As of March 31, 2010 there was $56,000 of total unrecognized compensation cost related to the non-vested option awards under the Equity Incentive Plan that is expected to be recognized over the remaining vesting period of the non-vested option awards.

Restricted Stock

As of March 2010, there was no unvested restricted common stock outstanding.

Stock–based Compensation Expense

Stock-based compensation expense recognized under the Equity Incentive Plan for the three months ended March 31, 2010 and 2009 was as follows:

		(Dollars in Thousands)
		Three Months Ended March 31,
		2010
		2010				2009
Stock Options		$	16			$	30

 

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Note 7. Common Stock warrants and Series A Convertible Preferred Stock

There are no warrants outstanding as of March 31, 2010. All warrants were canceled in December 2009 in conjunction with the debt restructuring described in Note 5.

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. In December 2009, as part of a debt restructuring, the Board of Directors approved the issuance of 3,000,000 shares of Series 1 Preferred Stock. At December 31, 2009 there were 2,497,205 shares of Series 1 Preferred Stock issued and outstanding. During the first quarter of 2010 an additional 200,000 shares of Series 1 Preferred Stock were issued for a total of 2,697,205 shares of Series 1 Preferred Stock issued and outstanding at March 31, 2010.

The Series 1 Preferred Stock was issued to the Bridge Note Holders and the 12% debenture holders as part of a debt restructuring during the fourth quarter of 2009. The Bridge Note Holders received 877,511 shares of Series 1 Preferred Stock and forgave all previously issued debt. In addition to the receipt of Series 1 Preferred Stock, the Bridge Note Holders received $700 in cash and received a note for $900 which bears interest at an annual rate of 6%. The Bridge Note Holders also agreed to cancel all their outstanding warrants.

In conjunction with the restructuring, the 12% debenture holders received 119,694 shares of Series 1 Preferred Stock. In addition, they received a note for $822 which bears interest at an annual rate of 6%. The 12% debenture holders received all interest accrued and payable. The 12% debenture holders also agreed to cancel all their outstanding warrants.

The remaining 1,500,000 shares of Series 1 Preferred Stock were sold to accredited investors at $2.50 per share. At December 31, 2009 we had commitments to purchase all 1,500,000 shares. The Company received $2,396 in cash and the remaining $1,354 was recorded as a subscription receivable. All monies were received by February 24, 2010. During the quarter ended March 31, 2010 an additional 200,000 shares of Series 1 Preferred Stock were sold to accredited investors at $2.50 per share. The Series 1 Preferred Stock is convertible into 66.83 shares of common stock per share of Series 1 Preferred Stock. The Series 1 Preferred Stock has a liquidation preference of a minimum Internal Rate of Return of 25% but no more than three times the investment amount.

As part of the debt restructuring, all options issued to employees under the 2005 Equity Incentive Plan were canceled. Employees received no consideration for the cancellations.

The restructuring of the bridge note and 12% debenture was accounted for in accordance with ASC 470-60 – Accounting for Troubled Debt Restructuring, and resulted in a gain being recorded for the difference between the fair market value of the preferred stock issued and the fair value amount of the debt forgiven and warrants surrendered.

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Note 8.  Long-Term Debt

On October 9, 2009, the Company received a $500 loan in the form of 2009 convertible promissory notes provided from a group of accredited investors. The Company repaid the loan in full on December 2, 2009.

During the fourth quarter of 2009 the Company entered into a restructuring agreement with the Bridge Note Holders. As part of the restructuring, the Bridge Note Holders received $700 in cash and were issued a $900 note that is due in 24 months. The note bears interest at a 6% annual rate. The note and accrued interest are payable starting 15 months from the closing date. The Bridge Note Holders forgave previously issued debt, canceled all the warrants received and received 877,511 shares of Series 1 Preferred Stock.  Per ASC 470-60 – Accounting for Troubled Debt Restructuring a gain was recorded for the difference between the fair market value of the preferred stock issued and the fair value of the debt forgiven and warrants surrendered.

In connection with the debt restructuring, two long term notes for $900 and $822 both of which bear interest at a rate of 6% per annum, were issued by the Company. The $900 note was issued to the Bridge Note Holders and is payable in quarterly installments starting in March, 2011. The $822 note was issued to the 12% debenture holders and is due, along with accrued interest in 24 months. All previously issued debt was forgiven in conjunction with the restructuring agreement.

 

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The revenue and gross profit breakdown based on the Company’s five business segments is as follows:

(The Company does not summarize expenses based on the segments).

 

		(Dollars in Thousands)
		Three months Ended March 31,
Net Revenue		2010								2009
uBid,com		$	2,089				69.9	%		$	2,686				52.7	%
RedTag.com			359				12.0	%			127				2.5	%
RedTag Live			-				0.0	%			792				15.5	%
Dibu Trading Co.			542				18.1	%			1,489				29.2	%
Commerce Innovations			-				-				-				-
Total		$	2,990				100.0	%		$	5,094				100.0	%
Gross Profit
uBid,com		$	651				87.0	%		$	914				74.4	%
RedTag.com			42				5.6	%			17				1.4	%
RedTag Live			(6	)			(0.8	)%			185				15.1	%
Dibu Trading Co.			61				8.2	%			113				9.2	%
Commerce Innovations			-				-				-				-
Total		$	748				100.0	%		$	1,229				100.0	%
Gross Profit %
uBid,com			31.2	%							34.0	%
RedTag.com			11.7	%							13.4	%
RedTag Live			0.0	%							23.4	%
Dibu Trading Co.			11.3	%							7.6	%
Commerce Innovations			-								-
Total			25.0	%							24.1	%

Note 9. Related Party Transactions

A member of the Company’s Board of Directors has provided inventory financing during the current period. The Board member was paid $18 in interest during the quarter ended March 31, 2010.

Note 10. 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 March 31, 2010 we had accumulated a deficit of approximately $55 million.  Over the last twelve years and through the first quarter of 2010, we have incurred losses due to operational problems, capital constraints and a change in our business model. During 2006 and 2007 the Company’s operations were funded by the capital raised during our 2005/2006 private offerings. During 2008 the Company had fully utilized these funds and drew on our bank line of credit. However, after the second quarter of 2008 the Company did not meet the established bank covenants and was required to pay off the outstanding balance. Due to the Company’s recurring losses we could not obtain new bank financing. Instead during 2008, 2009 and 2010 we received financing from our investors to fund our operations through the issuance of various debt instruments. We have also utilized short term financing deals in order to make inventory purchases. During 2009 the Company restructured our financing, reducing our debt from $4.6 million to $1.9 million. We also issued preferred stock, raising approximately $4.2 million. Most of this capital raised was used to pay off our outside vendors therefore we need to either raise additional capital, obtain financing or increase revenue in order for operations to continue. The current credit market remains volatile which affects our ability to raise long-term capital financing and inventory financing needed to run our business. This, coupled with our lack of cash, significantly reduces the Company’s ability to pursue the plans noted below. This creates substantial doubt about our ability to continue as a going concern.

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Management’s plans to continue operations consist of the following:

·

Increase available inventory for sale through establishing an asset based lending credit line (ABL) of approximately $3,000,

·

Raise additional long term equity capital,

·

Increase revenues through focused marketing to customers in our robust data base reestablishing our sites as ones that appeal to the diversified demographics of the group,

·

Increase revenues through the introduction of diversified product lines to serve the asset recovery industry,

·

Increase revenues by completing the installation of our ERP application allowing us to provide all the requirements necessary for our vendors and Certified Merchants to sell product through us both domestically and globally,

·

Increase revenues through the introduction of transaction fees and restructuring of CM vendor rate card,

·

Execute revised business plan under new leadership and expanded board.

As a result of the conditions discussed above, and in accordance with generally accepted accounting principles in the United States, there exists substantial doubt about our ability to continue as a going concern. Our continued operations are contingent on our ability to be successful in implementing the above plans. There is no assurance that we will be successful in these efforts, therefore there is substantial doubt as to our ability to have sufficient cash to meet our operating requirements and continue as a going concern. The accompanying consolidated financial statements do not reflect adjustments relating to the recoverability and classification of assets or liabilities that might result from the outcome of these uncertainties.

		Three Months Ended
		March 31,
Vendor		2010				2009
Always - at - Market			0.8	%			6.5	%
Hewlett Packard Company			35.5	%			42.2	%
Dealtree			9.6	%			0.0	%

Cost of Revenues: Cost of revenues primarily consists of the cost of the product and inbound and outbound shipping. There is no cost of revenues for UCM Program revenue. Cost of revenues does not include order fulfillment costs, which are included in general and administrative expenses.

Gross Profits: Our gross profit margins are impacted by a number of factors including the category of merchandise, the introduction of new product categories, the mix of sales among our product categories, pricing of products by our vendors, pricing strategies, promotional programs, market conditions, packaging, excess and obsolete inventory charges and other factors. Gross profits and gross profit percentages are not comparable to gross profit and gross profit percentages reported by companies that include order fulfillment costs in the cost of revenues.

Results of Operations (Dollars in Thousands)

Comparison of three months ended March 31, 2010 and 2009

(Dollars in thousands, except per share data and average order value)

The  below sets forth certain data from our statement of operations as a percentage of net revenues as well as the increase (decrease) in quarter ended March 2010 as compared to March 2009. This information should be read in conjunction with our financial statements and notes thereto included elsewhere in this report.

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		(Dollars in Thousands)
		Three months ended March 31,
		2010								2009								Increase (Decrease)
Net Revenues:
uBid.com $			2,089				69.9	%		$	2,686				52.7	%		$	(597	)			(22.2	)%
RedTag.com			359				12.0	%			127				4.2	%			232				182.7	%
RedTag LIVE			-				0.0	%			792				15.5	%			(792	)			(100.0	)%
Dibu Trading Co.			542				18.1	%			1,489				29.2	%			(947	)			(63.6	)%
Total Net Revenues			2,990				100.0	%			5,094				100.0	%			(2,104	)			(41.3	)%
Gross Profit:
uBid.com			651				21.8	%			914				17.9	%			(263	)			(28.8	)%
RedTag.com			42				1.4	%			17				-				25				(147.1	)%
RedTag LIVE			(6	)			(0.2	)%			185				3.6	%			(191	)			(103.2	)%
Dibu Trading Co.			61				2.0	%			113				2.2	%			(52	)			46.0	%
Total Gross Profit			748				25.0	%			1,229				24.1	%			(481	)			(39.1	)%
General and administrative			1,459				48.8	%			2,867				56.3	%			(1,408	)			(49.1	)%
Sales and marketing			144				4.8	%			295				5.8	%			(151	)			(51.2	)%
Total operating expenses			1,603				53.6	%			3,162				62.1	%			(1,559	)			(49.3	)%
Loss from operations			(855	)			(28.6	)%			(1,933	)			(37.9	)%			1,078				(55.8	)%
Interest Expense, net			(121	)			(4.0	)%			(692	)			(13.6	)%			571				82.5	%
Miscellaneous Income			55				1.8	%			(48	)			-				103				(100.0	)%
Net Loss $			(921	)			(30.8	)%		$	(2,673	)			(52.5	)%		$	1,752				(65.5	)%

 

Revenue

Web Properties:  uBid.com and RedTag.com

Net revenue for the web properties decreased $365 or13.0% and gross profit decreased $238 or 25.6%  in the quarter ended March 31, 2010 compared to the same period in 2009. Revenues decreased as a result of a decrease in visitors to the site. Visitors to the two web properties decreased 863 or 38.1%. The decrease in the visitors and the resulting revenue decline were due to the lack of capital to promote the sites and to obtain inventory for posting. The decline in revenue was primarily in the direct channel. The Certified Merchant channel also decreased as merchants experienced slower payments and reduced the amount of postings. The inventory at March 31, 2010 increased $785 or 316% over the same period in the prior year as we began to increase inventories with the capital raise that was completed on February 24, 2010.

The gross margin dollars decreased $238 on the lower sales volumes. The gross margin percentage increased to 26.6% from 17.9% as a result of eliminating some of the unprofitable listings and reducing the number of auctions for the reduced number of visitors.

Offline Sales Channels: Dibu Trading Co. and RedTag Live

Net revenue for the offline sales channels decreased approximately 76.2% in the first quarter of 2010 as compared to 2009, which was due to a live liquidation event held in 2009 versus none in 2010. Dibu trading revenues decreased $947 or 63.6% as a result of the liquidity constraints.

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Sales, General and Administrative Expenses

Sales and marketing, general and administrative (“SG&A”) expenses consist primarily of sales and marketing expenses, including online marketing activities, order fulfillment and other costs, such as personnel, rent, warehouse and handling, common area maintenance, depreciation, credit card processing charges, insurance, legal and accounting fees. The following is a summary of the SG&A expenses:

		Three months ended
		March 31,
		2010				2009				Increase (Decrease)
Salary and Benefits		$	630			$	1,187			$	(557	)
Advertising			121				205				(84	)
RedTag Live Events			-				362				(362	)
Credit Card Fees			170				281				(111	)
Legal, Audit, Insurance & Regulatory Fees			226				344				(118	)
Consulting and Outside Services			9				136				(127	)
Warehouse			26				187				(161	)
Stock Based Compensation			16				30				(14	)
Telecommucations, Hardware and Storage			128				152				(24	)
Depreciation & Amortization			168				119				49
Other SG&A			24				20				4
Facility Fees			63				63				-
Travel			21				31				(10	)
Dues & Subscriptions			1				45				(44	)
		$	1,603			$	3,162			$	(1,559	)

SG&A expenses decreased $1,559 or 49.30% in the quarter ended March 2010 as compared to the quarter ended March 2009.  The primary reason for the decrease in these expenses was the implementations of several cost reduction projects starting in November 2009. The primary categories contributing to the decrease are as follows:

·	Advertising expenses decreased $84 or 40.98% due to the continued elimination of unprofitable and ineffective advertising campaigns.
·	Salary and benefits expenses decreased $557 or 46.93% due to staff reductions and salary reductions. Most senior managers and other managers took pay reductions starting in November 2009 ranging from 10% to over 60%.
·	RedTag Live event expenses decreased $362 or100.0% no live liquidation events were held during the period.
·	Credit card fees decreased $111 or 39.5% due to decreased sales volume at the web properties.
·	Legal, audit, insurance, and other regulatory fees decreased $118 or 34.3% primarily due to fees incurred in the convertible debt issuance in the first quarter of 2009.
·	Consulting and outside services decreased $127 or 93.38% as we continued to eliminate outside services and consulting contracts.
·	Warehouse expense decreased $161 or 86.1% as a result of the lower sales volumes and the move to a multi-use facility that includes a warehouse.

 

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Net Losses

The Company experienced a net loss of $921 or $0.05 per share for the three months ended March 31, 2010 compared to a net loss of $2,673 or $0.14 per share for the three months ended March 31, 2009. Net loss decreased due to lower operating costs resulting from cost reduction measures imposed starting in the fourth quarter of 2009. The first quarter ending March 31, 2010 was the first full quarter with all the cost reductions completed. The delay in closing the capital raise also impacted the loss.

 Interest expense

Interest expense decreased $571 due to interest on warrants issued incurred during the three months ended March 31, 2009. All warrants were canceled in 2009 in conjunction with the restructure.

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Liquidity and Capital Resources