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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 000-29423
DYNABAZAAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3351937
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
888 Seventh Avenue, New York, NY 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 974-5730
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act).
Yes / / No /X/
The number of shares outstanding of the registrant's common stock as of May 11,
2004 was 26,702,862.
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DYNABAZAAR, INC.
FORM 10-Q
For the Quarter Ended March 31, 2004
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)...................................................................1
(a) Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003
(b) Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2004 and 2003
(c) Condensed Consolidated Statements of Cash Flows for Three Months Ended March 31, 2004 and 2003
(d) Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation............8
Item 3. Quantitative and Qualitative Disclosure about Market Risk......................................11
Item 4. Control and Procedures.........................................................................11
PART II. OTHER INFORMATION.......................................................................................
Item 1. Legal Proceedings...................................................................................12
Item 2. Changes in Securities and Use of Proceeds...........................................................12
Item 3. Defaults upon Senior Securities. Not applicable....................................................12
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable................................12
Item 5. Other Information. Not applicable..................................................................12
Item 6. Exhibits and Reports on Form 8-K....................................................................12
DYNABAZAAR and MarketSelect are registered service marks, and the Dynabazaar
logo and Dynabazaar Network are service marks, of Dynabazaar, Inc. The names of
other companies and products mentioned in this Report may be the trademarks of
their respective owners.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DYNABAZAAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited in thousands
March 31, December 31,
2004 2003
--------- ------------
Assets
Current assets:
Cash and cash equivalents $4,463 $5,697
Restricted cash 1,052 523
Accounts receivable, net of allowance for doubtful accounts of $164 and $162
at March 31, 2004 and December 31, 2003, respectively 179 351
Prepaid expenses 438 389
Other current assets 521 903
---------------------------------
Total current assets 6,653 7,863
Long-term marketable securities 5,000 5,000
Long-term prepaid expenses 1,575 1,658
Property and equipment, net 101 109
Other assets 2,000 2,000
---------------------------------
Total assets $15,329 $16,630
=================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $2 $82
Accrued expenses 632 1,034
Current portion of accrual for unutilized office space 900 1,200
---------------------------------
Total current liabilities 1,534 2,316
Other long-term liabilities 2,000 2,000
---------------------------------
Total liabilities 3,534 4,316
---------------------------------
Stockholders' equity:
Common stock, $0.001 par value; 90,000,000 shares authorized, 29,426,385
issued at March 31, 2004 and December 31, 2003 30 30
Additional paid-in capital 151,636 151,636
Treasury stock (at cost of $1.27 per share); 2,376,641shares at March 31,
2004 and December 31, 2003 (3,018) (3,018)
Accumulated other comprehensive income, net 252 191
Accumulated deficit (137,105) (136,525)
---------------------------------
Total stockholders' equity 11,795 12,314
---------------------------------
Total liabilities and stockholders' equity $15,329 $16,630
=================================
See accompanying notes to condensed consolidated financial statements.
1
DYNABAZAAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per share amounts)
Three Months Ended
March 31,
2004 2003
----------------------------
Revenue $- $1,357
----------------------------
Operating expenses:
Cost of revenue 759
Sales and marketing 562
Development and engineering 352
General and administrative 661 1,400
Equity-related charges 52
----------------------------
Total operating expenses 661 3,125
----------------------------
Loss from operations (661) (1,768)
Other income, net 81 215
----------------------------
Net loss $(580) $(1,553)
============================
Dividend and accretion on redeemable convertible preferred stock 49
Net loss attributable to common shareholders $(580) $(1,602)
============================
Basic and diluted net loss per common share $(0.02) $(0.06)
============================
Shares used to compute basic and diluted net loss per common share 27,050 26,586
============================
- --------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
2
DYNABAZAAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
March 31,
--------------------------------------
2004 2003
--------------------------------------
Cash flows from operating activities:
Net loss $(580) $(1,553)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 8 482
Reserve for uncollectible accounts 2 2
Amortization of deferred compensation and equity-related charges 52
Changes in operating assets and liabilities:
Accounts receivable 171 268
Prepaid expenses and other current assets 333 (709)
Long-term prepaid expenses 83 35
Accounts payable (80) (7)
Accrued expenses (402) (121)
Deferred revenue 4
Accrual for unutilized office space (300)
Other long-term liabilities (291)
--------------------------------------
Net cash used in operating activities (765) (1,838)
--------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (3)
Purchases of marketable securities (112,906)
Proceeds from maturity of marketable securities 112,222
Increase in restricted cash (528)
--------------------------------------
Net cash used in investing activities (528) (687)
--------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs 57
Dividends paid on redeemable convertible preferred stock (33)
--------------------------------------
Net cash provided by financing activities 24
--------------------------------------
Effect of foreign exchange rates on cash and cash equivalents 58 1
--------------------------------------
Net decrease in cash and cash equivalents (1,235) (2,500)
Cash and cash equivalents, beginning of period 5,697 32,743
--------------------------------------
Cash and cash equivalents, end of period $4,463 $30,243
======================================
See accompanying notes to condensed consolidated financial statements.
3
DYNABAZAAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Recent Events
Through September 3, 2003, Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the
"Company") was an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and consumer buyers.
We are currently reviewing alternatives for the use and disposition of our
remaining assets, which may include pursuing a plan of complete liquidation and
dissolution, possibly including the sale of our remaining assets. Alternatively,
we may decided to pursue selling our remaining assets outside of a liquidation
and dissolution, to make additional distributions of cash to our stockholders ,
to explore other business opportunities unrelated to our historical business,
including the possible acquisition of other businesses. At this time, our board
of directors has not made any decision to purse any one of these options and has
not identified any such opportunities. We cannot assure you that we will be able
to identify or successfully capitalize on any appropriate business
opportunities.
In December 2003, we received notice from the Nasdaq Stock Market that we were
not in compliance with the minimum bid price requirement for continued listing
on the Nasdaq National Market. To avoid delisting, Nasdaq has stated that the
bid price of our common stock must be at $1.00 per share or more for at least
ten consective trading days prior to June 14, 2004.
In connection with the Company's cessation of its online auction business,
effective as of January 1, 2004, the Company relocated its principal executive
offices to 888 Seventh Avenue, 17th Floor, New York, 10019, an office maintained
by Barington Capital Group, LP ("Barington"), a limited partnership whose
general partner is a corporation of which James Mitarotonda is Chairman,
President and Chief Executive Officer. James Mitarotonda is the Company's
President and Chief Executive Officer. We pay Barington a monthly fee of $8,000
for administrative services as well as reimbursement of reasonable expenses. In
connection with the agreement, we granted to James Mitarotonda an option to
purchase up to 320,000 shares of our common stock. The option is fully
excercisable and was granted with an exercise price per share equal to $0.33,
the fair market value of our common stock on the grant date.
On January 20, 2004, the Company and Acquaport Unicorn , Inc (the landlord)
executed a settlement agreement providing for lease termination of the Company's
Woburn, Massachusetts headquarters in consideration of a cash payment of $1.2
million.
2. Summary of Significant Acccounting Policies
Going Concern
The accompanying condensed consolidated financial statements as of March 31,
2004 and for the three-month periods ended have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The Company has incurred losses and negative cash flows from
operations for every year since inception. For the quarter ended March 31, 2004,
the Company incurred a net loss of approximately $.6 million and negative cash
flows from operations of approximately $.8 million. Subsequent to the Asset
Purchase Agreement in September 2003, the Company has not yet settled on an
operating plan. These factors, among others, indicate that the Company may be
unable to continue operations as a going concern. No adjustment has been made in
the accompanying financial statements to the amounts and classifications of
assets and liabilities which could result should the Company be unable to
continue as a going concern. The Company continues to consider future
alternatives, including the possible acquisition of other businesses. However,
the Company has not consummated any significant transactions to date and the
Company's business prospects remain uncertain. To the extent that management of
the Company moves forward on any alternative strategy, such strategy may have an
impact on the Company's liquidity. It remains management's prime focus to
acquire an operating business.
4
Basis of Presentation
The accompanying condensed consolidated financial statements of Dynabazaar are
unaudited and have been prepared on a basis substantially consistent with our
audited consolidated financial statements for the year ended December 31, 2003.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These consolidated interim financial statements should be read in conjunction
with our audited consolidated financial statements for the year ended December
31, 2003, which are contained in our Annual Report on Form 10-K, filed with the
Securities and Exchange Commission. The condensed consolidated interim financial
statements, in the opinion of management, reflect all adjustments (including all
normal recurring accruals) necessary for a fair presentation of the results of
operations and cash flows for the interim periods ended March 31, 2004 and 2003.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. The
consolidated interim financial statements include the accounts of Dynabazaar and
its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of cash placed in an overnight investment account,
commercial paper and money market accounts.
Accounting for Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure". SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also requires that
disclosures of the pro forma effect of using the fair value method of accounting
for stock-based employee compensation be displayed more prominently and in a
tabular format. Additionally, SFAS 148 requires disclosure of the pro forma
effect in interim financial statements. The transition and annual disclosure
requirements of SFAS 148 are effective for fiscal years ending after December
15, 2002. The interim disclosure requirements are effective for interim periods
ending after December 15, 2002.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18 "Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services."
Consistent with the disclosure provisions of SFAS 123, the Company's net loss
and basic and diluted net loss per share would have been adjusted to the pro
forma amounts indicated below (in thousands, except per share amounts).
March 31, March 31,
2004 2003
--------------------------------
Net loss attributable to common stockholders
As reported $(580) $(1,602)
Add: Stock-based employee compensation expense included in reported results 52
Deduct: Total stock-based employee compensation expense determined under the
fair-value-based method for all awards (234)
--------------------------------
Pro forma $(580) $(1,784)
================================
Net loss per common share
As reported $(0.02) $(0.06)
Pro forma $(0.02) $(0.07)
5
3. Net Loss per Share
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed using the weighted average number of common shares outstanding
during the period plus the effect of any dilutive potential common shares.
Dilutive potential common equivalent shares consist of the assumed exercise of
stock options, the proceeds of which are then assumed to have been used to
repurchase outstanding stock using the treasury stock method, and the assumed
conversion of convertible preferred stock and warrants. Potential common shares
were excluded from the calculation of net loss per common share for the periods
presented since their inclusion would be anti-dilutive. For the three months
ended March 31, 2004 and 2003, basic and diluted net loss per common share is
computed based on the weighted average number of common shares outstanding
during the period because the effect of potential common equivalent shares would
be anti-dilutive.
4. Comprehensive Loss
For the three months ended March 31, 2004 and 2003, total comprehensive loss was
as follows (in thousands):
Three Months Ended
March 31,
------------------------------------
2004 2003
------------------------------------
Net loss $(580) $(1,553)
Changes in other comprehensive loss:
Foreign currency translation adjustments 61 8
Unrealized gain (loss) on marketable securities 16
------------------------------------
Total comprehensive loss $(519) $(1,529)
====================================
5. Revenues and Long-lived Assets by Geographic Region
The table below presents revenues by principal geographic region for the three
months ended March 31, 2004 and 2003(in thousands):
Three Months Ended
March 31,
---------------------------
2004 2003
---------------------------
United States $- $975
United Kingdom 358
All other 24
---------------------------
Total $- $1,357
===========================
The table below presents long-lived assets by principal geographic region as of
March 31, 2004 and December 31, 2003 (in thousands):
March 31, December 31,
2004 2003
----------------------------
United States $---- $----
United Kingdom 101 109
----------------------------
Total $101 $109
============================
6
6. Commitments and Contingencies
We are a defendant in certain purported class action lawsuits filed by
individual shareholders in the U.S. District Court for the Southern District of
New York against Dynabazaar, Scott Randall (former President, Chief Executive
Officer and Chairman of the Board of Dynbazaar,) John Belchers (former Chief
Financial Officer of Dynabazaar,) U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc. and FleetBoston Robertson Stephens, Inc. The lawsuits have been
filed by individual shareholders who purport to seek class action status on
behalf of all other similarly situated persons who purchased the common stock of
Dynbazaar between March 14, 2000 and December 6, 2000. The lawsuits allege that
certain underwriters of Dynbazaar's initial public offering solicited and
received excessive and undisclosed fees and commissions in connection with that
offering. The lawsuits further allege that the defendants violated the federal
securities laws by issuing a registration statement and prospectus in connection
with Dynbazaar's initial public offering, which failed to accurately disclose
the amount and nature of the commissions and fees paid to the underwriter
defendents. On or about October 8, 2002, the Court entered an Order dismissing
the claims asserted against certain individual defendents in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10 (b) of the Securities Exchange Act of 1934. As a
result, the only claims that remain against the Company are those arising under
Section 11 of the Securities Act of 1934. The Company has entered into an
agreement-in-principle to settle the remaining claims in the litigation. The
proposed settlement will result in a dismissal with prejudice of all claims and
will include a release of all claims that were brought or could have been
brought against the Company and its present and former directors and officers.
It is anticipated that any payment to the plaintiff class and their counsel will
be funded by the Company's directors & officers liability insurance and that no
direct payment will be made by the Company. The proposed settlement is subject
to a number of significant conditions and contingencies, including the execution
of a definitive settlement agreement, final approval of the settlement by the
Company's directors & officers liability insurance carriers and by the plaintiff
class, and the approval of the settlement by the Court.
Indemnification Obligations
In the quarter ended September 30, 2003, eBay asserted two indemnifications
claims against us under one of our commercial agreements with eBay. We settled
one of these claims for a cash payment to eBay of $210,000. The remaining claim
is based upon a third party alleging that certain of our former technology
utilized by eBay infringes certain patents of the third party. No lawsuit has
been filed. Given the early stage of the claim at this time time, we cannot make
a determination as to the ultimate outcome of this matter and the impact, if
any, on our financial condition, liquidity or results of operations.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
Through September 3, 2003, Dynabazaar, Inc. ("we," "us," "Dynabazaar" or the
"Company") was an online auction and promotions technology service provider that
enabled marketers to create results-oriented rewards programs and helped
commerce companies automate the process of selling their excess inventory online
to wholesale and consumer buyers.
On September 4, 2003, we sold substantially all of our operating assets to eBay,
Inc. for considerations of $4.5 million in cash under the terms and conditions
of an asset purchase agreement we entered into with eBay on June 20, 2003 ( the
"Asset Purchase Agreement"). The assets sold included all of our intellectual
property and technology, all rights under certain transferred customer contracts
and under certain intellectual property license agreements, and accounts
receivable relating to services performed after the date of the closing of the
asset sale with respect to the transferred customer contracts. Of the total
consideration, $2.5 million in cash was paid to us at closing and $2 million was
placed in escrow for a period of two years following the closing in order to
secure our indemnifications, compensation and reimbursement obligations under
the Asset Purchase Agreement. At the end of the two-year escrow period, all
funds remaining in the escrow account at that time will be paid to us by the
escrow agent, subjet to any pending claims.
Following the closing of the asset sale, we changed our name from "Fairmarket,
Inc. " to "Dynabazaar, Inc".
In connection with the asset sale, the parties entered into a Transition
Services Agreement, ("TSA") pursuant to which we provided services to eBay
through December 31, 2003 to fulfill customer service obligation under customer
contracts assumed by eBay. Additionally, through December 31, 2003, we continued
to provided services to nine retained customers, six in the United States, and
three in the United Kingdom under the same terms as were provided before the
closing date of the asset sale. The revenue derived from those retained
customers was not significant.
Twelve of our former employees were hired by eBay, Inc. in connection with the
asset sale.
On October 10, 2003, we declared a cash dividend of $1.30 per share on our
common stock, representing an aggregate cash distribution of return of capital
of approximately $35 million. The dividend was paid on November 3, 2003 to
stockholders of record on October 20, 2003.
In connection with the closing of the asset sale, eBay, Inc., the holder of our
Series B preferred stock (the "Series B Shares"), elected to receive a
liquidation preference equal to approximately $2 million in the aggregate, or $
2.10 per share, plus all accrued and unpaid dividends with respect to the Series
B Shares. The liquidation preference and accrued and unpaid dividends were paid
to eBay, Inc. on September 5, 2003 in the amount of approximately $2,024,000. On
September 29, 2003, we repurchased from eBay and retired all of the Series B
shares for a purchase price of $1,466,665 in cash. The payment represented
payment in full for any and all obligations of the Company in respect of the
Series B shares.
In December 2003, we received notice from the Nasdaq Stock Market that we were
not in compliance with the minimum bid price requirement for continued listing
on the Nasdaq National Market. To avoid delisting, Nasdaq has stated that the
bid price of our common stock must close at $ 1.00 per share or more for at
least ten consecutive trading days prior to June 14, 2004.
8
In December 2003, we entered into an Administrative Services Agreement with
Barington Capital Group, L.P. James A. Mitarotonda, our Chief Executive Officer,
is Chairman of Barington's general partner. In connection with the Company's
cessation of its online auction business, effective as of January 1, 2004. the
Company relocated its principal executive offices to 888 Seventh Avenue, 17th
floor, New York, New York 10019, an office maintained by Barington Capital
Group, LP ("Barington"), a limited partnership whose general partner is a
corporation of which James Mitarotonda is Chairman, President and Chief
Executive Officer. James Mitarotonda is the Company's President and Chief
Executive Officer. We pay Barington a monthly fee of $8,000 for administrative
services as well as reimbursement of reasonable expenses. In connection with the
agreement, we granted to James Mitarotonda an option to purchase up to 320,000
shares of our common stock. The option is fully excercisable and was granted
with an exercise price per share equal to $0.33, the fair market value of our
common stock on the grant date.
In January 2004, James A. Mitarotonda was appointed as our Chief Executive
Officer and Mel Brunt was appointed as our Chief Financial Officer.
On February 2, 2004, we dismissed PricewaterhouseCoopers LLP as our independent
accountants and engaged Rothstein, Kass & Company, P.C. as our independent
auditors commencing with the audit of our financial statements for the year
ended December 31, 2003.
We are currently reviewing alternatives for the use and disposition of our
remaining assets, which may include pursuing a plan of complete liquidation and
dissolution, possibly including the sale of our remaining assets. Alternatively,
we may decided to pursue selling our remaining assets outside of a liquidation
and dissolution, to make additional distributions of cash to our stockholders,
to explore other strategic alternatives such as a business combination with
another party, and/or to continue as an independent stand-alone company focusing
on business opportunities unrelated to our historical business, including the
possible acquisition of other businesses. At this time, our board of directors
has not made any decision to pursue any one of these options and has not
identified any such opportunities. We cannot assure you that we will be able to
identify or successfully capitalize on any appropriate business opportunities.
Our common stock continues to be traded on The Nasdaq National Market. The
market price per share dropped significantly subsequent to the payment of the
$1.30 per share distribution to our common stockholders. The market price of our
common stock as of March 5, 2004 was $0.37 per share. On December 17, 2003, we
were notified by Nasdaq that pursuant to Marketplace Rule 4450 (a)(5), we have
until June 14, 2004 for our stock to trade above $1.00 for 10 consecutive
trading days to avoid being delisted from the Nasdaq National Market. We may be
delisted before that date if we fail to meet other criteria for continued
inclusion on The Nasdaq National Market. If we are delisted from The Nasdaq
National Market, our stock will only be traded on the OTC Bulletin Board. An
investment in an OTC security is speculative and involves a degree of risk. Many
OTC securities are relatively illiquid, or "thinly traded", which can enhance
volatility in the share price and make it difficult for investors to buy or sell
without dramatically effecting the quoted price or they may be unable to sell a
position at a later date. If our stock is delisted from the Nasdaq National
Market, then the ability of our stockholders to buy and sell our shares will be
materially impaired. Moreover, if we pursue a plan of complete liquidation and
dissolution, we will close our stock transfer books, discontinue recording
transfers of our common stock, and our common stock will no longer be assignable
or transferable on our books. Accordingly, the proportionate interests of all of
our stockholders will be fixed on the basis of their respective stock holdings
at the close of business on the date of dissolution, and any distributions made
by us after such date will be made solely to the stockholders of record at the
close of business on the date of dissolution.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their most
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. The SEC indicated that a
"critical accounting policy" is one which is both important to the portrayal of
the company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. Our
significant accounting policies are more fully described in Note 2, Summary of
Significant Accounting Policies, to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
These critical accounting policies relate to revenue recognition, allowance for
doubtful accounts, deferred tax assets and unutilized office space. No changes
to these critical polices have taken place during the quarter ended March 31,
2004.
9
Results of Operations for the Quarters Ended March 31, 2004 and 2003
For the quarter ended March 31, 2004, our net loss was $.6 million, compared to
our net loss of $1.6 million, for the quarter ended March 31, 2003.
Revenue
Total revenue was $0 for the quarter ended March 31, 2004, compared to total
revenue of $1.4 million for the quarter ended March 31, 2003.
Operating Expenses
Cost of revenues was $0 for the quarter ended March 31, 2004, compared to cost
of revenues of $759,000 for the quarter ended March 31, 2003.
Sales and marketing expenses were $0 for the quarter ended March 31, 2004,
compared to sales and marketing expenses of $562,000 for the quarter ended March
31, 2003. The decrease in sales and marketing expenses was due primarily to the
cessation of operating business activities.
Development and engineering expenses were $0 for the quarter ended March 31,
2004, compared to development and engineering expenses of $352,000 for the
quarter ended March 31, 2003.
General and administrative expenses were $661,000 for the three months ended
March 31, 2004, a decrease of $739,000, or 53%, compared to general and
administrative expenses of $1.4 million for the three months ended March 31,
2003. The decrease was due primarily to the reduction in facilities expenses of
$300,000 as a result of the charge for unutilized office space recorded during
the first quarter of 2002 and a decrease in depreciation expense of $480,000 as
a result of certain assets being fully depreciated when compared to the quarter
ended March 31, 2003.
At March 31, 2004, deferred stock compensation, which is a component of deferred
compensation and equity-related charges in stockholders' equity, totaled $0.
Other Income, net
Other income, net, was $81,000 for the three months ended March 31, 2004,
compared to other income, net, of $215,000, for the three months ended March 31,
2003. This decrease was due to lower interest income from lower average balances
of cash, cash equivalents and investments and lower interest rates in the first
quarter of 2004 compared to the same period of last year.
Liquidity and Capital Resources
At March 31, 2004, cash and cash equivalents totaled $ 9.5 million.
Cash used in operating activities was $765,000 for the three months ended March
31, 2004 and $1.8 million for the three months ended March 31, 2003. Net cash
flows used in operating activities primarily reflects the Company's net loss of
approximately $580,000 and $1.6 million respectively.
Cash used in investing activities was $528,000 for the three months ended March
31, 2004 and $687,000 for the three months ended March 31, 2004. Net cash flows
used in investing activities for the quarter ending March 31, 2004 reflects the
draw down of restricted cash to pay for lease related items. Cash used in
investing activities for the period ended March 31, 2003 was due mainly to the
purchase of marketable securities.
Cash flows from financing activities was $0 for the quarter ended March 31, 2004
and $24,000 for the quarter ended March 31, 2003.
10
Factors that May Affect Results of Operations and Financial Condition
This Form 10-Q 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. You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," "estimate," "assume" and other
similar expressions which predict or indicate future events and trends and which
do not relate to historical matters. You should not rely on forward-looking
statements, because they involve known and unknown risks, uncertainties and
other factors, some of which are beyond our control. Our actual results could
differ materially from those set forth in the forward-looking statements.
Some of the factors that might cause these differences include those set forth
below. You should carefully review all of these factors, and you should be aware
that there may be other factors that could cause these differences. These
forward-looking statements were based on information, plans and estimates at the
date of this Form 10-Q, and we do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
Risks Related to Our Business
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Portfolio
We do not use derivative financial instruments for investment purposes and only
invest in financial instruments that meet high credit quality standards, as
specified in our investment policy guidelines. This policy also limits the
amount of credit exposure of any one issue, issuer, and type of investment. Due
to the conservative nature of our investments, we do not believe that we have a
material exposure to interest rate risk.
Foreign Currency Risk
International sales are made from our foreign sales subsidiaries in the
respective countries and are denominated in the local currency of each country.
These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency. Our international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
our future results could be materially adversely impacted by changes in these or
other factors. Our intercompany accounts are typically denominated in the
functional currency of the foreign subsidiary in order to centralize foreign
exchange risk with the parent company in the United States. We are also exposed
to foreign exchange rate fluctuations as the financial results of foreign
subsidiaries are translated into U.S. dollars in consolidation. As exchange
rates vary, these results, when translated, may vary from expectations and
adversely impact overall financial results. The effect of foreign exchange rate
fluctuations on Dynabazaar in the quarter ended March 31, 2004 and 2003 was not
significant.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this report.
Based on their evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective.
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(b) Changes in Internal Controls
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in paragraph (a) above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Dynabazaar, Inc. has been named as a defendant in certain purported class action
lawsuits filed by individual shareholders in the U.S. District Court for the
Southern District of New York against Dynabazaar, Inc. Scott Randall (former
President, Chief Executive Officer and Chairman of the Board of Dynabazaar,
Inc.), John Belchers (former Chief Financial Officer of Dynabazaar, Inc.), U.S.
Bancorp Piper Jaffray Inc., Deutsche Bank Securities Inc. and FleetBoston
Robertson Stephens, Inc. The lawsuits have been filed by individual shareholders
who purport to seek class action status on behalf of all other similarly
situated persons who purchased the common stock of Dynabazaar, Inc.,between
March 14, 2000 and December 6, 2000. The lawsuits allege that certain
underwriters of FairMarket's initial public offering solicited and received
excessive and undisclosed fees and commissions in connection with that offering.
The lawsuits further allege that the defendants violated the federal securities
laws by issuing a registration statement and prospectus in connection with
Dynabazaar's initial public offering, which failed to accurately disclose the
amount and nature of the commissions and fees paid to the underwriter
defendants. On or about October 8, 2002, the Court entered an Order dismissing
the claims asserted against certain individual defendants in the consolidated
actions, including the claims against Mr. Randall and Mr. Belchers, without any
payment from these individuals or the Company. On or about February 19, 2003,
the Court entered an Order dismissing with prejudice the claims asserted against
the Company under Section 10(b) of the Securities Exchange Act of 1934. As a
result, the only claims that remain against the Company are those arising under
Section 11 of the Securities Act of 1934. The Company intends to vigorously
defend the remaining claims asserted against it in the actions.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
Item 5. Other Information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 and 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dynabazaar, Inc.
Date: May 12, 2004 By: /s/ James A. Mitarotonda
------------------------
James A. Mitarotonda,
--------------------
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2004 By: /s/ Mel Brunt
-------------
Mel Brunt,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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