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
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
uBid.com
Holdings, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
52-2372260
|
(State
or Other Jurisdiction of
|
(IRS
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
(Address
of principal executive offices and zip code)
Registrant’s
telephone number including area code:
(773)
272-5000
Indicate
by check mark whether the registrant (1) has filed all reports 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 filing requirements for the
past 90
days. Yes x
No
o
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. (Check
one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in
Exchange
Act Rule 12b-2). Yes o
No
x
|
Consolidated
Condensed Balance Sheets
|
(Dollars
in Thousands, except par value data)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,355
|
|
$
|
14,785
|
|
Restricted
investments
|
|
|
216
|
|
|
214
|
|
Accounts
receivable, less allowance for doubtful accounts of $215 and
$215,
respectively
|
|
|
2,114
|
|
|
1,810
|
|
Merchandise
inventories, net
|
|
|
4,303
|
|
|
4,054
|
|
Prepaid
expenses and other current assets
|
|
|
1,037
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
18,025
|
|
|
22,052
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
840
|
|
|
924
|
|
Purchased
Intangible Assets, net
|
|
|
377
|
|
|
602
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
19,242
|
|
$
|
23,578
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Flooring
facility
|
|
$
|
978
|
|
$
|
152
|
|
Accounts
payable
|
|
|
2,386
|
|
|
2,239
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
Advertising
|
|
|
242
|
|
|
428
|
|
Other
|
|
|
731
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
4,337
|
|
|
3,843
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
Common
stock, $.001 par value (200,000,000 shares authorized;
|
|
|
|
|
|
|
|
18,197,783
and 20,333,333 issued and outstanding, respectively)
|
|
|
20
|
|
|
20
|
|
Treasury
stock, 2,135,550 shares of common stock and 580,937 warrants
at
cost
|
|
|
(2,242
|
)
|
|
-
|
|
Stock
warrants
|
|
|
8,086
|
|
|
8,086
|
|
Additional
paid-in-capital
|
|
|
37,213
|
|
|
36,848
|
|
Accumulated
deficit
|
|
|
(28,172
|
)
|
|
(25,219
|
)
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
14,905
|
|
|
19,735
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
19,242
|
|
$
|
23,578
|
|
The
accompanying notes are an integral part of these consolidated
condensed
financial statements.
|
Consolidated
Condensed Statements of Operations
(Dollars
in Thousands, except for share and per share data)
(Unaudited)
|
|
Three
Months Ended June 30,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
Net
Revenues
|
|
$
|
13,663
|
|
$
|
19,097
|
|
$
|
23,270
|
|
$
|
39,185
|
|
Cost
of Revenues
|
|
|
10,794
|
|
|
16,980
|
|
|
17,849
|
|
|
34,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,869
|
|
|
2,117
|
|
|
5,421
|
|
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,326
|
|
|
3,451
|
|
|
6,348
|
|
|
6,984
|
|
Sales
and marketing
|
|
|
1,131
|
|
|
1,436
|
|
|
2,200
|
|
|
2,961
|
|
Total
operating expenses
|
|
|
4,457
|
|
|
4,887
|
|
|
8,548
|
|
|
9,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(1,588
|
)
|
|
(2,770
|
)
|
|
(3,127
|
)
|
|
(4,919
|
)
|
Interest
Expense
|
|
|
(98
|
)
|
|
(110
|
)
|
|
(210
|
)
|
|
(158
|
)
|
Interest
Income
|
|
|
149
|
|
|
159
|
|
|
324
|
|
|
353
|
|
Other
Income, net
|
|
|
-
|
|
|
-
|
|
|
60
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,537
|
)
|
$
|
(2,721
|
)
|
$
|
(2,953
|
)
|
$
|
(4,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss per share - Basic and Diluted
|
|
$
|
(0.08
|
)
|
$
|
(0.13
|
)
|
$
|
(0.15
|
)
|
$
|
(0.23
|
)
|
Weighted
Average Shares - Basic and Diluted
|
|
|
18,761,005
|
|
|
20,333,333
|
|
|
19,542,826
|
|
|
20,156,911
|
|
The
accompanying notes are an integral part of these consolidated
condensed
financial statements.
|
uBid.com
Holdings, Inc.
Consolidated
Condensed Statement of Shareholders' Equity
(Dollars
in Thousands)
(Unaudited)
|
|
Common
Stock
|
|
Stock
|
|
Paid-in
|
|
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Dollars
|
|
Warrants
|
|
Capital
|
|
Shares
|
|
Dollars
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,333,333
|
|
$
|
20
|
|
$
|
8,086
|
|
$
|
36,848
|
|
|
—
|
|
$
|
—
|
|
$
|
(25,219
|
)
|
$
|
19,735
|
|
Stock
compensation expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
365
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
365
|
|
Common
stock and warrants repurchase
|
|
|
(2,135,550
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,135,550
|
|
|
(2,242
|
)
|
|
—
|
|
|
(2,242
|
)
|
Net
Loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,953
|
)
|
|
(2,953
|
)
|
|
|
|
18,197,783
|
|
$
|
20
|
|
$
|
8,086
|
|
$
|
37,213
|
|
|
2,135,550
|
|
$
|
(2,242
|
)
|
$
|
(28,172
|
)
|
$
|
14,905
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
Consolidated
Condensed Statements of Cash Flows
(Dollars
in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
2006
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,953
|
)
|
$
|
(4,724
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
409
|
|
|
143
|
|
Non-cash
stock compensation expense
|
|
|
365
|
|
|
461
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(304
|
)
|
|
(1,704
|
)
|
Merchandise inventories
|
|
|
(249
|
)
|
|
(3,471
|
)
|
Prepaid expenses and other current assets
|
|
|
152
|
|
|
(280
|
)
|
Accounts payable
|
|
|
146
|
|
|
(1,849
|
)
|
Accrued expenses
|
|
|
(479
|
)
|
|
(2,046
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,913
|
)
|
|
(13,470
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(100
|
)
|
|
(97
|
)
|
Change
in restricted investments
|
|
|
(2
|
)
|
|
6,791
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(102
|
)
|
|
6,694
|
|
|
|
|
|
|
|
|
|
Cash
Flows From financing Activities
|
|
|
|
|
|
|
|
Change
in flooring facility
|
|
|
827
|
|
|
(1,131
|
)
|
Proceeds
from sale of common stock and warrants
|
|
|
-
|
|
|
12,000
|
|
Redemption
of common stock
|
|
|
-
|
|
|
(12,000
|
)
|
Proceeds
from note payable to bank
|
|
|
-
|
|
|
500
|
|
Common
stock and warrant repurchase
|
|
|
(2,242
|
)
|
|
-
|
|
Other
financing activities
|
|
|
-
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
|
(1,415
|
)
|
|
(836
|
)
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(4,430
|
)
|
|
(7,612
|
)
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, beginning of period
|
|
|
14,785
|
|
|
21,176
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
10,355
|
|
$
|
13,564
|
|
|
|
|
|
|
|
|
|
Supplemented
Cash Flow Disclosure
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
95
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
Warrants
issued in second offering
|
|
$
|
-
|
|
$
|
1,560
|
|
|
|
|
|
|
|
|
|
Warrants
and stock issued as stock issuance costs
|
|
$
|
-
|
|
$
|
204
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
NOTES
TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Dollars
in Thousands except share and per share data
(Unaudited)
1. Basis
of Presentation
uBid.com
Holdings, Inc. and subsidiaries (the “Company”) operate a leading on-line
business to consumer and business to business marketplace that enables itself,
certified merchants, manufacturers, retailers, distributors and small businesses
to offer high quality excess, new, overstock, close-out, refurbished and
limited
supply brand name merchandise to consumer and business customers primarily
located in the United States. Through the Company’s website, located at
www.ubid.com,
the
Company offers merchandise across a wide range of product categories including
but not limited to computer products, consumer electronics, apparel, housewares,
watches, jewelry, travel, sporting goods, home improvement products and
collectibles. The Company’s marketplace employs a combination of auction style
and fixed price formats.
The
Company’s unaudited consolidated condensed financial statements reflect normal
recurring adjustments that are necessary to present fairly the Company’s
financial position and results of operations on a basis consistent with that
of
the prior audited consolidated financial statements. As permitted by rules
and
regulations of the Securities and Exchange Commission applicable to quarterly
reports on Form 10-Q, the Company has condensed or omitted certain information
and disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”). Results for interim periods are not necessarily indicative of the
results that may be expected for a full year. These interim financial statements
should be read along with the audited consolidated financial statements included
in our Form 10-K for the year ended December 31, 2006. The consolidated
condensed financial statements include the accounts of the Company and its
wholly owned subsidiaries. All material intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
Company’s Consolidated Condensed Financial Statements and accompanying notes.
Actual results could differ materially from those estimates.
2. Summary
of Significant Accounting Policies
Since
December 31, 2006, none of the critical accounting policies, or the Company’s
application thereof, as more fully described in the Company’s 2006 Annual
Report, has significantly changed. Certain critical accounting policies have
been presented below due to the significance of related transactions during
the
six months ended June 30, 2007.
Revenue
Recognition
The
Company sells merchandise under two types of arrangements: direct purchase
sales
and revenue sharing arrangements.
For
direct purchase sales to consumer and business customers, the Company is
responsible for conducting the auction or listing the fixed sale price for
merchandise owned by the Company, billing the customer, shipping the merchandise
to the customer, processing merchandise returns and collecting accounts
receivable. In accordance with the provisions of Staff Accounting Bulletin
104,
the Company recognizes revenue when the following revenue recognition criteria
are met: (1) persuasive evidence of an arrangement exists; (2) the product
has
been shipped (FOB Shipping Point) and the customer takes ownership and assumes
the risk of loss; (3) the selling price is fixed or determinable; and (4)
collection of the resulting receivable is reasonably assured.
For
sales
of merchandise under revenue-sharing agreements, the Company is responsible
for
conducting the auction for merchandise owned by third parties, billing the
customer, arranging for a third party to complete delivery to the customer,
processing merchandise returns and collecting accounts receivable. The Company
bears no physical inventory loss or return risk related to these sales. The
Company records commission revenue at the time of shipment.
Long-Lived
Assets
Long-lived
assets are reviewed for impairment whenever events or circumstances indicate
the
remaining useful life of any long-lived assets may warrant revision or that
the
remaining carrying value of such assets may not be recoverable. When factors
indicate that such assets should be evaluated for possible impairment, the
Company uses an estimate of the undiscounted cash flows over the remaining
life
of the asset in measuring whether the asset is recoverable. No impairment
has
been recognized for the periods ended June 30, 2007 or 2006.
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R) (“SFAS 123R”). This pronouncement requires companies to measure the
cost of employee service received in exchange for a share based award (typically
stock options) based on the fair value of the award. The Company has elected
to
use the “modified prospective” transition method for stock options granted prior
to January 1, 2006, but for which the vesting period is not complete. Under
this
transition method, the Company accounts for such awards on a prospective
basis,
with expense being recognized in its statement of operations beginning in
the
first quarter of 2006 and continuing over the remaining requisite service
period
based on the grant date fair value estimated in accordance with Statement
of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(“SFAS 123”). The Company recognizes these compensation costs on a straight-line
basis over the requisite service period of the award which is generally the
option vesting term of four years. The total compensation expense related
to the
stock option plan for the three months ended June 30, 2007 and 2006 was
approximately $127 and $230, respectively. The total compensation expense
related to the stock option plan for the six months ended June 30, 2007 and
2006
was approximately $365 and $461, respectively.
Recent
Pronouncements
Updates
to recent accounting standards as disclosed in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006 are as follows:
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair
value to measure assets and liabilities. It also responds to investors’ requests
for expanded information about the extent to which companies measure assets
and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. SFAS 157 applies whenever
other standards require (or permit) assets or liabilities to be measured
at fair
value, and does not expand the use of fair value in any new circumstances.
SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and is required to be adopted by the
Company in the first quarter of 2008. The Company is currently evaluating
the
effect that the adoption of SFAS 157 will have on its consolidated results
of operations and financial condition but does not expect it to have a material
impact.
On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
-
Including an Amendment of FASB Statement No. 115" ("SFAS 159"). This standard
permits an entity to measure financial instruments and certain other items
at
estimated fair value. Most of the provisions of SFAS No. 159 are elective;
however, the amendment to FASB No. 115, "Accounting for Certain Investments
in
Debt and Equity Securities," applies to all entities that own trading and
available-for-sale securities. The fair value option created by SFAS 159
permits
an entity to measure eligible items at fair value as of specified election
dates. The fair value option (a) may generally be applied instrument by
instrument, (b) is irrevocable unless a new election date occurs, and (c)
must
be applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning
of the
previous fiscal year provided that the entity (i) makes that choice in the
first
120 days of that year, (ii) has not yet issued financial statements for any
interim period of such year, and (iii) elects to apply the provisions of
FASB
157. We are currently evaluating the impact of SFAS 159, if any, on our
consolidated financial statements.
3.
Net Loss Per Share (“EPS”)
The
Company computes loss per share under Statement of Financial Accounting
Standards (“SFAS”) No. 128, “Earnings Per Share.” The statement requires
presentation of two amounts: basic and diluted loss per share. Basic loss
per
share is computed by dividing the loss available to common shareholders by
the
weighted average common shares outstanding. Dilutive earnings per share would
include all common stock equivalents unless anti-dilutive.
Due
to
losses in each period presented, the Company has not included the following
common stock equivalents in its computation of diluted loss per share as
their
input would have been anti-dilutive.
|
|
|
|
2006
|
|
Shares
subject to stock warrants
|
|
|
3,232,939
|
|
|
3,813,336
|
|
Shares
subject to stock options
|
|
|
1,762,200
|
|
|
1,768,100
|
|
|
|
|
4,995,139
|
|
|
5,581,436
|
|
4.
Merger and Private Offerings
On
December 29, 2005 (the “Closing Date”), Cape Coastal Trading Corporation (or
“Cape Coastal”), uBid Acquisition Co., Inc. (“Acquisition Sub”) and uBid, Inc.
entered into a Merger Agreement and Plan of Reorganization (the “Merger
Agreement”). Under the Merger Agreement, Acquisition Sub merged with and into
uBid, Inc., with uBid, Inc. remaining as the surviving corporation and a
100%
owned subsidiary of Cape Coastal Trading Corporation. Just prior to the
Closing Date, all outstanding convertible preferred shares and warrants to
acquire shares of uBid, Inc. before the merger were converted and exercised
such
that, just prior to the merger, 3,793 shares of common stock were outstanding
which were exchanged on a 2,320 to 1 basis on the closing date
into 8,800,000 shares of common stock of Cape Coastal, with up to 444,444
shares of such common stock subject to redemption at a redemption price of
$4.50. The stockholders of Cape Coastal before the merger retained 599,331
shares of common stock of Cape Coastal after the merger. Before the merger,
Cape
Coastal was a public shell company. Concurrent with the merger, the
Company amended its Certificate of Incorporation to change its name
from Cape Coastal Trading Corporation to “uBid.com Holdings, Inc.”
The
merger was treated as a recapitalization of uBid, Inc. for financial accounting
purposes. Accordingly, the historical financial statements of Cape Coastal
before the merger were replaced with the historical financial statements
of
uBid, Inc. before the merger. All share and per share data has been
retroactively restated to reflect the implicit conversion ratio related to
the
exchange of shares in the merger.
Concurrent
with the merger, the Company completed the first part of a private offering
to accredited investors. The Company sold 10,000,003 shares of
its common stock (of which 2,222,224 shares were subject to redemption) and
warrants to purchase 2,500,003 shares of its common stock at $5.85 for a
period
of 5 years (the shares and warrants are collectively referred to as “Units”),
for aggregate consideration of approximately $45.0 million. These warrants
were valued at $2.08 per warrant for an aggregate of $5.2
million using a Black-Scholes option-pricing model using a 5 year
expected life, a risk free interest rate of 5.0%, no expected dividends and
a
68.0% volatility. Some of the investors participating in the first part of
the
private offering held notes that were issued by uBid before the merger,
including $10.5 million of debt held by the Petters Group, a holder greater
than
5% of our voting common stock, (“Petters Group”) and $5.0 million of debt held
by the bridge loan holders. Rather than accepting cash consideration for
the
Units acquired by these investors, the Company agreed to issue Units at a
rate of one Unit for each $4.50 of debt for consideration of the note holders’
cancellation of the existing notes. Therefore, the consideration the
Company received on the Closing Date consisted of approximately $29.5 million
in
cash and $15.5 million in cancelled debt. In addition, on the Closing
Date, the Company issued warrants to purchase 333,333 shares of our common
stock to the bridge note holders as a financing fee, which warrants are
exercisable for three years at an exercise price of $4.50 and the value of
which, $0.6 million, was recorded as interest expense. The Company also issued
warrants to purchase 230,000 shares of its common stock to its
placement agents in the offering, which warrants are exercisable for five
years
at an exercise price of $4.50 and the value of which, $0.5 million, was recorded
as a cost of the equity issuance. These warrants were valued at $1.80 and
$2.27
respectively per warrant for an aggregate of $1.1 million using a
Black-Scholes option-pricing model using the warrants respective life, a
risk
free interest rate of 5.0%, no expected dividends and a 68.0% volatility.
Issuance costs, including the value of the warrants, were $4.7
million.
On
February 3, 2006, the Company completed the second part of the
private offering of Units to accredited investors. In this offering, the
Company sold 3,000,000 shares of its common stock and warrants to
purchase 750,002 shares of its common stock on the same terms as
described above for an aggregate of $13.5 million. The Company also
redeemed the 2,666,668 shares of common stock issued in connection with the
merger and the first private offering that were subject to
redemption at a price of $4.50 per share and issued 600,667 shares of common
stock (valued at $4.50 per share) to Cape Coastal and uBid’s financial advisor,
Calico Capital Group. In addition, the Company issued additional
warrants to purchase 90,000 shares of its common stock to its
placement agents on the same terms as described above. The second part of
the
private offering resulted in no net cash proceeds being retained by the Company.
Issuance costs, including the value of the warrants and the shares issued
to
Calico Capital Group, were $4.4 million.
On
April
25, 2007, The Company entered into a stock repurchase agreement with a group
of
private investors under common management to repurchase 2,135,550 shares
of the
Company’s common stock and warrants to purchase 580,937 shares of the Company’s
common stock held by such private investors for $1.05 per share or an aggregate
purchase price of $2,242 These shares and warrants repurchased in this privately
negotiated transaction were originally acquired by the private investors
in the
Company’s private placement that initially closed on December 29, 2005. The
repurchase represented 11% of the common stock and warrants
outstanding.
The
Company’s registration statement on Form S-1 originally filed on February 28,
2006 was declared effective by the Securities and Exchange Commission on
July
21, 2006. The Registration Statement includes 20,210,109 shares of common
stock
which are held by existing shareholders of the Company. The Company currently
has 18,197,783 shares of common stock outstanding. The registration statement
also includes 3,903,338 shares of common stock issuable upon exercise of
warrants held by investors of the Company. The Company's shares will continue
to
trade under the symbol UBHI on the NASD OTC Bulletin Board.
5. 2005
Equity Incentive Plan
The
2005
Equity Incentive Plan is an equity-based compensation plan to provide incentives
to, and to attract, motivate and retain the highest qualified employees,
directors, consultants and other third party service providers. The 2005
Equity
Incentive Plan enables the board to provide equity-based incentives through
grants or awards of stock options and restricted stock (collectively, “Incentive
Awards”) to present and future employees, consultants, directors, and other
third party service providers.
A
total
of 2,500,000 shares of common stock have been reserved for issuance under
the
2005 Equity Incentive Plan. If an Incentive Award granted pursuant to the
2005
Equity Incentive Plan expires, terminates, is unexercised or is forfeited,
or if
any shares are surrendered to the Company in connection with an
Incentive Award, the shares subject to such award and the surrendered shares
will become available for future awards under the 2005 Equity Incentive Plan.
Options generally vest over a period of four years and have a ten year
contractual life. At June 30, 2007 and 2006, the Company had options to
purchase 1,762,200 and 1,763,400 shares, respectively, of common stock
outstanding to certain officers and other employees. The compensation costs
charged against income was $127 and $230 for the three months ended June
30,
2007 and 2006, respectively. The compensation costs charged was $365 and
$461
for the six months ended June 30, 2007 and 2006, respectively. Compensation
costs are included in General and Administrative Expenses in the Consolidated
Condensed Statement of Operations.
None
of
the Incentive Awards granted under the 2005 Equity Incentive Plan were issued
for cash consideration collected from the participants. The Incentive Awards
were granted to participants in the 2005 Equity Incentive Plan on the basis
of
services to be provided to the Company by the participants.
The
fair
value of the options awarded for the three months and six months ended June
30,
2007 and 2006, were estimated using the Black-Scholes option pricing model
with
the following weighted average assumptions:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
Risk
-free interest rate
|
|
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
|
5.0
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility
|
|
|
68.0
|
%
|
|
68.0
|
%
|
|
68.0
|
%
|
|
68.0
|
%
|
Expected
life (years)
|
|
|
6.0
|
|
|
6.0
|
|
|
6.0
|
|
|
6.0
|
|
Weighted
average grant date fair value
|
|
$
|
0.85
|
|
$
|
3.92
|
|
$
|
0.92
|
|
$
|
3.83
|
|
Expected
forfeiture rate
|
|
|
5.0
|
%
|
|
4.9
|
%
|
|
5.0
|
%
|
|
4.9
|
%
|
The
risk-free interest rate is based on the U.S. Treasury Bill rates. The dividend
reflects the fact that the Company has never paid a dividend on its common
stock
and does not expect to in the future. Expected volatility was based on a
market-based implied volatility. The expected term of the options is based
on
what the Company believes will be representative of future behavior. In
addition, we are required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest. If our actual forfeiture
rate is
materially different from our estimate, the stock-based compensation expense
could be significantly different from what we have recorded in the current
period.
The
following is a summary of all of the Company’s stock option
activity:
|
|
Shares
under
|
|
Weighted-
average
exercise
price per
|
|
|
|
option
|
|
share
|
|
|
|
|
1,530,600
|
|
|
4.50
|
|
Granted
|
|
|
250,000
|
|
|
1.49
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Surrendered
|
|
|
(101,700
|
)
|
|
4.91
|
|
|
|
|
1,678,900
|
|
|
4.08
|
|
Granted
|
|
|
120,000
|
|
|
1.68
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Surrendered
|
|
|
(36,700
|
)
|
|
5.12
|
|
|
|
|
1,762,200
|
|
$
|
3.96
|
|
|
|
|
|
|
|
|
|
|
|
|
101,400
|
|
$
|
4.23
|
|
As
of
June 30, 2007 there was $2,396 of total unrecognized compensation cost related
to the nonvested option awards under the 2005 Equity Incentive Plan. That
cost
is expected to be recognized over the 3.0 year remaining vesting period of
the
nonvested option awards. The total fair value of the option awards that vested
during the three months and six months ended June 30, 2007 was $224 and $298,
respectively.
The
following summarizes information about stock options at June 30,
2007:
|
|
Outstanding
|
|
Exercisable
|
|
Exercise Price
|
|
|
|
Weighted
Average Remaining Contractual Life
|
|
Weighted
Average
Exercise Price
|
|
|
|
Weighted
Average
Exercise Price
|
|
.01
- 2.00
|
|
|
349,800
|
|
|
9.7
|
|
$
|
1.46
|
|
|
15,625
|
|
$
|
1.49
|
|
2.01
- 4.00
|
|
|
93,100
|
|
|
9.4
|
|
$
|
3.02
|
|
|
6,250
|
|
$
|
2.90
|
|
4.01
- 6.00
|
|
|
1,251,400
|
|
|
8.5
|
|
$
|
4.50
|
|
|
62,850
|
|
$
|
4.50
|
|
6.01+
|
|
|
67,900
|
|
|
8.5
|
|
$
|
6.26
|
|
|
16,675
|
|
$
|
6.25
|
|
|
|
|
1,762,200
|
|
|
|
|
$
|
3.96
|
|
|
101,400
|
|
$
|
4.23
|
|
The
aggregate intrinsic value of the outstanding options (the difference between
the
closing stock price on the last trading day of the period ended June 30,
2007 of
$1.80 per share and the exercise price, multiplied by the number of in-the-money
options) was $537. This amount will change based on changes in the fair market
value of the Company’s common stock.
6. Note
Payable - Bank
On
May 9, 2006, the Company and its subsidiaries entered into a Credit and
Security Agreement with Wells Fargo Bank, National Association acting through
Wells Fargo Business Credit and related security agreements and other agreements
described in the Credit and Security Agreement (the “Credit Agreement”). The
Credit Agreement provides for advances to the Company of up to a maximum
of
$25,000. The amount actually available to the Company will vary from time
to
time, depending on, among other factors, the amount of eligible inventory
and
the amount of eligible accounts receivable. The obligations under the Credit
Agreement and all related agreements are secured by all of the Company assets.
The initial term of the Agreement is three years, expiring on April 28,
2009. Up to $7,000 of the maximum amount is available for irrevocable, standby
and documentary letters of credit. Advances under the Credit Agreement bear
interest at a base rate (Wells Fargo Bank's prime rate) or LIBOR plus 2.5%.
The
Credit Agreement requires a prepayment fee of $500 if the Company terminates
the
Credit Agreement during its first year, $375 if
it
terminates the Credit Agreement during its second year and $125 if the Company
terminates the Credit Agreement during the third year. The Credit Agreement
requires the Company, among other things, to limit capital expenditures and
maintain minimum availability on the line. Also, the Company is obligated
contractually by a restrictive lock box arrangement. The Credit Agreement
also
requires the Company to pay a variety of other fees and expenses, including
minimum annual interest of $120. The Company as of June 30, 2007 had $49
in
deferred financing fees being amortized over the life of the Credit Agreement.
As of June 30, 2007, the effective loan rate was 8.25% and the Company had no
outstanding balance and was in compliance with all the loan
covenants.
7.
Segment Information
The
Company is organized into four operating segments: Direct sales channel,
uBid
certified Merchant (“UCM”) sales channel, Business to Business sales channel and
Other. In classifying its operational entities into a particular segment,
the
Company segregated its operations with similar economic characteristics,
products and services, customers and methods of distribution into distinct
operating groups. Prior to March 31, 2007, all operating segments were
aggregated into one reportable segment. The Company’s management reviews the
four operating segments revenue and gross profits to evaluate segment
performance and allocate resources. Operating expenses are not analyzed by
segment.
For
the
Direct sales channel, the Company is responsible for conducting the auction
or
listing the fixed sale price for merchandise owned by the Company, billing
the
customer, shipping the merchandise to the customer, processing merchandise
returns and collecting accounts receivable.
For
the
UCM sales channel, the Company is responsible for conducting the auction
for
merchandise owned by third parties, billing the customer, arranging for a
third
party to complete delivery to the customer, processing merchandise returns
and
collecting accounts receivable. The Company bears no physical inventory loss
or
return risk related to these sales. The Company records commission revenue
at
the time of shipment.
For
the
Business to Business sales channel, the Company sells product purchased directly
to other businesses. Revenues are recognized upon shipment.
All
other
revenues consist primarily of advertising revenue. Advertising revenues are
derived principally from the sale of online advertisements. Advertising revenues
on contracts are recognized as “impressions” (i.e., the number of times that an
advertisement appears in pages viewed by users of our websites). Impressions
are
delivered over the term of the agreement where such agreements provide for
minimum monthly, quarterly or annual advertising commitments.
|
|
(Dollars
in Thousands)
|
|
|
|
Three
months Ended June 30,
|
|
Six
months Ended June 30,
|
|
Net
Revenue
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Direct
|
|
$
|
9,002
|
|
$
|
14,949
|
|
$
|
16,770
|
|
$
|
31,253
|
|
UCM
|
|
|
1,341
|
|
|
1,059
|
|
|
2,797
|
|
|
2,068
|
|
Business
to Business
|
|
|
3,035
|
|
|
2,992
|
|
|
3,096
|
|
|
5,679
|
|
Other
|
|
|
285
|
|
|
97
|
|
|
607
|
|
|
185
|
|
Total
|
|
$
|
13,663
|
|
$
|
19,097
|
|
$
|
23,270
|
|
$
|
39,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
873
|
|
$
|
892
|
|
$
|
1,633
|
|
$
|
2,314
|
|
UCM
|
|
|
1,341
|
|
|
1,059
|
|
|
2,797
|
|
|
2,068
|
|
Business
to Business
|
|
|
370
|
|
|
69
|
|
|
384
|
|
|
459
|
|
Other
|
|
|
285
|
|
|
97
|
|
|
607
|
|
|
185
|
|
Total
|
|
$
|
2,869
|
|
$
|
2,117
|
|
$
|
5,421
|
|
$
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
9.7
|
%
|
|
6.0
|
%
|
|
9.7
|
%
|
|
7.4
|
%
|
UCM
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Business
to Business
|
|
|
12.2
|
%
|
|
2.3
|
%
|
|
12.4
|
%
|
|
8.1
|
%
|
Other
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Total
|
|
|
21.0
|
%
|
|
11.1
|
%
|
|
23.3
|
%
|
|
12.8
|
%
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with our consolidated condensed
financial statements and related notes included in Item 1 of Part 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management’s Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2006. uBid.com Holdings, Inc. is a holding
company for uBid, Inc., and DiBu Trading Corp., Inc. our operating businesses.
For purposes of this Quarterly Report, unless otherwise indicated or the
context
otherwise requires, all references herein to “uBid,” “we,” “us,” and “our” refer
to uBid.com Holdings, Inc. and our subsidiary.
Information
in the following Management's Discussion and Analysis of Financial Condition
and
Results of Operations and elsewhere in this quarterly report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements provide current expectations or forecasts of future
events and can be identified by the use of terminology such as “believe,”
“estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or
expressions. Any statement that is not a historical fact, including statements
regarding estimates, projections, future trends and the outcome of events
that
have not yet occurred, is a forward-looking statement. Actual results could
differ materially from those projected in the forward-looking statements
as a
result of a number of factors, including but not limited to the risk factors
detailed in our filings with the SEC, including our Annual Report on Form
10-K
for the year ended December 31, 2006. We assume no obligation to update such
forward-looking statements or to update the reasons actual results could
differ
materially from those anticipated in such forward-looking statements.
Overview
We
operate a leading online marketplace located at www.ubid.com
offering
high quality excess, new, overstock, close-out, refurbished and limited supply
brand name merchandise to both consumers and businesses using auction style
and
fixed price formats. We offer consumers a trustworthy buying environment
in
which we continually monitor and certify activity to eliminate the potential
for
fraud by certifying all merchants and processing 100% of all transactions
between buyers and sellers. Our marketplace offers brand-name merchandise
from
over 200 product categories including computer products, consumer electronics,
apparel, housewares, watches, jewelry, travel, sporting goods, home improvement
products and collectibles.
Our
business model provides value for consumers, manufacturers, distributors,
retailers and other approved third party merchants. Consumers shop in a
trustworthy and secure online marketplace and have the opportunity to bid
their
own prices on popular, brand-name products realizing product savings of
generally 20% to 80% off retail prices. Our online marketplace provides
merchants with an efficient and economical distribution channel for maximizing
revenue on their merchandise. Merchants can monetize overstock and close-out
inventory, expand their customer base and increase sales without compromising
existing distribution channels.
Our
business model consists of three distinct business channels: uBid Direct,
UCM
and Business to Business.
We
purchase merchandise outright in the uBid Direct and Business to Business
channels and sell to consumers and businesses. On this merchandise, we bear
the
inventory, return and credit risk. The full sales amount is recorded as revenue
upon verification of the credit card transaction and shipment of the
merchandise.
We
also
sell merchandise through the UCM Program channel by allowing prescreened
third
party merchants to sell their product through our online marketplace to
consumers and business. On this merchandise, we do not take title and therefore
do not bear the related inventory risk. In the UCM Program, we are the primary
obligor to whom payment is due, but we bear no inventory or returns risk,
so we
record only our commission as revenue.
In
all
instances where the credit card authorization has been received but merchandise
has not been shipped, we defer revenue recognition until the merchandise
is
shipped.
Our
online marketplace is available 24 hours a day, seven days a week and we
currently offer over 200,000 items each day. Since the first offer of product
in
December 1997, our marketplace has facilitated over $1 billion in net revenues
and has registered over five million members.
Executive
Commentary
Success
Measures:
Our
management believes that the most important financial and non-financial measures
that track our progress include sales, website traffic, total average order
value, gross margin, customer acquisition costs, advertising expense, personnel
costs, and fulfillment costs.
Key
Business Metrics We
periodically review key business metrics to evaluate the effectiveness of
our
operational strategies and the financial performance of our business. These
key
metrics include the following:
Gross
Merchandise Sales (GMS)
Gross
Merchandise Sales differ from GAAP revenue in that gross bookings represents
the
gross sales price of goods sold by the Company (including sales through our
UCM
Program) before returns, sales discounts, and cancellations.
Number
of Orders
This
represents the total number of orders shipped in a specified period. We analyze
the number of orders by category to evaluate the effectiveness of our
merchandising and advertising strategies as well as to monitor our inventory
management.
Average
Order Value
Average
order value is the ratio of gross sales divided by the number of orders shipped
within a given time period. We analyze average order value by category primarily
to manage costs and other operating expenses.
Visitors
A
Visitor
is a consumer or business that voluntarily clicks through to the website
(uBid.com) using both online and offline advertising stimulus. Visitors don’t
include third party site pops, pop unders, or non converting impressions
to the
website. Examples of online marketing channels we advertise on are: affiliate
banner networks, comparison shopping sites, paid and organic search engines,
and
email.
Bidders
A
Bidder
is a visitor that places a bid on an item up for auction on the website
(uBid.com).
Visitors
to Bidder Conversion
The
percentage of visitors that bid on an auction item. We use this as a measure
of
the effectiveness of advertising.
Approved
UCM Program Vendors
Vendors
that have gone through the approval process to sell merchandise through our
website.
|
|
(In
Thousands except Average Order Value and Approved UCM
Vendors)
|
|
|
|
Q2
2007
|
|
Q1
2007
|
|
Q4
2006
|
|
Q3
2006
|
|
Q2
2006
|
|
Q1
2006
|
|
Q4
2005
|
|
Q3
2005
|
|
Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMS
(in thousands)
|
|
$
|
26,368
|
|
$
|
23,402
|
|
$
|
26,276
|
|
$
|
26,528
|
|
$
|
30,286
|
|
$
|
31,167
|
|
$
|
31,035
|
|
$
|
27,215
|
|
Number
of orders (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
29
|
|
|
21
|
|
|
24
|
|
|
23
|
|
|
37
|
|
|
36
|
|
|
43
|
|
|
36
|
|
uBid
Certified Merchant
|
|
|
98
|
|
|
104
|
|
|
99
|
|
|
89
|
|
|
88
|
|
|
87
|
|
|
93
|
|
|
72
|
|
Total
orders
|
|
|
127
|
|
|
125
|
|
|
123
|
|
|
112
|
|
|
125
|
|
|
123
|
|
|
136
|
|
|
108
|
|
Average
Order Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
336
|
|
$
|
390
|
|
$
|
424
|
|
$
|
424
|
|
$
|
416
|
|
$
|
465
|
|
$
|
398
|
|
$
|
495
|
|
uBid
Certified Merchant
|
|
$
|
119
|
|
$
|
120
|
|
$
|
126
|
|
$
|
128
|
|
$
|
110
|
|
$
|
107
|
|
$
|
108
|
|
$
|
112
|
|
Visitors
(in thousands)
|
|
|
6,901
|
|
|
6,744
|
|
|
6,529
|
|
|
6,488
|
|
|
7,215
|
|
|
6,369
|
|
|
7,051
|
|
|
8,287
|
|
Bidders
(in thousands)
|
|
|
231
|
|
|
235
|
|
|
239
|
|
|
211
|
|
|
255
|
|
|
241
|
|
|
267
|
|
|
222
|
|
Bidders
to Visitors Percentage
|
|
|
3.3
|
%
|
|
3.5
|
%
|
|
3.7
|
%
|
|
3.3
|
%
|
|
3.5
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
|
2.7
|
%
|
Approved
UCM Vendors
|
|
|
2,873
|
|
|
2,513
|
|
|
2,049
|
|
|
1,716
|
|
|
1,307
|
|
|
949
|
|
|
628
|
|
|
401
|
|
Revenue
Source:
We derive most of our revenue from sales of products to consumers and businesses
as well as commission revenue earned for sales of merchandise under revenue
sharing agreements with third party sellers. We believe that the principal
drivers of our revenue consist of the average order value placed by our
customers, the number of orders placed by both existing and new customers,
special offers we make available that result in incremental orders, our ability
to attract new customers and advertising that impacts our revenue drivers.
Sales
consist of orders placed through our uBid.com website and direct business
to
business sales. We further generate revenue from shipping fees we charge
our
customers and advertising sales. We record our revenue net of returns and
other
discounts. Our revenues may fluctuate from period to period as a result of
special offers we provide such as free shipping, and other special
promotions.
Our
revenue is dependent in part on sales of products produced by or purchased
from
Sony Electronics, Inc. (“Sony”), Hewlett-Packard Company (“HP”), and Recoupit,
Inc.(“Recoupit”). The following table represents the respective vendors’
percentage of sales for the three and six months ended June 30, 2007. No
other
supplier represented more than 5% of our net revenues for any period
presented.
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30,
|
|
June
30,
|
|
Vendor
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
HP
|
|
|
27.1
|
%
|
|
11.5
|
%
|
|
22.9
|
%
|
|
12.0
|
%
|
Recoupit
|
|
|
7.9
|
%
|
|
4.5
|
%
|
|
7.4
|
%
|
|
4.4
|
%
|
Sony
|
|
|
13.6
|
%
|
|
17.8
|
%
|
|
14.7
|
%
|
|
15.0
|
%
|
Cost
of Revenues:
Cost of
revenues primarily consists of the cost of the product and inbound and outbound
shipping. There is no cost of revenues for UCM Program revenue. Cost of revenues
does not include order fulfillment costs, which are included in general and
administrative expenses.
Gross
Profits:
Our
gross profit margins are impacted by a number of factors including the category
of merchandise, the introduction of new product categories, the mix of sales
among our product categories, pricing of products by our vendors, pricing
strategies, promotional programs, market conditions, packaging, excess and
obsolete inventory charges and other factors. Gross profits and gross profit
percentages are not comparable to gross profit and gross profit percentages
reported by companies that include order fulfillment costs in the cost of
revenues.
Expenses:
Sales
and marketing, general and administrative (“SG&A”) expenses consist
primarily of sales and marketing expenses, including online marketing
activities, order fulfillment and other costs, such as personnel, rent,
warehouse and handling, common area maintenance, depreciation, credit card
processing charges, insurance, legal and accounting fees. Interest expense
charges are from our IBM flooring facility at a rate of 1% per month on the
outstanding balances, interest and amortization of loan origination fees
related
to our credit facility.
Results
of Operations (Dollars in Thousands, except per share, order and visitor
data)
The
following table sets forth, for the periods presented, certain data from
our
statement of operations as a percentage of net revenues. This information
should
be read in conjunction with our financial statements and notes thereto included
elsewhere in this report.
|
|
(Dollars
in Thousands)
|
|
|
|
Three
months ended June 30,
|
|
|
|
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
9,002
|
|
|
65.9
|
%
|
$ |
14,949
|
|
|
78.3
|
|
$ |
16,770
|
|
|
72.1
|
|
$ |
31,253
|
|
|
79.8
|
%
|
UCM
|
|
|
1,341
|
|
|
9.8
|
%
|
|
1,059
|
|
|
5.5
|
%
|
|
2,797
|
|
|
12.0
|
%
|
|
2,068
|
|
|
5.3
|
%
|
Business
to Business
|
|
|
3,035
|
|
|
22.2
|
%
|
|
2,992
|
|
|
15.7
|
%
|
|
3,096
|
|
|
13.3
|
%
|
|
5,679
|
|
|
14.5
|
%
|
Other
|
|
|
285
|
|
|
2.1
|
%
|
|
97
|
|
|
0.5
|
%
|
|
607
|
|
|
2.6
|
%
|
|
185
|
|
|
0.5
|
%
|
Total
Net Revenues
|
|
|
13,663
|
|
|
100
|
%
|
|
19,097
|
|
|
100
|
%
|
|
23,270
|
|
|
100
|
%
|
|
39,185
|
|
|
100
|
%
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
873
|
|
|
6.4
|
%
|
|
892
|
|
|
4.7
|
%
|
|
1,633
|
|
|
7.0
|
%
|
|
2,314
|
|
|
5.9
|
%
|
UCM
|
|
|
1,341
|
|
|
9.8
|
%
|
|
1,059
|
|
|
5.5
|
%
|
|
2,797
|
|
|
12.0
|
%
|
|
2,068
|
|
|
5.3
|
%
|
Business
to Business
|
|
|
370
|
|
|
2.7
|
%
|
|
69
|
|
|
0.4
|
%
|
|
384
|
|
|
1.7
|
%
|
|
459
|
|
|
1.2
|
%
|
Other
|
|
|
285
|
|
|
2.1
|
%
|
|
97
|
|
|
0.5
|
%
|
|
607
|
|
|
2.6
|
%
|
|
185
|
|
|
0.5
|
%
|
Total
Gross Profit
|
|
|
2,869
|
|
|
21.0
|
%
|
|
2,117
|
|
|
11.1
|
%
|
|
5,421
|
|
|
23.3
|
%
|
|
5,026
|
|
|
12.8
|
%
|
General
and administrative
|
|
|
3,326
|
|
|
24.3
|
%
|
|
3,451
|
|
|
18.1
|
%
|
|
6,348
|
|
|
27.3
|
%
|
|
6,984
|
|
|
17.8
|
%
|
Sales
and marketing
|
|
|
1,131
|
|
|
8.3
|
%
|
|
1,436
|
|
|
7.5
|
%
|
|
2,200
|
|
|
9.5
|
%
|
|
2,961
|
|
|
7.6
|
%
|
Total
operating expenses
|
|
|
4,457
|
|
|
32.6
|
%
|
|
4,887
|
|
|
25.6
|
%
|
|
8,548
|
|
|
36.7
|
%
|
|
9,945
|
|
|
25.4
|
%
|
Loss
from operations
|
|
|
(1,588
|
)
|
|
(11.6)
|
%
|
|
(2,770
|
)
|
|
(14.5)
|
%
|
|
(3,127
|
)
|
|
(13.4)
|
%
|
|
(4,919
|
)
|
|
(12.6)
|
%
|
Interest
Income / (Expense) & Other, Net
|
|
|
51
|
|
|
0.4
|
%
|
|
49
|
|
|
0.3
|
%
|
|
114
|
|
|
0.5
|
%
|
|
195
|
|
|
0.5
|
%
|
Other
Income / (Expense)
|
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
60
|
|
|
0.0
|
%
|
|
-
|
|
|
-
|
%
|
Net
Loss
|
|
$
|
(1,537
|
)
|
|
(11.2)
|
%
|
$
|
(2,721
|
)
|
|
(14.2)
|
%
|
$
|
(2,953
|
)
|
|
(12.7)
|
%
|
$
|
(4,724
|
)
|
|
(12.1)
|
%
|
Net
loss
for the three months ended June 30, 2007 was $1,537 or $0.08 basic and diluted
loss per share. For the three months ended June 30, 2006, the loss was $2,721
or
$0.13 basic and diluted loss per share. The loss decreased by $1,184 or 43.5%
from the same period in the prior year.
Direct
Channel: Direct
channel sales decreased $5,947 or 39.8% to $9,002 for the three months ended
June 30, 2007 compared to direct sales of $14,949 in the same period last
year.
In the current period the number of direct orders decreased 8,000 or 21.6%
and
the average order value decreased $80.00 or 19.2% to $336.00 per order.
The
decline in the number of direct orders is primarily due to a shift from the
Direct channel sales to the UCM platform in which only commission revenue
is
recorded and an improved effort in managing product posted for
auction.
The
decrease in the average order value was due primarily to decreases in video,
portable audio and digital cameras. The decreases were offset by increases
in
flat-screen LCD televisions and notebook computers.
The
Direct channel gross profit decreased $19 or 2.1% for the three months ended
June 30, 2007 compared to the same period in the prior year. The Direct channel
gross profit percentage increased 3.7% to 9.7% for the three months ended
June
30, 2007 compared to 6.0% for the three months ended June 30, 2006. The increase
was a result of an
improved effort in managing product posted for auction. The
decreased order volume resulted in lower distribution and variable operating
costs which offset the margin dollar loss and improved the overall
profitability.
UCM
Channel: UCM
revenues and gross profit increased $282 or 26.6% to $1,341 for the three
months
ended June 30, 2007 compared to revenue and gross profit of $1,059 in the
same
period of the prior year. In the current period the number of UCM orders
increased 10,000 or 11.4% and the average order value increased $9.00 or
8.2% to
$119.00 per order. The number of UCM vendors increased 1,566 or 120.0% to
2,873
vendors compared to 1,307 at June 30, 2006. The increase in UCM orders and
the
average order value is primarily due to the shift of revenue and volume from
the
Direct sales channel to the UCM channel along with the increase in the number
of
UCM vendors.
Business
to Business: Business
to Business revenues increased $43 or 1.4 % for the three months ended June
30,
2007 compared to the same period in the prior year. Gross profit increased
$301
or 436.0% to $370 for the quarter ended June 30, 2007 compared to $69 for
the
quarter ended June 30, 2006. The gross profit percentage increased to 12.2%
for
the three months ended June 30, 2007 compared to 2.3% in the same period
of the
prior year.
Other
Revenue: Other
revenue and gross profit primarily comprised of online advertising revenue
increased $188 or 193.0% for the three months ended June 30, 2007. The increase
resulted from the enlistment of several new advertising customers on our
website. During the current quarter we implemented Google AdSense, a contextual
online advertising system that searches our web-pages and determines which
advertisements are most beneficial. Google then populates our website in
pre-designated areas with the advertisements that based on a calculation
would
maximize revenue. The Google AdSense program generated $66 for the three
months
ended June 30, 2007.
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the quarter ended June 30, 2007 were $4,457, a decrease of $430
or
8.8%, compared to the quarter ended June 30, 2006.
|
|
(Dollars
in Thousands)
|
|
|
|
Three
Month Period Ended
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
Advertising
|
|
$
|
993
|
|
$
|
1,285
|
|
$
|
(292
|
)
|
Salary
and benefits
|
|
|
1,245
|
|
|
1,546
|
|
|
(301
|
)
|
Stock-based
compensation
|
|
|
127
|
|
|
230
|
|
|
(103
|
)
|
Facilities
|
|
|
122
|
|
|
161
|
|
|
(39
|
)
|
Warehouse
|
|
|
185
|
|
|
304
|
|
|
(119
|
)
|
Credit
card fees
|
|
|
531
|
|
|
596
|
|
|
(65
|
)
|
Telecommunications,
hardware and storage
|
|
|
170
|
|
|
207
|
|
|
(37
|
)
|
Legal,
audit, insurance, and other regulatory fees
|
|
|
276
|
|
|
260
|
|
|
16
|
|
Depreciation
& amortization
|
|
|
227
|
|
|
73
|
|
|
154
|
|
Bad
debt
|
|
|
352
|
|
|
-
|
|
|
352
|
|
Consulting
and outside services
|
|
|
174
|
|
|
121
|
|
|
53
|
|
Other
SG&A
|
|
|
55
|
|
|
104
|
|
|
(49
|
)
|
|
|
$
|
4,457
|
|
$
|
4,887
|
|
$
|
(430
|
)
|
Advertising
expense decreased $292 or 22.7% and visitors decreased 317,000 or 4.3% as
we
continued to eliminate the least effective marketing efforts to optimize
profitable online campaigns including television and print campaigns. The
cost
per visitor decreased to $0.14 per visitor from $0.18 per visitor in the
same
period of the prior year.
Salary
and benefits expense decreased $301 or 19.5% as a result of eliminating certain
positions in the third quarter 2006. This reduction in positions also led
to a
$103 or 44.8% decrease in stock based compensation.
Facilities
expense decreased $39 or 24.2% due to the relocation of our corporate office
to
a larger facility with a lower lease cost.
Warehouse
expense and credit card fees decreased $119 or 39.1% and $65 or 10.9%,
respectively, due to the lower sales volume.
Telecommunications,
hardware and storage expenses decreased $37 as a result of negotiating new
maintenance contracts with favorable rates.
The
decreases in expenses were offset by increases in depreciation and amortization,
bad debt expense and consulting of $154, $352 and $53, respectively. The
increase in depreciation and amortization was a result of the purchase of
intangible assets and computer equipment. The increase in bad debt expense
is
attributable to a partial settlement of an aged receivable resulting in a
write-off of the remaining balance. Consulting and outside services expense
increased as temporary help was brought in to the advertising department
to help
with several projects.
Other
Expense:
Net
interest income was $51 for the quarter ended June 30, 2007 versus interest
income of $106 for the quarter ended June 30, 2006. The decrease in net interest
income is attributed to increased interest expense relating to the minimum
interest payment due under the credit facility terms. The Company retired
all
debt after receiving the capital raised on December 29, 2005.
Net
Losses:
The
Company experienced a net loss of $1,537 or $.08 per share for the quarter
ended
June 30, 2007 compared to a net loss of $2,721 or $.13 per share for the
quarter
ended June 30, 2006.
Net
loss
for the six months ended June 30, 2007, was $2,953 or $0.15 basic and diluted
loss per share. For the six months ended June 30, 2006, the loss was $4,724
or
$0.23 basic and diluted loss per share. The loss decreased by $1,771 or 37.5%
from the same period in the prior year.
Direct
Channel: Direct
channel sales decreased $14,483 or 46.3% to $16,770 for the six months ended
June 30, 2007 compared to Direct sales of $31,253 in the same period of the
prior year. In the current period the number of direct orders decreased 23,000
or 31.5% and the average order value decreased by $155 or 17.6% per order.
The
decline in the number of direct orders continues to be due to a shift
from the Direct channel sales to the UCM platform in which only commission
revenue is recorded and an improved effort in managing product posted for
auction.
The
decrease in the average order value was due primarily to decreases in video,
portable audio and digital cameras.
The
Direct channel gross profit decreased by $382 or 29.5% for the six months
ended
June 30, 2007 compared to the prior year. The Direct channel gross profit
percentage increased 2.3% to 9.7% for the six months ended June 30, 2007
compared to 7.4% for the six months ended June 30, 2006. The increase was
a
result of an
improved effort in managing product posted for auction.
UCM
Channel:
UCM
revenues and gross profit increased $729 or 35.3% to $2,797 for the six months
ended June 30, 2007 compared to revenue and gross profit of $2,068 in the
same
period of the prior year. In the current period the number of UCM orders
increased 27,000 or 15.4% and the average order value increased to $11.00
or
10.1% per order. The UCM orders and the average order value increased primarily
due to the shift of revenue and volume from the Direct sales channel to the
UCM
channel along with the increase in the number of UCM vendors.
Business
to Business: Business
to Business revenues decreased $2,583 or 45.5% for the six months ended June
30,
2007 compared to the same period in the prior year. In the three months ended
March 31, 2007 we had sales of $62 versus $2,687 in the same period of the
prior
year primarily due to not having a dedicated Business to Business sales force.
For the three months ended June 30, 2007 we had sales of $3,035 compared
to
sales of $2,992 for the three months ended June 30, 2006 due to the hiring
of a
new sales force in the period.
Gross
profit decreased $75 or 16.3% to $384 for the six months ended June 30, 2007
compared to $459 for the six months ended June 30, 2006. The gross profit
percentage increased to 12.4% for the six months ended June 30, 2007 compared
to
8.1% in the same period of the prior year.
Other
Revenue: Other
revenue and gross profit primarily comprised of online advertising revenue
increased $422 or 228.0% for the six months ended June 30, 2007. The increase
resulted from the enlistment of several new advertising customers on our
website.
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the six months ended June 30, 2007 were $8,548, a decrease of
$1,398 or 14.1%, compared to the six months ended June 30, 2006.
|
|
(Dollars
in Thousands)
|
|
|
|
Six
Month Period Ended
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
Advertising
|
|
$
|
1,961
|
|
$
|
2,618
|
|
$
|
(657
|
)
|
Salary
and benefits
|
|
|
2,522
|
|
|
3,114
|
|
|
(592
|
)
|
Stock-based
compensation
|
|
|
365
|
|
|
460
|
|
|
(95
|
)
|
Facilities
|
|
|
265
|
|
|
316
|
|
|
(51
|
)
|
Warehouse
|
|
|
360
|
|
|
589
|
|
|
(229
|
)
|
Credit
card fees
|
|
|
1,043
|
|
|
1,283
|
|
|
(240
|
)
|
Telecommunications,
hardware and storage
|
|
|
324
|
|
|
415
|
|
|
(91
|
)
|
Legal,
audit, insurance, and other regulatory fees
|
|
|
423
|
|
|
531
|
|
|
(108
|
)
|
Depreciation
& amortization
|
|
|
409
|
|
|
143
|
|
|
266
|
|
Bad
debt
|
|
|
352
|
|
|
-
|
|
|
352
|
|
Consulting
and outside services
|
|
|
343
|
|
|
230
|
|
|
113
|
|
Related
party management fees
|
|
|
-
|
|
|
30
|
|
|
(30
|
)
|
Other
SG&A
|
|
|
181
|
|
|
217
|
|
|
(36
|
)
|
|
|
$
|
8,548
|
|
$
|
9,946
|
|
$
|
(1,398
|
)
|
Advertising
expense decreased $657 or 25.1% as we continued to eliminate the least effective
marketing efforts to optimize profitable online campaigns including television
and print campaigns. The cost per visitor decreased to $0.14 per visitor
from
$.019 per visitor in the same period of the prior year.
Salary
and benefits expense decreased $592 or 19.0% as a result of eliminating certain
positions in the third quarter 2006. This reduction in positions also led
to a
$95 or 20.7% decrease in stock based compensation.
Facilities
expense decreased $51 or 16.1% due to the relocation of our corporate office
to
a larger facility with a lower lease cost.
Warehouse
expense and credit card fees decreased $229 or 38.9% and $240 or 18.7%,
respectively, due to lower Direct channel sales volume.
Telecommunications,
hardware and storage expenses decreased $91 as a result of negotiating new
maintenance contracts with favorable rates.
Legal,
audit, insurance and other regulatory fees decreased $108 or 20.3% primarily
as
a result of lower insurance premiums and legal fees. The Company completed
its
private placement on February 3, 2006 and Company’s registration statement on
Form S-1 was declared effective on July 21, 2006. The expenses were higher
in
the first quarter of 2006 due to closing of the private placement as well
as the
registration statement which was in the process of being declared
effective.
The
decreases in expenses were offset by increases in depreciation and amortization,
bad debt and consulting of $266 or 186%, $352 or 100% and $113 or 49.1%,
respectively. The increase in depreciation and amortization was a result
of the
purchase of intangible assets and computer equipment. The increase in bad
debt
is attributable to a bad debt incurred by Dibu Trading Corp., our business
to
business unit, for partial settlement of an aged debt. Consulting and outside
services expense increased as temporary help was brought in to the advertising
department to help with several projects.
Other
Expense:
Net
interest income was $115 for the year to date as of June 30, 2007 versus
interest income of $195 for the same period 2006. The decrease in net interest
income is attributed to increased interest expense relating to the minimum
interest payment due under the credit facility terms. The Company retired
all
debt after receiving the capital raised on December 29, 2005.
Net
Losses:
The
Company experienced a net loss of $2,953 or $.15 per share for year to date
as
of June 30, 2007 compared to a net loss of $4,724 or $.23 per share for the
same
period 2006.
Liquidity
and Capital Resources
Historically,
our primary sources of capital have been cash flow from operations and loans
from affiliated parties. More recently, our primary source of cash flow has
been
from operations and the $29.5 million raised in the December 29, 2005 private
offering of our common stock and warrants.
Net
cash
used in operating activities for the six months ended June 30, 2007 was $2,913
compared to $13,470 used in the six months ended June 30, 2006. The net cash
used in operating activities in 2007 was primarily the result of our net
loss
and a $249 increase in inventory since the year ended December 31, 2006.
The
increase in inventory was offset by an increase in accounts payable as open
trade terms with suppliers helped finance the inventory increase. The increase
in inventories is intended to increase product available for auction. Accounts
receivable increased $304 primarily due to the increased revenues in the
business to business sales channel. Prepaid expenses and other current assets
decreased $152 from the year ended December 31, 2006 as interest receivable
of
$124 was collected. In addition, a $50 rent deposit for the customer service
center facility was returned to the Company. The decrease in accrued expenses
of
$479 was primarily the result of lower payroll accruals due to the reduced
staffing and lower freight costs due to lower Direct channel sales
volumes.
Net
cash
used in operating activities for the six months ended June 30, 2006 was $13,470.
Inventory increased $3,471 or 58% from December 31, 2005. The increase in
inventories was intended to reverse the decline in the Direct channel sales,
but
the declines in sales of computer related products stunted the growth and
contributed to increased mark downs of inventory in these categories in 2006.
Accounts receivable increased $1,849 due to the growth of the direct business
to
business channel and the nature of payment terms associated with this type
of
business. Additionally, accounts payable and accrued expenses decreased $3,895
due to the timing of payments in 2006 and the tightening of payment terms
with
vendors in the Direct channel.
Net
cash
used in investing activities was $102 for the six months ended June 30, 2007
due
primarily to the purchase of property and equipment. Net cash provided by
investing activities was $6,694 for the period ended June 30, 2006 primarily
from a decrease in restricted investments as a result of the expiration of
letters of credit that were no longer required as restricted
collateral.
Net
cash
used by financing activities was $1,415 for the six months ended June 30,
2007,
compared to a cash outflow of $836 for the same period last year. The cash
outflow in 2007 is due to the stock repurchase offset by the decrease in
inventory financed through the flooring facility. On April 25, 2007, the
Company
repurchased in a private transaction 2,135,550 shares of common stock and
580,937 warrants at a combined price of $1.05 for the common stock and for
the
warrants for an aggregate total of $2,242,328 from a private investor. The
repurchase represents 11% of the common stock and warrants currently
outstanding.
For
the
period ended June 30, 2006, the majority of the cash used for financing
activities related to the second part of the private offering of the
Company’s units to accredited investors on February 3, 2006. In this
offering, the Company sold 3,000,000 shares of its common stock
and warrants to purchase 750,002 shares of its common stock on the
same terms as described in Note 4 for an aggregate of $13.5
million. The Company also redeemed 2,666,668 shares of common stock
issued in connection with the merger and the first private offering
that were subject to redemption at a price of $4.50 per share and issued
600,667 shares of common stock (valued at $4.50 per share) to shareholders
of
Cape Coastal prior to the merger and uBid’s financial advisor, Calico Capital
Group. In addition, the Company issued additional warrants to purchase
90,000 shares of its common stock to its placement agents on the same
terms as described in Note 4. The second part of the private offering resulted
in no net cash proceeds being retained by the Company.
On
May 9, 2006, the Company and its subsidiaries entered into a Credit and
Security Agreement with Wells Fargo Bank, National Association acting through
Wells Fargo Business Credit and related security agreements and other agreements
described in the Credit and Security Agreement (the “Credit Agreement”). The
Credit Agreement provides for advances to the Company of up to a maximum
of
$25,000. The amount actually available to the Company will vary from time
to
time, depending on, among other factors, the amount of eligible inventory
and
the amount of eligible accounts receivable. The obligations under the Credit
Agreement and all related agreements are secured by all of the Company assets.
The initial term of the Agreement is three years, expiring on April 28,
2009. Up to $7,000 of the maximum amount is available for irrevocable, standby
and documentary letters of credit. Advances under the Credit Agreement bear
interest at a base rate (Wells Fargo Bank's prime rate) or LIBOR plus 2.5%.
The
Credit Agreement requires a prepayment fee of $500 if the Company terminates
the
Credit Agreement during its first year, $375 if
it
terminates the Credit Agreement during its second year and $125 if the Company
terminates the Credit Agreement during the third year. The Credit Agreement
requires the Company, among other things, to limit capital expenditures and
maintain minimum availability on the line. Also, the Company is obligated
contractually by a restrictive lock box arrangement. The Credit Agreement
also
requires the Company to pay a variety of other fees and expenses, including
minimum annual interest of $120. The Company as of June 30, 2007 had $49
in
deferred financing fees being amortized over the life of the Credit Agreement.
As of June 30, 2007, the effective loan rate was 8.25% and the Company had
no
outstanding balance and was in compliance with all the loan
covenants.
We
believe that current working capital, together with cash flows from operations
and availability under our credit facility will be adequate to support our
current operating plans for at least the next 12 months.
We
currently have little exposure to risks of fluctuating interest rates or
fluctuating currency exchange rates. Accordingly, we do not believe that
changes
in interest or currency rates will have a material effect on our liquidity,
financial condition or results of operations. It is our policy not to enter
into
derivative financial instruments.
Disclosure
Controls and Procedures.
The
Company maintains disclosure controls and procedures that have been designed
to
ensure that information related to the Company is recorded, processed,
summarized and reported on a timely basis. We review these disclosure controls
and procedures on a periodic basis. In connection with this review, we have
established a compliance committee that is responsible for accumulating
potentially material information regarding its activities and considering
the
materiality of this information. The compliance committee (or a subcommittee)
is
also responsible for making recommendations regarding disclosure and
communicating this information to our Chief Executive Officer and Vice
President, Finance to allow timely decisions regarding required disclosure.
Our
compliance committee is comprised of our principal risk management officer
and
other members of our management team.
Our
Chief
Executive Officer and Vice President, Finance, with the participation of
the
compliance committee, evaluated the effectiveness of the design and operation
of
our disclosure controls and procedures as of the end of the period covered
by
this Quarterly Report, as required by Rule 13a-15 of the Securities Exchange
Act
of 1934. Based on their evaluation of our disclosure controls and procedures,
our Chief Executive Officer and Vice President, Finance believe that, as
of the
end of the period covered by this Quarterly Report, our disclosure controls
and
procedures are effective to ensure that information required to be disclosed
by
us in the reports we file or submit under the Securities Exchange Act of
1934 is
recorded, processed, summarized, and reported within the time periods specified
in the rules and forms of the SEC.
Internal
Control Over Financial Reporting. There
have been no changes in our internal control over financial reporting identified
in the evaluation that occurred during the first quarter of fiscal year 2007
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART
II OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
From
time
to time we may be named in claims arising in the ordinary course of business.
Currently, no legal proceedings or claims are pending against us or involve
us
that, in the opinion of our management, could reasonably be expected to have
a
material adverse effect on our business or financial condition.
ITEM
1A. RISK FACTORS
In
addition to other information set forth in this report, you should carefully
consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2006, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known to us or that are
currently deemed to be immaterial also may materially adversely affect our
business, financial conditions and/or operating results.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
For
the
three months ended June 30, 2007, options to purchase an aggregate of 50,000
shares of our common stock were granted to individuals, all of whom joined
the
Company’s board of directors. Options to purchase an aggregate of 50,000 shares
at $1.50 per share were granted on May 14, 2007. The options all have a term
of
ten years and vest over a four year period either quarterly or annually
beginning on the first quarter or year respectively after the date of grant.
The
option grants were exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, which provides an exemption for transactions not
involving a public offering.
On
April
25, 2007, The Company entered into a stock repurchase agreement with a group
of
private investors under common management to repurchase 2,135,550 shares
of the
Company’s common stock and warrants to purchase 580,937 shares of the Company’s
common stock held by such private investors for $1.05 per share or an aggregate
purchase price of $2,242 These shares and warrants repurchased in this privately
negotiated transaction were originally acquired by the private investors
in the
Company’s private placement that initially closed on December 29, 2005. The
repurchase represented 11% of the common stock and warrants
outstanding.
ITEM
3. DEFAULT UPON SENIOR SECURITIES
None
None
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
31.1
|
|
Certification
of the President and Chief Executive Officer pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Vice President, Finance pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of the President and Chief Executive Officer pursuant to 18 U.S.C.
Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002.
|
|
|
|
32.2
|
|
Certification
of the Vice President, Finance pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934,
the Registrant has duly caused this report to be signed on its behalf by
the
undersigned, thereunto duly authorized as of August 14, 2007.
|
|
|
|
UBID.COM
HOLDINGS, INC.
|
|
|
|
|
By: |
/s/
Miguel A. Martinez, Jr.
|
|
Name: Miguel
A. Martinez, Jr.
Title:
Vice President, Finance
(Principal
Financial Officer and Principal Accounting
Officer)
|
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
|
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
uBid.com
Holdings, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
52-2372260
|
(State
or Other Jurisdiction of
|
(IRS
Employer
|
Incorporation
or Organization)
|
Identification
No.)
|
(Address
of principal executive offices and zip code)
Registrant’s
telephone number including area code:
(773)
272-5000
Indicate
by check mark whether the registrant (1) has filed all reports 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 filing requirements for the
past 90
days. Yes x
No
o
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. (Check
one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in
Exchange
Act Rule 12b-2). Yes o
No
x
Consolidated
Condensed Balance Sheets
(Dollars
in Thousands, except par value data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,779
|
|
$
|
14,785
|
|
Restricted
investments
|
|
|
216
|
|
|
214
|
|
Accounts
receivable, less allowance for doubtful accounts of $215 and
$60,
respectively
|
|
|
1,223
|
|
|
1,810
|
|
Merchandise
inventories
|
|
|
6,127
|
|
|
4,054
|
|
Prepaid
expenses and other current assets
|
|
|
910
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
22,255
|
|
|
22,052
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
859
|
|
|
924
|
|
Purchased
Intangible Assets
|
|
|
512
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
23,626
|
|
$
|
23,578
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Flooring
facility
|
|
$
|
501
|
|
$
|
152
|
|
Accounts
payable
|
|
|
3,371
|
|
|
2,239
|
|
Accrued
expenses:
|
|
|
|
|
|
|
|
Advertising
|
|
|
462
|
|
|
428
|
|
Other
|
|
|
734
|
|
|
1,024
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
5,068
|
|
|
3,843
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
Common
stock, $.001 par value (200,000,000 shares authorized;
|
|
|
|
|
|
|
|
20,333,333
issued and outstanding)
|
|
|
20
|
|
|
20
|
|
Stock
warrants
|
|
|
8,086
|
|
|
8,086
|
|
Additional
paid-in-capital
|
|
|
37,086
|
|
|
36,848
|
|
Accumulated
deficit
|
|
|
(26,634
|
)
|
|
(25,219
|
)
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
18,558
|
|
|
19,735
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
23,626
|
|
$
|
23,578
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
Consolidated
Condensed Statements of Operations
(Dollars
in Thousands, except for per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Net
Revenues
|
|
$
|
9,607
|
|
$
|
20,088
|
|
Cost
of Revenues
|
|
|
7,055
|
|
|
17,178
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
2,552
|
|
|
2,910
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
3,022
|
|
|
3,534
|
|
Sales
and marketing
|
|
|
1,069
|
|
|
1,525
|
|
Total
operating expenses
|
|
|
4,091
|
|
|
5,059
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(1,539
|
)
|
|
(2,149
|
)
|
Interest
Expense
|
|
|
(112
|
)
|
|
(47
|
)
|
Interest
Income
|
|
|
176
|
|
|
193
|
|
Other
Income, net
|
|
|
60
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,415
|
)
|
$
|
(2,003
|
)
|
|
|
|
|
|
|
|
|
Net
Loss per share - Basic and
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
Weighted
Average Shares - Basic and Diluted
|
|
|
20,333,333
|
|
|
19,955,536
|
|
The accompanying notes are an integral part of these consolidated condensed
financial statements.
uBid.com
Holdings, Inc.
Consolidated
Condensed Statements of Shareholders' Equity
(Dollars
in Thousands)
(Unaudited)
|
|
Common
Stock
|
|
Stock
|
|
Paid-in
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Dollars
|
|
Warrants
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,333,333
|
|
$
|
20
|
|
$
|
8,086
|
|
$
|
36,848
|
|
$
|
(25,219
|
)
|
$
|
19,735
|
|
Stock
compensation expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
238
|
|
|
—
|
|
|
238
|
|
Net
Loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,415
|
)
|
|
(1,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20
|
|
$
|
8,086
|
|
$
|
37,086
|
|
$
|
(26,634
|
)
|
$
|
18,558
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
uBid.com
Holdings, Inc and Subsidiaries
Consolidated
Condensed Statements of Cash Flows
(Dollars
in Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,415
|
)
|
$
|
(2,003
|
)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
182
|
|
|
69
|
|
Non-cash
stock compensation expense
|
|
|
238
|
|
|
231
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
587
|
|
|
(871
|
)
|
Merchandise inventories
|
|
|
(2,073
|
)
|
|
(10,334
|
)
|
Prepaid expenses and other current assets
|
|
|
279
|
|
|
54
|
|
Accounts payable
|
|
|
1,132
|
|
|
587
|
|
Accrued expenses
|
|
|
(257
|
)
|
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,327
|
)
|
|
(13,644
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(26
|
)
|
|
(45
|
)
|
Change
in restricted investments
|
|
|
(2
|
)
|
|
344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
(28
|
)
|
|
299
|
|
|
|
|
|
|
|
|
|
Cash
Flows From financing Activities
|
|
|
|
|
|
|
|
Change
in flooring facility
|
|
|
349
|
|
|
(720
|
)
|
Proceeds
from sale of common stock and warrants
|
|
|
-
|
|
|
13,500
|
|
Redemption
of common stock
|
|
|
-
|
|
|
(12,000
|
)
|
Fees
paid in conjunction with Merger and offerings
|
|
|
-
|
|
|
(1,500
|
)
|
Payments
on long-term debt
|
|
|
-
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
349
|
|
|
(823
|
)
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(1,006
|
)
|
|
(14,168
|
)
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, beginning of period
|
|
|
14,785
|
|
|
21,176
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
13,779
|
|
$
|
7,008
|
|
|
|
|
|
|
|
|
|
Supplemented
Cash Flow Disclosure
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
75
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
Warrants
and stock issued as stock issuance costs
|
|
$
|
-
|
|
$
|
2,907
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
NOTES
TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Dollars
in Thousands except per share data
(Unaudited)
1. Basis
of Presentation
uBid.com
Holdings, Inc. and subsidiaries (the “Company”) operate a leading on-line
business to consumer and business to business marketplace that enables itself,
certified merchants, manufacturers, retailers, distributors and small businesses
to offer high quality excess, new, overstock, close-out, refurbished and
limited
supply brand name merchandise to consumer and business customers primarily
located in the United States. Through the Company’s website, located at
www.ubid.com,
the
Company offers merchandise across a wide range of product categories including
but not limited to computer products, consumer electronics, apparel, housewares,
watches, jewelry, travel, sporting goods, home improvement products and
collectibles. The Company’s marketplace employs a combination of auction style
and fixed price formats.
The
Company’s unaudited consolidated condensed financial statements reflect normal
recurring adjustments that are necessary to present fairly the Company’s
financial position and results of operations on a basis consistent with that
of
the prior audited consolidated financial statements. As permitted by rules
and
regulations of the Securities and Exchange Commission applicable to quarterly
reports on Form 10-Q, the Company has condensed or omitted certain information
and disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”). Results for interim periods are not necessarily indicative of the
results that may be expected for a full year. These interim financial statements
should be read along with the audited consolidated financial statements included
in our Form 10-K for the year ended December 31, 2006. The consolidated
condensed financial statements include the accounts of the Company and its
wholly owned subsidiaries. All material intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
The
preparation of financial statements in accordance with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
Company’s Consolidated Condensed Financial Statements and accompanying notes.
Actual results could differ materially from those estimates.
2. Summary
of Significant Accounting Policies
Since
December 31, 2006, none of the critical accounting policies, or the Company’s
application thereof, as more fully described in the Company’s 2006 Annual
Report, has significantly changed. Certain critical accounting policies have
been presented below due to the significance of related transactions during
the
three months ended March 31, 2007.
Revenue
Recognition
The
Company sells merchandise under two types of arrangements; direct purchase
sales
and revenue sharing arrangements.
For
direct purchase sales to consumer and business customers, the Company is
responsible for conducting the auction or listing the fixed sale price for
merchandise owned by the Company, billing the customer, shipping the merchandise
to the customer, processing merchandise returns and collecting accounts
receivable. In accordance with the provisions of Staff Accounting Bulletin
104,
the Company recognizes revenue when the following revenue recognition criteria
are met: (1) persuasive evidence of an arrangement exists; (2) the product
has
been shipped (FOB Shipping Point) and the customer takes ownership and assumes
the risk of loss; (3) the selling price is fixed or determinable; and (4)
collection of the resulting receivable is reasonably assured.
For
sales
of merchandise under revenue-sharing agreements, the Company is responsible
for
conducting the auction for merchandise owned by third parties, billing the
customer, arranging for a third party to complete delivery to the customer,
processing merchandise returns and collecting accounts receivable. The Company
bears no physical inventory loss or return risk related to these sales. The
Company records commission revenue at the time of shipment.
Long-Lived
Assets
Long-lived
assets are reviewed for impairment whenever events or circumstances indicate
the
remaining useful life of any long-lived assets may warrant revision or that
the
remaining carrying value of such assets may not be recoverable. When factors
indicate that such assets should be evaluated for possible impairment, the
Company uses an estimate of the undiscounted cash flows over the remaining
life
of the asset in measuring whether the asset is recoverable. No impairment
has
been recognized for the periods ended March 31, 2007 or 2006.
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R) (“SFAS 123R”). This pronouncement requires companies to measure the
cost of employee service received in exchange for a share based award (typically
stock options) based on the fair value of the award. The Company has elected
to
use the “modified prospective” transition method for stock options granted prior
to January 1, 2006, but for which the vesting period is not complete. Under
this
transition method, the Company accounts for such awards on a prospective
basis,
with expense being recognized in its statement of operations beginning in
the
first quarter of 2006 and continuing over the remaining requisite service
period
based on the grant date fair value estimated in accordance with Statement
of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(“SFAS 123”). The Company recognizes these compensation costs on a straight-line
basis over the requisite service period of the award which is generally the
option vesting term of four years. The total compensation expense related
to the
stock option plan for the three months ended March 31, 2007 and 2006 was
approximately $238 and $231, respectively.
Recent
Pronouncements
Updates
to recent accounting standards as disclosed in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006 are as follows:
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and was adopted by the Company in the first quarter
of fiscal 2007.
We
have
reviewed the impact of FIN 48 on our consolidated condensed financial statements
and have determined we do not have material uncertain tax positions or
unrecognized tax benefits and there is no material impact on our financial
position, results of operations or cash flows. We classify interest on tax
settlements as a component of interest expense and penalties on tax settlements
as a component of administrative expense in our financials. The Company’s FIN 48
evaluation was performed for the years 2003 through 2006, which are the years
that remain subject to federal and state examinations as of January 1,
2007.
On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
-
Including an Amendment of FASB Statement No. 115" ("SFAS 159"). This standard
permits an entity to measure financial instruments and certain other items
at
estimated fair value. Most of the provisions of SFAS No. 159 are elective;
however, the amendment to FASB No. 115, "Accounting for Certain Investments
in
Debt and Equity Securities," applies to all entities that own trading and
available-for-sale securities. The fair value option created by SFAS 159
permits
an entity to measure eligible items at fair value as of specified election
dates. The fair value option (a) may generally be applied instrument by
instrument, (b) is irrevocable unless a new election date occurs, and (c)
must
be applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that begins
after November 15, 2007. Early adoption is permitted as of the beginning
of the
previous fiscal year provided that the entity (i) makes that choice in the
first
120 days of that year, (ii) has not yet issued financial statements for any
interim period of such year, and (iii) elects to apply the provisions of
FASB
157. We are currently evaluating the impact of SFAS 159, if any, on our
consolidated financial statements.
3.
Net Loss Per Share (“EPS”)
The
Company computes loss per share under Statement of Financial Accounting
Standards (“SFAS”) No. 128, “Earnings Per Share.” The statement requires
presentation of two amounts: basic and diluted loss per share. Basic loss
per
share is computed by dividing the loss available to common shareholders by
the
weighted average common shares outstanding. Dilutive earnings per share would
include all common stock equivalents unless anti-dilutive.
Due
to
losses in each period presented, the Company has not included the following
common stock equivalents in its computation of diluted loss per share as
their
input would have been anti-dilutive.
|
|
|
|
2006
|
|
Shares
subject to stock warrants
|
|
|
3,903,336
|
|
|
3,903,336
|
|
Shares
subject to stock options
|
|
|
1,678,900
|
|
|
1,763,400
|
|
|
|
|
5,582,236
|
|
|
5,666,736
|
|
4.
Merger and Private Offerings
On
December 29, 2005 (the “Closing Date”), Cape Coastal Trading Corporation (or
“Cape Coastal”), uBid Acquisition Co., Inc. (“Acquisition Sub”) and uBid, Inc.
entered into a Merger Agreement and Plan of Reorganization (the “Merger
Agreement”). Under the Merger Agreement, Acquisition Sub merged with and into
uBid, Inc., with uBid, Inc. remaining as the surviving corporation and a
100%
owned subsidiary of Cape Coastal Trading Corporation. Just prior to the
Closing Date, all outstanding convertible preferred shares and warrants to
acquire shares of uBid, Inc. before the merger were converted and exercised
such
that, just prior to the merger, 3,793 shares of common stock were outstanding
which were exchanged on a 2,320 to 1 basis on the closing date
into 8,800,000 shares of common stock of Cape Coastal, with up to 444,444
shares of such common stock subject to redemption at a redemption price of
$4.50. The stockholders of Cape Coastal before the merger retained 599,331
shares of common stock of Cape Coastal after the merger. Before the merger,
Cape
Coastal was a public shell company. Concurrent with the merger, the
Company amended its Certificate of Incorporation to change its name
from Cape Coastal Trading Corporation to “uBid.com Holdings, Inc.”
The
merger was treated as a recapitalization of uBid, Inc. for financial accounting
purposes. Accordingly, the historical financial statements of Cape Coastal
before the merger were replaced with the historical financial statements
of
uBid, Inc. before the merger. All share and per share data has been
retroactively restated to reflect the implicit conversion ratio related to
the
exchange of shares in the merger.
Concurrent
with the merger, the Company completed the first part of a private offering
to accredited investors. The Company sold 10,000,003 shares of
its common stock (of which 2,222,224 shares were subject to redemption) and
warrants to purchase 2,500,003 shares of its common stock at $5.85 for a
period
of 5 years (the shares and warrants are collectively referred to as “Units”),
for aggregate consideration of approximately $45.0 million. These warrants
were valued at $2.08 per warrant for an aggregate of $5.2
million using a Black-Scholes option-pricing model using a 5 year
expected life, a risk free interest rate of 5.0%, no expected dividends and
a
68.0% volatility. Some of the investors participating in the first part of
the
private offering held notes that were issued by uBid before the merger,
including $10.5 million of debt held by the Petters Group, a holder greater
than
5% of our voting common stock, (“Petters Group”) and $5.0 million of debt held
by the bridge loan holders. Rather than accepting cash consideration for
the
Units acquired by these investors, the Company agreed to issue Units at a
rate of one Unit for each $4.50 of debt for consideration of the note holders’
cancellation of the existing notes. Therefore, the consideration the
Company received on the Closing Date consisted of approximately $29.5 million
in
cash and $15.5 million in cancelled debt. In addition, on the Closing
Date, the Company issued warrants to purchase 333,333 shares of our common
stock to the bridge note holders as a financing fee, which warrants are
exercisable for three years at an exercise price of $4.50 and the value of
which, $0.6 million, was recorded as interest expense. The Company also issued
warrants to purchase 230,000 shares of its common stock to its
placement agents in the offering, which warrants are exercisable for five
years
at an exercise price of $4.50 and the value of which, $0.5 million, was recorded
as a cost of the equity issuance. These warrants were valued at $1.80 and
$2.27
respectively per warrant for an aggregate of $1.1 million using a
Black-Scholes option-pricing model using the warrants respective life, a
risk
free interest rate of 5.0%, no expected dividends and a 68.0% volatility.
Issuance costs, including the value of the warrants, were $4.7
million.
On
February 3, 2006, the Company completed the second part of the
private offering of Units to accredited investors. In this offering, the
Company sold 3,000,000 shares of its common stock and warrants to
purchase 750,002 shares of its common stock on the same terms as
described above for an aggregate of $13.5 million. The Company also
redeemed the 2,666,668 shares of common stock issued in connection with the
merger and the first private offering that were subject to
redemption at a price of $4.50 per share and issued 600,667 shares of common
stock (valued at $4.50 per share) to Cape Coastal and uBid’s financial advisor,
Calico Capital Group. In addition, the Company issued additional
warrants to purchase 90,000 shares of its common stock to its
placement agents on the same terms as described above. The second part of
the
private offering resulted in no net cash proceeds being retained by the Company.
Issuance costs, including the value of the warrants and the shares issued
to
Calico Capital Group, were $4.4 million.
The
Company’s registration statement on Form S-1 originally filed on February 28,
2006 was declared effective by the Securities and Exchange Commission on
July
21, 2006. The Registration Statement includes 20,210,109 shares of common
stock
which are held by existing shareholders of the Company. The Company currently
has 20,333,333 shares of common stock outstanding. The registration statement
also includes 3,903,338 shares of common stock issuable upon exercise of
warrants held by investors of the Company. The Company's shares will continue
to
trade under the symbol UBHI on the NASD OTC Bulletin Board.
5. 2005
Equity Incentive Plan
The
2005
Equity Incentive Plan is an equity-based compensation plan to provide incentives
to, and to attract, motivate and retain the highest qualified employees,
directors, consultants and other third party service providers. The 2005
Equity
Incentive Plan enables the board to provide equity-based incentives through
grants or awards of stock options and restricted stock (collectively, “Incentive
Awards”) to present and future employees, consultants, directors, and other
third party service providers.
A
total
of 2,500,000 shares of common stock have been reserved for issuance under
the
2005 Equity Incentive Plan. If an Incentive Award granted pursuant to the
2005
Equity Incentive Plan expires, terminates, is unexercised or is forfeited,
or if
any shares are surrendered to the Company in connection with an
Incentive Award, the shares subject to such award and the surrendered shares
will become available for future awards under the 2005 Equity Incentive Plan.
Options generally vest over a period of four years and have a ten year
contractual life. At March 31, 2007 and 2006, the Company had options to
purchase 1,678,900 and 1,763,400 shares, respectively, of common stock
outstanding to certain officers and other employees. The compensation costs
charged against income was $238 and $231 for the periods ended March 31,
2007
and 2006, respectively, and are included in General and Administrative Expenses
in the Consolidated Condensed Statement of Operations
None
of
the Incentive Awards granted under the 2005 Equity Incentive Plan were issued
for cash consideration collected from the participants. The Incentive Awards
were granted to participants in the 2005 Equity Incentive Plan on the basis
of
services to be provided to the Company by the participants.
The
fair
value of the options awarded during the periods ended March 31, 2007 and
2006,
were estimated using the Black-Scholes option pricing model with the following
weighted average assumptions:
|
|
|
|
2006
|
|
Risk
-free interest rate
|
|
|
5.0
|
%
|
|
5.0
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
Expected
volatility
|
|
|
68.0
|
%
|
|
68.0
|
%
|
Expected
life (years)
|
|
|
6.0
|
|
|
4.0
|
|
Grant
date fair value
|
|
$
|
2.15
|
|
$
|
2.08
|
|
Expected
forfeiture rate
|
|
|
5.0
|
%
|
|
4.9
|
%
|
The
risk-free interest rate is based on the U.S. Treasury Bill rates. The dividend
reflects the fact that the Company has never paid a dividend on its common
stock
and does not expect to in the future. Expected volatility was based on a
market-based implied volatility. The expected term of the options is based
on
what the Company believes will be representative of future behavior. In
addition, we are required to estimate the expected forfeiture rate and recognize
expense only for those shares expected to vest. If our actual forfeiture
rate is
materially different from our estimate, the stock-based compensation expense
could be significantly different from what we have recorded in the current
period.
The
following is a summary of all of the Company’s stock option
activity:
|
|
|
|
Weighted-
|
|
|
|
|
|
average
|
|
|
|
Shares
under
|
|
exercise
price per
|
|
|
|
option
|
|
share
|
|
|
|
|
1,530,600
|
|
|
4.50
|
|
Granted
|
|
|
250,000
|
|
|
1.49
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Surrendered
|
|
|
(101,700
|
)
|
|
4.91
|
|
|
|
|
1,678,900
|
|
$
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
|
86,475
|
|
$
|
4.81
|
|
As
of
March 31, 2007 there was $3,381 of total unrecognized compensation cost related
to the nonvested option awards under the 2005 Equity Incentive Plan. That
cost
is expected to be recognized over the 3.0 year remaining vesting period of
the
nonvested option awards. The total fair value of the option awards that vested
during the three months ended March 31, 2007 was $74.
The
following summarizes information about stock options at March 31,
2007:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Number |
|
Remaining
|
|
Average
|
|
Number
|
|
Average |
|
Exercise
|
|
Outstanding
at |
|
Contractual
|
|
Exercise
|
|
Exercisable
at
|
|
Exercise |
|
Price
|
|
March
31, 2007 |
|
Life
|
|
Price
|
|
|
|
Price
|
|
$1.48
|
|
|
100,000
|
|
|
10.0
|
|
$
|
1.48
|
|
|
-
|
|
$
|
-
|
|
$1.50
|
|
|
150,000
|
|
|
10.0
|
|
$
|
1.50
|
|
|
-
|
|
$
|
-
|
|
$2.90
|
|
|
51,400
|
|
|
9.9
|
|
$
|
2.90
|
|
|
3,125
|
|
$
|
2.9
|
|
$3.55
|
|
|
30,000
|
|
|
9.8
|
|
$
|
3.55
|
|
|
-
|
|
$
|
-
|
|
$3.65
|
|
|
1,000
|
|
|
9.7
|
|
$
|
3.65
|
|
|
-
|
|
$
|
-
|
|
$3.95
|
|
|
500
|
|
|
9.7
|
|
$
|
3.95
|
|
|
-
|
|
$
|
-
|
|
$4.50
|
|
|
1,261,800
|
|
|
9.1
|
|
$
|
4.50
|
|
|
65,450
|
|
$
|
4.50
|
|
$5.25
|
|
|
300
|
|
|
9.6
|
|
$
|
5.30
|
|
|
75
|
|
$
|
5.25
|
|
$6.15
|
|
|
1,000
|
|
|
9.0
|
|
$
|
6.15
|
|
|
-
|
|
$
|
-
|
|
$6.15
|
|
|
50,000
|
|
|
9.0
|
|
$
|
6.15
|
|
|
12,750
|
|
$
|
6.15
|
|
$6.45
|
|
|
0
|
|
|
9.5
|
|
$
|
6.45
|
|
|
-
|
|
$
|
-
|
|
$6.49
|
|
|
1,000
|
|
|
9.5
|
|
$
|
6.49
|
|
|
-
|
|
$
|
-
|
|
$6.50
|
|
|
300
|
|
|
9.1
|
|
$
|
6.50
|
|
|
-
|
|
$
|
-
|
|
$6.50
|
|
|
15,000
|
|
|
9.2
|
|
$
|
6.50
|
|
|
3,825
|
|
$
|
6.5
|
|
$6.50
|
|
|
10,000
|
|
|
9.5
|
|
$
|
6.50
|
|
|
-
|
|
$
|
-
|
|
$6.65
|
|
|
400
|
|
|
9.3
|
|
$
|
6.65
|
|
|
-
|
|
$
|
-
|
|
$6.74
|
|
|
5,000
|
|
|
9.2
|
|
$
|
6.74
|
|
|
1,250
|
|
$
|
6.74
|
|
$6.80
|
|
|
1,200
|
|
|
9.5
|
|
$
|
6.80
|
|
|
-
|
|
$
|
-
|
|
|
|
|
1,678,900
|
|
|
|
|
$
|
4.08
|
|
|
86,475
|
|
$
|
4.81
|
|
The
aggregate intrinsic value of the outstanding options (the difference between
the
closing stock price on the last trading day of the year ended March 31, 2007
of
$1.20 per share and the exercise price, multiplied by the number of in-the-money
options) was zero. This amount will change based on changes in the fair market
value of the Company’s common stock.
6. Note
Payable - Bank
On
May 9, 2006, the Company and its subsidiaries entered into a Credit and
Security Agreement with Wells Fargo Bank, National Association acting through
Wells Fargo Business Credit and related security agreements and other agreements
described in the Credit and Security Agreement (the “Credit Agreement”). The
Credit Agreement provides for advances to the Company of up to a maximum
of
$25,000. The amount actually available to the Company will vary from time
to
time, depending on, among other factors, the amount of eligible inventory
and
the amount of eligible accounts receivable. The obligations under the Credit
Agreement and all related agreements are secured by all of the Company assets.
The initial term of the Agreement is three years, expiring on April 28,
2009. Up to $7,000 of the maximum amount is available for irrevocable, standby
and documentary letters of credit. Advances under the Credit Agreement bear
interest at a base rate (Wells Fargo Bank's prime rate) or LIBOR plus 2.5%.
The
Credit Agreement requires a prepayment fee of $500 if the Company terminates
the
Credit Agreement during its first year, $375 if
it
terminates the Credit Agreement during its second year and $125 if the Company
terminates the Credit Agreement during the third year. The Credit Agreement
requires the Company, among other things, to limit capital expenditures and
maintain minimum availability on the line. Also, the Company is obligated
contractually by a restrictive lock box arrangement. The Credit Agreement
also
requires the Company to pay a variety of other fees and expenses, including
minimum monthly interest of $10. The Company as of March 31, 2007 had $95
in
deferred financing fees being amortized over the life of the Credit Agreement.
As of March 31, 2007, the effective loan rate was 8.25% and the Company had
no
outstanding balance and was in compliance with all the loan
covenants.
7.
Segment Information
The
Company is organized into four operating segments: Direct sales channel,
UCM
sales channel, Business to Business sales channel and Other. In classifying
its
operational entities into a particular segment, the Company segregated its
operations with similar economic characteristics, products and services,
customers and methods of distribution into distinct operating groups. Prior
to
March 31, 2007, all operating segments were aggregated into one reportable
segment. The shift in revenues from the Direct sales channel to the UCM sales
channel has resulted in separate reportable operating segments.
For
the
Direct sales channel, the Company is responsible for conducting the auction
or
listing the fixed sale price for merchandise owned by the Company, billing
the
customer, shipping the merchandise to the customer, processing merchandise
returns and collecting accounts receivable.
For
the
uBid certified Merchant (“UCM”) sales channel, the Company is responsible for
conducting the auction for merchandise owned by third parties, billing the
customer, arranging for a third party to complete delivery to the customer,
processing merchandise returns and collecting accounts receivable. The Company
bears no physical inventory loss or return risk related to these sales. The
Company records commission revenue at the time of shipment.
For
the
Business to Business sales channel, the Company sells product purchased directly
to other businesses. Revenues are recognized upon shipment.
All
other
revenues consist primarily of advertising revenue. Advertising revenues are
derived principally from the sale of online advertisements. Advertising revenues
on contracts are recognized as “impressions” (i.e., the number of times that an
advertisement appears in pages viewed by users of our websites). Impressions
are
delivered over the term of the agreement where such agreements provide for
minimum monthly, quarterly or annual advertising commitments.
|
|
Three
months Ended March 31,
|
|
Net
Revenue
|
|
2007
|
|
2006
|
|
Direct
|
|
$
|
7,768
|
|
$
|
16,304
|
|
UCM
|
|
|
1,472
|
|
|
1,009
|
|
Business
to Business
|
|
|
62
|
|
|
2,687
|
|
Other
|
|
|
305
|
|
|
88
|
|
Total
|
|
$
|
9,607
|
|
$
|
20,088
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
Direct
|
|
$
|
761
|
|
$
|
1,423
|
|
UCM
|
|
|
1,472
|
|
|
1,009
|
|
Business
to Business
|
|
|
14
|
|
|
390
|
|
Other
|
|
|
305
|
|
|
88
|
|
Total
|
|
$
|
2,552
|
|
$
|
2,910
|
|
|
|
|
|
|
|
|
|
Gross
Profit %
|
|
|
|
|
|
|
|
Direct
|
|
|
9.8
|
%
|
|
8.7
|
%
|
UCM
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Business
to Business
|
|
|
22.6
|
%
|
|
14.5
|
%
|
Other
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Total
|
|
|
26.6
|
%
|
|
14.5
|
%
|
8.
Subsequent Event
On
April
25, 2007, the
Company
repurchased in a private transaction 2,135,550 shares of common stock and
580,937 warrants at a combined price of $1.05 for the common stock and for
the
warrants for an aggregate total of $2,242,328 from a private investor. The
repurchase represents 11% of the common stock and warrants currently
outstanding. The Company has 18,197,783 outstanding shares of common stock
after
the repurchase.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with our consolidated condensed
financial statements and related notes included in Item 1 of Part 1 of this
Quarterly Report and the audited consolidated financial statements and notes
thereto and Management’s Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2006. uBid.com Holdings, Inc. is a holding
company for uBid, Inc., and DiBu Trading Corp., Inc. our operating businesses.
For purposes of this Quarterly Report, unless otherwise indicated or the
context
otherwise requires, all references herein to “uBid,” “we,” “us,” and “our” refer
to uBid.com Holdings, Inc. and our subsidiary.
Information
in the following Management's Discussion and Analysis of Financial Condition
and
Results of Operations and elsewhere in this quarterly report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements provide current expectations or forecasts of future
events and can be identified by the use of terminology such as “believe,”
“estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or
expressions. Any statement that is not a historical fact, including statements
regarding estimates, projections, future trends and the outcome of events
that
have not yet occurred, is a forward-looking statement. Actual results could
differ materially from those projected in the forward-looking statements
as a
result of a number of factors, including but not limited the risk factors
detailed in our filings with the SEC, including our Annual Report on Form
10-K
for the year ended December 31, 2006. We assume no obligation to update such
forward-looking statements or to update the reasons actual results could
differ
materially from those anticipated in such forward-looking statements.
Overview
We
operate a leading online marketplace located at www.ubid.com
offering
high quality excess, new, overstock, close-out, refurbished and limited supply
brand name merchandise to both consumers and businesses using auction style
and
fixed price formats. We offer consumers a trustworthy buying environment
in
which we continually monitor and certify activity to eliminate the potential
for
fraud by certifying all merchants and processing 100% of all transactions
between buyers and sellers. Our marketplace offers brand-name merchandise
from
over 200 product categories including computer products, consumer electronics,
apparel, housewares, watches, jewelry, travel, sporting goods, home improvement
products and collectibles.
Our
business model provides value for consumers, manufacturers, distributors,
retailers and other approved third party merchants. Consumers shop in a
trustworthy and secure online marketplace and have the opportunity to bid
their
own prices on popular, brand-name products realizing product savings of
generally 20% to 80% off retail prices. Our online marketplace provides
merchants with an efficient and economical distribution channel for maximizing
revenue on their merchandise. Merchants can monetize overstock and close-out
inventory, expand their customer base and increase sales without compromising
existing distribution channels.
Our
business model consists of three distinct business channels: uBid Direct,
UCM
and Business to Business.
We
purchase merchandise outright in the uBid Direct and Business to Business
channels and sell to consumers and businesses. On this merchandise, we bear
the
inventory, return and credit risk. The full sales amount is recorded as revenue
upon verification of the credit card transaction and shipment of the
merchandise.
We
also
sell merchandise through the UCM Program channel by allowing prescreened
third
party merchants to sell their product through our online marketplace to
consumers and business. On this merchandise, we do not take title and therefore
do not bear the related inventory risk. In the UCM Program, we are the primary
obligor to whom payment is due, but we bear no inventory or returns risk,
so we
record only our commission as revenue.
In
all
instances where the credit card authorization has been received but merchandise
has not been shipped, we defer revenue recognition until the merchandise
is
shipped.
Our
online marketplace is available 24 hours a day, seven days a week and we
currently offer over 200,000 items each day. Since the first offer of product
in
December 1997, our marketplace has facilitated over $1 billion in net revenues
and has registered over five million members.
Executive
Commentary
Success
Measures:
Our
management believes that the most important financial and non-financial measures
that track our progress include sales, website traffic, total average order
value, gross margin, customer acquisition costs, advertising expense, personnel
costs, and fulfillment costs.
Key
Business Metrics We
periodically review key business metrics to evaluate the effectiveness of
our
operational strategies and the financial performance of our business. These
key
metrics include the following:
Gross
Merchandise Sales (GMS)
Gross
Merchandise Sales differ from GAAP revenue in that gross bookings represents
the
gross sales price of goods sold by the Company (including sales through our
UCM
Program) before returns, sales discounts, and cancellations.
Number
of Orders
This
represents the total number of orders shipped in a specified period. We analyze
the number of orders by category to evaluate the effectiveness of our
merchandising and advertising strategies as well as to monitor our inventory
management.
Average
Order Value
Average
order value is the ratio of gross sales divided by the number of orders shipped
within a given time period. We analyze average order value by category primarily
to manage costs and other operating expenses.
Visitors
A
Visitor
is a consumer or business that voluntarily clicks through to the website
(uBid.com) using both online and offline advertising stimulus. Visitors don’t
include third party site pops, pop unders, or non converting impressions
to the
website. Examples of online marketing channels we advertise on are: affiliate
banner networks, comparison shopping sites, paid and organic search engines,
and
email.
Bidders
A
Bidder
is a visitor that places a bid on an item up for auction on the website
(uBid.com).
Visitors
to Bidder Conversion
The
percentage of visitors that bid on an auction item. We use this as a measure
of
the effectiveness of advertising.
Approved
UCM Program Vendors
Vendors
that have gone through the approval process to sell merchandise through
our
website.
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|
2005
|
|
2005
|
|
2005
|
|
Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMS
(in thousands)
|
|
$
|
23,402
|
|
$
|
26,276
|
|
$
|
26,528
|
|
$
|
30,286
|
|
$
|
31,167
|
|
$
|
31,035
|
|
$
|
27,215
|
|
$
|
28,020
|
|
Number
of orders (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
|
21
|
|
|
24
|
|
|
23
|
|
|
37
|
|
|
36
|
|
|
43
|
|
|
36
|
|
|
39
|
|
uBid
Certified Merchant
|
|
|
104
|
|
|
99
|
|
|
89
|
|
|
88
|
|
|
87
|
|
|
93
|
|
|
72
|
|
|
64
|
|
Total
orders
|
|
|
125
|
|
|
123
|
|
|
112
|
|
|
125
|
|
|
123
|
|
|
136
|
|
|
108
|
|
|
103
|
|
Average
Order Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
390
|
|
$
|
424
|
|
$
|
424
|
|
$
|
416
|
|
$
|
465
|
|
$
|
398
|
|
$
|
495
|
|
$
|
493
|
|
uBid
Certified Merchant
|
|
$
|
120
|
|
$
|
126
|
|
$
|
128
|
|
$
|
110
|
|
$
|
107
|
|
$
|
108
|
|
$
|
112
|
|
$
|
106
|
|
Visitors
(in thousands)
|
|
|
6,744
|
|
|
6,529
|
|
|
6,488
|
|
|
7,215
|
|
|
6,369
|
|
|
7,051
|
|
|
8,287
|
|
|
7,545
|
|
Bidders
(in thousands)
|
|
|
235
|
|
|
239
|
|
|
211
|
|
|
255
|
|
|
241
|
|
|
267
|
|
|
222
|
|
|
251
|
|
Bidders
to Visitors Percentage
|
|
|
3.5
|
%
|
|
3.7
|
%
|
|
3.3
|
%
|
|
3.5
|
%
|
|
3.8
|
%
|
|
3.8
|
%
|
|
2.7
|
%
|
|
3.3
|
%
|
Approved
UCM Vendors
|
|
|
2,513
|
|
|
2,049
|
|
|
1,716
|
|
|
1,307
|
|
|
949
|
|
|
628
|
|
|
401
|
|
|
202
|
|
Revenue
Source:
We derive most of our revenue from sales of products to consumers and businesses
as well as commission revenue earned for sales of merchandise under revenue
sharing agreements with third party sellers. We believe that the principal
drivers of our revenue consist of the average order value placed by our
customers, the number of orders placed by both existing and new customers,
special offers we make available that result in incremental orders, our ability
to attract new customers and advertising that impacts our revenue drivers.
Sales
consist of orders placed through our uBid.com website and direct business
to
business sales. We further generate revenue from shipping fees we charge
our
customers and advertising sales. We record our revenue net of returns and
other
discounts. Our revenues may fluctuate from period to period as a result of
special offers we provide such as free shipping, and other special
promotions.
Our
revenue is dependent in part on sales of products produced by or purchased
from
Sony Electronics, Inc. (“Sony”), Hewlett-Packard Company (“HP”), and Recoupit,
Inc.(“Recoupit”). Sony related products represent 15.1% of sales for the quarter
ended March 31, 2007 compared to 12.7% for the quarter ended March 31, 2006.
HP
related products represented 22.5% of sales for the quarter ended March 31,
2007
compared to 10.3 % for the quarter ended March 31, 2006. Recoupit related
products represented 7.3% of sales for the quarter ended March 31, 2007 compared
to 4.1% for the quarter ended March 31, 2006. No other supplier represented
more
than 5% of our net revenues for any period presented.
Cost
of Revenues:
Cost of
revenues primarily consists of the cost of the product and inbound and outbound
shipping. There is no cost of revenues for UCM Program revenue. Cost of revenues
does not include order fulfillment costs, which are included in general and
administrative expenses.
Gross
Profits:
Our
gross profit margins are impacted by a number of factors including the category
of merchandise, the introduction of new product categories, the mix of sales
among our product categories, pricing of products by our vendors, pricing
strategies, promotional programs, market conditions, packaging, excess and
obsolete inventory charges and other factors. Gross profits and gross profit
percentages are not comparable to gross profit and gross profit percentages
reported by companies that include order fulfillment costs in the cost of
revenues.
Expenses:
Sales
and marketing, general and administrative (“SG&A”) expenses consist
primarily of sales and marketing expenses, including online marketing
activities, order fulfillment and other costs, such as personnel, rent,
warehouse and handling, common area maintenance, depreciation, credit card
processing charges, insurance, legal and accounting fees. Interest expense
charges are from our IBM flooring facility at a rate of 1% per month on the
outstanding balances, interest and amortization of loan origination fees
related
to our credit facility.
Results
of Operations (Dollars in Thousands, except per order
data)
The
following table sets forth, for the periods presented, certain data from
our
statement of operations as a percentage of net revenues. This information
should
be read in conjunction with our financial statements and notes thereto included
elsewhere in this report.
|
|
Three
months ended March
31
|
|
|
|
2007
|
|
2006
|
|
Net
Revenues
|
|
$
|
9,607
|
|
|
100.0
|
%
|
$
|
20,088
|
|
|
100.0
|
%
|
Cost
of Revenue
|
|
|
7,055
|
|
|
73.4
|
%
|
|
17,178
|
|
|
85.5
|
%
|
Gross
margin
|
|
|
2,552
|
|
|
26.6
|
%
|
|
2,910
|
|
|
14.5
|
%
|
General
and administrative
|
|
|
3,022
|
|
|
31.5
|
%
|
|
3,534
|
|
|
17.6
|
%
|
Sales
and marketing
|
|
|
1,069
|
|
|
11.1
|
%
|
|
1,525
|
|
|
7.6
|
%
|
Total
operating expenses
|
|
|
4,091
|
|
|
42.6
|
%
|
|
5,059
|
|
|
25.2
|
%
|
Loss
from operations
|
|
|
(1,539
|
)
|
|
(16.0
|
)%
|
|
(2,149
|
)
|
|
(10.7
|
)%
|
Interest
Income / (Expense) & Other, Net
|
|
|
64
|
|
|
0.7
|
%
|
|
146
|
|
|
0.7
|
%
|
Other
Income / (Expense)
|
|
|
60
|
|
|
0.6
|
%
|
|
-
|
|
|
0.0
|
%
|
Net
Loss
|
|
$
|
(1,415
|
)
|
|
(14.7
|
)%
|
$
|
(2,003
|
)
|
|
(10.0
|
)%
|
Net
loss
for the three months ended March 31, 2007, was $1,415 or $0.07 basic and
diluted
loss per share. In the three months ended March 31, 2006, the loss was $2,003
or
$0.10 basic and diluted loss per share. The loss decreased by $588 or 29.3%
from
the same period in the prior year.
Net
Revenues:
Net
revenues for the quarter ended March 31, 2007 were $9,607, a decrease of
$10,481, or 52.2% compared to the quarter ended March 31, 2006. The decline
is
primarily due to the shift from the Direct sales channel to the UCM platform
in
which only commission revenue is recorded.
Direct
sales declined $11,161 or 58.8% to $7,830 from $18,991. The number of direct
orders decreased 15,000 or 41.7% and the average direct order decreased $75.00
per order or 16.1%. The average sales prices of computers and other consumer
electronics continued to decline in the current period compared to the same
period of the prior year. The sales and order decline was in part due to
the
shift from the direct sales channel to the UCM sales channel.
UCM
revenues increased $447 or 44.3% to $1,456 from $1,009. The number of UCM
orders
increased 4,000 or 4.6% and the average order increased $13.00 per order
or
12.1%. In November 2006, we implemented a $0.30 per order charge which led
to
increased commission revenue for the three month period ended March 31, 2007.
The UCM program revenues and orders have increased as the Company shifts
the
revenues from the direct sales channel to the UCM sales channel as mentioned
above.
Other
revenue, primarily online advertising revenue, increased $233 as a result
of
actively pursuing new online advertising by the hiring of an employee
specializing in the advertising revenue sales in the third quarter of
2006.
Gross
Profit: Gross
profit for quarter ended March 31, 2007 was $2,552, a decrease of $358 or
12.3%
compared to the quarter ended March 31, 2006. In the current period gross
profit
as a percentage of sales increased to 26.6% compared to 14.5% in the period
ended March 31, 2006. The increase was due to the change in revenue mix
discussed above.
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the quarter ended March 31, 2007 were $4,091, a decrease of
$968 or
19.1%, compared to the quarter ended March 31, 2006.
|
|
Three
Month
|
|
Three
Month
|
|
|
|
|
|
Period
Ended
|
|
Period
Ended
|
|
Increase
|
|
SG&A
Expenses: |
|
|
|
|
|
(Decrease)
|
|
Stock-based
Compensation
|
|
$
|
238
|
|
$
|
231
|
|
$
|
7
|
|
Salary
and Benefits
|
|
|
1,277
|
|
|
1,567
|
|
|
(290
|
)
|
Warehouse
Expense
|
|
|
175
|
|
|
285
|
|
|
(110
|
)
|
Depreciation
& Amortization
|
|
|
182
|
|
|
70
|
|
|
112
|
|
Advertising
Expense
|
|
|
968
|
|
|
1,332
|
|
|
(364
|
)
|
Credit
Card Fees
|
|
|
512
|
|
|
688
|
|
|
(176
|
)
|
Telecommunications,
Hardware and Storage
|
|
|
154
|
|
|
209
|
|
|
(55
|
)
|
Legal,
Audit, Insurance, and other Regulatory Fees
|
|
|
147
|
|
|
271
|
|
|
(124
|
)
|
Facilities
Expense
|
|
|
143
|
|
|
155
|
|
|
(12
|
)
|
Related
Party Management Fees
|
|
|
-
|
|
|
30
|
|
|
(30
|
)
|
Consulting
and Outside Services
|
|
|
169
|
|
|
109
|
|
|
60
|
|
Other
SG&A
|
|
|
126
|
|
|
112
|
|
|
14
|
|
|
|
$
|
4,091
|
|
$
|
5,059
|
|
$
|
(968
|
)
|
Advertising
expense decreased $364 or 27.3% as we continued to eliminate the least effective
marketing efforts to optimize profitable online campaigns including television
and print campaigns. The cost per visitor decreased to $0.14 per visitor
from
$0.21 per visitor in the same period of the prior year.
Total
General & Administrative expenses decreased by $604 or 16.2% from the
quarter ended March 31, 2006. The decrease of $290 in salary and benefits
is a
result of eliminating certain positions in the third quarter 2006.
Warehouse
expense and credit card fees decreased $110 and $176, respectively, due to
the
lower sales volume.
Telecommunications,
hardware and storage expenses decreased $55 as a result of negotiating new
contracts with favorable rates.
Legal,
Audit, Insurance and other regulatory fees decreased $124 or 45.4% primarily
as
a result of lower insurance premiums and legal fees. The Company completed
its
private placement on February 3, 2006 and Company’s registration statement on
Form S-1 was declared effective on July 21, 2006. The expenses were higher
in
the first quarter of 2006 due to closing of the private placement as well
as the
registration statement which was in the process of being declared
effective.
The
decreases in expenses were offset by increases in depreciation and amortization,
other SG&A and consulting of $112, $14 and $60, respectively. The increase
in depreciation and amortization was a result of the recent purchases of
intangible assets and computer equipment. Consulting and Outside services
expense increased as temporary help was brought in to the advertising department
to help with several projects. Several items in Other SG&A increased, none
of which were material.
Other
Expense:
Net
interest income was $64 for the quarter ended March 31, 2007 versus interest
income of $146 for the quarter ended March 31, 2006. The decrease in net
interest income is attributed to increased interest expense relating to the
minimum interest payment due under the credit facility terms. The Company
retired all debt after receiving the capital raised on December 29,
2005.
Net
Losses:
The
Company experienced a net loss of $1,415 or $.07 per share for the quarter
ended
March 31, 2007 compared to a net loss of $2,003 or $.10 per share for the
quarter ended March 31, 2006.
Liquidity
and Capital Resources
Historically,
our primary sources of capital have been cash flow from operations and loans
from affiliated parties. More recently, our primary source of cash flow has
been
from operations and the $29.5 million raised in the December 29, 2005 private
offering of our common stock and warrants.
Net
cash
used in operating activities for three months ended March 31, 2007 was $1,327,
compared to $13,644 used in the three months ended March 31, 2006. The net
cash
used in operating activities in the 2007 quarter was primarily the result
of our
net loss and a $2,073 increase in inventory since the year ended December
31,
2006. The increase in inventory was offset by an increase in accounts payable
as
open trade terms with suppliers helped finance the inventory increase. The
increase in inventories is intended to increase product available for auction.
Accounts receivable decreased $587 due to lower on account sales since December
31, 2006. Prepaid expenses and other current assets decreased $279 from the
year
ended December 31, 2006 as interest receivable of $182 was collected. In
addition, a $50 rent deposit for the Danville, Illinois facility was returned
to
the Company. The decrease in accrued expenses of $257 was primarily a result
of
lower payroll accruals due to the reduced staffing and lower freight costs
due
to lower volumes.
Net
cash
used in operating activities for the period ended March 31, 2006 was $13,644.
Inventory increased $10,334 in the period ended March 31, 2006 compared to
December 31, 2005. The inventory was increased in an attempt to reverse the
decline in the Direct channel sales.
Net
cash
used in investing activities was $28 for the period ended March 31, 2007
due
primarily to the purchase of property and equipment. Net cash provided by
investing activities was $299 for the period ended March 31, 2006 primarily
from
a decrease in restricted investments as a result of the expiration of letters
of
credit that were no longer required to have restricted collateral.
Net
cash
provided by financing activities was $349 for the three months ended March
31,
2007, compared to a cash outflow of $823 for the same period last year. The
cash
inflow in 2007 is due to the increased inventory financed through the flooring
facility. Net cash used in financing activities for the period ended March
31,
2006 was primarily related to payments made on the flooring
facility.
For
the
period ended March 31, 2006, the majority of the cash used for financing
activities related to the second part of the private offering of the
Company’s units to accredited investors on February 3, 2006. In this
offering, the Company sold 3,000,000 shares of its common stock
and warrants to purchase 750,002 shares of its common stock on the
same terms as described in Note 4 for an aggregate of $13.5
million. The Company also redeemed 2,666,668 shares of common stock
issued in connection with the merger and the first private offering
that were subject to redemption at a price of $4.50 per share and issued
600,667 shares of common stock (valued at $4.50 per share) to shareholders
of
Cape Coastal prior to the merger and uBid’s financial advisor, Calico Capital
Group. In addition, the Company issued additional warrants to purchase
90,000 shares of its common stock to its placement agents on the same
terms as described in Note 4. The second part of the private offering resulted
in no net cash proceeds being retained by the Company.
On
May 9, 2006, the Company and its subsidiaries entered into a Credit and
Security Agreement with Wells Fargo Bank, National Association acting through
Wells Fargo Business Credit and related security agreements and other agreements
described in the Credit and Security Agreement (the “Credit Agreement”). The
Credit Agreement provides for advances to the Company of up to a maximum
of
$25,000. The amount actually available to the Company will vary from time
to
time, depending on, among other factors, the amount of eligible inventory
and
the amount of eligible accounts receivable. The obligations under the Credit
Agreement and all related agreements are secured by all of the Company assets.
The initial term of the Agreement is three years, expiring on April 28,
2009. Up to $7,000 of the maximum amount is available for irrevocable, standby
and documentary letters of credit. Advances under the Credit Agreement bear
interest at a base rate (Wells Fargo Bank's prime rate) or LIBOR plus 2.5%.
The
Credit Agreement requires a prepayment fee of $500 if the Company terminates
the
Credit Agreement during its first year, $375 if
it
terminates the Credit Agreement during its second year and $125 if the Company
terminates the Credit Agreement during the third year. The Credit Agreement
requires the Company, among other things, to limit capital expenditures and
maintain minimum availability on the line. Also, the Company is obligated
contractually by a restrictive lock box arrangement. The Credit Agreement
also
requires the Company to pay a variety of other fees and expenses, including
minimum monthly interest of $10. The Company as of March 31, 2007 had $95
in
deferred financing fees being amortized over the life of the Credit Agreement.
As of March 31, 2007, the effective loan rate was 8.25% and the Company had
no
outstanding balance and was in compliance with all the loan
covenants.
We
believe that current working capital, together with cash flows from operations
and availability under our credit facility will be adequate to support our
current operating plans for at least the next 12 months.
We
currently have little exposure to risks of fluctuating interest rates or
fluctuating currency exchange rates. Accordingly, we do not believe that
changes
in interest or currency rates will have a material effect on our liquidity,
financial condition or results of operations. It is our policy not to enter
into
derivative financial instruments.
Disclosure
Controls and Procedures.
The
Company maintains disclosure controls and procedures that have been designed
to
ensure that information related to the Company is recorded, processed,
summarized and reported on a timely basis. We review these disclosure controls
and procedures on a periodic basis. In connection with this review, we have
established a compliance committee that is responsible for accumulating
potentially material information regarding its activities and considering
the
materiality of this information. The compliance committee (or a subcommittee)
is
also responsible for making recommendations regarding disclosure and
communicating this information to our Chief Executive Officer and Vice
President, Finance to allow timely decisions regarding required disclosure.
Our
compliance committee is comprised of our principal risk management officer
and
other members of our management team.
Our
Chief
Executive Officer and Vice President, Finance, with the participation of
the
compliance committee, evaluated the effectiveness of the design and operation
of
our disclosure controls and procedures as of the end of the period covered
by
this Quarterly Report, as required by Rule 13a-15 of the Securities Exchange
Act
of 1934. Based on their evaluation of our disclosure controls and procedures,
our Chief Executive Officer and Vice President, Finance believe that, as
of the
end of the period covered by this Quarterly Report, our disclosure controls
and
procedures are effective to ensure that information required to be disclosed
by
us in the reports we file or submit under the Securities Exchange Act of
1934 is
recorded, processed, summarized, and reported within the time periods specified
in the rules and forms of the SEC.
Internal
Control Over Financial Reporting. There
have been no changes in our internal control over financial reporting identified
in the evaluation that occurred during the first quarter of fiscal year 2007
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART
II OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
From
time
to time we may be named in claims arising in the ordinary course of business.
Currently, no legal proceedings or claims are pending against us or involve
us
that, in the opinion of our management, could reasonably be expected to have
a
material adverse effect on our business or financial condition.
ITEM
1A. RISK FACTORS
In
addition to other information set forth in this report, you should carefully
consider the factors discussed in Part 1, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2006, which could materially
affect our business, financial condition or future results. The risks described
in our Annual Report on Form 10-K are not the only risks facing the Company.
Additional risks and uncertainties not currently known to us or that are
currently deemed to be immaterial also may materially adversely affect our
business, financial conditions and/or operating results.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
For
the
three months ended March 31, 2007, options to purchase an aggregate of 250,000
shares of our common stock were granted to individuals, all of whom joined
the
Company’s board of directors. Options to purchase an aggregate of 150,000 shares
at $1.50 per share were granted on February 13, 2007 and options to purchase
an
aggregate of 100,000 shares at $1.48 per share were granted on March 7, 2007.
The options all have a term of ten years and vest over a four year period
either
quarterly or annually beginning on the first quarter or year respectively
after
the date of grant. The option grants were exempt from registration under
Section
4(2) of the Securities Act of 1933, as amended, which provides an exemption
for
transactions not involving a public offering.
ITEM
3. DEFAULT UPON SENIOR SECURITIES
None
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
of the President and Chief Executive Officer pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Vice President, Finance pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of the President and Chief Executive Officer pursuant to 18 U.S.C.
Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002.
|
|
|
|
32.2
|
|
Certification
of the Vice President, Finance pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934,
the Registrant has duly caused this report to be signed on its behalf by
the
undersigned, thereunto duly authorized as of May 14, 2007.
|
|
|
|
UBID.COM
HOLDINGS, INC.
|
|
|
|
|
By:
|
/s/
Miguel A. Martinez, Jr.
|
|
Name: Miguel
A. Martinez, Jr.
Title:
Vice President, Finance
(Principal
Financial Officer and Principal Accounting
Officer)
|