Attached files
| file | filename |
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| EX-21.1 - Enable Holdings, Inc. | v162871_ex21-1.htm |
| EX-32.2 - Enable Holdings, Inc. | v162871_ex32-2.htm |
| EX-31.1 - Enable Holdings, Inc. | v162871_ex31-1.htm |
| EX-31.2 - Enable Holdings, Inc. | v162871_ex31-2.htm |
| EX-32.1 - Enable Holdings, Inc. | v162871_ex32-1.htm |
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UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K/A
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2008
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Commission
file Number: 000-50995
Enable
Holdings, Inc.
(Formerly known as uBid.com
Holdings, Inc.)
(Exact
name of registrant as specified in its charter)
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Delaware
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52-2372260
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer
Identification
No.)
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8725
W Higgins, Suite 900, Chicago, Illinois 60631
(Address
of principal executive offices and zip code)
Registrant's
telephone number including area code:
(773) 272-5000
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.001 per share
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. 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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting
company)
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Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes o No x
The
aggregate market value of the registrant's voting stock held by non-affiliates
of the registrant (based upon the per share closing sale price of $1.87 at
June 30, 2008) was approximately $16.0 million.
The
number of shares outstanding of the registrant's Common Stock, par value $0.001,
as of, March 15, 2009, was 18,826,678
DOCUMENTS
INCORPORATED BY REFERENCE
None
EXPLANATORY
NOTE
Enable Holdings,
Inc. (the "Company") filed its Annual Report on Form 10-K for fiscal year 2008
(the "Annual Report") with the Securities and Exchange Commission (the
"Commission") on April 10, 2009. On August 4, 2009, the Commission issued
comments to the Annual Report. This Amendment No. 1 to Annual Report on Form
10-K ("Amendment No. 1") amends the Annual Report to incorporate certain changes
that have been made to the presentation of Enable Holdings, Inc.’s
financial statements and the notes thereto, in response to the
Commission’s comments issued August 4, 2009.
Accordingly,
changes have been made to the following sections of the Annual
Report:
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·
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Item
8. Financial Statements and Supplementary Data Independent Auditors
Report
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·
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Item
8 Financial Statements and Supplementary Data Note 10 Bridge
Loans
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·
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Item
9A Controls and Procedures
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Although
this Form 10-K/A contains all of the items required to be included in an Annual
Report on Form 10-K, no other information in the Annual Report is amended
hereby. The foregoing items have not been updated to reflect other events
occurring after the Annual Report or to modify or update those disclosures
affected by subsequent events. In addition, pursuant to the rules of the SEC,
Item 15 of Part IV of the Annual Report has been amended to contain currently
dated certifications from the Company’s Chief Executive Officer and Chief
Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act
of 2002. Updated certifications of the Company’s Chief Executive Officer and
Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1,
31.2., 32.1 and 32.2.
Except
for the foregoing amended information, this Form 10-K/A continues to speak as of
the date of the Annual Report, and the Company has not updated the disclosures
contained herein to reflect events that occurred at a later
date.
ENABLE HOLDINGS,
INC.
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PART
I
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Business
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3
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Risk
Factors
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10
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Item 1B
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Unresolved
Staff comments—Not Applicable
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Properties
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25
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Legal
Proceedings
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25
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Submission
of Matters to a Vote of Security Holders
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25
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PART
II
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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28
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Selected
Financial Data
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29
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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31
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Quantitative
and Qualitative Disclosures about Market Risk
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47
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Financial
Statements and Supplementary Data
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47
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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75
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Controls
and Procedures
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75
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Other
Information
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75
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PART
III
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Directors
and Executive Officers of the Registrant
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76
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Executive
Compensation
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76
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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76
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Certain
Relationships and Related Transactions and Director
Independence
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76
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Principal
Accountant Fees and Services
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76
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PART
IV
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Exhibits
and Financial Statement Schedules
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77
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2
FORM
10-K ANNUAL REPORT
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
PART I
Forward-Looking
Statements
This Annual Report on
Form 10-K 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, including, without limitation, statements
regarding our expectations, beliefs, intentions or future strategies that are
signified by the words "expects," "anticipates," "intends," "believes,"
"estimates" or similar language. All forward-looking statements included in this
document are based on information available to Enable Holdings on the date
hereof. Enable Holdings cautions investors that its business and financial
performance and the matters described in these forward-looking statements are
subject to substantial risks and uncertainties. For further information
regarding these risks and uncertainties, please refer to publicly available
documents that Enable Holdings has filed with the Securities and Exchange
Commission. Because of these risks and uncertainties, some of which may not be
currently ascertainable and many of which are beyond Enable Holdings' control,
actual results could differ materially from those projected in the
forward-looking statements. Deviations between actual future events and the
Enable Holdings' estimates and assumptions could lead to results that are
materially different from those expressed in or implied by the forward looking
statements. We do not intend to update these forward looking statements to
reflect actual future events.
Item 1. Business
Overview
Enable
Holdings, Inc, along with its subsidiaries, enables manufacturers, retailers and
distributors to liquidate excess inventory by providing them with asset recovery
solutions, through a multi-channel environment. Asset recovery has become a
major market, especially in the current economic downturn, where consumers
demand brand name products at prices that are well below retail. When
manufacturers and retailers are unable to sell inventory from their warehouses,
distribution centers and stores, they contact us to provide solutions for them
to sell their excess inventory and recover their costs.
Enable
Holdings is organized as five distinct business units. Each business unit
provides a combination of seller solutions for sellers to efficiently liquidate
their excess inventory. The business units are listed below:
1.
uBid.com:
Our flagship website, which has operated for
11 years. The website allows merchants to sell excess inventory and allows
consumers to buy products online in an auction as well as fixed price
format.
2.
RedTag.com:
Our new fixed price internet site launched in August
2008, offers name brand merchandise with a low shipping and handling fee of only
$1.95.
3.
RedTag Live:
Our live liquidation group, dedicated to selling through
the traditional in-store sales and live liquidation sales.
4.
Dibu Trading Company:
A wholesale inventory liquidation company dedicated to
Business-to-Business solutions, providing manufacturers and distributors the
ability to sell large quantities of excess inventory. For example, when a
retailer needs to liquidate a large quantity of inventory, they contact us to
find a buyer that will buy the entire inventory in a single transaction. Our B2B
experience allows us to present deals to multiple interested buyers to get the
most profitable buyer.
3
Commerce Innovations:
A software service company which licenses auction
software to third party companies. Companies, businesses and governments can use
our platform to sell excess furniture, appliances, autos, and other surplus.
This allows them to utilize a trusted platform while reducing live auction
costs, as well as an efficient way to reach a wider target audience. The Company
is currently in the process of developing and testing this hosted solution and
anticipates its launch in the second half of 2009.
How
we provide value to the sellers
At
Enable Holdings we have developed a multi-channel solution that serves as a
one-stop shop for sellers to liquidate excess inventory, in categories such as
apparel, consumer electronics, personal computers, watches, jewelry,
home & garden, sporting goods and automobiles. Enable Holdings'
multi-channel approach allows the sellers to avoid any conflicts with their
primary distribution channels.
Our
Company is focused on helping sellers with their asset recovery needs. We assign
a dedicated account manager who ensures that your asset recovery needs are met
in an efficient and timely manner. The account manager will help assess your
situation, identify the best solutions and execute the plan.
We
offer multiple seller solutions that enable sellers to route their excess
inventory through our multi-channel solutions to attain maximum cost
recovery:
1.
Certified Merchant Program
(CM): CM is a unique seller program whereby
sellers can directly sell their inventory on our website, reaching out to the
5.5 million customer base we have established over the past eleven years.
Merchants participating in this program manage the entire warehouse and order
fulfillment for their sales while we manage the order processing and post-order
customer service. This greatly reduces any fraudulent activity by either the
seller or the buyer and allows us to act as an intermediary in any dispute
resolution. See below for more detail on the CM program.
2.
Managed Supply:
Managed Supply is a program, whereby, we sell inventory
that is consigned to us. The inventory is either stored at our warehouse or at
the sellers'.
3.
Cash Recovery:
We purchase inventory directly from sellers, allowing
them to dispose of excess inventory and attain immediate cost recovery. We then
direct the merchandise through one of our multi-channels—our online properties,
located at www.uBid.com and www.RedTag.com, our live sales business unit RedTag
Live or sell it through a wholesale transaction to another
business.
Strong
Brand and Loyal Customer Base
We
have been in operation for over 11 years and have a strong base of more
than 5.5 million registered users across our websites. The websites are
designed to provide a friendly and positive shopping experience through
interactive auction and fixed price formats.
CM/Certified
Central
The
CM Program provides merchants with greater management control over certain
aspects of the sale process related to their products, while maintaining the
opportunity to sell their products to our consumers on our online properties
through our auction style or fixed price formats. Merchants participating in the
CM Program manage all warehousing of and order fulfillment for their CM Program
inventory. However, Enable Holdings manages all order processing and first
response customer service needs related to CM Program transactions. In
furtherance of our commitment to minimize fraudulent activity and to provide a
trustworthy and credible online experience, we require all merchants, before
participating in the CM Program, to satisfactorily complete our merchant
certification process which verifies each participating merchant's business
status and trade references. Enable Holdings charges the merchants a commission
fee for all completed auction style and fixed price format
transactions.
4
Certified
Central is our secure web-based platform that allows our Certified Merchants to
build a database of products, create auctions, download orders, and communicate
with our customer care team and merchandising department quickly and easily. We
provide many different services through Certified Central at no additional
charge to our Certified Merchants. These services, which include the ability to
upload multiple images and view top selling product reports, are designed to
enhance the Certified Merchant's selling experience and satisfaction with us.
Whether a Certified Merchant is expanding its marketplace options or entering
the online auction channel for the first time, Certified Central is designed
around a simple and easy-to-use interface. Certified Central is also backed by
an account management team to assist with planning, problems or
inquiries.
Seller
Support
We
currently employ a staff of in-house customer support personnel responsible for
handling customer inquiries, tracking shipments and investigating and resolving
problems with merchandise. Customer Care representatives are available for
support from 8 a.m.–6 p.m. Central Standard Time (CST) Monday through
Friday. In addition, our customer service representatives are trained to
cross-sell complementary and ancillary products and services including extended
product warranties and accessories. Some of our support functions, order status
and tracking, order verification etc, are automated to provide immediate access
to the customers.
How
we provide value to the buyers
In
today's market, consumers want greater value for their money than they ever have
in the past; which is why we connect them to the world's top brands at prices
that are far below retail.
Broad
and Deep Product Selection
We
offer over 200,000 high quality and brand-name, new, close-out, overstock and
recertified merchandise in over 200 categories including personal computers,
consumer electronics, apparel, housewares, watches, jewelry, travel, sporting
goods, home improvement products and collectible products each day.
Extensive
Security and Fraud Protection
Our
websites, at ww.uBid.com and www.RedTag.com, provide a trustworthy and secure
buying environment in which we minimize fraudulent activity and questionable
product quality frequently associated with purchase transactions from
unestablished businesses, individual consumers and other non-commercial parties.
All merchants offering goods in our online marketplace are required to
successfully complete our merchant certification process, which includes
verification of the merchant's trade and bank references and other information
which establishes that the merchant is in good business standing. As a result of
this certification, fraudulent transactions in our marketplace are
minimized.
Compelling
Value to Consumers and Merchants
We
attract new consumers and retain existing consumers by offering low prices on
high quality, brand-name products in a marketplace supported by both auction
style and fixed price formats. We provide additional value to our consumers by
providing timely and accurate order processing, direct fulfillment where
applicable and in-house customer support. Sellers are attracted to Enable
Holdings because of the large and growing number of potential buyers. The
frequency of product offerings and the ability to continuously add new items
allow merchants to liquidate inventory quickly to minimize the risk of price
erosion. In addition, our auction style and fixed price formats allow sellers
the opportunity to optimize sales value while simultaneously liquidating excess
merchandise directly to a nationwide audience, without conflicting with their
primary distribution channels.
5
Multiple
Payment options
We
accept all the major credit cards for customer purchase as well as two
additional checkout options—Google™ Checkout and BillMeLater®. Google™ Checkout
allows customers to use their Google™ profile to purchase items while having to
avoid entering their credit card details on our website. BillMeLater® is a
service that extends immediate credit to customers allowing to them to pay for
the products at a later time.
Products
and Merchandising
Since
asset recovery is an unpredictable business, it is impossible to forecast
product supply ahead of time. The product mix and quantity fluctuates from
month-to-month but our main product categories continue to be as follows, in
order of most to least volume.
•
Personal
Computer Products: Including items such as desktops, portable computers,
computer accessories, disk drives, modems, monitors/video equipment, components,
printers, scanners, digital cameras, software and home office
products.
•
Consumer
Electronics: Including items such as home theater equipment, home audio
equipment, speakers, televisions, camcorders, VCRs, DVD players, portable audio
players and automobile audio equipment.
•
Home:
Including items such as appliances, vacuum cleaners, furniture, tools, luggage,
furnishings, art and lawn and garden.
•
Jewelry
and Gifts: Including items such as rings, earrings, watches, bracelets and loose
stones.
•
Apparel
and Accessories: Including items such as men's, women's and children's casual,
fitness, and dress clothing, shoes and accessories.
•
Sporting
Goods and Memorabilia: Including items such as sports memorabilia and
collectibles, equipment for golf, tennis, health and fitness, outdoor sports,
bicycles, water sports and team sports.
•
Books,
Music and Videos: Including items such as books, movies, video games, DVDs and
CDs.
•
Collectibles:
Including items such as dolls, stamps, coins, pottery, glass and
figurines.
Customer
Service & Support Center
Our
ability to establish and maintain long term relationships with our customers and
encourage repeat visits and purchases is dependent, in part, on the strength of
our customer support and service operations. We have established multiple
channels for communicating with our customers before and after the sale,
including phone, e-mail and online support.
We
currently employ a staff of in-house customer support personnel responsible for
handling customer inquiries, tracking shipments, investigating and resolving
problems with merchandise. Our Customer Care Center is located in Tilton,
Illinois. Customer Care representatives are available for support from
8 a.m.–6 p.m. CST Monday through Friday. In addition, our customer
service representatives are trained to cross-sell complementary and ancillary
products and services including extended product warranties and
accessories.
Most
products are covered by manufacturers' warranties or third party warranties
which customers can purchase through us. We will, in specific instances, accept
merchandise returns if a product is defective or does not conform to the
specifications of the item sold at auction, and we work with our customers to
resolve complaints concerning merchandise. In addition, we have automated some
of our customer service functions including providing online access to product
shipping status.
6
Product
Fulfillment and logistics
We
use a third party logistics warehouse and distribution system to store
inventory. This flexible system enables us to control warehouse costs and more
closely manage the distribution of our directly procured merchandise because we
only pay for the warehousing used on a per transaction basis. Direct product
fulfillment and its related costs shrink or expand to fit the needs of the
business. As a result, we do not incur significant overhead costs of owning and
operating a warehouse.
Marketing
Our
marketing strategy is aligned with our overall business goals to drive revenue
and margin growth by increasing our consumer and merchant bases.
Our
marketing strategy is focused primarily on four areas: (1) increasing
consumer awareness of www.uBid.com and www.RedTag.com; (2) expanding and
optimizing customer acquisition efforts; (3) implementing a scalable,
cost-effective customer retention program; and (4) increasing the
availability of qualified merchant leads for the CM Program.
•
Increasing
consumer awareness of Enable Holdings and its online properties— Enable
Holdings has created a unique position in the marketplace focused on earning
consumer trust. This position of "trust" is supported by our focus on
business-to-consumer selling (versus consumer-to-consumer selling), our efforts
to minimize fraudulent sellers by requiring all merchants participating in the
CM Program to complete a merchant certification process, significant investments
in our customer support services, internal product warehousing and payment
transaction processing and endorsements from various recognized third party
security and privacy programs. We believe this "trust" positioning will continue
to set us apart from our competitors and provide a meaningful difference in
attracting and maintaining customers.
•
Expanding and
optimizing customer acquisition efforts— Our marketing expenditures are
primarily spent on attracting traffic to our website. Potential new customers
are sourced through a range of online efforts including affiliate programs, paid
search listings, shopping comparison programs, online partnerships and e-mail
marketing. In addition, we are also re-evaluating marketing channels such as
offline direct response television and radio, in-store media, event marketing
and single partnerships with key online media companies to broaden our customer
demographics and drive larger incremental gains in customer
acquisition.
•
Implementing a
scalable, cost-effective customer retention program— It is critical to
have a program that effectively manages new customer relationships from
acquisition to activation (one-time bidding/buying) to repeat purchase. We have
recently increased our investment in the implementation of our customer
retention management. Our efforts to date have been focused on developing
programs aimed at improving bidding/buying behavior among key customer segments:
1) recent bidders, 2) lapsed and long lapsed bidders, 3) inactive
members (i.e., never bid), 4) registered members without a credit card
on file, and 5) members without an opt-in e-mail address.
•
Increasing the
availability of qualified merchants for the CM Program— The recruiting of
merchants to the CM Program has become a primary growth focus. We are marketing
to prospective merchants principally through online media, including e-mail
marketing and online trade media (e.g., auction industry newsletters), as
well as offline through public relations and trade show events. We regularly
evaluate Certified Merchants based on different metrics, including, returns,
customer service inquiries and cancellations, to part with poor performing
sellers and promote the ones that stand out.
7
Competition
Asset
recovery is a growing business model, especially in the current economic
conditions. We believe there are a very limited number of companies that provide
a one-stop solution to all the inventory liquidation needs that we provide.
There are companies that offer either an online liquidation marketplace or just
an in-store model, but our all around solution gives us an added advantage over
those companies.
We
face competition from liquidators, asset recovery companies and retailers that
can be divided in to two broad categories:
•
Online
liquidators and retailers such as Overstock.com, Ecost.com, Bluefly.com,
Amazon.com, Smartbargains.com, Bidz.com; and
•
In-store
liquidators such as Gordon Brothers, Hilco Trading Co.
As
the market for online auction grows, we believe that companies involved in
online retail, as well as traditional retailers and liquidation brokers, will
increase their efforts to develop services that compete with our online
services. We are unable to anticipate which other companies, such as Internet
companies currently not focused on the auction market, are likely to offer
services in the future that will compete with the services and products we
provide.
In
addition, many of our current competitors have greater brand recognition, longer
operating histories, larger customer bases and significantly greater financial,
marketing and other resources than we do, and may enter into strategic or
commercial relationships with larger, more established and well-financed
companies. Some of our competitors could enter into exclusive distribution
arrangements with our vendors and deny us access to their products, devote
greater resources to marketing and promotional campaigns and devote
substantially more resources to their website and systems development than we
do. New technologies and the continued enhancement of existing technologies also
may increase competitive pressures on us. We cannot assure you that we will be
able to compete successfully against current and future competitors or address
increased competitive pressures. See Item 1A, "Risk Factors," starting on
page 10 of this Annual Report on Form 10-K.
Information
Technology Infrastructure
Availability
Our
business model dictates that our online properties be available 24 hours a
day, seven days a week. Our data center has a robust, responsive, resilient
platform to support our growing customer base. Our technology platform is able
to achieve high availability by maintaining redundant components critical to the
effective functioning of the platform. We have built a cost-efficient network
that is resilient. This has been achieved by designing a fully meshed network
with dual network interfaces, switches, routers and load balancers. Every key
data circuit that is critical to the availability of the platform has an
alternate path to ensure that the websites are reachable. Our websites are
connected to the Internet through redundant DS-3 circuits using AT&T as the
back bone.
Scalability
The
Company's growth strategy focuses on building our buyer and seller bases which
will require our technology to fundamentally support large capacity levels and
provide scalability. Our technology is built on a "distributed architecture
model" which enables our software applications to run parallel on multiple
servers. This technique allows our system to load balance the increased traffic
and workload among a group of servers.
The
websites support several activities such as browsing/searching for items,
registration of customers, auction management tasks (e.g., opening and
closing of auctions or bidding for items in a variety of formats), order
processing, credit card and fraud management. The platform is able to process
hundreds of thousands of transactions every day.
8
Security
The
Company operates "trusted" online properties in which it has implemented
measures to minimize buyer and seller fraud including pre-screening of all new
bidders using anti-fraud detection tools. Our anti-fraud programs are
continually updated to stay current with the latest evolution of online fraud
tools. Additionally, all consumer sensitive data such as credit card numbers and
passwords are encrypted and stored behind our secure network. We use Secure
Sockets Layer and enhanced encryption algorithms to protect consumer sensitive
data. The network is also protected with Intrusion Detection Systems and
firewalls that allow restricted ports from the outside network.
Intellectual
property
We
regard our domain names and other intellectual property as critical to our
success. We rely on a combination of laws and contractual restrictions with our
employees, customers, suppliers, affiliates and others to establish and protect
our proprietary rights. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our intellectual property
without authorization. In addition, we cannot assure you that others will not
independently develop similar intellectual property. Although we are pursuing
the registration of our key trademarks in the United States, some of our trade
names are not eligible to receive trademark protection. In addition, effective
trademark protection may not be available or may not be sought by us in every
country in which our products and services are made available online, including
the United States.
The
uBid and RedTag service marks are registered trademarks in the United States.
Our proprietary software is protected by copyright laws. The source code for our
proprietary software is also protected under applicable trade secret laws. We
own the copyright and other proprietary rights for our auction processing and
auction management applications. We own the patent license for fixed price
consignment that will allow our vendors and our merchants to create auctions
with fixed pricing. We also own the patent license for search agents that will
allow us to search inventory of our vendors.
From
time to time, we may be subject to legal proceedings and claims regarding our
intellectual property in the ordinary course of our business, including claims
of alleged infringement of the trademarks and other intellectual property rights
of third parties by us.
Third
parties may, in the future, recruit our employees who have had access to our
proprietary technologies, processes and operations. These recruiting efforts
expose us to the risk that such employees may misappropriate our intellectual
property.
Litigation
may be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Any litigation, regardless of outcome or merit,
could result in substantial costs and diversion of management and technical
resources, any of which could materially harm our business. See
Item 1A,"Risk Factors," starting on page 14 of this
Form 10-K.
Employees
As
of December 31, 2008, we had 72 full-time employees. None of our employees
is represented by a labor union, and we consider our employee relations to be
good. We believe that our future success will depend in part on our continued
ability to attract, hire and retain qualified personnel.
Executive
officers
See
the end of Part I for a discussion of our executive
officers.
9
Item 1A. Risk Factors
(Dollars
in thousands, except per share data)
Based on current and known
information, we believe that the following identifies the most significant risk
factors that could affect our business. However, the risks and uncertainties we
face are not limited to those discussed below. There could be other unknown or
unpredictable economic, business, competitive or regulatory factors, including
factors that we currently believe to be immaterial, that could have material
adverse effects on our financial position, liquidity, and results of operations.
Past financial performance may not be a reliable indicator of future performance
and historical trends should not be used to anticipate results or trends in the
future periods.
Risks Related to Our
Company
There
is substantial doubt about our ability to continue as a going
concern.
Our
independent public accounting firm has issued an opinion on our consolidated
financial statements that states that the consolidated financial statements were
prepared assuming we will continue as a going concern and further states that
our recurring losses from operations, stockholders' deficit and inability to
generate sufficient cash flow to meet our obligations and sustain our operations
raise substantial doubt about our ability to continue as a going concern. Our
plans concerning these matters are discussed in Note 20 to the accompanying
audited consolidated financial statements. Our future is dependent on our
ability to raise additional capital and execute those plans successfully. If we
fail to do so for any reason, we would not be able to continue as a going
concern.
We
need to raise additional capital to meet our business requirements in the future
and such capital raising may be costly or difficult to obtain and could dilute
current stockholders' ownership interests. If we are unable to secure additional
financing we will not be able to continue as a going concern.
We
need additional capital, which may not be available on reasonable terms or at
all. The raising of additional capital will dilute our current stockholders'
ownership interests. We may need to raise additional funds through public or
private debt or equity financings to meet various objectives including, but not
limited to:
•
maintaining
enough working capital to run our business;
•
pursuing
growth opportunities, including more rapid expansion;
•
acquiring
complementary businesses;
•
making
capital improvements to improve our infrastructure;
•
hiring
qualified management and key employees;
•
buying
and selling inventory at profitable margins;
•
responding
to competitive pressures;
•
complying
with regulatory requirements such as licensing and registration;
and
•
maintaining
compliance with applicable laws.
Any
additional capital raised through the sale of equity or equity backed securities
may dilute current stockholders' ownership percentages and could also result in
a decrease in the fair market value of our equity securities because our assets
would be owned by a larger pool of outstanding equity. The terms of those
securities issued by us in future capital transactions may be more favorable to
new investors, and may include preferences, superior voting rights and the
issuance of warrants or other derivative securities, which may have a further
dilutive effect.
10
Furthermore,
any additional debt or equity financing that we may need may not be available on
terms favorable to us, or at all. If we are unable to obtain required additional
capital, we may have to curtail our growth plans or cut back on existing
business and, further, we may not be able to continue operating if we do not
generate sufficient revenues from operations needed to stay in
business.
We
may incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
issue, such as convertible notes and warrants, which may adversely impact our
financial condition.
Revenues
in prior periods may not be indicative of our future growth.
Our
revenues have fluctuated significantly in the past as a result of varying
amounts of funds we have spent on advertising and inventory supply and may
fluctuate significantly in the future as a result of changes made in our
business over the past 11 years. These changes in our business, including
changes in ownership, prevent the meaningful use of period-to-period comparisons
of financial results. Accordingly, investors should not rely on past revenue as
a prediction of our future growth.
We
have a history of operating losses which may continue.
We
have a history of losses and may continue to incur operating and net losses for
the foreseeable future. Enable Holdings incurred a net loss of approximately
$16,040 for the year ended December 31, 2008. As of December 31, 2008,
our accumulated deficit was $48,301. We have not achieved profitability on an
annual basis. If our revenues grow more slowly than anticipated or if operating
expenses exceed expectations, then we may not be able to achieve profitability
in the near future or at all, which may depress our stock price.
Our
financial results fluctuate and may be difficult to forecast.
General
U. S. and worldwide economic conditions have recently experienced a downturn due
to slower economic activity, concerns about inflation and deflation, decreased
consumer confidence, reduced corporate profits and capital spending, adverse
business conditions and liquidity concerns, recent international conflicts and
terrorist and military activity, and the impact of natural disasters and public
health emergencies. These conditions make it extremely difficult for our
customers, our vendors and us to accurately forecast and plan future business
activities, and they could cause vendors and consumers to slow spending on our
products and services. We cannot predict timing, strength of duration of any
economic slowdown or subsequent economic recovery in the U.S. or worldwide. If
the economy or markets in which we operate continue at their present levels, our
business, financial conditions and results of operations will likely be
materially and adversely affected.
Our
revenues, expenses and operating results are unpredictable. We expect that our
operating results will continue to fluctuate in the future due to a number of
factors, some of which are beyond our control. These factors include, but are
not limited to:
•
our
ability to increase our brand awareness;
•
our
ability to attract visitors to our websites and convert those visitors into
bidders, buyers and customers;
•
our
ability to increase our customer base;
•
the
amount and timing of costs relating to the expansion of our operations,
including sales and marketing expenditures;
•
our
ability to sell products at auction at the price targets we
set;
11
•
our
ability to introduce new types of merchandise, service offerings or customer
services in a competitive environment;
•
our
ability to control our gross margins;
•
technical
difficulties consumers might encounter in using our websites;
•
our
ability to manage third party outsourced operations;
•
our
ability to sell our inventory in a timely manner and maintain customer
satisfaction;
•
delays in
shipments as a result of computer systems failures, strikes or other problems
with our delivery service or credit card processing providers;
•
the
availability and pricing of merchandise from manufacturers, suppliers and
vendors;
•
the
amount of returns of our merchandise;
•
product
obsolescence and price erosion;
•
consumer
confidence in encrypted transactions on the Internet; and
•
the
effectiveness of offline advertising in generating additional traffic to our
websites.
Due
to all of these factors, our operating results may fall below the expectations
of investors, which could cause a decline in the trading price of our
stock.
Losing
key personnel could affect our ability to successfully grow our
business.
Our
future performance depends substantially on the continued service of our senior
management and other key personnel. In particular, our success depends upon the
continued efforts of our management personnel, including our Chief Executive
Officer, Jeffrey D. Hoffman, our Executive Vice President, Timothy E. Takesue,
and other members of the senior management team. Messrs. Hoffman, and
Takesue have executed employment agreements, but these agreements do not
guarantee continued employment. We do not currently maintain key person life
insurance. If our senior management were to resign or no longer be able to serve
as our management team, it could impair our revenue growth, business and future
prospects.
Our
business may suffer if we do not attract and retain additional highly skilled
personnel.
To
meet our expected growth, we believe that our future success will depend upon
our ability to hire, train and retain other highly skilled personnel.
Competition for quality personnel is intense among technology and
Internet-related businesses such as ours. We cannot be sure that we will be
successful in hiring, assimilating or retaining the necessary personnel, and our
failure to do so could cause our operating results to fall below our projected
growth and profit targets.
We
are a holding company that depends on cash flow from uBid.com, RedTag.com,
RedTag Live, Dibu Trading Corp and Commerce Innovations, our wholly-owned
subsidiaries, to meet our obligations.
We
are a holding company with no material assets other than the stock of our
wholly-owned subsidiaries. Accordingly, all of our operations are conducted by
uBid.com, Inc., Dibu Trading Corp., RedTag.com and RedTag Live, our
wholly-owned subsidiaries. We currently expect that the earnings and cash flow
of our subsidiaries will primarily be retained and used in its operations,
including servicing any debt obligations it may have now or in the future.
Accordingly, although we do not anticipate paying any dividends in the
foreseeable future, our subsidiaries may not be able to generate sufficient cash
flow to distribute funds to us in order to allow us to pay future dividends on,
or make any distributions with respect to our common stock.
12
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or detect fraud. Consequently,
investors could lose confidence in our financial reporting and this may decrease
the trading price of our stock.
We
must maintain effective internal controls to provide reliable financial reports
and detect fraud. Failure to implement these changes to our internal controls or
any others that we identify as necessary to maintain an effective system of
internal controls could harm our operating results and cause investors to lose
confidence in our reported financial information. Any such loss of confidence
would have a negative effect on the trading price of our stock.
While
we believe that we currently have adequate internal control procedures in place,
we are still exposed to potential risks from recent legislation requiring
companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act
of 2002.
Risks Related to Our
Business
Our
operating results, financial condition and cash flows may be adversely impacted
by the affect the current global economic crisis has on our
customers.
The
current economic crisis has severely impacted banks and other lenders, limiting
the ability of many individuals and businesses to access credit markets. As a
result of the credit crisis and the overall decline in the economy, our
customers may choose to delay or postpone purchases of products from us until
the economy strengthens and this may affect our operating results and financial
condition. An overall decline in economic activity may also have a negative
impact on our customers ability to pay us for the products they purchase. We
cannot predict the timing, strength or duration of the recession and the length
of the recovery. A prolonged recession of further decline in the global economy
will materially adversely affect our results of operations and financial
condition.
The
current capital and credit market conditions may adversely affect our access to
capital, cost of capital and business operations.
The
general economic and capital market conditions in the United States have
deteriorated significantly and have adversely affected businesses access to
capital as well as an increased cost of such capital. If the current economic
conditions in the United States continue or become worse, our cost of debt and
equity capital and the access to capital markets could be adversely
affected.
We
may not be successful in developing brand awareness, and the failure to do so
could significantly harm our business and financial condition.
We
believe that the importance of brand recognition will increase as more companies
engage in commerce over the Internet. Development and awareness of our brand
will depend largely on our ability to increase our customer base. If suppliers
do not perceive us as an effective marketing and sales channel for their
merchandise, or if consumers do not perceive us as offering an entertaining and
efficient way to purchase merchandise, we may be unsuccessful in promoting and
maintaining our brand. To attract and retain customers and promote our brand, we
expect to continue to increase our marketing and advertising budgets. Failure to
successfully promote our brand in a cost effective manner or achieve a leading
position in Internet commerce could significantly reduce the revenues we are
able to generate from our operations.
Our
failure to remain competitive may significantly hinder our growth.
The
electronic commerce marketplace is rapidly evolving and intensely competitive,
and we expect competition to intensify in the future. We compete with a variety
of other companies based on the type of merchandise and the sales format they
offer to customers. These competitors include, but are not limited
to:
13
•
Various
online websites such as eBay.com, Amazon.com and Bidz.com.
•
A number
of e-commerce companies focused primarily on excess and overstock products with
fixed price format, including Amazon.com, Overstock.com, Shopping.com,
eCost.com, BlueFly.com and SmartBargains.com.
•
A variety
of offline auction companies that offer similar merchandise to that available in
our marketplace supply.
•
Merchants
that have their own direct distribution channels for excess inventory or
refurbished products.
•
Companies
with substantial customer bases in the computer and peripherals catalog
business, including CDW Computer Centers, PC Connection and PC Mall, some of
which already sell online or may devote more resources to e-commerce in the
future.
Some
of our current and potential competitors have established or may establish
cooperative relationships among themselves or directly with suppliers to obtain
exclusive or semi-exclusive sources of merchandise. In addition, there has been
consolidation in the industry, which may continue in the future. Accordingly,
new competitors or alliances among competitors and suppliers may emerge and
rapidly acquire market share. Further, manufacturers may elect to sell their
products directly. Increased competition is likely to reduce our operating
margins, cause us to lose market share and/or diminish the value of our brand.
The occurrence of any of these events could significantly harm our
business.
Many
of our current competitors have significantly greater financial, marketing,
customer support, technical and other resources than we have. As a result, these
competitors may be able to secure merchandise from suppliers on more favorable
terms than we are able to. They may also be able to respond more quickly to
changes in customer preferences or devote greater resources to developing and
promoting their merchandise. We cannot ensure that we will be able to
successfully compete against current and future competitors. Our failure to
operate competitively in the marketplace could reduce the amount of revenue we
are able to generate in the future.
If
the products that we offer do not reflect our customers' tastes and preferences,
our revenues and profit margins could decrease.
Our
success depends in part on our ability to offer products and services that
reflect consumers' tastes and preferences. Consumers' tastes are subject to
frequent, significant and sometimes unpredictable changes. Because the products
that we sell typically consist of manufacturers' and retailers' excess
inventory, we have limited control over the specific products that we offer for
sale. If the merchandise we offer for sale fails to satisfy customers' tastes or
respond to changes in customer preferences, our sales could suffer and we could
be required to mark down unsold inventory which could depress profit margins. In
addition, any failure to offer products and services in line with customers'
preferences could allow competitors to gain market share, which could harm our
business, results of operations and financial condition.
Our
growth and future success depends on our ability to generate traffic to our
websites and we may not be able to effectively do so.
Our
ability to sell products on our online and offline sales channels depends
substantially on our ability to attract traffic to our websites. We have
traditionally spent significant amounts of money for online advertising to
attract such traffic. We expect that our sales and marketing expenses, including
advertising expenditures, will increase as we attempt to generate increased
traffic to our websites. If we are unable to generate traffic to our websites
cost effectively, or if our efforts to promote our auctions using both online
and offline media are not successful, our growth and business prospects may be
substantially limited.
14
We
depend to some extent on relationships with other online companies through which
we place our advertising and expect that our dependence on these relationships
will increase in the future. These relationships include:
•
portal
arrangements and agreements for anchor tenancy on other companies'
websites;
•
sponsorships;
•
promotional
placements;
•
banner
advertisements; and
•
other
online advertising including paid searches.
Generally,
these arrangements have terms for up to three years, are not exclusive, do not
provide for guaranteed renewal, and may be terminated by us without cause. The
risks created by our dependence on these relationships include the
following:
•
competitors
may purchase exclusive rights to attractive space on one or more key
websites;
•
our
online partners might be unable to deliver a sufficient number of customer
visits or impressions;
•
significant
spending on these relationships may not increase our revenues in the time
periods we expect or at all;
•
our
online partners could compete with us for limited online auction revenues;
and
•
space on
websites may increase in price or cease to be available to us on reasonable
terms or at all.
If
other online companies terminate any of our arrangements, or if we fail to
continue to acquire similar arrangements in the future, this could materially
reduce the amount of revenue we are able to generate from our
operations.
Our
cash recovery solutions may subject us to risks of decreased or negative gross
margins.
We
currently purchase considerable amount of merchandise to be sold on our online
properties, and in doing so assume the inventory and price risks of this
merchandise. These risks are especially significant because most of the
merchandise we sell is subject to rapid technological change, obsolescence and
price erosion. Because we rely heavily on purchased inventory, our success will
depend on our ability to sell such inventory rapidly through our websites. We
also rely heavily on the ability of our staff to purchase inventory at
attractive prices relative to resale value and our ability to manage customer
returns and the shrinkage resulting from theft, loss and misrecording of
inventory.
Due
to the inherently unpredictable nature of the auction style format, it is
impossible for us to determine with certainty whether any item will sell for
more than the price we pay for it. Further, because minimum opening bid prices
for the merchandise listed on our websites generally are lower than the
acquisition costs for the merchandise, we cannot be certain that we will achieve
positive gross margins on any given sale. If we are unable to liquidate our
purchased inventory rapidly, if our staff fails to purchase inventory at
attractive prices relative to resale value at auction, or if we fail to predict
with accuracy the resale prices for our purchased merchandise, we may have to
sell our inventory at a discount or at a loss. This could negatively impact our
revenues and profitability.
15
We
rely on third parties to maintain our critical systems and, if these third
parties fail to perform their services adequately, we could experience
disruptions in our operations.
We
rely on a number of third parties, including our Internet hosting facility and
telephone company, for Internet and telecommunications access, fulfillment and
delivery services, credit card processing and software services. We have limited
control over these third parties and no long-term relationships with any of
them. For example, we do not own a gateway onto the Internet. From time to time,
we have experienced temporary interruptions in our website connection and our
telecommunications access. Slow Internet transmissions or prolonged
interruptions in our website connection or telecommunications access could
materially harm our business.
We
and our certified merchants use UPS, Federal Express and USPS delivery services
for substantially all of our products. Should any of these third party service
providers be unable to deliver our products for a sustained period because of a
strike or other reason, we may not be able to engage other suitable service
providers on a timely basis, or upon favorable terms, which could harm our
business. In addition, Enable and our certified merchants could experience
delays in shipment due to computer systems failures or other problems related to
third party service providers. Delays in shipment could reduce the volume of
orders that we are able to fulfill, increase our delivery costs or cause
customer dissatisfaction with our business.
Our
internally developed software depends on operating systems, database and server
software that was developed and produced by and licensed from third parties. We
have, from time to time, discovered errors and defects in the software from
these third parties and we rely to some extent on these third parties to correct
errors and defects in a timely manner. If we are unable to develop and maintain
satisfactory relationships with these third parties on acceptable commercial
terms, or if the quality of products and services provided by these third
parties falls below a satisfactory standard, we could experience disruptions in
our ability to operate our business.
Our
business may suffer from capacity constraints or system
interruptions.
A
key element of our strategy is to generate a high volume of traffic to our
websites. Our revenues depend substantially on the number of customers who use
our websites to purchase merchandise. Accordingly, the satisfactory performance,
reliability and availability of our websites, transaction-processing systems,
network infrastructure and delivery and shipping systems are critical to our
operating results, as well as to our reputation and ability to attract and
retain customers and maintain adequate inventory and customer service
levels.
Periodically,
we have experienced minor systems interruptions, including Internet disruptions,
which we believe may continue to occur from time to time. Any systems
interruptions, including Internet disruptions that make our websites
inaccessible or reduce our order fulfillment performance, would reduce the
volume of goods we are able to sell, which could harm our business. We are
continually enhancing and expanding our transaction processing systems, network
infrastructure, delivery and shipping systems and other technologies to
accommodate a substantial increase in the volume of traffic on our websites. We
cannot assure you that we will be successful in these efforts or that we will be
able to project accurately the rate or timing of increases, if any, in the use
of our websites or timely expand and upgrade our systems and infrastructure to
accommodate these increases. We cannot assure you that our network or our
suppliers' networks will be able to timely achieve or maintain a sufficiently
high capacity of data transmission, especially if our website traffic increases.
If we fail to achieve or maintain our capabilities for high capacity data
transmission, consumer demand for our services could decline, negatively
impacting our revenues from operations.
16
We
may not be able to sustain or grow our business unless we keep up with rapid
technology changes.
The
Internet and electronic commerce industries are characterized by:
•
rapidly
changing technology;
•
evolving
industry standards and practices that could render our websites and proprietary
technology obsolete;
•
changes
in consumer demands; and
•
frequent
introductions of new services or products that embody new
technologies.
Our
future performance will depend, in part, on our ability to develop, license or
acquire leading technologies, enhance our existing services and respond to
technological advances and emerging industry standards and practices on a timely
and cost-effective basis. Developing websites and other proprietary technology
involves significant technical and business risks. We also cannot assure you
that we will be able to successfully use new technologies or adapt our websites
and proprietary technology to emerging industry standards. We may not be able to
remain competitive or sustain growth if we do not adapt to changing market
conditions or customer requirements.
We
may suffer disruption in our business because of changes in our systems,
facilities and fulfillment activities.
We
believe that our success is dependent in large part upon our ability to provide
prompt and efficient service to our customers. Any failure of our information
management systems or distribution capabilities could impair our ability to
receive and process customer orders and ship products on a timely
basis.
We
expect to upgrade our software and hardware systems on a continuing basis. The
transition to, or upgrading of, our hardware and software systems could result
in delays, failures or execution difficulties that could impair our ability to
receive and process orders and ship products in a timely manner.
To
date, we have had various interruptions to our service because of loss of power
and telecommunications connections. Our insurance coverage may not be adequate
to compensate for all losses that may occur because of any future service
interruptions. Our servers are vulnerable to computer viruses, physical or
electronic break-ins, attempts by third parties to overload our systems and
similar disruptive problems. Any of these problems could cause interruptions,
delays, loss of data or cessation in service to our users.
Technological
or other assaults on our service could harm our business.
We
are vulnerable to coordinated attempts to overload our systems with data,
resulting in denial or reduction of service to some or all of our users for a
period. The occurrence of any such event could reduce our revenue.
Our
inability to adequately protect our proprietary technology could adversely
affect our business.
Our
proprietary technology is one of the keys to our performance and ability to
remain competitive. We rely on a combination of trademark, copyright and trade
secret laws to establish and protect our proprietary rights. We also use
technical measures, confidentiality agreements and non-compete agreements to
protect our proprietary rights. Our uBid and RedTag service marks are registered
in the United States. However, we may not be able to secure significant
protection for our service marks or trademarks. Our competitors or others could
adopt product or service names similar to "uBid" or "RedTag" or our other
service marks or trademarks. Any of these actions by others might impede our
ability to build brand identity and could lead to customer confusion. Our
inability to protect our service mark or trademarks adequately could adversely
affect our business and financial condition, and the value of our brand name and
other intangible assets.
17
We
rely on copyright laws to protect our proprietary software and trade secret laws
to protect the source code for our proprietary software. We generally enter into
agreements with our employees and consultants and limit access to and
distribution of our software, documentation and other proprietary information.
The steps we take to protect our proprietary information may not prevent
misappropriation of our technology, and the agreements we enter into for that
purpose might not be enforceable. A third party might obtain and use our
software or other proprietary information without authorization or develop
similar software independently. It is difficult for us to police the
unauthorized use of our technology, particularly because the global nature of
the Internet makes it difficult to control the ultimate destination or security
of software or other transmitted data. The laws of other countries may not
provide us with adequate or effective protection of our intellectual
property.
We
may infringe on third party intellectual property rights and could become
involved in costly intellectual property litigation.
Other
parties claiming infringement by our software or other aspects of our business
could sue us. We are not currently involved in any suit that would have a
material effect on our business. However, any future claims, with or without
merit, could impair our business and financial condition because they
could:
•
result in
significant litigation costs;
•
divert
the attention of management;
•
divert
resources; or
•
require
us to enter into royalty and licensing agreements that may not be available on
terms acceptable to us or at all.
In
the future, we may also file lawsuits to enforce our intellectual property
rights, to protect our trade secrets, or to determine the validity and scope of
the proprietary rights of others. Litigation over these issues, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could reduce our profitability.
We
may experience unexpected expenses or delays in service enhancements if we are
unable to license third party technology on commercially reasonable
terms.
We
rely on a variety of technology that we license from third parties, such as
Microsoft and Oracle. These third party technology licenses might not continue
to be available to us on commercially reasonable terms or at all. If we are
unable to obtain or maintain these licenses on favorable terms, or at all, we
could experience delays in completing and developing our proprietary
software.
The
listing or sale of pirated, counterfeit or illegal items by third parties may
harm our business and reputation.
We
may be unable to prevent third parties from listing unlawful goods, and we may
be subject to allegations of civil or criminal liability for unlawful activities
carried out by third parties through our website. In the future, we may find it
necessary to implement additional measures to protect further against the
potential liabilities that could require us to spend substantial resources
and/or to reduce revenues by discontinuing certain service offerings. Any costs
incurred because of liability or asserted liability relating to the sale of
unlawful goods or the unlawful sale of goods could harm our revenues, business,
prospects, financial condition and results of operations. Negative publicity
generated because of the foregoing could damage our reputation, harm our
business and diminish the value of the uBid brand name.
18
We
may be liable if third parties misappropriate our customers' personal
information.
If
third parties are able to penetrate our network security or otherwise
misappropriate our customers' personal information or credit card information,
or if we give third parties improper access to our customers' personal
information or credit card information, we could be subject to liability. This
liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims. This liability could
also include claims for other misuse of personal information, including
unauthorized marketing purposes. These claims could result in litigation.
Liability for misappropriation of this information could adversely affect our
business. In addition, the Federal Trade Commission and state agencies have been
investigating various Internet companies regarding their use of personal
information. We could incur additional expenses from the introduction of new
regulations regarding the use of personal information or from government
agencies investigating our privacy practices.
We
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information, such as customer credit card numbers. We cannot
assure you that advances in computer capabilities, new discoveries in the field
of cryptography or other events or developments will not result in a compromise
or breach of the algorithms that we use to protect customer transaction data. If
any such compromise of our security were to occur, it could harm our reputation,
business, prospects, financial condition and results of operations. A party who
is able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. We cannot assure you
that our security measures will prevent security breaches or that failure to
prevent such security breaches will not harm our business, prospects, financial
condition and results of operations.
We
may be subject to product liability claims that could be costly and time
consuming.
We
sell products manufactured by third parties, some of which may be defective. If
any product that we sell were to cause physical injury or injury to property,
the injured party or parties could bring claims against us as the retailer of
the product. Our insurance coverage may not be adequate to cover every possible
claim asserted.
We
may encounter barriers to international expansion, which could limit our future
growth and adversely affect our business and financial condition.
We
do not currently have any website content localized for foreign markets, and may
not be able to establish a global presence. Our expansion into international
markets will require significant management attention and financial
resources.
Engaging
in business on a global level carries inherent risks that could adversely affect
our profitability, such as:
•
differing
regulatory requirements;
•
longer
payment cycles;
•
export
restrictions;
19
•
problems
in collecting accounts receivable;
•
difficulties
in staffing and managing foreign operations;
•
political
instability;
•
difficulties
in protecting our intellectual property rights;
•
fluctuations
in currency exchange rates; and
•
potentially
adverse tax consequences.
In
addition, export laws restrict some types of software that contain encryption
technology and we could become subject to liability for any violations of these
export restrictions. We may not be able to successfully market, sell and
distribute our products in foreign markets. The occurrence of one or more of
these events could have a material adverse effect on our future global
operations, and consequently, on our business and financial condition as a
whole.
Credit
card fraud could adversely affect our business.
We
do not carry insurance against the risk of credit card fraud, so the failure to
control adequately fraudulent credit card transactions could reduce our net
revenues and gross margin. We have implemented technology to help us detect the
fraudulent use of credit card information. However, we may in the future suffer
losses because of orders placed with fraudulent credit card data even though the
associated financial institution approved payment of the orders. Under current
credit card practices, we may be liable for fraudulent credit card transactions
because we do not obtain a cardholder's signature. If we are unable to detect or
control credit card fraud, our liability for these transactions could increase
our cost of doing business and reduce our profitability.
If
one or more states successfully assert that we should collect sales or other
taxes on the sale of our merchandise or the merchandise of third parties that we
offer for sale on our website, our business could be harmed.
We
have not collected nor do we currently collect sales or other similar taxes for
physical shipments of goods into states other than Illinois. One or more local,
state or foreign jurisdictions may seek to impose sales tax collection
obligations on us and other out-of-state companies that engage in online
commerce. Our business could be harmed if one or more states or any foreign
country successfully asserts that it should collect sales or other taxes on the
sale of our merchandise.
Failure
to maintain satisfactory relationships with our suppliers, or the inability to
obtain sufficient quantities of merchandise, could increase merchandise costs
and/or availability.
We
depend upon our suppliers to provide merchandise for sale through our online
marketplace. The availability of merchandise can be unpredictable. Since our
inception, we have sourced merchandise from over 3,600 suppliers. Merchandise
purchased from Hewlett-Packard accounted for 38.1% of net revenues, during the
year ended December 31, 2008. We do not have long-term supply contracts
with any of our suppliers. We cannot be certain that our current suppliers will
continue to sell or otherwise provide merchandise for sale on our online
properties. We also cannot be certain that we will be able to establish new
supplier relationships that ensure merchandise will be available for sale on our
online properties.
20
A
limited number of our suppliers process and ship merchandise directly to our
customers. We have limited control over their shipping procedures, and factors
beyond our control could delay shipments by these suppliers. Most merchandise we
sell carries a warranty supplied either by the manufacturer or the supplier. We
could be compelled to accept returns from customers without receiving
reimbursements from the suppliers or manufacturers if they do not honor their
warranties. If we are unable to develop and maintain satisfactory relationships
with suppliers on acceptable commercial terms, if we are unable to obtain
sufficient quantities of merchandise, if the quality of service provided by
these suppliers falls below a satisfactory standard or if our level of returns
exceeds our expectations, this could significantly harm our
business.
Risks Related to our
Industry
We
may not be able to attract traditional consumers of goods at reasonable
costs.
In
countries such as the U.S., where online commerce has generally been available
for some time, acquiring new users for our services may be more difficult and
costly than it has been in the past. To expand our user base, we must appeal to
and acquire consumers who historically have used traditional means of commerce
to purchase goods. If these consumers prove to be less active than our earlier
users, and we are unable to gain efficiencies in our operating costs, including
the cost of acquiring new customers, this could impact our
profitability.
Anything
that causes our website users to spend less time on their computers, including
seasonal factors and national events, may impact profitability.
Anything
that diverts users of our websites from their customary level of usage could
adversely affect our business. Geopolitical events such as war, the threat of
war or terrorist activity, and natural disasters such as hurricanes or
earthquakes all could adversely affect our profitability. Similarly, our results
of operations historically have varied seasonally because many of our users
reduce their activities on our website with the onset of good weather during the
summer months, and on and around national holidays.
Increasing
governmental regulation of the Internet could harm our business.
We
are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards conducting business on the Internet. However, due
to the increasing popularity and use of the Internet, many laws and regulations
relating to the Internet are being debated at the state and federal levels.
These laws and regulations could cover issues such as user privacy, freedom of
expression, pricing, fraud, quality of products and services, taxation,
advertising, intellectual property rights and information security. Furthermore,
the growth and development of Internet commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on
companies conducting business over the Internet. New laws or regulations may
decrease the growth of the Internet, which, in turn, could decrease the demand
for our Internet auctions and increase our cost of doing business. The
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, auction regulation, sales tax,
libel and personal privacy is uncertain and may take years to
resolve.
Applicability
to the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy could also harm our business. For example, United States
and foreign laws regulate our ability to use customer information and to
develop, buy and sell mailing lists. The vast majority of these laws were
adopted before the advent of the Internet, and do not contemplate or address the
unique issues raised by the Internet. The courts are only beginning to interpret
those laws that do reference the Internet, such as the Digital Millennium
Copyright Act and the CAN-SPAM Act of 2003, and their applicability and reach
are therefore uncertain. These current and future laws and regulations could
harm our business, results of operation and financial
condition.
21
In
addition, several telecommunications carriers have requested that the Federal
Communications Commission regulate telecommunications over the Internet. Due to
the increasing use of the Internet and the burden it has placed on the current
telecommunications infrastructure, telephone carriers have requested the FCC to
regulate Internet service providers and impose access fees on those providers.
If the FCC imposes access fees, the costs of using the Internet could increase
dramatically which could result in the reduced use of the Internet as a medium
for commerce and have a material adverse effect on our Internet business
operations.
Because
our service is available over the Internet and because we sell merchandise to
consumers residing in multiple states, we could be required to qualify to do
business as a foreign corporation in each state in which our services are
available. We are qualified to do business in Illinois and our failure to
qualify as a foreign corporation in a jurisdiction where we are required to do
so could subject us to taxes and penalties for the failure to qualify. Any new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to our business, could increase
our costs of doing business.
Current
and future laws could affect our auctions business.
Many
states and other jurisdictions have regulations governing the conduct of
traditional "auctions" and the liability of traditional "auctioneers" in
conducting auctions. These types of regulations may become applicable to online
auction sites. We are aware that several states and some foreign jurisdictions
have attempted to impose such regulations on other companies operating online
auction sites or on the users of those sites. In addition, some states have laws
or regulations that do expressly apply to online auction site services. We may
incur costs in complying with these laws. We may, from time to time, be required
to make changes in our business that may increase our costs, reduce our
revenues, and cause us to prohibit the listing of some items in certain
locations, or make other changes that may adversely affect our auctions
business.
The
security risks of e-commerce may discourage customers from purchasing goods from
us.
In
order for the e-commerce market to develop successfully, Enable Holdings and
other market participants must be able to transmit confidential information
securely over public networks. Third parties may have the technology or
expertise to breach the security of customer transaction data. Any breach could
cause customers to lose confidence in the security of our website and choose not
to purchase from our website. If someone is able to circumvent our security
measures, he or she could destroy or steal valuable information or disrupt our
operations. Concerns about the security and privacy of transactions over the
Internet could inhibit the growth of the Internet and e-commerce. Our security
measures may not effectively prohibit others from obtaining improper access to
our information. Third parties may target our customers directly with fraudulent
identity theft schemes designed to appear as legitimate communications from us.
Any security breach or fraud perpetrated on our customers could expose us to
increased costs and to risks of loss, litigation and liability and could
seriously disrupt our operations.
Laws
or regulations relating to privacy and data protection may adversely affect the
growth of our Internet business or marketing efforts.
We
are subject to increasing regulation at the federal, state and international
levels relating to privacy and the use of personal user information. For
example, we are subject to various telemarketing laws that regulate the manner
in which we may solicit future suppliers and customers. Such regulations, along
with increased governmental or private enforcement, may increase the cost of
growing our business. In addition, several states have proposed legislation that
would limit the uses of personal user information gathered online or require
online services to establish privacy policies. The Federal Trade Commission has
adopted regulations regarding the collection and use of personal identifying
information obtained from children under 13. Bills proposed in Congress would
extend online privacy protections to adults. Moreover, proposed legislation in
this country and existing laws in foreign countries require companies to
establish procedures to notify users of privacy and security policies, obtain
consent from users for collection and use of personal information, and/or
provide users with the ability to access, correct and delete personal
information stored by the company. We could become a party to a similar
enforcement proceeding. These data protection regulations and enforcement
efforts may restrict our ability to collect demographic and personal information
from users, which could be costly or harm our marketing
efforts.
22
More
individuals are using non-PC devices to access the Internet and versions of our
service developed or optimized for these devices may not gain widespread
adoption by users of such devices.
The
number of individuals who access the Internet through devices other than a
personal computer, such as personal digital assistants, mobile telephones and
television set-top devices has increased dramatically. We originally designed
our services for rich, graphical environments such as those available on desktop
and laptop computers. The lower resolution, functionality and memory associated
with alternative devices may make the use of our services through such devices
difficult, and the versions of our service developed for these devices may not
be compelling to users of alternative devices. As we have limited experience to
date in operating versions of our service developed or optimized for users of
alternative devices, it is difficult to predict the problems we may encounter in
doing so, and we may need to devote significant resources to the creation,
support and maintenance of such versions. If we are unable to attract and retain
a substantial number of alternative device users to our online services, we may
fail to capture a sufficient share of an increasingly important portion of the
market for online services.
Risks Related to Our Common
Stock
There has
been no established trading market for our common stock, which could impair the
value of our investors' investments and our business.
There
has been no established trading market for our common stock. The lack of an
active market may impair the ability to sell shares at the time investors wish
to sell them or at a price considered to be reasonable. The lack of an active
market may also reduce the fair market value of the shares. An inactive market
may also impair our ability to raise capital by selling shares of capital stock
and may impair our ability to acquire other companies or technologies by using
our common stock as consideration.
Investors
may have difficulty trading and obtaining quotations for our common stock, which
could impair their investments and our business.
Our
common stock is currently quoted on the NASD's OTC bulletin board and had its
first trade since it was approved for quotation on January 4, 2006. As a
result, an investor may find it difficult to dispose of, or to obtain accurate
quotations of the price of, shares of our common stock. The lack of an
established trading market severely limits the liquidity of our common stock,
and could depress the market price of our common stock and limit our ability to
raise additional capital.
23
The
price of our common stock has been and may continue to be volatile, which could
lead to losses by investors and costly securities litigation.
The
trading price of our common stock is likely to be highly volatile and could
fluctuate in response to factors such as:
•
actual or
anticipated variations in our operating results;
•
changes
in the market valuations of other Internet or online service
companies;
•
announcements
of technological innovations by us or our competitors;
•
announcements
by the Company or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital commitments;
•
additions
or departures of key personnel;
•
introduction
of new services by the Company or our competitors;
•
sales of
our common stock or other securities in the open market; and
•
other
events or factors, many of which are beyond our control.
The
stock market has experienced significant price and volume fluctuations, and the
market prices of stock in technology companies, particularly Internet-related
companies, have been highly volatile. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against the company. Litigation
initiated against us, whether or not successful, could result in substantial
costs and diversion of our management's attention and resources, which could
harm our business and financial condition.
Securities
analysts may not initiate coverage or continue to cover our common stock and
this may have a negative impact on its market price.
The
trading market for our common stock will depend on the research and reports that
securities analysts publish about us and our business. We do not have any
control over these analysts. There is no guarantee that securities analysts will
cover our common stock. If securities analysts do not cover our common stock,
the lack of research coverage may adversely affect its market price. If we are
covered by securities analysts, and our stock is downgraded, our stock price
would likely decline. If one or more of these analysts ceases to cover us or
fails to publish regular reports on us, we could lose visibility in the
financial markets, which could cause our stock price or trading volume to
decline.
Our
Certificate of Incorporation, Bylaws and the Delaware General Corporation Law
contains anti-takeover provisions, which could discourage or prevent a takeover
even if an acquisition would be beneficial to our stockholders.
Several
provisions of our Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent our change in control
even if that change in control would be beneficial to our stockholders. For
example, only one-third of the members of the board of directors will be elected
at each annual meeting of stockholders, which will make it more difficult for a
potential acquirer to change our management, even after acquiring a majority of
our common stock. These provisions, which cannot be amended without the approval
of two-thirds of the holders of shares of common stock, could diminish the
opportunities for a holder of common stock to participate in tender offers,
including tender offers at a price above the then-current market value of our
common stock. In addition, the board of directors, without further stockholder
approval, may issue preferred stock, with such terms as the board of directors
may determine, which could have the effect of delaying or preventing a change in
control of the Company. The issuance of preferred stock could also adversely
affect
the voting powers of our common stockholders, including the loss of voting
control to others. We are also afforded the protections of Section 203 of
the Delaware General Corporation Law. Section 203 could delay or prevent a
change in control of the Company or could impede a merger, consolidation,
takeover or other business combination involving the Company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company.
24
Item 2. Properties
Our
principal administrative, engineering, merchandising and marketing facilities
total approximately 27,000 square feet and are located in Chicago, Illinois. We
currently lease such facilities for $35,000 per month. The lease expires in
April 2010.
Our
in-house call center is located in Tilton, Illinois. We currently lease this
facility for $3,250 per month. The lease expires in April 2010.
The
Company is currently evaluating its real estate requirements and expects to
enter into new leases or extend the ones currently in place.
Item 3. Legal
Proceedings
From
time to time we may be named in claims arising in the ordinary course of
business. Currently, no legal proceedings or claims are pending against us or
involve us that, in the opinion of our management, could reasonably be expected
to have a material adverse effect on our business or financial
condition.
Item 4. Submission of Matters to a
Vote of Security Holders
No
matters were submitted to a vote of the Company's security holders during the
quarter ended December 31, 2008.
25
EXECUTIVE
OFFICERS
The
following table sets forth our executive officers, their ages and position(s) as
of December 31, 2008:
|
Name
|
Age
|
Position
|
||
|
Jeffrey
D. Hoffman
|
47
|
Chief
Executive Officer
|
||
|
Timothy
E. Takesue
|
40
|
EVP,
Account Management
|
||
|
Miguel
A. Martinez, Jr.
|
53
|
Chief
Financial Officer and Secretary
|
||
|
Glenn
Weisberger
|
50
|
EVP,
Business Development
|
||
|
Amy
Powers
|
32
|
Vice
President, Technology
|
Jeffrey D. Hoffman
Mr. Hoffman was named Chief Executive Officer and joined the uBid.com
holdings Board of Directors on September 24, 2007. He is an accomplished
entrepreneur and innovator establishing a long and winning track record in the
fields of on-line auction and retail, software and entertainment.
Mr. Hoffman was a founding partner of Competitive Technologies, Inc (CTI).,
which offered online travel reservation tools sold directly to travel agencies
and corporations. CTI was ultimately purchased by American Express. He was also
CEO and founding partner of Virtual Shopping, Inc., a leading developer of
patented, proprietary online retail systems, before joining the founding
executive team of his most notable venture, Priceline.com, where
Mr. Hoffman held two CEO titles in the Priceline family of companies. For
his contribution to the creation of the industry's first online retail tools, he
was twice named by the travel and tourism industry as one of its "25 Most
Influential Executives". Mr. Hoffman also serves as Chairman of Adapted
Sports, a charity organization dedicated to bringing sports and team
participation to disabled children nationwide. Mr. Hoffman received his
B.S. in Computer Sciences from Yale University.
Timothy E. Takesue has
over 21 years of merchandising, retail, mail order and e-commerce
experience. On December 29, 2005, Mr. Takesue was named Executive Vice
President, Account Management. In 1997, Mr. Takesue joined uBid, Inc.
as a member of the original management team of officers. During his tenure with
uBid, Inc., he has served in various positions including vice president of
merchandising, senior vice president of merchandising and sales, interim CEO and
acting chief marketing officer. Mr. Takesue became Executive Vice
President, Account Management in April 2003. Mr. Takesue was a part of the
officer team that led uBid, Inc. in the 1998 IPO, 1999 secondary offering,
subsequent sale in 2000 to CMGI and purchase from CMGI in 2003. Mr. Takesue
sits on the advisory board of The Brave Wings Foundation, a Northwestern
Memorial Foundation charity, and attended Wayne State University in Detroit,
Michigan.
Miguel A. Martinez, Jr.
was named Chief Financial Officer in January 2008, prior to that he was Vice
President of Finance of uBid.com Holdings, Inc. He has served as Vice
President of Finance of uBid, Inc. since February 2005. He was appointed as
Secretary of uBid.com Holdings, Inc. in January 2006. Mr. Martinez
brings over 20 years of financial management experience to uBid. Before
joining uBid, from March of 1999 to November 2004, Mr. Martinez was senior
vice president and chief financial officer with Hartford Computer Group, a
leading PC manufacturer, distributor and service company. Mr. Martinez is a
certified public accountant and received a BBA degree from Loyola University in
Chicago, Illinois and is actively involved in several professional
organizations.
Glenn Weisberger joined
Enable Holdings in May of 2008 as Executive Vice President of Business
Development. An accomplished lawyer and Certified Public Accountant with over
20 years experience, Mr. Weisberger established a solid track record
in both the online and entertainment industry's complex legal and financial
arenas, serving in several Chief Financial Officer and General Counsel roles
throughout his career. Most recently, Mr. Weisberger served as both General
Counsel and Chief Financial Officer for Silicon Valley-based Navio
Systems, Inc. Most notably, Mr. Weisberger served as Vice President of
Legal and Business Affairs for Universal Television and Networks Group
/MCA
26
Television
Limited, as well as Chief Financial Officer for Harvey Entertainment.
Mr. Weisberger earned his Bachelor of Science in Business Administration
from California State University and his Juris Doctor from Pepperdine University
School of Law.
Amy Powers is the
Company's Vice President of Technology, and is responsible for directing
strategic and tactical technology planning for the enterprise. Ms. Powers
previously served as the Company's Development Manager. Prior to joining the
Company in 2003, Ms. Powers worked as an independent contractor largely in
the retail sector as a developer. She holds an Applied Information Technology
degree from Information Technology Institute, Halifax, Nova Scotia and a B. S.
degree from Dalhousie University.
27
PART II
Item 5. Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
PRICE RANGE OF COMMON
STOCK
As
of March 23, 2009, there were approximately 277 holders of record of shares
of our common stock.
On
December 31, 2008, the last reported sales price of our shares on the OTC
bulletin board was $0.26. During the first quarter of 2009 through
February 4, 2009, the high sales price of our common stock was $0.48 and
the low sales price was $0.20.
|
2008
|
2007
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 1.15 | $ | 0.51 | $ | 2.70 | $ | 1.12 | ||||||||
|
Second
Quarter
|
$ | 2.34 | $ | 0.56 | $ | 2.00 | $ | 0.90 | ||||||||
|
Third
Quarter
|
$ | 3.25 | $ | 0.75 | $ | 1.85 | $ | 1.00 | ||||||||
|
Fourth
Quarter
|
$ | 0.85 | $ | 0.20 | $ | 1.33 | $ | 0.55 | ||||||||
As
of December 31, 2008, there were 44,862,398 warrants issued for the
purchase of 44,862,398 shares of our common stock at an exercise price ranging
between of $0.10 and $4.50. In addition, there are 2,500,000 shares of common
stock reserved for issuance of stock options and incentive awards pursuant to
our 2005 Equity Incentive Plan.
DIVIDEND POLICY
We
have never declared or paid dividends. We intend to retain earnings, if any, to
support the development of the business and therefore, do not anticipate paying
cash dividends for the foreseeable future. Payment of future dividends, if any,
will be at the discretion of our board of directors after taking into account
various factors, including current financial condition, operating results and
current and anticipated cash needs. Our board of directors has the authority to
issue preferred stock and to fix dividend rights that may have preference to
common shares.
RECENT SALES OF UNREGISTERED
SECURITIES
For
a discussion of recent sales of unregistered securities, please see our Current
Reports on Form 8-K filed through December 31, 2008.
28
Item 6. Selected Financial
Data
The
selected financial data of the Company should be read in conjunction with the
Condensed Consolidated Financial Statements and related notes included in this
report.
Enable Holdings, Inc and
Subsidiaries
Selected
Yearly Financial Data
(Dollars
in Thousands, except per share amounts)
|
Year Ended
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Consolidated
Income Statement Data:
|
||||||||||||||||||||
|
Net
Revenues
|
$ | 31,579 | $ | 43,061 | $ | 66,559 | $ | 84,592 | $ | 87,002 | ||||||||||
|
Cost
of Revenues
|
26,992 | 33,333 | 56,421 | 73,062 | 75,837 | |||||||||||||||
|
Gross
Profit
|
4,587 | 9,728 | 10,138 | 11,530 | 11,165 | |||||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||
|
General
and administrative
|
15,805 | 13,255 | 12,973 | 13,045 | 12,112 | |||||||||||||||
|
Sales
and marketing
|
2,820 | 3,753 | 4,987 | 4,996 | 4,260 | |||||||||||||||
|
Total
operating expenses
|
18,625 | 17,008 | 17,960 | 18,041 | 16,372 | |||||||||||||||
|
Loss
From Operations
|
(14,038 | ) | (7,280 | ) | (7,822 | ) | (6,511 | ) | (5,207 | ) | ||||||||||
|
Interest
(Expense) Income, net
|
(1,978 | ) | 179 | 267 | (2,538 | ) | (1,102 | ) | ||||||||||||
|
Miscellaneous
(Expense) Income
|
(24 | ) | 60 | — | — | — | ||||||||||||||
|
Net
Loss
|
(16,040 | ) | (7,041 | ) | (7,555 | ) | (9,049 | ) | (6,309 | ) | ||||||||||
|
Preferred
Stock Dividends
|
— | — | — | (1,216 | ) | (60 | ) | |||||||||||||
|
Net
Loss available to Common Shareholders
|
$ | (16,040 | ) | $ | (7,041 | ) | $ | (7,555 | ) | $ | (10,265 | ) | $ | (6,369 | ) | |||||
|
Net
Loss per share—Basic and Diluted
|
$ | (0.87 | ) | $ | (0.37 | ) | $ | (0.37 | ) | $ | (3.88 | ) | $ | (2.56 | ) | |||||
|
Weighted
Average Shares—Basic and Diluted
|
18,492,477 | 18,864,777 | 20,260,689 | 2,643,936 | 2,487,107 | |||||||||||||||
|
Year Ended
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
||||||||||||||||||||
|
Total
current assets
|
$ | 4,039 | $ | 14,499 | $ | 22,052 | $ | 36,120 | $ | 11,817 | ||||||||||
|
Total
assets
|
6,384 | 15,331 | 23,578 | 36,644 | 12,146 | |||||||||||||||
|
Total
current liabilities, excluding debt
|
7,290 | 4,479 | 3,843 | 9,652 | 7,030 | |||||||||||||||
|
Long-term
debt, including current maturities
|
— | — | — | 410 | 11,320 | |||||||||||||||
|
Redeemable
Common Stock(1)
|
— | — | — | 12,000 | — | |||||||||||||||
|
Total
shareholders equity (deficit)
|
(906 | ) | 10,852 | 19,735 | 14,582 | (6,204 | ) | |||||||||||||
(1)
Represents
2,666,668 shares of common stock subject to redemption after the merger with
Cape Coastal Trading Corporation and the first private offering. Such shares
were redeemed in February 2006.
29
Enable Holdings, Inc and
Subsidiaries
Selected
Quarterly Financial Data
(Dollars
in Thousands, except per share amounts)
|
(Dollars
in Thousands, except per share data)
|
||||||||||||||||||||||||||||||||
|
Q4
2008
|
Q3
2008
|
Q2
2008
|
Q1
2008
|
Q4
2007
|
Q3
2007
|
Q2
2007
|
Q1
2007
|
|||||||||||||||||||||||||
|
Net
Revenues
|
$ | 7,095 | $ | 8,917 | $ | 8,426 | $ | 7,141 | $ | 10,071 | $ | 9,720 | $ | 13,663 | $ | 9,607 | ||||||||||||||||
|
Cost
of Revenues
|
6,183 | 8,428 | 7,112 | 5,269 | 7,951 | 7,533 | 10,794 | 7,055 | ||||||||||||||||||||||||
|
Gross
Profit
|
912 | 489 | 1,314 | 1,872 | 2,120 | 2,187 | 2,869 | 2,552 | ||||||||||||||||||||||||
|
Operating
Expenses:
|
||||||||||||||||||||||||||||||||
|
General
and administrative
|
4,717 | 3,916 | 3,418 | 3,753 | 3,594 | 3,313 | 3,326 | 3,022 | ||||||||||||||||||||||||
|
Sales
and marketing
|
467 | 1,059 | 799 | 495 | 436 | 1,117 | 1,131 | 1,069 | ||||||||||||||||||||||||
|
Total
operating expenses
|
5,184 | 4,975 | 4,217 | 4,248 | 4,030 | 4,430 | 4,457 | 4,091 | ||||||||||||||||||||||||
|
Loss
from operations
|
(4,272 | ) | (4,486 | ) | (2,903 | ) | (2,376 | ) | (1,910 | ) | (2,243 | ) | (1,588 | ) | (1,539 | ) | ||||||||||||||||
|
Interest
(Expense) Income, net
|
(1,697 | ) | (199 | ) | (74 | ) | (9 | ) | 14 | 50 | 51 | 124 | ||||||||||||||||||||
|
Miscellaneous
(Loss) Income
|
(24 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||
|
Net
Loss
|
$ | (5,993 | ) | $ | (4,685 | ) | $ | (2,977 | ) | $ | (2,385 | ) | $ | (1,896 | ) | $ | (2,193 | ) | $ | (1,537 | ) | $ | (1,415 | ) | ||||||||
|
Basic
and Diluted Net Loss per share
|
$ | (0.33 | ) | $ | (0.25 | ) | $ | (0.16 | ) | $ | (0.13 | ) | $ | (0.10 | ) | $ | (0.12 | ) | $ | (0.08 | ) | $ | (0.07 | ) | ||||||||
|
Weighted
Average Shares— Basic
and Diluted
|
18,802,142 | 18,638,678 | 18,325,786 | 18,197,783 | 18,197,783 | 18,197,783 | 18,761,005 | 20,333,333 | ||||||||||||||||||||||||
Unaudited
quarterly data above should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations." This information
has been derived from our unaudited consolidated financial statements that, in
our opinion, reflect all recurring adjustments necessary to fairly present our
financial information when read in conjunction with our Consolidated Financial
Statements and Notes. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any future
period.
30
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations
You should read the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations together with our consolidated financial statements and notes to
those consolidated financial statements included elsewhere in this Annual
Report. This discussion contains forward-looking statements that are based on
our management's current expectations, estimates and projections about our
business and operations. Our actual results may differ from those currently
anticipated and expressed in such forward-looking statements. The terms "Enable
Holdings" "we," "us," and "our," refer to Enable Holdings, Inc. and our
subsidiaries.
Overview
We
operate leading online websites located at www.uBid.com and www.RedTag.com, respectively.
The two websites offer high quality excess, new, overstock, close-out,
recertified and limited supply brand name merchandise to both consumers and
businesses using auction style and fixed price formats. We offer consumers a
trustworthy buying environment in which we continually monitor and certify
activity to minimize the potential for fraud by certifying all merchants and
processing 100% of all transactions between buyers and sellers. Our online
properties offer 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
current business model provides value for consumers, manufacturers,
distributors, retailers and other approved third party merchants. Consumers shop
in a trustworthy and secure online environment 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 properties 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 currently consists of three distinct business channels: Certified
Merchant (CM), Managed Supply and Cash Recovery.
We
sell merchandise through the CM 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 CM 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. Through the Managed Supply channel, we
sell inventory that is consigned to us. The inventory is either stored at our
warehouse or at the sellers'. We purchase merchandise outright in the Cash
Recovery 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. 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 properties are available 24 hours a day, seven days a week and we
currently offer over 200,000 items each day. Since the first offer of product in
December 1997, our marketplace has facilitated over $1 billion in net
revenues and has registered over five million members.
We
conduct live liquidation events at various times throughout the year. Live sales
are conducted over a short period of time (usually a week) and all the
merchandise is sold locally.
In
the first quarter of 2008, the Company began transforming its business model
from a seller marketplace to an asset recovery solution. Asset recovery is a
rapidly growing industry with revenues of $38.5 billion in 2004 and is
expected to climb to over $63.1 billion in 2009, according to D.F. Blumberg
Associates Inc., a logistics research and consulting firm.
31
The
Company began changing its business model in the first quarter of 2008 and
continued implementing those changes through the end of 2008. The seven
proprietary selling solutions within the five operating divisions
are:
•
uBid.com: Our
flagship website, which has operated for 11 years. The website allows
merchants to sell excess inventory and allows consumers to buy products in an
auction as well as fixed price format.
•
RedTag.com : Our
new fixed price internet site launched in August 2008, offers name brand
merchandise with a low shipping and handling fee of only $1.95.
•
RedTag Live: Our
live liquidation group, dedicated to selling through the traditional in-store
sales and live liquidation sales.
•
Dibu Trading Co.:
A wholesale inventory liquidation company dedicated to
Business-to-Business solutions, providing manufacturers and distributors the
ability to sell large quantities of excess inventory. For example, when a
retailer needs to liquidate a large quantity of inventory, they contact us to
find a buyer that will buy the entire inventory in a single transaction. Our B2B
experience allows us to present deals to multiple interested buyers to achieve
the most profitable transaction.
•
Commerce Innovations:
A software service company which licenses auction software to third
party companies. Companies, businesses and governments can use our platform to
sell excess furniture, appliances, autos, and other surplus. This allows them to
utilize a trusted platform while reducing live auction costs, as well as an
efficient way to reach a wider target audience. The Company is currently in the
process of developing and testing this hosted solution and anticipates its
launch in the second half of 2009.
The
Company's financial results for the twelve months ended December 31, 2008
have been negatively impacted by the planned change in the business model and
the severe global economic downturn. To achieve the objective of becoming the
leading excess inventory provider, the Company has made significant investments
in increased staffing levels and information technology infrastructure,
specifically in the first nine months of 2008. We have also made major changes
to our traditional operations as we transition to the new business
model.
As
part of the transition to a new business model, we significantly reduced our
marketing spending while realigning the marketing and advertising resources to
better position them to each new operating division. The sales and marketing
expenses decreased 24.9% in the fiscal year 2008 compared to the fiscal year
2007. The result was a significant decline in the visitor traffic to our website
and decreased revenue volume. The visitor traffic in the fiscal year ended
December 31, 2008 decreased 10.8% compared to 2007.
The
Company also made the strategic decision to eliminate outside advertisement on
its website. Historically advertisement sales have added a revenue stream but
have negatively impacted overall sales by redirecting visitor traffic from the
Company's website to competing websites. As a result of the elimination of
advertisement sales, outside advertisement revenues decreased $885 or 82.2% for
the year ended December 2008.
The
transition from an auction marketplace to an asset solutions company also
required that operationally we improve the efficiency of our platform to enhance
the user experience. The Company significantly decreased the number of listings,
eliminating the unprofitable listings, while preparing to migrate fixed price
listings to the RedTag platform based on the new business model. The reduction
in the number of unprofitable listings improved our auction success rate and
provides efficiencies to both buyers and sellers on our
platform.
32
In
line with the above changes, we have suffered increased losses compared to the
prior year. The losses were consistent with management projections as we
strategically transform the Company to a leading excess inventory solutions
company. The transition to the new business model was primarily completed in
2008 and we expect all aspects of the new model to be fully implemented in the
first half of 2009.
Critical
Accounting Policies and Estimates
Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of our financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, net revenues and expenses, as well as
the disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about carrying values of our assets and liabilities that are
not readily apparent from other sources. Actual results could differ from those
estimates, and we include any revisions to our estimates in our results for the
period in which the actual amounts become known.
Our
management considers an accounting estimate to be critical if it requires
assumptions to be made that were uncertain at the time the estimate was made or
changes in the estimate or different estimates that could have been selected
that could have a material impact on our results of operations or financial
condition.
We
believe the critical accounting policies described below affect the more
significant judgments and estimates used in the preparation of our financial
statements.
Revenue
Recognition
We
adhere to the guidelines and principles of sales recognition described in Staff
Accounting Bulletin No. 104, Revenue Recognition. Under SAB 104, sales
are recognized when the title and risk of loss are passed to the customer, there
is persuasive evidence of an arrangement for the sale, delivery has occurred
and/or services have been rendered, the sales price is fixed or determinable and
collectability is reasonably assured. Under these guidelines, we recognize a
majority of our sales, including revenue from product sales and gross outbound
shipping and handling charges, upon shipment of the product to the customer. For
all product sales shipped directly from suppliers to customers, we bear credit
risk. The CM Program allows certified merchants to sell product through our
website. Therefore, while we are the primary obligor to whom payment is due, we
bear no inventory or returns risk, so we record only our commission as revenue
at the time of shipment.
Sales
are reported net of estimated returns and allowances which we estimate based
upon recent historical information such as return rates experience. Management
also considers any other current information and trends in making estimates. If
actual sales return and allowances are greater than estimated by management,
additional expenses may be incurred.
Allowance
for Doubtful Accounts Receivable
We
maintain an allowance for doubtful accounts receivable based upon estimates of
future collection. We extend credit to our business customers based upon an
evaluation of each business customer's financial condition and credit history,
and generally do not require collateral. Our business customers' financial
conditions and credit and payment histories are evaluated in determining the
adequacy of our allowance for doubtful accounts. If estimated allowances for
uncollectible accounts subsequently prove insufficient, additional allowance may
be required.
33
Reserve
for Inventory Obsolescence
We
maintain allowances for the valuation of inventory by estimating the obsolete or
unmarketable inventory based on the difference between inventory cost and market
value determined by general market conditions, nature, age and type of each
product. If the inventory reserve subsequently proves insufficient, additional
inventory write-downs may be required, which are recorded as an increase in cost
of revenues.
Long
Lived Assets
We
test certain long-lived assets or groups of assets for recoverability whenever
events or changes in circumstances indicate that we may not be able to recover
the assets' carrying amount. When events or changes in circumstances dictate an
impairment review of a long-lived asset or group, we will evaluate
recoverability by determining whether the undiscounted cash flows expected to
result from the use and eventual disposition of that asset or group cover the
carrying value at the evaluation date. If the undiscounted cash flows are not
sufficient to cover the carrying value, we will measure any impairment loss as
the excess of the carrying amount of the long-lived asset or group over its fair
value (generally determined by a discounted cash flows model or independent
appraisals).
Stock
Based Compensation
The
Company's 2005 Equity Incentive Plan ("2005 Equity Incentive Plan") is an
equity-based compensation plan in-place to provide incentives, and to attract,
motivate and retain the highest qualified employees, directors, consultants and
other third party service providers. The 2005 Equity Incentive Plan enables the
board to provide equity-based incentives through grants or awards of stock
options and restricted stock (collectively, "Incentive Awards") to present and
future employees, consultants, directors, and other third party service
providers.
A
total of 2,500,000 shares of common stock have been reserved for issuance under
the 2005 Equity Incentive Plan. If an Incentive Award granted pursuant to the
2005 Equity Incentive Plan expires, terminates, expires and is unexercised or is
forfeited, or if any shares are surrendered to the Company in connection with an
Incentive Award, the shares subject to such award and the surrendered shares
will become available for future awards under the 2005 Equity Incentive Plan.
Options generally vest over a period of four years and have a ten year
contractual life.
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 (stock options and restricted stock) based on the fair value
of the award. The Company has elected to use the "modified prospective"
transition method for stock options granted prior to January 1, 2006, but
for which the vesting period is not complete. Under this transition method, the
Company accounts for such awards on a prospective basis, with expense being
recognized in its statement of operations beginning in the first quarter of 2006
and continuing over the remaining requisite service period based on the grant
date fair value estimated in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). The Company recognizes these compensation costs on a
straight-line basis over the requisite service period of the award which is
generally the option vesting term of four years.
Income
Taxes
We
account for income taxes under the liability method, under which we recognize
deferred income taxes by applying enacted statutory tax rates applicable to
future years to differences between the tax bases and financial reporting
amounts of our existing assets and liabilities and net operating loss
carryforwards. We have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation allowance
against our deferred tax assets. In making this assessment, we are required to
consider all available positive and negative evidence to determine whether,
based on such evidence, it is more likely than not that some portion or all of
our net deferred assets will be realized in future periods.
34
Executive
Commentary
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:
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Quarter
4
|
Quarter
3
|
Quarter
2
|
Quarter
1
|
Quarter
4
|
Quarter
3
|
Quarter
2
|
Quarter
1
|
|||||||||||||||||||||||||
|
uBid.com
|
||||||||||||||||||||||||||||||||
|
GMS
(in thousands)
|
$ | 12,374 | $ | 14,385 | $ | 17,117 | $ | 16,671 | $ | 21,765 | $ | 22,731 | $ | 23,304 | $ | 23,340 | ||||||||||||||||
|
Number
of Orders (in thousands)
|
94 | 95 | 97 | 95 | 115 | 129 | 136 | 133 | ||||||||||||||||||||||||
|
Average
Order Value
|
$ | 131.38 | $ | 151.77 | $ | 175.97 | $ | 174.58 | $ | 188.49 | $ | 176.78 | $ | 171.49 | $ | 175.64 | ||||||||||||||||
|
Visitors
to Bidders %
|
2.93 | % | 3.32 | % | 3.61 | % | 4.08 | % | 3.09 | % | 2.70 | % | 2.88 | % | 3.06 | % | ||||||||||||||||
|
Auctions
Closed (in thousands)
|
383 | 215 | 181 | 455 | 780 | 715 | 619 | 539 | ||||||||||||||||||||||||
|
Auction
Success Rate
|
15.03 | % | 26.64 | % | 30.85 | % | 12.94 | % | 8.55 | % | 10.88 | % | 12.54 | % | 14.13 | % | ||||||||||||||||
|
RedTag.com(1)
|
||||||||||||||||||||||||||||||||
|
GMS
(in thousands)
|
$ | 474 | $ | 304 | — | — | — | — | — | — | ||||||||||||||||||||||
|
Number
of Orders (in thousands)
|
5 | 3 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Average
Order Value
|
$ | 96.43 | $ | 119.25 | — | — | — | — | — | — | ||||||||||||||||||||||
|
Visitors
to Bidders %
|
30.19 | % | 15.14 | % | — | — | — | — | — | — | ||||||||||||||||||||||
|
Auctions
Closed (in thousands)
|
36 | 14 | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Auction
Success Rate
|
8.46 | % | 8.68 | % | — | — | — | — | — | — | ||||||||||||||||||||||
(1)
RedTag.com
was first launched in August 2008.
(Auctions
in these metrics refer to auctions and fixed price listings)
Gross
Merchandise Sales (GMS): Gross Merchandise Sales
differ from GAAP revenue in that gross bookings represents the gross sales price
of goods sold by us (including sales through our CM 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
to Bidder %: The percentage of visitors that bid
on an auction item. We use this as a measure of the effectiveness of
advertising.
Auctions
Closed: A closed auction is an auction that has
ended because it reached the scheduled closing time for that auction. Auctions
closed include both successful auctions and auctions with no bids.
Auction
Success Rate: The percentage of closed auctions
that were successful and received at least one bid.
35
Segment
Information and Financial Comparison
Prior
to the change in the business model in 2008, the Company was organized into four
operating segments: Direct sales channel, uBid Certified merchant ("UCM") sales
channel, Wholesale (Business to Business) sales channel and Other.
For
the Direct sales channel, the Company was responsible for conducting the auction
or listing the fixed sale price for merchandise owned by the Company, billing
the customer, shipping the merchandise to the customer, processing merchandise
returns and collecting accounts receivable.
For
the UCM sales channel, the Company was 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 bore no physical inventory loss
or risk for returns related to these sales and recorded commission revenue at
the time of shipment.
For
the Wholesale sales channel, the Company sold product purchased directly to
other businesses. Revenues were recognized upon shipment.
All
other revenues consisted primarily of advertising revenue derived principally
from the sale of online advertisements. Advertising revenues on contracts are
recognized as "impressions" (i.e., the number of times that an
advertisement appears in pages viewed by users of our websites).
Impressions are delivered over the term of the agreement where such agreements
provide for minimum monthly, quarterly or annual advertising
commitments.
The
revenue and gross profit breakdown of the Company based on the segments prior to
the change in the business model is as follows:
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(Dollars
in Thousands)
|
||||||||||||
|
Net
Revenue
|
||||||||||||
|
Direct
|
$ | 14,499 | $ | 31,135 | $ | 50,382 | ||||||
|
UCM
|
4,544 | 5,533 | 4,686 | |||||||||
|
Business
to Business
|
9,324 | 5,258 | 10,790 | |||||||||
|
Live
Events
|
2,999 | — | — | |||||||||
|
Other(1)
|
213 | 1,135 | 701 | |||||||||
|
Total
|
$ | 31,579 | $ | 43,061 | $ | 66,559 | ||||||
|
Gross
Profit (Loss)
|
||||||||||||
|
Direct
|
$ | (378 | ) | $ | 2,469 | $ | 3,955 | |||||
|
UCM
|
4,544 | 5,533 | 4,686 | |||||||||
|
Business
to Business
|
(306 | ) | 592 | 817 | ||||||||
|
Live
Events
|
514 | — | — | |||||||||
|
Other(1)
|
213 | 1,134 | 680 | |||||||||
|
Total
|
$ | 4,587 | $ | 9,728 | $ | 10,138 | ||||||
|
Gross
Profit %
|
||||||||||||
|
Direct
|
-2.6 | % | 7.9 | % | 7.9 | % | ||||||
|
UCM
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Wholesale
|
-3.3 | % | 11.3 | % | 7.6 | % | ||||||
|
Other(1)
|
100.0 | % | 99.9 | % | 97.0 | % | ||||||
|
Total
|
14.5 | % | 22.6 | % | 15.2 | % | ||||||
(1)
Other Net
Revenue and Gross profit includes $21, $58 and $37 related to Bidville.com and
$192, $1,077 and $643 related to advertising revenues, for 2008, 2007 and 2006,
respectively.
Bidville.com
was an intangible asset bought in 2006 and fully amortized in 2008. See purchased intangible assets
in the notes to the financial statements. Advertising revenues were eliminated
during 2008.
36
During
the first quarter of 2008, Enable Holdings commenced efforts to change its
business model. Concurrent with this change, we reorganized the segments based
on the business units. Each segment provides a combination of seller solutions
for sellers to efficiently liquidate their inventory. The seller solutions
offered by the Company are: Certified Merchant (CM), Managed Supply and Cash
Recovery. Each of the business segments, except commerce innovations, can offer
the three seller solutions. The five business segments are listed
below:
1.
uBid.com:
Our flagship website, which has operated for
11 years. The website allows merchants to sell excess inventory and allows
consumers to buy products in an auction as well as fixed price
format.
2.
RedTag.com:
Our new fixed price internet site launched in August
2008, offers name brand merchandise with a low shipping and handling fee of only
$1.95.
3.
RedTag Live:
Our live liquidation group, dedicated to selling through
the traditional in-store sales and live liquidation sales.
4.
Dibu Trading Company:
A wholesale inventory liquidation company dedicated to
Business-to-Business solutions, providing manufacturers and distributors the
ability to sell large quantities of excess inventory. For example, when a
retailer needs to liquidate a large quantity of inventory, they contact us to
find a buyer that will buy the entire inventory in a single transaction. Our B2B
experience allows us to present deals to multiple interested buyers to get the
most profitable one.
5.
Commerce Innovations:
A software service company which licenses auction
software to third party companies. Companies, businesses and governments can use
our platform to sell excess furniture, appliances, autos, and other surplus.
This allows them to utilize a trusted platform while reducing live auction
costs, as well as an efficient way to reach a wider target audience. The Company
is currently in the process of developing and testing this hosted solution and
anticipates its launch in the second half of 2009.
The
revenue and gross profit breakdown of the Company based on the segments after
the transition is as follows:
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(Dollars
in Thousands)
|
||||||||||||
|
Net
Revenue
|
||||||||||||
|
uBid.com(1)
|
$ | 18,624 | $ | 37,803 | $ | 55,769 | ||||||
|
RedTag.com
|
632 | — | — | |||||||||
|
RedTag
LIVE
|
2,999 | — | — | |||||||||
|
Dibu
Trading Co.
|
9,324 | 5,258 | 10,790 | |||||||||
|
Commerce
Innovations
|
— | — | — | |||||||||
|
Total
|
$ | 31,579 | $ | 43,061 | $ | 66,559 | ||||||
|
Gross
Profit (Loss)
|
||||||||||||
|
uBid.com(1)
|
$ | 4,283 | $ | 9,136 | $ | 9,321 | ||||||
|
RedTag.com
|
96 | — | — | |||||||||
|
RedTag
LIVE
|
514 | — | — | |||||||||
|
Dibu
Trading Co.
|
(306 | ) | 592 | 817 | ||||||||
|
Commerce
Innovations
|
— | — | — | |||||||||
|
Total
|
$ | 4,587 | $ | 9,728 | $ | 10,138 | ||||||
|
Gross
Profit %
|
||||||||||||
|
uBid.com(1)
|
23.0 | % | 24.2 | % | 16.7 | % | ||||||
|
RedTag.com
|
15.2 | % | — | — | ||||||||
|
RedTag
LIVE
|
17.1 | % | — | — | ||||||||
|
Dibu
Trading Co.
|
-3.3 | % | 11.3 | % | 7.6 | % | ||||||
|
Commerce
Innovations
|
— | — | — | |||||||||
|
Total
|
14.5 | % | 22.6 | % | 15.2 | % | ||||||
(1)
uBid.com
Net Revenue and Gross profit includes $21, $58 and $37 related to Bidville.com
and $192, $1,077 and $643 related to advertising revenues, for 2008, 2007 and
2006, respectively. Bidville.com was an intangible asset bought in 2006 and
fully amortized in 2008. See purchased intangible assets
in the notes to the financial statements. Advertising revenues were eliminated
during 2008.
37
Comparison
of year ended December 31, 2008 and 2007
(Dollars in
thousands, except per share data and average order value)
In
the year ended December 31, 2008 a number of factors impacted the Company's
financial result. During the first quarter of 2008, the Company initiated the
transition of our business model from a marketplace seller to an asset recovery
company.
The
transition required us to significantly increase investment in certain business
areas resulting in an increased net loss in 2008 compared to 2007. During 2008,
the Company incurred costs of $4,184 in the transitioning. The planned
investment in our new business model required us to utilize available cash and
revert to borrowing on our credit facility to fund operations. Due to increasing
losses in the third quarter of 2008 we were no longer able to meet the minimum
availability requirements on our existing credit facility. Further impacting us
was the broader economic conditions in 2008 when the U.S. and worldwide
economies experienced a severe downturn. Uncertainty in credit markets
negatively impacted the Company's borrowing and capital raising ability and
employment uncertainty negatively affected consumer spending, leading to
declines in revenues and margins.
As
part of the transition from a seller marketplace to an asset recovery company,
the Company implemented a new ERP system which will allow us to enter
international markets and increase our operational capabilities. The approximate
software and implementation cost of the new ERP system was $1,021. In addition,
to expand into diverse channels, we developed a private auction platform and a
fixed price platform. The cost related to each was $458 and $119, respectively.
The related personnel expense to implement the two projects was approximately
$288.
As
the Company transitioned its business model, it incurred additional expenses
related to business development and investor relations of $504 and $140,
respectively. We also introduced a new business unit—RedTag Live, which
facilitates in-store sales and live events. The operating losses related to the
RedTag Live business unit in 2008 was $1,194.
To
facilitate the above changes the Company increased its staffing levels. The
number of employees at the end of 2007 was 79 employees and reached peak levels
in August of 2008 of 106 employees (including temporary workforce). We ended
2008 with a staffing level of 72 employees.
Expense
of $461 was incurred relating to an increase in marketing department employees
and consultants. In order to facilitate our website functionality we eliminated
ineffective marketing campaigns. Advertising spending was decreased by $1,442 or
44.5% in 2008, a significant decrease compared to 2007. The Company also made
the strategic decision to eliminate outside advertising revenues. The
advertising revenues historically provided a revenue stream to our Company but
also directed visitors away from our websites. The elimination of advertising
revenues improved the visitor retention on our sites.
As
the Company changed its business model to an asset recovery solution, we
eliminated unprofitable product categories and inefficient and unprofitable
sellers.
The
change in the business model was primarily completed in 2008 and we expect all
aspects of the new model to be fully implemented in the first half of
2009.
Revenue
•
Web
Properties—consists of uBid.com and RedTag.com
Revenues
for our two web properties decreased $18,547 or 49.1% compared to 2007. During
2008 we eliminated several unprofitable product categories and certified
merchants and eliminated the advertising revenue.
Orders
for both the Cash Recovery and the Certified Merchant channels decreased 26% and
24%, respectively from the prior year. The number of active CM listers decreased
22% in 2008, as we eliminated the ones that do not fit with our new asset
recovery model. In addition to the decrease in the number of orders, the average
order value for the Cash Recovery channel decreased $130 or 35.9% per order. The
Certified Merchant channel also experienced an average order value decline of
$13 or 9.4%.
38
The
Cash Recovery channel was negatively impacted by the Company's cash position as
well as the overall economic climate. The company's lack of cash and open credit
terms impacted the Company's ability to offer this solution to its customers.
The decline in the Company's cash position was primarily due to the change in
the business model in 2008 as well as operating losses.
The
advertising revenue was $192 compared to $1,077 in 2007. The company made the
strategic decision to eliminate advertising revenue to increase the customer
retention rate on our websites.
Traffic
to the web properties decreased by 2.6 million visitors or 10.7%, primarily
due to the decrease in advertising spend. The number of auctions and items for
sale at fixed prices decreased by 1.3 million or 51.6% as unprofitable
categories and sellers were eliminated. While auctions and items decreased, the
number of successful auctions declined slightly by 49,538 or 18.9%.
•
Off Line
Sales Channels—consists of Dibu Trading Co. and RedTag Live
Dibu
Trading revenues increased $4,066 or 77.3% compared to the same period of the
prior year. Through the second quarter ending June 30, 2008, revenues were
53.4% above the prior year. In the third and fourth quarters, revenues declined
as our lack of ability to purchase inventory due to cash and credit limitations
negatively impacted sales.
Red
Tag Live was launched in the second quarter of 2008. Sales were $2,999. Red Tag
Live held a physical liquidation sale in Florida and two events in Illinois. Red
Tag Live also operates a small outlet store in Port Charlotte,
Florida.
Gross
Profit
•
Web
Properties—consists of uBid.com and RedTag.com
Gross
profit decreased $4,757 or 52.1% primarily as a result of the decrease in net
revenue volume. The gross profit percentage decreased 1.5% from 24.2% to 23.0%
at December 31, 2007 and 2008, respectively. The gross profit percentage
declined as the overall retail prices within consumer electronics decreased due
to the economic conditions negatively impacting consumer spending.
The
gross profit decrease was primarily noted in the third and fourth quarters. As
cash availability decreased we were unable to offer a cash recovery solution to
sellers, resulting in an inability to purchase merchandise inventory and
generate revenues.
•
Off Line
Sales Channels—consists of Dibu Trading Co. and RedTag Live
Dibu
Trading gross profit for the year was a negative $306 or 3.3%. During the third
and fourth quarters we accepted lower selling prices to expedite sales in an
effort to generate cash, resulting in negative gross profits incurred on certain
sales.
RedTag
Live gross profit for the year was $514 and the gross profit percentage was
17.1%.
Expenses
Sales,
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, common area maintenance, depreciation,
credit card processing charges, bad debt expenditures, legal and accounting fees
as follows.
SG&A
expenses for the year ended 2008 were $18,625, an increase of $1,617 compared to
the year ended 2007.
39
General &
Administrative (G&A) expense increased $2,550 to $15,805 primarily in the
following areas:
•
Stock
based compensation expense, a noncash charge increased by $1,324. The issuance
of approximately 45 million warrants triggered a change of control
provision. The change of control provision triggered the vesting of
approximately 62% of the employee options and all of the outstanding shares of
restricted stock. This accelerated vesting resulted in an expense of
$1,006.
•
RedTag
Live, which was launched as a major operation in 2008, had expenses of $1,708 in
2008 compared to none in 2007. The RedTag Live expenses primarily consist of
salary, facility and advertising revenues for our facility in
Florida.
•
Salary
and benefit expenses increased $668 or 12.1% as additional staff was brought on
to develop the web properties—uBid.com and RedTag.com. As part of the
transition, employee staffing increased from 79 at the end of 2007 to 93. As we
achieved our initial objectives of the change in the business model, we
decreased the staff levels to 72 at the end of 2008.
The
increases in the G&A expense above were partially offset by:
•
Decreases
of $607 and $188 in warehouse and facility expenses respectively, both of which
decreased due to the decrease in sales revenue and inventory
levels.
•
Decrease
in bad debt expense of $431. The bad debt expense decrease in 2008 was because
in 2007, the Company expensed an uncollectible account receivable of
approximately $352.
•
Decrease
in depreciation & amortization expense of $346, which was primarily due
to a decrease in amortization expense related to the Bidville.com intangible
asset. The Bidville.com intangible asset was fully amortized in 2008 with
amortization expense of $107 and $495, incurred in 2008 and 2007,
respectively.
Advertising
expense decreased $1,442 to $1,799 as we continued to eliminate less effective
marketing programs. The cost to acquire a bidder or buyer decreased $1.19 or
31.6% to $2.58 per bidder during the year ended December 31, 2008 compared
to $3.77 per bidder in the 2007.
Other
Expense
Net
interest expense was $1,978 for the year ended December 31, 2008 versus net
interest income of $179 for the year ended December 31, 2007. The increase
in interest expense is a result of the bridge loan and the amortization of the
related warrants, commitment fees and payment of fees to Wells Fargo. The
interest expense related to the bridge loan warrants was $987. We paid $350 in
commitment fees to Fusion Capital. In addition, we paid termination and
forbearance fees to Wells Fargo of $125 and $50, respectively. See the liquidity section for
additional discussion related to the Wells Fargo and Fusion Capital
fees.
Net
Loss
The
Company experienced a net loss of $16,040 or $0.87 per share for the year ended
December 31, 2008 compared to a net loss of $7,041 or $0.37 per share for
the year ended December 31, 2007. Net loss per share increased due to the
aforementioned change in the business model and the interest expense related to
the bridge loan.
40
Comparison
of year ended December 31, 2007 and 2006
(Dollars in
thousands, except per share data and average order value)
Revenue
•
Web
Properties—consists of uBid.com
Revenues
for our two web properties decreased $17,966 or 32.2% compared to 2006. Traffic
to the web properties decreased by 3.4 million visitors or 11.2%, primarily
due to a 25.9% reduction in advertising spending in 2007. The numbers of orders
increased by 42,000 while the average order value decreased by $12 per order.
The decrease in average order value was primarily due to the decline in the
prices of consumer electronics.
•
Off Line
Sales Channels—consists of Dibu Trading Co.
Dibu
Trading revenues decreased $5,532 or 51.3% in 2007, compared to 2006. In the
fourth quarter of 2006, Dibu Trading was reorganized along with the release of
several staff members. No additional staff was added to this division until
November 2007, resulting in the decreased revenues in 2007 compared to
2006.
Gross
Profit
•
Web
Properties—consists of uBid.com
Gross
profit decreased $185 or 2.0% primarily as a result of the decrease in volume.
The gross profit percentage increased 7.5% from 16.7% to 24.2% for the year
ended December 31, 2006 and 2007, respectively. Generally, overall margins
fluctuate based on several factors, including product mix by our direct consumer
business.
•
Off Line
Sales Channels—consists of Dibu Trading Co.
Dibu
Trading gross profit decreased $225 in 2007, compared to 2006.The gross profit
percentage increased 3.7% in 2007, from 7.6% to 11.3%, in 2006 and 2007,
respectively.
Expenses
SG&A
expenses for the year ended December 31, 2007 were $17,008, a decrease of
$952 from the year ended December 31, 2006.
Sales
and marketing expenses decreased $1,234 to $3,753 in 2007 compared to $4,987 in
2006. During 2007 we eliminated less effective marketing efforts and decreased
the advertising spend by 26.0% resulting in an 11.2% reduction in visitor
traffic. The cost per bidder decreased from $4.62 in the prior year to $3.78 at
December 31, 2007, an 18.2% decrease.
General
and administrative expenses increased by $282 or 2.2% primarily due to a $615
increase in bad debt expense and a $439 increase in depreciation and
amortization. There were other expense increases of $307 for consulting
expenses. The increases were offset by a $308 decrease in stock-based
compensation as older more expensive shares were forfeited, a decrease of $735
in salary and benefits due to lower headcount and a decrease of $260 in
warehouse expense due to lower volumes.
Other
Expense
Net
interest income was $179 for the year ended December 31, 2007 compared to
$267 for the year ended December 31, 2006. Net interest income results from
interest received on short term investments of excess cash proceeds less
interest incurred on credit line borrowings. The lower cash balances during 2007
resulted in decreased interest income.
Net
Loss
The
Company incurred a net loss of $7,041 or $0.37 per share for the year ended
December 31, 2007 compared to a net loss of $7,555 or $0.37 per share for
the year ended December 31, 2006.
41
Liquidity
and Capital Resources
(Dollars in thousands, except
per share data)
Historically,
our primary sources of capital have been cash flow from operations and from
private offerings of our common stock and warrants to acquire our common stock.
Since 2005, we raised an aggregate of $29,500 from private offerings. In October
2008, we obtained a $2,550, 90-day bridge loan, part of which was extended
through April 2009.
Net
cash used in operating activities for the years ended December 31, 2008,
2007 and 2006 was $8,139, $4,801 and $9,870, respectively. The 2008 increase was
primarily due to increase in net loss and accounts receivable. Partially
offsetting was the cash provided by the increase in accounts payable as well as
a decrease in merchandise inventories. Inventory levels and accounts payable
balances fluctuate based on cash availability as well as availability of product
in the market. The 2007 decrease was primarily due to decreases in accounts
receivable, prepaid expenses, lower net loss and increases in accounts payable.
Partially offsetting the decreases were increased cash used for inventory and
accrued expenses. The 2006 increase was primarily due to decreases in accounts
payable and accrued expenses offset by lower net losses and lower
inventories.
Net
cash used in investing activities was $2,092 and $180 for the years ended
December 31, 2008 and 2007, respectively. Net cash provided by investing
activities was $5,349 for the year ended December 31, 2006. The 2008
increase is primarily attributable to the increase in capital spending. During
2007, we purchased and began implementing a new Enterprise Resource System (ERP)
from Microsoft. The system and installation costs incurred during 2008 were
approximately $1,550. The first phase of the conversion was completed during the
first quarter of 2009.
Net
cash provided by financing activities was $2,606 for the year ended
December 31, 2008. Net cash used in financing activities was $2,080 and
$1,870 for the years ended December 31, 2007 and 2006, respectively. The
cash provided in 2008 is primarily attributable to the proceeds of $2,550
related to the bridge loan (described below). The $2,080 cash used in 2007 was
primarily due to the purchase of treasury stock in April 2007. The $1,870 cash
used at December 31, 2006 was primarily due to payments made under the
flooring facility and the second part of the private offering as described
below.
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 provided for advances to the Company of up to a maximum of
$25,000. The amount actually available to the Company varied 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 were secured by all of the Company's
assets. The initial term of the Agreement was three years, expiring on
April 28, 2009. Up to $7,000 of the maximum amount was available for
irrevocable, standby and documentary letters of credit. Advances under the
Credit Agreement incurred interest at a base rate (Wells Fargo Bank's prime
rate) or LIBOR plus 2.5%. The Credit Agreement requires a prepayment fee of $500
if the Company terminated the Credit Agreement during its first year, $400 if it
terminated the Credit Agreement during its second year and $100 if the Company
terminated 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 was obligated
contractually by a restrictive lock box arrangement. The Credit Agreement also
required the Company to pay a variety of other fees and expenses, including
minimum monthly interest of $10.
42
On
July 25, 2008, Wells Fargo Bank notified the Company of the Company's
failure to meet the minimum excess availability requirement of $3,500. Since the
Company did not meet the minimum excess availability requirement as stated in
the agreement, the financial covenants went into effect which required that the
Company demonstrate net earnings at the levels stated in the agreement. Due to
the change in the business model of the Company in 2008, it was unable to meet
the covenants. On October 15, 2008, the Company paid off-the outstanding
balance owed to Wells Fargo Bank terminating the Credit Agreement specified
above. Pursuant to the pay-off agreement, the Company paid a forbearance
agreement fee of $50 and early termination fee of $125. Wells Fargo has also
released its security interest in the Company's collateral.
On
July 15, 2008 the Company signed a $10,000 common stock purchase agreement
with Fusion Capital Fund II, LLC, an Illinois limited liability company
("Fusion Capital"). Concurrently with entering into the common stock purchase
agreement, the Company entered into a registration rights agreement with Fusion
Capital. Under the registration rights agreement, the Company agreed to
file a registration statement related to the transaction with the U.S.
Securities and Exchange Commission ("SEC") covering the shares that have been
issued or may be issued to Fusion Capital under the common stock purchase
agreement. After the SEC has declared effective the registration statement
related to the transaction, as long as the Company's common stock is trading
above $0.75 per share, the Company has the right over a 24-month period to sell
shares of common stock to Fusion Capital from time to time in amounts ranging
from $60 to $1,000, depending on certain conditions set forth in the agreement,
up to an aggregate of $10,000.
In
consideration for entering into the agreement, upon execution of the common
stock purchase agreement the Company issued to Fusion Capital 230,074 shares of
the Company's common stock as a commitment fee. Also, the Company will issue to
Fusion Capital an additional 230,074 shares as a commitment fee pro rata as the
Company receives the $1,000 of future funding. The purchase price of the shares
related to the $1,000 of future funding will be based on the prevailing market
prices of the Company's common stock at the time of sales without any fixed
discount, and the Company will control the timing and amount of any sales of
shares to Fusion Capital. Fusion Capital shall not have the right or the
obligation to purchase any shares of the Company's common stock on any business
day that the price of the Company's common stock is below $0.75 per share. The
common stock purchase agreement may be terminated by the Company at any time at
the Company's discretion without any cost to the Company. There are no negative
covenants, restrictions on future funding, penalties or liquidated damages in
the agreement. The proceeds received by the Company under the common stock
purchase agreement will be used to provide working capital to further implement
the Company's recently announced strategic change to focus on liquidating excess
inventories.
The
Company issued the initial 230,074 shares as a commitment fee, at the agreed
upon price of $1.52 per share, determined based on the 20-day moving average as
of the agreement acceptance date of June 25, 2008. The Company filed the
registration statement on September 5, 2008 and recorded the common stock
transaction in the quarter ended September 30, 2008. In a letter dated
October 3, 2008, the SEC notified the Company that the S-1 registration
statement has been selected for review. The Company elected not to respond to
the SEC notification because the stock price of the Company was trading well
below the agreed upon price of $0.75, which would have obliged Fusion Capital to
not provide the capital. In December 2008, the Company wrote off the commitment
fee issued in conjunction with this agreement. The commitment fee was paid in
the form of common stock of the Company.
Due
to the recent worldwide economic downturn, the Company continues to experience
difficulty raising capital to finance ongoing operations. The difficulty in
raising capital during this severe economic downturn was compounded by the fact
that the Company's largest shareholder, The Petters Group Worldwide and in
particular Thomas J. Petters, is currently the subject of a Federal
investigation. Although the Company is not controlled by the Petters Group
Worldwide, nor does Thomas J. Petters have any control over the Company's
management or day to day operations, the investigation negatively impacted the
Company's financing efforts.
43
During
the fourth quarter of 2008, the Company received a $2,550 bridge loan provided
by multiple accredited investors, a portion of which was provided by related
parties (See Note 18). The bridge loan is in the form of an Unsecured
Debentures and bear interest at the rate of 18% per annum. In consideration, the
investors received warrants to purchase an aggregate of 12,750,000, 25,500,000
and 3,200,000 shares of the Company's common stock at an exercise price of
$0.20, $0.10 and $0.25 per share, respectively, for an aggregate of 41,450,000
shares of the Company's common stock. The warrants are exercisable immediately
for a period of 5 years from the agreement date. The investors may elect to
convert the accrued and unpaid interest into the common stock of the
Company.
On
January 16, 2009, the Company received extensions from certain accredited
investors who previously made total commitments for an aggregate of $2,550 in
the form of a 90 day bridge loan. The original maturity date of such loans
was January 12, 2009, January 29, 2009 and February 19, 2009, and
the maturities have been extended by an additional 90 days. The investors
made such extensions pursuant to Debenture Modification and Extension Agreements
which call for an extension of the loans for 90-days after their original 90-day
terms. Although the bridge loan holders are under no obligation to extend the
maturity of the loan and can call the loan payment upon maturity, the Company
expects to request further extension until it gains access to credit to be able
to pay off this loan. During the first quarter of 2009, the Company paid off
$100 associated with the bridge loan.
As
a result of the tightening credit market (including uncertainties with respect
to financial institutions and the global credit markets), extreme volatility in
energy costs and other macro-economic challenges currently affecting the economy
of the United States and other parts of the world, customers or vendors may
experience serious cash flow problems and as a result, may modify, delay or
cancel plans to purchase the Company's products and vendors may significantly
and quickly increase their prices or reduce their output. Additionally, if the
Company has not been successful in securing financing, we may not be able to
pay, or may delay payment of, accounts payables owed to our vendors which may
adversely affect the Company's ability to procure additional materials and
services needed to meet our customers' requirements. If the Company is unable to
secure long-term financing or capital, the operations will be difficult to
continue for the near term.
For
more information on financing arrangements that the Company is currently
pursuing and intend to pursue, refer to footnote 20 of the financial
statements.
However,
there is no assurance that we will be successful in these efforts, which raises
substantial doubt as to our ability to continue as a going concern.
Contractual
Obligations
As
of December 31, 2008, our contractual obligations consisted of the $2,550
bridge loan and operating leases.
The
bridge loan is in the form of an Unsecured Debenture and bears interest at the
rate of 18% per annum. As of December 31, the outstanding balance on the
bridge loan was $2,588 including the unpaid interest of $38. See footnote #10
for more discussion.
The
operating leases consist of base rent under our current leases for both our
corporate office and call center. Under both leases we also pay additional rent
for our proportionate share of common area maintenance, real estate taxes and
other operating expenses.
Minimum
payments for the bridge loan and the operating leases are as
follows:
|
Total
|
Less than 1 Year
|
1-3 Years
|
3-5 Years
|
After 5
Years
|
|||||||||
|
$
|
3,266,476
|
$
|
3,095,176
|
$
|
171,301
|
$
|
—
|
$
|
—
|
||||
44
Off-Balance
Sheet Arrangements
As
of December 31, 2008, 2007 and 2006, we had no off-balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K,
promulgated by the SEC.
Inflation
Inflation
has not had a material impact upon operating results, and we do not expect it to
have such an impact in the near future. There can be no assurances, however,
that our business will not be adversely affected by inflation.
Recent
Pronouncements
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measures . SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued Statement of Financial Staff Position ("FSP") No. SFAS 157-2,
"Effective Date of FASB
Statement No. 157" which permits a one-year deferral for the
implementation of SFAS 157 with regards to non-financial assets and
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). In October 2008, the FASB
issued FSP No. SFAS 157-3, which provides guidance in determining the fair
value of a financial asset when the market for that financial asset is not
active. We have adopted the provisions of SFAS No. 157 related to financial
assets and liabilities as of January 1, 2008. The application of this
standard did not have a material impact on our results of operations or
financial condition. We elected to defer adoption of SFAS No. 157 for
non-financial assets and liabilities and we do not anticipate that full adoption
in fiscal 2009 will have a material impact on our results of operations or
financial condition.
On
February 15, 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities—Including an Amendment of FASB Statement No. 115"
("SFAS 159"). This standard permits an entity to measure financial
instruments and certain other items at estimated fair value. Most of the
provisions of SFAS No. 159 are elective; however, the amendment to FASB
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," applies to all entities that own trading and available-for-sale
securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair
value option (a) may generally be applied instrument by instrument,
(b) is irrevocable unless a new election date occurs, and (c) must be
applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity (i) makes
that choice in the first 120 days of that year, (ii) has not yet
issued financial statements for any interim period of such year, and
(iii) elects to apply the provisions of FASB 157. The Company did not
elect the fair value option pursuant to SFAS 159.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. SFAS 141R
is effective for fiscal years beginning after December 15, 2008, and will
be adopted in the first quarter of fiscal 2009. The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition.
45
SFAS 141R
is applied prospectively to business combinations for which the acquisition date
is on or after January 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS 160 is
effective for fiscal years beginning after December 15, 2008.The Company
does not have any non-controlling interests and thus SFAS 160 has no effect
on Company's financials.
In
June 2008, the FASB ratified EITF No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock"
("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions. EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15,
2008. The Company is currently assessing the impact of the adoption of
EITF 07-5 on its consolidated financial statements. We currently do not
anticipate adoption of EITF No. 07-5 will have a significant effect on our
consolidated financial statements.
46
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk
We
currently have no exposure to risks associated with foreign 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.
Item 8. Financial Statements and
Supplementary Data
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49
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50
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51
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52
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47
Independent Auditors' Report
Board of
Directors and stockholders
Enable
Holdings, Inc.
Chicago,
Illinois
We
have audited the accompanying consolidated balance sheets of Enable
Holdings, Inc. (the "Company") as of December 31, 2008 and 2007 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2008.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enable
Holdings, Inc. at December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 20 to the financial
statements, the Company has a working capital deficit, suffered recurring losses
from operations and has a net capital deficiency that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 20. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO
Seidman, LLP
Chicago,
Illinois
April 6,
2009
48
ENABLE HOLDINGS, INC. and Subsidiaries
Consolidated
Condensed Balance Sheets
(Dollars
in Thousands, except per value per share)
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 99 | $ | 7,724 | ||||
|
Restricted
investments
|
462 | 212 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of $635 and $467,
respectively
|
820 | 648 | ||||||
|
Merchandise
inventories, less reserve for obsolescence of $548 and $409,
respectively
|
2,274 | 5,156 | ||||||
|
Prepaid
expenses and other current assets
|
384 | 759 | ||||||
|
Total
Current Assets
|
4,039 | 14,499 | ||||||
|
Property
and Equipment, net
|
2,143 | 725 | ||||||
|
Purchased
Intangible Assets, net
|
202 | 107 | ||||||
|
Total
Assets
|
$ | 6,384 | $ | 15,331 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Accounts
payable
|
$ | 4,016 | $ | 2,766 | ||||
|
Bridge
loan payable, net of discount of $987
|
1,563 | — | ||||||
|
Accrued
expenses:
|
||||||||
|
Product
cost
|
619 | — | ||||||
|
Other
|
692 | 1,141 | ||||||
|
Deferred
rent
|
30 | 258 | ||||||
|
Flooring
facility
|
370 | 314 | ||||||
|
Total
Current Liabilities
|
7,290 | 4,479 | ||||||
|
Shareholders'
Equity (Deficit)
|
||||||||
|
Common
stock, $.001 par value (200,000,000 shares authorized as of
December 31, 2008 and December 31, 2007; 18,826,678 and
18,197,783 shares issued and outstanding, respectively as of
December 31, 2008 and December 31, 2007)
|
$ | 20 | $ | 20 | ||||
|
Treasury
stock, 2,135,550 shares of common stock
|
(2,242 | ) | (2,242 | ) | ||||
|
Stock
warrants
|
10,249 | 8,086 | ||||||
|
Additional
paid-in-capital
|
39,368 | 37,248 | ||||||
|
Accumulated
deficit
|
(48,301 | ) | (32,260 | ) | ||||
|
Total
Shareholders' Equity (Deficit)
|
$ | (906 | ) | $ | 10,852 | |||
|
Total
Liabilities and Shareholders' Equity (Deficit)
|
$ | 6,384 | $ | 15,331 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
49
ENABLE HOLDINGS, INC. and Subsidiaries
Consolidated
Condensed Statement of Operations
(Dollars
in Thousands, except per share amounts)
|
Year Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
Revenues
|
$ | 31,579 | $ | 43,061 | $ | 66,559 | ||||||
|
Cost
of Revenues
|
26,992 | 33,333 | 56,421 | |||||||||
|
|
||||||||||||
|
Gross
Profit
|
4,587 | 9,728 | 10,138 | |||||||||
|
|
||||||||||||
|
Operating
Expenses
|
||||||||||||
|
General
and administrative
|
15,805 | 13,255 | 12,973 | |||||||||
|
Sales
and marketing
|
2,820 | 3,753 | 4,987 | |||||||||
|
Total
operating expenses
|
18,625 | 17,008 | 17,960 | |||||||||
|
|
||||||||||||
|
Loss
From Operations
|
(14,038 | ) | (7,280 | ) | (7,822 | ) | ||||||
|
Interest
(Expense) Income, net
|
(1,978 | ) | 179 | 267 | ||||||||
|
Miscellaneous
(Expense) Income
|
(24 | ) | 60 | — | ||||||||
|
|
||||||||||||
|
Net
Loss
|
$ | (16,040 | ) | $ | (7,041 | ) | $ | (7,555 | ) | |||
|
|
||||||||||||
|
Net
Loss per share—Basic and Diluted
|
$ | (0.87 | ) | $ | (0.37 | ) | $ | (0.37 | ) | |||
|
|
||||||||||||
|
Weighted
Average Shares—Basic and Diluted
|
18,492,477 | 18,864,777 | 20,260,689 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
50
ENABLE HOLDINGS, INC. and Subsidiaries
Consolidated
Statement of Shareholders' Equity (Deficit)
(Dollars
in Thousands)
|
Common Stock
|
Treasury Stock
|
|||||||||||||||||||||||||||||||
|
Stock
Warrants
|
Paid-in
Capital
|
Accumulated
Deficit
|
||||||||||||||||||||||||||||||
|
Shares
|
Dollars
|
Shares
|
Dollars
|
Total
|
||||||||||||||||||||||||||||
|
Balance,
December 31, 2005
|
19,399,334 | $ | 17 | $ | 6,322 | $ | 25,907 | $ | — | $ | — | $ | (17,664 | ) | $ | 14,582 | ||||||||||||||||
|
Second
private offering(1)
|
333,332 | 3 | 1,560 | 11,937 | — | — | — | 13,500 | ||||||||||||||||||||||||
|
Stock
compensation expense
|
— | — | — | 708 | — | — | — | 708 | ||||||||||||||||||||||||
|
Second
private offering costs(1)
|
600,667 | — | 204 | (1,704 | ) | — | — | — | (1,500 | ) | ||||||||||||||||||||||
|
Net
Loss
|
— | — | — | — | — | — | (7,555 | ) | (7,555 | ) | ||||||||||||||||||||||
|
Balance,
December 31, 2006
|
20,333,333 | $ | 20 | $ | 8,086 | $ | 36,848 | — | $ | — | $ | (25,219 | ) | $ | 19,735 | |||||||||||||||||
|
Stock
compensation expense
|
— | — | — | 400 | — | — | — | 400 | ||||||||||||||||||||||||
|
Common
stock and warrants repurchase(2)
|
(2,135,550 | ) | — | — | — | 2,135,550 | (2,242 | ) | — | (2,242 | ) | |||||||||||||||||||||
|
Net
Loss
|
— | — | — | — | — | — | (7,041 | ) | (7,041 | ) | ||||||||||||||||||||||
|
Balance,
December 31, 2007
|
18,197,783 | $ | 20 | $ | 8,086 | $ | 37,248 | 2,135,550 | $ | (2,242 | ) | $ | (32,260 | ) | $ | 10,852 | ||||||||||||||||
|
Stock
compensation expense
|
— | — | — | 1,723 | — | — | — | 1,723 | ||||||||||||||||||||||||
|
Common
stock issuance(3)
|
150,000 | — | — | 202 | — | — | — | 202 | ||||||||||||||||||||||||
|
Common
stock issuance(4)
|
230,074 | — | — | 350 | — | — | — | 350 | ||||||||||||||||||||||||
|
Common
stock issuance(5)
|
248,821 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Warrants
issued for services(6)
|
— | — | 188 | (156 | ) | — | — | — | 32 | |||||||||||||||||||||||
|
Warrants
issued in conjunction with debt(7)
|
— | — | 1,975 | — | — | — | — | 1,975 | ||||||||||||||||||||||||
|
Net
Loss
|
— | — | — | — | — | — | (16,040 | ) | (16,040 | ) | ||||||||||||||||||||||
|
Balance,
December 31, 2008
|
18,826,678 | $ | 20 | $ | 10,249 | $ | 39,367 | 2,135,550 | $ | (2,242 | ) | $ | (48,300 | ) | $ | (906 | ) | |||||||||||||||
(1)
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 $13,500.
The Company also redeemed the 2,666,668 shares of common stock issued in
connection to the merger and the first private offering that were subject to
redemption at a price of $4.50 per share (and then reissued these shares without
the redemption feature as part of the 3,000,000 shares sold). The Company also
issued 600,667 shares of common stock (valued at $4.50 per share) to
shareholders of Cape Coastal prior to merger and uBid's financial advisor,
Calico Capital Group. In addition, the Company issued additional warrants to
purchase 90,000 shares of it's common stock to its placement agents on the same
terms as described above. The second part of the private offering resulted in no
net cash proceeds being retained by the Company. Issuance costs, including the
value of the warrants and the shares issued to Calico Capital Group, were
$4,407.
(2)
On
April 25, 2007, the Company entered into a stock repurchase agreement with
a group of private investors under common management to repurchase 2,135,550
shares of the Company's common stock and warrants to purchase 580,937 shares of
the Company's common stock held by such private investors at a combined price of
$1.05 for the company stock and for the warrants for an aggregate purchase price
of $2,242. These shares and warrants repurchased in this privately negotiated
transaction were originally acquired by the private investors in the Company's
private placement that initially closed on December 29, 2005. The
repurchase represented 11% of the common stock and warrants
outstanding.
(3)
150,000
shares of common stock issued for the acquisition of www.redtag.com URL at
$1.35/share.
(4)
230,074
shares of common stock issued as a commitment fee at $1.52/share.
(5)
248,821
shares of restricted common stock issued in exchange for previously issued stock
options. 767,000 stock options were converted into a total of 255,657 shares of
restricted common stock, of which 248,821 are vested and 6,836 are forfeited, as
of December 31, 2008. The stock options were cancelled upon issuance of
such restricted common stock.
(6)
Issued
warrants to purchase 90,000 shares of common stock to an investor relations
company. The face value of the warrants is $188, of which $156 was allocated to
paid in capital, based on a $32 fair value.
(7)
Issued
warrants to purchase 41,450,000 shares of common stock in conjunction with the
issuance of Bridge Loan. Per APB 14, The fair value of the warrants of
$8,700 was allocated to warrants and the debt based on the relative fair value
of each. The fair value allocated to the warrants is $1,975.
The
accompanying notes are an integral part of these consolidated financial
statements.
51
ENABLE HOLDINGS, INC. and Subsidiaries
Consolidated
Condensed Statement of Cash Flows
(Dollars
in Thousands)
|
Years Ended
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
Flows From Operating Activities
|
||||||||||||
|
Net
loss
|
$ | (16,040 | ) | $ | (7,041 | ) | $ | (7,555 | ) | |||
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||||||
|
Depreciation
and amortization
|
531 | 876 | 438 | |||||||||
|
Non-cash
stock compensation expense
|
1,723 | 400 | 708 | |||||||||
|
Interest
on Warrants issued 90 day Bridge Loan
|
988 | — | — | |||||||||
|
Warrants
issued for services
|
32 | — | — | |||||||||
|
Commitment
fee
|
350 | — | — | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
(340 | ) | 911 | (659 | ) | |||||||
|
Provision
for bad debts
|
168 | 251 | 155 | |||||||||
|
Merchandise
inventories
|
2,882 | (1,102 | ) | 1,935 | ||||||||
|
Prepaid
expenses and other current assets
|
375 | 430 | (542 | ) | ||||||||
|
Accounts
payable
|
1,250 | 526 | (2,217 | ) | ||||||||
|
Accrued
expenses
|
170 | (245 | ) | (2,198 | ) | |||||||
|
Deferred
rent
|
(228 | ) | 193 | 65 | ||||||||
|
Net
cash used in operating activities
|
(8,139 | ) | (4,801 | ) | (9,870 | ) | ||||||
|
Cash
Flows From Investing Activities
|
||||||||||||
|
Capital
expenditures
|
(1,842 | ) | (182 | ) | (717 | ) | ||||||
|
Intangible
assets
|
— | — | (723 | ) | ||||||||
|
Change
in restricted cash
|
(250 | ) | — | — | ||||||||
|
Change
in restricted investments
|
— | 2 | 6,789 | |||||||||
|
Net
cash (used in) provided by investing activities
|
(2,092 | ) | (180 | ) | 5,349 | |||||||
|
Cash
Flows From Financing Activities
|
||||||||||||
|
Change
in flooring facility
|
56 | 162 | (1,460 | ) | ||||||||
|
Redemption
of common stock
|
— | — | (12,000 | ) | ||||||||
|
Common
stock and warrant repurchase
|
— | (2,242 | ) | 13,500 | ||||||||
|
Fees
paid in conjunction with merger and offerings
|
— | — | (1,500 | ) | ||||||||
|
Payments
on long-term debt
|
— | — | (410 | ) | ||||||||
|
Proceeds
from 90 day Bridge Loan
|
2,550 | — | — | |||||||||
|
Net
cash provided by (used in) financing activities
|
2,606 | (2,080 | ) | (1,870 | ) | |||||||
|
Net
Decrease in Cash and Cash Equivalents
|
(7,625 | ) | (7,061 | ) | (6,391 | ) | ||||||
|
Cash
and Cash Equivalents, beginning of period
|
7,724 | 14,785 | 21,176 | |||||||||
|
Cash
and Cash Equivalents, end of period
|
$ | 99 | $ | 7,724 | $ | 14,785 | ||||||
|
Supplemented
Cash Flow Disclosure
|
||||||||||||
|
Cash
paid for interest
|
$ | 425 | $ | 260 | $ | 275 | ||||||
|
Non-cash
Investing Activity(1)
|
203 | — | — | |||||||||
|
Warrants
and stock issued as stock issuance costs
|
— | — | 2,907 | |||||||||
(1)
Issuance
of common stock for www.RedTag.com
URL
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
52
Enable Holdings, Inc.
Notes
to Consolidated Financial Statements
(Dollars
in Thousands, except per share data)
1.
Organization and Operations
Enable
Holdings, Inc. (the "Company" or "Enable"), formerly uBid.com
Holdings, Inc., operates leading on-line websites that enable 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. Through the
Company's websites, located at www.uBid.com and www.RedTag.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.
uBid,
Inc. commenced operations in 1997 primarily selling computer and consumer
electronics on our online auction style marketplace as a wholly-owned subsidiary
of PC Mall. In December 1998, uBid completed an initial public
offering.
During
the first quarter of 2008, Enable Holdings commenced it efforts to change its
business model. Concurrent with this change, we changed the name of the Company
to Enable Holdings and reorganized the segments based on the business units.
Each segment provides a combination of seller solutions for sellers to
efficiently liquidate their inventory. The segments are listed
below:
1.
uBid.com:
Our flagship website, which has operated for
11 years. The website allows merchants to sell excess inventory and allows
consumers to buy products in an auction as well as fixed price
format.
2.
RedTag.com:
Our new fixed price internet site launched in August
2008, offers name brand merchandise with a low shipping and handling fee of only
$1.95.
3.
RedTag Live:
Our live liquidation group, dedicated to selling through
the traditional in-store sales and live liquidation sales.
4.
Dibu Trading Company:
A wholesale inventory liquidation company dedicated to
Business-to-Business solutions, providing manufacturers and distributors the
ability to sell large quantities of excess inventory. For example, when a
retailer needs to liquidate a large quantity of inventory, they contact us to
find a buyer that will buy the entire inventory in a single transaction. Our B2B
experience allows us to present deals to multiple interested buyers to get the
most profitable one.
5.
Commerce Innovations:
A software service company which licenses auction
software to third party companies. Companies, businesses and governments can use
our platform to sell excess furniture, appliances, autos, and other surplus.
This allows them to utilize a trusted platform while reducing live auction
costs, as well as an efficient way to reach a wider target audience. The Company
is currently in the process of developing and testing this hosted solution and
anticipates its launch in the second half of 2009.
53
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
2.
Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those
estimates.
Year-End
The
Company's fiscal year ends on December 31.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash and cash equivalents include
financial instruments that potentially subject the Company to a concentration of
credit risk. The Company maintains its cash balances in two institutions and has
concentration of credit risk to the extent deposits may exceed the federally
insured limits.
Restricted
Investments
The
Company maintains restricted collateral invested in money market accounts and
are used as security for the Company's office lease and purchases from certain
suppliers. Interest on the money market account is earned at approximately 2.0%
per annum.
The
Company is required to maintain Letters of Credit collateralized by restricted
investments to support credit lines with certain suppliers. For 2007, a maximum
of $250 was available under the credit line described in Note 9 eliminating
the need for restricted investments.
Accounts
Receivable
Accounts
receivable consist of amounts due from customers, businesses, and credit cards
billed for which payment has not yet been received at year end. An allowance for
doubtful accounts is maintained at a level management believes is sufficient to
cover potential losses based on historical trends and known current
factors.
Activity
relating to the allowance for doubtful accounts is summarized as
follows:
|
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | 467 | $ | 215 | $ | 60 | ||||||
|
Charged
to costs and expenses
|
340 | 282 | 155 | |||||||||
|
Write-offs,
retirements and recoveries
|
(172 | ) | (30 | ) | — | |||||||
|
Balance,
end of year
|
$ | 635 | $ | 467 | $ | 215 | ||||||
54
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
2.
Summary of Significant Accounting Policies (Continued)
Merchandise
Inventories
Merchandise
inventories consist of merchandise purchased for resale and are valued at the
lower of specifically identified cost or market. The Company establishes
allowances for damages, excess and obsolete inventory equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions.
Property
and Equipment
Property
and equipment are stated at cost and depreciated/amortized on a straight-line
basis over the estimated useful lives of the related assets as
follows:
|
Furniture
and fixtures
|
7 years
|
|
|
Computer
equipment
|
3 years
|
|
|
Leasehold
improvements
|
Life
of lease
|
Maintenance
and repairs are charged to expense as incurred. Major betterments are
capitalized and depreciated over the remaining useful lives of the respective
assets. Gains and losses on disposal of assets are credited or charged to
income.
Purchased
Intangible Assets
Purchased
intangible assets consist primarily of a trademark and customer relationships.
These assets are amortized over their estimated useful lives of twelve to
twenty-four months, in accordance with the Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets
("SFAS 142").
Long-Lived
Assets
Long-lived
assets are reviewed for impairment whenever events or circumstances indicate the
remaining useful life of any long-lived assets may warrant revision or that the
remaining carrying value of such assets may not be recoverable. When factors
indicate that such assets should be evaluated for possible impairment, the
Company uses an estimate of the undiscounted cash flows over the remaining life
of the asset in measuring whether the asset is recoverable. No impairment has
been recognized for the years ended December 31, 2008 and
2007.
Financial
Instruments
The
carrying amounts reported in the balance sheet for cash, cash equivalents,
restricted investments, accounts receivable, flooring facility, accounts
payable, accrued expenses and current maturities of long term debt approximate
fair value because of the short-term nature of these amounts.
Revenue
Recognition
The
Company sells merchandise under three types of arrangements, cost recovery,
managed supply and certified merchant (CM).
55
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
2.
Summary of Significant Accounting Policies (Continued)
For cost
recovery sales, the Company is responsible for conducting the auction 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 managed supply 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. CM is
identical to managed supply sales, except that the Company is not resposonsible
for conducting the auctions. The Company bears no physical inventory loss or
returns risk related to these sales. The Company records commission revenue at
the time of shipment. Commission revenues recognized under managed supply and CM
arrangements were $4,544, $5,533 and $4,686 for the periods ended
December 31, 2008, 2007 and 2006, respectively.
Shipping
and Handling Costs
Shipping
costs that are billable to the customer are included in revenue and all shipping
costs that are payable to vendors are included in cost of revenues in the
accompanying consolidated statements of operations. Handling costs consisting
primarily of the third party logistics warehouse costs are included in general
and administrative expenses and for the years ended December 31, 2008, 2007
and 2006 were $551, $560 and $767, respectively.
Merchandise
Return Policy
The
Company's return policy, for all selling arrangements, is that merchandise sold
by the Company can be returned within 15 days. Returns are subject to a 15%
restocking fee which are included in revenues. Restocking fees for the periods
ended December 31, 2008, 2007 and 2006 were $26, $62 and $81, respectively.
However, the Company, although not obligated to do so, may accept merchandise
returns outside the 15-day period if a product is defective or does not conform
to the specifications of the item sold at auction, and attempts to work with its
customers to resolve complaints about merchandise. The Company provides an
accrual for estimated future returns at the time of shipment based on historical
experience.
Advertising
Costs
The
Company has marketing relationship agreements with various online companies such
as portal networks, contextual sites, search engines and affiliate partners.
Agreements have varying terms including 1-14 day cancellation clauses.
Advertising costs are generally charged to the Company monthly per vendor
agreements, which typically are based on visitors and/or registrations delivered
to the site or at a set fee. Agreements do not provide for guaranteed renewal
and may be terminated by the Company without cause. Such advertising costs are
charged to expense as incurred.
Total
advertising costs included in Sales and Marketing expense in the Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006 were $1,784, $3,241 and $4,377, respectively.
56
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
2.
Summary of Significant Accounting Policies (Continued)
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. There were no options granted prior to
December 29, 2005. 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
years ended December 31, 2008, 2007 and 2006 was $1,723, $400 and $708,
respectively.
Income
Taxes
The
Company accounts for income taxes under the liability method. Under this method,
deferred income taxes are recognized by applying enacted statutory tax rates
applicable to future years to differences between the income tax bases and
financial reporting amounts of existing assets and liabilities. A valuation
allowance is provided when it is more likely than not that all or some portion
of deferred income tax assets will not be realized.
Net
Loss Per Share
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 stockholders by the
weighted average common shares outstanding. Dilutive earnings per share includes
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.
|
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Shares
subject to stock warrants
|
44,862,398 | 3,232,939 | 3,903,336 | |||||||||
|
Shares
subject to stock options
|
1,568,500 | 1,984,100 | 1,530,600 | |||||||||
| 46,430,898 | 5,217,039 | 5,433,936 | ||||||||||
57
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
2.
Summary of Significant Accounting Policies (Continued)
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measures . SFAS
No. 157 defines fair value, establishes a framework for measuring fair
value and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued Statement of Financial Staff Position ("FSP") No. SFAS 157-2,
"Effective Date of FASB
Statement No. 157" which permits a one-year deferral for the
implementation of SFAS 157 with regards to non-financial assets and
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). In October 2008, the FASB
issued FSP No. SFAS 157-3, which provides guidance in determining the fair
value of a financial asset when the market for that financial asset is not
active. We have adopted the provisions of SFAS No. 157 related to financial
assets and liabilities as of January 1, 2008. The application of this
standard did not have a material impact on our results of operations or
financial condition. We elected to defer adoption of SFAS No. 157 for
non-financial assets and liabilities and we do not anticipate that full adoption
in fiscal 2009 will have a material impact on our results of operations or
financial condition.
On
February 15, 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities—Including an Amendment of FASB Statement No. 115"
("SFAS 159"). This standard permits an entity to measure financial
instruments and certain other items at estimated fair value. Most of the
provisions of SFAS No. 159 are elective; however, the amendment to FASB
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," applies to all entities that own trading and available-for-sale
securities. The fair value option created by SFAS 159 permits an entity to
measure eligible items at fair value as of specified election dates. The fair
value option (a) may generally be applied instrument by instrument,
(b) is irrevocable unless a new election date occurs, and (c) must be
applied to the entire instrument and not to only a portion of the instrument.
SFAS 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the
beginning of the previous fiscal year provided that the entity (i) makes
that choice in the first 120 days of that year, (ii) has not yet
issued financial statements for any interim period of such year, and
(iii) elects to apply the provisions of FASB 157. The Company did not
elect the fair value option pursuant to SFAS 159.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. SFAS 141R
is effective for fiscal years beginning after December 15, 2008, and will
be adopted in the first quarter of fiscal 2009. The Company is currently
evaluating the potential impact, if any, of the adoption of SFAS 141R on
its consolidated results of operations and financial condition. SFAS 141R
is applied prospectively to business combinations for which the acquisition date
is on or after January 1, 2009.
58
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
2.
Summary of Significant Accounting Policies (Continued)
In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51" ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS 160 is
effective for fiscal years beginning after December 15, 2008.The Company
does not have any non-controlling interests and thus SFAS 160 has no effect
on Company's financials.
In June
2008, the FASB ratified EITF No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock"
("EITF 07-5"). EITF 07-5 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument's
contingent exercise and settlement provisions. EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15,
2008. The Company is currently assessing the impact of the adoption of
EITF 07-5 on its consolidated financial statements. We currently do not
anticipate adoption of EITF No. 07-5 will have a significant effect on our
consolidated financial statements.
3.
Merger and Private Offerings
On
December 29, 2005, Cape Coastal Trading Corporation, uBid
Acquisition Co., Inc. ("Acquisition Sub") and uBid, Inc. entered
into a Merger Agreement and Plan of Reorganization. Under the Merger Agreement,
Acquisition Sub merged with and into uBid, Inc., with uBid, Inc.
remaining as the surviving corporation and a wholly-owned subsidiary of Cape
Coastal Trading Corporation (or "Cape Coastal"). Just prior to the closing date,
all outstanding convertible preferred shares and warrants to acquire common
shares of uBid were converted and exercised such that, just prior to the merger
3,793 common shares were outstanding which were exchanged on a 2,320 to 1 basis
on the closing date into 8,800,000 shares of common stock with up to 444,444
shares of 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. 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 for financial accounting
purposes. Accordingly, the historical financial statements of Cape Coastal
before the merger were replaced with the historical financial statements of uBid
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.
59
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
3.
Merger and Private Offerings (Continued)
Concurrent
with the merger, the Company completed the first part of a private offering of
common stock shares and warrants (the "Units") 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, for aggregate consideration
of approximately $45,000. These warrants were valued at $2.08 per warrant for an
aggregate of $5,200 using a Black-Scholes model (see Note 16 for pricing
assumptions). Some of the investors participating in the first part of the
private offering held notes that were issued by uBid before the merger,
including $10,500 of debt held by the Petters Group and $5,000 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. Of the 3,444,444 Units issued in exchange for debt,
2,222,224 Units were issued to Petters Group with common shares that were
subject to redemption at a redemption price of $4.50. For debt exchanged with
Units that did not have redeemable common shares, the value of the securities
issued in exchange for the debt equaled the face value of the debt exchanged,
and accordingly, no gain or loss was recognized or recorded by the Company. Due
to the higher value of the redeemable common shares issued to Petters Group, the
Company realized a loss of approximately $1,156 upon the exchange of debt for
Units with those redeemable common shares. However, as the Petters Group is
considered a significant related party to the Company, the exchange was treated
for accounting purposes as a capital transaction and the resulting loss was
reflected as a dividend to shareholders rather than as a direct reduction of net
earnings. Therefore, the consideration the Company received on the Closing Date
consisted of approximately $29,500 in cash and $15,500 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, $600, 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, $522, was recorded as cost of the equity
issuance. These warrants were valued at $1.80 and $2.27, respectively; per
warrant for an aggregate of $1,122 using a Black-Scholes model. Issuance costs,
including the value of the placement agent warrants, were $4,670.
On
February 3, 2006, the Company completed the second part of the private
offering to accredited investors. In this offering, the Company sold on the same
terms as described above for an aggregate of $13,500, 3,000,000 shares of its
common stock and warrants to purchase 750,002 shares of its common stock. The
Company also redeemed the 2,666,668 shares of common stock issued in connection
with the merger and the first private offering that were subject to redemption
at a price of $4.50 per share and issued 600,667 shares of common stock (valued
at $4.50 per share) to Cape Coastal and uBid's financial advisor, Calico Capital
Group. In addition, the Company issued additional warrants to purchase 90,000
shares of its common stock to its placement agents on the same terms as
described above. The second part of the private offering resulted in no net cash
proceeds being retained by the Company. Issuance costs, including the value of
the placement agent warrants and the shares issued to Calico Capital Group, were
$4,407.
On
April 25, 2007, the Company entered into a stock repurchase agreement with
a group of private investors under common management to repurchase 2,135,550
shares of the Company's common stock and warrants to purchase 580,937 shares of
the Company's common stock held by such private investors at a combined price of
$1.05 for the company stock and for the warrants for an aggregate purchase price
of $2,242. These shares and warrants repurchased in this privately negotiated
transaction were originally acquired by the private investors in the Company's
private placement that initially closed on December 29, 2005. The
repurchase represented 11% of the common stock and warrants
outstanding.
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
3.
Merger and Private Offerings (Continued)
On
July 15, 2008 the Company signed a $10,000 common stock purchase agreement
with Fusion Capital Fund II, LLC, an Illinois limited liability company
("Fusion Capital"). Concurrently with entering into the common stock purchase
agreement, the Company entered into a registration rights agreement with Fusion
Capital. Under the registration rights agreement, the Company agreed to
file a registration statement related to the transaction with the U.S.
Securities and Exchange Commission ("SEC") covering the shares that have been
issued or may be issued to Fusion Capital under the common stock purchase
agreement. After the SEC has declared effective the registration statement
related to the transaction, as long as the Company's common stock is trading
above $0.75 per share, the Company has the right over a 24-month period to sell
shares of common stock to Fusion Capital from time to time in amounts ranging
from $60 to $1,000, depending on certain conditions set forth in the agreement,
up to an aggregate of $10,000.
In
consideration for entering into the agreement, upon execution of the common
stock purchase agreement the Company issued to Fusion Capital 230,074 shares of
the Company's common stock as a commitment fee. Also, the Company will issue to
Fusion Capital an additional 230,074 shares as a commitment fee pro rata as the
Company receives the $1,000 of future funding. The purchase price of the shares
related to the $1,000 of future funding will be based on the prevailing market
prices of the Company's common stock at the time of sales without any fixed
discount, and the Company will control the timing and amount of any sales of
shares to Fusion Capital. Fusion Capital shall not have the right or the
obligation to purchase any shares of the Company's common stock on any business
day that the price of the Company's common stock is below $0.75 per share. The
common stock purchase agreement may be terminated by the Company at any time at
the Company's discretion without any cost to the Company. There are no negative
covenants, restrictions on future funding, penalties or liquidated damages in
the agreement. The proceeds received by the Company under the common stock
purchase agreement will be used to provide working capital to further implement
the Company's recently announced strategic change to focus on liquidating excess
inventories.
The
Company issued the initial 230,074 shares as a commitment fee, at the agreed
upon price of $1.52 per share, determined based on the 20-day moving average as
of the agreement acceptance date of June 25, 2008. The Company filed the
registration statement on September 5, 2008 and recorded the common stock
transaction in the quarter ended September 30, 2008. In a letter dated
October 3, 2008, the SEC notified the Company that the S-1 registration
statement has been selected for review. The Company elected not to respond to
the SEC notification because the stock price of the Company was trading well
below the agreed upon price of $0.75, which would have obliged Fusion Capital to
not provide the capital. In December 2008, the Company wrote off the commitment
fee issued in conjunction with this agreement. The commitment fee was paid in
the form of common stock of the Company.
During the fourth quarter of 2008, the
Company received a $2,550 bridge loan provided by multiple accredited investors.
The 90 day bridge loan is in the form of an Unsecured Debenture and bears
interest at the rate of 18% per annum. In consideration, the investors received
warrants to purchase 12,750,000, 25,500,000 and 3,200,000 shares of the
Company's common stock at an exercise price of $0.20, $0.10 and $0.25 per share,
respectively, for an aggregate of 41,450,000 shares of the Company's common stock. The warrants
are exercisable immediately for a period of 5 years from the agreement
date. The investor may elect to convert the accrued and unpaid interest into the
common stock of the Company. The original due dates for the bridge loan ranged
from January 12, 2009 to February 19, 2009. During the first quarter
of 2009, the Company elected to extend the maturity date of the bridge loan by
an additional period of 90 days through April 14,
2009.
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
4.
Merchandise Inventories
|
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Merchandise
Inventories
|
$ | 2,822 | $ | 5,565 | $ | 4,095 | ||||||
|
Inventory
in transit
|
— | — | 108 | |||||||||
|
Less
reserves
|
(548 | ) | (409 | ) | (149 | ) | ||||||
|
Total
|
$ | 2,274 | $ | 5,156 | $ | 4,054 | ||||||
|
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Balance,
beginning of year
|
$ | (409 | ) | $ | (149 | ) | $ | (315 | ) | |||
|
Charged
to costs and expenses
|
(1,404 | ) | (431 | ) | (1,621 | ) | ||||||
|
Write-offs
|
1,265 | 171 | 1,787 | |||||||||
|
Balance,
end of year
|
$ | (548 | ) | $ | (409 | ) | $ | (149 | ) | |||
5.
Major Suppliers
During
the year ended December 31, 2008, Hewlett-Packard Company ("HP") accounted
for 38.13%, of the Company's inventory purchases. Amount due at
December 31, 2008 included in accounts payable and flooring facility was
approximately $903 to HP.
During
the year ended December 31, 2007, Sony and HP accounted for 25.6% and
29.7%, respectively, of the Company's inventory purchases. Amounts due at
December 31, 2007 included in accounts payable and flooring facility were
approximately $404 and $527, respectively, to these vendors.
During
the year ended December 31, 2006, Sony Electronics, Inc. ("Sony")
accounted for 12.9% of the Company's inventory purchases. Amount due at
December 31, 2006 included in accounts payable and flooring facility was
approximately $883 to Sony.
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
6.
Property and Equipment
Property
and equipment consist of the following:
|
December 31,
|
2008
|
2007
|
||||||
|
Computer
equipment
|
$ | 1,523 | $ | 1,160 | ||||
|
Furniture
and fixtures
|
95 | 95 | ||||||
|
Leasehold
improvements
|
511 | 511 | ||||||
|
Construction
in Progress
|
1,479 | — | ||||||
|
Less
accumulated depreciation
|
(1,465 | ) | (1,041 | ) | ||||
|
Total
|
$ | 2,143 | $ | 725 | ||||
Construction
in progress increased in 2008 due to the ongoing implementation of Microsoft AX
dynamics to replace our current ERP system as well as other consulting
expenditures. The Company estimates that it will incur an additional $250 to
complete the system implementation.
Depreciation
and amortization expense was $531, $876 and $438 for the years ended
December 31, 2008, 2007 and 2006, respectively.
7.
Purchased Intangible Assets
During
2008, the Company purchased an internet domain name or Universal Resource
Locator or URL, www.redtag.com, from a holder of greater than 5% of our voting
common stock. The URL has an indefinite useful life and thus in accordance with
the Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), the intangible asset need not be amortized.
Each reporting period, the Company will evaluate the useful life of the
intangible asset to determine whether events and circumstances continue to
support an indefinite useful life, and record impairment if needed. No
impairment was recorded as of December 31, 2008. The carrying value of the
URL as of December 31, 2008 was $203.
During
2006, the Company purchased certain intangible assets consisting of a trademark
and customer list totaling approximately $723. Total amortization for the years
ended December 31, 2008, 2007 and 2006 was $107, $495 and $121,
respectively. The carrying value of the trademark and customer list at
December 31, 2008 was $0.
8.
Flooring Facility
During
2008, 2007 and 2006, the Company maintained a short-term $1,000, $2,000 and
$4,000 secured flooring facility with IBM (the "Flooring Facility"),
respectively, whereby IBM made payments on behalf of the Company to its vendors.
Under the terms of the agreement, the Flooring Facility does not bear interest
if outstanding balances are paid within the terms specific to each vendor;
otherwise, interest is accrued on outstanding balances at the prime rate plus
6.5%. The Company accounts for all Flooring Facility purchases as a financing
cash inflow, with a corresponding cash outflow for the increase in its
inventory. Upon repayment, the cash outflow is reported as a financing activity.
The net effect on operating cash flow is the amount of gross profit generated.
Interest expense for the years ended and December 31, 2008, 2007and 2006
relating to the Flooring Facility was $44, $102 and $150,
respectively.
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
8.
Flooring Facility (Continued)
|
December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Face
value
|
$ | 370 | $ | 317 | $ | 154 | ||||||
|
Less
discount
|
— | (3 | ) | (2 | ) | |||||||
|
Present
Value
|
$ | 370 | $ | 314 | $ | 152 | ||||||
During
2008 and 2007, the Flooring Facility was secured by security deposits of $500
and $1,000, respectively. (See Note 2) There are no restrictive covenants
on the Flooring Facility. The IBM flooring facility was terminated in 2008 and
hence there was no balance due as of December 31, 2008.
During
2008, the Company entered into multiple short-term inventory financing
arrangements with various investors. The arrangements allow the Company to
finance inventory purchases for which interest is accrued at a rate of .50% per
week to 1% per week. For 2008, the liability related to such financing
arrangements totaled $370.
9.
Long-Term Debt
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 provided for advances to the Company of up to a maximum of
$25,000. The amount actually available to the Company varied 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 were secured by all of the Company's
assets. The initial term of the Agreement is three years, expiring on
April 28, 2009. Up to $7,000 of the maximum amount was available for
irrevocable, standby and documentary letters of credit. At December 31,
2007, the Company had $2,000 in letters of credit issued as security for
purchases from certain suppliers. Advances under the Credit Agreement bore
interest at a base rate (Wells Fargo Bank's prime rate) or LIBOR plus 2.5%. The
Credit Agreement required a prepayment fee of $500 if the Company terminated the
Credit Agreement during its first year, $400 if it terminated the Credit
Agreement during its second year and $100 if the Company terminated the Credit
Agreement during the third year. The Credit Agreement required the Company,
among other things, to limit capital expenditures and maintain minimum
availability on the line. Also, the Company was obligated contractually by a
restrictive lock box arrangement. The Credit Agreement also required the Company
to pay a variety of other fees and expenses, including minimum monthly interest
of $10.
On
July 25, 2008, Wells Fargo Bank notified the Company of the Company's
failure to meet the minimum excess availability requirement of
$3.5 million. Since the Company did not meet the minimum excess
availability requirement as stated in the agreement, the financial covenants
went into effect which required that we demonstrate net earnings at the levels
stated in the agreement. Due to the change in the business model of the Company
in 2008, the Company was unable to meet the financial
covenants.
64
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Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
9.
Long-Term Debt (Continued)
On
October 15, 2008, the Company paid off-the outstanding balance owed to
Wells Fargo Bank terminating the Credit Agreement. Pursuant to the pay-off
agreement, the Company paid a forbearance agreement fee of $50 and early
termination fee of $125. Wells Fargo has also released its security interest in
the Company's collateral.
10.
Bridge Loan
During
the fourth quarter of 2008, the Company received a $2,550 bridge loan provided
by multiple accredited investors. The bridge loan is in the form of an Unsecured
Debenture and bears interest at the rate of 18% per annum. In consideration for
the loan, the investors received warrants to purchase an aggregate of
12,750,000, 25,500,000 and 3,200,000 shares of the Company's common stock at an
exercise price of $0.20, $0.10 and $0.25 per share, respectively, for an
aggregate of 41,450,000 shares of the Company's common stock. The warrants are
exercisable immediately for a period of five years from the agreement date. The
investors may elect to convert the accrued and unpaid interest into common stock
of the Company.
Management
retained the services of an independent valuation company in order to assist in
evaluating the estimated fair value of the warrants that were issued in
conjunction with the bridge loan. The fair market value of the warrants was
determined to be $8,752 based on a volatility range of 66.71%-83.60% and an
interest rate range of 1.22%-4.08%.
Per
APB 14-1— Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement), the Company recorded the fair value
of the warrants using the relative fair value of the warrants and the debt. The
resulting discount of $1,975 will be amortized over a period of 6 months.
The Company amortized the discount over 6 months because the loan was
extended for an additional period of 90 days for a total of 180 days
(6 months).
During
the first quarter of 2009, the Company elected to extend the maturity for $2,450
related to the bridge loan. The original due dates of the $2,450 ranged from
January 12, 2009 to February 19, 2009, which was extended for an
additional period of 90 days through April 14, 2009. The Company
expects to extend the maturity of this remaining balance until it gains access
to credit to be able to pay off this loan. During the first quarter of 2009, the
Company has paid off $100 associated with the bridge loan.
11.
Employee Benefit Plans
Company
employees participate in a 401(k) savings plan. The plan is open to all
full-time eligible employees who have attained age 21 and have completed
30 days of service. Participants may make tax-deferred contributions
subject to limitations specified by the Internal Revenue Code. During 2008, 2007
and 2006, employee contributions of up to 3% were matched by the Company at a
rate of 50%. Employees are 100% vested in their pretax contributions at all
times and become fully vested in the employer-matching contribution after two
years of service. During the years ended December 31, 2008, 2007 and 2006,
the Company incurred $52, $44 and $69 of expenses, respectively, related to the
401(k) matching component of this plan.
Effective
2009, the Company discontinued the employer matching component of the 401(k)
savings plan.
65
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
12.
Contingent Liabilities
From
time to time, the Company is subject to claims and administrative proceedings,
including product liability matters, resulting from the conduct of its business.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the financial position or results of
operations of the Company. In addition, the Company maintains product liability
insurance that is evaluated annually and considered adequate. There were no
significant contingencies as of December 31, 2008.
13.
Income Taxes
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Current
provision:
|
||||||||||||
|
Federal
|
$ | — | $ | — | $ | — | ||||||
|
State
|
— | — | — | |||||||||
|
Deferred
benefit
|
(5,808 | ) | (2,791 | ) | (2,868 | ) | ||||||
|
Benefit
for income taxes
|
(5,808 | ) | (2,791 | ) | (2,868 | ) | ||||||
|
Less
increase in valuation allowance
|
5,808 | 2,791 | 2,868 | |||||||||
|
Income
tax provision
|
$ | — | $ | — | $ | — | ||||||
The
income tax benefit at the federal statutory tax rate is reconciled to the actual
expense for income taxes for the years presented as follows:
|
Year
ended December 31,
|
2008
|
2007
|
2006
|
|||||||||
|
Federal
income tax benefit at federal statutory rate
|
$ | (5,384 | ) | $ | (2,587 | ) | $ | (2,659 | ) | |||
|
Effect
of state income taxes
|
(424 | ) | (204 | ) | (209 | ) | ||||||
|
Increase
in valuation allowance
|
5,808 | 2,791 | 2,868 | |||||||||
|
Total
|
$ | — | $ | — | $ | — | ||||||
66
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
13.
Income Taxes (Continued)
Components
of deferred income tax assets and liabilities are as follows:
|
December 31,
|
2008
|
2007
|
||||||
|
Deferred
income tax assets
|
||||||||
|
Net
operating loss carryforward
|
$ | 16,106 | $ | 10,883 | ||||
|
Inventories
|
381 | 332 | ||||||
|
Stock-based
compensation
|
1,148 | 476 | ||||||
|
Allowance
for doubtful accounts
|
248 | 182 | ||||||
|
Property
and equipment
|
135 | 347 | ||||||
|
Other
|
12 | 100 | ||||||
|
Gross
deferred income tax assets
|
18,030 | 12,320 | ||||||
|
Deferred
income tax liabilities
|
||||||||
|
Prepaid
expenses
|
(125 | ) | (223 | ) | ||||
|
Gross
deferred income tax liabilities
|
(125 | ) | (223 | ) | ||||
|
Net
deferred income tax assets
|
17,905 | 12,097 | ||||||
|
Less
valuation allowance
|
(17,905 | ) | (12,097 | ) | ||||
|
Net
deferred income tax asset
|
$ | — | $ | — | ||||
The
Company has estimated federal net operating loss carryforwards as of
December 31, 2008 of $41.3 million that have expiration dates from
2024 through 2028. Pursuant to section 382 of the Internal Revenue Code,
the usage of these net operating loss carryforwards may be limited due to
changes in ownership that have occurred or may occur in the future. The Company
has not yet determined the impact, if any, that changes in ownership have had on
net operating loss carryforwards. The Company has provided a valuation allowance
against all of its deferred income tax assets as it is more likely than not that
the deferred income tax assets will not be realized.
14.
Leases
The
Company leases office space and certain equipment under operating leases
expiring through 2010. Total rent expense from operating leases was
approximately $470, $474 and $605 for the years ended December 31, 2008,
2007 and 2006, respectively.
The
following is a schedule, by year, of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 2008:
|
Year
|
Amount
|
|||
|
2009
|
$
|
507
|
||
|
2010
|
171
|
|||
|
Total
|
$
|
678
|
||
67
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
15.
Stock Warrants
Stock
warrants issued in 2005 and 2006 are described in Note 3. On March 25,
2008, the Company issued warrants to purchase 90,000 shares of its common stock
to an unrelated investor relations company. The warrants are exercisable for
10 years at the exercise price of $0.55, $1.20 and $4.50, for each tranche
of 30,000 warrants, respectively. These warrants were issued for services to be
provided over a period of time, as indicated in the agreement and the Company
expensed the entire fair value of $32 of these warrants during 2008. The
estimated fair value was measured using the Black-Scholes pricing
model.
In
the fourth quarter of 2008, the Company issued warrants to purchase 41,450,000
shares of its common stock to a group of accredited investors in conjunction
with the issuance of a bridge loan. The warrants are exercisable for five years
at the exercise price of $0.25, $0.20 and $0.10. In accordance with APB 14
(Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants),
the fair value of the warrants of $8,700 was allocated to warrants and the debt,
based on the relative value of each. The fair value allocated to the warrants
was $1,975.
The
warrants issued in 2008, resulted in the repricing of the exercise price for the
warrants issued in 2005 private offering. The original exercise of those
warrants was $5.85 which was adjusted to $1.33 due to the issuance of new
warrants in 2008.
The
following table summarizes information about warrants outstanding as of
December 31, 2008:
|
Number
Outstanding
|
Exercise
Price
|
Remaining
Contractual
Life
|
Warrants
Fair
Value
at
Issuance
|
||||||
|
2,669,065
|
$ | 1.33 |
4 years
|
2.08 | |||||
|
333,333
|
$ | 4.50 |
2 years
|
1.80 | |||||
|
320,000
|
$ | 4.50 |
4 years
|
2.27 | |||||
|
30,000
|
$ | 0.55 |
10 years
|
0.43 | |||||
|
30,000
|
$ | 1.20 |
10 years
|
0.37 | |||||
|
30,000
|
$ | 4.50 |
10 years
|
0.25 | |||||
|
12,750,000
|
$ | 0.20 |
5 years
|
0.19 | |||||
|
25,500,000
|
$ | 0.10 |
5 years
|
0.22 | |||||
|
3,200,000
|
$ | 0.25 |
5 years
|
0.18 | |||||
16.
Common Stock and Series A Convertible Preferred Stock
Common
Stock
At
December 31, 2008 and 2007 there were 200,000,000 shares of common stock
$.001 par value authorized and 18,826,678 and 18,197,783 shares issued and
outstanding respectively.
Series A
Convertible Preferred Stock
There
are 25,000,000 shares authorized of preferred stock with preferences and rights
to be determined by our board of directors. No shares were issued at
December 31, 2008 and 2007.
68
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
17.
2005 Equity Incentive Plan
The
Company's 2005 Equity Incentive Plan ("2005 Equity Incentive Plan") is an
equity-based compensation plan in-place to provide incentives, and to attract,
motivate and retain the highest qualified employees, directors, consultants and
other third party service providers. The 2005 Equity Incentive Plan enables the
board to provide equity-based incentives through grants or awards of stock
options and restricted stock (collectively, "Incentive Awards") to present and
future employees, consultants, directors, and other third party service
providers.
A
total of 2,500,000 shares of common stock have been reserved for issuance under
the 2005 Equity Incentive Plan. If an Incentive Award granted pursuant to the
2005 Equity Incentive Plan expires, terminates, expires and is unexercised or is
forfeited, or if any shares are surrendered to the Company in connection with an
Incentive Award, the shares subject to such award and the surrendered shares
will become available for future awards under the 2005 Equity Incentive Plan.
Options generally vest over a period of four years and have a ten year
contractual life.
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 (stock options and restricted stock) based on the fair value
of the award. The Company has elected to use the "modified prospective"
transition method for stock options granted prior to January 1, 2006, but
for which the vesting period is not complete. Under this transition method, the
Company accounts for such awards on a prospective basis, with expense being
recognized in its statement of operations beginning in the first quarter of 2006
and continuing over the remaining requisite service period based on the grant
date fair value estimated in accordance with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). The Company recognizes these compensation costs on a
straight-line basis over the requisite service period of the award which is
generally the option vesting term of four years.
69
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
17.
2005 Equity Incentive Plan (Continued)
Stock
options
Stock
option activity under the Company's 2005 Equity Incentive Plan for the year
ended December 31, 2008 is summarized as follows:
|
Shares
|
Weighted-Average
exercise price
per share
|
|||||||
|
Outstanding
at December 31, 2006
|
1,530,800 | $ | 4.55 | |||||
|
Granted
|
1,138,500 | 1.28 | ||||||
|
Exercised
|
— | — | ||||||
|
Surrendered
|
(685,200 | ) | 4.54 | |||||
|
Outstanding
at December 31, 2007
|
1,984,100 | $ | 1.30 | |||||
|
Granted
|
581,500 | 0.92 | ||||||
|
Exercised
|
— | — | ||||||
|
Forfeited/Cancelled/Surrendered
|
(230,100 | ) | 1.99 | |||||
|
Converted
|
(767,000 | ) | 4.60 | |||||
|
Outstanding
at December 31, 2008
|
1,568,500 | $ | 1.18 | |||||
|
Exercisable
at December 31, 2008
|
1,123,875 | $ | 1.15 | |||||
The
fair value of the stock options granted under the Company's 2005 Equity
Incentive Plan was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions:
|
December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Risk-free
interest rate
|
5.0 | % | 5.0 | % | ||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
|
Expected
volatility
|
68.0 | % | 68.0 | % | ||||
|
Expected
life (years)
|
6.0 | 6.0 | ||||||
|
Weighted
average grant date fair value
|
$ | 0.89 | $ | 0.78 | ||||
|
Estimated
forfeiture rate
|
11.7 | % | 4.9 | % | ||||
The
risk-free interest rate is based on the U.S. Treasury Bill rates. The dividend
reflects the fact that the Company has never paid a dividend on its common stock
and does not expect to do so in the foreseeable-future. Expected volatility was
based on a market-based implied volatility. The expected term of the options is
based on what the Company believes will be representative of future behavior. In
addition, the Company is required to estimate the expected forfeiture rate and
recognize expense only for those shares expected to vest. If the Company's
actual forfeiture rate is materially different from its estimate, the
stock-based compensation expense could be significantly different from what the
Company has recorded in the current period.
70
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
17.
2005 Equity Incentive Plan (Continued)
The
following table summarizes additional information regarding outstanding and
exercisable options at December 31, 2008.
|
Outstanding
|
Exercisable
|
||||||||||||
|
Exercise
Price
|
Number
Outstanding
at December 31,
2008
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Life
|
Number
Exercisable
at December 31,
2008
|
Weighted
Average
Exercise Price
|
||||||||
|
.01–2.00
|
1,491,000
|
$
|
1.08
|
8.94
|
1,090,625
|
$
|
1.09
|
||||||
|
2.01–4.00
|
66,500
|
2.83
|
9.32
|
25,000
|
2.90
|
||||||||
|
4.01–5.00
|
11,000
|
4.50
|
6.99
|
8,250
|
4.50
|
||||||||
|
1,568,500
|
$
|
1.18
|
8.90
|
1,123,875
|
$
|
1.15
|
|||||||
Restricted
Stock
On
February 19, 2008 the Company offered eligible employees the opportunity to
exchange on a grant by grant basis, their outstanding eligible options for
shares of restricted stock. Options eligible for the exchange in this offer were
granted under the Company's 2005 Equity Incentive Plan that were granted in 2005
and 2006 and had an exercise price per share that is greater than $2.00.
Individuals that held 500 or fewer eligible options were cashed
out.
The
number of restricted stock rights granted in exchange for each eligible option
surrendered was based upon an exchange ratio of 3 to 1. The 3 to 1 exchange
ratio was determined because at the origination of the offer the fair value of
the eligible options approximated the share price at a 3 to 1 conversion rate.
The incremental stock compensation expense resulting from the offer is $109 to
be amortized over the remaining life of the original options
granted.
Pursuant
to the offer, 16,000 options were canceled and cashed out by individuals who had
500 or fewer options. There were an additional 22 individuals that tendered
767,000 options for an aggregate of 255,667 shares of restricted common stock of
which 248,821 are vested and 6,845 are forfeited.
There
was no unvested restricted common stock as of December 31,
2008.
|
Number
of
Shares
|
||||
|
Outstanding
at December 31, 2007
|
—
|
|||
|
Granted
|
255,666
|
|||
|
Forfeited
|
(6,845
|
)
|
||
|
Vested
|
(248,821
|
)
|
||
|
Outstanding/Unvested
at December 31, 2008
|
—
|
|||
71
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
17.
2005 Equity Incentive Plan (Continued)
Stock-based
Compensation Expense
Stock-based
compensation expense recognized, related to the 2005 Equity Incentive Plan for
the years ended December 31, 2008 and 2007 was as follows (in
thousands):
|
December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(Dollars
in Thousands)
|
||||||||||||
|
Stock
Options
|
$ | 718 | $ | 399 | $ | 708 | ||||||
|
Restricted
Common Stock
|
1,005 | — | — | |||||||||
|
Total
Stock-Based compensation expense
|
$ | 1,723 | $ | 399 | $ | 708 | ||||||
In
October 2008, the Company issued stock warrants in conjunction with a bridge
loan (see Notes 3, 11 & 16). The issuance of stock warrants
resulted in a change of control provision which accelerated the vesting of all
senior management stock options and all of the unvested shares of restricted
stock.
18.
Related Party Transactions
The
following represents significant transactions between the Company and Petters
Group, a holder of greater than 5% of our voting common stock during 2008, 2007
and 2006:
Service
Assistance
The
Company had entered into an advisory agreement with Petters Group, whereby
Petters Group Worldwide provided financial and management consulting services to
the Company for a fee, which was terminated in 2006. General and administrative
expenses include approximately $30 for management fees payable to Petters Group
Worldwide for services rendered during 2006.
Product
Purchases
The
Company historically purchased products from Petters Group for direct purchase
sales. Purchases from Petters Group Worldwide were $3,753, $2,930 and $365 for
the years ended December 31, 2008, 2007 and 2006, respectively. At
December 31, 2008 and 2007, amounts due to Petters Group included in
accounts payable were $993 and $0, respectively.
On
September 23, 2008, the Company ceased business relationships with Petters
Group.
Bridge
Loan
During
October 2008, the Company received a $2,550 bridge loan from a group of
accredited investors (See Note. 10), of which $2,450 was from investors who
became beneficial owners of greater than 5% of our common stock. $1,600 of the
loan was provided by the Geras family and $850 was provided by Ted Deikel. Of
the $850 provided by Mr. Deikel, management of the Company provided a
guarantee for $250. In return for providing the guarantee, the management
received warrants to purchase $1,880 shares of the Company's common
stock.
72
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
18.
Related Party Transactions (Continued)
Subsequent
to the bridge loan transaction, Mr. Geras was appointed as the Company's
board of director in November 2008.
19.
Subsequent Events
On
January 16, 2009, the Company received extensions from certain accredited
investors who previously made total commitments for an aggregate of $2,550 in
the form of a 90 day bridge loan. The extensions relate to $2,450 of the
$2,550 bridge loan. The original maturity date of such loans was
January 12, 2009, January 29, 2009 and February 19, 2009, and the
maturities have been extended by an additional 90 days. The investors made
such extensions pursuant to Debenture Modification and Extension Agreements
which call for an extension of the loans for 90-days after their original 90-day
terms, through April 14, 2009. The Company is currently negotiating an
additional 90-day extension.
The
Company elected not to extend the remaining $100 of the bridge loan which was
subsequently paid on February 26, 2009.
On
February 9, 2009, the Company's Board of Directors approved the termination
of Company's relationship with Gilford Securities, Inc., who had been
acting as the Company's financial advisor. The Company continues to seek
financing through other channels, including through the efforts of its Board of
Directors and management team.
In
March 2009, the Company initiated a private placement offering to accredited
investors. Investors may purchase units, with each unit consisting of a senior
convertible debenture for one share of common stock of the Company, and a
warrant, depending on the date of investment, to acquire either two shares or
one share of Common Stock for ten years at a purchase price of $0.25 per share.
The Debentures will pay interest at a rate of 12% per annum, have a term of
30 months and are convertible into the Company's common stock at any time
at the option of the investor. The minimum and maximum number of units that must
be sold for the private placement to initially close is 2,000,000 units and
15,000,000 units, respectively. As of April 8, 2009, the Company has
received an investment of $1,350, currently held in an escrow account, and is in
the process of accessing those funds.
In
March 2009, the Company entered into an independent consulting agreement with
Salzwedel Financial Communications, Inc (Salzwedel), with a term expiring
May 15, 2010. Salzwedel will represent the Company in investors'
communications and public relations with existing shareholders, brokers, dealers
and other investment professionals as to the Company's current and proposed
activities, and to consult with management concerning such Company activities.
For undertaking the engagement, for previous services rendered and for other
good and valuable consideration, the Company has agreed to issue Salzwedel a
Commencement Bonus of 900,000 shares of Common Stock and a five-year warrant to
purchase 3,000,000 shares of Common Stock at $0.25 per share. Additionally the
Company has agreed to pay Salzwedel $8,000 cash per month, during the term of
the engagement, unless terminated early. Pursuant to the terms of the engagement
at no time will Salzwedel beneficially own 5 percent or more of the
Company.
20.
Going Concern
The
accompanying consolidated financial statements have been prepared assuming that
we will continue as a going concern, considering we realize the assets and
liquidate the liabilities in the normal course of business. As of
December 31, 2008 we had accumulated a deficit of approximately $48,301. We
have incurred losses in the last 11 years, significantly so in 2008,
attributable to operations and the change in the business model. We have managed
our liquidity during this time through a series of cost reduction initiatives
and short-term financing transactions. However, the current credit market
remains volatile which affects our ability to raise long-term capital financing
and inventory financing needed in our business.
73
Enable
Holdings, Inc.
Notes
to Consolidated Financial Statements (Continued)
(Dollars
in Thousands, except per share data)
20.
Going Concern (Continued)
Management's
plans to alleviate this condition consist of, but are not limited to the
following:
|
|
•
|
Issuance
of a private placement memorandum to accredited investors with an estimate
capital raise of approximately
$4,500-$7,500,
|
|
|
•
|
Entered
in to an asset based lending credit line (ABL) of approximately
$5,000,
|
|
|
•
|
Increase
revenues through the introduction of diversified product lines to serve
the asset recovery industry,
|
|
|
•
|
Increase
revenues through the introduction of customer transaction fees and
restructuring of CM vendor rate
card,
|
|
|
•
|
Cost
reduction plans including consolidating corporate, warehouse and customer
care facilities and reducing head
count.
|
However,
there is no assurance that we will be successful in these efforts, which raises
substantial doubt as to our ability to continue as a going
concern.
74
As
of the date of this report, we have no disagreements with our current
accountants.
Disclosure
Controls and Procedures. The Company maintains
disclosure controls and procedures (as defined in Rules 13a-15 (e) and
15d-15 (e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) that are designed to ensure that information required to be
disclosed in its reports filed or submitted under the Exchange Act is processed,
recorded, summarized and reported within the time periods specified in the SEC's
rules and forms, and that such information is accumulated and communicated to
the Company's management. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended, as of the end of the period
covered by this report (the "Evaluation Date"). Based on this evaluation, our
principal executive officer and principal financial officer concluded as of the
Evaluation Date that our disclosure controls and procedures were effective at
the reasonable assurance level such that the information relating to the
Company, including our consolidated subsidiaries, required to be disclosed in
our Securities and Exchange Commission ("SEC") reports (i) is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms, and (ii) is accumulated and communicated to the Company's
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure.
Management's
report on internal control over financial reporting.
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f). All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on
our evaluation under the framework Internal Control Integrated Framework, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2008.
This
report does not include an attestation report of the company's registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the SEC that permit the
company to provide only management's report in this annual report.
Internal
Control Over Financial Reporting. There have been
no changes in our internal control over financial reporting identified in the
evaluation that occurred during our fourth quarter of fiscal year 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
None.
75
PART
III
Other
than the information included in this Form 10-K under the heading
"Executive Officers," which is set forth at the end of Part I, the
information required by Item 10 is incorporated herein by reference to the
sections labeled "Election of Directors," "Corporate Governance," "Code of
Ethics and Business Conduct," and "Section 16(a) Beneficial Ownership
Reporting Compliance," all of which appear in our definitive proxy statement to
be filed with the SEC within 120 days after the close of the fiscal year
covered by this Annual Report (December 31, 2008) for our 2009 Annual
Meeting.
The
information required by Item 11 is incorporated herein by reference to the
sections labeled "Executive Compensation" and "Compensation to Non-Employee
Directors," which appear in our definitive proxy statement for our 2009 Annual
Meeting.
The
information required by Item 12 is incorporated herein by reference to the
sections entitled "Principal Stockholders," and "Equity Compensation Plan,"
which appear in our definitive proxy statement for our 2009 Annual
Meeting.
The
information required by Item 13 is incorporated herein by reference to the
sections entitled "Corporate Governance—Independence" and "Certain Transactions
and Business Relationships," which appear in our definitive proxy statement for
our 2009 Annual Meeting.
The
information required by Item 14 is incorporated herein by reference to the
section entitled "Audit Fees," which appears in our definitive proxy statement
for our 2009 Annual Meeting.
76
PART IV
(a)(1)
Consolidated Financial statements commence on page 48:
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheet as of December 31, 2008 and 2007
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006.
Consolidated
Statement of Shareholders' Equity for the years ended December 31, 2008,
2007 and 2006.
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006.
Notes to
Consolidated Financial Statements
(2)
Consolidated
Financial Statement Schedules.
All
schedules have been omitted as the required information is inapplicable or the
information is presented in the consolidated financial statements or related
notes.
|
(3)
|
Exhibits
required by Item 601 of Regulation S-K. (Note: Management
contracts and compensatory plans or arrangements are identified with a "+"
in the following list.)
|
|
Exhibit
No.
|
Description
|
Reference
|
||
|
2.1
|
Agreement
and Plan of Merger dated as of December 15, 2005, by and between Cape
Coastal Trading Corporation, a New York corporation and Cape Coastal
Trading Corporation, a Delaware corporation.
|
Incorporated
by reference to Exhibit 2.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 21,
2005 (File No. 000-50995).
|
||
|
2.2
|
Merger
Agreement and Plan of Reorganization dated as of December 29, 2005,
by and among Cape Coastal Trading Corporation, uBid
Acquisition Co., Inc. and uBid, Inc.
|
Incorporated
by reference to Exhibit 2.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995), and as amended by reference to Exhibit 3.1
to the Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 8, 2008 (File
No. 000-50993).
|
||
|
3.1
|
Certificate
of Incorporation, as amended.
|
Incorporated
by reference to Exhibit 3.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 21,
2005 (File No. 000-50995), and as amended by reference to
Exhibit 3.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 8, 2008 (File
No. 000-50993).
|
||
|
3.2
|
Amended
and Restated Bylaws.
|
Incorporated
by reference to Exhibit 3.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 8, 2008
(File
No. 000-50995).
|
77
|
Exhibit
No.
|
Description
|
Reference
|
||
|
4.1
|
Form
of Warrant to be issued to the Investors.
|
Incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
4.2
|
Form
of Warrant to be issued to the Placement Agents.
|
Incorporated
by reference to Exhibit 4.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
4.3
|
Form
of Warrant to be issued to the Note Holders.
|
Incorporated
by reference to Exhibit 4.3 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
4.4
|
Form
of Lockup Agreement.
|
Incorporated
by reference to Exhibit 4.4 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
4.5
|
Form
of 18% Unsecured Debentures to be issued to Investors dated
October 9, 2008.
|
Incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 14, 2008
(File No. 000-50995).
|
||
|
4.6
|
Form
of Common Stock Purchase Warrant to be issued to Investors dated
October 9, 2008.
|
Incorporated
by reference to Exhibit 4.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 14, 2008
(File No. 000-50995).
|
||
|
4.7
|
Form
of 18% Senior Secured Debenture dated October 16, 2008 issued to
certain Investors.
|
Incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 22, 2008
(File No. 000-50995).
|
||
|
4.8
|
Form
of Series A Common Stock Purchase Warrant dated October 16, 2008
issued to certain Investors.
|
Incorporated
by reference to Exhibit 4.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 22, 2008
(File No. 000-50995).
|
||
|
4.9
|
Form
of Series B Common Stock Purchase Warrant dated October 16, 2008
issued to certain Investors.
|
Incorporated
by reference to Exhibit 4.3 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 22, 2008
(File No. 000-50995).
|
||
|
4.10
|
Form
of 18% Senior Secured Debenture dated November 26, 2008 issued to
certain Investors.
|
Incorporated
by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 3, 2008
(File No. 000-50995).
|
||
|
4.11
|
Form
of Series A Common Stock Purchase Warrant dated November 26,
2008 issued to certain Investors.
|
Incorporated
by reference to Exhibit 4.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 3, 2008
(File
No. 000-50995).
|
78
|
Exhibit
No.
|
Description
|
Reference
|
||
|
4.12
|
Form
of Series B Common Stock Purchase Warrant dated November 26,
2008 issued to certain Investors.
|
Incorporated
by reference to Exhibit 4.3 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 3, 2008
(File No. 000-50995).
|
||
|
10.1
|
Asset
Purchase Agreement dated as of January 13, 2005, by and between Cape
Coastal Trading Corporation, a New York corporation and Kwajo
Sarfoh.
|
Incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 14, 2005
(File No. 000-50995).
|
||
|
10.2
|
Form
of Securities Purchase Agreement by and among Cape Coastal Trading
Corporation, uBid, Inc. and the Investors named
therein.
|
Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
10.3
|
+
|
Employment
Agreement dated as of December 29, 2005 by and between Cape Coastal
Trading Corporation and Timothy E. Takesue.
|
Incorporated
by reference to Exhibit 10.4 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
|
|
10.4
|
+
|
Employment
Agreement dated as of September 21, 2007 by and between uBid.com
Holdings, Inc. and Jeffrey D. Hoffman.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 26,
2007 (File No. 000-50995).
|
|
|
10.5
|
+
|
Employment
Agreement dated as of May 15, 2008 by and between uBid.com
Holdings, Inc. and Glenn R. Weisberger.
|
Incorporated
by reference to Exhibit 10.1 on the Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 20, 2008
(File No. 000-50995).
|
|
|
10.6
|
+
|
2005
Equity Incentive Plan, effective as of December 15,
2005.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 23,
2005 (File No. 000-50995).
|
|
|
10.7
|
+
|
Form
of Incentive Stock Option Agreement.
|
Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 23,
2005 (File No. 000-50995).
|
|
|
10.8
|
Form
of Non-Qualified Stock Option Agreement.
|
Incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 23,
2005 (File No. 000-50995).
|
||
|
10.9
|
Form
of Indemnity Agreement.
|
Incorporated
by reference to Exhibit 10.9 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
10.10
|
Form
of Amendment Number 1 to Securities Purchase Agreement dated as of
February 28, 2006.
|
Incorporated
by reference to Exhibit 10.10 to the Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 28, 2006
(File
No. 000-50995).
|
79
|
Exhibit
No.
|
Description
|
Reference
|
||
|
10.11
|
+
|
Credit
and Security Agreement between uBid.com Holdings, Inc.,
uBid, Inc. and Wells Fargo Bank, National Association acting through
Wells Fargo Business Credit dated May 9, 2006 and Revolving Note in
the amount of $25,000,000 issued on May 9, 2006 by uBid, Inc and
uBid.com Holdings, Inc. payable to Wells Fargo Bank, National
Association.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on May 10, 2006
(File No. 000-50995).
|
|
|
10.12
|
Forbearance
Agreement dated September 25, 2008 between Enable Holdings, Inc.
and Wells Fargo Bank, National Association acting through Wells Fargo Bank
Business Credit.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on September 30,
2008 (File No. 000-50995).
|
||
|
10.13
|
Common
Stock Purchase Agreement dated July 15, 2008, by and between
u-Bid.com Holdings, Inc. and Fusion Capital
Fund II, LLC.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 16, 2008
(File No. 000-50995).
|
||
|
10.14
|
Registration
Rights Agreement dated July 15, 2008, by and between u-Bid.com
Holdings, Inc. and Fusion Capital
Fund II, LLC.
|
Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on July 16, 2008
(File No. 000-50995).
|
||
|
10.15
|
Securities
Purchase Agreement dated October 9, 2008 by and between Enable
Holdings, Inc. and certain Investors.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 14, 2008
(File No. 000-50995).
|
||
|
10.16
|
Securities
Purchase Agreement dated October 16, 2008 by and between Enable
Holdings, Inc. and certain Investors.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 22, 2008
(File No. 000-50995).
|
||
|
10.17
|
Security
Agreement dated October 16, 2008 issued to certain
Investors.
|
Incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 22, 2008
(File No. 000-50995).
|
||
|
10.18
|
Securities
Purchase Agreement dated November 26, 2008 by and between Enable
Holdings, Inc. and certain Investors.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 3, 2008
(File No. 000-50995).
|
||
|
10.19
|
Form
of Debenture Modification and Extension Agreement dated January 16,
2009.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 20, 2009
(File
No. 000-50995).
|
80
|
Exhibit
No.
|
Description
|
Reference
|
||
|
10.20
|
Independent
Consulting Agreement effective March 15, 2009 by and between Enable
Holdings, Inc. and Salzwedel Financial
Communications, Inc.
|
Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 23, 2009
(File No. 000-50995).
|
||
|
16.1
|
Letter
regarding Change in Certifying Accountant.
|
Incorporated
by reference to Exhibit 16.1 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 5, 2006
(File No. 000-50995).
|
||
|
16.2
|
Letter
regarding Change in Certifying Accountant.
|
Incorporated
by reference to Exhibit 16.2 to the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on
February 10, 2006 (File No. 333-131733).
|
||
|
21.1
|
List
of Subsidiaries.
|
Filed
herewith
|
||
|
23.1
|
Consent
of Independent Registered Public Accounting Firm
|
Filed herewith | ||
|
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
Filed
herewith
|
||
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
Filed
herewith
|
||
|
32.1
|
Certification
of the President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
Filed
herewith
|
||
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Filed
herewith
|
81
SIGNATURES
Pursuant
to requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized as of October 22, 2009.
|
ENABLE
HOLDINGS, INC.
|
|||
|
By:
|
/s/ JEFFREY
D. HOFFMAN
|
||
|
Name: Jeffrey
D. Hoffman
|
|||
|
Title: Chief Executive
Officer
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated as of the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ JEFFREY D. HOFFMAN
|
Chief
Executive Officer and Director
|
October
22, 2009
|
||
|
Jeffrey
D. Hoffman
|
(Principal
Executive Officer)
|
|||
|
/s/ MIGUEL A. MARTINEZ,
JR.
|
Chief
Financial Officer
|
October
22, 2009
|
||
|
Miguel
A. Martinez, Jr.
|
(Chief
Financial Officer and Principal Accounting Officer)
|
|||
|
/s/ STEVEN SJOBLAD
|
Director
|
October
22, 2009
|
||
|
Steven
Sjoblad
|
||||
|
/s/ CASEY L. GUNNELL
|
Director
|
October
22, 2009
|
||
|
Casey
L. Gunnell
|
||||
|
/s/ KENNETH J. ROERING
|
Director
|
October
22, 2009
|
||
|
Kenneth
J. Roering
|
82