(formerly
known as Cape Coastal Trading Corporation)
24,113,447
Shares of Common Stock
This
Prospectus Supplement No. 1 supplements our Prospectus contained on Form S-1/A
filed on July 19, 2006 and declared effective July 21, 2006 (the
“Prospectus”).
You
should read this Prospectus Supplement No. 1 together with the Prospectus and
this Supplement No. 1 is qualified by reference to the Prospectus, except to
the
extent that the information herein supersedes the information contained in
the
Prospectus.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
On
November 14, 2006, we filed with the U.S. Securities and Exchange Commission
the
attached Quarterly Report for the period ended September 30, 2006 on Form 10-Q.
On
August14, 2006, we filed with the U.S. Securities and Exchange Commission the attached
Quarterly Report for the period ended June 30, 2006 on the Form
10-Q.
On
August1, 2006, the Company increased its Board of Directors from two to three members
and elected Paul Traub as an additional director.
Selling
Stockholder Table
The
information in the table appearing under the heading “Selling Stockholders”
beginning on page 23 of the Prospectus is amended by superseding the information
with respect to persons listed in the Prospectus that are listed
below.
In
August
of 2006 two selling stockholders transferred all of their holdings in the
Company’s common stock and warrants to another selling stockholder.
In
November of 2006, one selling stockholder transferred a portion of its shares
of
the Company’s common stock to its members, retaining a small portion its
originally issued shares.
The
following table lists the changes to the Selling Stockholder Table for the
selling stockholders involved in the transactions described above as well as
changes that reflect changes in the management of the Company that necessitate
changes to the Selling Stockholder Table:
Name
Shares
of Common Stock Owned Prior to the Offering
Shares
of Common Stock Being Offered
Percentage
of Common Stock Outstanding
Shares
of Common Stock Owned Upon Completion of the Offering
(a)
Anthony
Priore (++)
(3)
20,881
20,881
*
--
Brax
Capital Group, LLC (b)
0
261,051
1.28
%
--
Calico
Capital Group, LLC (7)
550,667
45,000
*
--
Calico
Capital Management, LLC (c)
0
244,616
1.20
%
--
Laborers’
District Council and Contractors’ of Ohio Pension Fund (nominee: Tarp
& Co.) (25)
36,375
0
*
--
Manoharan
Sivashanmugam (28)
11,600
11,600
*
--
Ohio
Carpenters’ Pension Fund (nominee: Hammerhead & Co.)
(35)
Mr.
Priore no longer serves as our Chief Marketing Officer.
(7)
Calico
Capital Group served as our financial advisor in the private offerings
and
acquired its original shares at the closing on February 3, 2006.
Pursuant
to a letter agreement, Calico subsequently transferred 25,000 shares
to
Fountainhead Investments, Inc. and 25,000 shares to Gaha Ventures,
LLC. In
November, 2006 Calico Capital Group distributed substantially all
of its
shares to its members, retaining 45,000 shares of common
stock.
(25)
Holder
originally acquired 22,000 shares of our common stock and warrants
to
acquire an additional 5,500 shares of common stock at an exercise
price of
$5.85 per share, acquired at the closing on December 29, 2005 and
7,100
shares of our common stock and warrants to acquire an additional
1,775
shares of common stock at an exercise price of $5.85 per share, acquired
at the closing on February 3, 2006. All of the holders interest in
our common stock and warrants to acquire common stock was transferred
to
WTC-CIF Emerging Companies Portfolio (nominee: Finwell & Co.) in
August 2006. Wellington Management Company, LLP is an investment
adviser
registered under the Investment Advisers Act of 1940, as amended.
Wellington Management Company, in such capacity, is deemed to share
beneficial ownership over the shares held by its client
accounts.
(28)
Mr.
Sivashanmugam no longer serves as our Vice-President,
Technology.
(35)
Holder
originally acquired 36,000 shares of our common stock and warrants
to
acquire an additional 9,000 shares of common stock at an exercise
price of
$5.85 per share, acquired at the closing on December 29, 2005 and
8,800
shares of our common stock and warrants to acquire an additional
2,200
shares of common stock at an exercise price of $5.85 per share, acquired
at the closing on February 3, 2006. All of the holders interest in
our common stock and warrants to acquire common stock was transferred
to
WTC-CIF Emerging Companies Portfolio (nominee: Finwell & Co.) in
August 2006. Wellington Management Company, LLP is an investment
adviser
registered under the Investment Advisers Act of 1940, as amended.
Wellington Management Company, in such capacity, is deemed to share
beneficial ownership over the shares held by its client
accounts.
(64)
Includes
224,500 shares of our common stock and warrants to acquire an additional
56,125 shares of common stock at an exercise price of $5.85 per share,
acquired at the closing on December 29, 2005. Includes 71,800 shares
of
our common stock and warrants to acquire an additional 17,950 shares
of
common stock at an exercise price of $5.85 per share, acquired at
the
closing on February 3, 2006. Includes 22,000 shares of our common
stock and warrants to acquire an additional 5,500 shares of common
stock
at an exercise price of $5.85 per share, acquired by Laborers’ District
Council and Contractors’ of Ohio Pension Fund (nominee: Tarp & Co.) at
the closing on December 29, 2005 and transferred to the holder in
August
2006. Includes 7,100 shares of our common stock and warrants to acquire
an
additional 1,775 shares of common stock at an exercise price of $5.85
per
share, acquired by Laborers’ District Council and Contractors’ of Ohio
Pension Fund (nominee: Tarp & Co.) at the closing on February 3,2006 and transferred to the holder in August 2006. Includes 36,000
shares
of our common stock and warrants to acquire an additional 9,000 shares
of
common stock at an exercise price of $5.85 per share, acquired by
Ohio
Carpenters’ Pension Fund (nominee: Hammerhead & Co.) at the closing on
December 29, 2005 and transferred to the holder in August 2006. Includes
8,800 shares of our common stock and warrants to acquire an additional
2,200 shares of common stock at an exercise price of $5.85 per share,
acquired by Ohio Carpenters’ Pension Fund (nominee: Hammerhead & Co.)
at the closing on February 3, 2006 and transferred to the holder in
August 2006. Wellington Management Company, LLP is an investment
adviser
registered under the Investment Advisers Act of 1940, as amended.
Wellington Management Company, LLP is an investment adviser registered
under the Investment Advisers Act of 1940, as amended. Wellington
Management Company, in such capacity, is deemed to share beneficial
ownership over the shares held by its client accounts.
(b)
Includes
261,051 shares of common stock distributed by Calico Capital Group,
LLC in
November, 2006.
(c)
Includes
244,616 shares of common stock distributed by Calico Capital Group,
LLC in
November, 2006.
_____________________
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 5 of the Prospectus.
_____________________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(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
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 (“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
amended Form 10-K/A for the year ended December 31, 2005.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 U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the Company’s Consolidated Financial Statements
and accompanying notes. Actual results could differ materially from those
estimates.
2.Summary
of Significant Accounting Policies
Since
December 31, 2005, none of the critical accounting policies, or the Company’s
application thereof, as more fully described in the Company’s 2005 Annual
Report, has significantly changed. Certain critical accounting policies have
been presented below due to the significance of related transactions during
the
nine months ended September 30, 2006.
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.
7
Long-Lived
Assets
The
Company records impairment losses on other intangible assets when events
and
circumstances indicate that such assets might be impaired and the estimated
fair
value of the asset is less than its recorded amount in accordance with Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or
Disposal of Long-Lived Assets". The Company reviews the value of its long-lived
assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable
or
that the useful lives of these assets are no longer appropriate. Conditions
that
would necessitate an impairment assessment include material adverse changes
in
operations, significant adverse differences in actual results in comparison
with
initial valuation forecasts prepared at the time of acquisition, a decision
to
abandon certain acquired products, services, or marketplaces, or other
significant adverse changes that would indicate the carrying amount of the
recorded asset might not be recoverable.
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”). Prior to 2006, the Company accounted for employee stock options
using the method of accounting prescribed by Accounting Principles Board
Opinion
No. 25, Accounting for Stock Issued to Employees, and associated interpretations
using the intrinsic method. Generally, no expense was recognized related
to its
stock options under this method because the stock option’s exercise price was
set at the stock’s fair market value on the date the option was granted. 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 and nine months ended September 30, 2006 was approximately
$0.2
million, and $0.7 million, respectively.
Prior
to
January 1, 2006, the Company had a Phantom Stock Appreciation Plan in which
certain employees had been issued phantom shares which were subject to certain
vesting provisions. The plan was implemented on July 1, 2003 and issued phantom
shares were scheduled to vest over four years. Effective July 2005, the Company
terminated the Phantom Stock Appreciation Plan. The total expense incurred
and
recorded in conjunction with the plan termination was $0.5 million in accordance
with the plan agreement based on an independent third-party valuation. Payouts
required under the plan were made on December 31, 2005 with a portion of
the
proceeds from the first private offering described in Note 4.
Recent
Pronouncements
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 is required to be adopted by the Company in the
first quarter of fiscal 2007. The cumulative effects, if any, of applying
FIN 48
will be recorded as an adjustment to retained earnings as of the beginning
of
the period of adoption. The Company is currently evaluating the effect that
the
adoption of FIN 48 will have on its consolidated results of operations and
financial condition and is not yet in a position to determine such
effects.
8
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. Considering the retroactive impact of
the
share exchange (at a ratio of 2,320 to 1 as described in Note 4), no common
stock equivalents were outstanding until December 29, 2005.
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 Financial Statements reflect the impact of the merger and the resulting
exchange of the Company’s common stock outstanding before the conversion and
exercise of the convertible preferred stock and warrants). 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.
9
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 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 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 $3.2
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
July21, 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 (the “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 Company’s Board of Directors to provide
equity-based incentives through grants or awards of stock options and restricted
stock awards (collectively, "Incentive Awards") to 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
Plan. If an incentive award granted pursuant to the Plan expires, terminates,
or
is forfeited, or if any shares are surrendered to uBid in connection with
an
incentive award, the shares subject to such award and the surrendered shares
will become available for future awards under the Plan. On December 29, 2005,
uBid granted options under the Plan to purchase 1,721,700 shares of common
stock
to certain officers and other employees.
All
of
the options issued on December 29, 2005 under the Plan vest over a four year
period and will expire on December 29, 2015 if not exercised prior to that
date.
None of the options granted under the Plan on December 29, 2005 were issued
for
cash consideration collected from the participants. The options were granted
to
participants on the basis of services to be provided to the Company by the
participants. Prior to December 29, 2005, there were no outstanding stock
options.
The
fair
value of the 413,500 options awarded during the nine months ended September30,2006 was estimated using the Black-Sholes option pricing model with the
following assumptions:
The
risk-free interest rate is based on the U.S. Treasury Bill rates at the time
of
grant. 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. The Company estimated
the volatility of its common stock at the date of grant based on the historical
volatility of its industry and competitors’ stock. The expected term of the
options is based on what the Company believes will be representative of future
behavior.
10
The
following is a summary of all of the Company’s stock option activity and related
information for the nine months ended September 30, 2006:
The
aggregate intrinsic value of the outstanding options (the difference between
the
closing stock price on the last trading day of the third quarter of 2006
of
$3.65 per share and the exercise price, multiplied by the number of in the
money
options) that would have been received by the option holders had all the
option
holders exercised their options on September 30, 2006 was zero. This amount
will
change based on changes in the fair market value of the Company’s common
stock.
11
The
following is a summary of non-vested stock option activity:
As
of
September 30, 2006, $4.2 million of total unrecognized compensation cost
related
to stock options is expected to be recognized over a weighted-average vesting
period of 3.25 years.
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
$25.0 million. 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 $7.0 million 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 $0.5 million
if the Company terminates the Credit Agreement during its first year, $0.4
million if it terminates the Credit Agreement during its second year and
$0.1
million 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 $0.01 million. The Company as of September30, 2006 had $0.2 million in deferred financing fees being amortized over
the
life of the Credit Agreement. As of September 30, 2006, the effective loan
rate
was 8.25% and the Company had no outstanding balance and was in compliance
with
all the loan covenants.
7.
Purchase
of Bidville Assets
On
July26, 2006, the Company purchased certain assets for cash of the online auction
company, Bidville, Inc. which included the company’s customer file, URL and
related online technologies. Bidville, Inc., a Nevada corporation, was founded
in 1999 primarily as a sport card auction site but began expanding its
merchandise offerings over the last few years to compete as an online auction
alternative to eBay. Bidville provides unique user features, such as
storefronts, watch list, image gallery, and fixed price marketplaces. The
purchase price was $746,000.
The
acquired assets were recorded as intangible assets. Purchased intangibles
consisting of the customer file, the URL, and related online technologies
are
presented net of accumulated amortization of $31,000 as of September 30,2006
and are being amortized on a straight-line basis over the remaining estimated
useful lives twenty-four months.
12
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 condensed consolidated
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 as
amended for the fiscal year ended December 31, 2005. 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, 2005. 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 an online marketplace located at www.ubid.com, offering new, close-out,
overstock and refurbished 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 two distinct business channels: uBid Direct and
the
UCM Program.
We
purchase merchandise outright in the uBid Direct channel 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 currently
offers 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.
13
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.
Cost
per Bidder
Cost
of
each bidder during the month computed by dividing the sales and marketing
expense by number of bidders.
Cost
per Registration
Cost
of
each registration obtained during the month computed by dividing the sales
and
marketing expense by number of registrations.
14
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2004
2005
2005
2005
2005
2006
2006
2006
Key
Business Metrics:
(Unaudited)
GMS
(in thousands)
$
28,059
$
34,623
$
28,020
$
27,215
$
31,035
$
31,167
$
30,286
$
26,528
Number
of orders (in thousands):
Direct
41
46
39
36
43
36
37
23
UCM
50
51
64
72
93
87
88
89
Total
orders
91
97
103
108
136
123
125
112
Average
Order Value:
Direct
$
511
$
443
$
493
$
495
$
398
$
465
$
416
$
424
UCM
$
104
$
119
$
106
$
112
$
108
$
107
$
110
$
128
Visitors
(in thousands)
7,245
6,829
7,545
8,287
7,051
6,369
7,215
6,488
Bidders
(in thousands)
239
243
251
222
267
241
255
211
Visitors
to Bidder Conversion
3.3
%
3.6
%
3.3
%
2.7
%
3.8
%
3.8
%
3.5
%
3.3
%
Approved
UCM Vendors
70
169
202
401
628
949
1,307
1,716
Cost
Per Bidder
$
6.38
$
5.29
$
4.50
$
5.61
$
5.02
$
6.32
$
5.03
$
4.63
Cost
Per Registration
$
28.79
$
20.05
$
22.10
$
21.14
$
23.91
$
27.73
$
24.69
$
17.76
Registrations
(in thousands)
53
64
51
59
56
55
52
55
Revenue
Source:
We derive 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.
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 provided by Sony Electronics,
Inc (“Sony”) and Hewlett-Packard Company (“HP”). Sony related products
represented 22.6% and 20.7% of sales for the three and nine months ended
September 30, 2006, respectively, compared to 44.8% and 40.2% for the three
and
nine months ended September 30, 2005, respectively. HP related products
represented 7.8% and 2.4% of sales for the three and nine months ended September30, 2006, respectively, compared to 7.9% and 3.8% for the three and nine
months
ended September 30, 2005, respectively. No other supplier represented more
than
5.0% 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.
15
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
on our
credit facility, and related party interest on borrowings from 2005. Interest
expense on advances from related parties is primarily based on an annual
interest rate of 14% and all borrowings were paid off on December, 29,
2005.
Results
of Operations
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.
Net
Revenues:
Net
revenues for the quarter ended September 30, 2006 were $14.4 million, a decrease
of $4.2 million, or 22.5% compared to the quarter ended September 30, 2005.
Direct consumer revenues decreased $7.3 million or 43.3% while direct business
revenues increased $2.8 million or 333.0% and UCM revenues increased $0.3
million or 32.0% over the quarter ended September 30, 2005.
The
net
decrease in direct consumer revenues was primarily driven by decreases in
both
volume levels and average selling prices. Desktop computer volume experienced
a
41.6% decrease in units sold and a 20.0% decrease in average sales price
compared to the same period in the prior year. Computer monitor volume decreased
78.5% and the average sales price decreased 14.0% compared to the same period
of
the prior year. Portable computer volume decreased 10.7% while the average
sales
price experienced a 25.0% decrease. New gross margin initiatives were
implemented in the third quarter which decreased the lower margin revenue
sales
through the site impacting total sales. The volume decreases in the desktop,
monitor, and portable computer categories were partially offset by increased
sales in the jewelry product category. The increase in the direct business
channel is attributable to the expansion of the channel by hiring personnel
specializing in these types of transactions in addition to the direct sale
to
businesses of inventory that had been purchased for sale through the direct
consumer channel. The total number of approved UCM vendors to sell on the
website grew from 401 in September 2005 to 1,716, or 327.9%, in September
2006. We
will
continue to drive UCM revenue growth by increasing the participation of
merchants in our UCM Program.
Total
orders increased by 4,000 or 8.9% to 112,000 for the three months ended
September 30, 2006 compared to the quarter ended September 30, 2005. The
direct
consumer orders decreased by 13,000 or 36.1% and UCM orders increased by
17,000
or 23.6%. Although bidders to visitors improved from 2.7% to 3.3%, overall
bidders decreased by 11,000 or 5.0% from the third quarter in the prior year.
The average order value for the direct and UCM channels were $424 and $128
versus $495 and $112 from a year ago, respectively.
Gross
Profit: Gross
profit for quarter ended September 30, 2006 was $1.9 million, a decrease
of
$1.2 million or 38.7% compared to the quarter ended September 30, 2005.
Gross profit was impacted by a $0.8 million increase in the Company’s inventory
reserves. A substantial investment was made in certain categories of inventories
in the first quarter of 2006 in anticipation of increased visitors to the
website. The anticipated increase in visitors failed to materialize with
visitors decreasing 10.1% from the second quarter ended June 30, 2006. Also,
many visitors did not convert to bidders which resulted in a decline in the
number of orders. Generally, our overall gross margins fluctuate based on
several factors, including our product mix of sales; sales volumes mix by
our
direct consumer business, direct business to business and UCM merchants;
vendor
pricing; customer pricing and inventory management decisions. The decrease
was
primarily a result of the direct consumer margins decreasing in the computer
related categories. Sales of desktops, monitors and laptops continue to decline
in average price which results in a corresponding decrease in gross margins.
The
lower gross margins experienced by the direct business are primarily the
result
of lowering prices to our customers in an effort to accelerate the reduction
in
inventory levels.
The
decrease in the direct consumer business gross profit and the increase in
inventory reserves, were offset by an increase in UCM gross profits. The
UCM
gross profit grew from $0.9 million to $1.1 million, or 4.6%. Gross profit
as a
percentage of net revenues increased to 19.1% from 16.9%, before the impact
of
inventory reserves, from the same period a year ago. The overall gross margin
as
a percentage of net revenues decreased to 13.5% from 16.7% in the same period
a
year ago.
17
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the quarter ended September 30, 2006 were $4.6 million, an increase
of $0.2 million or 4.5%, compared to the quarter ended September 30, 2005.
Overall, advertising expense was unchanged from the same period in the prior
year, however during the third quarter the Company launched a $0.2 million
Direct Response Television (DRTV) test campaign to grow brand awareness and
website traffic. Although the number of visitors to the website decreased
for
the quarter, visitor traffic and registrations increased an average of 25.0%
during the test period. The number of visitors was down 1.8 million or 21.7%
from the same period in the prior year period, and was down 0.7 million or
10.1%
from the previous quarter. We continued to eliminate the least effective
marketing efforts to optimize profitable online campaigns, television and
print
campaigns for the third quarter of 2006. The cost per bidder improved to
$4.63
from $5.03 in the previous quarter. The cost per registration improved to
$17.76
from $24.69 in the previous quarter.
General
& Administrative expenses increased by $0.2 million or 5.9% from the quarter
ended September 30, 2005. The increase for the quarter ended September 30,2006
was primarily due to increases of $0.2 million in stock based compensation
expense and $0.2 million increase in severance pay as a result of eliminating
certain positions in the third quarter 2006. The increases were offset by
decreases of $0.1 million in Related Party Management Fees, which were
discontinued in January 2006, in the third quarter 2006 $0.1 million in credit
card fees related to lower sales volumes.
Legal,
Audit, Insurance, and other Regulatory Fees
0.2
0.1
0.1
Facilities
Expense
0.2
0.2
-
Related
Party Management Fees
-
0.1
(0.1
)
Warehouse
Expense
0.2
0.2
-
Other
SG&A
-
0.1
(0.1
)
$
4.6
$
4.4
$
0.2
Other
Expense:
Interest
income was $0.01 million for the quarter ended September 30, 2006 versus
interest expense of $0.6 million for the quarter ended September 30, 2005.
The
Company retired all debt after receiving the capital raised on December 29,2005.
Net
Losses:
The
Company experienced a net loss of $2.7 million or $.13 per share for the
quarter
ended September 30, 2006 compared to a net loss of $1.8 million or $.74 per
share for the quarter ended September 30, 2005.
Net
Revenues:
Net
revenues for nine months ended September 30, 2006 were $53.6 million, a decrease
of $11.7 million or 17.9%. Direct consumer revenues decreased $14.9 million
or
26.6%, direct business revenues increased $2.3 million and UCM revenues
increased $0.9 million or 32.8% over the same nine month period a year ago.
Desktop computer sales volumes decreased 54.5% and average sales prices
decreased 15.3%. Monitor sales volumes were down 39.1% and Portable computer
volumes were flat. Average sales prices of monitors and portable computers
were
down 15.5% and 17.3% respectively.
Total
orders increased by 52,000 or 16.9% from 308,000 to 360,000 for the nine
months
ended September 30, 2006. The direct consumer orders decreased 25,000 or
20.7%
and UCM orders increased 77,000 or 41.2%. Traffic to the website was 20.1
million visitors for the nine months ended 2006 versus 22.7 million visitors
for
the same period in 2005. The average order value for the direct and UCM channels
were $435 and $110 versus $478 and $112 from a year ago,
respectively.
18
Gross
Profit:
Gross
profit for the nine months ended September 30, 2006 was $7.0 million, compared
to $8.5 million for the same period a year ago. The direct consumer business
decreased $2.8 million due to an increase in inventory reserves of $1.1 million
and decreases in the average sales prices in the desktops, monitors and laptop
computer categories. The decrease was offset by a $0.9 million increase in
gross
profit in the UCM category.
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the nine months ended September 30, 2006 were $14.6 million,
an
increase of $1.1 million, or 8.1%, compared to nine months ended September30,2005. Advertising expenses increased $0.5 million, or 16.1%, for the nine
months
ended September 30, 2006 primarily due to our attempt to increase internet
visitors to the website. In addition, the Company launched a $0.2 million
Direct
Response television (DRTV) test campaign in the third quarter trying to grow
brand awareness and website traffic to the webpage. Visitors to the website
were
20.1 million for the nine months ended 2006 versus 22.7 million for the same
period in 2005.
General
& Administrative expenses increased by $0.6 million, or 5.8%, from the nine
months ended September 30, 2005. The increase for the nine months ended
September 30, 2006 was due to an increase of $0.4 million in legal, accounting,
and increased director and officer insurance expenses required for being
a
public company, $0.2 million in stock-based compensation, $0.2 million in
severance compensation as a result of eliminating certain positions, and
$0.2
million in depreciation and amortization. The increases were offset by decreases
of $0.3 million in related party management fees, $0.2 million in
telecommunications and hardware due to expiring operating leases and reduction
in hosting related fees and $0.2 million in other G&A.
Legal,
Audit, Insurance, and other Regulatory Fees
0.8
0.4
0.4
Facilities
Expense
0.6
0.5
0.1
Related
Party Management Fees
-
0.3
(0.3
)
Other
G&A
0.1
0.3
(0.2
)
$
14.6
$
13.5
$
1.1
Other
Expense:
Interest
income was $0.2 million for the nine months ended September 30, 2006 versus
interest expense of $1.5 million for the nine months ended September 30,2005.
The Company retired all debt after receiving the capital raised on December29,2005 resulting in a reduction of interest expense and an increase in interest
income for the nine month period ended September 30, 2006.
Net
Losses:
The
Company experienced a net loss of $7.4 million or $0.37 per share for the
nine
months ended September 30, 2006 compared to a net loss of $6.5 million or
$2.62
per share for the same period ended September 30, 2005.
19
Liquidity
and Capital Resources
Historically,
our primary sources of capital had 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 raise in the December 29, 2005 private
offering.
Net
cash
used in operating activities for nine months ended September 30, 2006 was
$12.7
million, compared to $6.1 million used in the nine months ended September30,2005. Inventory increased $0.9 million or 14.5% from December 31, 2005. The
increase in inventories was intended to reverse the decline in the direct
consumer channel sales, but as mentioned above, 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
$0.5 million 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 $6.2 million due to the timing
of payments in 2006.
Net
cash
provided by investing activities was $5.5 million for nine months
ended September 30, 2006 compared to $0.1 million used in the same period
last
year. Restricted investments used primarily as collateral on irrevocable
letters
of credit decreased during the quarter as we used our credit facility which
provides for up to $7.0 million in letters of credit alleviating the need
for
restricted investments. On July 26, 2006, the Company purchased certain assets
for $0.7 million of the online auction company, Bidville, Inc. which includes
the company’s customer file, brand name, URL and related online
technologies.
Net
cash
used in financing activities was $1.6 million for the nine months ended
September 30, 2006 compared to a cash inflow of $5.0 million for the same
period
last year. The cash outflow in 2006 was primarily made up of payments on
the IBM
flooring facility of $1.3 million. The cash inflow of $5.0 million for the nine
months ended September 30, 2005 was from related party borrowings to fund
operating losses and working capital needs.
We
currently estimate that we will incur material commitments for capital
expenditures equal to $1.0 million for systems upgrades which shall be made
within the next calendar year.
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. It is our policy not to enter into
derivative financial instruments. 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.
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.
20
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 third quarter of fiscal year 2006
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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 as amended for the year ended December 31, 2005, which
could
materially affect our business, financial condition or future results. The
risks
described in our Annual Report on Form 10-K as amended 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
nine months ended September 30, 2006, options to purchase an aggregate of
413,500 shares of our common stock were granted to employees. Options to
purchase an aggregate of 1,600 shares at $7.10 per share were granted on
January15, 2006, options to purchase an aggregate of 300 shares at $6.50 per share
were
granted on February 14, 2006, options to purchase an aggregate of 70,500
shares
at $6.75 per share were granted on March 15, 2006, options to purchase an
aggregate of 10,400 shares at $6.25 per share were granted on April 15, 2006,
options to purchase an aggregate of 10,500 shares at $6.69 per share were
granted on May 15, 2006, and options to purchase an aggregate of 1,000 shares
at
$6.50 per share were granted on June 15, 2006. Options to purchase an aggregate
of 268,200 shares at $6.49 were granted on July 15, 2006, options to purchase
an
aggregate of 50,000 shares a $4.99 were granted on August 15, 2006. Options
to
purchase an aggregate 1,000 shares at $3.65 were granted on September 15,2006.
The options all have a term of ten years and vest in four annual increments
beginning on the first anniversary date of 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.
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 November 14, 2006.
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)
22
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
10-Q
xQUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
(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
The
number of shares outstanding of the registrant’s Common Stock, par value $0.001,
as of June 30, 2006 was 20,333,333.
TABLE
OF CONTENTS
Page
PART
I
Financial
Information
Item
1. Consolidated Financial Statements
Consolidated
Balance Sheets
3
Condensed
Consolidated Statements of Operations
4
Consolidated
Statement of Shareholders' Equity
5
Consolidated
Statements of Cash Flows
6
Notes to Consolidated Financial Statements
7
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
13
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
19
Item
4. Controls and Procedures
19
PART
II
Other
Information
Item
1. Legal Proceedings
20
Item
1A. Risk Factors
20
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
20
Item
3. Default Upon Senior Securities
20
Item
4. Submission of Matters to a Vote of Security Holders
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 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 (“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
amended Form 10-K/A for the year ended December 31, 2005.
The
preparation of financial statements in accordance with U.S. generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the Company’s Consolidated Financial Statements
and accompanying notes. Actual results could differ materially from those
estimates.
2.Summary
of Significant Accounting Policies
Since
December 31, 2005, none of the critical accounting policies, or the Company’s
application thereof, as more fully described in the Company’s 2005 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, 2006.
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.
7
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”). Prior to 2006, the Company accounted for employee stock options
using the method of accounting prescribed by Accounting Principles Board
Opinion
No. 25, Accounting for Stock Issued to Employees, and associated interpretations
using the intrinsic method. Generally, no expense was recognized related
to its
stock options under this method because the stock option’s exercise price was
set at the stock’s fair market value on the date the option was granted. 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 and six months ended June 30, 2006 was approximately $0.2 million
and $0.5 million, respectively.
Prior
to
January 1, 2006, the Company had a Phantom Stock Appreciation Plan in which
certain employees had been issued phantom shares which were subject to certain
vesting provisions. The plan was implemented on July 1, 2003 and issued phantom
shares were scheduled to vest over four years. Effective July 2005, the Company
terminated the Phantom Stock Appreciation Plan. The total expense incurred
and
recorded in conjunction with the plan termination was $0.5 million in accordance
with the plan agreement based on an independent third-party valuation. Payouts
required under the plan were made on December 31, 2005 with a portion of
the
proceeds from the first private offering described in Note 4.
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. Considering the retroactive impact of
the
share exchange
(at a
ratio of 2,320 to 1 as discussed in Note 4),
no
common stock equivalents were outstanding until December 29, 2005.
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 Financial Statements reflect the impact of the merger and the resulting
exchange of the Company’s common stock outstanding before the conversion and
exercise of the convertible preferred stock and warrants). 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
respective 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 its
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 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 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 $3.2 million.
9
5.2005
Equity Incentive Plan
The
2005
Equity Incentive Plan (the “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 Company’s Board of Directors to provide
equity-based incentives through grants or awards of stock options and restricted
stock awards (collectively, "Incentive Awards") to 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
Plan. If an incentive award granted pursuant to the Plan expires, terminates,
or
is forfeited, or if any shares are surrendered to uBid in connection with
an
incentive award, the shares subject to such award and the surrendered shares
will become available for future awards under the Plan. On December 29, 2005,
uBid granted options under the Plan to purchase 1,721,700 shares of common
stock
to certain officers and other employees.
All
of
the options issued on December 29, 2005 under the Plan will expire on December29, 2015 if not exercised prior to that date. None of the options granted
under
the Plan on December 29, 2005 were issued for cash consideration collected
from
the participants. The options were granted to participants on the basis of
services to be provided to the Company by the participants. Prior to December29, 2005, there were no outstanding stock options.
The
fair
value of the 94,300 options awarded during the six months ended June 30,2006
was estimated using the Black-Sholes option pricing model with the following
assumptions:
The
risk-free interest rate is based on the U.S. Treasury Bill rates at the time
of
grant. 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. The Company estimated
the volatility of its common stock at the date of grant based on the historical
volatility of its industry and competitors’ stock. The expected term of the
options is based on what the Company believes will be representative of future
behavior.
The
following is a summary of all of the Company’s stock option activity and related
information for the six months ended June 30, 2006:
The
aggregate intrinsic value of the outstanding options (the difference between
the
closing stock price on the last trading day of the second quarter of 2006
of
$6.47 per share and the exercise price, multiplied by the number of in the
money
options) that would have been received by the option holders had all the
option
holders exercised their options on June 30, 2006 was $3.3 million. This amount
will change based on changes in the fair market value of the Company’s common
stock.
The
following is a summary of nonvested stock option activity (in
thousands):
As
of
June 30, 2006, $3.7 million of total unrecognized compensation cost related
to
stock options is expected to be recognized over a weighted-average vesting
period of 3.50 years.
6.Note
Payable - Bank
On
May 9, 2006, the Company and its 100%-owned subsidiary, uBid, Inc. 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 uBid, Inc. of up
to a maximum of $25.0 million. 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 uBid, Inc.’s assets. The initial term of the Agreement is
three years, expiring on April 28, 2009. Up to $7.0 million 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 $0.5 million if the Company terminates the Credit Agreement
during its first year, $0.4 million if it terminates the Credit Agreement
during
its second year and $0.1 million 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 $0.01 million.
The Company as of June 30, 2006 had $0.2 million in deferred financing fees
being amortized over the life of the Credit Agreement. As of June 30, 2006,
the
effective loan rate was 8.25% and the Company had an outstanding balance
of $0.5
million and was in compliance with all the loan covenants.
11
7.Subsequent
Events
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
July21, 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.
On
April28, 2006the Company became obligated to pay $0.4 million monthly for liquidated
damages until the registration statement was declared effective. The Securities
Purchase Agreement was amended on June 30, 2006 by the required 66 2/3
stockholder vote to change the required effective date to July 31, 2006.
As a
result of the registration statement being declared effective on July 21,2006,
no liquidated damages were due.
On
July26, 2006, DIBU Trading Corp., a subsidiary of the Company purchased certain
assets for cash of the online auction company Bidville, Inc. which includes
the
company’s customer file, brand name, and URL and related online technologies.
Bidville, Inc., a Nevada corporation, was founded in 1999 primarily as a
sport
card auction site but began expending its merchandise offerings over the
last
few years to compete as an online auction alternative to eBay. Bidville provides
unique user features, such as storefronts, watch list, image gallery, and
fixed
price marketplaces.
The
purchase price was less than 10% of total
assets
of the
Company.
12
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 condensed consolidated
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 as
amended for the fiscal year ended December 31, 2005. uBid.com Holdings, Inc.
is
a holding company for uBid, Inc., our operating business. 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 subsidiaries.
Overview
We
operate an online marketplace located at www.ubid.com, offering new, close-out,
overstock and refurbished 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 two distinct business channels: uBid Direct and
the
UCM Program.
We
purchase merchandise outright in the uBid Direct channel 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 currently
offers 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.
13
Executive
Commentary
Success
Measures:
Our
management believes that the most important financial and non-financial measures
that track our progress include sales, orders shipped, website traffic, number
of orders, inventory turnover, 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 an online 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.
Approved
UCM Program Vendors
Vendors
that have gone through the approval process to sell merchandise through our
website.
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
2004
2004
2005
2005
2005
2005
2006
2006
Measure
GMS
(in thousands)
$
26,640
$
28,059
$
34,623
$
28,020
$
27,215
$
31,035
$
31,167
$
30,286
Number
of orders (in thousands)
Direct
33
41
46
39
36
43
36
37
UCM
Program
43
50
51
64
72
93
87
88
Total
orders
76
91
97
103
108
136
123
125
Average
Order Value
Direct
$
613
$
511
$
443
$
493
$
495
$
398
$
465
$
416
UCM
Program
$
101
$
104
$
119
$
106
$
112
$
108
$
107
$
110
Visitors
(in thousands)
5,523
7,245
6,829
7,545
8,287
7,051
6,369
7,215
Approved
UCM Program Vendors
53
70
169
202
401
628
949
1,307
Revenue
Source:
We derive our revenue from sales of products to consumers and businesses.
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. 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.
14
Our
revenue is dependent in part on sales of products provided by Sony Electronics,
Inc (“Sony”) and Hewlett-Packard Company (“HP”). Sony related products
represented 17.1% and 15.6% of sales for the three and six months ended June30,2006 respectively compared to 36.3% and 36.6% for the three and six months
ended
June 30, 2005 respectively. HP related products represented 12.0% and 10.6%
of
sales for the three and six months ended June 30, 2006 respectively compared
to
9.4% and 12.0% for the three and six months ended June 30, 2005, respectively.
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
Margin:
Our
gross 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
on our
credit facility, and related party interest on borrowings from 2005. Interest
expense on advances from related parties is primarily based on an annual
interest rate of 14% and all borrowings were paid off on December, 29,
2005.
Results
of Operations
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.
Net
Revenues:
Net
revenues for the quarter ended June 30, 2006 were $19.1 million, a decrease
of
$0.8 million, or 4.0%. Direct consumer revenues decreased $3.6 million or
19.4%
while direct business revenues increased $2.5 million or 400% and UCM revenues
increased $0.3 million or 37.5% over the quarter ended June 30, 2005.
Direct
revenues decreased primarily as a result of decreased volumes and average
sales
prices of desktop computers and monitors. Desktop computer and monitor sales
decreased 61.9% and 65.0%, respectively, over the same prior year period.
The
decrease in desktops and monitors was offset by increased sales in video
categories of 62.9%. The increase in the direct business channel was related
to
the hiring of personnel who specialize in these types of transactions and
the
direct sale to businesses of inventory that had been bought for the direct
consumer channel.
Total
orders increased by 2,000 or 1.6% to 125,000 for the three months ended June30,2006. The direct consumer orders increased by 1,000 or 2.8% and UCM orders
increased by 1,000 or 1.1%. The average order value for the direct and UCM
channels were $416 and $110 versus $493 and $106 from a year ago, respectively.
The total number of approved UCM vendors to sell on the website grew from
202 in
June 2005 to 1,307, or 547%, in June 2006. We
will
continue to drive UCM revenue growth by increasing the participation of
merchants in our UCM Program.
Gross
Margin: Gross
margin for quarter ended June 30, 2006 was $2.1 million, a decrease of
$0.7 million or 24.1% compared to the quarter ended June 30, 2005. The
decrease was primarily a result of the direct consumer margins decreasing
in the
computer related categories. Sales of desktops and laptops continue to decline
in average price which results in decreasing margins
accordingly.
Generally,
our overall gross margins fluctuate based on several factors, including our
product mix of sales; sales volumes mix by our direct consumer business,
direct
business to business and UCM merchants; vendor pricing; customer pricing
and
inventory management decisions.
In
addition, gross profit was affected due to an increase in the Company’s
inventory reserves. A substantial investment was made in certain categories
of
inventories in the first quarter of 2006 in anticipation of increased visitors
to the website. While visitors increased 17.9% from the first quarter ended
March 31, 2006, the increased visitors did not convert to bidders which resulted
in declining average order values. The Company expects that gross margins
may
continue to be affected in the third quarter of 2006 as the Company continues
to
manage overall inventory levels.
The
decrease in the direct consumer business gross profit and the increase in
inventory reserves, were offset by the increase in UCM gross profits. The
UCM
gross profit grew from $0.8 million to $1.1 million, or 37.5%. Overall gross
profit as a percentage of net revenues decreased to 11.1% from 14.0% from
the
same period a year ago.
16
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the quarter ended June 30, 2006 were $4.9 million, an increase
of
$0.2 million or 4.3%, compared to quarter ended June 30, 2005. Advertising
expenses increased $0.3 million or 30.0% for the three month period ended
June30, 2006 primarily due to the increased focus on growing the number of visitors
to the website through online marketing channels, such as sponsored search,
portal advertising, and e-mail campaigns. The number of visitors was down
687,000 or 9.1% from prior year period, but was up 7.7%
from
the previous quarter. The
increased number of visitors did not convert into bidders.
During
the quarter ended June 30, 2006 we discontinued the least effective marketing
efforts to optimize profitable online campaigns and are focusing on television,
print and radio campaigns for the third quarter of 2006.
General
& Administrative expenses decreased by $0.1million or 2.7% from the quarter
ended June 30, 2005. The decrease for the quarter ended June 30, 2006 was
due to
a reduction of $0.1 million in telecommunications, hardware and storage fees,
stock-based compensation of $0.3 million and related party management fees
of
$0.1 million. These decreases are related to the expiration of some equipment
leases and other favorable pricing with storage fees, cancellation of the
Phantom stock plan in preparation of the merger, and the elimination of related
party management fees. The decreases were offset by an increase of $0.1 million
in legal, accounting, and increased director and officer insurance expenses
required for being a public company. In addition, other G&A, warehouse, and
depreciation increased $.01 million, $.01 million and $.01 million ,
respectively due to increased headcount and warehouse space in growing the
direct business to business channel.
Three
months ended
June
30
SG&A
Expenses:
2006
2005
Increase
(Decrease)
(Dollars
in millions)
Stock-based
Compensation
$
0.2
$
0.5
$
(0.3
)
Salary
and Benefits
1.5
1.5
-
Warehouse
Expense
0.3
0.2
0.1
Depreciation
0.1
—
0.1
Advertising
Expense
1.3
1.0
0.3
Credit
Card Fees
0.6
0.6
—
Telecommunications,
Hardware and Storage
0.3
0.4
(0.1
)
Legal,
Audit, Insurance, and other Regulatory Fees
0.3
0.2
0.1
Facilities
Expense
0.2
0.2
—
Related
Party Management Fees
—
0.1
(0.1
)
Other
SG&A
0.1
—
0.1
$
4.9
$
4.7
$
0.2
Other
Expense:
Interest
income was $0.05 million for the quarter ended June 30, 2006 versus interest
expense of $0.5 million for the quarter ended June 30, 2005. The Company
retired
all debt after receiving the capital raised on December 29, 2005 and invested
excess proceeds in CD’s and overnight funds, resulting in a reduction of
interest expense and an increase in interest income in the second quarter
of
2006.
Net
Losses:
The
Company experienced a net loss of $2.7 million or $.13 per share for the
quarter
ended June 30, 2006 compared to a net loss of $2.5 million or $.99 per share
for
the quarter ended June 30, 2005.
Net
Revenues:
Net
revenues for six months ended June 30, 2006 were $39.2 million, a decrease
of
$7.5 million or 16.1%. Direct consumer revenues decreased $7.8 million or
19.9%,
direct business revenues decreased $0.4 million and UCM revenues increased
$0.7
million or 50.0% over the same six month period a year ago. Desktops and
monitors were down 66.5% and 49.2%, respectively, due to a decrease in the
volume of units sold and average sales prices of computer-related
products.
Total
orders increased by 48,000 or 24% to 248,000 for the six months ended June30,2006. The direct consumer orders decreased 12,000 or 14.1% and UCM orders
increased 60,000 or 52.2%. Traffic to the website was 13.2
million
visitors for the six months ended 2006 versus 14.4 million visitors for the
same
period in 2005. The average order value for the direct and UCM channels were
$440 and $107 versus $469 and $112 from a year ago, respectively.
17
Gross
Margin:
Gross
margin for the six months ended June 30, 2006 was $5.0 million, compared
to $5.4
million for the same period a year ago. The direct consumer business decreased
$1.3 million due to an increase in inventory reserves of $0.4 million and
decreases of $0.9 million in the desktops, monitors and laptop computer
categories. The decrease was offset by increases of $0.7 million in the UCM
channel and $0.2 million in the direct business channel.
Sales
and Marketing, General and Administrative Expenses:
SG&A
expenses for the six months ended June 30, 2006 were $9.9 million, an increase
of $0.7 million, or 7.6%, compared to six months ended June 30, 2005.
Advertising expenses increased $0.5 million, or 23.8%, for the six months
ended
June 30, 2006 primarily due to the increased focus and costs related to growing
internet visitors to the website. Visitors to the website were 13.2
million
for the six months ended 2006 versus 14.4 million for the same period in
2005.
General
& Administrative expenses increased by $0.2 million, or 2.2%, from the six
months ended June 30, 2005. The increase for the six months ended June 30,2006
was due to an increase of $0.3 million in legal, accounting, and increased
director and officer insurance expenses required for being a public company.
In
addition, other G&A, credit card fees, and depreciation increased $.01
million, $.01 million and $.01 million, respectively due to increased headcount
and warehouse space in growing the direct business to business channel. The
increases were offset by decreases of $0.2 million in telecommunications,
hardware and storage fees, and related party management fees of $0.2 million.
These decreases are related to the expiration of some equipment leases and
other
favorable pricing with storage fees, cancellation of the Phantom stock plan
in
preparation of going public, and the elimination of related party management
fees.
Six
months ended
June
30
SG&A
Expenses:
2006
2005
Increase
(Decrease)
(Dollars
in millions)
Stock-based
Compensation
$
0.5
$
0.5
$
—
Salary
and Benefits
3.1
3.1
—
Warehouse
Expense
0.5
0.5
—
Depreciation
0.2
0.1
0.1
Advertising
Expense
2.6
2.1
0.5
Credit
Card Fees
1.3
1.2
0.1
Telecommunications,
Hardware and Storage
0.5
0.7
(0.2
)
Legal,
Audit, Insurance, and other Regulatory Fees
0.6
0.3
0.3
Facilities
Expense
0.4
0.4
—
Related
Party Management Fees
—
0.2
(0.2
)
Other
SG&A
0.2
0.1
0.1
$
9.9
$
9.2
$
0.7
Other
Expense:
Interest
income was $0.2 million for the six months ended June 30, 2006 versus interest
expense of $0.9 million for the six months ended June 30, 2005. The Company
retired all debt after receiving the capital raised on December 29, 2005
resulting in a reduction of interest expense and an increase in interest
income
for the six month period ended June 30, 2006.
Net
Losses:
The
Company experienced a net loss of $4.7 million or $.23 per share for the
six
months ended June 30, 2006 compared to a net loss of $4.7 million or $1.88
per
share for the same period ended June 30, 2005.
18
Liquidity
and Capital Resources
Historically,
our primary sources of capital had 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.
Net
cash
used in operating activities for six months ended June 30, 2006 was $13.7
million, compared to $5.3 million used in the six months ended June 30, 2005.
Inventory increased $3.5 million or 58% from December 31, 2005. The increase
in
inventories was intended to reverse the decline in the direct consumer channel
sales, but as mentioned above, 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 $1.8 million 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 $3.9 million due to the timing of payments in
2006
and the tightening of payment terms with vendors in the direct consumer channel.
Net
cash
provided by investing activities was $6.7 million for six months ended
June 30, 2006 compared to $0.1 million used in the same period last year.
Restricted investments used primarily as collateral on irrevocable letters
of
credit decreased during the quarter as we used our credit facility which
provides for up to $7.0 million in letters of credit.
Net
cash
used in financing activities was $0.6 million for the six months ended June30,2006 compared to a cash inflow of $5.7 million for the same period last year.
The cash outflow was primarily made up of payments on the IBM flooring facility
of $1.1 million offset by borrowing of $0.5 million on the Wells Fargo credit
line. The cash inflow of $5.7 million for the six months ended June 30, 2005
was
from related party borrowings to fund operating losses and working capital
needs.
We
currently estimate that we will incur material commitments for capital
expenditures equal to $1.0 million for systems upgrades which shall be made
within the next calendar year.
We
believe that current working capital, together with cash flows from operations
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. It is our policy not to enter into
derivative financial instruments. 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.
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 senior manager in charge of investor
relations, principal risk management officer, chief information officer and
certain other members of our senior management.
19
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 second quarter of fiscal year
2006
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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 as amended for the year ended December 31, 2005, which
could
materially affect our business, financial condition or future results. The
risks
described in our Annual Report on Form 10-K as amended 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
During
the quarter ended June 30, 2006, options to purchase an aggregate of 94,300
shares of our common stock were granted to employees. Options to purchase
an
aggregate of 1,600 shares at $7.10 per share were granted on January 15,2006,
options to purchase an aggregate of 300 shares at $6.50 per share were granted
on February 14, 2006, options to purchase an aggregate of 70,500 shares at
$6.75
per share were granted on March 15, 2006, options to purchase an aggregate
of
10,400 shares at $6.25 per share were granted on April 15, 2006, options
to
purchase an aggregate of 10,500 shares at $6.69 per share were granted on
May15, 2006, and options to purchase an aggregate of 1,000 shares at $6.50 per
share were granted on June 15, 2006. The options all have a term of ten years
and vest in four annual increments beginning on the first anniversary date
of
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. All other sales and issuances
of
unregistered securities in the quarter ended June 30, 2006 were previously
reported in our Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 3, 2006.
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, 2006.
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)
21
Dates Referenced Herein and Documents Incorporated by Reference
