Edgar Filing: LQ CORP INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2006

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number 000-25977

L Q CORPORATION, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 77-0421089
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

888 Seventh Ave., 17TH floor, New York, NY 10019
------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:
(212) 974-5730

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|

Indicate by check mark whether the registrant is 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.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|

The number of shares outstanding of the registrant's common stock as of May 15,
2006 was 3,214,408.

L Q CORPORATION, INC.

INDEX

PART I. FINANCIAL INFORMATION..................................................1

ITEM 1. FINANCIAL STATEMENTS ..............................................1
Condensed Consolidated Balance Sheets as of March 31, 2006
(unaudited) and December 31, 2005.............................1
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2006 (unaudited) and 2005........2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2006 (unaudited) and 2005..............3
Notes to Condensed Consolidated Financial Statements.............4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .....................................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......25
ITEM 4. CONTROLS AND PROCEDURES..........................................25

PART II. OTHER INFORMATION....................................................26

ITEM 1. LEGAL PROCEEDINGS................................................26
ITEM 6. EXHIBITS.........................................................26

SIGNATURES....................................................................27

ITEM 1. FINANCIAL STATEMENTS

L Q CORPORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

March 31, December 31,
2006 2005
unaudited
--------- ----------

ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 2,730 $ 5,746

Accounts receivable .......................................................... 1,209 1,097
Inventories .................................................................. 715 855
Other current assets ......................................................... 146 96
--------- ---------

Total current assets ....................................................... 4,800 7,794

Fixed assets, net ............................................................ 129 14

Goodwill ..................................................................... 1,013 999

Security deposit ............................................................. 22
--------- ---------

Total assets ............................................................... $ 5,964 $ 8,807
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 578 $ -
Accrued expenses and other current liabilities ............................... 251 575
Due to Checkpoint ............................................................ 2,581
--------- ---------

Total current liabilities .................................................... 829 3,156

Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares authorized; 3,214,408 shares
issued and outstanding at March 31, 2006 and
December 31, 2005 .......................................................... 3 3
Additional paid-in capital ................................................... 146,006 146,006
Accumulated deficit .......................................................... (140,783) (140,267)
Accumulated other comprehensive loss ......................................... (91) (91)
--------- ---------

Total stockholders' equity ................................................. 5,135 5,651
--------- ---------

Total liabilities and stockholders' equity ................................. $ 5,964 $ 8,807
========= =========

See accompanying notes to condensed consolidated financial statements.

L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)

Three Months Ended
March 31,
-------------------
2006 2005
------- -------
Revenues .................................... $ 1,533 $ -

Cost of goods sold .......................... 856 -
------- -------

Gross profit ............................. 677 -
------- -------

Operating expenses:
Selling, general and administrative expense 908 161
Technical and engineering expense ......... 312
------- -------

Total operating expenses ................ 1,220 161

Loss from operations ........................ (543) (161)

Other income (expense), net ................. 27 49
------- -------

Net loss .................................. $ (516) $ (112)
======= =======

Net loss per share:
Basic and diluted ......................... $ (0.16) $ (0.03)
======= =======

Weighted average shares ................... 3,214 3,214
======= =======

See accompanying notes to condensed consolidated financial statements.

L Q CORPORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)

Three Months Ended
March 31,
--------------------------------------
2006 2005
----------------- -----------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................................... $ (516) $ (112)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation.................................................................. 1
Provision for doubtful accounts............................................... 37
Issurance of stock options.................................................... 12
Increase (decrease) in cash attributable to changes in operating assets and
liabilities
Accounts receivable.......................................................... (149)
Inventories.................................................................. 140
Other current assets......................................................... (50) 48
Accounts payable............................................................. 578
Accrued expenses and other current liabilities............................... (336) (5)
----------------- -----------------

Net cash used in operating activities........................................ (283) (69)
----------------- -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of fixed assets ...................................................... (130)
Payment of security deposit ................................................... (22)
Payment of Due to Checkpoint ..................................................
Supplemental disclosures of non-cash investing activities:
Reduction in the estimated fair value of fixed assets acquired............... $ (14) -
================= =================
Increase in Goodwill due to the adjustment of the estimated fair value of
fixed assets acquired....................................................... $ 14 -
================= =================
Acquisition of ACPG (2,581)
----------------- -----------------

Net cash used in investing activities (2,733) -
----------------- -----------------

EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS......................... - (13)
----------------- -----------------

NET DECREASE IN CASH AND CASH EQUIVALENTS...................................... (3,016) (82)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................. 5,746 6,432
----------------- -----------------

CASH AND CASH EQUIVALENTS, END OF PERIOD....................................... $ 2,730 $ 6,350
================= =================

See accompanying notes to condensed consolidated financial statements.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

THE COMPANY

OVERVIEW

L Q Corporation, Inc. (the "Company") was incorporated in California as "Liquid
Audio, Inc." in January 1996 and reincorporated in Delaware in April 1999. In
July 1999, we completed our initial public offering of common stock. Our name
was formally changed to "L Q Corporation, Inc." on January 7, 2004. Our
principal executive offices are located at 888 Seventh Avenue, 17th Floor, New
York, NY 10019, and our telephone number is (212) 974-5730.

Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.

From January 2003 until December 30, 2005, we did not operate any business and
were settling our remaining claims and liabilities while reviewing
alternatives for the use or disposition of our remaining assets.

Our common stock is reported currently on The NASDAQ OTC Bulletin Board. Our
common stock was traded on The NASDAQ National Market, but was delisted on June
5, 2003. The market price per share of our stock increased significantly
following the implementation of the 1:250 reverse stock split and our 35:1
forward stock split effective as of June 8, 2004. The market price of our common
stock as of May 8, 2006 was $1.79 per share.

As disclosed in a Form 8K filed by the Company on May 11, 2006, William J. Fox
delivered to the secretary of the Company notice of his resignation as a
director and President and Chief Executive Officer of the Company, effective
as of the close of business on May 15, 2006. Mr. Fox had no disagreements with
the Company on any matters related to the Company's operations, policies or
practices. On May 9, 2006, the Board of Directors of the Company appointed
Sebastian E. Cassetta to serve as a director and as the Company's President and
Chief Executive Officer, effective as of May 16, 2006.

In addition, as disclosed in a Form 8K filed by the Company on May 11, 2006, the
Board of Directors of the Company approved an amendment of the services
agreement between Barington Capital Group, L.P. and the Company dated as of
November 18, 2004. The amendment reduced the monthly fee payable to Barington
for performing certain administrative, accounting and other services on behalf
of the Company from $15,000 per month to $10,000 per month, effective as of
March 1, 2006.

Checkpoint Acquisition

On January 6, 2006, a newly formed, wholly-owned subsidiary of the Company,
Sielox, LLC, ("Sielox") completed the acquisition from Checkpoint Systems, Inc.
("Checkpoint") of substantially all of the assets of Checkpoint's Access Control
Products Group ("ACPG") division, effective as of the close of business on
December 30, 2005. The cash consideration for the transaction was approximately
$2.6 million, subject to post-closing adjustments, an escrow, and related
expenses estimated to be $0.3 million. The acquisition of the net assets of ACPG
are included in the consolidated statement of financial position as of December
31, 2005 and the operations of the business for the first quarter are reflected
in the Statement of Operations for the three months ended March 31, 2006.

The ACPG business, which operates as Sielox(TM) under the Company's management,
develops, designs and distributes a complete line of open architecture access
control software, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards, which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations.

SES Resources, Ltd.

On January 6, 2006, the Company's newly formed, wholly-owned subsidiary, SES
Resources International, Inc. ("SES"), completed the acquisition of
substantially all of the assets of SES Resources, Ltd., a start up consulting
venture, effective as of December 30, 2005. SES Resources, Ltd. assets consisted
primarily of various trademarks. It has been determined that these trademarks
had a fair value of zero. Consideration given in exchange for these assets was a
19.5% share in SES. The newly formed business unit specializes in delivering
critical strategic security and business protection solutions based on best
practices developed by accomplished retired law enforcement agents and in
association with an advisory panel comprised of senior executive service level
government risk assessment and law enforcement professionals ("Advisory Panel").
SES's primary areas of specialization are expected to include: corporate
investigations (e.g. know your customer, know your employee, know your vendor
reviews); due diligence reviews; forensic accounting; anti-money laundering
investigatory services consistent with the requirements of the Patriot Act;
anti-counterfeiting and intellectual property protection, corporate health and
wellness consultancy; emergency preparedness and contingency planning; executive
staffing solutions; and education and government security training services. The
operations of the business are reflected in the Statement of Operations for the
three months ended March 31, 2006.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Advisory Panel will serve SES with advice and will identify expert talent
throughout the United States and internationally, to manage and staff client
assignments. The Advisory Panel is in the process of formation and includes a
senior executive service level agent from the U.S. Internal Revenue Service, the
former Chief of Police of Boca Raton, Florida and a medical doctor who is
presently Assistant Clinical Professor at Albert Einstein College of Medicine.
The Advisory Panel is chaired by one of the owners/founders of SES Resources,
Ltd. and vice chaired by Sebastian Cassetta the former vice president and
Director of Brinks Inc. and, effective May 16, 2006, the newly appointed
President and CEO of the Company. SES is in the process of adding additional
members to the Advisory Panel from various law enforcement agencies.

LIQUIDITY ($ IN THOUSANDS)

The Company has incurred losses and negative cash flows from operations for
every year since inception. For the three months ended March 31, 2006, the
Company incurred a net loss of approximately $516 and negative cash flows from
operations of approximately $283. As of March 31, 2006, the Company had an
accumulated deficit of approximately $140,783. The Company feels its existing
cash and cash equivalents are sufficient to fund the Company's current
operations and satisfy its other obligations. The Company believes these other
obligations will primarily relate to costs associated with the satisfaction of
any potential legal judgments or settlements, investments in software
development and engineering related to the operations of Sielox and expenses
related to the operations of SES. Such operational related expenses are expected
to require the use of the Company's liquidity.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of the Company for
the three months ended March 31, 2006, (unaudited) and March 31, 2005 have been
prepared on a basis substantially consistent with our audited consolidated
financial statements for the year ended December 31, 2005. The condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Consequently, these statements do not include all disclosures normally required
by generally accepted accounting principles for annual financial statements.
These condensed consolidated interim financial statements should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 2005, which are contained in our Annual Report on Form 10-K,
filed with the Securities and Exchange Commission ("SEC"). The condensed
consolidated interim financial statements, in the opinion of management, reflect
all adjustments (including all normal recurring accruals) necessary to present
fairly the Company's financial position, results of operations and cash flows
for the interim periods ended March 31, 2006 and 2005. The results of operations
for the interim periods are not necessarily indicative of the results of
operations to be expected for the fiscal year.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries Sielox and SES. Significant
intercompany transactions and balances have been eliminated.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CASH AND CASH EQUIVALENTS

The Company considers all highly-liquid debt instruments with original
maturities of three months or less to be cash equivalents, including highly
rated money market funds with daily liquidity. At March 31, 2006, and throughout
the three month period, balances of cash at financial institutions exceeded the
federally insured limit. The Company has not experienced any losses in such
accounts and believes it is not subject to any significant credit risk on cash
and cash equivalents. The following schedule summarizes the estimated fair value
of the Company's cash and cash equivalents (in thousands):

March 31, December 31,
2006 2005
---------------- ----------------

Cash and cash equivalents:
Cash...................................................... $ 221 $ 19
Money market funds........................................ 2,509 5,727
---------------- ----------------
$ 2,730 $ 5,746
================ ================

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
short term investments and accounts receivable. Substantially all of the
Company's cash and cash equivalents are invested in a highly liquid money market
fund.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments, including cash and cash equivalents,
accounts receivable and accrued expenses are carried at cost. The Company's
financial instruments approximate fair value due to their relatively short
maturities. The Company does not hold or issue financial instruments for trading
purposes.

ACCOUNTS RECEIVABLE, NET ($ IN THOUSANDS)

Accounts receivable is recorded at net realizable values. The Company maintains
an allowance for estimated losses resulting from the inability of customers to
make required payments and for anticipated returns. The allowance is based on
specific facts and circumstances surrounding individual customers as well as
historical experience. Provisions for the losses on receivables and returns are
charged to income to maintain the allowance at a level considered adequate to
cover losses and future returns. Receivables are charged off against the reserve
when they are deemed uncollectible and returns are charged off against the
reserve when the actual returns are incurred. The Company's accounts receivable,
net from third parties was $1,231 and $1,097 as of March 31, 2006 and
December 31, 2005, respectively net of allowances of $64 at March 31, 2006. Per
the Asset Purchase Agreement, Checkpoint has guaranteed collection of all
acquired net receivables at December 31, 2005. At March 31, 2006, such amount of
net receivables acquired from Checkpoint remaining in the process of collection
was $176.

INVENTORIES

Inventories are stated on the first-in, first-out method, at the lower of cost
or market. A provision is made to reduce excess or obsolete inventories to their
net realizable value.

PROPERTY AND EQUIPMENT, NET

Property and equipment are carried at cost less accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred. Additions,
improvements, and major renewals are capitalized. Depreciation generally is
provided on a straight-line basis over the estimated useful lives of the assets.
Machinery and equipment estimated useful lives range from three to ten years.
The cost and accumulated depreciation applicable to assets retired are removed
from the accounts and the gain or loss on disposition is included on the
statements of operations.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

IMPAIRMENT OF LONG-LIVED ASSETS

Pursuant to Statement of Financial Accounting Standards No. 144 ("SFAS 144")
"Accounting for the Impairment or Disposal of Long-lived Assets," the Company
reviews property and equipment for impairment whenever events or changes in
circumstances indicated that the carrying amount of the assets may not be
recoverable. A loss is recognized on the statements of operations if it is
determined that an impairment exists based on expected future undiscounted cash
flows. The amount of the impairment, if any, is the excess of the carrying
amount of the impaired asset over its fair value.

INTANGIBLE ASSETS

Pursuant to Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," effective December 31, 2001, intangible
assets with indefinite lives are no longer amortized, but instead tested for
impairment. Intangible assets are reviewed for impairment annually or whenever
events or changes in business circumstances indicate the carrying value of the
assets may not be recoverable. Impairment losses are recognized if future cash
flows of the related assets are less than their carrying values.

GOODWILL

Pursuant to SFAS 142, "Goodwill and Other Intangible Assets," effective
December 31, 2001, goodwill is no longer being amortized. The Company tests
goodwill for impairment on an annual basis, relying on a number of factors
including operating results, business plans and future cash flows.
Recoverability of goodwill is evaluated using a two-step process. The first step
involves a comparison of fair value of the Company with its carrying value. If
the carrying amount exceeds its fair value, the second step of the process
involves a comparison of the fair value and carrying value of the goodwill. If
the carrying value exceeds its fair value, an impairment loss is recognized in
an amount equal to the excess.

ACCRUED WARRANTY COSTS

The Company provides product warranties for various products. The warranties
vary in length depending on the product. The Company accrues warranty costs
based on historical data of warranty transactions. Accrued warranties are
reported under accrued expenses and other current liabilities at March 31, 2006
and December 31, 2005.

REVENUE RECOGNITION

Revenue and related costs are recognized upon transfer of ownership, which
generally coincides with the shipment of products to customers. Service revenue
is recognized as services are performed. The Company records revenues net of an
allowance for estimated return activities.

ROYALTY EXPENSES

The Company pays royalties at amounts defined in each agreement based upon units
sold of certain components of its software solution products to various third
parties, which expire at various dates through May 2008.

RESEARCH AND DEVELOPMENT COSTS

Expenditures for research, development and engineering of software and hardware
products are expensed as incurred.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

ADVERTISING COSTS

Advertising costs are charged to operations when incurred.

SHIPPING AND HANDLING COSTS

Shipping and handling costs which are billable to customers are accounted for in
revenues, and such shipping and handling costs incurred are accounted for in
cost of revenues. Other non-billable shipping and handling costs incurred are
accounted for in cost of sales or are expensed as necessary.

STOCK-BASED COMPENSATION ($ IN THOUSANDS)

On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123(R), "Accounting for Stock-Based Compensation
(Revised)." This statement requires companies to record compensation expense for
share-based awards issued to employees and directors in exchange for services
provided. The amount of compensation expense is based on the estimated fair
value of the awards on their grant dates and is recognized, on a straight line
basis, over the applicable vesting period. In addition, SFAS No. 123(R) requires
forfeitures of share-based awards to be estimated at the time of grant and
revised, if necessary, in subsequent periods if those estimates change based on
the actual amount of forfeitures. In the pro-forma information required under
SFAS No. 123 for periods prior to January 1, 2006, the Company accounted for
forfeitures as they occurred.

The fair value of stock options is determined using an option-pricing model that
takes into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and the
expected dividends on it, and the risk free interest rate over the expected life
of the option.

In the three months ended March 31, 2006, the Company recognized compensation
expense of approximately $12 in the Company's condensed consolidated financial
statements, all of which were for stock options. This amount includes
compensation expense for stock options which were granted prior to January 1,
2006 but not yet vested as of that date. Such compensation expense was estimated
in accordance with the provisions of SFAS 123. The compensation expense also
includes the expense recognized for stock options granted subsequent to
January 1, 2006. Such compensation expense was estimated based on the grant date
fair value in accordance with provisions of SFAS No. 123(R). Compensation
expense increased by $8 during the three months ended March 31, 2006 as a result
of implementing SFAS 123(R).

On January 6, 2006, in conjunction with the completion of the purchase of the
ACPG division of Checkpoint, the Company awarded 123,000 stock option grants.
These awards were granted to employees of Sielox and SES, together with members
of Advisory Panel and the Company's executive officers.

Consistant with disclosure provision of SFAS 123, the Company's net loss and
basic and diluted net loss per share would have been adjusted for the three
months ended March 31, 2005, to the pro forma amounts indicated below (in
thousand, except per share amounts).

Three Months Ended
March 31,
------------------
2005
------------

Net loss - as reported................................................... $ (112)
Less stock-based compensation (income) expense determined under
fair value based method, net of tax effects............................ (6)
------------
Net loss - including the effect of stock-based compensation expense...... $ (118)
============

Basic and diluted net loss per share - as reported....................... $ (0.03)
Basic and diluted net loss per share - pro forma......................... $ (0.04)

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123(R), "Accounting for Stock-Based Compensation (Revised)." SFAS No. 123(R)
supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. SFAS No. 123(R)
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R) requires
a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period
during which an employee is required to provide service in exchange for the
award during the requisite service period (usually the vesting period). No
compensation costs are recognized for equity instruments for which employees do
not render the requisite service. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. The Company has adopted this new standard starting in the first
quarter of 2006.

In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151, "Inventory Costs", an amendment of Accounting Research Bulletin (ARB)
No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges and require the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The Company has adopted this new standard
starting in the first quarter of 2006.

In March 2005, FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," that requires an entity to recognize
a liability for a conditional asset retirement obligation when incurred if the
liability can be reasonably estimated. FIN No. 47 clarifies that the term
Conditional Asset Retirement Obligation refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. The Company has adopted this new standard starting in the first
quarter of 2006.

In June 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which will require entities that voluntarily make a change in
accounting principle to apply that change retrospectively to prior periods'
financial statements, unless this would be impracticable. SFAS No. 154
supersedes APB Opinion No. 20, Accounting Changes, which previously required
that most voluntary changes in accounting principle be recognized by including
in the current period's net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between
"retrospective application" of an accounting principle and the "restatement" of
financial statements to reflect the correction of an error. Another significant
change in practice under SFAS No. 154 will be that if an entity changes its
method of depreciation, amortization, or depletion for long-lived, non-financial
assets, the change must be accounted for as a change in accounting estimate.
Under APB Opinion No. 20, such a change would have been reported as a change in
accounting principle. The Company has adopted this new standard starting in the
first quarter of 2006.

NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS):

ACPG ACQUISITION

On January 6, 2006 the Company acquired certain assets and assumed certain
liabilities of the Access Control Products Group ("ACPG") division of Checkpoint
Systems, Inc. with an effective date as of the close of business on December 30,
2005. The Company is a former public shell which had no operations. With the
consummation of the ACPG acquisition, the Company became the parent company of
an operating business. The aggregate purchase price including acquisition
expenses of approximately $300 was approximately $2,900.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS)(CONTINUED):

The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed as of the date of acquisition. The Company is in the
process of identifying an independent appraiser to conduct an appraisal of all
tangible and intangible assets received as a result of the acquisition of ACPG.
Such assets, if appropriate, will be adjusted upon results of an independent
appraisal.

DECEMBER 31, 2005 ($ IN THOUSANDS)
----------------------------------

Accounts Receivable $ 1,097

Inventories 855

Goodwill 1,013

Other assets 37
----------

Total assets acquired $ 3,002

Current liabilities (89)
----------

Net assets acquired $ 2,913
==========

Goodwill arose from the ACPG acquisition. This is due to the aggregate of the
purchase price plus acquisition costs of approximately $2,900 which exceeded the
fair market value of all identifiable assets. An independent appraisal will be
conducted of all tangible and intangible assets (including, but not limited to,
inventory, fixed assets, developed software, hardware designs, customer lists,
patents, trademarks and trade names, etc.) received as a result of the
acquisition of ACPG. The results of this appraisal may give rise to, among other
things, goodwill. Goodwill of approximately $1,013 will be adjusted for amounts
provided for in the Asset Purchase Agreement and will be reclassified upon
results of an independent appraisal. As the independent appraisal is not yet
completed on the intangible assets acquired, the Company has not made an
estimate of amortization. As a result, no amortization was charged to operations
for the three months ended March 31, 2006.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS)(CONTINUED):

The following unaudited pro forma information presents results of operations of
the Company as if the acquisition of ACPG occurred as of January 1, 2005. As the
Company is in the process of receiving an appraisal on the goodwill acquired as
a result of the acquisition, amortization expense can not be estimated at this
time. Although prepared on a basis consistent with the Company's consolidated
financial statements, these unaudited pro forma results do not purport to be
indicative of the actual results of operations of the combined companies which
would have been achieved had these events occurred at the beginning of the
periods presented nor are they indicative of future results.

THREE MONTHS ENDED
MARCH 31, 2005
-------------------------
($ in thousands)
Net Sales $1,555
Cost of Goods Sold (888)
-------------------------
Gross Profit 667
Selling, General and Administrative Expenses 1,149
-------------------------
Net Loss from Operations (482)
Interest Income 46
Pro forma Adjustment in Interest Income (22)(A)
Other Income (Expense), Net 3
-------------------------
Net Loss-Pro forma ($455)
=========================

Net loss per share - as reported $ (0.03)
Net loss per share - proforma $ (0.14)
Weighted average shares 3,214

(A) Interest income has been reduced based on cash balances that would have
existed had the acquisition occurred at the beginning of the period.

NOTE 3-INCOME TAXES:

The Company complies with SFAS No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial reporting for income
taxes. Deferred income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized.

At March 31, 2006, the Company had approximately $18.9 million of federal and
state net operating loss carryforwards available to offset future taxable
income. The federal and state net operating loss carryforwards expire beginning
in 2013. At March 31, 2006, the Company had approximately $2.0 million of
federal and state research and development tax credit carryforwards available to
offset future taxes. The federal tax credit carryforward expire in varying
amounts beginning in 2011. The California tax credit carryforward can be carried
forward indefinitely.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3-INCOME TAXES (CONTINUED):

The total net operating loss carry-forwards ("NOL") of $18.9 million has been
reduced, for financial reporting purposes by $117.2 million for federal and
$48.9 million for state, which is unlikely ever to be utilized due to the
application of the Section 382 provisions. The remainder of the NOL also likely
might effectively be obviated if certain future events were to occur that would
invoke additional Section 382 provisions. Future use of the NOL's therefore is
extremely speculative and should not be presumed absent extensive analysis of
the complex Section 382 provisions.

The Company has incurred a loss in each period since its inception. Based on the
available objective evidence, including the Company's history of losses,
management believes it is more likely than not that the net deferred tax assets
will not be fully realizable. Accordingly, the Company has provided for a full
valuation allowance against its total deferred tax assets at March 31, 2006. The
valuation allowance increased by approximately $41,000 in the three months ended
March 31, 2006.

NOTE 4-BALANCE SHEET COMPONENTS:

INVENTORIES, NET

The components of inventories are as follows(in thousands):

March 31, December 31,
2006 2005
------- ---------
Finished goods................ $ 449 $ 581
Raw materials................. 266 274
------- ---------
$ 715 $ 855
======= =========

AMOUNTS DUE TO CHECKPOINT

Amounts due to Checkpoint are the result of consideration due from the
acquisition of ACPG by Sielox, LLC. These amounts were paid on January 6, 2006.

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The components of accrued expenses and other current liabilities are as follows
(in thousands):

March 31, December 31,
2006 2005
----------------- ----------------

Accrued Expenses and Other Current Liabilities;
Consulting and professional services.................................. $ 75 $ 486
Warranty reserve...................................................... 36 25
Compensation.......................................................... 48 -
Other................................................................. 92 64
----------------- ----------------

$ 251 $ 575
================= ================

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5 - COMPREHENSIVE LOSS:

Comprehensive loss includes net loss and other comprehensive loss. Other
comprehensive loss includes accumulated translation adjustments. The components
of comprehensive loss are as follows (in thousands):

Three Months Ended
March 31,
---------------------------
2006 2005
------------ -------------

Comprehensive loss:
Net loss............................................... $ (516) $ (112)
Foreign currency translation adjustments............... (13)
------------ -------------
$ (516) $ (125)
============ =============

NOTE 6 - NET LOSS PER SHARE:

Basic and diluted net loss per share is computed by dividing the net loss for
the period by the weighted average number of common shares outstanding during
the period. The calculation of diluted net loss per share excludes potential
common shares if the effect is anti-dilutive. Potential common shares consist of
unvested restricted common stock and incremental common shares issuable upon the
exercise of stock options. The Company had a total of 596,000 and 349,000 of
such options outstanding at March 31, 2006 and 2005, respectively.

NOTE 7 - SEGMENT REPORTING ($ IN THOUSANDS)

Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the method companies report information about
operating segments in financial statements. SFAS No. 131 focuses on the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
No. 131 also requires disclosures about products and services, geographic areas
and major customers. The Company has determined that it operated in two and zero
operating segment(s) at March 31, 2006 and 2005, respectively.

The following table represents total net revenues of each of the Company's
reporting segments for the three months ended March 31, 2006 and 2005:

Three months ended March 31,
----------------------------
2006 2005
---- ----

Sielox, LLC $ 1,533 -
SES International Resources, Inc. - -
General Corporate - -

----------------- --------------------
Total $ 1,533 $ -
================= ====================

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table represents the total loss of each of the Company's reporting
segments for the three months ended March 31, 2006 and 2005:

Three months ended March 31,
----------------------------
2006 2005
---- ----

Sielox, LLC $ (267) -
SES International Resources, Inc. (43) -
General Corporate (206) (112)

----------------- --------------------
Total $ (516) $ (112)
================= ====================

The following table represents the total assets of each of the Company's
reporting segments at March 31, 2006 and December 31, 2005, respectively:

March 31, 2006 December 31, 2005
-------------- -----------------
Sielox, LLC $2,963 $2,687
SES International Resources, Inc. 6
General Corporate 2,995 6,120
------ ------
$5,964 $8,807
====== ======

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Legal proceedings

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 certain of our former officers and directors, and various of
the underwriters in our initial public offering ("IPO") and secondary offering.
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 the Company between July 8, 1999 and December 6,
2000. The lawsuits allege that certain underwriters of the 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 the Company'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 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 amended. As a result,
the only claims that remain against the Company are those arising under Section
11 of the Securities Act of 1933, as amended. 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' and officers' liability insurance and that
no direct payment will be made by the Company. The parties have negotiated and
executed a definitive settlement agreement. The proposed settlement provides
that the class members in the class action cases brought against the
participating issuer defendants will be guaranteed a recovery of $1 billion by
insurers of the participating issuer defendants. If recoveries totaling $1
billion or more are obtained by the class members from the underwriter
defendants, however, the monetary obligations to the class members under the
proposed settlement will be satisfied. In addition, the Company and any other
participating issuer defendants will be required to assign to the class members
certain claims that they may have against the underwriters of their IPOs. The
proposed settlement contemplates that any amounts necessary to fund the
settlement or settlement-related expenses would come from participating issuers'
directors and officers liability insurance policy proceeds as opposed to funds
of the participating issuer defendants themselves. A participating issuer
defendant could be required to contribute to the costs of the settlement if that
issuer's insurance coverage were insufficient to pay that issuer's allocable
share of the settlement costs. If ultimately approved by the Court, the proposed
settlement would result in the dismissal, with prejudice, of all claims in the
litigation against the Company and all of the other issuer defendants who
have elected to participate in the proposed settlement, together with the
current or former officers and directors of participating issuers who were named
as individual defendants. The proposed settlement does not provide for the
resolution of any claims against the underwriter defendants, and the litigation
as against those defendants is continuing. Consummation of the proposed
settlement remains conditioned upon obtaining approval by the Court. On
September 1, 2005, the Court preliminarily approved the proposed settlement,
directed that notice of the terms of the proposed settlement be provided to
class members, and scheduled a fairness hearing. On April 24, 2006, the Court
held a fairness hearing in connection with the motion for final approval of the
proposed settlement at which objections to the proposed settlement were heard.
The Court did not issue a ruling at the fairness hearing. The settlement remains
subject to a number of conditions, including final approval of the Court.

L Q CORPORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Contingencies

On January 6,2006,the Company's wholly owned subsidiary, Sielox, acquired
Checkpoint's ACPG division. The acquisition had an effective date of December
30, 2005. The total cash consideration given to Checkpoint for the transaction
was approximately $2.6 million, of which approximately $2.5 million was paid
directly to Checkpoint and $100,000 was paid to an escrow agent on January 6,
2006.

This cash is held by the escrow agent and will be delivered by the agent to
Checkpoint after a period of one year subsequent to the acquisition date.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following Management's Discussion and Analysis contains forward-looking
statements within the meaning of Federal securities laws. You can identify these
statements because they use forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue," "believe," and "intend" or other
similar words. These words, however, are not the exclusive means by which you
can identify these statements. You can also identify forward-looking statements
because they discuss future expectations, contain projections of results of
operations or of financial conditions, characterize future events or
circumstances or state other forward-looking information. We have based all
forward-looking statements included in Management's Discussion and Analysis on
information currently available to us, and we assume no obligation to update any
such forward-looking statements. Although we believe that the expectations
reflected in such forward-looking statements are based on reasonable
assumptions, actual results could differ materially from those projected in the
forward-looking statements. Potential risks and uncertainty include, but are not
limited to, those set forth in the Company's Annual Report on Form 10-K for
the year ended December 31, 2005 which is incorporated by reference herein.

While we believe that the discussion and analysis in this report is
adequate for a fair presentation of the information, we recommend that you read
this discussion and analysis in conjunction with the description of our business
included elsewhere in this report and "Management's Discussion and Analysis"
included in our Annual Report on Form 10-K for the year ended December 31, 2005
filed with the SEC.

OVERVIEW
Overview
L Q Corporation, Inc. ("Registrant" or the "Company") was incorporated in
California as "Liquid Audio, Inc." in January 1996 and reincorporated in
Delaware in April 1999. In July 1999, we completed our initial public offering
of common stock. Our name was formally changed to "L Q Corporation, Inc." on
January 7, 2004. Our principal executive offices are located at 888 Seventh
Avenue, 17th Floor, New York, NY 10019, and our telephone number is (212)
974-5730.

Through January 2003, we provided an open platform that enabled the digital
delivery of media over the Internet.

From January 2003 until December 30, 2005, we did not operate any business and
were settling our remaining claims and liabilities while reviewing alternatives
for the use or disposition of our remaining assets.

History

On September 8, 2005, Registrant entered into a non-binding letter of intent
with Checkpoint Systems, Inc. ("Checkpoint") dated September 7, 2005 to acquire
substantially all of the assets of Checkpoint's Access Control Products Group
("ACPG") division. On October 26, 2005, Registrant's Board of Directors approved
the transaction and on November 4, 2005 the parties entered into an Asset
Purchase Agreement. On December 30, 2005, Registrant and Checkpoint entered into
a First Amendment to the Asset Purchase Agreement to, among other things, extend
the closing of the acquisition to January 5, 2006. On January 6, 2006,
Registrant's subsidiary, Sielox, LLC, completed the acquisition from Checkpoint
of substantially all of the assets of the ACPG division, effective as of
December 30, 2005. The cash consideration for the transaction was approximately
$2.6 million, subject to post-closing adjustments, an escrow, and related
expenses estimated to be $0.3 million.

Also on January 6, 2006, Registrant's subsidiary, SES, completed the acquisition
of substantially all of the assets of SES Resources Ltd, a start up consulting
venture. The newly formed business unit specializes in delivering critical
strategic security and business protection solutions based on best practices
developed by accomplished retired law enforcement agents and in association with
an advisory panel comprised of senior executive service level government risk
assessment and law enforcement professionals ("Advisory Panel").

SES has established an Advisory Panel which will serve the business with advice
and will identify expert talent throughout the United States and
internationally, to manage and staff client assignments. The Advisory Panel is
in the process of formation and includes Michael J. Thomas, a senior executive
service level agent from the U.S. Internal Revenue Service, Andrew J. Scott, the
former Chief of Police of Boca Raton, Florida, and David Edelson MD, FACP, a
medical doctor who is presently Assistant Clinical Professor at Albert Einstein
College of Medicine. The Advisory Panel is chaired by one of the owners/founders
of SES Resources Ltd., and vice chaired by Sebastian Cassetta, a former Vice
President and Director of Brinks Inc. and effective May 16, 2006, the newly
appointed President and CEO of the Company. SES is in the process of adding
additional members to the Advisory Panel from various law enforcement agencies.

Business

Access Control Products Group
The ACPG business was originally acquired by Checkpoint when Checkpoint acquired
Sielox Systems, Inc. of Sunnyvale, California in 1986. At that time, the ACPG
business distributed, developed and manufactured System Five and System Ten
access control systems for automated access to buildings and areas within
buildings. In the late eighties, ACPG introduced the Threshold series for use on
DOS and QNX operating systems and in the middle nineties developed a series of
applications for use on the Windows operating systems. In March 2003, the ACPG
business introduced Pinnacle, the next generation in access control software
solutions. Today ACPG develops, designs and distributes a complete line of open
architecture access control software, including both Pinnacle and the legacy
Enterprise Threshold, programmable controllers (electronic circuit boards), and
related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations. ACPG generally does not experience seasonality in its business and
there is no single customer which constitutes 10% or more of its revenue.

SES Resources International
The newly formed business unit specializes in delivering critical strategic
security and business protection solutions based on best practices developed by
accomplished retired law enforcement agents and in association with its Advisory
Panel comprised of senior executive service level government risk assessment and
law enforcement professionals. SES' primary areas of specialization include:
corporate investigations (e.g. know your customer, know your employee, know your
vendor reviews); due diligence reviews; forensic accounting; anti-money
laundering investigatory services consistent with the requirements of the
Patriot Act; anti-counterfeiting and intellectual property protection; corporate
health and wellness consultancy; emergency preparedness and contingency
planning; executive staffing solutions; and education and government security
training services.

Industry

Access Control Products Group
As security concerns continue to mount around the world, security access systems
are an important component to a company's or Government Agency's complete
security solution. Organizations continue to invest and upgrade such solutions
and place increased reliance upon such systems. The trend towards integrating
all security solutions including access control, CCTV, burglar and fire alarms
into one system continues to expand.

SES Resources International
Companies and governments are faced with a variety of security concerns and
risk assessment challenges including terrorism, fraud, litigation, compliance,
intellectual property protection, cyber attacks, industrial espionage,
regulatory issues, crisis management and executive security staffing. The
security consulting industry is highly fragmented with various established firms
and a large number of independent organizations with various specializations and
capabilities throughout the United States and around the world.

Strategy

Access Control Products Group
The primary strategy of ACPG is to continue to invest in the Pinnacle software
solution through added features and interfaces with other value added providers
in order to provide enhanced physical access security and event management
systems. ACPG will also continue to provide technical service and training to
ACPG's dealer base and end users and where necessary upgrade its technical
services.

SES Resources International
SES is distinguishing its services and positioning by its diverse services
offering. SES is in the process of identifying Senior Executive Service level
retired law enforcement officers and federal agents with specialization and
experience related to each service offering. SES expects to utilize the
relationships and advice of its Advisory Panel in connection with identifying
such resources. Each resource is expected to participate in SES projects as an
independent contractor on a project by project basis in an effort to match
expert talent with each specific project.

Products
ACPG develops, designs and distributes a complete line of open architecture
access control software, programmable controllers (electronic circuit boards),
and related accessories such as readers and ID cards which can be configured to
monitor, manage and control physical access to building perimeters and interior
locations.

ACPG supports both the Pinnacle software solution, introduced in March 2003 and
the Threshold Enterprise solution introduced in 1997. The Pinnacle based system
runs on both Windows Server 2003 and XP Professional. The system is an access
control and event management system with unlimited scalability. The Threshold
Enterprise runs on a Windows NT or 2000 access control platform.

The Pinnacle access control system is extremely flexible and compatible and
offers added functionality including badging utility for use in the design and
production of professional quality badges. The Pinnacle system also has a DVR
interface with video and event management linking. In addition, an interface
with the OASIS mapping utility offers graphical mapping with icon links to over
75 systems from 30 vendors. Other Pinnacle utilities include standalone
applications using the SDK, ever expanding libraries including n-man rule,
report scheduler, door control, EventLink and Administrative Management. The
newly introduced visitor management system allows for integration with
STOPware's lobby visitor management system.

ACPG designs and distributes a complete line of intelligent controllers. This
state of the art technology is available as 16-bit or 32-bit controllers capable
of supporting from 2 to 8 door configurations. In addition, these controllers
support from 4 to 60 alarm monitored inputs and/or controlled outputs and are
configurable to meet any customer requirements. The 32-bit 1200 series
controller can be used in a traditional hardwired environment or LAN/WAN
environment with static IP or DHCP. In addition, ACPG currently offers several
readers that are all compatible with both its Pinnacle and Threshold Enterprise
software solutions. Such readers include the Performa (and legacy Mirage)
readers, a 13.56 MHz reader manufactured by Checkpoint Systems, Inc., a complete
line of HID's 125 KHz Prox and 13.56 MHz iClass readers and cards, AWID's long
range Prox readers, BioScrypt's biometric fingerprint, and Panasonic's Iris Scan
Readers.

Intellectual Property
ACPG is entitled to the exclusive use of certain patents and to the
non-exclusive use of certain patents which were acquired in the acquisition from
Checkpoint. Such patents and other intellectual property are utilized in the
Performa and Mirage ID card readers. ACPG also acquired identified trademarks as
well as licenses for specific intellectual properties which consist of critical
components to the Pinnacle and Threshold Enterprise operating systems. ACPG also
licenses two badging programs which it sells to third parties. ACPG pays
royalties on these licensing contracts.

Registrant has registered domain names for its key businesses including
SESresources.com and Sielox.com.

Technology and Product Development
ACPG's software engineers develop proprietary code for product functionality in
features. Certain product features have been acquired from third parties for
which ACPG pays royalties relative to the feature set embedded within certain
software products.

ACPG expended approximately $1 million, $1.7 million, and $1.6 million in
product development activities during 2005, 2004 and 2003, respectively. The
emphasis of these activities is the continued broadening of the product lines
offered by ACPG, cost reductions of the current product lines, and an expansion
of the markets and applications for ACPG's products. ACPG's future growth in
revenues will be dependent, in part, on the products and technologies resulting
from these efforts. The Company expects to continue to invest at comparable
levels in such activities in 2006 (and thereafter) in order to provide
additional functionality to ACPG's offerings to meet the needs of ACPG's
customer base.

Marketing Efforts
ACPG and SES use a combination of internal and subcontract marketing and public
relations agencies. ACPG and SES currently retain LRG Inc. as their public
relations firm focused on the security market. ACPG typically attends two trade
shows a year, ISCW and ASIS International. SES typically attends the Anti-Money
Laundering Conference trade show. ACPG and SES's marketing initiatives include
trade advertising and company websites - www.sielox.com; www.sesresources.com.
In addition, ACPG and SES distribute data sheets, marketing bulletins and
brochures, and launch packages to its current and prospective clients, dealers
and end-users, as appropriate for their respective businesses.

Components
ACPG purchases components from outside suppliers and assembles the electronic
components for legacy controllers and proximity readers at Checkpoint's
facilities in the Dominican Republic and Puerto Rico. The 32-bit controllers are
manufactured to specified designs by a third party. Select readers are also
manufactured in Thailand. As part of the acquisition, Registrant entered
into a manufacturing agreement with Checkpoint. For non-proximity electronic
access control components, ACPG subcontracts manufacturing activities. All
electronic access control final system assembly and testing is performed at
ACPG's facility in Thorofare, New Jersey. On January 27, 2006, we signed a five
year lease on 8,900 square feet located at 170 Ninth Avenue, Runnemede, New
Jersey. Occupancy at this facility began on April 1, 2006. Accordingly,
assembly and testing will be relocated to the Runnemede facility.

Distribution
The sales personnel of ACPG market electronic access control products to
approximately 200 independent dealers, some of whom are national dealers,
primarily located in the US. ACPG employs regional salespeople who are
compensated by salary plus commissions. Under the independent dealer program,
the dealer takes title to our products and sells them to the end-user customer.
The dealer installs the systems and provides ongoing service to the end-user
customer. ACPG requires its dealers to be certified in our products and
requires them to attend training classes on our various product offerings.

Competition
ACPG competes with other manufacturers of electronic access control systems as
well as with conventional security systems. Major competitors are GE (the Casi
Rusco and Infographics divisions), Honeywell (the NexWatch and Northern
divisions), United Technologies (the Lenel Systems division), and Tyco (the
Software House and Kantech divisions), as well as many other comparably sized
companies.

SES shall provide services that compete with the services provided by a highly
fragmented market of many firms of various sizes, including investigatory firms
and full service accounting and legal services firms, which provide such
services as part of a broad range of services. Some of the well recognized firms
include Kroll Worldwide, a division of Marsh & McLennan Companies, Inc., and
Guiliani Associates.

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 1, The Company
and 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, 2005. No changes to these critical polices have taken place during
the quarter ended March 31, 2006.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (IN THOUSANDS)

Total Revenues

Revenue for the three month period ending March 31, 2006 was $1,533 compared to
$0 for the three month period ending March 31, 2005. Revenue for the three month
period ending March 31, 2006 is entirely due to the activities of our newly
formed wholly owned subsidiary, Sielox. There was no revenue for the three month
period ending March 31, 2005 due to the discontinuation of our software license
and our music hosting business and the sale of our digital music fulfillment
business to Geneva Media, LLC in January 2003.

Operating Expenses

Selling, General and Administrative. Selling, General and
administrative expenses increased approximately 564% to $908 for the three
months ended March 31, 2006 from $161 in the comparable period of 2005.
Substantially all of the increase can be attributed to expenses relating to the
business and operations of our newly formed subsidiaries Sielox and SES
Resources International. General and administrative expenses consist primarily
of compensation for personnel, selling commissions, marketing expenses and
payments to outside contractors for general corporate functions, including
finance, information systems, human resources, facilities, legal management and
professional service fees, bad debt expense, occupancy and other overhead.

Technical and Engineering. Technical and engineering expense was $312 for the
three months ended March 31, 2006, compared to $0 for the three months ended
March 31, 2005. Technical and engineering expense consists of expenses relating
to personnel costs and other expenses for software and hardware engineers and
applications.

Other Income (Expense), Net. Substantially all other income is from
interest received from investments in highly-liquid money market funds. Other
income was $27 for the three months ended March 31, 2006 compared to $49 for the
three months ended March 31, 2005. The decrease in other income is directly
attributable to a decline in the cash balances available for investment after we
purchased the Access Control Products Group Division of Checkpoint Systems Inc.
This purchase was completed on January 6, 2006.

LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)

As of March 31, 2006, we had approximately $2,700 of cash and cash
equivalents.

Net cash used in operating activities was approximately $283 and
approximately $69 for the three months ended March 31, 2006 and 2005,
respectively. Substantially all of the increase is attributable to expenses
incurred by our newly formed subsidiaries Sielox and SES Resources
International. These expenses consist primarily of compensation to employees and
payments to outside contractors for general corporate functions.

Net cash used in investing activities was approximately $2,733 for the
three months ended March 31, 2006 and $0 for the three months ended March 31,
2005. Cash used for investing activities relates to the purchase of the ACPG
divison of Checkpoint Systems, Inc. for $2,581,and the purchase of fixed assets
for $130.

We also, as permitted under Delaware law and in accordance with our
Bylaws, indemnify our officers and directors for certain events or occurrences,
subject to certain limits, while the officer or director is or was serving at
our request in such capacity. The term of the indemnification period is for the
officer's or director's lifetime. The maximum amount of potential future
indemnification is unlimited; however, we have a Director and Officer Insurance
Policy that limits our exposure and enables us to recover a portion of any
future amounts paid. As a result of our insurance policy coverage, we believe
the fair value of these indemnification agreements is minimal.

We believe that our existing cash and cash equivalents will be sufficient
to meet our anticipated cash needs for working capital and capital expenditures
in the near future.

BUSINESS ACQUISITIONS ($ IN THOUSANDS)(CONTINUED):

For the three months ended March 31, 2006 2005
----------------- -----------------
($ in thousands) ($ in thousands)

Net Sales $1,533 $1,555
Cost of Goods Sold 856 888
----------------- -----------------
Gross Profit 677 667
General and Administrative Expenses 1,220 1,149
----------------- -----------------
Net Loss from Operations (543) (482)
Interest Income 27 46
Pro forma Adjustment in Interest Income N/A (22)(A)
Other Income (Expense), Net 3
----------------- -----------------
Net Loss $ (516) $ (455)
================= =================

Net loss per share - as reported $ (0.16) $ (0.03)
Net loss per share - pro forma N/A $ (0.14)
Weighted average shares 3,214 3,214

(A) Interest income has been reduced based on cash balances that would have
existed had the acquisition occurred at the beginning of the three month period
ending March 31, 2005.

MARKET RISK

No material changes exist to the market risk our investment portfolio of
cash and money market funds faced during the three months ended March 31, 2006.

RISK FACTORS

REGISTRANT MUST OVERCOME PRICING COMPETITION WITH RESPECT TO ITS ACPG PRODUCTS.
COMPETITIVE PRICING PRESSURES CAN CAUSE PROFIT EROSION.

The ACPG products compete against products sold by an increasing number of
competitors on the basis of several factors including price. In order to compete
in the marketplace, ACPG's products must provide superior technology at
competitive prices. Failure to produce cost-effective products could adversely
affect customer demand and adversely affect Registrant's results of operations.
In addition, the competitive business arena could create pricing pressure for
the ACPG products. A reduction in pricing of ACPG's products due to competitive
pressures could have an adverse effect on Registrant's revenues, operating
income and results of operations.

REGISTRANT MUST DEVELOP NEW PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS TO
REMAIN COMPETITIVE. IF REGISTRANT FAILS TO DEVELOP NEW PRODUCTS AND PRODUCT
ENHANCEMENTS ON A TIMELY BASIS, IT MAY LOSE MARKET SHARE. REGISTRANT'S
INVESTMENT IN THE PINNACLE SOFTWARE SOLUTION MAY NOT REALIZE A RETURN ON
INVESTMENT.

The market for ACPG's Pinnacle software solution is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. Accordingly, our future success
will depend to a substantial extent on our ability to:

o Invest significantly in research and product development;
o Develop, introduce and support new products and enhancements on a
timely basis; and
o Gain and consecutively increase market acceptance of our products.

Registrant's ACPG division is currently developing new products and enhancements
to its existing products. Registrant may not be able to successfully complete
the development and market introduction of new products or product enhancements.
If Registrant fails to develop and deploy new products and product enhancements
on a timely basis, or if Registrant fails to gain market acceptance of its new
products, revenues will decline and Registrant may lose market share to its
competitors. There is no assurance that Registrant will be successful in
marketing and selling its Pinnacle software solution or other new products, that
the revenues from the sales of the Pinnacle software solution or other new
products will justify the investment, or that the sales of Pinnacle will
continue to increase.

THE AVAILABILITY AND PRICING OF COMPONENT PARTS MAY ADVERSELY AFFECT PRODUCTION
AND PROFITABILITY.

Registrant's ability to grow earnings will be affected by increases in the cost
of component parts, including electronic components and circuit boards.
Registrant may not be able to offset fully the effects of higher cost component
parts through price increases, productivity improvements or cost reduction
programs.

FUTURE ACQUISITIONS MAY NOT BE FOUND OR MAY NOT BE SUCCESSFULLY INTEGRATED INTO
REGISTRANT'S BUSINESS AND COULD ADVERSELY AFFECT REGISTRANT'S BUSINESS.

Registrant has pursued, and will continue to pursue, growth opportunities
through attempted acquisition of complementary businesses, products and
technologies. Registrant is unable to predict whether or when any other
prospective acquisition will be completed. The process of integrating an
acquired business may be prolonged due to unforeseen difficulties and may
require a disproportionate amount of Registrant's resources and management's
attention. There can be no assurances that management will be able to
successfully identify suitable acquisition candidates, complete acquisitions,
integrate acquired businesses into existing operations, or expand into new
markets. Further, once integrated, acquisitions may not achieve levels of
revenues, profitability or productivity comparable to Registrant's existing
business or otherwise perform as expected. The occurrence of any of these events
could harm Registrant's business, financial condition or results of operations.

In addition, future acquisitions may require substantial capital resources,
which may require us to seek additional debt or equity financing. Future
acquisitions by us could result in the following, any of which could seriously
harm our results of operations or the price of our stock:

o issuance of equity securities that would dilute our current
stockholders' percentages of ownership;
o large one-time write-offs;
o the incurrence of debt and contingent liabilities;
o difficulties in the assimilation and integration of operations,
personnel, technologies, products and information systems of the
acquired companies;
o diversion of management's attention from other business concerns;
o contractual disputes;
o risks of entering geographic and business markets in which we have no
or only limited prior experience; and
o potential loss of key employees of acquired organizations

THE ACPG BUSINESS HAS INCURRED NET LOSSES. THERE IS NO ASSURANCE THAT IT WILL
TURN PROFITABLE IN THE FUTURE.

Registrant (including the ACPG operations) has incurred losses in the past and
may incur losses in the future. The ACPG business incurred net losses in 2005,
2004 and 2003. In 2005, the ACPG business's net loss was approximately $(1.0)
million. In 2004, the ACPG business's net loss was approximately $(1.4) million.
In 2003, the ACPG business's net loss was approximately $(0.9) million.
Continued or increased net losses could have a material adverse effect on
Registrant's business, financial condition and results of operations, liquidity
and the value and market price of Registrant's common stock.

THE REGISTRANT'S LIQUIDITY COULD BE IMPAIRED IF OPERATING LOSSES CONTINUE AND/OR
OTHER OBLIGATIONS NEED BE FULFILLED.

The Registrant has incurred losses and negative cash flows from operations for
every year since inception. The ACPG operations have incurred losses in the past
and may incur losses in the future, which may impair the Registrant's liquidity.
As a newly formed organization, SES has no independent record of performance in
the various service categories it has identified. As a new business, SES may not
be successful in being engaged by prospective clients, which would have an
adverse affect on revenues and results of operations and liquidity. In addition,
the Registrant has other obligations primarily related to the costs associated
with the operation as a public company (legal, accounting, insurance, etc.), and
the satisfaction of any potential legal judgments or settlements. Such other
obligations, if required to be funded from sources other than operating profits,
may impair the Registrant's liquidity.

REGISTRANT'S SUCCESS IN THE SES BUSINESS DEPENDS ON ITS ABILITY TO EXPAND THE
SES ADVISORY PANEL.

Registrant may not be able to identify additional senior executive service law
enforcement agents who are able to serve as Advisors on the Advisory Panel. Such
inability would harm the development of the SES business in general, and prevent
Registrant from distinguishing itself in the marketplace in particular, which
could adversely affect revenues and results of operations.

SES IS A NEWLY FORMED BUSINESS.

As a newly formed organization, SES has no independent record of performance in
the various service categories it has identified. As a new business, SES may not
be successful in being engaged by prospective clients, which would have an
adverse affect on revenues and results of operations.

SOME OF REGISTRANT'S COMPETITORS HAVE GREATER RESOURCES THAN REGISTRANT, WHICH
MAY LIMIT ITS ABILITY TO EFFECTIVELY COMPETE WITH THEM.

Some of Registrant's competitors have greater financial, personnel and other
resources than Registrant, which may limit its ability to effectively compete
with them. For example, Registrant's main competitors in the ACPG business
include Tyco International Ltd. and Honeywell International Inc. These and other
large competitors may be able to:

o Respond more quickly to new or emerging technologies or changes in
customer requirements;
o Benefit from greater economies of scale;
o Offer more aggressive pricing; and/or

o Devote greater resources to the promotion of their products.

REGISTRANT IS DEPENDENT ON ITS KEY PERSONNEL, THE LOSS OF WHOM COULD NEGATIVELY
AFFECT BUSINESS.

Registrant is dependent on its key personnel, including general management,
software and hardware engineers, technical support and sales executives, who
have significant industry experience, knowledge and know how. The loss of these
key personnel could negatively affect business and results of operations.

REGISTRANT'S STOCK HAS BEEN DELISTED FROM THE NASDAQ NATIONAL MARKET, AND IS
THEREFORE SIGNIFICANTLY LESS LIQUID THAN BEFORE.

Registrant's common stock has been delisted from trading on The NASDAQ National
Market by reason of not maintaining listing requirements due to the lack of
tangible business operations and significantly reduced market price of the
common stock. As a result, Registrant's common stock currently trades over the
counter on the NASDAQ OTC Bulletin Board, and the ability of Registrant's
stockholders to obtain liquidity and consistent market prices for Registrant's
shares has been significantly impaired.

REGISTRANT INCURS THE EXPENSE OF COMPLYING WITH PUBLIC COMPANY REPORTING AND
OTHER REQUIREMENTS.

As a public company, Registrant incurs significant legal, accounting, and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules
subsequently implemented by the Securities and Exchange Commission and NASDAQ,
have required changes in corporate governance practices of public companies.
These rules and regulations increase legal and financial compliance costs and
make some activities more time consuming and costly. In addition, Registrant
incurs additional costs associated with its public company reporting
requirements. These rules and regulations also may make it more difficult and
more expensive for Registrant to obtain director and officer liability
insurance, and Registrant may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage.

REGISTRANT RELIES ON LICENSES WITH THIRD PARTIES TO LICENSE SOFTWARE CODE THAT
IS AN INTEGRAL PART OF THE ACPG BUSINESS'S PINNACLE SOFTWARE SOLUTION AND IF
REGISTRANT WOULD NEED TO SEEK ALTERNATE LICENSES, ITS RESULTS OF OPERATIONS
COULD BE ADVERSELY AFFECTED.

Registrant licenses certain software code that is an integral part of ACPG's
Pinnacle software solution from third parties. In particular, Registrant obtains
from third party licensors certain software code included in the Pinnacle
software solution, and the software for its badging products. Registrant would
need to seek alternative licensors for the software code if any of the third
party licensors terminate or decides not to renew a license. If any of these
third party licensors become unable to or refuses to license its code, it could
interrupt and delay the development, design and delivery of the Pinnacle
software solution and related products. Any such disruption could adversely
affect Registrant's results of operations.

CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS MAY ADVERSELY AFFECT REGISTRANT'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Registrant's operating results may be affected adversely by the general cyclical
pattern of the industries in which it operates. For example, demand for ACPG
products and services is significantly affected by levels of commercial
construction and consumer and business discretionary spending. The demand
patterns of these markets could impact the revenues and margins in this
business.

Before deciding to invest in us or to maintain or increase your investment, you
should carefully consider the risks described above, in addition to the other
information contained in this report and in our other filings with the SEC,
including our Annual Report on Form 10-K filed March 31, 2006. The risks and
uncertainties described above are not the only ones facing us. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business operations. If any of these risks actually occur,
our business, financial condition or results of operations could be seriously
harmed. In that event, the market price of our common stock could decline and
you may lose all or part of your investment.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See "Market Risk" in Part I, Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations.

ITEM 4. CONTROLS AND PROCEDURES

Based on the evaluation of the effectiveness of our disclosure controls and
procedures by our management, with the participation of our chief executive
officer and our chief financial officer, as of end of the period covered by this
report, our chief executive officer and our chief financial officer have
concluded that our disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms.

No change in our internal control over financial reporting (as defined in Rules
13a-15(f) or 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in Note 8--Commitments and Contingencies, to the
condensed consolidated financial statements of this report is incorporated
herein by reference.

ITEM 6. EXHIBITS

10.86 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of May 10, 2006
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

L Q CORPORATION, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DATE: May 15, 2006 L Q CORPORATION, INC.

By: /s/ William J. Fox
------------------------------------------------------
William J. Fox
Chief Executive Officer (Principal Executive Officer)

By: /s/ Melvyn Brunt
------------------------------------------------------
DATE: May 15, 2006 Melvyn Brunt
Chief Financial Officer (Principal Financial and
Accounting Officer)