UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-25977
L Q CORPORATION, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0421089
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 Seventh Ave., 17TH floor, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 974-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes /X/ No / /
The number of shares outstanding of the registrant's common stock as of November
9, 2005 was 3,214,408.
L Q CORPORATION, INC.
INDEX
PART I. FINANCIAL INFORMATION.....................................................................................1
ITEM 1. FINANCIAL STATEMENTS .................................................................................1
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited) and
December 31, 2004
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2005 and 2004 (unaudited)
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004 (unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ...............9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................14
ITEM 4. CONTROLS AND PROCEDURES.............................................................................14
PART II. OTHER INFORMATION.......................................................................................15
ITEM 1. LEGAL PROCEEDINGS...................................................................................15
ITEM 6. EXHIBITS............................................................................................15
SIGNATURES.......................................................................................................16
ITEM 1. FINANCIAL STATEMENTS
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2005 2004
unaudited
------------- ------------
Assets
Current assets:
Cash and cash equivalents .................................................... $ 5,930 $ 6,432
Other current assets ......................................................... 65 103
--------- ---------
Total assets ................................................................. $ 5,995 $ 6,535
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accrued expenses and other current liabilities ............................... $ 57 $ 114
--------- ---------
Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares authorized; 3,214,408 shares
issued and outstanding at September 30, 2005 and
December 31, 2004 .......................................................... 3 3
Additional paid-in capital ................................................... 146,006 146,006
Accumulated deficit .......................................................... (139,980) (139,510)
Accumulated other comprehensive loss ......................................... (91) (78)
--------- ---------
Total stockholders' equity ................................................... 5,938 6,421
--------- ---------
Total liabilities and stockholders' equity ................................... $ 5,995 $ 6,535
========= =========
See accompany notes to condensed consolidated financial statements.
1
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2005 2004 2005 2004
------- ------- ------- -------
Revenues ........................................... $ -- $ -- $ -- $ --
------- ------- ------- -------
Operating expenses:
General and administrative ......................... 229 225 636 792
------- ------- ------- -------
Loss from operations ............................... (229) (225) (636) (792)
Other income, net .................................. 63 40 166 120
------- ------- ------- -------
Net loss ........................................... $ (166) $ (185) $ (470) $ (672)
======= ======= ======= =======
Net loss per share:
Basic and diluted................................... $ (0.05) $ (0.06) $ (0.15) $ (0.21)
======= ======= ======= =======
Weighted average shares ............................ 3,214 3,027 3,214 3,154
======= ======= ======= =======
See accompany notes to condensed consolidated financial statements.
2
L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Nine Months Ended
September 30,
---------------------
2005 2004
------- -------
Cash flows from operating activities:
Net loss .................................................................. $ (470) $ (672)
Adjustments to reconcile net loss to net cash used in operating activities:
Other current assets ...................................................... 38 (35)
Accrued expenses and other current liabilities ............................ (57) (1,845)
------- -------
Net cash used in operating activities ..................................... (489) (2,552)
------- -------
Effects of exchange rates on cash and cash equivalents .................... (13)
------- -------
Net decrease in cash and cash equivalents ................................. (502) (2,552)
Cash and cash equivalents, beginning of period ............................ 6,432 9,077
------- -------
Cash and cash equivalents, end of period .................................. $ 5,930 $ 6,525
======= =======
See accompany notes to condensed consolidated financial statements.
3
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
L Q Corporation, Inc. was incorporated in California as "Liquid Audio,
Inc." in January 1996 and reincorporated in Delaware in April 1999. In July
1999, we completed our initial public offering of common stock. Our Board of
Directors (the "Board") received stockholder approval on July 30, 2003 to change
our name to "L Q Corporation, Inc." Our name was formally changed on January 7,
2004. Our principal executive offices are located at 888 Seventh Avenue, 17th
Floor, New York, NY 10019, and our telephone number is (212) 974-5730.
Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.
Since January 2003, we have not operated any business and have been
settling our remaining claims and liabilities while reviewing alternatives for
the use or disposition of our remaining assets. We intend to pursue other
business opportunities and investments unrelated to the downloading of digital
music. Neither our Board nor our stockholders have yet approved any such
opportunities.
On September 8, 2005, the Company entered into a non-binding letter of
intent with Checkpoint Systems, Inc. ("Checkpoint"), dated September 7, 2005, to
acquire the assets of Checkpoint's Access Control division. The Access Control
division designs, manufactures and distributes scaleable electronic access
control systems and related application software used in a variety of security
applications. On October 26, 2005, the Company's Board approved the transaction
and on November 4, 2005 the parties entered into an asset purchase agreement
which is subject to customary closing conditions and the completion of an audit
of Checkpoint's Access Control division for fiscal years 2004 and 2003. The
contemplated cash consideration for the transaction is approximately $2.5
million, subject to post-closing adjustments and escrow. There can be no
assurance, however, that the closing conditions will be satisfied or that the
transaction between the parties will ultimately be consummated.
If we are unable to consummate any suitable business opportunities and/or
investments, we may pursue a plan of complete liquidation and dissolution. If a
complete liquidation and dissolution is approved, pursuant to Delaware General
Corporation Law, we will continue to exist for three years after the dissolution
becomes effective or for such longer period as the Delaware Court of Chancery
shall direct, for the purpose of prosecuting and defending suits against us and
enabling us gradually to close our business, to dispose of our property, to
discharge our liabilities and to distribute to our stockholders any remaining
assets.
At our September 29, 2003 meeting of our stockholders, our stockholders
approved amendments to our certificate of incorporation to effect a 1-for-250
reverse stock split, to be followed immediately by a 35-for-1 forward stock
split (collectively, the "Reverse/Forward Stock Split"), as well as a reduction
in the number of common shares authorized for issuance from 50,000,000 shares to
30,000,000 shares (the "Share Reduction"). On June 7, 2004, we filed amendments
necessary to implement the Reverse/Forward Stock Split and the Share Reduction,
which took place on July 26, 2004 with an effective date as of June 8, 2004. All
weighted average and earnings per share amounts have been restated to reflect
the retroactive effect of the Reverse/Forward Stock Split.
Our common stock is reported currently on The Nasdaq OTC Bulletin Board.
Our common stock was traded on The Nasdaq National Market, but was delisted on
June 5, 2003. The market price per share of our stock increased significantly
following the implementation of the Reverse/Forward stock split. The market
price of our common stock as of November 8, 2005 was $ 1.68 per share.
4
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has incurred losses and negative cash flows from operations for
every year since inception. For the nine months ended September 30, 2005, the
Company incurred a net loss of approximately $470,000 and negative cash flows
from operations of approximately $489,000. As of September 30, 2005, the Company
had an accumulated deficit of approximately $140.0 million. The Company has not
yet settled on an operating plan, although the Company feels its existing cash
and cash equivalents are sufficient to fund the Company's current operations and
satisfy its obligations. The Company believes these obligations will primarily
relate to costs associated with its operation as a public company (legal,
accounting, insurance, etc.), as well as the satisfaction of any potential legal
judgments or settlements and the expenses associated with any new business
activities, which may be undertaken by the Company. The Company continues to
consider future alternatives, including the possible acquisition of other
businesses. However, the Company has not consummated any significant
transactions to date and the Company's business prospects remain uncertain. To
the extent that management of the Company moves forward on any alternative
strategy, such strategy may have an impact on the Company's liquidity.
On June 15, 2005, the Company entered into a non-binding letter of intent (the
"Letter of Intent") with Southern Imaging, Inc. ("Southern Imaging") to acquire
all of the assets of Southern Imaging and its subsidiaries. Subsequently, as
previously reported in the Company's Form 10-Q filed with the Securities and
Exchange Commission (the "SEC") on August 15, 2005, representatives of Southern
Imaging informed the Company that Southern Imaging desired to change certain of
the terms of the transaction that were outlined in the Letter of Intent. Since
that time, the Company and Southern Imaging have not agreed on new terms for the
transaction and the parties have discontinued discussions.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of L Q
Corporation for the nine months ended September 30, 2005 are unaudited and have
been prepared on a basis substantially consistent with our audited condensed
consolidated financial statements for the year ended December 31, 2004. The
condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These condensed consolidated interim financial statements should be read in
conjunction with our audited condensed consolidated financial statements for the
year ended December 31, 2004, which are contained in our Annual Report on Form
10-K, filed with the SEC. The condensed consolidated interim financial
statements, in the opinion of management, reflect all adjustments (including all
normal recurring accruals) necessary to present fairly the Company's financial
position, results of operations and cash flows for the interim periods ended
September 30, 2005 and 2004. The results of operations for the interim periods
are not necessarily indicative of the results of operations to be expected for
the fiscal year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of our
wholly-owned (inactive) subsidiary. Significant intercompany transactions and
balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents. At September 30,
2005, and throughout the nine month period, balances of cash at financial
institutions exceeded the federally insured limit. The Company has not
experienced any losses in such accounts and believes it is not subject to any
significant credit risk on cash and cash equivalents. The following schedule
summarizes the estimated fair value of the Company's cash and cash equivalents
(in thousands):
September 30, December 31,
2005 2004
---------------- ----------------
Cash and cash equivalents:
Cash.................................................................. $ 29 $ 53
Money market funds.................................................... 5,901 6,379
---------------- ----------------
$ 5,930 $ 6,432
================ ================
5
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Concentration of Credit Risk
Substantially all of the Company's cash and cash equivalents are invested in
highly-liquid money market funds.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents
and accrued expenses payable are carried at cost. The Company's financial
instruments approximate fair value due to their relatively short maturities. The
Company does not hold or issue financial instruments for trading purposes.
STOCK-BASED COMPENSATION
The Company complies with Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also requires that disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" and
Emerging Issues Task Force ("EITF") Issue No. 96-18 "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services."
Consistent with the disclosure provisions of SFAS No. 123 and SFAS No. 148, the
Company's net loss and basic and diluted net loss per share would have been
adjusted to the pro forma amounts indicated below (in thousands, except per
share amounts).
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
2005 2004 2005 2004
------------- ------------ ------------ -------------
Net loss - as reported ........................................ $(166) $(185) $(470) $(672)
Less stock-based compensation (income) expense determined under
fair value based method, net of tax effects ................. (6) (2) (17) (54)
----- ----- ----- -----
Net loss - proforma ........................................... $(172) $(187) $(487) $(726)
===== ===== ===== =====
Basic and diluted net loss per share - as reported ............ $(0.05) $(0.06) $(0.15) $(0.21)
Basic and diluted net loss per share - pro forma .............. $(0.05) $(0.06) $(0.15) $(0.23)
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment (Revised)." SFAS No. 123(R) replaces SFAS
No. 123 and supersedes APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS No. 123(R) establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS No. 123(R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123(R) requires a public
entity to measure the cost of employee services received in exchanges for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award
during the requisite service period (usually the vesting period). No
compensation costs are recognized for equity instruments for which employees do
not render the requisite service. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification.
6
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has not completed its evaluation of SFAS No. 123(R) but expects
the adoption of this new standard, which will take effect for the Company during
the first quarter of 2006, will not have a material impact on operating results
of the Company.
NOTE 2 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
The components of accrued expenses and other current liabilities are as follows
(in thousands):
September 30, December 30,
2005 2004
------------- ------------
Accrued Expenses:
Consulting and professional services........... $ 57 $ 104
Other ......................................... - 10
---------- ----------
$ 57 $ 114
========== ==========
NOTE 3 - COMPREHENSIVE LOSS:
Comprehensive loss includes net loss and other comprehensive loss. Other
comprehensive loss includes accumulated translation adjustments. The components
of comprehensive loss are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------- ------------ ------------
Comprehensive loss:
Net loss .......................................... $ (166) $ (185) $ (470) $ (672)
Foreign currency translation adjustments........... - - 13 -
----------- ------------ ----------- ------------
$ (166) $ (185) $ (483) $ (672)
=========== ============ =========== ============
NOTE 4 - NET LOSS PER SHARE:
Basic and diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding during
the period. The calculation of diluted net loss per share excludes potential
common shares if the effect is anti-dilutive. Potential common shares consist of
unvested restricted common stock, incremental common shares issuable upon the
exercise of stock options and common shares issuable upon the exercise of common
stock warrants, as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------- -------------
Common stock options.............................. 349 111 349 111
Common stock warrants............................. - - - -
------------ ------------ ------------- -------------
349 111 349 111
============ ============ ============= =============
7
L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONTINGENCIES AND LEGAL PROCEEDINGS:
We, certain of our former officers and directors, and various of the
underwriters in our initial public offering ("IPO") and secondary offering, were
named as defendants in a consolidated action filed in the United States District
Court for the Southern District of New York on July 20, 2001, In re Liquid
Audio, Inc. Initial Public Offering Securities Litigation, CV-6611. The
consolidated amended complaint generally alleges that various investment bank
underwriters engaged in improper and undisclosed activities related to the
allocation of shares in our IPO and secondary offering of securities. The
plaintiffs brought claims for violation of several provisions of the federal
securities laws against those underwriters, and also against us and certain of
our former directors and officers, seeking unspecified damages on behalf of a
purported class of purchasers of our common stock between July 8, 1999 and
December 6, 2000. Various plaintiffs filed similar actions asserting virtually
identical allegations against more than 40 investment banks and 250 other
companies. All of these "IPO allocation" securities class actions currently
pending in the Southern District of New York are assigned to Judge Shira A.
Scheindlin for coordinated pretrial proceedings as In re Liquid Audio, Inc.
Initial Public Offering Securities Litigation, 21 MC 92. The issuer defendants
in the coordinated proceedings including the Company, filed omnibus motions to
dismiss the actions. In October 2002, our former directors and officers named as
defendants were dismissed without prejudice pursuant to a tolling agreement. In
February 2003, the court issued a ruling denying the motion to dismiss with
respect to the claims against us. In June 2004, a stipulation of settlement for
the release of claims against the issuer defendants, including the Company, in
exchange for a contingent payment to be made by the issuer defendants' insurance
carriers and an assignment of certain claims, was submitted to the Court for
approval. On August 31, 2005, the Court granted a preliminary approval of the
stipulation of settlement. The settlement is subject to a number of conditions,
including approval of the Court. If the settlement does not occur, and
litigation against us continues, we believe that we have meritorious defenses to
the claims against us and intend to defend ourselves vigorously.
NOTE 6-INCOME TAXES
At December 31, 2004, the Company had approximately $18.9 million of federal and
state net operating loss carryforwards ("NOL") available to offset future
taxable income. The federal and state net operating loss carryforwards expire
beginning in 2013. At December 31, 2004, the Company had approximately $2.0
million of federal and state research and development tax credit carryforwards
available to offset future taxes. The federal tax credit carryforward expire in
varying amounts beginning in 2011. The California tax credit carryforward can be
carried forward indefinitely.
The total NOL of $18.9 million has been reduced by $117.2 million for federal
and $48.9 million for state financial reporting purposes, which is unlikely ever
to be utilized due to the application of the Internal Revenue Code Section 382
("Section 382") provisions. The remainder of the NOL are likely to be
effectively obviated if certain future events were to occur that would invoke
additional Section 382 provisions. Future use of the NOL's therefore is
extremely speculative and should not be presumed absent extensive analysis of
the complex Section 382 provisions.
The Company has incurred a loss in each period since its inception. Based on the
available objective evidence, including the Company's history of losses,
management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly the Company has provided for a full
valuation allowance against its total deferred tax assets at December 31, 2004
and 2003. The valuation allowance increased by approximately $158,000 in the
year ended December 31, 2004.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis contains forward-looking
statements within the meaning of Federal securities laws. You can identify these
statements because they use forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue," "believe," and "intend" or other
similar words. These words, however, are not the exclusive means by which you
can identify these statements. You can also identify forward-looking statements
because they discuss future expectations, contain projections of results of
operations or of financial conditions, characterize future events or
circumstances or state other forward-looking information. We have based all
forward-looking statements included in Management's Discussion and Analysis on
information currently available to us, and we assume no obligation to update any
such forward-looking statements. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, actual results could differ materially from those projected in the
forward-looking statements. Potential risks and uncertainty include, but are not
limited to, those set forth under the caption "Additional Factors Affecting
Future Results" included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
While we believe that the discussion and analysis in this report is
adequate for a fair presentation of the information, we recommend that you read
this discussion and analysis in conjunction with the description of our business
included elsewhere in this report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our Annual Report on
Form 10-K for the year ended December 31, 2004 filed with the SEC.
OVERVIEW
Since January 2003, we have not operated any business and have been
settling our remaining claims and liabilities while reviewing alternatives for
the use or disposition of our remaining assets. We intend to pursue other
business opportunities and investments unrelated to the downloading of digital
music.
On September 8, 2005, the Company entered into a non-binding letter of
intent with Checkpoint Systems, Inc. ("Checkpoint"), dated September 7, 2005, to
acquire the assets of Checkpoint's Access Control division. The Access Control
division designs, manufactures and distributes scaleable electronic access
control systems and related application software used in a variety of security
applications. On October 26, 2005, the Company's Board approved the transaction
and, on November 4, 2005, the parties entered into an asset purchase agreement
which is subject to customary closing conditions and the completion of an audit
of Checkpoint's Access Control division for fiscal years 2004 and 2003. The
contemplated cash consideration for the transaction is approximately $2.5
million, subject to post-closing adjustments and escrow. There can be no
assurance, however, that the closing conditions will be satisfied or that the
transaction between the parties will ultimately be consummated.
If we are unable to consummate any suitable business opportunities and/or
investments, we may pursue a plan of complete liquidation and dissolution. If a
complete liquidation and dissolution is approved, pursuant to Delaware General
Corporation Law, we will continue to exist for three years after the dissolution
becomes effective or for such longer period as the Delaware Court of Chancery
shall direct, for the purpose of prosecuting and defending suits against us and
enabling us gradually to close our business, to dispose of our property, to
discharge our liabilities and to distribute to our stockholders any remaining
assets.
Our common stock currently trades over the counter on The Nasdaq OTC
Bulletin Board. Our common stock was traded on The Nasdaq National Market, but
was delisted on June 5, 2003. The market price per share of our common stock
increased significantly following the implementation of the Reverse/Forward
Stock Split. The market price of our common stock as of November 8, 2005 was $
1.68 per share.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are more fully described in Note 2, Summary of
Significant Accounting Policies, to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
No changes to these critical polices have taken place during the quarter ended
September 30, 2005.
9
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (IN THOUSANDS)
Total Revenues
We did not derive any revenues in each of the three months ended September
30, 2005 and September 30, 2004 due to the discontinuation of our software
license and our music hosting businesses and the sale of our digital music
fulfillment business to Geneva Media, LLC in January 2003.
Operating Expenses
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel and payments to outside contractors for
general corporate functions, including finance, information systems, human
resources, facilities, legal and general management, fees for professional
services, bad debt expense and an allocation of our occupancy costs and other
overhead. General and administrative expenses increased by 1% to approximately
$229 for the three months ended September 30, 2005 from approximately $225 in
the comparable period of 2004.
Other Income (Expense), Net. Substantially all other income is from
interest received from investments in highly-liquid money market funds. Other
income was $63 for the three months ended September 30, 2005 and $40 for the
three months ended September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Total Revenues
We did not derive any revenues in each of the nine months ended September
30, 2005 and September 30, 2004 due to discontinuation of our software license
and our music hosting businesses and the sale of our digital music fulfillment
business to Geneva Media, LLC in January 2003.
Operating Expenses
General and Administrative. General and administrative expenses consist
primarily of compensation for personnel and payments to outside contractors for
general corporate functions, including finance, information systems, human
resources, facilities, legal and general management, fees for professional
services, bad debt expense and an allocation of our occupancy costs and other
overhead. General and administrative expenses decreased 20% to $636 for the nine
months ended September 30, 2005 from $792 in the comparable period of 2004. This
decrease was primarily due to the cessation of business activity.
Other Income (Expense), Net. Substantially all other income is from
interest received from investments in highly-liquid money market funds. Other
income was $166 for the nine months ended September 30, 2005 and $120 for the
nine months ended September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
As of September 30, 2005, we had approximately $5.9 million of cash and
cash equivalents.
10
Net cash used in operating activities was approximately $489 and
approximately $2.6 million for the nine months ended September 30, 2005 and
2004, respectively. Net cash used for operating activities in the 2004 period
was primarily the result of the payment of $1,452 to BeMusic and approximately
$314 in legal fees relating to the SightSound litigation, combined with our $672
operating loss. Net cash used for operating activities in the 2005 period was
primarily the result of payment of general and administrative expenses.
We have no material commitments for capital expenditures and anticipate no
capital expenditures during the remainder of 2005. We anticipate that we will
experience a decline in our operating expenses for the foreseeable future and
that our operating expenses will be a material use of our cash resources. We
anticipate using cash for the acquisition of Checkpoint' Access Control division
discussed above. There can be no assurance, however, that the acquisition will
be consummated.
We also, as permitted under Delaware law and in accordance with our Bylaws,
indemnify our officers and directors for certain events or occurrences, subject
to certain limits, while the officer or director is or was serving at our
request in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a Director and Officer Insurance
Policy that limits our exposure and enables us to recover a portion of any
future amounts paid. As a result of our insurance policy coverage, we believe
the fair value of these indemnification agreements is minimal.
We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
in the near future. Additionally, we do not currently have an operating business
and, consequently, we are currently exploring various options for the use of our
remaining assets, including pursuit of a business strategy unrelated to digital
music distribution. Acquisition and/or operation of any future business strategy
may require additional cash resources. See "ADDITIONAL FACTORS AFFECTING FUTURE
RESULTS "below.
ADDITIONAL FACTORS AFFECTING FUTURE RESULTS
Before deciding to invest in us or to maintain or increase your investment,
you should carefully consider the risks described below, in addition to the
other information contained in this report and in our other filings with the
SEC, including our Annual Report on Form 10-K filed March 31, 2005. The risks
and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our business operations. If any of these risks
actually occur, our business, financial condition or results of operations could
be seriously harmed. In that event, the market price of our common stock could
decline and you may lose all or part of your investment.
WE CURRENTLY DO NOT HAVE AN OPERATING BUSINESS, BUT ALSO DO NOT INTEND TO PURSUE
A COURSE OF COMPLETE LIQUIDATION AND DISSOLUTION, AND ACCORDINGLY, THE VALUE OF
YOUR SHARES MAY DECREASE
We have not had an operating business since January 2003; we are
considering various options for the use of our remaining assets. On September 8,
2005, we entered into a non-binding letter of intent with Checkpoint Systems,
Inc. ("Checkpoint"), dated September 7, 2005, to acquire the assets of
Checkpoint's Access Control division. The Access Control division designs,
manufactures and distributes scaleable electronic access control systems and
related applications. On October 26, 2005, our Board of Directors approved the
transaction and on November 4, 2005 the parties entered into an asset purchase
agreement which is subject to customary closing conditions and the completion of
an audit of Checkpoint's Access Control division for fiscal years 2004 and 2003.
The contemplated cash consideration for the transaction is approximately $2.5
million, subject to post-closing adjustments and escrow. There can be no
assurance, however, that the closing conditions will be satisfied or that the
transaction between the parties will ultimately be consummated.
In the meantime, we will continue to incur operating expenses while we
consider alternative operating plans. These plans may include business
combinations with or investments in other operating companies, or entering into
a completely new line of business. Even if we are able to identify business
opportunities that our Board deems appropriate, such as the transaction
described above, we cannot assure you that such a strategy will provide you with
a positive return on your investment, and it may in fact result in a substantial
decrease in the value of your stock. These factors will substantially increase
the uncertainty, and thus the risk, of investing in our shares. Furthermore, we
currently do not intend to pursue a course of complete liquidation and
dissolution. As a result, you should also not expect any further cash
distributions.
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WE MAY NOT BE ABLE TO IDENTIFY OR FULLY CAPITALIZE ON ANY APPROPRIATE BUSINESS
OPPORTUNITIES
We are considering various options for the use of our remaining assets,
which may include business combinations with or investments in other operating
companies, or entering into a completely new line of business. As discussed
above, we have entered into an asset purchase agreement with Checkpoint to
acquire the assets of its Access Control division. There can be assurance,
however, that the closing conditions will be satisfied or that the transaction
between the parties will ultimately be consummated.
Even if we are able to consummate a transaction or identify other business
opportunities that our Board deems appropriate, we cannot assure you that such a
strategy will provide you with a positive return on your investment, and may in
fact result in a substantial decrease in the value of your stock. In addition,
if we enter into a combination with a business that has operating income, we
cannot assure you that we will be able to utilize all or even a portion of our
existing net operating loss carryover for federal or state tax purposes
following such a business combination. If we are unable to make use of our
existing net operating loss carryover, the tax advantages of such a combination
may be limited, which could negatively impact the price of our stock and the
value of your investment. These factors will substantially increase the
uncertainty, and thus the risk, of investing in our shares.
WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR BUSINESS STRATEGY TO
AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940
We traded shares of an available-for-sale security in August and September
of 2003. Although we liquidated our entire remaining position in this security
as of November 12, 2003 and do not intend to make any additional purchases of
available-for-sale securities, we may inadvertently have become, or may become
in the future, an investment company under the Investment Company Act of 1940
(the "Investment Company Act"). The Investment Company Act provides a set of
regulations for companies that are or that hold themselves out as being engaged
primarily in the business of investing, reinvesting, owning, holding or trading
in securities. A company may also become subject to regulation under the
Investment Company Act if it owns "investment securities" with a value exceeding
40% of the value of its total assets (exclusive of government securities and
cash items) as a result of our lack of an operating business, our significant
cash balance as a percentage of our total assets and our recent trading
activities. Although we continue to consider future operating alternatives,
including the possible acquisition of one or more operating businesses, we could
become subject to regulation under the Investment Company Act. Registration as
an investment company would be very expensive and further deplete our cash
balances, which would leave us with fewer resources to pursue further operating
alternatives. Registration would also subject us to restrictions that may be
inconsistent with any future business strategy we may decide upon. In order to
avoid these regulations, we may have to take actions that we would not otherwise
choose to take to avoid registration under the Investment Company Act.
STOCKHOLDERS MAY BE LIABLE TO OUR CREDITORS FOR UP TO AMOUNTS RECEIVED FROM US
IF OUR RESERVES ARE INADEQUATE
If we pursue a plan of complete liquidation and dissolution, a Certificate
of Dissolution will be filed with the State of Delaware after such plan is
approved by our stockholders. Pursuant to the Delaware General Corporation Law,
we will continue to exist for three years after the dissolution becomes
effective or for such longer period as the Delaware Court of Chancery shall
direct, for the purpose of prosecuting and defending suits against us and
enabling us gradually to close our business, to dispose of our property, to
discharge our liabilities and to distribute to our stockholders any remaining
assets. Under the Delaware General Corporation Law, in the event we fail to
create an adequate contingency reserve for payment of our expenses and
liabilities during this three-year period, each stockholder could be held liable
for payment to our creditors for such stockholder's pro rata share of amounts
owed to creditors in excess of the contingency reserve. The liability of any
stockholder would be limited, however, to the amounts previously received by
such stockholder from us (and from any liquidating trust or trusts), including
the return of capital cash distribution of $2.50 per share paid to stockholders
on January 29, 2003. Accordingly, in such event a stockholder could be required
to return all distributions previously made to such stockholder. In such event,
a stockholder could receive nothing from us under a plan of complete liquidation
and dissolution. Moreover, in the event a stockholder has paid taxes on amounts
previously received, a repayment of all or a portion of such amount could result
in a stockholder incurring a net tax cost if the stockholder's repayment of an
amount previously distributed does not cause a commensurate reduction in taxes
payable. There can be no assurance that the contingency reserve maintained by us
will be adequate to cover any expenses and liabilities.
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SUCCESS OF A PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION DEPENDS ON QUALIFIED
PERSONNEL TO EXECUTE IT
If we pursue a plan of complete liquidation and dissolution, the success of
any such plan depends in large part upon our ability to retain the services of
qualified personnel to handle the sale of our remaining assets and settlement of
remaining liabilities. We may retain the services of a consulting firm
specializing in such purpose, however the retention of qualified personnel is
particularly difficult under our current circumstances.
OUR STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET, AND IS THEREFORE
SIGNIFICANTLY LESS LIQUID THAN BEFORE
Our stock has been delisted from trading on The Nasdaq National Market by
reason of not maintaining listing requirements due to the lack of tangible
business operations and significantly reduced market price of our common stock.
As a result, our common stock currently trades over the counter on the Nasdaq
OTC Bulletin Board and the ability of our stockholders to obtain liquidity and
fair market prices for our shares has been significantly impaired.
AFTER OUR WIND UP THERE MAY BE NO ADDITIONAL CASH TO DISTRIBUTE TO OUR
STOCKHOLDERS AND IF THERE IS ADDITIONAL CASH TO DISTRIBUTE, THE TIMING OF ANY
SUCH FUTURE DISTRIBUTION IS UNCERTAIN
If we pursue a plan of complete liquidation and dissolution, uncertainties as
to the ultimate amount of the proceeds, if any, from the sale of our assets and
the amount of our liabilities make it impracticable to predict the aggregate net
value ultimately distributable to our stockholders. Claims, liabilities and
expenses from operations (including costs associated with any retained firm's
efforts to sell our remaining assets and settle our remaining liabilities,
taxes, legal and accounting fees and miscellaneous office expenses) will
continue to be incurred. These expenses will reduce the amount of cash available
for ultimate distribution to stockholders. However, no assurances can be given
that available cash and amounts received on the sale of assets will be adequate
to provide for our obligations, liabilities, expenses and claims and to make
cash distributions to stockholders. If such available cash and amounts received
from the sale of assets are not adequate to provide for our obligations,
liabilities, expenses and claims, we may not be able to distribute meaningful
cash, or any cash, to our stockholders. Further, if we pursue a plan of complete
liquidation and dissolution, (a) the actual nature, amount and timing of all
distributions will be determined by our Board, in its sole discretion, and will
depend in part upon our ability to resolve our remaining contingencies, (b)
there will be no firm timetable for the distribution of proceeds to our
stockholders because of contingencies inherent in winding up a business and (c)
the liquidation should be concluded prior to the third anniversary of the filing
of the Certificate of Dissolution in Delaware.
WE WILL CONTINUE TO INCUR THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY REPORTING
AND OTHER REQUIREMENTS
We have an obligation to continue to comply with the applicable reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and other applicable requirements including those under the
Sarbanes-Oxley Act of 2002 even though compliance with such requirements is
economically burdensome. In order to curtail expenses, if we elect to pursue a
liquidation and dissolution strategy, after we file our Certificate of
Dissolution, we will seek relief from the SEC from the reporting requirements
under the Exchange Act, which may or may not be granted. Until such relief is
granted we will continue to make obligatory Exchange Act filings. We anticipate
that even if such relief is granted in the future, we will continue to file
current reports on Form 8-K to disclose material events relating to our
liquidation and dissolution along with any other reports that the SEC may
require.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
No material changes exist to the market risk our investment portfolio of
cash and money market funds faced during the six months ended September 30,
2005.
ITEM 4. CONTROLS AND PROCEDURES
Based on the evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(c) or 15a-15(e) under the Exchange Act) by
our management, with the participation of our chief executive officer and our
chief financial officer, as of end of the period covered by this report, our
chief executive officer and our chief financial officer have concluded that our
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 5 from Part I of this report is incorporated
herein by reference.
ITEM 6. EXHIBITS
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant
3.2 Certificate of Amendment of the Second Amended and Restated Certificate
of Incorporation of the Registrant
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
--------------
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L Q CORPORATION, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 14, 2005 L Q CORPORATION, INC.
/s/ William J. Fox
---------------------------------------------
William J. Fox
Chief Executive Officer (Principal
Executive Officer)
/s/ Melvyn Brunt
---------------------------------------------
DATE: November 14, 2005 Melvyn Brunt
Chief Financial Officer (Principal
Financial and Accounting Officer)
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