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 June 30, 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
filler" 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 August
10, 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 June 30, 2006
(unaudited) and December 31, 2005
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2006 (unaudited) and 2005
(unaudited)
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2006 (unaudited) and 2005
(unaudited)
Notes to Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................ 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 17
ITEM 4. CONTROLS AND PROCEDURES......................................... 17
PART II. OTHER INFORMATION................................................. 19
ITEM 1. LEGAL PROCEEDINGS............................................... 19
ITEM 6. EXHIBITS........................................................ 19
SIGNATURES................................................................. 20

ITEM 1. FINANCIAL STATEMENTS

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

June 30,
2006 December 31,
(unaudited) 2005
----------- ------------

ASSETS
Current assets:
Cash and cash equivalents ................................. $ 2,401 $ 5,746
Accounts receivable, net of allowance for doubtful
accounts of $43 and $0, respectively ................... 1,413 1,097
Inventories ............................................... 573 855
Other current assets ...................................... 117 96
--------- ---------
Total current assets ................................... 4,504 7,794
Fixed assets, net ......................................... 253 14
Goodwill .................................................. 985 999
Security deposit .......................................... 22 --
--------- ---------
Total assets ........................................... $ 5,764 $ 8,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 587 $ --
Accrued expenses and other current liabilities ............ 316 575
Obligations under capital lease ........................... 25 --
Due to Checkpoint ......................................... -- 2,581
--------- ---------
Total current liabilities 928 3,156
Long-term liabilities:
Obligations under capital lease ........................... 55 --
Stockholders' equity:
Common stock, $0.001 par value; 30,000,000 shares
authorized; 3,214,408 shares issued and outstanding at
June 30, 2006 and December 31, 2005 .................... 3 3
Additional paid-in capital ................................ 146,006 146,006
Accumulated deficit ....................................... (141,137) (140,267)
Accumulated other comprehensive loss ...................... (91) (91)
--------- ---------
Total stockholders' equity ............................. 4,781 5,651
--------- ---------
Total liabilities and stockholders' equity ............. $ 5,764 $ 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 Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------

Revenues ......................................... $1,669 $ -- $3,202 $ --
Cost of goods sold ............................... 915 -- 1,771 --
------ ------ ------ ------
Gross profit .................................. 754 -- 1,431 --
------ ------ ------ ------
Operating expenses:
Selling, general and administrative expenses 868 246 1,776 407
Technical and engineering expenses 275 -- 587 --
------ ------ ------ ------
Total operating expenses 1,143 246 2,363 407
Loss from operations ............................. (389) (246) (932) (407)
Other income (expense), net ...................... 35 54 62 103
------ ------ ------ ------
Net loss $ (354) $ (192) $ (870) $ (304)
====== ====== ====== ======
Net loss per share:
Basic and diluted ............................. $(0.11) $(0.06) $(0.27) $(0.09)
====== ====== ====== ======
Weighted average shares ....................... 3,214 3,214 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)

Six Months Ended
June 30,
----------------
2006 2005
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (870) $ (304)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation .......................................... 12 --
Provision for doubtful accounts ....................... 43 --
Stock-based compensation .............................. 17 --
Increase (decrease) in cash attributable to changes
in operating assets and liabilities:
Accounts receivable ................................... (359) --
Inventories ........................................... 282 --
Other current assets .................................. (21) 96
Accounts payable ...................................... 587 --
Accrued expenses and other current liabilities ........ (276) (107)
------- ------
Net cash used in operating activities ........... (585) (315)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets .............................. (180) --
Payment of security deposit ........................... (22) --
Reimbursement from Checkpoint ......................... 28 --
Acquisition of ACPG ................................... (2,581) --
------- ------
Net cash used in investing activities ........... (2,755) --
------- ------
CASH FLOWS USED IN FINANCING ACTIVITIES,
principal payments on capital lease ................... (5) --
------- ------
EFFECTS OF EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS ........................................... -- (13)
------- ------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................ (3,345) (328)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........... 5,746 6,432
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................. $ 2,401 $6,104
======= ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Reduction in the estimated fair value of fixed
assets acquired .................................... $ (14) $ --
======= ======
Decrease in Goodwill due to the adjustment of the
estimated fair value of fixed assets acquired ...... $ 14 $ --
======= ======
Fixed assets acquired under capital lease obligation .. $ 85 $ --
======= ======

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. ("we" 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.

Until the sale of substantially all of our assets to Ebay, Inc. in 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 August 10, 2006 was $1.56 per share.

As disclosed in a Form 8-K 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 (as amended, the "Services Agreement"). 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. Furthermore, as disclosed in a
Form 8-K filed by the Company on July 12, 2006, the Board of Directors of the
Company approved an amendment of the Services Agreement extending the terms of
the agreement until December 31, 2007. The Services Agreement was previously set
to expire by its terms on June 30, 2006.

Checkpoint Acquisition

On January 6, 2006, the newly formed wholly owned subsidiary of the Company,
Sielox, LLC ("Sielox") completed the acquisition from Checkpoint Systems, Inc.
("Checkpoint") of substantially all of the net assets of the 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 are reflected in the Statement of
Operations for the six months ended June 30, 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.

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

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. The assets of SES Resources, Ltd.
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% ownership interest 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 and six months ended June
30, 2006.

The Advisory Panel will provide SES with strategic and operational advice and
will identify expert talent throughout the United States and internationally, as
well as manage and staff client assignments. The Advisory Panel is in the
process of being formed and currently 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, former Vice President and Director of Brinks Inc. and,
effective May 16, 2006, the newly appointed President and chief executive
officer 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 every
year since inception. For the six months ended June 30, 2006, the Company
incurred a net loss of $870 and negative cash flows from operations of $585. As
of June 30, 2006, the Company had an accumulated deficit of approximately
$141,137. 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 ($ IN THOUSANDS)

The accompanying condensed consolidated financial statements of the Company for
the three and six months ended June 30, 2006 (unaudited) and June 30, 2005
(unaudited) 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 June 30, 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.

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

PRINCIPLES OF CONSOLIDATION ($ IN THOUSANDS)

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

CASH AND CASH EQUIVALENTS ($ IN THOUSANDS)

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 June 30, 2006, and throughout
the six 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):

June 30, December 31,
2006 2005
-------- ------------
Cash and cash equivalents:
Cash................... $ 90 $ 19
Money market funds..... 2,311 5,727
------ ------
$2,401 $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 payable are carried at cost. The
Company's financial instruments approximate fair value due to their relatively
short maturities. The Company does not hold or issue financial instruments for
trading purposes.

STOCK-BASED COMPENSATION ($ 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 six months ended June 30, 2006, the Company recognized compensation
expense of $17 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 were not yet
vested as of that date. Such compensation expense was estimated in accordance
with the provisions of No. 123(R). 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
$13 during the six months ended June 30, 2006 as a result of implementing SFAS
No. 123(R).

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

On January 6, 2006, in conjunction with the completion of the purchase of the
ACPG division of Checkpoint Systems, Inc. and SES Resources, Ltd., the Company
awarded 123,000 stock option grants. These options were granted to employees of
Sielox and SES, together with members of the Advisory panel and executive
officers. Due to the resignation of former CEO William Fox, 40,000 of those
options awarded were forfeited. In addition, approximately 66,000 previously
outstanding options were foreited as a result of Mr. Fox's resignation.

Consistent with disclosure provision of SFAS No. 123, the Company's net loss and
basic and diluted net loss per share would have been adjusted for the three and
six months ended June 30, 2005, to the pro forma amounts indicated below in
thousand, except per share amounts.

Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------------ ----------------

Net loss - as reported.............................. $(192) $(304)
Less stock-based compensation (income) expense
determined under fair value based method, net of
tax effects...................................... (5) (11)
------ ------
Net loss - including the effect of stock-based
compensation expense............................. $(197) $(315)
====== ======
Basic and diluted net loss per share - as reported.. ($0.06) ($0.09)
Basic and diluted net loss per share - pro forma.... ($0.06) ($0.10)

NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for Income
Taxes" ("FIN 48"). FIN 48 which clarifies the application of SFAS No. 109,
"Accounting for Income Taxes." FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements by
prescribing a recognition threshold (whether a tax position is more likely than
not to be sustained) without which, the benefit of that position is not
recognized in the financial statements. It requires a measurement determination
for recognized tax positions based on the largest amount of benefit that is
greater than 50 percent likely of being realized upon ultimate settlement. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.

FIN 48 requires that the cumulative effect of applying this interpretation be
reported and disclosed as an adjustment to the opening balance of retained
earnings for that fiscal year and presented separately. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We have not completed the
process of determining the effect of this interpretation on our financial
statements.

NOTE 2-BUSINESS ACQUISITIONS ($ IN THOUSANDS):

ACPG ACQUISITION

On January 6, 2006, the Company acquired certain assets and assumed certain
liabilities of the ACPG division of Checkpoint Systems Inc. with an effective
date as of the close of business on December 30, 2005. Prior to the ACPG
acquisition, the Company was a 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 costs
of approximately $300, was approximately $2,900.

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

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 985
Other assets 37
------
Total assets acquired 2,974
Current liabilities (89)
------
Net assets acquired $2,885
======

Goodwill arose from the ACPG acquisition. Since the aggregate of the purchase
price plus acquisition costs of approximately $2,900 exceeded the fair market
value of all identifiable net 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,
additional goodwill. Goodwill of approximately $985, net of purchase price
adjustments made during the quarter ended June 30, 2006, 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 and six months ended June 30, 2006.

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

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 SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
------------------ ----------------
($ in thousands) ($ in thousands)
Net Sales $1,611 $3,166
Cost of Goods Sold (693) (1,581)
------ ------
Gross Profit 918 1,585
Selling, General and Administrative
Expenses 994 2,304
------ ------
Loss from Operations (76) (719)
Interest Income 54 103
Pro forma Adjustment in Interest Income (43)(A) (65)(A)
Other Income, Net 10 13
------ ------
Net Loss-Pro forma ($55) ($668)
====== ======
Net loss per share - as reported $(0.06) $(0.09)
Net loss per share - proforma $(0.02) $(0.21)
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 period.

NOTE 3 - BALANCE SHEET COMPONENTS:

INVENTORIES, NET

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

June 30, December 31,
2006 2005
-------- -----------
Finished goods... $357 $581
Raw materials.... 216 274
---- ----
$573 $855
==== ====

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

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

June 30, December 31,
2006 2005
-------- ------------
Accrued Expenses and Other Current Liabilities;
Consulting and professional services........ $187 $486
Warranty reserve............................ 23 25
Compensation................................ 38
Other....................................... 68 64
---- ----
$316 $575
==== ====

NOTE 4- 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 Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
----- ----- ----- -----
Comprehensive loss:
Net loss.................... $(354) $(192) $(870) $(304)
Foreign currency translation
adjustments.............. (13)
----- ----- ----- ------
$(354) $(192) $(870) $(317)
===== ===== ===== ======

NOTE 5 - 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 468,000 and 349,000 of
such options outstanding at June 30, 2006 and 2005, respectively.

NOTE 6 - SEGMENT REPORTING

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 in which 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 June 30, 2006 and 2005, respectively.

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

The following table represents total net revenues of each of the Company's
reporting segments for the three and six months ended June 30, 2006 and 2005:

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
------ ---- ------ ----

Sielox, LLC $1,663 $-- $3,196 $--
SES International Resources, Inc. 6 6
------ --- ------ ---
Total $1,669 $-- $3,202 $--
====== === ====== ===

The following table represents the total loss of each of the Company's reporting
segments for the three and six months ended June 30, 2006 and 2005:

Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
------ ---- ----- -----

Sielox, LLC $ (62) $ -- $(329) $ --
SES International Resources, Inc. (65) (108)
General Corporate (227) (192) (433) (304)
------ ------ ----- -----
Total $(354) $(192) $(870) $(304)
====== ====== ===== =====

The following table represents the total assets of each of the Company's
reporting segments at June 30, 2006 and December 31, 2005, respectively:

June 30, 2006 December 31, 2005
------------- -----------------
Sielox, LLC $3,003 $2,687
SES International Resources, Inc. 7
General Corporate 2,754 6,120
------ ------
Total $5,764 $8,807
====== ======

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

NOTE 7- OBLIGATIONS UNDER CAPITAL LEASE

The Company leases certain equipment under a capital lease expiring in 2009. The
assets and liabilities under that capital lease are recorded at the lower of the
present value of the minimum lease payments or the fair value of the assets. The
assets are amortized over their estimated useful lives. Amortization of assets
under capital leases is included in depreciation and amortization expense for
the six months ended June 30, 2006.

At June 30, 2006 and December 31, 2005, fixed assets included $85 and $0,
respectively and accumulated amortization included $5 and $0, respectively,
related to assets recorded under the capital lease.

Aggregate future minimum lease payments at June 30, 2006 are as follows:

TWELVE MONTH PERIOD ENDING JUNE 30,
2007 $ 36
2008 36
2009 29
----
Total future minimum lease payments 101
Amount representing interest 21
----
Present value of future minimum
lease payments 80
Less current portion 25
----
$ 55
====

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Legal proceedings

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

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.

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
assuming no claims for indemnification are made against Checkpoint.

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 Securities and Exchange Commission ("SEC").

OVERVIEW

Until the sale of substantially all our assets to Ebay, Inc. in January 2003, we
provided an open platform that enabled the digital delivery of media over the
Internet.

In addition, as disclosed in a Form 8-K 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. Furthermore, as disclosed in a Form 8-K filed by the Company on
July 12, 2006, the Board of Directors of the Company approved an amendment of
the services agreement extending the term of the Services Agreement until
December 31, 2007. The Agreement was previously set to expire by its terms on
June 30, 2006.

History

On January 6, 2006, the newly formed wholly owned subsidiary of the Company,
Sielox, LLC ("Sielox"), completed the acquisition from Checkpoint Systems, Inc.
("Checkpoint") of substantially all of the net assets of the 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 are reflected in the Statement of
Operations for the six months ended June 30, 2006.

Also on January 6, 2006, our 80.5% 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 31,
2005. 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' 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 Advisory Panel will provide strategic and operational advice and will
identify expert talent throughout the United States and internationally, as well
as manage and staff client assignments. The Advisory Panel is in the process of
being formed 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 chief executive officer of the Company. SES is in the process of
adding additional members to the Advisory Panel from various law enforcement
agencies.

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 June 30, 2006.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2006 AND 2005 ($ IN THOUSANDS)

Total Revenues

Revenue for the three month period ending June 30, 2006 was $1,669 compared to
$0 for the three month period ending June 30, 2005. Revenue for the three month
period ending June 30, 2006 is entirely due to the activities of our
subsidiaries, Sielox and SES. Revenue for Sielox was $1,663 and $6 for SES.
There was no revenue for the three month period ending June 30, 2005 due to the
discontinuation of our software license and our music hosting business and the
sale of digital music fulfillment business to Geneva Media, LLC in January 2003.

Operating Expenses

Selling, General and Administrative Selling. general and administrative expenses
increased approximately 352% to $868 for the three months ended June 30, 2006
from $246 in the comparable period of 2005. Substantially all of the increase
can be attributed to expenses relating to the business and operations of our
subsidiaries Sielox and SES. Selling, 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 $275 for the
three months ended June 30, 2006, compared to $0 for the three months ended June
30, 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
$35 for the three months ended June 30, 2006 compared to $54 for the three
months ended June 30, 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. This
purchase was completed on January 6, 2006.

SIX MONTHS ENDED JUNE 30, 2006 AND 2005 ($ IN THOUSANDS)

Total Revenues

Revenue for the six month period ending June 30, 2006 was $3,202 compared to $0
for the six month period ending June 30, 2005. Revenue for the six month period
ending June 30, 2006 is entirely due to the activities of our subsidiaries,
Sielox and SES. Revenue was $3,196 for Sielox and $6 for SES. There was no
revenue for the six month period ending June 30, 2005 due to the discontinuation
of our software license and our music hosting business and the sale of digital
music fulfillment business to Geneva Media, LLC in January 2003.

Operating Expenses.

Selling General and Administrative. Selling, general and administrative expenses
increased approximately 336% to $1,776 for the six months ended June 30, 2006
from $407 in the comparable period of 2005. Substantially all of the increase
can be attributed to expenses relating to the business and operations of our
subsidiaries, Sielox and SES. Selling, 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 $587 for the
six months ended June 30, 2006 compared to $0 for the six months ended June 30,
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 investment in highly-liquid money market funds. Other income was
$62 for the six months ended June 30, 2006 compared to $103 for the six months
ended June 30, 2005. The decrease in other income is directly attributable to a
decline in the cash balances available for investment after we purchased the
ACPG division of Checkpoint. This purchase was completed on January 6, 2006.

LIQUIDITY AND CAPITAL RESOURCES ($ IN THOUSANDS)

As of June 30, 2006, we had approximately $2,401 of cash and cash
equivalents.

Net cash used in operating activities was approximately $585 and
approximately $315 for the six months ended June 30, 2006 and 2005,
respectively. Substantially all of the increase is attributable to the
activities of our subsidiaries, Sielox and SES. The net loss accounted for $870,
accounts receivable and accrued expenses and other current liabilities used $359
and $276 respectively. This increase in cash used was reduced by an increase in
inventories and accounts payable of $282 and $587 respectively.

Net cash used in investing activities was approximately $2,755 and $0 for
the six months ended June 30, 2006 and 2005, respectively. Cash used for
investing activities primarily relates to the purchase of the ACPG division of
Checkpoint for $2,581, and the purchase of fixed assets for $180.

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.

RISK FACTORS

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 other than operating profits, may
impair the Registrant's liquidity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

No material changes exist to the market risk our investment portfolio of
cash and money market funds faced during the three months ended June 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Based on the evaluation of the effectiveness of our disclosure controls and
procedures(as defined in Rules 13a-15(f) or 15d-15(f) under the Securities
Exchange Act of 1934 ("Exchange Act")) by our management, with the

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

No change in our internal control over financial reporting 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

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 IPO 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 IPO 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 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, LQ Corporation 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 IPO's. 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.

ITEM 6. EXHIBITS

10.87 Amendment to Administrative Services Agreement with Barington Capital
Group, L.P. dated as of July 12, 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: ___ August, 2006 L Q CORPORATION, INC.

By:
------------------------------------
Sebastian E. Cassetta
Chief Executive Officer (Principal
Executive Officer)

By:
------------------------------------
DATE: ___ August, 2006 Melvyn Brunt
Chief Financial Officer (Principal
Financial and Accounting Officer)