINESS ACQUISITION ($ IN THOUSANDS)
On June 20, 2006, Costar Video Systems, LLC ("Costar") and Video Solutions
Technology Center, LLC ("VSTC"), the Company's direct and indirect wholly owned
subsidiaries, completed the acquisition (the "Acquisition") of substantially all
of the assets of Southern Imaging, Inc., a Texas corporation ("Southern
Imaging"), and Video Solutions Technology Center, Inc., a Nevada corporation
("Video Solutions"), pursuant to the transactions contemplated by the asset
purchase agreement, dated as of June 20, 2006, by and between Southern Imaging,
Video Solutions, the shareholders of Southern Imaging, Costar and VSTC. However,
the acquisition is being accounted for as if it was effectively completed on
June 30, 2006. Results of operations of Southern Imaging and Video Solutions are
included in the consolidated financial statements since June 30, 2006.
Estimated consideration for the Acquisition is up to approximately $9.6 million,
consisting of the issuance at closing of 200,000 shares of our common stock, a
cash payment of approximately $3.8 million (including a finders fee payment of
approximately $154,000, payment of $108,000 to Barington and the payoff of
shareholder loans of approximately $612,000) less the value of the 200,000
shares of Dynabazaar common stock, the assumption of certain liabilities of
approximately $3.5 million, and deferred consideration of up to $4 million in
cash, contingent upon Costar and VSTC achieving certain levels of sales and
EBITDA after the closing, through 2009 of which $2,225 is recorded as a
long-term liability. On September 29, 2006, the 200,000 shares of Dynabazaar
common stock were issued.
There were no material relationships between Registrant or its affiliates and
any of the parties to the Asset Purchase Agreement, other than in respect of
such agreement.
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Allocation of Purchase Price
Allocated to:
Other intangibles $ 3,066
Trade name 1,587
Cash 240
Prepaids 105
Deposits 4
Accounts receivables, net 1,875
Inventory 2,623
Property and equipment, net 95
-------
Total 9,595
Liabilities Assumed:
Accounts payable and other (1,634)
Revolver facilities (1,863)
Issuance of common stock (74)
Long term liability (2,225)
-------
Net purchase price $ 3,800
=======
Intangible assets arose from the Costar acquisition. The aggregate of the
estimated purchase price plus acquisition costs of an estimated $9.6 million
exceeded the fair market value for all identifiable net assets. An independent
appraisal was conducted of all intangible assets (including, but not limited to,
distribution agreements, customer lists, patents, trademarks and trade names,
etc.) received as a result of the acquisition of Costar.
CRITICAL ACCOUNTING POLICIES
In December 2001, the Securities and Exchange Commission (the "SEC") requested
that all registrants discuss their most "critical accounting policies" in
management's discussion and analysis of financial condition and results of
operations. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Our significant accounting policies are more fully described in Note 1, Summary
of Significant Accounting Policies, to our consolidated financial statements
included in this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006 ($ IN THOUSANDS)
Net loss
For the three months ended March 31, 2007 and March 31, 2006, our net loss
(loss) was $(31) and $(112), respectively. Net loss in 2006 reflects business
activity prior to the acquisition of an operating company.
Revenue
For the three months ended March 31, 2007 and March 31, 2006, total revenue was
$4,208 and $0, respectively. Total revenue for the three months ended March 31,
2007 is entirely attributable to the activities of our recently acquired
subsidiaries Costar and Video Solutions.
Operating Expenses
For the three months ended March 31, 2007, general and administrative expenses
were $934 compared to $215 for the three months ended March 31, 2006. The
increase is entirely attributable to the activities of our recently acquired
subsidiaries Costar and Video Solutions.
Major expense categories were: (in thousands)
Payroll related $429
Rent $29
Accounting and tax preparation $60
Depreciation and amortization $77
Directors and Officers insurance $94
Advertising $53
Contract professional services $42
----
$784
====
For the three months ended March 31, 2007 and March 31, 2006, interest income
was $35 and $103, respectively. The decrease is entirely attributable to the
decrease in cash held in interest bearing bank accounts.
For the three months ended March 31, 2007 and 2006, interest expense was $12 and
$0, respectively. The increase is entirely attributable to the Company's line of
credit.
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LIQUIDITY AND CAPITAL RESOURCES ($ IN THOUSANDS)
At March 31, 2007, cash and cash equivalents totaled $2,770.
Cash used in operating activities was $340 for the three months ended March 31,
2007, compared to cash used of $120 for the three months ended March 31, 2006.
Cash used in operating activities for the period ended March 31, 2007 primarily
reflects the activities of our recently acquired operating subsidiaries, Costar
and Video Solutions. Major changes in operating assets and liabilities reflect
an increase in accounts receivable of $481 and an increase in accounts payable
of $54, offset by depreciation and amortization of $76, prepaid expenses of $13
and an increase in inventories of $27.
Cash used in investing activities for the three months ended March 31, 2007 was
$52 compared to cash provided of $0 for the three months ended March 31, 2006.
The cash used represents the purchase of fixed assets.
Cash provided by financing activities for the three months ended March 31, 2007
was $224, compared to $0 for the period ended March 31, 2006. The cash provided
for the three months ended March 31, 2007 reflects a draw on the line of credit
with the Bank of Texas.
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.
FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act, of
1934 as amended (the "Exchange Act"). You can identify forward-looking
statements by the use of the words "believe," "expect," "anticipate," "intend,"
"estimate," "assume" and other similar expressions which predict or indicate
future events and trends and which do not relate to historical matters. You
should not rely on forward-looking statements, because they involve known and
unknown risks, uncertainties and other factors, some of which are beyond our
control. Our actual results could differ materially from those set forth in the
forward-looking statements.
Some of the factors that might cause these differences include those set forth
in the Company's Annual Report on Form 10-K for the year ended December 31, 2006
which is incorporated herein by reference. You should carefully review all of
these factors, and you should be aware that there may be other factors that
could cause these differences. Forward-looking statements herein are based on
information, plans and estimates at the date of this Form 10-Q, and we do not
promise to update any forward-looking statements to reflect changes in
underlying assumptions or factors, new information, future events or other
changes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT PORTFOLIO
We do not use derivative financial instruments for investment purposes and only
invest in financial instruments that meet high credit quality standards. Due to
the conservative nature of our investments, we do not believe that we have a
material exposure to interest rate risk.
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ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b) under the Exchange Act, as of the end of the
period covered by this Quarterly Report, our management conducted an evaluation
with the participation of our Chief Executive Officer and Chief Financial
Officer of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13d-15(e) or Rule 15d-15(e) of the Exchange Act). In designing
and evaluating our disclosure controls and procedures, we recognize that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. The effectiveness of our
disclosure controls and procedures is necessarily limited by the staff and other
resources available to us. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this Quarterly Report, our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the
reports 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 (as
defined in Rule 13d-15(f) or Rule 15d-15(f) of the Exchange Act) occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. In connection with these rules, we will continue to
review and document our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and may from time to
time make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.
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 our common stock between July 8, 1999 and December 6, 2000. A
consolidated amended class action complaint was filed on April 19, 2002. The
complaint alleges that certain underwriters of the IPO solicited and received
excessive and undisclosed fees and commissions in connection with that offering.
The complaint further alleges that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with our 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 us. On or about February 19, 2003, the Court entered an Order
dismissing with prejudice the claims asserted against us under Section 10(b) of
the Exchange Act. As a result, the only claims that remain against us are those
arising under Section 11 of the Securities Act. 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, we 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 us 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. By order entered on September
1, 2005, the Court granted preliminarily approval of the proposed settlement and
directed that notice of the terms of the proposed settlement be provided to
class members. Thereafter, the court held a fairness hearing, on April 24, 2006,
at which objections to the proposed settlement were heard. The Court has yet to
issue a ruling on the motion for final approval. On December 5, 2006, the Court
of Appeals for the Second Circuit reversed the Court's order certifying a class
in six test cases that were selected by the underwriter defendants and
plaintiffs in the coordinated proceeding. On April 6, 2007, the Court of Appeals
denied the plaintiffs' petition for rehearing of the Court's December 5, 2006
ruling but noted that the plaintiffs remain free to ask the District Court to
certify a different class which might meet the standards for class certification
that the Court of Appeals articulated in its December 5,
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2006 decision. Because our proposed settlement with the plaintiffs involves the
certification of the case against us as a class action for settlement purposes,
it is unclear what impact, if any, the Second Circuit's class certification
ruling will have on our case or the viability of the proposed settlement. In the
event the settlement is not finalized, the Company believes that it has
meritorious defenses to plaintiffs' claims and intends to defend the action
vigorously.
The expense of defending this litigation may be significant. The amount of time
to resolve these lawsuits is unpredictable and defending us may divert
management's attention from the day-to-day operations of our business, which
could adversely affect our business, results of operations and cash flows. In
addition, an unfavorable outcome in such litigation could have a material
adverse effect on our business, results of operations and cash flows.
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ITEM 6. EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
--------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNABAZAAR, INC.
Date: May 15, 2007 By: /s/ Sebastian Cassetta
------------------------------------
Sebastian Cassetta
Chief Executive Officer (Principal
Executive Officer)
Date: May 15, 2007 By: /s/ Melvyn Brunt
------------------------------------
Melvyn Brunt
Chief Financial Officer (Principal
Financial and Accounting Officer)
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